National Casualty Co. v. Forge Industrial Staffing, Inc., 567 F.3d 871 (7th Cir. 2009), addresses the vexed subject of when an insured is entitled to demand that its insurer appoint independent counsel. National Casualty provided Forge Industrial with employment practices and liability insurance. The EEOC charged Forge Industrial with discrimination. National Casualty agreed to defend Forge Industrial under a reservation of rights and retained counsel to defend Forge Industrial. Because the EPLI policy excluded “willful failure to comply with any law or regulations relating to employment practices,” Forge Industrial demanded that National Casualty provide independent counsel.
National Casualty’s EPLI policy provided Forge Industrial for coverage for intentional acts, including intentional discrimination, against one of its employees. Nonetheless, the policy excluded “willful failure to comply” with employment laws or regulations. Id. at 873-74.
The court observed that, under Illinois law, an insurer’s obligation to defend the insured correspondingly provides the insurer with the right to control and direct the defense. 567 F.3d at 874. Counsel appointed by the insurer holds an ethical obligation to both the insurer and the insured. The court observed that “in reality this counsel may have a closer relationship with the insurer and a greater desire to protect the insurer’s interests.” Id. Therefore, where there “is an actual conflict of interest between the insurer and insured, the insured has the right to obtain independent counsel at the insurer’s expense.” Id. “An actual conflict does not arise merely because the insurer has an interest in mitigating coverage as to every count of the underlying complaint.” Id. “Conversely, it is not dispositive that insurer and insured have a shared interest in a finding of no liability; in that case, the question becomes whether the insurer’s interest would be equally protected by a finding that would not be in the interest of the insured.” Id.
A conflict of interest exists where “after comparing the complaint against the insured to the insurance policy, it appears the factual issues will be resolved in the underlying suit that would allow insurer’s retained counsel to lay the groundwork for a later denial of coverage.” Id. at 875. The court remarked that such a conflict generally “arises when the insurance policy covers negligent but not intentional conduct.” Id.
The court acknowledged that because National Casualty’s EPLI policy excluded “willful failure to comply” with employment laws or regulations, National Casualty’s counsel arguably had an incentive to present the facts in such a way that it appeared that Forge Industrial had willfully violated the law. Id. at 876-77. Therefore, “it is certainly possible for [National Casualty]-appointed counsel to subtly elicit facts tending to show that Forge had knowledge of the applicable antidiscrimination laws which would negate NCC’s obligation to insure Forge in the event that Forge was found liable for the discrimination.” Id. at 877. Nonetheless, the court found this risk to be “quite minimal” because as “an employment-placement company, one would assume that Forge has strong knowledge of employment laws, and, as such, the underlying plaintiffs with the Commission itself will likely inquire about Forge’s knowledge of these laws during the EEOC process. Id. at 878. The court thus reasoned that “NCC-appointed counsel’s ability to solicit this information during his defense of the EEOC charges is of little import.” Id. What is more, the court found it material that “there are no allegations present in the EEOC charges that Forge willfully violated the law,” so that the “case presents neither mutually exclusive theories of liability nor facts or allegations which, when resolved, would preclude coverage.” Id.
The court concluded that “if no fact issues appear on the face of the underlying complaint that can be conclusively resolved in such a way that insurance coverage is necessarily precluded under the policy, then appointment of independent counsel is not warranted.” Id. at 878. The “EEOC charges do not contain any claims that Forge willfully violated the law, nor do they contain any fact allegations regarding Forge’s knowledge of antidiscrimination laws.” Id.
The court held that “only in the event that .. [the] EEOC’s charges are amended to include allegations of willfulness, or evolve into actual lawsuits whose complaints contain allegations regarding willfulness, will an actual conflict arise.” Id. at 879.
