The Insurer’s Duty to Provide Independent Counsel in Illinois

Illinois law requires insurers to provide independent counsel for their insured when a conflict of interest arises. The duty developed from balancing the insurer’s obligation to defend the insured with the ethical obligations of appointed attorneys, and is firmly grounded in the rules of professional conduct for attorneys.

States have adopted varying rules for when the duty to provide independent counsel arises. California and Alaska both have statutes outlining the conflict rules. California’s statute requires insurer’s to appoint independent counsel only where an actual and significant conflict exists between the insurer and insured, but defers to the courts to define when such a conflict arises. Alaska, on the other hand, has drawn a more solid line, requiring independent counsel whenever an insurer issues a reservation of rights.

Unlike in Alaska and California, the rule in Illinois is not codified by statute, but rather is based on the court’s application of the rules of professional conduct for attorneys in the state. In Maryland Cas. Co. v. Peppers, 355 N.E.2d 24 (Ill. 1976), the Illinois Supreme Court recognized that when a conflict of interest arises between an insurer and its insured, the attorney appointed by the insurer is faced with serious ethical questions and the insured is entitled to its own attorney.

The case arose after an insured injured a trespasser on his land. The underlying action against the insured presented claims alleging both intentional wrongdoing and negligence. The insurer was obligated to defend the insured, but because the insurance policy provided coverage for negligent acts only and not intentional acts, a conflict of interest arose between the insurer and the insured. The court recognized that the insurer could avoid coverage if the acts were determined to be intentional, leaving the insured responsible for the entire loss, and that the insured’s interests would be protected only if the acts were deemed negligent. According to the court, this conflict created a serious ethical problem for the appointed attorney who would be faced with representing opposing interests.

The court held that the rules of professional conduct prohibited the attorney from simultaneously representing the conflicting interests of the insurer and the insured; but that the insurer’s contractual duty to provide a defense required it to reimburse the insured for independent counsel.

With its foundation in the attorney rules of professional conduct, the duty to provide independent counsel in Illinois continued to develop, but courts have recognized only a few situations where a conflict requires independent counsel. First, as demonstrated in Peppers, an insurer that reserves its rights must provide independent counsel when proof of certain facts in the underlying case could shift liability from the insurer to the insured. Ill. Mun. League Risk Mgmt. Ass’n v. Seibert, 585 N.E.2d 1130 (Ill. App. 1992). Second, a conflict between multiple parties insured by the same insurer entitles the insured to independent counsel. Murphy v. Urso, 430 N.E.2d 1079 (Ill. 1981). In both instances, as prohibited by the rules of professional conduct, “the representation of one or more clients may be materially limited by the lawyer’s responsibilities to another client.”

In addition, claims for punitive damages, which are not covered by insurance policies and may not be vigorously defended by the insurer, may require the provision of independent counsel. In Nandorf, Inc. v. CNA Ins. Co., 479 N.E.2d 988 (Ill. App. 1985), the court outlined the general rule in Illinois, which reflects the conflict rule in the rules of professional conduct, that: “In determining whether a conflict exists, Illinois courts have considered whether, in comparing the allegations of the complaint to the policy terms, the interest of the insurer would be furthered by providing a less-than-vigorous defense to those allegations.” The court went on to hold that because substantial punitive damages were sought, the insurer would have an interest in providing a less than vigorous defense and must provide independent counsel. But the court limited its ruling to the specific facts of the case and noted that not all cases where punitive damages are sought require independent counsel.

Illinois courts have consistently confirmed that few conflicts require the provision of independent counsel. The court in Pekin Ins. Co. v. Home Ins. Co., 479 N.E.2d 1078 (Ill. App. 1985) firmly articulated this position as it referenced the narrow circumstances implicating the duty and held that the insurer’s desire to minimize litigation costs does not create a conflict requiring independent counsel.

Despite the state’s relatively constrained rules that are generally favorable to insurers, a decision from the Seventh Circuit Court of Appeals interpreting Illinois law has potentially opened the insurer’s duty to provide independent counsel to expansion. In R.G. Wegman Constr. Co. v. Admiral Ins. Co., 629 F.3d 724 (7th Cir. 2011), the court found that a conflict requiring independent counsel arose when it became apparent that a judgment in excess of the policy limits was a “nontrivial probability.” The court was concerned that an insurer that is subject to paying the full policy limits is more likely to “gamble with the insured’s money by forgoing reasonable opportunities to settle a claim on terms that will protect the insured against an excess judgment.” The Seventh Circuit concluded that such a situation is best addressed by requiring the insurer to provide independent counsel. The decision expands the duty to provide independent counsel but deviates from previous rulings in the state.

Nevertheless, the case law in Illinois generally supports a narrow reading of the duty to provide independent counsel. Highlighting the foundation of the duty in the rules of professional conduct, courts have determined that an insurer must only provide independent counsel when a conflict arises such that “the insurer’s interests would be furthered by providing a less than vigorous defense…”

As evidenced by the decisions from Alaska, California and Illinois, the source of the duty to provide independent counsel can have important affects on the scope of the obligation. The duty in Alaska is strictly defined by statute and can be burdensome on insurers but provides much protection to insureds. California’s duty arises out of a statute that relies heavily on the courts to determine whether conflicts are “actual and significant.” In Illinois, the duty is based on an attorney’s ethical obligations and has generally been narrowly construed to apply only in limited situations. To properly satisfy their obligations and protect their interests, insurers and insureds must know when the insurer’s duty to provide independent counsel arises, and could benefit from understanding the source of the duty and the reasoning behind the requirement.

This is the final article in a three-part series on states where insurers may be required to assign independent counsel to defend an insured in a lawsuit. Read Part 1, The Insurer’s Duty to Provide Independent Counsel in California. Read Part 2, The Insurer’s Duty to Provide Independent Counsel in Alaska.