Motion to Withdraw as Retained Defense Counsel Due to Liability Insurer's Subsequent Disclaimer Is Denied

CGL – DUTY TO DEFEND – WITHDRAWING AS RETAINED DEFENSE COUNSEL – DECLARATORY JUDGMENT ACTION
Iacobellis v. A-1 Tool Rental, Inc.
(2nd Dept., decided 9/8/2009)

It has long been the rule in New York that once a liability insurer retains counsel to defend its insured, only a declaratory judgment relieving the insurer of that defense or the insured's consent will enable retained counsel to withdraw.

James River Insurance Company retained Wilson Elser Moskowitz Edelman & Dicker, LLP to defend its insureds in this personal injury action.  After James River subsequently issued a letter disclaiming coverage and denying that it had a duty to defend its insureds, Wilson Elser moved for leave to withdraw as attorneys of record for them. Kings Supreme granted Wilson Elser's motion. 

In REVERSING the order allowing Wilson Elser to withdraw as defense counsel, the Second Department reiterated New York's long-standing rule:

The motion of Wilson Elser was a "poor vehicle" to test the propriety of the disclaimer of coverage and withdrawal of defense by James River (Brothers v Burt, 27 NY2d 905, 906; see Seye v Sibbio, 33 AD3d 608; Garcia v Zito, 242 AD2d 258; Pryer v DeMatteis Orgs., 259 AD2d 476). An action seeking a declaratory judgment respecting the rights of the insured entities vis-à-vis their insurance carrier pursuant to the subject insurance policy is the appropriate means of resolving the issue of coverage, as it will afford the insured entities an opportunity to adequately litigate James River's disclaimer (see Seye v Sibbio, 33 AD3d 608; Garcia v Zito, 242 AD2d 258; Pryer v DeMatteis Orgs., 259 AD2d 476; Laura Accessories v A.P.A. Warehouses, 140 AD2d 182; Monaghan v Meade, 91 AD2d 1014).

So what is a liability insurer to do if it receives a summons and complaint that appears to trigger a defense obligation and an answer is due in days?  If plaintiff's counsel won't grant an extension?  If there are unanswered coverage questions that warrant inquiry or investigation?

If the insured does not have its own counsel to protect against a default, the liability insurer risks not being able to contest the insured's alleged liability and plaintiff's damages if it does not retain counsel to defend its insured and a default judgment is taken while the insurer is investigating coverage.

In New York, if, however, the insurer retains defense counsel who puts in an appearance and becomes the "attorney of record" for the insured, only a declaratory judgment in a separate DJ action relieving the insurer of that defense or the insured's consent will enable retained counsel subsequently to withdraw.  The insurer may not withdraw its defense by simply instructing retained counsel to make a motion to withdraw.