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June 18, 2008

Court Finds Failure to Notify Insured of Right to Independent Counsel Violates General Business Law §349

In April 2005, the Appellate Division, Third Department, ruled that when covered and non-covered liability claims present a conflict between an insurer and its insured, the insured is entitled to independent counsel of her own choosing at the expense of the insurer and the insurer has an obligation to notify its insured of this right. Elacqua v. Physicians' Reciprocal Insurers, 21 A.D.3d 702, 707 (3d Dep't 2005), app. dism., 6 N.Y.3d 844 (2006).

On June 5, 2008, the Third Department rendered a second decision in the Elacqua case. In Elacqua v. Physicians' Reciprocal Insurers, 2008 N.Y. App.Div. LEXIS 4831 ("Elacqua II"), the plaintiffs sought to recover attorneys' fees incurred in their action against the defendant, Physicians' Reciprocal, to compel defendant to indemnify them for the verdict against them in the underlying medical malpractice action. Physicians' Reciprocal had agreed to settle the underlying malpractice action for $2.4 million, thereby satisfying all claims against the plaintiffs. However, plaintiffs continued their action against Physicians' Reciprocal alleging causes of action for, among other things, deceptive business practices pursuant to General Business Law § 349 in failing to inform the plaintiffs of their right to select independent counsel of their choosing, at defendant's expense, in the underlying malpractice action.

The lower court dismissed the plaintiffs' complaint and plaintiffs appealed contending the lower court erred in dismissing their General Business Law § 349 claim on the grounds that they could not demonstrate actual harm as a result of the insurer's failure to provide independent counsel in defense of the medical malpractice action (the "Hytko Action").

General Business Law § 349 prohibits "[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state . . . " The act or practice must be "consumer oriented" and the plaintiff must also demonstrate that the act or practice was "deceptive or misleading in a material way and that plaintiff has been injured by reason thereof."

On appeal, the Appellate Division found that the lower court correctly determined that the alleged deceptive practice of failing to inform the plaintiffs of their right to select independent counsel at defendant's expense was "consumer-oriented." The Court noted that testimony by the defendant's general counsel demonstrated that the defendant's practice is "not to inform its insureds with whom it has conflicts that they have the right to select independent counsel at defendant's expense . . . "

The Court further found that the practice was "deceptive within the meaning of General Business Law § 349." The Court cited the Court of Appeals decision in Public Service Mutual Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 401 (1981) holding that where an insurer may face liability on some grounds for recovery but not others, the insured defendant is entitled to representation by an attorney of his or her own choosing at the expense of the insurer. The Court emphasized that on the prior appeal (Elacqua I), it held that the insurer has "an affirmative obligation to inform the insured of his or her right to select independent counsel at the insurer's expense; '[t]o hold otherwise would seriously erode the protection afforded.'" The Court noted that the partial disclaimer letters utilized by the defendant to its insureds, including the plaintiffs in Elacqua, were misleading and misadvised plaintiffs that they could retain counsel at their own expense. "Equally disturbing is the fact that defendant continued to send similar letters to its insureds, failing to inform them of their rights, even after this court's pronouncement in Elacqua I."

Finally, the Court held that the plaintiffs had demonstrated actual harm as a result of the insurer's deceptive acts and practices. The Court pointed out that the plaintiffs need not demonstrate pecuniary harm. The deprivation of plaintiffs' right to independent counsel was sufficient harm to implicate the provisions of the General Business Law. Plaintiffs were entitled to representation by counsel with undivided, conflict free loyalty to the plaintiffs. "This obligation is particularly important in situations where, as here, the interests of an insured are at odds with that of an insurer, in which case tactical decisions must be made by counsel whose loyalty to the insured is unquestioned and whose dedication to the interest of the insured is paramount . . . This threat of divided loyalty and conflict of interest between the insurer and the insured, is the precise evil sought to be remedied by Goldfarb and our decision in Elacqua I, hence the requirement that independent counsel be provided at the expense of the insurer and that the insurer advise the insured of this right. Defendant's failure to inform plaintiffs of this right, together with plaintiffs' showing that undivided and uncompromised conflict free representation was not provided to them, constitutes harm within the meaning of General Business Law § 349."

The Court found that the underlying facts clearly demonstrated that the attorneys retained by the insurer to represent the insureds in the malpractice action were not able to provide an undivided, conflict-fee representation on behalf of the insureds.

The case underscores the obligation of an insurer to notify its insureds of their right to independent counsel of their choosing at the carrier's expense in any case where the insured is faced with covered and uncovered claims.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.


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