## Facts

- Ben Arnold-Sunbelt Beverage Company of South Carolina, L.P. was a wholesale beverage distributor; Sunbelt Beverage Company, L.L.C. was its parent.
- Two employees, Joyce Anglin and Ellen White, filed South Carolina tort suits against Ben Arnold and executives Harvey Belson and William Tovell (and, in White’s suit, Sunbelt), alleging misconduct arising primarily from Belson’s alleged sexual harassment.
- The complaints included both potentially covered “personal injury” torts (including defamation and false imprisonment) and other intentional or employment-related claims.
- Twin City Fire Insurance Company and Hartford Casualty Insurance Company issued commercial general liability policies providing $1 million in personal-injury coverage and agreed to defend at least some claims while reserving rights as to noncovered claims.
- The insurers retained attorney Robert McKenzie to defend all insureds, but the insureds rejected him, asserting the reservation of rights created a conflict entitling them to choose counsel at the insurers’ expense.
- The insureds proceeded with their chosen law firm, excluded the insurers from directing or participating in the defense and settlement, and incurred substantial defense fees.
- The insurers filed a federal declaratory judgment action, contending the insureds breached policy cooperation clauses, relieving the insurers of any duty to pay defense costs or indemnify settlements.

## Issues

1. Whether, under South Carolina law, an insurer’s defense under a reservation of rights in a mixed covered/noncovered case automatically creates a conflict requiring insurer-funded independent counsel chosen by the insured.
2. Whether the insureds’ rejection of insurer-selected counsel and exclusion of the insurers from the defense breached the cooperation clause, relieving the insurers of duties to defend and indemnify.
3. Whether any insured (specifically Belson) was entitled to separate insurer-funded counsel based on individualized conflicts.

## Decision

- The Fourth Circuit affirmed summary judgment largely for the insurers.
- The court held that a reservation of rights does not automatically create a conflict of interest entitling insureds to select independent counsel at the insurers’ expense.
- The court held that Ben Arnold, Sunbelt, and Tovell materially breached the cooperation clause by ousting insurer-selected counsel and preventing insurer participation before any actual conflict emerged; the insurers were relieved of defense-cost and indemnity obligations as to them.
- The court agreed that, on the specific facts, Belson was entitled to separate insurer-funded defense counsel, without adopting any per se “reservation-of-rights equals conflict” rule.

## Legal Principles

- A reservation of rights in a mixed-claims case does not, by itself, create a disqualifying conflict requiring insurer-funded counsel selected by the insured.
- Conflict questions in insurer-appointed representations are assessed case by case; professional responsibility rules are treated as primary safeguards unless a concrete conflict appears.
- An insured’s unilateral refusal of tendered defense counsel and exclusion of the insurer from defense control can constitute a material breach of the policy cooperation clause.
- A material cooperation-clause breach may relieve the insurer of obligations to pay defense costs and to indemnify the insured for settlements or judgments.
- Separate insurer-funded counsel may be warranted for an individual insured when the facts show divergent interests requiring independent representation.

## Conclusion

The Fourth Circuit predicted South Carolina would reject an automatic-conflict rule based solely on a reservation of rights, and it enforced policy cooperation clauses to deny defense and indemnity to insureds who unilaterally displaced insurer-appointed counsel and barred insurer participation; only the accused executive received separate insurer-funded counsel on the case’s particular facts.


Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co., 433 F.3d 365 (4th Cir. 2005)