Page 49 - Reservation of Rights - Special Edition

Conflicts of Interest and Independent Counsel
There is no statute in New York that relinquishes the in- sured’s right to choose independent defense counsel when there is a conflict of interest (i.e. both covered and arguably uncovered counts) or when the insurer issues a reservation of rights letter.
Under case law, New York does not recognize the insured’s right to unilaterally select defense counsel to be paid concur- rently by the carrier when the carrier issues a reservation of rights letter. Instead, it has long been well-settled law in New York that the insured has a right to independent counsel only when a conflict of interest arises on the part of the in-surer due to a reservation of rights. Pub. Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392 (1981);Prashker v. U.S. Guarantee Co., 1 N.Y.2d 584 (1956). 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 in-sured’s liability.” Both Goldfarb and Prashker are decisions from the New York Court of Appeals, the highest appellate court in the state.
Following Prashker and Goldfarb, many other New York courts have recognized that, under New York law, a policy- holder has a right to independent counsel paid for by the insurance company, for the reasons stated above, where a conflict of interest arises because a complaint contains alle- gations possibly both within and outside the coverage of the insurance policy. Other examples of such conflicts giving rise to a right to independent counsel are conflicting trial strate- gies; 69th St. & 2nd Ave. Garage Assocs. v. Ticor Title Guar., 622 N.Y.S.2d 13 (App. Div. 1st 1995); Ansonia Assocs. v. Pub. Serv. Mut. Ins., 693 N.Y.S.2d 386 (Sup. Ct. 1998), aff’d, 692 N.Y.S.2d 5 (App. Div 1st 1999); and claims exceeding the policy limits and including punitive damages. Parker v. Agric. Ins., 440 N.Y.S.2d 964, 968-969 (Sup. Ct. N.Y. County 1981).
Recently, the Second Circuit emphatically stated that an in- sured cannot reject a proposed defense firm merely because the insured believes that they are too small to handle a “bet the company” case. The court also restated New York’s interpretation of Cumis, that a right to independent counsel should only arise where an insurer has reserved rights on coverage issues that are of a sort that might influence ap- pointed defense counsel to try the case in such a manner that could result in an uninsured verdict (i.e. where a conflict of interest exists). N.Y. Marine & Gen. Ins. Co. v. Lafarge N. Am., Inc., 599 F.3d 102 (2d Cir. 2010).
The remaining controversy, however, lies in just what are the communication obligations of the insurer in this area. In Elacqua v. Physicians’ Reciprocal Insurers, 860 N.Y.S.2d 229
(App. Div. 3d 2008), the Third Department held that an insurer has an affirmative obligation to inform the 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 what 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. Contrary to Elacqua, another intermediate appellate court in New York held inSumo Container Station v. Evans, Orr, Pacelli, Norton & Laffan, 719 N.Y.S.2d 223 (App. Div. 1st 2001), that an insurer had no obligation to advise its insured of its right to independent counsel when such right exists. Though it has yet to definitively address the issue, the Second Department favorably mentionedElacqua in Wilner v. Allstate Ins. Co., 893 N.Y.S.2d 208, 213 (2010). 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.
Case law indicates only that the fee charges for independent counsel selected by the insured must be “reasonable.” Prashker v. U.S. Guarantee Co., 136 N.E.2d 871, 875 (N.Y. 1956); N.Y. State Urban Dev. Corp. v. VSL Corp., 738 F.2d 61, 66 (2d Cir. 1984). The insured will have the abso-lute right to choose counsel where a conflict exists when the governing insurance contract fails to expressly indicate that the insurer will only be obligated to pay for defense costs if it is permitted to participate in the selection of counsel. Klein v. Salama, 545 F.Supp. 175, 179 (E.D.N.Y.1982); Pub. Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d at 401;Prashker, 1 N.Y.2d at 593. However, New York courts have noted that an insured’s right to be accorded legal representation is a con-tractual right. As such, where the insurance contract states that the insurer will only be obligated to pay for defense costs if it is permitted to participate in the selection of counsel, the terms of the contract govern unless they are against public policy. Int’l Paper Co. v. Cont’l Cas. Co., 35 N.Y.2d 322, 325 (1974); Emons Indus., Inc. v. Liberty Mut. Ins. Co., 749 F.Supp. 1289 (S.D.N.Y. 1990); Cunniff v. Westfield, Inc., 829 F.Supp. 55 (E.D.N.Y. 1993).
Time for Providing Insured with Coverage Position/ Reservation of Rights
• Within 15 days after receipt of proof of loss, an insurer must accept or deny coverage, unless more time is needed, in which case the insurer must notify the insured of that and continue to do so every 90 days thereafter until a determination of coverage is made. N.Y. Admin. Code § 216.4 to § 216.6.
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