Once an individual or business entity is sued, its first inclination is usually (rightfully so) to evaluate its available insurance policies and place its respective carriers on notice of the claim. However, many times – especially in the complicated, litigious world of New York – Insurers agree to “defend” their insureds but “reserve their rights” with respect to indemnification or some other issue. This leaves the insured in a precarious position: Its defense is being funded, but it is unclear whose coffers will satisfy any eventual settlement or judgment. Moreover, it risks insurance coverage – and conjointly carrier appointed defense counsel – “dropping out” at some point should the covered elements of a suit be severed from its uncovered components.
Under these reservation of rights circumstances, where an insurer claims it is obligated to cover its insured only for certain particularized grounds asserted in the underlying law suit, New York courts conclude that an inherent conflict of interest is possible. As a result, the law has become well settled: An insured has the right to choose its own attorney and the reasonable fees associated with that representation must be paid by the insurer.1 This rule is so fundamentally entrenched that two judges of the New York Court of Appeals (the highest court in the state) recently described it as “black letter law.”2 Moreover, even if the insurer chooses to file a separate law suit against the insured to declare the insurance policy inapplicable to the underlying claim, it must pay for the insured’s attorney’s fees to defend that separate suit as well, but only in the instance the insured is successful as against the insurer.3
Myriad benefits inure to an insured when it is allowed to choose its own counsel. For example, it can select counsel: 1) experienced in a particular area of law (such as construction law); 2) familiar with representing individuals or business entities (regardless of size) as opposed to only advising insurers; 3) familiar with other aspects of its particular business; and 4) familiar with a geographic region, allowing for a “local counsel” advantage. Moreover, the insured will have easier direct access to counsel, have the ability to work closer on the litigation decision making process, and will avoid the risk of the insurer appointed counsel “dropping out,” which necessitates the retention of new counsel who must “get up to speed” on the insured’s dime. Finally, and most importantly, the insured may choose to be represented in the law suit by its own attorney who regularly represents it and is familiar with its business and key personnel.
However, all too often insureds are unaware of this right (and the concomitant advantages it bestows) because many insurers fail to advise of the entitlement. In fact, there appears to be a split between certain jurisdictions in New York – apparently not yet resolved by the Court of Appeals – as to whether an insurer is obligated to advise the insured of its right to select counsel.4
Their insurers’ practices notwithstanding, insureds should be mindful of receiving a reservation of rights letter as it alters the relationship between the parties and upon receipt should seriously consider selecting their own counsel to represent them in the underlying litigation.
1 E.g., Pub. Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 401-02, 425 N.E.2d 810, 815 (NY 1981); First Jeffersonian Associates v. Ins. Co. of N. Am., 262 A.D.2d 133, 134, 691 N.Y.S.2d 506, 506-07 (1st Dep’t 1999); City of New York v. Clarendon Nat. Ins. Co., 309 A.D.2d 779, 779, 765 N.Y.S.2d 802 (2nd Dep’t 2003); Elacqua v. Physicians' Reciprocal Insurers, 21 A.D.3d 702, 706-07, 800 N.Y.S.2d 469, 473 (3rd Dep’t 2005); State Farm Fire & Cas. Co. v. Ricci, 96 A.D.3d 1571, 1572, 947 N.Y.S.2d 265, 268 (4th Dep’t 2012).
2 QBE Ins. Corp. v. Jinx-Proof Inc., 22 N.Y.3d 1105, 1110, 983 N.Y.S.2d 465, 468 (2014) (Pigott J., Dissenting).
3 Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21, 389 N.E.2d 1080 (1979) and State Farm Fire & Cas. Co. v. Ricci, 96 A.D.3d 1571, 1574, 947 N.Y.S.2d 265, 269 (4th Dep’t 2012)
4 See Elacqua v. Physicians' Reciprocal Insurers, 52 A.D.3d 886, 888-89, 860 N.Y.S.2d 229, 232 (3rd Dep’t 2008) (holding insurer has an affirmative duty to inform insured of right to direct counsel and ruling failure to do so a deceptive business practice in violation of GBL § 349), compare with Sumo Container Station, Inc. v. Evans, Orr, Pacelli, Norton & Laffan, P.C., 278 A.D.2d 169, 170, 719 N.Y.S.2d 223, 224 (1st Dep’t 2000) (commenting that cases cited by appellant due not impose an affirmative duty on insurer to advise of right to choose counsel). See also QBE Ins. v. Jinx, 22 N.Y.3d at 1110 (Pigott J. Dissenting) (stating in dicta that insurer has an obligation to inform insured and citing to Elacqua, but failing to discuss Sumo or any other supporting authority).