A liability insurer’s reservation of rights can affect the insurer’s ability to participate in the litigation of the underlying action.  In most states, an insurer must provide independent counsel if the insurer’s coverage position might benefit from a failure of the insured’s defense on one or more issues in the underlying suit.  As this blog has reported, it is a rule in some other states that the reservation of rights, in and of itself, creates a conflict that requires the insurer to provide independent counsel.

In Heubel Materials Handling Co. v. Universal Underwriters Ins. Co., Nos. 12-1777, 12-1951 (8th Cir. Jan. 30, 2013), the insured had the luxury of coverage under two different policies, one of which was provided by its own corporate affiliate.  It argued that one insurer’s refusal to forego contribution from the other created a conflict, because it would force the insured to breach its duty to cooperate with its affiliate.  On that basis, the insured claimed a right to independent counsel—in this case, the one the affiliate had provided.  The U.S. Court of Appeals for the Eighth Circuit disagreed.

Two Sources of Coverage

Heubel is an authorized dealer of material handling equipment (think forklifts) manufactured by its corporate affiliate, The Raymond Corporation.  It was also a defendant in a personal injury suit, because it allegedly failed to diagnose and correct defects in a Raymond “walkie-rider” it had serviced.

Heubel participates in the Raymond Dealer Defense and Indemnification Program, under which Raymond undertakes to provide defense and indemnification for personal injury claims involving its products.  Raymond’s obligations under the Program are covered by an insurance policy issued by Liberty Mutual.  Among other things, the Program agreement requires Heubel to “[f]ully cooperate with Raymond and its Defense Counsel.”

Heubel was also insured under its own CGL policy issued by Universal Underwriters.  That policy gave Universal the right and duty to defend suits for covered damages, and it required Heubel to “cooperate and assist in the . . . enforcement of contribution or indemnification.”

Jockeying for Control

When the underlying suit was filed, Heubel immediately notified Raymond, which duly paid for and controlled Heubel’s defense.  Six months later, Heubel also gave notice to Universal.  Universal initially agreed to provide a defense, subject to a full reservation of rights based on the late notice, but it also asked Heubel to identify any other relevant insurance policies.  Heubel responded by suing, in state court in Missouri, for a declaration that the reservation entitled Heubel to select its own counsel and control the defense.  It argued, in other words, that Universal should pay for a defense that Raymond controlled.

Universal countered by (i) removing the DJ action to federal court and (ii) withdrawing its reservation of rights.  It offered to retain counsel to defend Heubel going forward, and it also offered to reimburse the insured for interim defense costs incurred after the notice date.

At that point, Heubel asked Universal to execute a stipulation that it would “satisfy any judgment” in the underlying case “on a primary, non-contributing basis.”  Universal refused, because it still intended to seek indemnification from Raymond—Heubel’s corporate affiliate.  It specifically informed Heubel that it would require the insured to cooperate in that effort.

Who Breached?

Heubel’s next move was to amend the complaint in its DJ action to add a claim for breach of contract.  According to Heubel, “Universal’s requirement that Heubel pursue and enforce indemnity [against Raymond] create[d] a potential or actual conflict of interest between Universal and Heubel.”

Specifically, Heubel asserted that enforcement of the cooperation clause in the Universal policy would force the insured to breach its obligation to cooperate with Raymond, which had a competing contractual right to control Heubel’s defense.  In the Eighth Circuit, Heubel argued strenuously that it was this contractual obligation, and not “Raymond’s indirect 83% ownership stake in Heubel,” that “explain[ed] why Heubel refused to accept” the defense Universal had tendered.

Universal responded with a declaratory judgment claim of its own.  Universal’s counterclaim asserted that Heubel’s rejection of the tendered defense breached the cooperation clause in Heubel’s CGL policy, under which it agreed to “cooperate and assist in the . . . enforcement of contribution or indemnification.”  That breach, Universal argued, absolved it of any further duty to provide coverage.

Universal Wins

On appeal from a district court decision awarding summary judgment to Universal, Heubel argued that Universal’s refusal to stipulate that it would forego indemnification by Raymond meant that the insurer had not really withdrawn its reservation of rights.  The Eighth Circuit didn’t buy it:

Because Universal did not reserve the right to disclaim coverage of any damages that might be awarded or legal fees that might be incurred in the underlying suit, its action does not qualify as a reservation of rights.

The court also rejected Heubel’s arguments about conflict of interest, because “Heubel makes no claim that the underlying suit presents any circumstance that would reward Universal for failing to provide a full and vigorous defense.”  What Heubel ws really asserting, the court found, was that the Universal policy provides primary coverage for the underlying personal injury suit and yet, at the same time, the Raymond indemnification program provides primary control of the defense to Raymond.

The court held that this position “is antithetical to the traditional principle that conflicting right-to-control clauses should be resolved in favor of the insurer with primary coverage.”