Conflicts of Interest in MCS-90 Related Litigation

The Potential for Conflicts.

In the context of coverage under the MCS-90, a conflict of interest may arise between the insurer and the insured, particularly when the insurer assumes the defense under a reservation of rights due to questions of coverage. This conflict can stem from the fact that the insurer-appointed counsel's defense efforts could potentially favor the insurer's interests rather than the insured, especially when the claim against the insured contains both covered and non-covered claims.

When Conflicts Arise

In situations where a conflict of interest exists, the insured is generally entitled to select independent counsel of their own choice, with the insurer obligated to pay the reasonable costs of such independent counsel. The insurer, however, has the right to approve the counsel selected by the insured, and this approval cannot be unreasonably withheld.

A conflict of interest does not automatically arise when an insurer defends a suit under reservation of rights on grounds that some of the multiple claims against the insured are outside coverage. A conflict of interest may only exist when an insurer reserves its rights on a given issue, and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.

Reservation of Rights Letter is not an Automatic Conflict.

It's important to note that the insurer's decision to defend under a reservation of rights does not automatically create a conflict of interest that entitles the insured to engage defense counsel of their choice at the insurer's expense. The insurer or defense counsel retained by the insurer must fail to meet an enhanced obligation of good faith for such a conflict to arise.

Despite the potential conflict of interest, an insurer's defense of the claim could indeed drive up costs, which could subsequently fall to the insured to reimburse under the MCS-90.

In case of a conflict, a significant, not merely theoretical, actual, not merely potential conflict is required to disqualify the insurer from controlling the defense of its insured. The existence of a conflict depends upon the grounds on which the insurer is denying coverage. If the reservation of rights arises because of coverage questions which depend upon the insured's own conduct, a conflict exists.

Conclusion

The potential for a conflict of interest between the insurer and the insured in the context of MCS-90 coverage disputes is nuanced and dependent on specific circumstances and the conduct of the parties involved. However, counsel should pay special attention to these conflicts and address them as soon as they arise.