The duty of a liability insurer to provide a defense for its insured is controlled by the contents of the pleading against that insured: the duty can arise on the basis of allegations that establish grounds for coverage, even if the insurer knows those allegations to be false. If, in those circumstances, the insurer reserves its right to dispute coverage (and especially if, in doing so, it relies on a theory that would prejudice the insured’s position in the underlying case), then the duty to defend might also include a duty to provide the insured with counsel that is independent from the insurer. (This blog has discussed recent cases involving the obligation to provide independent counsel here and here.

Recently, in a case of first impression, an appellate court in Florida considered whether the same approach governs the insurer’s duty to provide separate counsel for each of two insureds–if they are co-defendants in a lawsuit, and if they assert apparently conflicting defenses. In a bit of good news to members of the Florida Bar, the court held that the insurer is responsible for the cost of separate counsel, even where the potential conflict is, at best, extremely dubious. In fact, the insurer must bear the costs of separate counsel, even if the underlying suit has been resolved, without the conflict’s ever having materialized.

An outfit called MagiCamp ran a summer swim camp for children, putting a wholesome gloss on the swimming pool that adorns the center of the University of Miami. MagiCamp’s contract with the home of the Hurricanes provided, among other things, that the camp was “solely responsible for the safety and welfare of its . . . guests,” and that it assumed “full financial responsibility for,” and agreed to “release, indemnify and hold [the University] harmless . . . from and against” all claims for injuries arising out of the camp’s use of the pool. MagiCamp was covered under a commercial general liability policy issued by Great American Assurance Company, and it named the U as an additional insured under that policy.

In July 2000, a four-year-old camper suffered serious injury in the pool while participating in MagiCamp. His parents sued both MagiCamp and the University, alleging both that the camp had been negligent in the supervision of its campers, and that the University was liable for the alleged negligence of its lifeguards. Great American retained a single law firm to represent both defendants. The law firm filed an answer on behalf of MagiCamp, in which it made these boilerplate allegations:

If Plaintiff was injured or damaged as alleged . . . such injuries and damages were caused in whole or in part by the fault, neglect and/or want of care of persons or entities other than Defendants, and therefore Defendants are entitled to indemnity and/or contribution from such persons or entities in direct proportion to their respective fault.

On the basis of that allegation, the University asserted, in a letter to Great American, that MagiCamp was seeking contribution from the University (the only other defendant in the action), and so that there was a conflict of interest between the two co-defendants. The school demanded that Great American provide it with counsel of its own choosing that would be independent from MagiCamp.

Great American refused, asserting that there was no conflict, and the University hired separate lawyers on its own. The case then dragged on for a total of seven years, during which neither defendant ever attempted to prove the liability of the other. After the case settled (at no cost to the University), the University brought a new action against Great American to recover the cost of its separate defense.

The trial court found that there had been no conflict between MagiCamp and the University, because the camp was contractually obligated to indemnify the school for any liability that resulted from the underlying claim. It awarded summary judgment to the insurer. But in University of Miami v. Great American Assurance Company, No. 3D09-2010 (Fla. App. Feb. 20, 2013), a 2-to-1 majority of the District Court of Appeal disagreed. The majority found that a conflict was present, because the “allegations in the answer and affirmative defenses set forth by MagiCamp and UM” created “diverse legal positions that are inherently adverse.”

In defense of both co-defendants, Great American’s counsel would have had to argue conflicting legal positions, that each of its clients was not at fault, and the other was, even to the extent of claiming indemnification and contribution for the other’s fault. In so doing, legal counsel would have had to necessarily imply blame to one co-defendant to the detriment of the other. On these facts, we believe this legal dilemma clearly created a conflict of interest between the legal defenses of the common insureds sufficient to qualify for indemnification for attorney’s fees and costs for independent counsel.

In effect, the majority seemed to be saying that an insurer fails to discharge its duty to defend, if the counsel it provides is impaired by a conflict of interest. Consequently, the court used the same trigger for the obligation to provide separate counsel–the contents of the pleadings–that it would use to determine the existence of a duty to defend. But the risks confronting an insured who must share counsel with a co-defendant are not the same as the risks associated with no defense at all, and there is no logical reason to approach those risks in the same way. After all, while an insurer’s refusal to provide a defense can change the outcome of almost any case, it is virtually inconceivable that sharing an attorney with MagiCare would have prejudiced the University in this one. As the dissent pointed out, there was never any realistic possibility that MagiCare and the University would take adverse positions in the underlying litigation, since neither defendant had anything to gain by making the other defendant a scapegoat. (Either way, MagiCare would end up responsible for any judgment.) In the majority’s view, Great American nevertheless had a duty simply to pretend this was not the case. In fact, the majority held that it had to maintain that pretense, even after the two insureds had concluded the ligitaiton, without ever having adopted conflicting positions.

The dissent took a pessimistic view about who is likely to be benefitted by this decision, and it’s hard not to agree with it:

The court today opens a new frontier in insurance litigation of benefit only to the legal profession.  The insurance contract in this case expressly states the insurer has “the right and the duty to defend the insured” against any suit to which the insurance applies. The insurer appointed the law firm of Hyman and Kaplan to defend both Magicamp and the University of Miami. Without providing Great American the courtesy of a phone call or demand, the Isicoff law firm declared conflict and appointed itself. The majority affords them fees for their trouble. The future of dual insured claims should not be hard to see.