Failure to Disclose Insureds’ Right to Independent Defense Counsel Was Deceptive

This posting was written by Mark Engstrom, Editor of CCH State Unfair Trade Practices Law.

An insurer’s failure to inform two physicians and their limited liability partnership that they had a right to hire independent counsel—at the insurer’s expense—to defend a malpractice action that asserted both covered and uncovered claims was a deceptive business practice under New York's Deceptive Acts and Practices Law, a New York appellate court has ruled.

Rather than inform the plaintiffs of their right to choose independent counsel, the insurer advised them (and other insureds) that they could retain counsel to protect their insured interests "at their own expense." This conduct was likely to mislead a reasonable consumer acting reasonably under the circumstances, and thus was deceptive under the New York statute.

The insurer's conduct was "consumer oriented" because its failure to inform plaintiffs of their right to choose independent counsel had become a "routine practice" that affected many similarly-situated insureds, the court held.

The existence of both covered and uncovered claims created a conflict of interest between the insurer and the insureds. The defense attorney's duty to the insured required him to defeat liability on any ground; his duty to the insurer, however, required only those theories that would defeat the insurer's liability. In the proceedings below, the attorneys retained by the insurer to represent the physicians successfully moved to dismiss the malpractice action against them.

Moreover, the attorney that the insurer had retained for the partnership had joined in the motion, despite the fact that he had legally sufficient grounds to oppose it. The dismissal of claims against the physicians left the partnership exposed to an uncovered claim for vicarious liability, which ultimately resulted in a jury award of more than $3 million.

Under these circumstances, one could not conclude that the plaintiffs' interests had been adequately represented. In the court's view, liability in the malpractice action was engendered by a lack of independent representation and undivided loyalty, and was not uncompromised by conflicts of interest. It thus constituted sufficient harm under Deceptive Acts and Practices Law. Accordingly, the trial court's dismissal of the claim was reversed, and the matter was remanded to the lower court for a trial on damages.

The June 5 decision is Elacqua v.Physicians’ Reciprocal Insurers, New York Appellate Division, Third Department, CCH State Unfair Trade Practices Law ¶31,594.