Most policies that cover claims by third parties give the insurer the “right and duty” to defend the insured. They also give the insurer the right to settle any claim. There are, however, limits to the insurer’s rights.
Under Illinois law, the insured business can choose its own lawyer (at the insurer’s expense) if there is a conflict of interest between the insurance company and insured. Such a conflict often arises when the insurance companies responds to a notice of claim by “reserving its rights” to deny coverage if the insured is found liable for conduct or damages that are not within the scope of the insurance policy. For example, assume a lawsuit is filed against a business alleging that it is liable for both negligence (covered by its insurance policy) and fraud (not covered by its insurance policy). The business provides notice of the lawsuit to the insurance company, which provides a defense, but also sends a “reservation of rights” letter stating that it will not cover any damages based on fraud. At this point, there is a conflict because a lawyer that is appointed by the insurance company may have an incentive to defend the negligence count vigorously, without the same incentive to defend the fraud count.
Conflicts can also arise when the financial liability of the business greatly exceeds the coverage limits of the insurance policy.