The insured's right to independent counsel after the insurer agreed to defend under a reservation of rights was the issue presented in National Casualty Co. v. Forge Indus. Staffing Inc., No. 08-3110 (7th Cir. June 3, 2009) [here].

    Forge was a staffing agency that placed temporary employees at companies throughout the United States.  NCC issued a policy insuring Forge against any legal damages stemming from intentional acts, including intentionally discriminating against any of its employees.  The policy did not cover, however, punitive damages nor "willful failure to comply with any law relating to employment practices."  Willful was defined as "acting with intentional or reckless disregard for such employment-related laws . . . ."

    Four employees filed anti-discrimination charges with the EEOC against Forge based on race, gender and retaliation.  NCC defended Forge and appointed counsel.  NCC, however, reserved the right to later deny coverage for willful acts and punitive damages.  Forge then insisted that NCC provide independent counsel because a purported conflict of interest existed based on the reservation of rights.   Forge asserted that indemnity under the policy depended on how the EEOC charges were defended with respect to Forge's knowledge of the applicable anti-discrimination laws.  When NCC refused to provide independent counsel, Forge hired its own counsel.

    NCC then filed for declaratory relief to resolve the conflict of interest issue.  The district court found no actual conflict existed and determined that Forge had to bear the cost of retaining its own counsel. 

    The Seventh Circuit affirmed.  The Court acknowledged that Illinois courts hold that conflict counsel must be appointed when the underlying complaint contains two mutually exclusive theories of liability, one which is covered and one which is not.  This situation typically arises when the policy covers negligent but not intentional conduct.

    Here, the specter of punitive damages was merely speculative and did not create an actual conflict.  Not until punitive damages were actually requested and upon a determination that the nature of the damages created a conflict was it necessary for a court to order appointment of independent counsel.

    Further, the EEOC charges did not contain any claims that Forge willfully violated the law nor were there any fact allegations regarding Forge's knowledge of anti-discrimination laws.  Only one theory was presented by the EEOC – that Forge committed an intentional tort by intentionally discriminating against its employees based on race and gender.  Only if the EEOC charges were amended to include allegations of willfulness, or evolved into a suit with allegations regarding Forge's willfulness, would an actual conflict arise, authorizing the appointment of independent counsel.