Carrier’s counsel and the collapsing three-legged stool –

The triangular relationship between (1) an insurer, (2) an insured, and (3) the counsel chosen by the insurer to defend the insured in litigation can become an uneasy one.  Grain Dealers Mut. Ins. Co. v. Cooley illustrates when it can become unstable. The insurer (Grain Dealers) provided the insureds (the Cooleys) a defense, “yet simultaneously disclaimed coverage if the Cooleys were ordered to clean the spill. In doing so, Grain Dealers failed to inform the Cooleys of their right to hire independent counsel. When the [relevant administrative agency] ultimately found the Cooleys liable for the spill, Grain Dealers then refused to defend or indemnify the Cooleys against a resulting claim.” That failure created the prejudice needed to estop Grain Dealers from denying coverage for liability: ” [T]he Cooleys presented evidence that Grain Dealers’ attorney never informed them of their right to challenge the [agency] decision. That right has since lapsed. The loss of the right to challenge the underlying administrative order with the benefit of non-conflicted counsel is clearly prejudicial.” No. 17-60307 (May 14, 2017, unpublished).