(Article from Insurance Law Alert, May 2019)
For more information, please visit the Insurance Law Alert Resource Center.
An Illinois appellate court ruled that an insured was entitled to retain independent counsel rather than use insurer-appointed counsel based on a conflict of interest arising out of a punitive damages claim. Xtreme Protection Servs., LLC v. Steadfast Ins. Co., 2019 WL 1976482 (Ill. Ct. App. May 3, 2019).
A lawsuit brought against Xtreme Protection Services alleged eavesdropping, trespass, intrusion upon seclusion and intentional infliction of emotional distress. Xtreme tendered the complaint to Steadfast, but requested permission to select its own defense counsel. Xtreme argued that a conflict of interest existed because the underlying complaint alleged intentional conduct, which was excluded from coverage under the policy. Steadfast appointed counsel and reserved its right to deny coverage. Xtreme continued to use its own counsel to defend the suit and sought a declaration that it was authorized to retain independent counsel based on a conflict of interest arising from Steadfast’s reservation of rights. In response, Steadfast waived its right to deny coverage based on any policy exclusions but reserved its right to deny coverage for punitive damages. Steadfast argued that as a result of this waiver, there was no longer any conflict of interest, and Xtreme was obligated to utilize insurer-appointed counsel.
An Illinois trial court disagreed and granted Xtreme’s motion for judgment on the pleadings. The trial court held that Xtreme was entitled to counsel of its choice based on Steadfast’s ongoing reservation as to punitive damages. The appellate court affirmed, stating that Steadfast “has little interest in defending against [the underlying] claims for punitive damages.”
Importantly, the court noted that an underlying claim for punitive damages does not automatically give rise to a conflict of interest justifying the use of independent counsel. Rather, a conflict of interest exists when punitive damages form a substantial portion of the potential liability and where the insurer’s disclaimer for punitive damages leaves the policyholder with the greater interest and risk in the litigation. The court deemed this standard met because the underlying complaint sought no less than $120,000 in compensatory damages and no less than $2.1 million in punitive damages.