When Do Insureds Get Independent Counsel in Illinois? Pan-Oceanic Provides New Guidance

A recent Illinois appellate decision, Pan-Oceanic Eng’g Co., Inc. v. Grange Mut. Ins., 2026 IL App (1st) 250511-U, provides new guidance on when an insured may be entitled to independent counsel at the insurer’s expense.

Historically, Illinois courts focused on whether insurer-appointed counsel could shape or shift facts in a way that would defeat coverage. Pan-Oceanic signals a more practical approach, focusing not only on coverage-related factual disputes, but also on whether the insurer and insured remain genuinely aligned on litigation strategy, settlement incentives, and financial exposure, particularly where punitive damages are involved.

It is well established, though commonly misunderstood, that insurers do not automatically lose control of the defense simply because there is a reservation of rights or coverage dispute. See, e.g., Shelter Mut. Ins. Co. v. Bailey, 160 Ill. App. 3d 146, 154 (5th Dist. 1987), citing O’Bannon v. N. Petrochemical Co., 113 Ill. App. 3d 734, 739 (1st Dist. 1983). See also Nandorf, Inc. v. CNA Ins. Companies, 134 Ill. App. 3d 134, 137-38 (1st Dist. 1985). The real question is whether the insurer’s interests and the insured’s interests have actually diverged in a meaningful way during the underlying litigation.

The basic rule comes from Maryland Cas. Co. v. Peppers, 64 Ill. 2d 187, 196-99 (1976), where the Illinois Supreme Court explained that if the lawyer hired by the insurer could defend the case in a way that helps the insurer avoid coverage later, then the insured should not be forced to accept that representation. In that situation, the insured is entitled to choose its own counsel, and the insurer must pay the reasonable costs of the defense.

Courts generally determine whether a conflict exists by comparing the allegations in the underlying complaint to the terms of the insurance policy. Courts describe the inquiry as whether insurer-appointed counsel could “steer” or “shift” facts in a way that pushes the case outside coverage due to “mutually exclusive theories” of liability against the insured, which has been referred to as a “demanding standard.” Builders Concrete Servs., LLC v. Westfield Nat’l Ins. Co., 486 F. Supp. 3d 1225, 1229 (N.D. Ill. 2020) (Illinois law); Nat’l Cas. Co. v. Forge Indus. Staffing Inc., 567 F.3d 871 (7th Cir. 2009) (Illinois law). See also Am. Family. Mut. Ins. Co. v. W.H. McNaughton Builders, Inc., 363 Ill. App. 3d 505, 511-14 (2d Dist. 2006).

Some common situations where courts have found a conflict requiring independent counsel include:

• Covered negligence versus uncovered intentional conduct. If a lawsuit alleges both negligence (which may be covered) and intentional misconduct (which may not be covered), insurer-appointed counsel may have an incentive to frame the conduct as intentional to avoid coverage. Courts say that is a true conflict requiring independent counsel. Maryland Cas., 64 Ill. 2d at 193, 198-99; State Sec. Ins. Co. v. Globe Auto Recycling Corp., 141 Ill. App. 3d 133, 136 (1st Dist. 1986); Fireman’s Fund Ins. Co. v. Waste Mgmt. of Wisconsin, Inc., 777 F.2d 366, 368 (7th Cir. 1985) (Illinois law).
• Intent- or knowledge-based coverage issues. Conflicts can arise where coverage depends on whether the insured acted knowingly, intentionally, recklessly, or wrongfully, because defense strategy and factual development may directly impact coverage. Pekin Ins. Co. v. Home Ins. Co., 134 Ill. App. 3d 31, 35 (1st Dist. 1985); Williams v. Am. Country Ins. Co., 359 Ill. App. 3d 128, 138 (1st Dist. 2005); but see Sears, Roebuck & Co. v. Emerson Elec. Co., 2001 WL 1155273, at *9 (N.D. Ill. Sept. 28, 2001) (no right to independent counsel where vigorous defense benefits both parties).
• Multiple insureds with materially adverse interests. Conflicts can also arise where the same insurer is defending multiple insureds whose defenses or litigation interests are materially adverse to one another. In those situations, the insurer may no longer be able to fairly control the defense for all insureds at the same time. Murphy v. Urso, 88 Ill. 2d 444, 454 (1981) (insurer could not control defense where insureds’ interests “diametrically opposed”).
• Punitive damages creating significantly different litigation incentives. More recent Illinois cases recognize that conflicts are not limited to situations where insurer-appointed counsel could manipulate facts to defeat coverage. A conflict may also exist where the insurer and insured no longer share the same practical litigation incentives.

For example, in 2019, the First District Appellate Court reiterated that the conflict inquiry should focus on “who bears the greater risk and interest in the allegations of the underlying complaint.” Xtreme Prot. Services, LLC v. Steadfast Ins. Co., 2019 IL App (1st) 181501, ¶ 33, citing Nandorf, 134 Ill. App. 3d at 140. There, because punitive damages substantially exceeded compensatory damages and were excluded from coverage, the insured faced the overwhelming financial exposure while the insurer had comparatively little risk. The court held that this divergence created a conflict requiring independent counsel.

Pan-Oceanic built on that reasoning. Although it is an unpublished Rule 23 decision, the case notably synthesizes and expands on prior Illinois conflict of interest cases, particularly Xtreme and Nandorf. The Pan-Oceanic court held that a conflict existed where punitive damages created materially different exposure and litigation incentives between the insurer and insured. The court emphasized that the insurer only faced compensatory exposure while the insured alone faced potentially unlimited punitive exposure. According to the court, that divergence could affect virtually every aspect of the litigation, including settlement decisions, discovery strategy, trial tactics, jury instructions, and overall risk tolerance. The court also made clear that once a conflict exists, the insured controls counsel selection and the insurer cannot continue controlling the defense while simultaneously attempting to impose internal panel rate limitations on counsel fees.

Illinois courts also say, however, that large exposure alone does not automatically mean the insured gets independent counsel. In Joseph T. Ryerson & Son, Inc. v. Travelers Indem. Co. of Am., 2020 IL App (1st) 182491, ¶¶ 56-60, the insured argued there was a conflict because the verdict was far above the primary policy limits and the insurers were fighting over who controlled the appeal and bond issues. The court still held that excess exposure alone was not enough. There still had to be a real split between the insurer’s interests and the insured’s interests in the actual defense of the case. That said, Ryerson shows the kinds of facts that can strengthen an independent counsel argument. The insured claimed the insurer refused to tender limits, refused to give up control of the defense despite massive exposure, delayed handling appeal bond issues, and forced the insured to hire its own lawyers to protect itself while the insurers fought among themselves. Even though the court ultimately found no actionable conflict there, the case shows courts will closely examine whether the insurer’s actions are putting its own financial interests ahead of protecting the insured.

In short, Illinois law provides that an insured is entitled to independent counsel where the insurer’s lawyer cannot fully defend the insured without also protecting the insurer’s own separate coverage or financial interests. While older Illinois cases focused heavily on whether insurer-appointed counsel could shape facts to defeat coverage, more recent cases reflect a broader and more practical inquiry, i.e., whether the insurer and insured remain genuinely aligned in terms of litigation strategy, settlement incentives, and financial risk.

Please contact us if you need assistance with coverage or independent counsel issues, reservation of rights disputes, or other insurer defense obligations.