The 5th Circuit Court of Appeals, handed down the attached decision in Grain Dealers v. Cooley, addressing obligations of an insurer to provide independent counsel.  We view this case as an expansion of the obligation that was created by the Moeller caseUnder Cooley,  an insurer is required to provide independent counsel if it either defends claims under a reservation of rights or defends less than all claims without a reservation of rights.  


In this recent case, Cooley owned a gas station and insured their operation through a policy with Grain Dealers.  Cooley sold the station to Pine Belt. Thereafter, a neighboring property owner reported that gasoline was leaking into a pond on the neighbor’s property.  In response, the MDEQ (Mississippi Department of Environmental Quality) launched an investigation and sent notice to Pine Belt requesting an assessment of the fuel lines, and Pine Belt forwarded the notice to Cooley. Cooley, in turn, requested defense and indemnification from Grain Dealers for the investigation.  Grain Dealers provided a defense for the investigation, but also advised that the policy did not cover the actual clean up.  Based on its agreement to defend, Grain Dealers retained counsel to represent Cooley. No reservation of rights was issued, and Grain Dealers did not advise Cooley of its opportunity to retain independent counsel, presumably because it was defending without reservation.  The MDEQ ultimately determined that Cooley and Pine Belt had to remediate the spill, but did not make a determination as to apportionment, or fault, between the two; although, the order by the MDEQ advised that any “aggrieved” party had 30 days to request a hearing. Neither Cooley nor Pine Belt requested a hearing, and Cooley alleged that the attorney hired by Grain Dealers to represent Cooley never advised Cooley of the right to a hearing.


Pine Belt later sought indemnification from Cooley for the cost of compliance with the MDEQ order. Cooley sought defense and indemnification from Grain Dealers for Pine Belt’s claim. Grain Dealers denied that the policy provided coverage as a result of a “total pollution exclusion” and filed a declaratory judgment action seeking a determination that it had no duty to defend or indemnify Cooley. Cooley counterclaimed seeking judgment that coverage was owed and that Grain Dealers failure to provide Cooley notice of its right to independent counsel in the MDEQ proceeding prejudiced Cooley. On summary judgment, the district court, Judge Keith Starrett, determined that Grain Dealers had no duty to defend or indemnify Cooley because (1) Cooley could not show that Grain Dealers’ failure to provide independent counsel resulted in prejudice and (2) gasoline was a “pollutant” under the policy making the total pollution exclusion applicable. Cooley appealed.


The Fifth Circuit Court of Appeals reversed the decision of the district court, finding that Grain Dealers was required to provide Cooley notice of its right to retain independent counsel even though it did not defend Cooley under a reservation of rights, but rather denied coverage for any obligation to clean up the spill under the policy. The Fifth Circuit found that Grain Dealers’ failure to provide notice of the right for Cooley to retain independent counsel resulted in prejudice to Cooley since the attorney hired by Grain Dealers failed to notify Cooley of its right to a hearing on the MDEQ order. Because of this prejudice, the panel concluded that coverage defenses had been waived and that the policy exclusion would not be applied. The panel stated:


“ First, Grain Dealers argues that Moeller does not control because Grain Dealers did not defend under a “reservation of rights.” The Moeller court, however, was concerned with conflicts that occur when an insurer provides a defense “while at the same time reserving the right to deny coverage in the event a judgment is rendered against the insured.” We see no relevant distinction between Grain Dealers’ outright denial of coverage from the start versus a reservation to later deny coverage. Grain Dealers’ refusal to ultimately cover the claim creates the same conflict of interest addressed in Moeller.


At best, this creates some confusion as to the insurer’s obligations when there are covered and non-covered claims, particularly in light of Liberty Mutual v. Tedford (here).  In  Tedford, the court discussed the waiver of coverage defenses that resulted from the insurer’s continued defense, under reservation, of certain claims following a ruling that put the claims squarely outside the scope of coverage under the policy. Meaning continued defense of clearly non-covered claims resulted in a waiver of the coverage defense. A fair reading of Tedford with Cooley, creates a potential conundrum for an insurer where there are covered and non-covered claims.


Contact us for more information on Moeller obligations in Mississippi.