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An Insured’s Right to Have Independent Defense Counsel at the Insurer’s Expense
An Insured’s Right to Have Independent Defense Counsel at the Insurer’s Expense
By Joseph P. Monteleone, JD
The issue of who chooses and who pays for counsel to defend an insured arises often under specialty lines policies. While resolution of the issue is fairly clear in so-called “indemnity type” policies such as most public company D&O forms, the issue is a bit more complicated in the duty to defend type policies common in the professional malpractice and E&O lines, as well as private company and not-for-profit D&O and other management liability forms.
In the indemnity policy situation, the short answer is that the insured chooses and the insurer pays subject to its consent, which will not be unreasonably withheld. In this month’s column, however, we will turn our attention to the more troublesome duty to defend policies.
One major jurisdiction, California, has very well-developed statutory and case law in this regard by way of the seminal appellate decision in San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App. 3d 358, 208 Cal. Rptr. 494 (1984) and the statutory guidelines that were enacted following that decision at California Insurance Code §2860. That is why independent defense counsel selected by the insured and paid for by the insurer after the insurer reserves rights on certain bases are often called “Cumis counsel” in California and even outside that jurisdiction. If anyone would like further information on the current state of the law on these issues in California, please feel free to contact any of my California partners listed on the last page of this Advisory.
The focus here, however, will be on the other coast, specifically New York, and its treatment of the same issue under duty to defend policies. The law may vary from state to state, but New York and California deal with the issue in similar, but not identical, ways.
The most recent judicial pronouncement from New York in this area came down a little over a year ago in Elacqua v. Physicians’ Reciprocal Insurers, 52 A.D.3d 886, 860 N.Y.S.2d 229 (App. Div. 2008), a decision from the Appellate Division, Third Judicial Department on June 5, 2008. The Elacqua court held that an insurer has an affirmative obligation to inform its insured of its right to have an independent defense counsel (i.e., not one from the insurer’s “panel”, approved list, or its own staff counsel) defend in a claim situation where the insurer has reserved its rights to deny coverage. Further, and somewhat remarkably, the Court held that failure to so inform the insured was a deceptive trade practice under applicable New York law and remitted the case to the trial court for a determination of the appropriate damages.
Although relief in the form of deceptive trade practices damages is seemingly harsh, the history of the Elacqua litigation may shed some further light on this aspect of the decision.
The Court had previously ruled in 2005 in the same case that there was a conflict due to the presence of covered and uncovered allegations in the underlying lawsuit such that the insured had a right to independent defense counsel at the insurer’s expense. Despite this, it appears that the insurer proceeded to advise the insured that it could only retain independent counsel at its own expense! The insurer also apparently admitted to a practice of sending similar letters to other insureds in similar situations.
It has long been well-settled law in New York that there is a right on the part of the insured to independent counsel when a conflict of interest arises on the part of the insurer due to a reservation of rights. See, Public Service Mutual Insurance Co. v. Goldfarb, 53 N.Y.2d 392 (1981) and Prashker v. United States Guarantee Co., 1 N.Y.2d 584 (1956). Both Goldfarb and Prashker are decisions from the New York Court of Appeals, the highest appellate court in the state.
In Goldfarb, the court made clear that not every coverage issue or reservation of rights gives rise to an insured’s right to independent counsel. Rather, it is only those that may allow defense counsel to unethically steer the outcome of the case toward liability premised upon a non-covered cause of action, as opposed to those coverage issues that are “not intertwined with the question of the insured’s liability.”. Goldfarb presented precisely this scenario because the underlying case was on e of alleged sexual molestation of a patient by an insured dentist. Indeed, there was a prior criminal conviction for the conduct at issue in the civil case, which was premised upon intentional assault and sought punitive damages. Nonetheless, the policy provided coverage for claims of “undue familiarity” (seems quaint, but remember that the conduct took place and the insurance policy was issued in the 1970s) and the court held that the possibility that this could be established instead of or in addition to the intentional assault created the conflict on the part of the insurer and its appointed defense counsel. Accordingly, the court held that the insured was “entitled to defense by an attorney of his own choosing whose reasonable fee is to be paid by the insurer.” (emphasis added).
The remaining controversy, however, lies in just what are the communication obligations of the insurer in this area. Contrary to Elacqua, another intermediate appellate court in New York held in Sumo Container Sta. v. Evans, Orr, Pacelli, Norton & Laffan, 278 A.D.2d 69, 719 N.Y. S.2d 223 (1st Dept. 2001) that an insurer had no obligation to advise its insured of its right to independent counsel when such right exists.
This conflict between the First and Third Departments of the Appellate Division in New York has yet to be resolved in an appropriate case to be brought before the New York Court of Appeals. Until then, Elacqua serves as a cautionary tale for insurers dealing with these rights to independent counsel scenarios.
Joseph P. Monteleone, Esq. is a partner with Tressler, Soderstrom, Maloney & Priess LLP with over of 25 years of experience in the insurance industry, Joe is well-known for his special expertise in Director & Officers coverage. He is a co-author of the well-regarded coverage and risk-management book, Directors & Officers Liability: Guide to Risk Exposures and Coverage (National Underwriter 1999).
