• Horizon Issues: Insurance -- Policyholders' Right to Independent Counsel
  • September 8, 2008 | Author: Seth B. Schafler
  • Law Firm: Proskauer Rose LLP - New York Office
  • A recent New York ruling found that insurance companies must inform insureds of their right to select independent defense counsel at the insurer’s expense when the insurer’s reservation of the right to deny coverage creates a conflict of interest with the insured.

     

    In Elacqua v. Physicians’ Reciprocal Insurers (2008), the Third Department of the Appellate Division of the Supreme Court of New York imposed an affirmative obligation on insurers to inform their insureds that they may choose counsel in such instances, and held that failure to do so may constitute a deceptive practice in New York—entitling the insureds to recover damages and attorneys’ fees. The Elacqua decision arose from a malpractice claim involving two physicians and their partnership entity. Initially, the insurer retained one attorney to represent both physicians and the partnership, but retained separate counsel for each physician when the first attorney perceived a conflict. The complaints against the physicians were dismissed, but a verdict was rendered against the partnership. The insurer refused to indemnify the partnership, saying its policy did not cover vicarious liability. The appellate court ruled that the attorneys chosen by the insurer had misled the physicians, by moving to dismiss the complaint against them without explaining the ramifications of leaving viable the uncovered claim against the partnership. As a result of the Elacqua decision, insurers should consider changing their standard reservation of rights letters to stipulate the right to independent counsel who will provide uncompromised, conflict-free representation under the insurance contract and New York law.