HNRK Coverage Corner

On December 11, 2018, Judge Failla of the SDNY issued a decision in Liberty Mut. Fire Ins. Co. v. Hamilton Ins. Co., 17-CV-2350 (KFP), holding that an insured had the right to select defense counsel because of the insurer’s conflict of interest.

Liberty v. Hamilton arose from an injury at a construction site.  The injured worker sued the construction manager (Gilbane) and the property owner (DASNY).  DASNY filed a cross-claim against Gilbane and a third-party action against the contractor (Preferred), and Gilbane filed its own claims against Preferred.  Gilbane was an additional insured under Preferred’s liability policy and tendered the defense of the claims against it to Preferred’s insurer (Hamilton).  Hamilton initially disclaimed coverage, but two years later agreed to assume the defense, subject to a reservation of rights.  Among other things, Hamilton sought to replace Gilbane’s counsel with counsel selected by Hamilton, and took the position that Gilbane’s additional insured status “applies only to the extent the liability of the additional insured arises out of Preferred Builders’ work.”  Gilbane refused to accept defense counsel selected by Hamilton, citing a conflict of interest:  Hamilton had an economic incentive to establish that the construction worker’s injuries were caused by Gilbane’s negligence, as this would absolve its principal insured (Preferred) of liability, and would also eliminate additional insured coverage for Gilbane under Preferred’s policy.  In addition, Gilbane and Preferred were actually adverse to one another in the underlying litigation, where Gilbane asserted claims against Preferred.

In subsequent coverage litigation between Gilbane’s liability carrier (Liberty Mutual) and Hamilton, Judge Failla held that there was a conflict of interest that entitled Gilbane to select defense counsel of its own choosing to be paid for Hamilton.  The Court explained:

In Public Service Mutual Insurance Co. v. Goldfarb, the Court of Appeals held that, if a conflict exists because “the insurer [is] liable only upon some of the grounds for recovery asserted and not upon others — defendant … is entitled to defense by an attorney of his choosing, whose reasonable fee is to be paid by the insurer.” 53 N.Y.2d 392, 401 (1981). Liberty Mutual argues from this decision that Hamilton had no right to choose Gilbane’s counsel because of a conflict of interest whereby Hamilton “would be liable only on some of the grounds for which recovery was sought in the Underlying Action,” i.e., “only to the extent the liability … arises out of Preferred Builders’ work.”It posits that this limitation on Hamilton’s liability created a conflict: Hamilton “would not only be less interested in defending liability arising from Gilbane’s work; it would want to show that liability arose solely from Gilbane’s work — increasing Gilbane’s exposure and eliminating Hamilton’s exposure both as insurer of Gilbane and as insurer of Preferred.”In addition, Liberty Mutual notes that “Gilbane had cross-claims against and from DASNY, Hamilton’s additional insured, and a third-party action for indemnification against Preferred, Hamilton’s Named Insured.”

Hamilton contends that the issue of conflict “is irrelevant” because, by the time it finally undertook Gilbane’s defense, there was no more conflict.  Specifically, by October 11, 2013, there was no longer any dispute “that Preferred Builders was … solely responsible for Siguencia’s injury”; that Preferred had no plausible claim against Gilbane; and that Gilbane’s sole liability flowed from the negligence of its sub-contractor, Preferred.  Hamilton also asserts that Liberty Mutual was aware of the absence of conflict no later than January 28, 2011, and thus had no basis to refuse Hamilton’s October 11, 2013 acceptance of the tender of defense.  In any event, Hamilton claims, even before the determination of Preferred’s sole liability, Hamilton could have obviated the issue by appointing different counsel for Gilbane, which counsel would have been ethically bound to defend Gilbane against all claims independent of Hamilton’s coverage position.

The Court agrees with Liberty Mutual. Even if the Court could plausibly determine that the conflict posed by the limitations on Hamilton’s liability had evaporated by 2013, Gilbane’s cross-claim and third-party action persisted. “A further justification for representation by attorneys selected by the insureds exists in the instant case by reason of the claims and cross claims of the respondents.… The cross claims indicate true adversity and conflict of interest[.]” Rimar v. Cont’l Cas. Co., 376 N.Y.S.2d 309, 313 (4th Dep’t 1975). Here, the specter of conflict from the cross-claims and third-party action loomed larger due to Hamilton’s repeated, and unsuccessful, attempts to persuade Gilbane to drop those claims.  Under these circumstances, the apparent conflict of interest between Hamilton and Gilbane entitled Gilbane to counsel of its own choosing. Thus, Gilbane’s refusal to accept Hamilton’s offer of defense under the condition of a change of counsel did not absolve Hamilton of its duty to defend.

Some liability policies (particularly those under which the carrier has a “duty to defend”) give the insurer the right to select defense counsel.  However, as this decision illustrates, a conflict of interest between the insurer and the insured gives the insured the right to select counsel regardless of what the policy has to say on the issue.