Defense Counsel Journal - International Association of Defense ...

Splitting the File in Liability Insurance Page 407wall between the adjusters cured anyconflict of interest that would havenecessitated the appointment ofindependent counsel to defend the insuredin the underlying action. 48 The ArmstrongCleaners court rejected Erie’s argumentbased in part on the insufficiency of itsscreening procedures. 49 The court didnot, however, recognize a duty to split thefile.II.ANALYSISThere are good reasons, whetherconsidered individually or together, forrejecting arguments for a duty to splitfiles in conflict of interest situations.First, consider the case in which aliability insurer receives notice of a lossbefore suit is filed. Although no suit hasbeen filed, it is safe to say that the insurerwould prefer to have the loss fall outsidecoverage rather than within. Now, it iscertainly true that an insurer’s interest innegating coverage is not alone a conflictof interest. 50 At the same time, anadjuster conducting a pre-suitinvestigation may develop informationthat will allow the insurer to denycoverage just as easily as the adjuster willmarshal facts relevant to the insured’sdefense should a third-party sue theinsured. The insurer is entitled to obtaininformation from the insured that isrelevant to coverage—at least until theinsurer has good reason to believe that48 Id. at 817.49 Id.50 Nat’l Cas. Co. v. Forge Indus. Staffing Inc.,567 F.3d 871, 874 (7th Cir. 2009) (applyingIllinois law).coverage may be disputed. 51 Even thenthe insurer may be able to obtaininformation from the insured that bearson coverage pursuant to the cooperationclause in its policy. 52 Yet, the insurer isnot required at the outset to assign twoadjusters to the loss: one to prepare theinsured’s defense in the event of a claimor suit, and one to evaluate coverage. It isperfectly reasonable for a single adjusterto be responsible for both liability andcoverage when there is no litigationpending. 53If a liability insurer were to have aduty to split a file in a case in whichcoverage was disputed, then the insurerwould also have a duty to split the filefrom the time it received pre-suit noticeof a loss until it confirmed coverage forthe loss. The argument here isstraightforward: an insurer thatundertakes a pre-suit investigation andwaits to split the file only if and when theadjuster learns of information suggestinga possible coverage defense has actedinappropriately because the adjuster willby then be privy to information theinsurer can use against the insured.Assigning the original adjuster the51 See Lloyd’s & Inst. of London UnderwritingCos. v. Fulton, 2 P.3d 1199, 1204 (Alaska2000) (stating that an insurer conducting a presuitinvestigation must notify its insured of aconflict of interest when the insurer “has goodreason to believe that a coverage dispute mayexist”).52 1 ALLAN D. WINDT, INSURANCE CLAIMS ANDDISPUTES § 2:6 (5th ed. 2007).53 Edward Currie, Jr., John G. Farnan andLaura Faust, Splitting Files: Implications onHandling Liability and Coverage Claims 5(July 2011) (paper presented at the annualmeeting of the Federation of Defense &Corporate Counsel).