Written by David O’Neill, JD, Director of Investigations, PolicyFind

Valley Forge Insurance Company sued scrap yard operator, Hartford Iron & Metal in the U.S. District Court for the Northern District of Indiana, seeking a declaration that it had both the right to control the defense and remediation of the Hartford environmental contamination site.  A settlement agreement entered into by the parties, a U.S. District Court ruled, did not override Indiana case law that defines a “conflict of interest” in the environmental coverage context.

Right to Select Counsel

Valley Forge argued its agreement with Hartford stating it could appoint defense counsel with Hartford Iron’s approval gave it the right to control the defense to the underlying Indiana Department of Environmental Management (“IDEM”) and U.S. Environmental Protection (“EPA”) claims. There was no “conflict of interest” it argued, that otherwise might give Hartford Iron the right to control its own defense.

In deciding this issue, the District Court looked to Indiana Rule of Professional Conduct 1.7 which provides that a lawyer may not represent a client if the representation involves a “concurrent conflict of interest.”  The rule defined “concurrent conflict of interest” as existing where “the representation of one client will be directly adverse to another client” or “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client or a third person or by a personal interest of the lawyer.” The Court stated that such a conflict often exists “where the attorney defending the underlying claim may have to select a defense that furthers the financial interest of the insured or insurer, rather than both.” The “accepted practice” it stated, had long been for “the insurer to pay for independent defense counsel and exercise no control.”

Looking to the Armstrong Cleaners, Inc. v. Erie Insurance Exchange decision by the U.S. District Court for the Southern District of Indiana in 2005, the Northern District observed that the Armstrong opinion stated that “not every reservation of rights poses a conflict for defense counsel,” however where the counsel hired by the insurer would be conducting discovery on issues relevant to the underlying suit that would also be relevant to the coverage dispute, “a significant conflict of interest existed.”  The Northern District Court noted that Hartford Iron had urged the environmental agencies to pursue Valley Forge and its environmental engineer for the cost of pollution cleanup. This defense was in direct conflict with Valley Forge’s claim that Hartford Iron had breached their agreement. It observed  that “defense counsel appointed for Hartford Iron but controlled by Valley Forge  will need to decide which of the two masters to serve when gathering evidence and preparing reports” about environmental damages.  “This conflict,” it held, “is sufficient to materially limit the attorney’s representation of Hartford Iron.”

Right to Control Remediation

Valley Forge sought a declaratory judgment regarding its right to control the remediation at the Hartford Iron site.  It argued that “even if” a conflict existed with regard to the defense of the IDEM and EPA claims, it did not alter its absolute right to control the remediation. It argued that the costs of remediation were “settlement costs” or “damages” rather than defense costs. The Northern District rejected this argument stating that Valley Forge had repeatedly stated that it did not dispute coverage and would pay all reasonable remediation costs up to the policy limits. The precedents on which Valley Forge relied, it ruled, were not well chosen.  Defense and remediation activities it stated were “inextricably intertwined” and one of the defense counsel’s duties in this matter was overseeing the environmental contractors doing the remediation. “Accordingly,” it stated, “many of the same conflicts concerns presented by Valley Forge’s control over the defense are also implicated by control of the remediation.”