(Article from Insurance Law Alert, December 2024)
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Holding
The Ninth Circuit affirmed the dismissal of a policyholder’s suit against her insurer seeking reimbursement of costs paid to independent counsel in an underlying defamation suit. New York Marine and General Ins. Co. v. Heard, 2024 U.S. App. LEXIS 29910 (9th Cir. Nov. 25, 2024).
Background
The coverage dispute arose out of actor Johnny Depp’s defamation suit against his former spouse, actress Amber Heard. Heard retained a Virginia law firm to defend the suit but did not notify her insurer, New York Marine, until approximately six months after the suit was filed. New York Marine agreed to defend subject to a reservation of rights and continued the appointment of the Virginia law firm. Heard claimed that the reservation of rights created a conflict of interest between her and New York Marine and asked New York Marine to appoint independent counsel. New York Marine refused, but Heard nonetheless retained her own counsel, whose costs were partially reimbursed by another insurer.
New York Marine agreed to reimburse that insurer for a portion of those defense costs and then sought a declaration that it had fulfilled its duty to defend Heard. Heard counterclaimed, alleging that New York Marine breached its duty to defend by refusing to appoint independent counsel.
Decision
The court ruled that New York Marine did not breach its duty to defend, rejecting Heard’s contention that a conflict of interest arose from New York Marine’s reservation of rights such that New York Marine was obligated to pay for independent counsel.
The court explained that, because the defamation suit was litigated in Virginia and because Heard’s attorneys were members of the Virginia bar, the conflict-of-interest issue was governed by Virginia (rather than California) law. Under Virginia law, an attorney appointed by an insurer owes a duty only to the insured, not the insurer (whereas under California law, an appointed lawyer owes a duty to both the insured and the insurer). As such, any disputes between an insured and insurer as to coverage do not create a conflict of interest requiring the appointment of independent counsel. The court therefore concluded that New York Marine had no duty to fund Heard’s independent counsel.
Comments
The question of whether and under what circumstances a reservation of rights gives rise to a conflict of interest varies by jurisdiction. Many states recognize the distinction between a “potential” conflict of interest, which would not necessarily entitle the insured to independent counsel, as compared to an “actual” conflict, which would require such appointment. For an actual conflict to exist, many states look to whether the facts to be adjudicated in the underlying suit are the same facts upon which coverage depends.