[This write-up appeared in a recent Coverage Opinions dispatch.  The reader mail that I received in response made clear that this is an issue that many have considered.]  

In general, when it comes to choice of law for a coverage dispute, the state where the policy was issued – and not the state where the underlying action is venued -- usually applies. It is beyond the scope of the discussion here to explain why that is usually the case. In brief terms, a coverage dispute is a contract dispute. So, where the policy, i.e., the contract was issued matters for a lot.  In addition, when an insured does business in more than one state, courts often conclude that there is no principal location of the insured risk.  Thus, the state where the policy was issued takes on important consideration.   

But I have long believed that an exception to this conclusion could exist for purposes of a specific issue—whether the insured is entitled to independent counsel.  [An exception may also exist for choice of law for bad faith, as I discussed in a top ten article a couple of years back.]

As I see it, whether the insured is entitled to independent counsel may not be a coverage issue per se. While duty to defend is, of course, the independent counsel aspect of the duty to defend has much to do with the role of the lawyer defending the insured. So, if the underlying action is venued in a state other than where the policy was issued, then the underlying action state’s independent counsel rule may apply. This would be so even if all other coverage issues are governed, as is often the case, by the state where the policy was issued.

In other words, the conduct of defense counsel in the underlying action is governed by the rules of professional responsibility of the state where the action is pending. It seems that a court in that state may not conclude that its own rules of professional conduct -- and, specifically, those concerning conflicts of interest -- do not apply, simply because the insurance policy, under which the defense is being provided, was issued in a different state.

This is exactly what happened in New York Marine v. Heard, No. 23-3399 (9th Cir. Nov. 25, 2024) (unpublished).  At issue was whether Amber Heard was entitled to independent counsel in a defamation suit filed against her, in Virginia state court, by her ex-husband, actor Johnny Depp. Heard had claimed in a newspaper editorial that Depp had domestically abused her.

Heard was insured under a liability policy issued by New York Marine. Heard had retained her own Virginia defense counsel, Cameron McEvoy PLLC, prior to giving notice to the insurer. After getting notice, New York Marine retained counsel for Heard under a reservation of rights. Heard claimed that the reservation of rights created a conflict of interest and sought to be defended by independent counsel.

The court’s explanation of the hiring of counsel -- plus there was another insurer involved -- is not crystal clear. But for what matters here, the sum and substance of the decision is whether Heard, being defended under a reservation of rights – based on no coverage being owed if her conduct was “willful” and “intentional” -- was entitled to be represented by independent counsel paid for by New York Marine.

Heard pointed to California’s Cumis statute – presumably where the policy was issued -- to maintain that, because she was being defended under a reservation of rights, a conflict of interest existed, and she was entitled to independent counsel.

But, alas, the federal appeals court concluded that Heard was looking at the wrong state’s law in support of her entitlement to independent counsel. While it is likely that the policy was issued to Heard in California (the opinion doesn’t say), the defamation case was being tried in Virginia. Since that’s where the defense lawyers were, the court held that Virginia’s rules for independent counsel were the ones that mattered. In other words, as discussed above, the ethical rules of the state where the underlying action was pending – not where the policy was issued -- was the driver of the court’s decision. The court explained:

“There was no conflict of interest between New York Marine and Heard. Cameron McEvoy’s attorneys litigated the defamation case in Virginia, were members of the Virginia bar, and were bound by Virginia’s, and not California’s, ethics rules. Unlike California, Virginia’s ethics rules provide that a lawyer appointed by an insurer owes a duty only to the insured, not to the carrier. [several citations omitted] Potential disputes between an insurer and insured over indemnification therefore do not put Virginia lawyers in a conflicted position. New York Marine had no obligation to provide Heard with independent counsel, and thus did not breach its duty to defend her.”

In general, there is not much law on this issue. It was addressed by Hartford Underwriters Ins. Co. v. Foundation Health Services, Inc. 524 F.3d 588 (5th Cir. 2008) (Applying Mississippi’s most significant relationship test, the Fifth Circuit determined that even though the right to select counsel related to the duty to defend, which was contractual in nature, the issue was not one of “pure contract interpretation” but “is closely connected to the court where the ‘defending took place’” and “[t]he court where a case is tried has a substantial interest in preventing conflicts of interest . . . [and] in whether independent counsel is provided to avoid a conflict of interest.”).