An insured may be able to recover damages from its insurer under New York General Business Law §349 if the insurer breaches its affirmative obligation to advise its insured of its right to independent counsel, at the insurer's expense, where an insurer's reservation of rights gives rise to a conflict of interest between the insured and insurer.
In Elacqua v. Physicians' Reciprocal Insurers, the insureds sued their insurer, Physicians' Reciprocal Insurers, to recover attorneys' fees incurred in an earlier action against the insurer to indemnify them for a $2.4 million verdict in an underlying medical malpractice action. The insureds sought damages based on the insurer's alleged deceptive business practices in violation of General Business Law §349, claiming that the insurer failed to inform them of their right to independent counsel at the insurer's expense in the underlying malpractice action. The insureds claimed they had this right because of the conflict of interest created by the insurer's reservation of rights. The Court ruled in the insureds' favor, holding that an insurer's failure to advise an insured of this right could result in a claim for damages under General Business Law §349.
General Business Law §349 prohibits "deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state," and injury caused by such conduct may give rise to a private right of action for damages. The act or practice must be: (1) "consumer oriented," in that it has the potential to affect the public at large; and (2) deceptive or misleading in a material way that has resulted in harm to the plaintiff. The Court found that the insureds satisfied these requirements in this case.
Physicians' Reciprocal Insurers appealed, but the Appellate Court found that the trial court had correctly determined that the insurer's allegedly deceptive practice of failing to inform the insureds of their right to select independent counsel at the insurer's expense was "consumer oriented" since it was not an isolated incident, but rather was the insurer's routine practice that affected many similarly situated insureds.
The Court also found that the insurer's practice was "deceptive" within the meaning of General Business Law §349. The Court cited to the Court of Appeals' decision in Public Service Mutual Ins. Co. v. Goldfarb, which held that where an insurer may face liability based upon some of the grounds asserted by the underlying complaint but not upon others, the insured is entitled to representation by an attorney of his or her own choosing at the expense of the insurer. Moreover, the Elacqua Court noted that it had previously held in the same case that, where a potential conflict exists between the insured and the insurer as a result of an insurer's reservation of rights, the insurer has an affirmative obligation to inform the insured of its right to select independent counsel at the insurer's expense. In this case, the partial disclaimer letters sent to the insureds by the insurer failed to inform the insureds of their right to select independent counsel at the insurer's expense and, instead, incorrectly advised them that they could retain independent counsel to protect their uninsured interests at their own expense.
Additionally, the Court determined that the insureds had demonstrated "actual harm" as a result of the insurer's deceptive acts and practices. The deprivation of the insureds' right to independent counsel, together with their showing that the insurer had not provided them with undivided and uncompromised conflict-free representation, constituted "actual harm" within the meaning of General Business Law §349.
What This Means to You
New York appellate courts disagree on this issue. The court in this case is the New York Supreme Court Appellate Division, Third Department. The Third Department's holding in Elacqua conflicts with an earlier decision of the First Department in Sumo Container Station Inc. v. Evans, Orr, Pacelli, Norton & Laffan, in which the First Department supported the insured's right to independent counsel, but found no affirmative obligation on the part of the insurer to advise the insured of that right. Given the split between the First and Third Departments, and the importance of the issue, we anticipate that Physicians' Reciprocal Insurers may seek an appeal to the New York Court of Appeals, seeking a final resolution from the highest court in the state. In the interim, we recommend that insurers err on the side of caution and advise their New York insureds of their right to select independent counsel, at the insurer's expense, where a conflict of interest arises as a result of a reservation of rights.
For more information on these issues or other insurance matters, please contact:
Copyright © 2008 Herrick, Feinstein LLP. Insurance Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm. Prior results do not guarantee a similar outcome.