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Finley v. Home Insurance Company12/30/1998
esent the insured in defense of the suit, the law is clear that the insurer has waived its right to withdraw, and will be estopped to later assert such right when sued by the insured for failure to properly defend." Yuen v. London Guar. & Accident Co., 40 Haw. 213, 232 (1953) (citations omitted) (emphasis added).
Moreover, the right to refuse an insurer's tender of a defense under a reservation of rights is mandated by the HRPC. See HRPC Rule 1.8(f), stating that " lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client consents after consultation[.]" The requirement of client consent necessarily implies the right not to consent. Therefore, if the client does not desire the representation under the terms offered by the insurer, the insurer must either choose to defend unqualifiedly or allow the insured to conduct its own defense of the action.
If the insured chooses to conduct its own defense, the insured is responsible for all attorneys' fees related thereto. The insurer is still potentially liable for indemnification for a judgment within the scope of insurance coverage. However, having refused the contractual terms of the policy, the insured foregoes its right to compensation for defense fees. A contrary holding would effectively nullify our determination that the insurer, even in a reservation of rights situation, retains the contractual right to select the counsel whom it will pay to defend the insured.
In the instant case, there is no showing that the Aaron Defendants asserted a right to select counsel or objected to the appointment of MacLaren and Tom by HIGA. While the Aaron Defendants did retain Bernstein to additionally represent their interests, this did not operate as an exercise of their right to reject the tender of the defense under a reservation of rights. Under our holding, the Aaron Defendants were entitled to a single counsel paid for by the insurer, as provided by the contract. The Aaron Defendants accepted MacLaren and Tom, and, therefore, HIGA fulfilled its contractual obligation to provide a defense by paying the fees for those attorneys' services.
4. Alternate remedies in case of actual misconduct and a caution to retained defense attorneys and insurers
If the duties prescribed by the HRPC are not followed by retained counsel, various remedies exist to protect the insured. These remedies include: (1) an action against the attorney for professional malpractice; (2) an action against the insurer for bad faith conduct; and (3) estoppel of the insurer to deny indemnification. HIGA argues that these remedies are adequate to deter unethical conduct on the behalf of the insurer and retained counsel. We agree with HIGA on this point.
Attorneys are required to follow the HRPC. Violation of the ethical duties owed to their clients could result in actions for professional malpractice. In determining that counsel chosen by the insurer could not adequately represent the interests of the insured, the Alaska Supreme Court was concerned that
"if the insurer knows that it can later assert non-coverage, or if it thinks that the loss which it is defending will not be covered under the policy, it may only go through the motions of defending: it may offer only a token defense. . . . f there are several theories of recovery, at least one of which is not covered under the policy, the insurer might conduct the defense in such a manner as to make the likelihood of a plaintiff's verdict greater under the uninsured theory. [Also,] the insurer might gain access to confidential or privileged information in the process of the defense which it might later use to its ad
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