                            PUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT


TWIN CITY FIRE INSURANCE COMPANY;       
HARTFORD CASUALTY INSURANCE
COMPANY,
                Plaintiffs-Appellees,
                 v.
                                                  No. 04-2048
BEN ARNOLD-SUNBELT BEVERAGE
COMPANY OF SOUTH CAROLINA, LP;
SUNBELT BEVERAGE COMPANY, LLC;
HARVEY BELSON; WILLIAM TOVELL,
            Defendants-Appellants.
                                        
           Appeal from the United States District Court
          for the District of South Carolina, at Columbia.
           Joseph F. Anderson, Jr., Chief District Judge.
                           (CA-01-4769-3)

                      Argued: September 21, 2005

                      Decided: December 27, 2005

Before LUTTIG, Circuit Judge, HAMILTON, Senior Circuit Judge,
  and James C. DEVER III, United States District Judge for the
     Eastern District of North Carolina, sitting by designation.



Affirmed by published opinion. Judge Dever wrote the opinion, in
which Judge Luttig and Senior Judge Hamilton joined.


                             COUNSEL

ARGUED: William Elvin Hopkins, Jr., MCCUTCHEN, BLANTON,
JOHNSON & BARNETTE, L.L.P., Columbia, South Carolina, for
2            TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT
Appellants. Gary S. Parsons, BAILEY & DIXON, Raleigh, North
Carolina, for Appellees. ON BRIEF: T. English McCutchen, III,
MCCUTCHEN, BLANTON, JOHNSON & BARNETTE, L.L.P.,
Columbia, South Carolina; Dennis T. D’Antonio, Joshua L. Mallin,
WEG & MYERS, P.C., New York, New York, for Appellants. War-
ren T. Savage, BAILEY & DIXON, Raleigh, North Carolina, for
Appellees.


                              OPINION

DEVER, District Judge:

   When a party with insurance coverage is sued, the insured notifies
the insurance company of the suit. The insurance company, in turn,
typically chooses, retains, and pays private counsel to represent the
insured as to all claims. If the suit involves some claims that are cov-
ered under the insurance policy and some claims that are not covered,
the insurance company typically will send a reservation of rights letter
to the insured stating what claims the insurance company believes are
covered and what claims it believes are not covered. In this case, we
examine whether, under South Carolina law, such a reservation of
rights letter automatically triggers a conflict of interest entitling the
insured to reject counsel tendered by the insurance company and
instead to choose and retain its own counsel and to have the insurance
company pay for that counsel.

   South Carolina law does not address this issue. The district court
(predicting South Carolina law) concluded that a reservation of rights
letter contesting coverage of certain claims but not other claims does
not automatically trigger a conflict of interest entitling the insured to
choose its own counsel and have the insurance company pay counsel
fees. Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co. of
S.C., 336 F. Supp. 2d 610, 621 (D.S.C. 2004). Because we agree with
the district court’s conclusion, we affirm.

                                   I.

  In June 2000, Joyce Anglin sued Ben Arnold-Sunbelt Beverage
Company of South Carolina, L.P. ("Ben Arnold"), Ben Arnold’s Pres-
             TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT               3
ident and Chief Executive Officer ("CEO") William Tovell, and Ben
Arnold’s former President and CEO Harvey Belson. Ben Arnold is a
wholesale beverage distributor in South Carolina. In July 2000, Ellen
White sued these same parties as well as Sunbelt Beverage Company,
L.L.C. ("Sunbelt"), Ben Arnold’s parent company (referred to collec-
tively as "appellants" or "defendants"). Both cases involved South
Carolina tort claims based primarily on Belson’s alleged sexual
harassment of Anglin and White while employed by Ben Arnold.
Specifically, Anglin asserted claims against (1) Belson for intentional
infliction of emotional distress, false imprisonment, assault and bat-
tery, civil conspiracy, and defamation, (2) Tovell for intentional
infliction of emotional distress and civil conspiracy, and (3) Ben
Arnold for intentional infliction of emotional distress, negligence,
false imprisonment, defamation, negligent hiring, retention, and
supervision, and wrongful discharge. JA 340-41. White made similar
claims against Belson, Ben Arnold, and Sunbelt. JA 341-42.

   Ben Arnold purchased general commercial liability policies from
Twin City Fire Insurance Company ("Twin City") and from Hartford
Casualty Insurance Company ("Hartford Casualty") (collectively "in-
surance companies" or "appellees"). See JA 44. The policies covered
claims for "personal injury" up to $1 million. JA 354. Under the terms
of the policies, "personal injury" was defined to include claims for
defamation and false imprisonment. Claims for defamation and false
imprisonment were alleged in both the Anglin and White actions. The
policies, however, did not cover the remaining claims in Anglin or
White. Twin City Fire Ins. Co., 336 F. Supp. 2d at 613.

   Ben Arnold had consulted outside counsel concerning the allega-
tions involving Anglin and White fourteen months before Anglin and
White filed suit. See JA 463-65, 470-72. Only after Anglin and White
filed suit did Ben Arnold notify the insurance companies of the
Anglin and White actions. JA 390.

   Around October 12, 2000, the insurance companies orally informed
Ben Arnold that they would assume responsibility for defending all
defendants and all claims in both actions. JA 342. On December 19,
2000, the insurance companies confirmed in writing that they would
undertake the defense, but added that they were doing so under a res-
ervation of rights, and informed Ben Arnold that Robert McKenzie,
4            TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT
an attorney in private practice in Columbia, South Carolina, had been
retained to represent the defendants in these actions. JA 351-60. The
insurance companies’ letter included a reservation of rights and
explained that the insurance companies believed that the defamation
and false imprisonment claims were covered under the policies, but
that the other claims were not. Id. Nevertheless, the insurance compa-
nies agreed to pay McKenzie to defend the defendants against all
claims alleged in both cases. Id.

   On January 19, 2001, Ben Arnold informed the insurance compa-
nies that the defendants believed there was a conflict of interest inher-
ent in the reservation of rights and that this conflict entitled the
defendants to select their own counsel and to have the insurance com-
panies pay the legal bills. JA 396-97. The defendants proceeded with
counsel whom they had previously hired. On February 20, 2001, the
insurance companies sent a proposal to the defendants that McKenzie
and counsel selected by Ben Arnold share control of the litigation. JA
400-01. On May 4, 2001, the defendants rejected this proposal. JA
402. Thus, McKenzie never represented any of the defendants, and
the defendants excluded the insurance companies and McKenzie from
the White and Anglin litigation.

   The White action settled in June 2002 for $315,000 (JA 453), and
the Anglin action settled in September 2002 for $515,000 (JA 189).
According to the insurance companies, the defendants also incurred
legal fees of $1.4 million. Appellees’ Br. 29.

   In December 2001, the insurance companies filed a declaratory
judgment action seeking a declaration that they had no duty to indem-
nify the defendants in either action for various reasons, including that
they were absolved of any duty to defend or indemnify because the
defendants breached their contractual duty to cooperate and because
the insurance companies suffered material prejudice from that breach.
Defendants counterclaimed and sought a declaratory judgment that
the insurance companies had a duty to defend and to indemnify in
both cases. Essentially, the defendants contended that the insurance
companies had to pay the legal bills and the cost of the settlement.
Each side moved for summary judgment.

   On May 25, 2004, the district court granted the insurance compa-
nies’ motion for summary judgment concerning the claims for
              TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT                  5
defense costs and indemnification by defendants Ben Arnold, Sunbelt,
and Tovell. Twin City Fire Ins. Co., 336 F. Supp. 2d at 612. As to
Belson’s claims for defense costs and indemnification, the court
rejected Belson’s indemnification claim. However, the court con-
cluded that Belson was entitled to have the insurance companies pay
for a separate defense attorney and that a trial was necessary to deter-
mine the reasonableness of Belson’s attorney fees. Id. Thereafter, the
parties settled the dispute about the amount of Belson’s attorney fees.
JA 306.

   The defendants filed a timely notice of appeal. JA 338. We have
jurisdiction under 28 U.S.C. 1291.

                                    II.

   We review a district court’s grant of summary judgment de novo.
See Private Mortgage Inv. Servs., Inc. v. Hotel & Club Assocs., Inc.,
296 F.3d 308, 312 (4th Cir. 2002). We have jurisdiction based on
diversity, and South Carolina law governs. Accordingly, as to the dis-
puted legal issue, we must determine how the Supreme Court of
South Carolina would rule. Id. If the Supreme Court of South Caro-
lina "has spoken neither directly nor indirectly on the particular issue
before us, we are called upon to predict how that court would rule if
presented with the issue." Id. In making that prediction, we may con-
sider lower court opinions in South Carolina, the teachings of trea-
tises, and "the practices of other states." Wade v. Danek Med., Inc.,
182 F.3d 281, 286 (4th Cir. 1999).

                                   III.

   The district court declared that the "principal question in this case
is whether the Supreme Court of South Carolina would adopt a per
se disqualification rule that would entitle an insured to select indepen-
dent counsel at its insurer’s expense any time the insurer attempts to
defend a lawsuit under a reservation of rights." Twin City Fire Ins.
Co., 336 F. Supp. 2d at 612. The district court concluded that "South
Carolina would reject a per se disqualification rule because it rests
upon the presumption that whenever a lawyer is confronted with a
potential conflict of interest, the lawyer will always compromise the
interests of the client." Id. at 613. In reaching this conclusion, the dis-
6            TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT
trict court noted that the Supreme Court of South Carolina had not
directly addressed the principal legal question in this case. Id. at 612.

   On appeal, the appellants contend that Hegler v. Gulf Insurance
Co., 243 S.E.2d 443 (S.C. 1978), controls this case. In Hegler, the
court stated: "There is no material difference in legal effect between
an outright refusal to defend and in undertaking the defense under a
reservation of rights . . . ." Hegler, 243 S.E.2d at 444. In Hegler, the
insurance company defended the insured in the underlying suit with
a reservation of rights and simultaneously filed suit against the
insured and sought declaratory judgment on whether coverage
existed. Id. at 444. The insurance company did not pay the insured’s
legal fees in the declaratory judgment action, and the insured pre-
vailed in that litigation and sought attorney fees. The court analyzed
whether the insured who prevailed in the declaratory judgment could
recoup from the insurance company the attorney fees that the insured
expended in successfully litigating the coverage question. Id. In the
sentence cited by Ben Arnold, the court was explaining that forcing
the insured to hire counsel to litigate against the insurance company
in the declaratory judgment action concerning coverage was function-
ally equivalent to refusing to pay for the insured’s defense in the
underlying action. Id. Hence, the insured was entitled to the attorney
fees arising from the insured’s successful defense in the declaratory
judgment action. Id. Because in Hegler the insurer did defend the
insured in the underlying action, Hegler is not helpful (much less con-
trolling) on the issue presented in this case.

   Appellants also cite Ollie’s Seafood Grille & Bar, LLC v. Selective
Insurance Co. of South Carolina, No. 01-CP-07-1994 (C.P. 14th Jud.
Cir. Nov. 27, 2002), as evidence that the Supreme Court of South
Carolina would hold that when an insurance company issues a reser-
vation of rights letter, a per se disqualification rule applies, and the
insured may hire counsel of its own choosing and require the insur-
ance company to pay the legal bills. In Ollie’s Seafood, a South Caro-
lina state trial court confronted "whether [the plaintiff-insured] is
entitled to conduct its own defense in the underlying personal injury
action through counsel it selects and controls at the expense of [the
insurance company]." Ollie’s Seafood, No. 01-CP-07-1994, Order at
1-2; JA 1070-71. The trial court expressly adopted San Diego Navy
Federal Credit Union v. Cumis Insurance Society, Inc., 208 Cal. Rptr.
             TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT                 7
494 (Cal. Ct. App. 1984), in which the California Court of Appeals
held that where "multiple theories of recovery are alleged and some
theories involve uncovered conduct under the policy, a conflict of
interest exists." Cumis Ins. Soc’y, Inc., 208 Cal. Rptr. at 501. When
such a conflict exists, "the insurer must pay for such defense con-
ducted by independent counsel." Id. at 501-02.

   Ollie’s Seafood is not helpful because the parties in Ollie’s Seafood
did not contest that "the issuance of the reservation of rights gave rise
to a conflict of interest" between the insured and the insurance com-
pany, and the defense counsel appointed by the insurance company
expressly acknowledged the conflict. Ollie’s Seafood, No. 01-CP-07-
1994, Order at 3; JA at 1072. In contrast, the insurance companies in
this case vigorously dispute that a conflict of interest existed preclud-
ing McKenzie from representing the defendants. Because the conflict
was simply assumed in Ollie’s Seafood, the case provides no guid-
ance as to how the Supreme Court of South Carolina would rule on
the issue presented here.

   Moreover, a federal court sitting in diversity is not bound by a state
trial court’s decision on matters of state law. In King v. Order of
United Commercial Travelers of America, 333 U.S. 153 (1948), the
Supreme Court upheld the Fourth Circuit’s refusal to follow an opin-
ion issued by a state trial court in a South Carolina insurance case.
The Court concluded, "a Court of Common Pleas does not appear to
have such importance and competence within South Carolina’s own
judicial system that its decisions should be taken as authoritative
expositions of that State’s ‘law.’" Id. at 161. Accordingly, we reject
appellants’ reliance on Ollie’s Seafood.

                                  IV.

   Because South Carolina law does not address whether an insured
is entitled to select its own counsel at its insurance company’s
expense any time that the insurance company issues a reservation of
rights letter concerning coverage, we look to other sources, including
decisions in other states, for guidance as to how the Supreme Court
of South Carolina would rule on this issue. Wade, 182 F.3d at 286.
Not surprisingly, the parties cite competing lines of authority in sup-
port of their respective positions.
8            TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT
   Several courts have adopted a per se rule that where an insurance
company reserves the right to deny coverage for a particular claim,
then a conflict of interest between the insurance company and insured
exists. These cases include: CHI of Alaska, Inc. v. Employers Reins.
Corp., 844 P.2d 1113, 1118 (Alaska 1993); Union Ins. Co. v. Knife
Co., Inc., 902 F. Supp. 877, 880 (W.D. Ark. 1995) (predicting Arkan-
sas law); Kroll & Tract v. Paris & Paris, 86 Cal. Rptr. 2d 78, 82 (Cal.
Ct. App. 1999)(citing Cal. Civ. Code § 2860); Nandorf, Inc. v. CNA
Ins. Cos., 479 N.E.2d 988, 994 (Ill. App. Ct. 1985)(finding conflict
when punitive damages not covered by policy); Herbert A. Sullivan,
Inc. v. Utica Mut. Ins. Co., 788 N.E.2d 522, 539 (Mass. 2003); How-
ard v. Russell Stover Candies, Inc., 649 F.2d 620, 625 (8th Cir.
1981)(predicting Missouri law); Moeller v. Am. Guar. & Liab. Ins.
Co., 707 So. 2d 1062, 1069 (Miss. 1996); Rhodes v. Chicago Ins. Co.,
719 F.2d 116, 120 (5th Cir. 1983) (applying Texas law).

   These courts conclude that where an insurance company defends
its insured under a reservation of rights concerning coverage, a con-
flict exists. These courts have identified the following conflicts: if an
insurance company contends that a particular loss will not be covered
under the policy, the lawyer hired by the insurance company may
offer only a token defense of the potentially non-covered claim or
conduct the defense in such a manner as to make the likelihood of the
plaintiff’s verdict greater on the non-covered claim. Additionally, the
lawyer hired by the insurance company might gain access to confi-
dential information during the defense that the lawyer might provide
to the insurance company to contest coverage. Further, the lawyer
retained to defend the insured might tend to favor the insurance com-
pany over the insured due to a desire to receive future legal work
from the insurance company.

   In contrast, many other courts have held that defending an insured
with a reservation of rights concerning coverage does not create a per
se conflict. The following cases reject a per se rule: L & S Roofing
Supply Co. v. St. Paul Fire & Marine Ins. Co., 521 So. 2d 1298, 1304
(Ala. 1987); Travelers Indem. Co. of Ill. v. Royal Oak Enter., Inc.,
344 F. Supp. 2d 1358, 1374 (M.D. Fla. 2004) (predicting Florida
law); Armstrong Cleaners, Inc. v. Erie Ins. Exch., 364 F. Supp. 2d
797, 816 (S.D. Ind. 2005) (applying Indiana law); Trinity Universal
Ins. Co. v. Stevens Forestry Serv., Inc., 335 F.3d 353, 356 (5th Cir.
             TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT               9
2003) (applying Louisiana law); Finley v. Home Ins. Co., 975 P.2d
1145, 1150-55 (Haw. 1998); Cent. Mich. Bd. of Trs. v. Employers
Reins. Corp., 117 F. Supp. 2d 627, 634-35 (E.D. Mich. 2000) (apply-
ing Michigan law); Fed. Ins. Co. v. X-Rite, Inc., 748 F. Supp. 1223,
1229 (W.D. Mich. 1990)(same); Driggs Corp. v. Pa. Mfrs. Ass’n Ins.
Co., 3 F. Supp. 2d 657, 659 (D. Md. 1998)(applying Maryland law);
Nisson v. Am. Home Assur. Co., 917 P.2d 488, 490 (Okla. Civ. App.
1996); HK Sys., Inc. v. Admiral Ins. Co., No. 03 C 0795, 2005 WL
1563340, at *8-10 (E.D. Wis. June 27, 2005)(applying Wisconsin
law); Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133, 1137-38
(Wash. 1986)(holding that potential conflict created by reservation of
rights mandates enhanced obligations of good faith for attorneys
whose fees are covered by insurer). In rejecting a per se rule, these
courts hold that not every reservation of rights creates a conflict.
Instead a case-by-case assessment must be made.

   Regardless of whether a court applies a per se conflict rule, once
a court does find that a conflict of interest exists, it must determine
how to remedy the conflict. Courts universally require that the insured
receive counsel, but are divided into three camps over who should
control the selection of counsel. Some courts hold that if a conflict
exists, the insured has the right to select its own counsel to be paid
for by the insurance company. See, e.g., CHI of Alaska, 844 P.2d at
1118-19; Knife Co., 902 F. Supp. at 881; Kroll, 86 Cal. Rptr. 2d at
82; Am. Family Life Assur. Co. of Columbus, Ga. v. U.S. Fire Co.,
885 F.2d 826, 831-32 (11th Cir. 1989)(applying Georgia law and
holding that insurer must pay for co-counsel selected by insured);
Nandorf, 479 N.E.2d at 992; Armstrong Cleaners, 364 F. Supp. 2d at
817; Herbert A. Sullivan, Inc., 788 N.E.2d at 539; Moeller, 707 So.
2d at 1069; Rhodes, 719 F.2d at 120-21.

   At least one court has held that the insurance company has the right
to provide counsel or to allow the insured to choose counsel. In either
case, the insurance company pays the legal bills. HK Sys., 2005 WL
1563340, at *16.

   Other courts hold that an insurance company retains the right to
select counsel on the insured’s behalf or acknowledge the insured’s
right to counsel without specifying who is entitled to make the selec-
tion. Finley, 975 P.2d at 1151-52; Patrons Mut. Ins. Ass’n v. Harmon,
10            TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT
732 P.2d 741, 745 (Kan. 1987); Employers Reins. Corp., 117 F. Supp.
2d at 634-35; Howard, 649 F.2d at 625; Am. Emp. Ins. Co. v. Craw-
ford, 533 P.2d 1203, 1208-09 (N.M. 1975); Nisson, 917 P.2d at 490;
Consol. Rail Corp. v. Hartford Accident and Indem. Co., 676 F. Supp.
82, 86 (E.D. Pa. 1987)(predicting Pennsylvania law); Chatterton v.
Walker, 938 P.2d 255, 262 (Utah 1997).

   After reviewing these cases, we agree with the district court and
reject the notion that the reservation of rights letter issued in this case
creates a per se conflict that must be remedied through the insured
selecting counsel and having the insurance companies pay the legal
fees. More importantly, we agree with the district court’s conclusion
that the Supreme Court of South Carolina would so hold. See Twin
City Fire Ins. Co., 336 F. Supp. 2d at 621-22. Specifically, we find
the analysis and holding of X-Rite particularly persuasive and the
facts remarkably similar:

     When Federal [Insurance] received notice of the action
     against X-Rite, it proceeded in accordance with black letter
     Michigan law by undertaking the defense with reservation
     of rights. Further, Federal tendered the representation of "in-
     dependent counsel," the Vandeveer, Garzia firm. X-Rite
     objected not because it believed Vandeveer, Garzia was not
     "independent," but because it questioned the qualifications
     of attorney William Heaphy of Vandeveer, Garzia to com-
     petently defend the wrongful discharge and anti-trust claims,
     and because it believed the conflict created by Federal’s res-
     ervation of rights gave it the absolute right to retain counsel
     of its choice at Federal’s expense. Ultimately, X-Rite did
     not pursue its question regarding attorney Heaphy’s qualifi-
     cations. X-Rite essentially ignored his proposed substitution
     as counsel, and proceeded in litigation with Varnum, Rid-
     dering as counsel. X-Rite thus acted upon a questionable
     interpretation of Michigan law without first having ascer-
     tained whether representation by Vandeveer Garzia would
     involve a substantial likelihood of prejudice to its interests.

X-Rite, 748 F. Supp. at 1228 (footnote omitted); see also Twin City
Fire Ins. Co., 336 F. Supp. 2d at 621-22.
             TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT                 11
   As in X-Rite, the defendants in this case proceeded under the same
questionable interpretation of South Carolina law. The insurance
companies, in contrast, adhered to settled principles under South Car-
olina law regarding their right and duty to defend by providing coun-
sel (i.e., Robert McKenzie) to represent the defendants for all claims
filed against them, despite the reservation of rights. See, e.g., Allstate
Ins. Co. v. Wilson, 193 S.E.2d 527, 530 (S.C. 1972)(holding that
insurance company, operating under a reservation of rights, "had the
right and the duty to control the defense until such time as it was
determined that it had no liability insurance coverage"); Allstate Ins.
Co. v. Best, 728 F. Supp. 1263, 1269 n.3 (D.S.C. 1990)(stating that
insurance company "retains the ability under South Carolina law to
defend the underlying personal injury action under a reservation of
rights").

   In rejecting the argument that receiving a reservation of rights letter
per se allowed the insured to hire counsel of its choosing with the
insurance company footing the bill, the court in X-Rite explained:

     Public policy requires the insurer to act with the utmost
     good faith. As long as this standard is observed, the Court
     may not interfere with the terms of the parties’ agreement.
     To hold that the insurer who, under reservation of rights,
     participates in selection of counsel, automatically breaches
     its duty of good faith is to indulge the conclusive presump-
     tion that counsel is unable to fully represent its client, the
     insured, without consciously or unconsciously compromis-
     ing the insured’s interests. The Court is unable to conclude
     that Michigan law professes so little confidence in the integ-
     rity of the bar of this state.

X-Rite, 748 F. Supp. at 1229 (footnote omitted).

   We are equally unable to conclude that the Supreme Court of South
Carolina would profess so little confidence in the integrity of the
members of the South Carolina Bar. Rigorous ethical standards gov-
ern South Carolina attorneys. Rule 1.8(f) of the South Carolina Rules
of Professional Conduct mandates that a lawyer cannot accept com-
pensation for representing a client from a third party unless certain
conditions are met, including that the lawyer’s judgment must remain
12            TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT
independent. Rule 407, SCACR.1 Rule 5.4(c) states: "A lawyer shall
not permit a person who recommends, employs, or pays the lawyer
to render legal services for another to direct or regulate the lawyer’s
professional judgment in rendering such legal services." Id. As part
of exercising the lawyer’s professional judgment, an attorney in South
Carolina who represents an insured owes the insured a duty of loyalty
and cannot, for example, communicate information detrimental to the
insured to the insurance company. See Rule 1.8(b), Rule 407,
SCACR; Rule 1.6, Rule 407, SCACR (general confidentiality rule).
As Rule 7 of the South Carolina Rules for Lawyer Disciplinary
Enforcement explains, a violation of these rules could lead to sanc-
tions such as suspension, public reprimand, or disbarment. Rule 413,
SCACR.2 These possibilities, coupled with the threat of bad faith
actions or malpractice actions if a lawyer violates these rules, provide
strong external incentives for attorneys to comply with their ethical
obligations. Cf. Smith v. Haynsworth, Marion, McKay & Geurard,
472 S.E.2d 612, 614 (S.C. 1996) (holding that although violation of
Rules of Professional Conduct does not constitute negligence per se,
such violations may be relevant and admissible in assessing the legal
duty of an attorney in a malpractice action and whether that duty was
breached).3

   Of course, an insured must consent to the counsel assigned by the
insurance company. See Rule 1.8(f)(1), Rule 407, SCACR. If the
insured does not consent to counsel selected by the insurance com-
pany, the insured may refuse the defense and pay for its own defense.
Stated differently, "having refused the contractual terms of the policy,
  1
    The South Carolina Rules of Professional Conduct are codified under
Rule 407 of the South Carolina Appellate Court Rules.
  2
    The South Carolina Rules for Lawyer Disciplinary Enforcement are
codified under Rule 413 of the South Carolina Appellate Court Rules.
  3
    The conclusion that the mere possibility of a conflict does not auto-
matically trigger the right of the insured to select counsel of its own
choosing is also supported by treatises dealing with legal ethics. See, e.g.,
3 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice § 29.21, at
911 (2005 ed.) ("Theoretical conflicts often are present. The possibility
of a conflict occurring, however, does not entitle the insured to select
counsel and control the defense.").
             TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT                13
the insured foregoes its right to compensation for defense fees." Fin-
ley, 975 P.2d at 1155.

   Because we conclude that the reservation of rights letter in this
case does not create a per se conflict of interest mandating that the
insured be allowed to choose its own counsel and have the insurance
companies pay the legal bills, we turn to the facts of the case to deter-
mine if an actual conflict arose. The record reflects that the defen-
dants ousted the insurance companies from their defense long before
any hypothetical conflict crystalized into an actual one warranting the
insured’s selection of counsel at the insurers’ expense. Indeed, Ben
Arnold consulted outside counsel fourteen months before White and
Anglin filed suit and failed to notify the insurance companies about
the White and Anglin matters until after the suits were filed. See JA
463-65, 470-72. Further, the defendants’ failure to cooperate included
not permitting the counsel appointed by the insurance companies to
appear or participate in the White or Anglin actions.

   The district court cogently explained how the insurance companies
and all of the defendants did not have a conflict of interest at the out-
set and instead "shared the common interest of proving that Belson
had not engaged in sexual harassment." Twin City Fire Ins. Co., 336
F. Supp. 2d at 620. The female employees’ claims in White and
Anglin both "(covered and non-covered) turned largely on who was
telling the truth in a ‘he said, she said’ swearing contest. If Belson
was telling the truth and no sexual harassment had occurred, then Ben
Arnold would prevail on all claims (covered and non-covered). If the
female employee was telling the truth and Belson had sexually
harassed her, the fact that some claims were covered and some were
not covered would not have divided the defense." Id. at 620-21 (cita-
tions and footnotes omitted).

   In this case, the defendants breached the contractual duties owed
to the insurance companies, which mandate that the insurance compa-
nies had both the right and duty to defend any suit seeking damages
covered by the insurance contracts and that the insured had a corre-
sponding duty to cooperate with the insurance companies in the
defense and settlement of any claim. JA 378-89. Accordingly, after
effecting such a breach of their contractual duties, the defendants
(other than Belson with whom we deal later) cannot now successfully
14           TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT
claim they are entitled to reimbursement for the legal fees and settle-
ment costs arising from the White and Anglin actions.

   Defendants cite Evans v. American Home Assurance Co., 166
S.E.2d 811 (S.C. 1969), for the proposition that it is "settled law with
us that a liability insurer may successfully defend upon the ground
that the insured has violated the cooperation clause of the policy only
when the breach has been material and has resulted in substantial
prejudice to the insurer." Evans, 166 S.E.2d at 813. In Evans, the
insured allegedly refused to participate in his defense, as conducted
by an attorney that his insurance company retained. We question,
however, whether Evans applies to the opposite situation where the
insured attempts to conduct its own defense while refusing to cooper-
ate with the insurance company. Assuming that Evans applies, the
insured’s failure to cooperate in Evans was ambiguous and the court
held that the insurance company had not met its burden of proving
that he had refused to cooperate. Id. at 813-14. By contrast, in this
case, the defendants’ failure to cooperate with the insurance compa-
nies could not have been more stark. Finally, cases such as Evans do
not address, let alone control, those instances, such as here, where in
addition to violating the duty to cooperate, the insured also interfered
with the insurance companies’ right to conduct a defense.

                                  V.

   Defendants also claim that the insurance companies are estopped
from arguing that the defendants breached the insurance policies
because the insurance companies attempted to appoint unqualified
counsel to represent them and failed to adequately investigate or
inform defendants of McKenzie’s legal experience. Under South Car-
olina law, the elements of equitable estoppel are:

     [A]s to the party estopped [ ]: (1) conduct by the party
     estopped which amounts to a false representation or con-
     cealment of material facts; (2) the intention that such con-
     duct shall be acted upon by the other party; and (3)
     knowledge, actual or constructive, of the true facts. As to
     the party claiming the estoppel, the elements are: (1) lack of
     knowledge and of the means of knowledge of the truth as to
             TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT               15
    the facts in question; and (2) reliance upon the conduct of
    the party estopped.

Ingram v. Kasey’s Assocs., 531 S.E.2d 287, 292 n.2 (S.C. 2000).

   We reject the estoppel argument for an obvious reason: Robert
McKenzie, the lawyer selected by the insurance companies to repre-
sent the defendants in the White and Anglin actions, was eminently
qualified to handle those cases and the insurance companies so
informed the defendants. As the district court stated, McKenzie has
been practicing law in Columbia, South Carolina since 1966, he is a
Diplomate with the American Board of Trial Advocates, a Fellow of
the American College of Trial Lawyers, a member of the John Belton
O’Neal Inn of Court, and chairs the South Carolina Supreme Court
Commission on Continuing Legal Education. He also has served as
a member of the South Carolina Bar House of Delegates, and is a
member of the Defense Research Institute. Twin City, 336 F. Supp.
2d at 623. "A South Carolina lawyer, with McKenzie’s credentials,
experienced in trying cases before South Carolina juries, was per-
fectly competent to handle all of these claims." Id. As such, the insur-
ance companies’ conduct was in no way deceitful, and we reject the
estoppel argument.

                                  VI.

   Defendants also contest the district court’s holding that Belson was
not entitled to indemnification for settlement funds because of his
refusal to cooperate. They argue that this conclusion contradicts the
district court’s holding that Belson was entitled to counsel of his own
choosing to be paid for by the insurance companies and, as such, is
entitled to reimbursement of his reasonable legal fees. Appellants’ Br.
47-52 (discussing Twin City Fire Ins. Co., 336 F. Supp. 2d at 625-26).

   We disagree. The district court recognized that, at the outset of the
White and Anglin litigation, Belson and the other defendants had
divergent interests. If Belson and the other defendants lost the "he
said/she said" argument about Belson’s conduct, the other defendants
had an alternative argument unavailable to Belson: Belson’s conduct
was outside the course and scope of his employment; therefore, the
other defendants should not be liable. See, e.g., Frazier v. Badger,
16           TWIN CITY FIRE INS. v. BEN ARNOLD-SUNBELT
603 S.E.2d 587, 591 (S.C. 2004) (holding that assistant principal
could not use an immunity defense because his sexual advances and
ensuing retaliatory conduct towards a teacher were outside the scope
of his official duties of employment); Doe v. S.C. State Budget and
Control Bd., 523 S.E.2d 457, 458 (S.C. 1999) (police officer’s
coerced sexual acts with women whom he pulled for traffic stops
were not within the scope of his official duties, and therefore the acts
were not covered under the state’s general tort liability policy). In
addition, if Belson was found to be acting outside the course and
scope of his employment, he would have no coverage under the pol-
icy. JA 383. Though the "case-by-case" conflict analysis was not done
at the outset of the White and Anglin matters, McKenzie’s inability to
represent all defendants was self-evident. The insurance companies,
however, never tendered counsel separate from McKenzie for Belson.
This obvious conflict between Belson and the other defendants
explains why the district court properly concluded that Belson was
entitled to counsel separate from the other defendants and entitled to
have the insurance companies pay the reasonable legal fees of that
separate counsel. See Twin City Fire Ins. Co., 336 F. Supp. 2d at 625-
26; see also Nisson, 917 P.2d at 490-91.

   As for Belson’s indemnification claim, Belson’s separate represen-
tation does not address, must less obviate, Belson’s duties under the
insurance policies to cooperate and to not make any payments without
the insurance companies’ consent. See JA 384-85 (Sections IV, 2c &
2d). The record demonstrates that Belson and the other defendants
ousted the insurance companies from the White and Anglin cases,
refused to cooperate with the companies throughout the litigation, and
negotiated and paid a settlement without the insurance companies’
consent. As such, Belson breached his duty to cooperate under the
policies. Accordingly, the district court properly rejected Belson’s
claim for indemnification.

                                 VII.

   For the reasons stated above, the district court’s judgment is
affirmed.

                                                           AFFIRMED
