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An Insured's 'Right' to Independent Counsel In New York
As a matter of conventional wisdom, if an insurer reserves its right to deny coverage, even while agreeing to defend an insured against a third party's claim, or denies coverage for a loss while accepting the duty to defend the insured, the insured has the right to be represented by defense counsel chosen by the insured and paid by the insurance carrier. The rationale for this result is that a reservation of rights or disclaimer of indemnity creates a conflict of interest between the insured and the insurer. Lawyers familiar with liability insurance issues recognize this principle as axiomatic. (See “Right to Independent Counsel: Effectively Implement and Insurer's Duty to Defend,” NYLJ, Sept. 10, 2012.) However, while the principle may be simply stated, its application, not surprisingly, is more complex. When does the “right” arise in New York? Who gets to choose? What does “independent” mean? The right answer to each of these questions is, It depends.
When Does Right Arise?
When does a right to independent counsel arise? In Prashker v. U.S. Guarantee Co , 1 NY2d 584 (1956), the New York Court of Appeals laid down the basic rule. If the grounds of liability asserted against an insured fall partly within and partly outside exclusionary clauses in a liability insurance policy, the insurer faces a conflict of interest. Its duty to the insured demands that it attempt to defeat liability on every ground asserted, while its own self-interest requires only that it defeat liability on grounds that might result in liability that is not excluded from the policy. In these circumstances, since the insured's interest is paramount, the insured has the right to defense counsel who will not suffer from the conflict, and the carrier remains liable to pay the full cost of defense (subject, of course, to any applicable deductible). This rule has been carried forward. See, e.g., Hartford Accident & Indemnity Co. v. Village of Hempstead, 48 NY2d 218 (1979). (Although, as one lower court commented, “Allowing the insured to select independent or controlling counsel at the insurance company's expense seems to depend on the facts of each case.” Parker v. Agricultural Ins. Co., 109 Misc. 2d 678 (Sup. Ct. N. Y. Co. 1981).)
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