Same Counsel May Defend Insured in DJ Action and Underlying Personal Injury Action

CGL – CONFLICT OF INTEREST – INSURED'S RIGHT TO CHOOSE INDEPENDENT COUNSEL
Everest Natl. Ins. Co. v. Quest Bldr. Group, Inc.
(Sup. Ct., New York Co., decided 8/10/2009)

Interesting issue.

Liability insurer denies coverage and commences a declaratory judgment action against its insured to confirm its denial.  Pending the DJ action's outcome, it retains counsel to defend the insured in a related, underlying personal injury action.  The insured retains its own counsel to defend the DJ action and asks that the insurer allow that same counsel to defend the insured in the underlying action, given the conflict of interest retained counsel has in representing the insured in that action.  Insurer says no.

Court says yes.  In New York County Supreme Court  Justice Judith Gische's opinion:

It is well established that when there is a conflict of interest between an insurer and an insured regarding the defense of an action brought by a third party, the insured has the right to select defense counsel of its own choosing and the insurer is liable for the payment of the reasonable value of the services provided by such attorneys.  Public Service Mut. Ins, Co. v. Goldfarb, 53 NY2d 392, 401 (1981); Prashker v. U.S. Guarantee Co., 1 NY2d 584, 593 (1956). At bar, the conflict between Quest, as insured, and Everest, as insurer, is readily apparent and even conceded by Everest. Everest has not only denied coverage under the policy for the incident that is the subject of the personal injury action, but it has commenced the instant declaratory judgment action for a ruling upholding its denial of coverage.

Everest concedes that Quest has the right to retain counsel of its own choosing  to defend the personal injury action. It argues in this case, however, that the right to retain such counsel is not without restrictions and that the Lawrence law firm should not be able to defend Quest in this action and also the personal injury action at the same time.

The cases cited by plaintiff do not support its contention that there are restrictions on who Quest may hire to defend it, now that a conflict has arisen between it and Quest. The only limitation found in the case law is that the fees charged by the insured’s selected counsel must be reasonable.

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Even apart from the lack of legal precedent, Everest has not presented any plausible argument why this “dual representation” of Quest by the Lawrence law firm creates any real or potential conflict of interest. Everest argues that if the Lawrence law firm is retained in the personal injury action, it will still have to “report” to Everest. It conjectures that if the Lawrence law firm learns something in the personal injury action that is injurious to Quest’s position in the declaratory judgment action, it would have trouble reporting this information to Everest. This may in turn, according to Everest, affect its "settlement position".

As Quest points out, the arguments of Everest are an outgrowth of the underlying conflict of interest between Quest and Everest. Everest is only identifying that upon the substitution of counsel of Quest's choosing in the personal injury action, it will lose the ability to control the defense of the underlying personal injury action. It will lose that control, however, regardless of any dual representation by the Lawrence law firm in the declaratory judgment and personal injury actions.