Category Archives: Insurers

Unanimous Supreme Court Upholds Katrina Fraud Verdict In Favor Of Weisbrod Matteis & Copley Clients

In a unaniimagesmous decision, the U.S. Supreme Court upheld a jury’s verdict that State Farm committed fraud in the adjustment of insurance claims arising out of Hurricane Katrina. A copy of the Court’s decision can be accessed at https://www.supremecourt.gov/opinions/16pdf/15-513_43j7.pdf. The case involving Weisbrod Matteis & Copley clients, Cori and Kerri Rigsby, represents an important victory for both whistleblowers and insurance policyholders.

The Rigsbys sued State Farm under the False Claims Act (“FCA”), which permits individuals to sue on behalf of the federal government. The Rigsbys were former claim adjusters employed by a contractor retained by State Farm to adjust insurance claims in the aftermath of Hurricane Katrina. They alleged, and eventually proved at trial in a bellweather case, that State Farm fraudulently represented to the government that Katrina-related damage to the exemplar home was caused by flood rather than wind. State Farm sold both federal government-backed flood insurance policies and general homeowners policies. By misclassifying wind damage as flood damage, State Farm was able to shift liability to the federal government and away from State Farm.

State Farm sought to dismiss the case on a procedural technicality by arguing that one of the Rigsbys’ former lawyers had prematurely leaked the lawsuit in violation of the FCA’s “seal” requirements. Pursuant to those “seal” requirements, lawsuits brought under the FCA must be filed under seal for a minimum of sixty days. State Farm argued that the seal was broken when the Rigsbys’ former lawyer disclosed the lawsuit to the news media and others.

In a unanimous decision, the Supreme Court rejected State Farm’s contention that the seal violation required dismissal of the Rigsbys’ lawsuit. The Court recognized that the seal requirement is intended to benefit the government because it prevents those suspected of fraud from being tipped off. As a result, the Court concluded that “it would make little sense to adopt a rigid interpretation of the seal provision that prejudices the government by depriving it of needed assistance from private parties.”

With the Supreme Court’s affirmance, State Farm must now satisfy the jury’s verdict of $758,000, which represents the damages for a single home, as well as an order to pay attorneys’ fees. The Rigsbys are now ready to move forward and prove the scope of State Farm’s fraud already proven fraud, which could involve thousands of homes and billions of dollars. Indeed, the State of Mississippi contends that State Farm also improperly shifted its Hurricane Katrina losses onto Mississippi’s Homeowner Assistance Program, which was set up to pay thousands of policyholders for losses that were not covered by insurance.  Mississippi has retained Weisbrod Matteis & Copley to pursue these claims against State Farm and other insurers on the State’s behalf. Stay tuned as more on these developing cases will follow.

START SPREADIN’ THE NEWS…NEW YORK’S HIGHEST COURT SAYS PRO RATA ALLOCATION IS LEAVING TODAY

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Guest Blogger: John G. Koch, Weisbrod Matteis & Copley PLLC

In a much anticipated decision, New York’s highest court handed policyholders a significant victory in In re Viking Pump, Inc. & Warren Pumps, LLC, Insurance Appeals, No. 59 (N.Y. May 3, 2016).  In the context of long-tail bodily injuries or property damage spanning multiple policy periods, the Court declared that policy language is the King of New York and trumps all else when determining whether the “all sums” or “pro rata” allocation approach applies to a liability insurer’s indemnity obligation.  Specifically, the Court held that the “all sums” approach applies to an insurer’s indemnity obligation where the policy contains language inconsistent with a pro rata approach. In this case, the Court reasoned that a “non-cumulation” or “anti-stacking” clause is inconsistent with allocating an insurer’s liability on a pro rata basis.  Although Viking Pump dealt only with the duty to indemnify, its ruling applies to the broader duty to defend and bolsters existing case law recognizing that the duty to defend language in most general liability policies cannot be reconciled with a pro rata allocation approach.

To put the Viking Pump decision in context, insurers usually prefer a pro rata approach, meaning they can only be liable for their share of a loss based on the time period their policies were in force compared to the overall period that the long term injury or property damage occurred.  This rests on the legal fiction that a single indivisible loss taking place over many years can be treated as one occurrence in each successive policy period, which is an expedient method for dividing the indivisible loss among multiple successive policies based upon each policy’s time on the risk, as opposed to the extent of actual injury or damage that took place during any specific period.  Id.  As the Court stated, the foundation of this approach is that no insurer will have to pay for any injury or damage that occurs outside of its policy period.  Viking Pump, slip op. at 11-12.

Insurers usually prefer the pro rata approach because their risk is typically reduced and the risk of lost policies, insurer insolvencies or other gaps in coverage may fall upon the policyholder.  In contrast, under the “all sums” approach, each successive insurance policy triggered by a long term injury or damage is, essentially, jointly and severally liable for the entire loss up until the policy’s limits are exhausted.  Under this approach, the insured may target one or many insurers for the entire loss, leaving it to the insurers to seek contribution from one another.

Prior to Viking Pump, insurers often brandished Consolidated Edison Co. of New York v. Allstate Insurance Co., 98 N.Y.2d 208 (2002), to assert that New York is a “pro rata” state.  But in Viking Pump, the Court of Appeals distinguished and limited the reach of Consolidated Edison by pointing out that it never formed a blanket rule for pro rata allocation and that the policies in Consolidated Edison did not contain non-cumulation or similar clauses.  Viking Pump, slip op. at 11-12.

The Viking Pump Court held that non-cumulation clauses are antithetical to the concept of a pro rata allocation.  Non-cumulation clauses essentially provide that where a single loss triggers successive policies, any amount paid by a prior policy will reduce the limits of the policy containing the non-cumulation clause.  The original purpose of the clause was to prevent policyholders from double dipping when the industry made the switch from accident based policies to occurrence based policies.  Non-cumulation clauses are inconsistent with a pro rata allocation because they “plainly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence,” whereas the entire premise underlying pro rata allocation is that an insurer cannot be liable for the same loss to the extent the loss occurs in another insurer’s policy period – hence the legal fiction that a separate occurrence takes place in each successive policy period.  Id. at 18 (emphasis added).  The two provisions are logically inconsistent.  Thus, adopting the pro rata approach would render the non-cumulation clause superfluous in violation of New York’s principles of policy interpretation. For this reason, the Court determined that the “all sums” approach applies to policies containing a non-cumulation clause.

In addition to the pro rata versus all sums allocation issue, the Court determined that the proper method for allocating between primary and excess layers of insurance under the “all sums” method is vertical exhaustion – meaning that a single primary policy may be required to respond to the long term loss up to its policy limits, at which time the excess coverage above that policy is pierced on an all sums basis.  The Court rejected the argument that horizontal exhaustion should apply, where all primary coverage would have to be exhausted before any excess coverage must respond to a loss, noting that the excess coverage was tied to the exhaustion of only the underlying policy, not prior or subsequent policies.  Thus, the Court ruled that vertical exhaustion is the appropriate method.

Although Viking Pump specifically addressed the effect of non-cumulation clauses, it undoubtedly stands for the propositions that: (1) no blanket rule controls how an  insurer’s indemnity obligation must be allocated, and (2), where language or a clause in an insurance policy is inconsistent with the pro rata approach, pro rata allocation does not apply.

The latter point is especially important when considering the issue of whether the duty to defend is subject to pro rata allocation.  Most general liability policies provide that the insurer has a duty to defend “any suit” in which at least one potentially covered claim is alleged.  New York courts have interpreted this language as requiring the defense of the entire lawsuit so long as at least one claim is at least in part potentially covered.  A pro rata allocation is inconsistent with the language obligating insurers to “defend” “any suit” if at least one potentially covered claim is alleged.  Thus, the reasoning in Viking Pump suggests that the “all sums” approach is the appropriate method respecting the duty to defend and is consistent with the duty to defend language found in most liability policies.

To learn more, contact John G. Koch

Weisbrod Matteis & Copley Uncovers Massive Fraud In the Adjustment Of Superstorm Sandy Claims

I, and several colleagues, recently had the good fortune of joining the law firm of Weisbrod Matteis & Copley (“WMC”) and opening its first office based outside of Washington, D.C. in Philadelphia, PA. In addition to representing corporate policyholders in maximizing insurance recoveries, WMC is one of the leading firms in the country representing individuals who have been left high and dry by their insurers after a major disaster, such as Hurricane Katrina or Superstorm Sandy, strikes.

For nearly ten years, the firm has represented the whistleblowers who first discovered fraudulent engineering reports after Hurricane Katrina. It remains the only firm in history to prove to a jury that a FEMA-contracted insurer committed fraud in adjusting Hurricane Katrina claims.

WMC is now bringing that experience to bear for the benefit of home and business owners who continue to suffer so greatly in the aftermath of Superstorm Sandy. The firm represents nearly 1300 Sandy victims who are seeking a fair adjustment of their flood insurance claims by FEMA. Unfortunately, that adjustment process is rife with fraud.

On the positive side, both congress and the media are taking note. Recently, WMC partner, August Matteis, appeared on a television news segment along with Congressman Tom MacArthur to discuss the fraud. You can view that segment by clicking here. Most recently, Matthew Krauss, another WMC attorney, appeared on Maggie Glynn’s radio show to further explain how Sandy victims are being underpaid. That interview can be heard by clicking here.

Victims of natural disasters have suffered enough. If nothing else, FEMA owes them an honest adjustment of their insurance claims.

 

For more information, please contact Lee M. Epstein.

Caveat Emptor in the Brave New World of Cyber Insurance Coverage

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Guest Blogger:  Martin Bienstock, Weisbrod Matteis & Copley PLLC

There are two types of entities in the world, goes the adage: those who have learned that their data was breached; and those who just don’t know it yet.  The cost of these data breaches is no laughing matter, however; according to a recent study sponsored by IBM, the average data breach costs a company more than $200 for each record lost.[1]  (In the health-care sector, the cost are even greater, approaching $400 per-record lost record.[2])  The more records that are lost, the greater the per-record expense, so that a large data breach may give rise to exorbitant costs.[3]

Thoughtful executives can mitigate these costs through effective utilization of insurance coverage.  Insurance companies aggressively are marketing new cyber-insurance policies that provide first-party and third-party coverage in the event of a data breach.  Often, the new policies are accompanied by an exclusion in the entity’s Commercial General Liability Policy for losses arising from a data breach.

Entities entering the market for cyber coverage therefore must be vigilant to ensure that, at the end of the day, their efforts not yield less coverage than previously had been available.

Cyber Insurance Policies Are Often Conditioned Upon Maintaining a Particular Level of IT Security.

The new cyber policies typically require an applicant to complete a comprehensive assessment of its cyber security measures, affirming, for example, that it has in place “up-to-date, active firewall technology,” and “updated anti-virus software active on all computers and networks.”[4]   Coverage may be conditioned on the accuracy of these representations.[5]   In the event of a breach, if it turns out that the IT security information represented in the application form was inaccurate, coverage might not be available.

Thus, in one recent case,[6] an insurer sought to deny coverage because, among other things, the insured health-care provider had not maintained the level of IT security described in its application.  The insurer argued that the policy therefore was void.[7]  Under cyber-liability policies, then, an insured might be excluded from coverage in the event that it was negligent in implementing cyber-security measures – hardly the result that the insured had in mind when it purchased the policy.

Traditional CGL Policies Offer Some Protection for Data Breaches Even When the Insured Failed to Maintain Adequate IT Security.

When a data breach arises from an entity’s failure to maintain security, third-party coverage likely would be available under a standard Commercial General Liability Policy.  The standard CGL Policy provides coverage for “advertising injury.”  It defines such advertising injury to include injury caused by “oral or written publication, including publication by electronic means,” which “disclosed information about a person’s private life.”

This definition of “advertising injury” is ill-suited for costs arising from a data breach since it depends upon “publication.”  In the event of a data breach, many of the costs are unrelated to the actual publication of private data; the costs arise from the mere possibility of publication, not its actuality.  Conditioning data-breach coverage upon an irrelevant “publication” standard makes little sense.

Two recent cases highlight the limitation of relying on the “publication” standard to provide protection against data-breach claims.  In one case, electronic data concerning 50,000 employees fell out of a transport van and never was recovered.  The Connecticut Supreme Court held that the data had not been “published,” since there no factual support for the conclusion that the data, which was not in a readily usable format, ever was accessed by anyone.[8]  In contrast, in another recent case, the Fourth Circuit Court of Appeals affirmed a district court decision that damages resulting from a data-breach did constitute “advertising injury” because the information had been made available on the internet, and therefore was “published.”[9]

Cyber-data and Cyber-security policies can be better designed than the CGL “advertising injury” coverage, so that coverage is not dependent on publication.  But as some insureds have learned to their dismay, cyber-liability policies may be drafted to shift the costs of negligence back to the insured, and to make coverage unavailable for the very data breaches for which the insured purchased the insurance in the first place.

Caveat Emptor

Cyber-risk insurance therefore may serve a useful purpose by providing coverage that is targeted specifically towards data breaches, and that covers damages that go beyond the scope of the traditional CGL Policy. Buyers must beware however that the extra financial and administrative burden they assume in buying such policies not leave them worse-off than before.

For more information, please contact Marty at mbienstock@wmclaw.com or 202.751.2002.

 

[1] IBM 2015 Cost of Data Breach Study United States, conducted by Ponemon Institute LLC (May 2015) at 1.

[2] Id. at 7.

[3] Id. at 7.

[4] A sample cyber-risk policy issued by Travelers Group and containing these representations (last accessed on the date of publication) is available here .

[5] Id., Cyber-Risk Policy at III.M. (p. 22).

[6] Columbia Cas. Co. v. Cottage Health Sys., 15-cv-3432 (2015 C.D. Cal.).

[7] Id., Dkt No. 22.

[8] Recall Total Info. Mgmt., Inc. v. Fed. Ins., 317 Conn. 46, 115 A.3d 458 (2015).  The Connecticut Supreme Court adopted the reasoning of the appellate court in Recall Total Information Management, Inc. v. Federal Ins. Co., 147 Conn.App. 450, 465, 83 A.3d 664 (2014).

[9] Travelers Indem. Co. of Am. v. Portal Healthcare Sols., L.L.C No. 14-1944, 2016 WL 1399517, at *2 (4th Cir. Apr. 11, 2016).

Ding Dong the Witch is Dead: The California Supreme Court Overrules Henkel

ding dongIn a stunning development, the California Supreme Court recently overruled its prior decision of Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934 (Cal. 2003). For over a decade insurers have relied on Henkel to argue that the assignment of insurance rights without the insurer’s consent was invalid, even with respect to assignments that post-dated an insured loss. In advancing that argument, insurers rely on a standard form “consent to assignment” provision that provides as follows: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.”

With the decision in Fluor Corporation v. Hartford Accident & Indemnity Co., Case No. S205889, 2015 WL 4938295 (Cal. August 20, 2015), the wicked witch that was Henkel is now dead. In a unanimous decision, the Fluor Court ruled that Henkel is contrary to Section 520 of California’s Insurance Code. Under Section 520, after an insured loss has occurred, an insured is permitted to assign its rights under an insurance policy without its insurer’s consent. The California Supreme Court failed to consider the ramifications of Section 520 when it rendered its earlier ruling in Henkel.

In holding that Section 520 applies to third party as well as first party claims, the Fluor Court reasoned as follows:

Under [Section 520], after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer — and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement. Our contrary conclusion announced in Henkel Corp. v. Hartford Accident & Indemnity Co., supra, 29 Cal.4th 934, is overruled to the extent it conflicts with this controlling statute and this opinion’s analysis.

2015 WL 4938295, at *29.

Beyond relying on Section 520, the Fluor Court also acknowledged that “virtually all” decisions from other courts around the country were “at odds” with the key holding in Henkel and that Henkel fared no better in scholarly publications.

The Fluor decision underscores the importance of insureds remaining resolute in the face of seemingly insurmountable odds. Despite the insurer friendly decision in Henkel, the insured found a yellow brick road to coverage and, along the way, laid a wicked witch to rest.

Questions? Let me know.

Insuring Success: The Transfer of Insurance Assets in Corporate Mergers and Acquisitions

Corporate America is in a constant state of flux. Mergers, acquisitions and spin-offs continue unabated. As a consequence, virtually every major insurance coverage case involves an examination of the corporate policyholder’s history and its rights to insurance for liabilities caused by predecessors and after-acquired entities.

While great care is devoted to documenting and perfecting these sophisticated corporate transactions, all too often, not enough attention is paid to the transfer of insurance assets.  For example, to the extent that insurance assets are addressed, transferring documents often deal only with the disposition of currently in force insurance policies and are silent with respect historic insurance policies.  As we now know, however, long tail liabilities arising out of asbestos, environmental and other exposures often trigger coverage under insurance policies dating back decades.

Equally troublesome is the virtually universal inclusion of so-called “anti-assignment” clauses in insurance policies that purport to require the insurer’s consent before rights under an insurance policy are transferred.  A typical “anti-assignment” clause provides as follows: “Assignment of the interest under this policy shall not bind the company until its consent is endorsed thereon.”  Insurers argue that these clauses are designed to prevent policyholders from saddling insurers with risks they never anticipated nor underwrote.

Courts throughout the country have been grappling with these and other issues.  Although holdings vary from jurisdiction to jurisdiction, some general legal principles have emerged:

  • After a merger, the insurance assets of the predecessor entity typically transfer, along with any liabilities, to the successor entity.
  • The transfer of insurance assets pursuant to other corporate transactions, such as asset purchase agreements, is largely dependent on the wording of the agreement.
  • “Anti-assignment” clauses typically do not bar the transfer of insurance assets and rights after a merger or for losses that occur before the transfer.
  • A successor entity is generally not entitled to insurance coverage under its own insurance policies for liabilities of after-acquired subsidiaries that are based on events that occurred prior to the transfer.

All of this suggests that great care should be devoted to the treatment of insurance assets in any corporate transaction.

Questions? Contact Lee Epstein at Weisbrod Matteis & Copley PLLC.

Three’s a Crowd: Adventures in the Tripartite Relationship

An insurance company’s duty to defend its policyholder is at least as important as its duty to indemnify — if not more so. Indeed, it has been estimated that 55 cents out of every claim dollar is paid for defense.

The not insignificant expense associated with defending claims has caused insurers to seek greater control over the defense of claims asserted against policyholders. With increasing frequency, insurers are insisting on the use of panel defense counsel, the adherence to strict billing guidelines and the pre-approval of even the most basic costs. The resulting tensions have led defense counsel to seek guidance from their bar associations and policyholders to seek relief from the courts. Those tensions are exacerbated even further when conflicts of interest between insurers and policyholders arise.

This article discusses the nuances of the tripartite relationship involving insurers, policyholders and defense counsel and examines the current state of the law governing that relationship.

I. The Policyholder Is Always The Client

Even when an insurer is defending an action without reservation, the policyholder remains the client of the defense counsel retained and paid by the insurer. In certain jurisdictions, however, the insurer is also considered the client when a tripartite relationship is formed. Notwithstanding whether the insurer is also considered the client, insurers will invariably insist that they are entitled to control that defense, especially when they are defending without reservation.

According to insurers, the right to control will include the right to select defense counsel, approve all tactical decisions and settle any claim within policy limits. At times, however, the policyholder and insurer may have divergent views on how to defend a case or the policyholder may have business reasons for not wanting to settle a case within policy limits. In those situations, the Model Rules of Professional Conduct for attorneys provide necessary guidance for defense counsel and their clients.

Rule 1.2(a) of the Model Rules dictates that the lawyer must consult with and abide by a client’s decisions concerning the representation. Moreover, Model Rule 5.4(c) provides that a lawyer “shall not permit a person who recommends, employs or pays a lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering . . . legal services.” Thus, irrespective of whether the insurer is also deemed the client, defense counsel must consult with the policyholder, and not permit the insurer to interfere with counsel’s judgment in defending the interests of the policyholder.

II. An Insurer May Not Insist On Unfettered Compliance With Its Billing Guidelines   

In an effort to reduce litigation costs, insurers are increasingly insisting that defense counsel comply with stringent billing guidelines. Those guidelines typically impose strict reporting requirements and require defense counsel to seek prior insurer approval of any significant costs to be incurred. The insurer’s interest in reducing costs will, in many instances, diverge from the policyholder’s interests in obtaining the best possible defense.
When compliance with insurer-imposed billing guidelines will compromise the defense, defense counsel must protect the policyholder’s interests. In those circumstances, defense counsel must first consult with both the insurer and the policyholder. If the insurer is unwilling to modify or withdraw the limitation a billing guideline places on the defense, and the policyholder is unwilling to accept that limitation, Rule 1.7(b) requires that defense counsel withdraw from representation of both the policyholder and the insurer. Rule 1.7(b) provides, in pertinent part, that “[a] lawyer shall not represent a client if the representation of that client will be materially limited by the lawyer’s responsibilities to another client or to a third person . . . .”

A specific cost-reduction mechanism employed by insurers, which has come under fire recently, is the use of third-party auditors to review defense counsel bills. Such “legal bill audits,” typically involve an examination of hourly rates charged, time spent and defense counsel’s work product to determine the reasonableness of the amounts charged. In the usual case, defense counsel may share this type of information with the insurer because such sharing is either required by the insurance policy or it is permissible in those jurisdictions in which the insurer is also considered the client of defense counsel. When the disclosure would affect a material interest of the policyholder, however, defense counsel may not share such information with the insurer, absent informed consent from the policyholder. For example, defense counsel are usually prohibited from disclosing information to the insurer that could adversely affect the policyholder’s coverage under the insurance policy at issue. An apt example was provided by the Pennsylvania Bar Association:

Generally, an attorney representing an insured need only inform the Insurer of the information necessary to evaluate a claim. For example, assume an attorney represents an Insured in a premise liability slip and fall. During the course of the representation, the attorney discovers that the subject property is a rental property, not a residential property as set forth in the policy.
Although this information may radically affect coverage, the attorney is prohibited from releasing this information to the Insurer or any other third parties. In the foregoing hypothetical, the attorney would simply inform the Insurer of the nature of the injuries claimed by plaintiff and the circumstances surrounding the incident. The insurer would have all of the information necessary to evaluate the value and basis for the claim and the Insured’s confidentiality would be protected.

Pa. Bar Assoc. Comm. On Legal Ethics and Prof. Resp. Informal Op., No. 97-119, 1997 WL 816708 at *2 (Oct. 7, 1997).

Moreover, the majority of jurisdictions have concluded that defense counsel may not disclose confidential information to a third-party auditor, absent the policyholder’s informed consent. Unlike the case with insurers, disclosure of such information to third-party auditors, with whom defense counsel have no employment or contractual relationship, may result in a waiver of any applicable privilege. In order to secure informed consent from the policyholder, defense counsel must discuss the nature of the disclosures sought by the third-party auditor as well as the consequences of disclosure (i.e., potential waiver of privilege) and non-disclosure (i.e., insurer may view non-disclosure as a breach of the duty to cooperate under the insurance policy).

III. When Conflicts Arise, The Insurer Must Relinquish Control Over The Defense 

When a conflict of interest between the insurer and policyholder arises, an insurer must typically relinquish any right to control the defense, including the right to select defense counsel. “It is settled law that where conflicts of interest between an insurer and policyholder arise, such that a question as to the loyalty of the insurer’s counsel to that policyholder is raised, the policyholder is entitled to select its counsel, whose reasonable fee is to be paid by the insurer.” St. Peter’s Church v. American Nat. Fire Ins. Co., No. 00-2806, 2002 WL 59333 at *10 (E.D. Pa. Jan 14, 2002).

A classic example of a conflict necessitating the retention of independent counsel may arise where the insurer reserves the right to deny coverage for certain of the underlying claims, but not others. In that situation, an insurer “would be tempted to construct a defense which would place any damage award outside policy coverage.” Public Serv. Mut. Ins. Co. v. Goldfarb, 442 N.Y.S.2d 422, 427 (N.Y. 1981).

Another prime example of a conflict sufficient to cause an insurer to relinquish the control over the defense is where the insurer lacks the economic motive for mounting a vigorous defense. This situation may arise where the underlying claimant prays for damages that are well in excess of the insurer’s policy limits. See, e.g., Emons Indus., Inc. v. Liberty Mut. Ins. Co., 749 F. Supp. 1289, 1297 (S.D.N.Y. 1990).

IV. Conclusion

The tripartite relationship between the insurer, policyholder and defense counsel provides fertile ground for confusion and abuse. Even when an insurer defends a matter without reservation, the policyholder remains the client and can properly object to any limitations placed on the defense by the insurer. If defense counsel reasonably believes that an insurer-imposed limitation will materially impair the defense, defense counsel must withdraw from representing both the insurer and the policyholder.

When a conflict of interest between the insurer and policyholder arises, the insurer must relinquish control over the defense and the policyholder is entitled to select defense counsel. Such a conflict may arise where an insurer reserves the right to deny coverage for only certain of the underlying claims, or where the insurer does not have an economic incentive to defend vigorously, or where the insurer could construct a defense placing any damage award outside of coverage.

Questions? Contact Lee Epstein at Weisbrod Matteis & Copley PLLC.

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