[textbook]Traversing the Ethical Minefield Problems, Law, and Professional Responsibility by Susan R. Martyn (z-lib.org)(1) (1)

which means that the insurer must provide an adequate defense against the allegedly
uncovered conduct. Courts have developed two approaches to this issue. Some require
defense under a “reservation of rights,” which means that the insurer can reserve its right to
claim any policy exclusion later, but must provide a conflict-free defense in the meantime.
Others allow a declaratory judgment action to be filed by the insurer before any trial on the
merits to determine coverage and the obligation to defend.
Providing an adequate defense under a reservation of rights requires defense counsel to
ignore the interests of the insurer and focus exclusively on the interests of the insured. The
insurer is entitled to hire its own counsel in the matter, but the lawyer retained to provide
the insured’s defense must be guided solely by the insured’s best interests. 25 Insurance law
provides that failure to send a reservation of rights letter or provide independent counsel to
an insured estops the insurer from later denying coverage. 26
The third actual conflict occurs when an insured is sued for an amount in excess of
policy limits. 27 When this occurs, insurance law imposes an obligation on the insurer to act
in good faith in responding to settlement offers. Where there is a reasonable probability
that the insured will be found liable for an excess judgment, the insurer must take the
insured’s interests into account. 28 This means that the insurer must have an objective legal
basis to justify its refusal to settle. If a lawyer representing the insured alone would advise
litigating genuine issues of liability or damages, failure to settle within policy limits may
have a reasonable basis. But if a lawyer representing the insured alone would recommend
settlement, and the insured would settle, failure to settle within policy limits constitutes bad
faith. 29
Perez in Chapter 6 and Sanford in Chapter 9 illustrate another variation of this
circumstance: multiple insureds facing damage claims. Here, when conflict develop, courts
require separate counsel for each insured to guarantee each his or her right to a conflict-free
defense. 30 Failure to recognize this conflict can create insurer liability for bad-faith refusal
to settle, including the full amount of any eventual judgment against the insured. Lawyers
faced with insurers who refuse to settle within policy limits or provide independent counsel
must remind insurers about this potential for bad-faith liability. 31
The Bounds of the Law
In most jurisdictions, insurance law facilitates the work of defense lawyers by creating
additional incentives for insurers to abide by their obligation to provide a “defense” free of
unwarranted interference in the client-lawyer relationship.
For example, the tort of bad faith in insurance law is designed to encourage reasonable
settlements in the best interests of insureds. Insurance law also includes the remedy of
estoppel to prevent the insurer from unfairly relying on a policy defense. Similarly, courts
find that conflicts created by the duty to defend and policy limitations necessitate a
reservation of rights letter when some claims are made outside of policy coverage. These
letters promote a fair response to conflicts by notifying insureds about the contractual limits
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