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Page 400 DEFENSE COUNSEL JOURNAL–October 2012information which it can then use to itsadvantage in coverage litigation. 5 Toguard against these possibilities and todispel later allegations of bad faith,liability insurers sometimes “split thefile” in a case defended under reservationof rights. In such cases, the insurerestablishes one file for the investigationand defense of the loss and a second filefor the investigation and resolution ofcoverage issues, and assigns a differentclaims professional to each. 6But insurers do not always split files,and their failure to do so occasionallygives rise to bad faith and estoppelallegations, among other claimed wrongs.Policyholders’ lawyers insist that insurersthat do not split claim files in appropriatecases breach their duties to their insureds,violate industry custom and practice, andviolate state unfair claims settlementpractices acts. 7 They base thesearguments on years of case law holdingthat insurers cannot employ the samedefense counsel representing the insuredto develop coverage defenses, or useinformation wrongfully obtained by adefense lawyer to deny coverage. 8 There5 Armstrong Cleaners, Inc. v. Erie Ins. Exch.,364 F. Supp.2d 797, 814-815 (S.D. Ind. 2005).6 Steven Plitt and Steven J. Gross, SplittingClaim Files: Managing the Concern forConflicts of Interest Through Use of InsuranceCompany Conflict Screens, 32 INS. LITIG. REP.151, 151 (2010) (calling this “a commonclaims practice”).7 Brent W. Huber and Angela P. Krahulik,Bad Faith Coverage Litigation: The InCovenant of Good Faith and Fair Dealing, 42TORT TRIAL & INS. PRAC. L.J. 29, 47 (2006).8 Parsons v. Cont’l Nat’l Am. Group, 550 P.2d94, 97-100 (Ariz. 1976); Employers Cas. Co.v. Tilley, 496 S.W.2d 552, 558-561 (Tex.1973).is, however, a material differencebetween an insurer inducing a defenselawyer to violate her duties to her clientor exploiting confidential informationsupplied by a careless or unprincipleddefense lawyer to deny coverage and aninsurer making a single adjusterresponsible for evaluating both liabilityand coverage. The former types ofconduct may well expose the insurer tobad faith liability or strip it of coveragedefenses; the latter arrangement, standingalone, should not. The fact that a singleclaims professional is responsible for bothliability and coverage issues in a givencase does not compel the conclusion thatthe insurer will be tempted to shortchangethe insured’s defense. Courts’ focuswhen evaluating insurer-insured conflictsin this context therefore must be on theinsurer’s allegedly improper collection oruse of information to the insured’sdetriment, not on the insurer’s internalorganization. 9 Although insurancecompanies may opt to split files inappropriate cases, they have no duty to doso. 10 An insurer’s failure to split a file,9 See Vt. Mut. Ins. Co. v. Parsons Hill P’ship,1 A.3d 1016, 1025 (Vt. 2010) (“The issue isnot whether [the] insurance carrier properlyorganized its staff and maintained a wallbetween coverage counsel and defensecounsel. . . . Instead, the issue is whether itsorganization could have had any effect on thecoverage determination.”).10 Employers Ins. of Wausau v. Albert D.Seeno Constr. Co., 945 F.2d 284, 286-288 (9thCir. 1991) (applying California law); StateFarm Fire & Cas. Co. v. Super. Ct., 265 Cal.Rptr. 372, 374-375 (Cal. Ct. App. 1989);also Specialty Surplus Ins. Co. v. SecondChance, Inc., 412 F. Supp.2d 1152, 1169(W.D. Wash. 2006) (rejecting the argumentthat an insurer had to assign separate adjusters
Splitting the File in Liability Insurance Page 401without more, will not support bad faithallegations or similar claims. 11This article explains why insurers donot have a duty to split files in cases inwhich coverage is disputed. Part I beginsthat analysis with a survey of the limitedcase law on the subject. Part II goesbeyond the cases in explaining whyinsurers have no duty to split files. Part IIalso recognizes that although insurersclearly have no duty to split files, that factalone does not necessarily end theinquiry. Rather, the next question iswhether insurers arguably should splitfiles in appropriate cases to preemptpotential bad faith or estoppel argumentsor further the insured’s defense. Part IIidentifies several possible reasons forsplitting files that insurers may wish toconsider and briefly identifies somelogistical considerations when splittingfiles. Of course, the fact that an insurancecompany opts not to split a file in aparticular case evidences nothing otherthan a legitimate exercise of businessjudgment.to two insureds’ files in the same matter);United Servs. Auto. Ass’n v. Bult, 183 S.W.3d181, 187-188 (Ky. Ct. App. 2003) (concludingthat insurer had no duty to assign twoadjusters where multiple insureds wereinvolved in a single loss).11 See, e.g., State Farm Fire & Cas. Co. v.King Sports, Inc., 827 F. Supp.2d 1364, 1378(N.D. Ga. 2011) (applying Georgia bad faithlaw); Travelers Indem. Co. v. Page & Assocs.Constr. Co., No. 07-07-0022-CV, 2002 WL1371065, at *10 (Tex. App. June 25, 2002)(involving alleged violations of the TexasInsurance Code and Deceptive Trade PracticesAct and rejecting insurer’s failure to split fileas a basis for liability).I. Reviewing the Case LawNo reported case has recognized aduty on an insurer’s part to split a file andseveral courts have expressly rejectedcalls for such a duty. A few courts havediscussed insurers’ use of informationdeveloped in an insured’s defense toadvance their coverage positions, orinsurers’ decisions to split files or theirmethods for doing so, but have alwaysstopped far short of endorsing a duty tosplit a file.A. Cases Rejecting a Duty to Splita FileState Farm Fire & Casualty Co. v.Superior Court 12 is one of the firstreported cases to address file-splitting.State Farm was a bad faith case. In theunderlying action, State Farm defendedits insureds, the Durants, under areservation of rights. State Farm alsofiled a declaratory judgment actionalleging that it had no duty to defend orindemnify the Durants under theirhomeowners policy. State Farm providedthe Durants with independent counsel—Cumis counsel, in California parlance—and retained a separate law firm toprosecute the declaratory judgmentaction. 13 A single State Farm adjuster,12 265 Cal. Rptr. 372 (Cal. Ct. App. 1989).13 Although independent counsel are oftendescribed as Cumis counsel, the concept ofindependent counsel long preceded thedecision in San Diego Navy Federal CreditUnion v. Cumis Insurance Soc’y, 208 Cal.Rptr. 494 (Cal. Ct. App. 1984). See, e.g.,Prashker v. United States Guar. Co., 136N.E.2d 871, 876 (N.Y. 1956) (offeringindependent counsel paid for by insurer as
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