The opinion of the court was delivered by: SCHEINDLIN
SHIRA A. SCHEINDLIN, U.S.D.J.:
II. FACTUAL AND PROCEDURAL BACKGROUND
This action arises out of the settlement of a state court action in which a patron of The Tunnel, Lourdes Ortiz, sought damages for an alleged rape that occurred in The Tunnel's bathroom on July 17, 1988. United National provided an insurance policy to The Tunnel in which Waterfront was an additional named insured. This policy had a $ 500,000 limit per occurrence and in the aggregate, and an exclusion for "assault and/or battery." Affidavit of Andrew Entwistle ("Entwistle Aff."), attorney for United National, dated July 15, 1996, Exh. 1. Waterfront was also covered by a Comprehensive General Liability Insurance Policy issued by Commerce & Industry Insurance Company ("Commerce"), a member of American International Group companies ("AIG"). Affidavit of Philip Touitou ("Touitou Aff."), attorney for Waterfront, dated August 27, 1996, Exh. C. This policy provided bodily injury limits of $ 1 million per occurrence and in the aggregate. Id.
Waterfront was initially defended in the Ortiz action by counsel appointed by AIG, Jones Hirsch Connors & Bull ("Jones Hirsch"), id. P 4, while The Tunnel was defended by Molod, Berkowitz & Godsky ("Molod"), appointed by United National. Id., Exh. D. After the Waterfront filed an answer and cross-claim against The Tunnel in the Ortiz action, id., Exh. F, Jones Hirsch wrote to Molod in May 1989, advising that under the terms of The Tunnel's lease, The Tunnel was obligated to indemnify and hold Waterfront harmless. Id., Exh. G. In addition, Jones Hirsch stated that it would be in the parties' best interest if The Tunnel assumed Waterfront's defense in Ortiz, as Waterfront was likely to be dismissed from the action. Id. By letter dated May 9, 1989, United National's Vice President Richard March, on behalf of The Tunnel, acknowledged Jones Hirsch's letter to Molod, and advised Jones Hirsch that Molod's defense of The Tunnel was subject to a reservation of rights. Id., Exh. H. Waterfront alleges that it never received a reservation of rights letter from United National. Affidavit of Steven Honig ("Honig Aff."), General Counsel and Vice President of Waterfront, dated August 26, 1996, P 3. In addition, March noted that Waterfront should determine if it wanted to tender its defense to United National under the circumstances, i.e. United National's defense of The Tunnel, and any other insured under The Tunnel's policy subject to a reservation of rights. After a second request from AIG asking United National to assume Waterfront's defense, based on the lease and the United National insurance policy under which Waterfront was an additional insured, United National advised AIG in June 1989 that it intended to defend Waterfront, but that it had reserved its rights under the Policy. Entwistle Aff., Exh. 2. In addition, United National informed AIG that it had retained counsel to institute a declaratory judgment action to determine United National's rights and obligations under the Policy. Id.
In July 1989, United National instructed Molod to assume Waterfront's defense, Touitou Aff., Exh. J. Jones Hirsch then forwarded an executed Consent to Change Attorney form and its case file to Molod. Id., Exh. K. Jones Hirsch was no longer involved with the Ortiz action until October 1989, when United National wrote to Jones Hirsch and requested that Jones Hirsch withdraw Waterfront's cross-claim against The Tunnel. Id., Exh. M. United National never appointed independent counsel for Waterfront, although it did offer to split the cost of a second counsel with AIG in October 1989. Entwistle Aff., Exh. 5.
Between July 1989 and February 1991, the Defendants in the Ortiz action failed to comply with several discovery orders. As a consequence, in November 1989, the Plaintiff in the Ortiz action filed a motion to strike the Defendants' answer for failure to obey an order of disclosure. Touitou Aff., Exh. Q. This motion was granted in November 1991. Id. Molod then sought reargument of that decision, which was denied in June 1992. Id., Exh. R. On December 1, 1992, the Appellate Division affirmed. The following day, the Ortiz action was settled for $ 1,050,000. Entwistle Aff., Exh. 7. United National paid $ 500,000 toward the settlement (its policy limit) but reserved its rights on the record as against the other carriers. Id. The balance of $ 550,000 was paid on behalf of Waterfront by Commerce, pursuant to the Comprehensive General Liability Insurance Policy held by Waterfront. See Proposed Amended Answer at P 51, Touitou Aff., Exh. U. In a subsequent opinion issued in June 1993, the Appellate Division sanctioned Molod sua sponte, stating, "The record is clear that counsel for defendants were ultimately responsible for these actions. Their acts were 'undertaken primarily to delay or prolong the resolution of the litigation.'" Id., Exh. S.
B. The 1989 Declaratory Relief Action
In June 1989, United National commenced a declaratory judgment action in the Southern District of New York against Waterfront and The Tunnel to determine United National's rights and liabilities under the Policy. Id., Exh. 6. United National and Waterfront cross-moved for summary judgment. On October 25, 1991, this Court denied United National's motion and granted Waterfront's cross-motion, concluding that the assault and battery exclusion was ambiguous and should be construed against United National. United Nat'l Ins. Co. v. Waterfront New York Realty Corp., 777 F. Supp. 254 (S.D.N.Y. 1991). In December 1992, United National filed a notice of appeal, and in June 1993, the Second Circuit reversed, holding that the assault and battery exclusion was not ambiguous and encompassed a charge of rape. United Nat'l Ins. Co. v. Waterfront New York Realty Corp., 994 F.2d 105 (2d Cir. 1993). The case was dismissed in August 1994, based on lack of subject matter jurisdiction. United Nat'l Ins. Co. v. Waterfront New York Realty Corp., 907 F. Supp. 663 (S.D.N.Y. 1995).
C. The Commerce State Court Action
Commerce, proceeding as subrogee to Waterfront's rights by virtue of a contract entered into between Commerce and Waterfront, and as a result of the $ 550,000 payment it made to settle the Ortiz action on Waterfront's behalf, commenced an action in April 1993 in Supreme Court, New York County, against United National and Molod. Touitou Aff., Exh. T. Commerce alleged that United National breached its fiduciary obligations to Waterfront as a result of its failure to provide Waterfront with a competent defense, and argued that such negligence precluded Waterfront's ability to defend itself in the Ortiz action. Id. As a result, Commerce argued that it should recover its contribution to the settlement. Commerce also sued Molod for malpractice and breach of fiduciary duty. United National's motion for ...