Reservation of rights letter doesn’t create conflict

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The 4th U.S. Circuit Court of Appeals has upheld a South Carolina judge’s ruling that found no conflict of interest with either an insurer’s reservation of rights letter to an insured or the actions of the attorney provided to the insured by the insurer, handing down a prediction of how the South Carolina Supreme Court would likely come down on the matter.

Mechanic Charles Vititoe was injured while replacing a tire on an 18-wheeler when the rim assembly, which secures the tires, exploded. Vititoe sued Flexi-Van Leasing, the owner of the chassis to which the rim assembly was attached.

As part of a pool of chassis owners, Flexi-Van had joined a maintenance and repair agreement with a management company, Interstar. As a result, Flexi-Van was insured by Interstar’s commercial insurance policy with Travelers Indemnity Company, and it tendered defense of Vititoe’s lawsuit to Travelers, which provided Flexi-Van with an attorney, Mark Wall, while it investigated whether coverage existed under the policy.

Travelers later sent Flexi-Van a reservation of rights letter indicating that it wouldn’t defend or indemnify Flexi-Van for any issues arising outside of its coverage and certain exceptions might apply to preclude coverage of Vititoe’s suit. Concerned, Flexi-Van requested that Wall bring a third-party complaint against Interstar. Wall told Flexi-Van that he was willing to do so, but that Flexi-Van would have to pay him because Travelers would not. Flexi-Van then claimed that Wall had a conflict of interest and terminated his representation.

After hiring new counsel and settling with Interstar, Flexi-Van sued Travelers, seeking a declaratory judgment that it was entitled to a defense and indemnity from the insurance company in the Vititoe action, as well as claims for breach of the policy and breach of the implied obligation of good faith and fair dealing.

On cross-motions for summary judgment, U.S. District Judge David C. Norton sided with Travelers. Flexi-Van appealed, and the 4th Circuit, in a unanimous unpublished opinion by Judge A. Marvin Quattlebaum Jr., affirmed, finding that no conflict of interest existed. The case is Flexi-Van Leasing Inc. v. The Travelers Indemnity Co. (VLW 020-2-301).

“The facts, even when construed in the light most favorable to Flexi-Van, do not create a genuine issue of material fact as to whether Wall’s actions created an actual conflict,” Quattlebaum wrote. “Similarly, because Flexi-Van fired Wall before an actual conflict arose, thereafter settling with its substitute counsel, Flexi-Van is not entitled to indemnification for settlement costs in the underlying action. Accordingly, the district court’s grant of summary judgment to Travelers was proper.”

Flexi-Van argued that a conflict of interest existed in two forms. First, it pointed to Travelers’ reservation of rights letter. No South Carolina law directly addresses this issue, Quattlebaum explained, but the 4th Circuit had previously affirmed a district court’s prediction that South Carolina courts would find that a reservation of rights letter contesting coverage of certain claims, but not others, doesn’t automatically trigger a conflict of interest.

A reservation of rights letter may still establish an actual conflict where the parties lack a common interest, Quattlebaum wrote, but when it issued the reservation of rights letter, Travelers had a common interest with Flexi-Van in proving that Vititoe was at fault in the underlying action.

“Flexi-Van has not identified any genuine issue of material fact on this point. Given that common interest, the district court properly found the reservation of rights letter did not create a conflict of interest,” Quattlebaum wrote.

Flexi-Van based its second conflict of interest argument on Wall’s alleged failure to bring a third-party complaint against Interstar. But the record showed that Wall didn’t refuse to bring a third-party complaint against Interstar, and in fact, expressly stated that he would. Finding a conflict of interest in this scenario would destroy the ability of an insurer to hire counsel to defend its insured solely within the scope of an insurance policy, Quattlebaum said, since the existence of a coverage issue alone doesn’t give rise to an actual conflict.

The 4th Circuit also affirmed summary judgment in favor of Travelers on a claim alleging breach of the implied obligation of good faith and fair dealing.

The serious legal issues in the case didn’t prevent the injection of a little levity. Quattlebaum began the opinion by saying that the appeal presented conflict of laws and conflict of interests questions in an insurance coverage dispute, followed by a footnote “[apologizing] in advance for the excitement generated by our framing of the issues presented here.”

William Pearce Davis, an attorney in Columbia, South Carolina, represented Travelers.

“The 4th Circuit predicted that if presented with the question, the South Carolina Supreme Court would find that a reservation of rights letter from an insurer to its insured contesting coverage for certain claims—but not others—does not automatically trigger a conflict of interest between the insurer and its insured,” Davis said.

Charleston. South Carolina, attorney Edward K. Pritchard III, who represented Flexi-Van, did not respond to a request for comment.