United States District Court, Eastern District of New York
April 14, 1999
U.S. UNDERWRITERS INSURANCE COMPANY, PLAINTIFF,
TNP TRUCKING INC., PHILIP LAGRANA, INC., QUEENS SURFACE GROUP, I.F.D. CONSTRUCTION CORP., RUDRADAVE SHARMA, AND EAGLE INSURANCE COMPANY, DEFENDANTS.
The opinion of the court was delivered by: Trager, District Judge.
MEMORANDUM AND ORDER
U.S. Underwriters Insurance Company ("U.S.Underwriters")
commenced a declaratory judgment action against TNP Trucking,
Inc. ("TNP"), seeking a declaration that it has no obligation to
defend or indemnify TNP in connection with a personal injury
action pending in New York State Supreme Court. The state action
charges TNP with negligence. While disclaiming any obligation to
defend or indemnify TNP, U.S. Underwriters provided a defense for
TNP under a reservation of rights and hired defense counsel on
TNP's behalf to defend the underlying action.
TNP now requests the right to have the counsel presently
representing it in this declaratory disclaimer action represent
it in the underlying negligence cause of action. TNP also
requests that U.S. Underwriters be ordered to pay the reasonable
costs incurred by TNP's defense counsel of choice. U.S.
Underwriters opposes both requests.
TNP cites a number of New York cases in support of its
position. See Prashker v. United States Guarantee Co., 1 N.Y.2d 584,
154 N.Y.S.2d 910, 136 N.E.2d 871 (1956); Public Serv.
Mutual Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 442 N.Y.S.2d 422,
425 N.E.2d 810 (1981); Baron v. Home Ins. Co., 112 A.D.2d 391,
492 N.Y.S.2d 50 (2d Dept. 1985); 69th Street Garage Assocs.,
L.P. v. Ticor Title Guarantee Co., 207 A.D.2d 225, 622 N.Y.S.2d 13
(1st Dept. 1995); Ladner v. Am. Home Assurance Co.,
201 A.D.2d 302, 607 N.Y.S.2d 296 (1st Dept. 1994); Major Builders
Corp. v. Commercial Union Ins. Co., 155 A.D.2d 267, 546 N.Y.S.2d 866
(1st Dept. 1989); Nelson Electrical Contracting Corp. v.
Transcontinental Ins. Co., 231 A.D.2d 207, 660 N.Y.S.2d 220 (3d
Dept. 1997). These cases all involve fact patterns where some
allegations of the underlying complaint would trigger coverage,
and others would negate coverage. In such cases, the conflict of
interests between the insured and the insurer is readily
apparent; the attorney's potential or actual conflict of interest
is evident in the sense that whether coverage existed under one
or more causes of action could depend upon how the facts were
developed or argued by counsel.
But it is not evident that the cited cases are on point here
because neither party has taken the trouble to give even a
partial account of the underlying accident. TNP has not offered
any factual scenario under which there might be a potential
conflict of interest. While U.S. Underwriters has alleged several
reasons for disclaiming coverage,*fn1
it, too, has failed to
offer an account of how the accident happened. Nothing in the
reservation of rights letter indicates a possible conflict. The
letter simply denies coverage on any basis. Thus, at this point,
it cannot be discerned how the insured's present counsel in the
underlying action has any conflict of interest similar to that
present in the cited cases.
It seems that TNP is arguing for a rule that a disclaimer,
itself, creates the conflict of interest. TNP argues that if an
insurer controls the litigation, counsel selected by the insurer
always has every incentive to develop the facts in such a way
that it would reduce the risk of the insurer's exposure. To
follow the logic of TNP, however, it would equally follow that
counsel chosen by the insured — who presumably would have no
obligation of loyalty to the insurer — would have every incentive
to develop, or even admit to, facts which might result in
liability for the insured in the underlying action, so long as
the admitted facts at the same time placed the insured within the
ambit of the insurance coverage. Although, in such a case, the
carrier, as a non-party or non-participant in the underlying
action, would not be bound by the actions of counsel chosen by
the insured, the possibility of substantial prejudice to the
carrier surely exists.
While California law appears to support a position similar to
the one being urged by TNP, see McGee v. Superior Court
(Pedersen), 176 Cal.App.3d 221, 221 Cal.Rptr. 421 (4th Dist.
1985) (conflict of interests exists whenever insurer disclaims
coverage and a determination of coverage depends upon the nature
of the insured's conduct as developed at trial), the more
appropriate resolution of this issue was stated by the Sixth
Circuit interpreting Arizona law in Insurance Co. of North Am.
v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980),
where the Court noted that:
Forty-Eight [the insured] raises the spectre of a
conflict of interest between the insurers and
Forty-Eight, since the insurance company would have
an interest in minimizing the amount of exposure
during its policy period and maximizing that of the
manufacturer for those periods that the latter was
self-insured. We cannot agree that this is a
significant problem in light of an attorney's duty to
protect the interest of the insured.
Id. at 1225 n. 25 (citing Parsons v. Continental Nat'l. Am.
Group, 113 Ariz. 223
, 550 P.2d 94 (1976)). Here, too, TNP's
argument ignores the ethical obligations that, under New York
law, counsel chosen by the insurer has to the insured not to take
actions which would, in effect, leave the insured exposed to
liability for the sake of preventing exposure of the insurer to
liability. See Nelson, 231 A.D.2d at 210, 660 N.Y.S.2d at 222
(Insured's attorney is 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;'" an
insured's attorney cannot permit the insurer "`to direct or
regulate his or her professional judgment in rendering such legal
services.'") (quoting N.Y.Code of Prof'l Responsibility EC 5-21;
id. at DR 5-107[B], 22 N.Y.C.R.R. 1200.26(b)). Accordingly, it
will not be assumed that present counsel for TNP in the
underlying action will defend in a manner that prejudices TNP to
the benefit of U.S. Underwriters. Should counsel chosen by the
carrier behave in such a manner, they will be exposing themselves
not only to charges of professional misconduct, but to a claim
for monetary damages as well.
U.S. Underwriters also claims that to require it to provide
independent counsel for TNP here, absent a specific showing of
actual or potential conflict of interest, would set a precedent
which would create "turmoil" in the insurance industry by denying
insurers who provide representation under a reservation of rights
the opportunity to choose counsel in the underlying action. Pl.
Letter, dated 2/19/99. I am unable to assess the accuracy of this
prediction, but it appears to be a bit of an overstatement.
"As a general rule, when an insurance company has a duty to
defend its insured, it also has the right to control the
litigation and to select the counsel it wishes to handle the
insured's defense." Mount Vernon Fire Ins. Co. v. J.J.C. Stucco
& Carpentry Corp., No. 95-CV-5202, 1997 WL 177864, at *3
(E.D.N.Y. April 3, 1997) (citing Parker v. Agric. Ins. Co.,
109 Misc.2d 678, 681, 440 N.Y.S.2d 964, 967 (N.Y.Sup.Ct. 1981)).
However, where there has been a disclaimer, the general rule does
not apply. Thus, U.S. Underwriters' argument disregards the rule
that an insured is not required to accept a carrier's chosen
counsel under a reservation of rights. The insured may refuse a
defense offered with that limitation and demand an unqualified
representation, i.e., coverage. If the carrier persists in its
position, the insured is free to take over the defense of the
underlying action at its own expense with the right to recover
reasonable counsel fees for defending not only the underlying
negligence action, but also the disclaimer action, should it
subsequently be determined that the insurer's disclaimer of
coverage was erroneous. See Cunniff v. Westfield, 829 F. Supp. 55,
58 (E.D.N.Y. 1993) (insured forced to defend action due to
insurer's wrongful refusal to provide a defense is entitled to
recover reasonable attorney's fees incurred in defense) (citing
United States Fidelity and Guar. Co. v. Copfer, 48 N.Y.2d 871,
873, 424 N.Y.S.2d 356, 357, 400 N.E.2d 298 (1979); AFA
Protective Systems, Inc. v. Atlantic Mut. Ins. Co., 157 A.D.2d 683,
549 N.Y.S.2d 783 (2d Dept. 1990)). See also GA Ins. Co. of
New York v. Naimberg Realty Assocs., 233 A.D.2d 363, 365,
650 N.Y.S.2d 246, 248 (2d Dept. 1996) (insured cast in defensive
position as result of insurer's disclaimer action entitled to
award of reasonable costs and attorney's fees incurred in
defending declaratory judgment action); Barry v. Romanosky,
147 A.D.2d 605, 606-07, 538 N.Y.S.2d 14, 16 (2d Dept. 1989) (same).
From the perspective of the insured, the picture is also murky.
While not being required to accept the insurer's choice of
counsel — where the insurer asserts a reservation of rights —
might, at first blush, appear to be advantageous to the insured,
that view ignores certain countervailing realities. Just as the
insured is not required to accept the insurer's representation
under a reservation of rights, the insurer is not obligated to
advance the payment of legal fees. Faced with the necessity of
allowing the insured to pick counsel, the insurer may well take
the position that a court will ultimately uphold the correctness
of its refusal to defend and its disclaimer of coverage, and not
offer to provide counsel to the insured, even under a reservation
of rights. In that case, the insured would be required to fund
the defense of the underlying action,
and it might not have the means to do so. Moreover, if the
insurer prevails in the disclaimer action, the insured will then
be responsible not only for the fees associated with defending
the disclaimer action, but also the legal fees in the underlying
negligence action. Thus, by accepting legal representation chosen
by the carrier, the insured avoids at least the latter expense.
All together, the conflicting possibilities and incentives for
both the insured and the insurer make it unlikely that "turmoil"
would necessarily result from a flat rule allowing the insured to
pick counsel at the carrier's expense whenever the carrier offers
a defense under a reservation of rights. In light of the
disposition above, however, there is no need to determine the
accuracy of the carrier's counsel's prediction.
Accordingly, TNP's motion is denied with leave to renew upon a
more adequate showing of a potential or actual conflict of
interests by its present attorneys in the underlying tort action.