Mixed Claim, Panel Counsel Conflict, and a Time-Limited Demand
A general contractor holds a CGL policy with a $2,000,000 each-occurrence limit and a $2,000,000 aggregate. A homeowner sues for $4,500,000, alleging two things in one complaint: defective workmanship in the contractor's own scope, excluded by the your-work exclusion, and negligent supervision of a roofing subcontractor whose tar kettle started a fire that damaged the neighbour's house, which is covered property damage. The insurer accepts defence under a reservation of rights. It appoints panel counsel, whose firm is also defending the insurer in an unrelated coverage action against the same insured. The insured's personal counsel demands independent counsel at the insurer's expense, citing the conflict. Meanwhile the plaintiff serves a $750,000 policy-limits demand with a 21-day deadline. Defence costs are $140,000 to date and will erode the $2,000,000 limit. The insured wants to accept the demand; the insurer wants to continue defending.
1. Does the insurer owe a defence? Explain the potential-for-coverage analysis and why it differs from indemnity.
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The duty to defend is broader than the duty to indemnify. Compare the allegations in the complaint with the policy language, not the insurer's view of the underlying facts. Here, at least one allegation, negligent supervision of a subcontractor causing fire damage to a neighbour's property, potentially falls within the grant of coverage. The your-work exclusion may bar the cost of repairing or replacing the contractor's own defective work, but it does not necessarily bar resulting damage to other property. Because one claim is potentially covered, the insurer must defend the action, even if other claims are excluded. The duty to indemnify is decided later, after facts are established, and may be narrower. The insurer can reserve rights and seek allocation of defence costs in some jurisdictions, but it cannot refuse to defend the entire suit simply because the largest claim is excluded. Document the comparison clause by clause and claim by claim.
2. Is independent counsel required? What facts decide it?
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Not every reservation of rights creates a conflict requiring independent counsel. The question is whether panel counsel's representation creates a genuine conflict between the insurer and the insured. Strong indicators here: the same firm is defending the insurer against this insured in an unrelated coverage action, which could affect loyalty and access to information; and counsel may need to develop facts that undermine coverage while defending the tort claim. If the coverage dispute turns on the same facts counsel must investigate, the insured may be entitled to independent counsel at the insurer's expense. The insurer may select counsel in many jurisdictions, but it must pay a reasonable fee and cannot use selection to control the coverage defence. The insurer should disclose the relationship, obtain the insured's informed consent if appropriate, or agree to independent counsel. Document the analysis and respond promptly; ignoring the demand increases bad-faith and regulatory exposure.
3. How should the time-limited demand be handled?
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A time-limited demand does not change the coverage analysis, but it changes the settlement analysis. Verify that the demand is genuine, written, and open for acceptance. Assess liability and damages independently. Tell the insured in writing that the insurer is evaluating the demand and that consent is required for settlement. Do not accept or reject solely because of the deadline. Consider whether the demand can be accepted within the covered portion, with a release and allocation. Document why the demand is accepted or rejected. If liability is clear and the demand is within limits, rejecting it can expose the insurer to a bad-faith claim for any excess judgment, even where coverage is disputed. Accepting a demand that includes excluded damages may waive coverage positions. That is why allocation and the insured's consent must be addressed before the deadline. Request a short extension in good faith if needed, and keep the insured informed throughout.