In a number of states, when an insurance company has a duty to
defend its insured and reserves its rights in a certain way, the
carrier must pay for independent counsel selected by the
policyholder to defend the action alongside insurer-selected panel
counsel. This is to cure the panel lawyer's conflict of
interest created where the interests of the carrier and the
defended policyholder diverge.
The U.S. Court of Appeals for the Fifth Circuit decided recently
that the carrier's duty to pay independent counsel's fees
under Moeller v. American Guar. & Liab. Ins.
Co. is governed by the terms of the policy, including erosion
of limits. In a case from this spring, Fed. Ins. Co. v. Singing
River Health Sys., the Fifth Circuit denied, on public policy
grounds, a policyholder's attempt to keep its policy limits
from being eroded by defense costs. Rejecting this argument, the
Fifth Circuit cited a Mississippi Supreme Court's decision in
Southern Healthcare Services, Inc. v.
