An Insured’s Right to Independent Counsel in New York State —and Why That Right Matters
When a dispute arises that implicates an insured’s liability insurance policy, insurance companies are often obligated—pursuant to their policies—to engage and pay for counsel to defend their insured against the claims asserted against it. These contract provisions are generally mutually beneficial as they relieve the insured of the costs of litigation; while also allowing the insurer to make certain that its own interests are protected by competent counsel who can work to limit the insurer’s ultimate exposure in connection with a claim.
A conflict arises, however, when an insurer’s interests differ from the interests of its insured’s. When not all claims asserted against an insured are covered under its insurance policy, for example, an inherent conflict of interest exists. The insured is motivated to defeat liability on all grounds, whether they are covered under the insurance policy or not. While the insurer is motivated to focus on and vigorously defend only those claims that are covered under the policy—i.e., the claims for which it is exposed to liability.
Because of this significant conflict, insureds in New York who face both covered and uncovered claims under their insurance policies are entitled—as a matter of law and public policy—to select their own independent counsel to defend them, paid for by the insurer. Public Service Mutual Insurance Co. v. Goldfarb, 53 N.Y. 2d 392 (1981). This right is crucial because it ensures that the insureds have an unbiased defense to all claims asserted against them without having to bear the cost for that defense.
Independent counsel also ensures that strategic decisions that are made concerning the defense of a claim are based solely on the best interests of the insured. Such strategic decisions can even include the decision not to oppose a dispositive motion on a covered claim—on the grounds that opposing liability for the covered claim could increase the insured’s exposure for uncovered claims. And the Appellate Division, Third Department has held that such a strategy does not violate an insured’s contractual obligation to “cooperate” with its insurer:
Where, …the interests of the insured are at odds with those of its insurer, the former is entitled to select independent counsel to conduct the defense so that, inter alia, tactical decisions will “be in the hands of an attorney whose loyalty to [the insured] is unquestioned”. Inherent in this rule is the axiom that when such a conflict exists, the interests of the insured are paramount. To hold…that counsel, having been employed for the very purpose of safeguarding the interests of the insured, must nonetheless obtain the insurer's consent before pursuing a course of action tailored to serve that end, or risk a loss of coverage for “failure to cooperate”, would be untenable; it would effectively enable the insurer to take control of the defense and subordinate the insured's interests to its own. This would not only defeat the purpose of assigning independent counsel, it would pose an ethical dilemma for the insured's attorney, who, being bound to “exercise professional judgment solely on behalf of the client * * * disregard[ing] the desires of others that might impair the lawyer's free judgment”, cannot permit the insurer “to direct or regulate his or her professional judgment in rendering such legal services.”
Nelson Electric Contracting Corporation v. Transcontinental Insurance Company, 231 A.D.2d 207 (3d Dept. 1997 [internal citations omitted])
Notably, the Third Department has even held that insurers have an affirmative obligation to inform their insureds of their right to independent counsel in the event of a conflict; and that the failure to comply with that obligation can constitute a deceptive business practice within the meaning of General Business Law § 349. See Elacqua v. Physicians’ Reciprocal Insurers, 52 A.D.3d 886 (3d Dep’t 2008) at 888. (The Appellate Division, First Department, by contrast, does not currently recognize this affirmative obligation. See Tower Ins. Co. of New York v. Sanita Const. Co., 129 A.D.3d 430, 431 [1st Dep’t 2015]).
Similarly, a conflict of interest warranting the right to independent counsel also exists where an insurance company is providing a defense for an insured under a reservation of rights. Federated Dept. Stores, Inc. v. Twin City Fire Ins. Co., 807 N.Y.S.2d 62 (1st Dep’t 2006); Nat'l Hockey League v. TIG Ins. Co., No. 653421, 2022 WL 2733210 (N.Y. Sup. Ct. June 24, 2022).
It should also be noted that circumstances triggering an insured’s entitlement to independent counsel can arise at any point during the defense of a claim. Facts can develop over the course of investigating the claim or through discovery in litigation, for example, that can take a claim out of the policy’s coverage—creating an uncovered claim or causing the insurer to issue a reservation of rights. The insured’s right to retain independent counsel begins once the conflict of interest between insurer and insured occurs, regardless of when.
If a conflict arises and independent counsel is retained, the attorney must become familiar with the insurance policy’s limits to properly protect the insured. Specifically, the attorney should thoroughly review the policy, and the insurer’s previous coverage letters and any reservations of rights that have been asserted so that he or she is aware of how any actions in the case might affect the insured’s remaining coverage. The attorney is ethically bound to act solely in the interests of the insureds—and cannot allow the insurer to influence his or her professional judgement and obligations.