New York Appellate Court Reiterates Duty Of Insurer To Advise Insureds Of Their Right To Independent Counsel Where A Conflict Exists And That Failure To Do So Further Constitutes A "Deceptive Trade Practice"
July, 2008
In Elacqua v. Physician’s Reciprocal Insurers, 2008 WL 2277860 (N.Y. App. Div. 3d Dep’t, June 5, 2008) (“Elacqua II”), a New York intermediate appellate court (Third Department) held that, where an insurer may face liability based upon some of the grounds for recovery asserted but not upon others, the insured defendant is entitled to be represented by an attorney of his or her own choosing at the expense of the insurer and that an insurer’s failure to meet its “affirmative obligation” to so inform the insured is further a deceptive trade practice under New York’s General Business Law, § 349.
Facts
The Elacqua action arose out of a malpractice suit against a medical partnership and the partnership’s member physicians (insured by Physicians Reciprocal Insurers), and a nurse employed by the partnership (but not similarly insured). Although the insurer hired counsel to represent the partnership and the physicians, a conflict of interest existed where the insurer had asserted that some of the claims were covered while others were not. As such, the insurer sent partial disclaimer letters to the individual physicians and the partnership advising that they could retain counsel to protect their uninsured interests “at [their] own expense.”After the close of plaintiff’s evidence at trial, the two doctors were successfully dismissed from the claim, but a judgment of $2 million was ultimately entered against the partnership based on its vicarious liability for the nurse’s negligence. The trial court, after finding against the insurer that the policy did not provide coverage for the $2 million judgment, found for the insurers on the issue of whether the insurer had a duty to notify its insureds of the right to select independent counsel at the insurer's expense. In so holding, the trial court relied on a New York Appellate Division, First Department holding in Sumo Container Sta. v. Evans, Orr, Pacelli, Norton & Laffan, 719 N.Y.S.2d 223 (N.Y. App. Div. 1st Dep’t. 2000), that while an insurer is obligated to pay for its insured's independent counsel, it is not obligated to notify its insured of its right to independent counsel. In the first appeal of this Elacqua action, Elacqua v. Physician's Reciprocal Insurers, 800 N.Y.S.2d 469 (N.Y. App. Div. 3d Dep’t 2005)
("Elacqua I”), the Third Department reversed the trial court, holding that an insurer indeed does have an affirmative obligation to notify its insureds of their right to select independent counsel at the insurer's expense when there is a conflict between the insurer and insured’s interests.
In light of the decision in Elacqua I, the insureds amended their complaint adding causes of action for Deceptive Trade Practices under New York’s GBL § 349--claiming the insurer's failure to notify them of their right to independent counsel at the insurer's expense caused them “actual harm” under the that section. The trial court dismissed this claim on the ground that the insureds were not able to show such "actual harm," defined in the law as “actual, but not necessarily pecuniary, harm.”
Analysis
The appellate court in Elacqua II reversed the trial court’s dismissal of the Deceptive Trade Practices claim, first noting that the trial court was correct in finding that the alleged offending practice of defendant was “consumer-oriented”—as required by the law--inasmuch as the failure to inform plaintiffs of their right to select independent counsel was not an isolated incident, but a routine practice that affected many similarly situated insureds. The appellate court further agreed with the insureds’ argument that the “harm” to them is grounded in the deprivation of their right to independent counsel and the resulting lack of undivided, conflict-free loyalty of counsel retained for the partnership by the insurer and the attorneys retained by the insurer to represent the individual doctors.
The court focused on the actual result of the conflict in the trial court, where the motion to dismiss on behalf of the two physicians, if granted, would leave the partnership exposed to uncovered claims. The partnership’s insurer-assigned counsel “fully joined in making [the motion], despite the fact that he had legally sufficient grounds to oppose the motion.” The court noted that the combined effect of the actions by counsel supplied by defendant was that, “the end result was the [defendant’s] interests were advanced and the insured doctors’ interests were, to put it mildly, not enhanced.” Thus, according to the court, this result constituted harm sufficient to sustain a claim under General Business Law § 349.
As such, given the Elacqua II court’s enthusiastic reiteration of the Elacqua I court’s rule that a carrier presented with a defense conflict must fully advise its insureds of their right to independent counsel of their choosing and that the insurer will pay for that counsel’s representation, creates a clear conflict between the New York appellate court’s First Department, which does not assign insurers such a duty (Sumo, supra), and the Third Department, which decidedly does impose that duty. The Elacqua II court’s further step of allowing for the viability of a Deceptive Trade Practices action for an insurer’s failure to properly advise their policyholders of the ramifications of a conflict of interest certainly increases the stakes of an insurer’s decision-making in identifying conflicts and advising their insureds.
Learning Point
Although the Elacqua I and Elacqua II opinions are arguably only binding in the Third Department, given the detailed reasoning of the two opinions, as well as the fact they are much more recent than the more insurer-favorable Sumo decision, this can be fairly seen as a potentially emerging trend. As such, insurers handling claims of New York policyholders—and claims of policyholders in any jurisdiction, really—should be extremely careful in determining whether independent counsel may be required in the defense of an insured. If it appears so, the safer course in this new climate may well be to fully advise the insured of the full scope of its rights in any positional communication.
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