Fifth Circuit recognizes that not all coverage defenses give rise to obligation to provide independent counsel

by Saul Ewing Arnstein & Lehr LLP


The United States Court of Appeals for the Fifth Circuit held that an insured was not entitled to independent counsel where the facts to actually be adjudicated in the underlying lawsuit were not the same facts upon which coverage depended.

In Downhole Navigator, L.L.C. v. Nautilus Ins. Co., No. 11-20469, 2012 WL 2477846 (5th Cir. June 29, 2012), the Fifth Circuit rejected an insured's claim for reimbursement from its insurer for the cost of hiring independent counsel. The insured, Downhole Navigator, L.L.C. ("Downhole"), alleged the insurer's reservation of rights created a conflict of interest that prevented the insurer from controlling the defense.

The insurer, Nautilus Insurance Company ("Nautilus"), had reserved its right to decline indemnity coverage if the underlying suit fell under one of three policy exclusions: (1) the "expected or intended injury" exclusion, which excluded coverage for injury or damage expected or intended from the standpoint of the insured; (2) the "property damage" exclusion, which excluded certain physical injury to property, including damage that occurred while occupied by the insured; and (3) the "testing or consulting" exclusion, which excluded damages arising out of an error or omission in performing a test, evaluation or consultation given by or on behalf of the insured. Although not mentioned in the reservation letter, the Fifth Circuit found that two other exclusions were also relevant: the "professional liability" exclusion, which excluded damages arising from the rendering or failure to render professional services; and the "data processing" exclusion, which excludes damages arising from the rendering or failure to render electronic data processing services.

Downhole argued that the reservation of rights letter presented a conflict of interest in the selection of defense counsel because facts which could be developed in the underlying litigation are the same facts upon which coverage depended. Downhole asserted that counsel selected by an insurer could develop facts during the course of litigation which would implicate one of the policy's exclusions. Downhole argued that the conflict of interest assessment should focus on the "facts to be developed" rather than the "facts to be adjudicated."

The Fifth Circuit rejected Downhole's argument, and held that a conflict of interest does not arise simply because the attorney provided by the insurer could develop facts in the underlying lawsuit that could exclude coverage. Instead, whether a conflict of interest exists is dependent upon whether the facts to be actually adjudicated in the underlying lawsuit are the same as the facts upon which coverage depends.

The panel noted that the underlying litigation concerned whether Downhole had negligently performed its work in redirecting an oil well. Therefore, the fact finder in the underlying litigation would determine whether Downhole had negligently provided services, and would not decide whether Downhole was "testing" or "consulting" for Sedona; whether Downhole provided "professional" or "data processing" services; whether it should have expected the damage to the well; or whether it occupied the property while providing services. Although facts relating to the coverage issues could arise during the course of that litigation, because the facts to be adjudicated in the negligence action were not the same as those facts that would decide coverage, the panel determined there was not a conflict of interest sufficient to necessitate independent counsel. Accordingly, the Fifth Circuit held Downhole was not entitled to reimbursement from Nautilus for the cost of hiring independent counsel.

The panel also noted a point often overlooked in this context, the defense counsel's duty to the insured. The panel wrote:

Of course, the attorney hired by the insurer to represent the insured is duty-bound to defend the interests of the insured. State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 628 (Tex. 1998) ("[B]ecause the lawyer owes unqualified loyalty to the insured, the lawyer must at all times protect the interests of the insured if those interests would be compromised by the insurer's instructions." (Citation omitted.)). Downhole's concern is thus somewhat overblown.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Saul Ewing Arnstein & Lehr LLP | Attorney Advertising

Written by:

Saul Ewing Arnstein & Lehr LLP

Saul Ewing Arnstein & Lehr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.