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Finley v. Home Insurance Company12/30/1998
ict of interest, or must pay the reasonable cost for hiring independent counsel by the insured." ICA's opinion at 24 (quoting McGee v. Superior Court, 221 Cal. Rptr. 421, 423 (1985)).
The ICA vacated the judgment of the circuit court and remanded the case for determination of (1) whether a "conflict of interest existed" because the reservation of rights was based on the nature of the Aaron Defendants' conduct and (2) whether HIGA or the retained attorneys, MacLaren and Tom, obtained the informed consent of the Aaron Defendants to the "conflict of interest." ICA's opinion at 25. The ICA's opinion implied that, if there were a conflict of interest, as defined in the opinion, and no consent by the Aaron Defendants, then HIGA would be liable for the attorneys' fees incurred by Bernstein in representing the Aaron Defendants, the claim for which has now been assigned to the Finleys.
We granted certiorari to address the issues of (1) whether a conflict of interest arises when an insurer defends its insured under a reservation of rights based on the nature of the insured's conduct and (2) the appropriate remedy for such a conflict of interest, whether actual or perceived. While this question has generated a significant amount of litigation across the nation, it is an issue of first impression in this jurisdiction.
II. DISCUSSION
A. An insurer who defends its insured under a reservation of rights is not necessarily required to pay for separate counsel, who has been chosen and retained by the insured.
1. Overview of the issue
"The tripartite relationship between insurer, insured and insurance defense counsel is unique. In no other area of the law are parties routinely represented by counsel selected and paid by a third party whose interests may differ from those of the individual or entity the attorney was hired to defend. The potential for conflict is inherent in the tripartite relationship."
Douglas Richmond, Walking a Tightrope: The Tripartite Relationship Between Insurer, Insured and Insurance Defense Counsel, 73 Neb. L. Rev. 265, 270 (1994) (footnotes omitted) (hereinafter "Tripartite Relationship").
Where a complaint alleges grounds that are both within and without the scope of insurance coverage, the insurer is required to defend the entire action. See First Ins. Co. of Hawaii, Inc. v. State, 66 Haw. 413, 417, 665 P.2d 648, 652 (1983) ("Where a suit raises a potential for indemnification liability of the insurer to the insured, the insurer has a duty to accept the defense of the entire suit even though other claims of the complaint fall outside the policy's coverage.").
Assuming that the reservation of rights is the result of allegations of conduct by the insured both within and without the scope of insurance coverage, the insurer and the insured will have divergent economic interests in the outcome of the litigation.
"When an insurer provides an unconditional defense for its insured, the insured and the carrier share the same goal--minimizing or eliminating liability in the third party action--and no conflict of interest inhibits the ability of one lawyer to represent both the insurer and its insured. But where the carrier questions the availability of coverage and provides a defense in the third party action subject to a reservation of rights, a conflict exists--because the insured's goal is coverage, which flies in the face of the insurer's desire to avoid its duty to indemnify." Rockwell Int'l Corp. v. Superior Court of Los Angeles, 32 Cal. Rptr. 2d 153, 158 (Cal. App. 1994). "An insurer's reservation of rights presents a potential conflict of interest because the insurer may be mor
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