Chi of Alaska, Inc. v. Employers Reinsurance Corp.

844 P.2d 1113, 1993 Alas. LEXIS 3, 1993 WL 6013

• Court: Alaska Supreme Court
• Decided: January 15, 1993
• Docket: S-4323
• Status: Published

Opinions

OPINION

MATTHEWS, Justice.

A seaman aboard a vessel owned by Oceanic Research Services, Inc. (Oceanic) accidentally sustained serious injuries. Oceanic believed it was insured against the loss by a $500,000 bodily injury insurance policy it purchased through CHI of Alaska, Inc. (CHI). That policy, however, actually had a bodily injury limit of only $100,000. Oceanic sued CHI, asserting contract and negligent tort claims, as well as a claim that CHI had intentionally misrepresented that the policy coverage was $500,000. Oceanic sought compensatory and punitive damages.

CHI tendered the defense of this suit to its liability insurer, Employers Reinsurance Corporation (Employers). Employers agreed to defend CHI, conditional on reserving its rights to disclaim coverage with respect to Oceanic’s claim of intentional misconduct. Employers claimed that intentional misconduct would be excluded under the policy if such misconduct was ratified by CHI.

CHI objected, noting that the reservation of rights created a conflict of interest between Employers and CHI, and demanded independent counsel paid for by Employers and selected by CHI. CHI stated that it wanted its personal attorney Brett von Gemmingen to defend it. Employers expressed reservations about von Gemmin-gen’s experience in handling claims of this nature and suggested that CHI provide the names of other attorneys with more experience who might be retained by Employers to defend CHI. This was not acceptable to CHI. Next Employers offered to pay von Gemmingen to defend that portion of the lawsuit pertaining to the intentional misconduct claim while retaining the law firm of Hughes, Thorsness, Gantz, Powell & Brundin to act as co-counsel for CHI with responsibility for the defense of all claims. CHI declined this offer. CHI then brought the present action for declaratory relief, seeking vindication of its position that it is entitled to select independent counsel. In the meanwhile, the Oceanic case has been jointly defended by Hughes Thorsness and von Gemmingen.

CHI and Employers each moved for summary judgment in the present case. CHI contended that there was necessarily a conflict of interest between CHI and Employers respecting the defense of Oceanic’s claim because Employers could win either by defeating all claims of liability or by establishing that CHI is liable for intentional misconduct. Given this conflict of interest, CHI contended that Employers should have no role in the selection of defense counsel because any attorney selected by an insurance company “will attempt to help his real client, the insurance company, at the expense of the insured.” CHI argued that the retention of von Gemmingen “to defend claims as they are pushed outside the policy coverage does not resolve the conflict.” Instead, dual representation, according to CHI, would still permit the attorney hired by the insurance company to work against the interests of the insured and in addition would cause confusion concerning who is to control various litigation decisions. In response and in support of its motion for summary judgment, Employers argued that potential conflicts were eliminated by allowing CHI to have its personal attorney handle the non-covered claim at Employers’ expense.

The superior court granted Employers’ motion for summary judgment. The court ruled that Employers’ offer to allow CHI to retain counsel of its choice to defend it on the intentional tort claim adequately resolved potential conflicts of interest. In addition, the court stated that if CHI contends at the conclusion of the Oceanic lawsuit “that a conflict existed despite Employers’ action in allowing it to retain its own counsel to defend uncovered claims, then it can raise this issue at the coverage trial.” Following the order granting Employers’ motion for summary judgment, a final judgment was entered which contained no explicit declaration. CHI has appealed from this judgment.

There are three issues on appeal:

1. Did Employers’ reservation of rights to disclaim coverage give CHI a right to retain independent counsel?

2. Does the two-counsel scheme proposed by Employers and approved by the superior court satisfy CHI’s right to independent counsel?

3. Does CHI have the unilateral right to select independent counsel?

We turn to a discussion of these issues.

1. Did Employers’ reservation of rights to disclaim coverage give CHI a right to retain independent counsel?

We answer this question in the affirmative.

Liability insurers have separate duties to defend and to indemnify their insureds.¹ In order to discharge their duty to defend, insurers hire counsel to conduct the defense of their insureds.² Often there is no conflict of interest between the interests of the insurers and the interests of the insureds. Both wish to successfully defend and, if that is not possible, minimize damages.

Sometimes, however, the insurer claims that the policy has been breached by the insured. These are so-called policy defenses³ of which the insured’s failure to give notice or to cooperate are typical examples. The insurer may wish to preserve its policy defenses and still provide a defense to the insured. By doing so it may be able to avoid paying the underlying claim either by succeeding in its defense of the insured or, failing that, by successfully asserting its policy defense. The insurer can preserve these options by defending the insured under a reservation of rights to later disclaim coverage if the reservation of rights is acquiesced in by the insured. Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 288 (Alaska 1980).

Similarly, the insurer may claim that although no condition of the policy has been breached by the insured, a particular claim made by the plaintiff does not come within the coverage of the policy. Such defenses are called coverage defenses. The most typical example is the coverage defense in this case where alternative theories of negligent and intentional tort are plead and negligent acts are covered by the policy but intentional acts are not.⁴ In such cases the insurer’s duty to defend may require it to defend even if the most likely theory of recovery is one for which there is no insurance coverage.⁵ The insurer can preserve its coverage defense and fulfill its duty to defend by defending under a reservation of rights to later disclaim coverage if liability is attributable to the excluded theory.

In cases where an insurer asserts either policy or coverage defenses, and defends its insured under a reservation of rights, there are various conflicts of interest between the insurer and the insured. We identified three of these in Continental. First, if the insurer knows that it can later assert non-coverage, or if it thinks that the loss which it is defending will not be covered under the policy, it may only go through the motions of defending: “it may offer only a token defense.... [I]t may not be motivated to achieve the lowest possible settlement or in other ways treat the interests of the insured as its own.” Id. at 289. Second, if there are several theories of recovery, at least one of which is not covered under the policy, the insurer might conduct the defense in such a manner as to make the likelihood of a plaintiffs verdict greater under the uninsured theory. Id. Third, the insurer might gain access to confidential or privileged information in the process of the defense which it might later use to its advantage in litigation concerning coverage. Id. at 291.

Merely because the insurer and the insured have divergent interests when the insurer seeks to defend under a reservation of rights does not necessarily mean that appointed counsel also has conflicting interests. If appointed counsel makes it clear at the outset of his engagement that he is going to be involved only in the defense of the liability claim, not in coverage issues, and that his client is the insured, not the insurer, conflicts should be rare.⁶ A number of authorities hold that this is the appropriate role of appointed counsel. For example, the Arizona Supreme Court held that appointed counsel who in the course of representing the insured gains access to information which may give rise to a policy defense is prohibited from communicating that information to the insurance company. Farmers Ins. Co. of Arizona v. Vagnozzi, 138 Ariz. 443, 448, 675 P.2d 703, 708 (1983): “We emphasize that the attorney who represents the insured owes him an undeviating allegiance whether compensated by the insurer or the insured and cannot act as an agent of the insurance company by supplying information detrimental to the insured.” Employers agrees with this view, noting that counsel has “an absolute duty of fidelity to the insured over the interests of the insurer.”

Other authorities, however, take the view that appointed counsel represents both the insured and the insurer. A former president of the Defense Research Institute has written that appointed counsel has an obligation to disclose to the insurance company information detrimental to the insured. Thomas A. Ford, The Insurance Contract: The Conflicts of Interest it Breeds, Ins. Couns.J. 610, 620 (Oct. 1969):

In order for the attorney to perform his role properly, he must never lose sight of the fact that he is working for two different and distinct parties — the insured and the insurer. He must fully disclose to both parties the information he has obtained as a result of his unique relationship with them.

See also Shafer v. Utica Mutual Ins. Co., 248 A.D. 279, 289 N.Y.S. 577, 587 (1936) (appointed attorney acted properly in disclosing to. insurer information which enabled insurer to disclaim liability); Alaska Code of Professional Responsibility EC 5-17 (stating that one typically recurring situation involving potentially different interests is dual representation of insured and insurer).

Where there is a conflict between insurer and insured, appointed counsel may tend to favor the interests of the insurer primarily because of the prospect of future employment. United States Fidelity & Guar. Co. v. Lewis A. Roser Co., 585 F.2d 932, 938 n. 5 (8th Cir.1978) (“Even the most optimistic view of human nature requires us to realize that an attorney employed by an insurance company will slant his efforts, perhaps unconsciously, in the interest of his real client — the one who is paying his fee and from whom he hopes to receive future business — the insurance company.”); San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, Inc., 162 Cal.App.3d 358, 208 Cal.Rptr. 494, 498 (1984) (“ ‘A lawyer who does not look out for the carrier’s best interest may soon find himself out of work.’ ” (quoting the trial court)); Michael A. Berch and Rebecca W. Berch, Will the Real Counsel for the Insured Please Rise?, 19 Ariz.St.L.J. 27, 29-30 (1987) (“[T]he attorney’s economic interests weigh heavily in favor of the insurer, which, after all, may retain his services in other cases; yet the rules of professional responsibility tip the scales toward the insured.”); Arthur P. Berg, Losing Control of the Defense — The Insured’s Right to Select His Own Counsel, 26 For the Defense 10, 15 (July 1984) (“Although [some] courts seem to trust the insurer and attorney to act in the best interests of the insured, the more common view is that the longstanding ties that defense counsel has with the insurer will inevitably influence his conduct of the case.”); Sampson A. Brown and John L. Romaker, Cumis, Conflicts and the Civil Code: Section 2860 Changes Little, 25 Cal. W.L.Rev. 45, 54 (1988) (“The attorney, wishing to maintain the insurer’s business, does not want to aggravate the company.”); Mark A. Saxon, Conflicts of Interest: Insurers’ Expanding Duty to Defend and the Impact of “Cumis” Counsel, 23 Idaho L.Rev. 351, 353 (1987) (Insurance counsel’s “relationship with the insurer is contractual, usually ongoing, supported by strong financial interests, and often strengthened by sincere friendships.”).⁷ In recognition of this, most courts hold that in conflict situations the insured has the right to independent counsel to conduct its defense and the insurance company has the obligation to pay the reasonable value of the defense conducted by independent counsel.⁸

In dicta in National Indemnity Co. v. Flesher, 469 P.2d 360, 367 n. 22 (Alaska 1970), we recognized the right of the insured to independent counsel under circumstances involving a coverage defense: “In such circumstances, the insurer must provide the insured with independent counsel.” Ten years later in Continental Insurance Co. v. Bayless & Roberts, Inc., 608 P.2d 281 (Alaska 1980), we recognized the right of the insured to independent counsel in cases involving policy defenses. However, we reserved the question whether the insured had the same right in coverage defense cases. Id. at 289.

In Continental the insurer claimed that the insured had breached the cooperation clause of the policy, but offered to defend the insured under a reservation of rights. Id. at 283. The insured rejected the insurer’s offer of a conditional defense and demanded a defense without a reservation of rights. Id. at 286. This the insurer refused to do. Id. Subsequently, the insured’s personal counsel took over the defense of the case and entered into a settlement which resulted in a consent judgment against the insured. Id. In the ensuing litigation between the insured and the insurer, the insurer contended that the insured had breached the insurance policy by refusing to accept the insurer’s offer to defend under a reservation of rights. Id. at 288. We held that the insured did not breach the policy and that it was within its rights to require the insurer to defend unconditionally or withdraw from the defense. Id. at 291. We also affirmed the jury’s award which included $4,000 expended by the insured as its defense costs. Id. at 296 n. 28.

In reaching this result, we expressed and adopted in policy defense cases the general rule that the insurer must surrender its right to control the defense to the insured if the insured refuses to accept a defense under a reservation of rights:

[T]he general rule is that, if an insured refuses to accede to the insurer’s reservation of rights, the carrier must either accept liability under the policy and defend unconditionally or surrender control of the defense....

Id. at 288. We explained in some detail the types of conflicts of interests which arise when the insurer asserts a right to later contest its liability. Id. at 289-90. We noted that these conflicts might be avoided if the insured were offered the right to retain independent counsel:

The possibility of a conflict might be avoided in such cases if the insurance company were to offer its insured the right to retain independent counsel to conduct his defense, and agree to pay all the necessary costs of that defense. In that event, it would seem that the company should be entitled to reserve the right to later litigate an alleged policy defense.

Id. at 291 n. 17. As already stated, the holding in Continental was limited to policy defenses; the question as to whether the same rules should apply where coverage defenses are involved was reserved. Id. at 289.

All three general types of conflicts of interests between insurer and insured which we identified in Continental — the insurer may offer mere token defense, the insurer may steer result to judgment under an uninsured theory of recovery, the insurer may gain access to confidential or privileged information which it may later use to its advantage — apply in coverage defense cases. However, the second reason does not apply in policy defense cases. Policy defenses, such as lack of notice or noncooperation, involve facts which are generally irrelevant to the litigation between the plaintiff and the insured. Therefore, appointed counsel has no opportunity to “covertly frame [a] defense to achieve a verdict based upon [a theory under which no coverage would result] so that [the insurer] could later assert that the defense was not covered_” Id. at 289. Thus, the need for independent counsel is, if anything, greater in coverage than in policy defense cases.⁹ We conclude that the right to independent counsel recognized in Continental should also apply to cases involving cover-. age defenses.¹⁰ We thus adhere to the dicta contained in National Indemnity, which we noted above.

2. Does the two-counsel scheme proposed by Employers and approved by the superior court satisfy CHI’s right to independent counsel?

We answer this question in the negative.

The trial court was of the view that neither CHI nor Employers was bound by any determination of fact made in the underlying tort suit concerning whether CHI’s conduct was negligent or intentional. From this the trial court concluded that Employers’ two-counsel scheme would solve the conflict of interest between the insurer and the insured.¹¹ The view that issues determined in the initial action as to which a conflict of interest exists between insurer and insured may be subsequently relitigated appears to be sensible and in accordance with a number of authorities.¹² That view, however, does not resolve all conflicts of interest between insurer and insured. It does not alleviate the access of appointed counsel to information in possession of the insured which may be used against the insured in subsequent coverage litigation:

This solution overlooks the fact that, during the initial litigation, the insured may transmit information to counsel that the insurer could use in subsequent litigation to the insured’s disadvantage. A heavy burden of silence falls on the attorney the insurer selects to defend the insured.

Berch & Berch, supra, at 32 n. 23. The fact that personal counsel for CHI is acting as co-counsel with counsel appointed by the insurer also does not eliminate this conflict. Appointed counsel has and should have full access to the client so that the defense may be effectively conducted.

Moreover, even where the facts in conflict may be relitigated, the opportunity to direct a case through witness selection, interrogation, and discovery may afford a dispositive advantage in subsequent litigation:

In such cases, the insured’s attorney has the opportunity to develop the facts through discovery and to shape the case for, and present the evidence at, the trial. So even though the insured or the insurer may relitigate the coverage issue in a subsequent proceeding, controlling the defense in the main proceeding could be critical. Testifying under oath in the main proceeding may freeze in the witnesses’ minds one version of the facts. Very little latitude may remain in subsequent proceedings to mold the evidence bearing upon coverage.

Id. at 37-38.¹³

We conclude therefore that the two-counsel solution does not satisfactorily resolve the conflicts which have given rise to the right to independent counsel.

3. Does CHI have the unilateral right to select independent counsel?

Most cases which recognize the right to independent counsel express the view that the insured has the right to select independent counsel of its choice. American Family Life Assur. Co. v. United States Fire Co., 885 F.2d 826, 831 (11th Cir.1989) (if insured had rejected conflicted counsel, insurer “would have been obligated to pay” for defense conducted by insured) (interpreting Georgia law); Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120-21 (5th Cir.1983) (“When a reservation of rights is made ... the insured may ... pursue his own defense [and the] insurer remains liable for attorneys’ fees”) (interpreting Texas law); Previews Inc. v. California Union Ins. Co., 640 F.2d 1026 (9th Cir.1981) (“the insurer’s obligation to defend extends to paying the reasonable value of the legal services and costs performed by independent counsel selected by the insured”) (interpreting California law); San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, 162 Cal.App.3d 358, 208 Cal.Rptr. 494, 501-02 (1984) (“the insurer must pay the reasonable cost for hiring independent counsel by the insured”); Maryland Casualty Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24, 31 (1976) (The insured “has the right to be defended ... by an attorney of his own choice who shall have the right to control the conduct of the case.”); Illinois Masonic Medical Ctr. v. Turegum Ins. Co., 168 Ill.App.3d 158, 118 Ill.Dec. 941, 943, 522 N.E.2d 611, 613 (1988) (“where a conflict of interest exists the insured, rather than the insurer, is entitled to assume control of the defense of the underlying action; ... the insurer must underwrite the reasonable costs incurred by the insured in defending the action with counsel of his own choosing.”); Prashker v. United States Guar. Co., 1 N.Y.2d 584, 154 N.Y.S.2d 910, 915, 136 N.E.2d 871, 876 (1956) (“the selection of the attorneys to represent the assureds should be made by them rather than by the insurance company, which should remain liable for the reasonable value of the services”); Allstate Ins. Co. v. Noorhassan, 158 A.D.2d 638, 551 N.Y.S.2d 942, 944 (1990) (the insured “should be permitted to select their own attorney [and the insurer] is liable for the reasonable value of the services”); Gorman v. Pattengell, 145 A.D.2d 411, 535 N.Y.S.2d 402, 404 (1988) (the insured “is entitled to retain, at her insurer’s expense, an attorney with no business connection to her insurance carrier and who will defend solely her interests”); see also Mallen, supra, at 118 (“The right to independent counsel means an attorney of the insured’s choice.”); Smyth, supra, at 938 (“Most courts appear to allow the insured to select independent counsel when a conflict of interests arises.”). Under this line of authority the insurance company is obligated to pay the “reasonable cost for hiring independent counsel by the insured.” Cumis, 208 Cal.Rptr. at 506; see also Mallen, supra, at 120.

A recent California case, Center Foundation v. Chicago Insurance Co., 227 Cal. App.3d 547, 278 Cal.Rptr. 13 (App.1991), has noted that the insured’s right to select independent counsel is subject to the implied covenant of good faith and fair dealing. In context, this means that the insured must act reasonably to select an attorney who is capable of presenting an effective defense and who will bill reasonably for his or her services. The court stated:

In our view, the duty of good faith imposed upon an insured includes the obligation to act reasonably in selecting as independent counsel an experienced attorney qualified to present a meaningful defense and willing to engage in ethical billing practices susceptible to review at a standard stricter than that of the marketplace. Conduct arguably acceptable in the ordinary attorney-client relationship where the latter pays the former from his own pocket is not necessarily appropriate in the tripartite context created when independent counsel undertakes to represent the insured at the expense of the insurer.

Center Foundation, 278 Cal.Rptr. at 21 (footnote omitted).

A few cases support Employers’ argument that it should have the right to approve of CHI’s choice for independent counsel. In Employers’ Fire Insurance Co. v. Beals, 103 R.I. 623, 240 A.2d 397, 404 (1968), the court approved of the solution suggested in Prashker, that the insured should be allowed to select independent counsel. However, the Beals court added the proviso that counsel selected by the insured should be approved by the insurer and that “[s]uch approval, however, should not be unreasonably withheld.” Id. 240 A.2d at 404. Fireman’s Fund Insurance Co. v. Waste Management of Wisconsin, 777 F.2d 366 (7th Cir.1985) (apparently interpreting Wisconsin law), involves an atypical fact pattern. The question whether the insurer should have approval rights for independent counsel was not the issue; however, the case does contain dicta which states that giving the insurer the right to approve or disapprove of independent counsel selected by the insured is “fair, sensible and reasonable.” Id. at 370.

We conclude that the insured should have the unilateral right to select independent counsel and that this right should be subject to the implied covenant of good faith and fair dealing.¹⁴ In our view the covenant of good faith and fair dealing in this context requires that the insured select an attorney who is, by experience and training, reasonably thought to be competent to conduct the defense of the insured. Such a result, in our view, fairly balances the interest of the insured — being defended by competent counsel of undivided loyalty — with the interests of the insurer — having the defense of the insured conducted by competent counsel. The insurer is only required to pay the reasonable cost of the defense. See, e.g., Turegum, 118 Ill.Dec. at 943, 522 N.E.2d at 613 (“insurer must underwrite reasonable costs incurred by the insured in defending the action”); Noo-rhassan, 551 N.Y.S.2d at 944 (same). This provides a measure of protection for insurers against overbilling — and overlitigat-ing — by independent counsel.

In the present case the record is unclear as to whether it is reasonable for CHI to select von Gemmingen as independent counsel. On remand, a hearing should be conducted promptly in order to determine this question. If the trial court finds that von Gemmingen is a reasonable selection, a declaration should be entered that he may conduct the defense of CHI as independent counsel. If the court finds that he is not a reasonable selection, the court should so declare and CHI should proceed to select qualified counsel.

For the above reasons the judgment of the superior court is REVERSED and this case is REMANDED for further proceedings and entry of a declaration in accordance with this opinion.

MOORE, J., concurs in part and dissents in part.

COMPTON, J., dissents.

1 . Sauer v. The Home Indemnity Co., 841 P.2d 176, 180 (Alaska 1992); Alaska Pac. Assur. Co. v. Collins, 794 P.2d 936, 945 (Alaska 1990); National Indem. Co. v. Flesher, 469 P.2d 360, 366 (Alaska 1970); Theodore v. Zurich Gen. Accident & Liab. Ins. Co., 364 P.2d 51, 55 (Alaska 1961).

2 . In this opinion we will refer to such counsel as appointed counsel.

3 . Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 288-89 (Alaska 1980).

4 . See Continental, 608 P.2d at 289.

5 . The duty to defend arises "if the complaint on its face alleges facts which, standing alone, give rise to a possible finding of liability covered by the policy,” Afcan v. Mutual Fire, Marine & Inland Ins. Co., 595 P.2d 638, 645 (Alaska 1979); or, if the complaint does not contain such allegations, where “the true facts are within, or potentially within, the policy coverage and are known or reasonably ascertainable to the insurer.” National Indent. Co. v. Flesher, 469 P.2d 360, 366 (Alaska 1970).

6 . Ronald E. Mallen, A New Definition of Insurance Defense Counsel, Ins.Couns.J. 108, 108-109 (Jan. 1986).

7 . In addition, at least two of our reported cases demonstrate that appointed counsel sometimes favor the interest of the insurer over those of the insured. Continental, 608 P.2d at 294 ("it is quite apparent that both [appointed counsel] and Continental believed that [appointed counsel's] first loyalty was to Continental, and that throughout the course of the litigation he acted for and on behalf of the insurance company”); Bohna v. Hughes, Thorsness, Gantz, Powell & Brundin, 828 P.2d 745, 749-50 (Alaska 1992) (appointed counsel proposed to put insured through bankruptcy in order to reduce insurer’s liability to plaintiff).

8 . "The prevailing view is that the presence of a coverage issue enables the insured to reject appointed counsel, select his own lawyer and control the defense at the expense of the insurer." Mallen, supra, at 113; see, e.g., American Family Life Assur. Co. v. United States Fire Co., 885 F.2d 826, 831 (11th Cir.1989) (interpreting Georgia law); Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120-21 (5th Cir.1983) (interpreting Texas law); Previews Inc. v. California Union Ins. Co., 640 F.2d 1026 (9th Cir.1981) (interpreting California law); San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, 162 Cal.App.3d 358, 208 Cal.Rptr. 494, 501-02 (1984); Maryland Casualty Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24 (1976); Illinois Masonic Medical Ctr. v. Turegum Ins. Co., 168 IlI.App.3d 158, 118 Ill.Dec. 941, 522 N.E.2d 611 (1988); Prashker v. United States Guar. Co., 1 N.Y.2d 584, 154 N.Y.S.2d 910, 915, 136 N.E.2d 871, 876 (1956); Allstate Ins. Co. v. Noorhassan, 158 A.D.2d 638, 551 N.Y.S.2d 942, 944 (1990); Gorman v. Pattengell, 145 A.D.2d 411, 535 N.Y.S.2d 402, 404 (1988); see abo Todd R. Smyth, Annotation, Duty of Insurer to Pay for Independent Counsel When Conflict of Interest Exbts Between Insured and Insurer, 50 A.L.R.4th 932, 938 (1986). A minority of courts hold that the insured has no right to independent counsel. Mallen, supra, at 113. They rely on appointed counsel to resolve conflicts in favor of the insured. Id.; see, e.g., Federal Ins. Co. v. X-Rite, Inc., 748 F.Supp. 1223, 1229 (W.D.Mich.1990).

9 . See also Berch & Berch, supra, at 38 ("[policy defense] cases do not present the same dangers [of conflicting interests] that coverage cases present").

10 . We have recently recognized the application of the right to independent counsel expressed in Continental in the context of a coverage defense case in Sauer v. The Home Indemnity Co., 841 P.2d 176, 182, 183 (Alaska 1992), where we stated:

However, if the insured does not consent to a non-waiver agreement, or to a defense under a reservation of rights, then the insurance company must choose whether it wishes to defend unconditionally or pursue other options. One such option is to permit the insured to exercise its right to reject the defense offered by the insurer and to obtain substitute counsel at the insurer’s expense. In the event the defense is conducted by substitute counsel, the insurance company retains the right to later contest policy coverage. See Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 291 n. 17 (Alaska 1980).

11 . As noted earlier, Employers offered to pay CHI’s personal attorney, von Gemmingen, to defend against the noncovered claims.

12 . See Theodore v. Zurich Gen. Accident & Liab. Ins. Co., 364 P.2d 51, 56 (Alaska 1961) (issues determined in initial action as to which interests of insurer and insured were not conflicting held to be binding on insurer); Farmers Ins. Co. v. Vagnozzi, 138 Ariz. 443, 448, 675 P.2d 703, 708 (1983); Ferguson v. Birmingham Fire Ins. Co., 254 Or. 496, 460 P.2d 342, 349 (1970); Restatement (Second) of Judgments § 58 (1982). Section 58 of Restatement (Second) of Judgments provides:

Effect of Judgment Against Indemnitee on Indemnitor Who Has Independent Duty to Defend Indemnitee

(1) When an indemnitor has an obligation to , indemnify an indemnitee (such as an insured)

against liability to third persons and also to provide the indemnitee with a defense of actions involving claims that might be within the scope of the indemnity obligation, and an action is brought against the indemnitee involving such a claim and the indemnitor is given reasonable notice of the action and an opportunity to assume its defense, a judgment for the injured person has the following effects on the indemnitor in a subsequent action by the indemnitee for indemnification:

(a) The indemnitor is estopped from disputing the existence and extent of the indemni-tee’s liability to the injured person; and

(b) The indemnitor is precluded from relit-igating those issues determined in the action against the indemnitee as to which there was no conflict of interest between the indemnitor and the indemnitee.

(2) A "conflict of interest” for purposes of this Section exists when the injured person’s claim against the indemnitee is such that it could be sustained on different grounds, one of which is within the indemnitor’s obligation to indemnify and another of which is not.

13 . CHI also notes that there are unresolved problems of which of the two counsel is to control discovery and trial strategy. One commentator has noted: "The role of a second Iaw-yer with clearly antagonistic coverage interests to the insured is uncertain and seems inappropriate." Mallen, supra, at 119.

14 . We have held that the implied covenant of good faith and fair dealing is inherent in all contractual relationships including the insured-insurer relationship. Guin v. Ha, 591 P.2d 1281, 1291 (Alaska 1979).