The Insurer’s Duty to Provide Independent Counsel in Alaska

This is part two of a three part series focusing on an insurer’s duty to provide independent counsel in Alaska, California and Illinois. Read Part 1.

Alaska imposes a broad duty on insurers to provide independent counsel for the insured when a conflict of interest arises between the insurer, defense counsel and the insured. The development of this duty in Alaska followed a path similar the one taken in California, where the landmark court decision in San Diego Fed. Credit Union v. Cumis Ins. Soc’y, 162 Cal. App. 3d 358 (1984) established a right that was later codified by the state’s legislature. But whereas California has taken an intermediate approach to the duty—imposing the obligation to provide independent counsel only where an actual and significant conflict exists—Alaska’s approach is more sensitive to potential conflicts and provides a more inclusive protection for insureds but a more burdensome obligation for insurers.

Alaska is one of the few states that have passed legislation addressing the issue of when an insurer owes a duty to provide independent counsel, but the question was initially triggered in the state by a series of court decisions. In National Indemnity Co. v. Flesher, 469 P.2d 360 (Alaska 1970), the Alaska Supreme Court first suggested that an insured has a right to independent counsel when the insurer asserts a coverage defense, though the discussion was merely dicta and not binding law.

A decade later, in Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281 (Alaska 1980), the Court held that a conflict based upon a policy defense required the insurer to provide independent counsel. The court made an important distinction between insurers asserting policy defenses and coverage defenses.

A reservation of rights based on a policy defense arises when insurers tender a defense but reserve their right to later deny coverage because of the insured’s failure to comply with technical requirements under the policy agreement, such as providing the insurer with timely notice of the claim or abiding by the cooperation clause.

A coverage defense, on the other hand, involves situations where the insurer reserves the right to deny coverage because the insured’s act may or may not be covered under the policy. A reservation based on a coverage defense typically arises where alternative theories of recovery are asserted in the underlying suit against the insured. “The most typical example is…where alternative theories of negligent and intentional tort are pled and negligent acts are covered by the policy but intentional acts are not.” CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844 P.2d 1113 (Alaska 1993).

In both situations, when the insurer issues a reservation of rights, the interests of the insurer and insured diverge and a potential conflict arises. The court was concerned that insurers reserving the right to deny coverage may not treat the loss as their own and provide only a “token defense”; may gain access to confidential or privileged information to use in a later case against the insured; or, may steer the underlying case toward a result that would enable the insurer to avoid coverage but leave the insured liable.

The court in Continental was presented only with the issue as it related to policy defenses, and broadly ruled that whenever an insurer issues a reservation of rights based on a policy defense it is obligated to provide independent counsel. “The carrier must either accept liability under the policy and defend unconditionally or surrender control of the defense and be held liable if it guessed wrong on the coverage issue.” Continental, 608 P.2d 281.

It took another decade for the Court to analyze the issue in the context of a coverage defense. In CHI of Alaska, Inc. v. Employers Reinsurance Corp., the court extended the insured’s right to independent counsel to cases involving coverage defenses. The Court issued a broad and definite ruling that when an insurer reserves it rights based upon either a coverage defense or a policy defense, the insurer must provide independent counsel. According to the court, “the need for independent counsel is, if anything, greater in coverage than in policy defense cases” due to the nature of the conflict presented.

CHI also determined that an insured has the right to select the independent counsel but, under the implied covenant of good faith and fair dealing, must select counsel that is reasonably competent to handle the matter.

Like California’s response to the Cumis decision, Alaska responded to CHI by enacting legislation to codify the rule set forth by the court. Alaska Statute Section 21.96.100 is similar to California’s statute. Both statutes require an insurer to provide independent counsel to the insured when a conflict of interest arises and both state that claims for punitive damages and claims for damages in excess of policy limits do not constitute conflicts. In addition, both laws include protections for insurers, allowing insurers to impose experience requirements on the independent counsel and requiring insurers to pay fees only in the amount the insurer would pay in the ordinary course of business for a similar claim.

A significant difference in the states’ statutes has resulted in different obligations for insurers in the two jurisdictions.

In line with the decision in CHI, Alaska’s statute states that “if an insurer reserves the insurer’s rights on an issue for which coverage is denied, the insurer shall provide independent counsel to the insured…” Alaska Stat. 21.96.100(c).

California’s statute does not include this blanket requirement, but rather suggests that in such situations “a conflict may exist.” Cal. Civ. Code 2860. The difference is subtle but important. California’s statute leaves the issue open to interpretation, deferring to the courts to determine which conflicts deserve independent counsel and which do not. Alaska’s definitive language imposes a strict requirement that reflects the broad ruling in CHI and that leaves no room for interpretation. When an insurer in Alaska issues a reservation of rights based on a policy defense or coverage defense, a conflict arises requiring the insurer to pay for independent counsel.

While a lack of clarity in California law has led to a judicial narrowing of the protections for policyholders, Alaska’s law has promoted a much broader approach that is more favorable to insureds but more burdensome for insurers.