Not Advising Insureds of Right to Independent Counsel at Insurer's Expense Found to Constitute Deceptive Business Acts and Practices

PROFESSIONAL LIABILITY – RIGHT TO INDEPENDENT COUNSEL – DUTY TO ADVISE INSUREDS OF SUCH RIGHT – GENERAL BUSINESS LAW § 349
Elacqua v. Physicians' Reciprocal Insurers
(3rd Dept., decided 6/5/2008)

This case has a somewhat convoluted procedural background, so I'll skip ahead to its core holding.

Previously in this action plaintiffs had successfully sought leave to amend their complaint to add causes of action against PRI for, among other things, deceptive business practices pursuant to General Business Law § 349 in failing to inform them that they had a right to select independent counsel of their choosing at PRI's expense.

In REVERSING the lower court's dismissal of the plaintiffs' GBL § 349 claim, the Third Department ruled:

The deceptive practice alleged by plaintiffs is that defendant failed to inform them that they had a right to select independent counsel of their choosing at defendant's expense. Supreme Court properly found that the alleged offending practice of defendant was consumer-oriented inasmuch as its failure to inform plaintiffs of their right to select independent counsel was not an isolated incident, but a routine practice that affected many similarly situated insureds. Gregory Mignella, an attorney for defendant, acknowledged that 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, and defendant's general counsel, James Tuffin, confirmed that practice.

We further find that this practice was deceptive within the meaning of General Business Law § 349. In Public Serv. Mut. Ins. Co. v Goldfarb (53 NY2d at 401), the Court of Appeals reaffirmed the proposition that where an insurer may face liability based upon some of the grounds for recovery asserted but not upon others, the insured defendant is entitled to be represented by an attorney of his or her own choosing at the expense of the insurer (see Prashker v United States Guar. Co., 1 NY2d 584, 593 [1956]). Moreover, as we recently held in Elacqua I, where such potential conflict exists between the insurer and the insured, 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" (21 AD3d at 707).

Here, the partial disclaimer letters sent by defendant to its insureds including plaintiffs failed to inform them that they had the right to select independent counsel at defendant's expense, instead misadvising that plaintiffs could retain counsel to protect their uninsured interests "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. This practice was certainly "likely to mislead a reasonable consumer acting reasonably under the circumstances" (citations omitted) and, therefore, constitutes a deceptive practice pursuant to General Business Law § 349.

Liability insurers would be well advised to study both this and its predecessor decisions and, expecially in the Third Department, affirmatively advise their insureds of their right to independent counsel at the insurer's expense where there exists a covered/non-covered claim situation.