Insurance Law

Insurer Appointed Lawyer’s Duty is to Client It Was Retained to Defend – Conflict of Interest Required To Remove Counsel

Insurance companies have the right and obligation to choose counsel to defend its insureds. Counsel retained by an insurer to defend an insured, contrary to the belief of many, is obligated solely to represent the rights, duties, obligation and defenses of the party insured. When that party is a corporation the counsel is obligated to represent the interest of the corporation even if it is contrary to the rights and obligations of its officers and shareholders.

In Landon v. Austin, — N.Y.S.3d —-, 2015 N.Y. App. Div. LEXIS 4815 (N.Y.A.D. 3 Dept.), 2015 N.Y. Slip Op. 04911 (6/11/15), [enhanced version available to lexis.com subscribers], a New York appellate court was asked to agree with a corporate officer’s attempt to disqualify the lawyers assigned to represent the corporation since counsel’s defense of the corporation could allow for a judgment in excess of the officer’s personal liability insurance.

FACTS

Plaintiff sued to recover for injuries he suffered while performing construction work on a residence owned by defendant Duane Austin. The project also involved equipment owned by, and several employees of, defendant Austin Construction, Inc. (hereinafter ACI). Austin and his wife are the sole shareholders and officers of ACI, and Austin cross-claimed against ACI for contribution and/or indemnification.

ACI has commercial liability insurance coverage, and its carrier selected Smith, Sovik, Kendrick & Sugnet P.C. (hereinafter SSKS) to provide a defense. Austin is also entitled to a defense under the terms of his homeowners insurance policy, and a separate law firm was retained to represent him.

Approximately three weeks before the trial in this matter was to begin, Austin moved to disqualify SSKS as counsel for ACI. Austin argues that he is the “alter ego” of ACI, and that SSKS is impermissibly placing the interests of ACI’s insurance carrier ahead of his stated wishes. Austin fears that the damages awarded at trial will exceed the liability limits of his homeowners insurance policy and that, should ACI not be held liable, he will be personally responsible for some of the award.

He argued that he was acting in his corporate capacity in the lead-up to the injury, which would render ACI liable and bring the liability limits of its commercial liability insurance policy into play. SSKS rejected the demands of Austin that it endorse that strategy, and has instead argued that ACI is not liable because Austin was acting solely in his individual capacity.

ANALYSIS

The court’s analysis begins with the observation that any disqualification motion is founded upon an allegation of a breach of a fiduciary duty owed by the attorney to a current or former client. Although SSKS was retained by the insurer for ACI, the paramount interest SSKS represents is that of ACI and the insurer is precluded from interference with counsel’s independent professional judgments in the conduct of the litigation on behalf of its client. (Feliberty v. Damon, 72 N.Y.2d 112, 120 [1988], [enhanced version available to lexis.com subscribers]; see Elacqua v. Physicians’ Reciprocal Insurers, 52 AD3d 886, 889–890 [2008], [enhanced version available to lexis.com subscribers]; Federal Ins. Co. v. North Am. Specialty Ins. Co., 47 AD3d 52, 59 [2007]), [enhanced version available to lexis.com subscribers], . Disqualification is therefore appropriate only where a conflicting interest between the insurer and insured may, even inadvertently, affect, or give the appearance of affecting, the obligations of the professional relationship.

A conflicting interest exists, for example, where the defense attorney’s duty to the insured would require that he or she defeat liability on any ground and his or her duty to the insurer would require that he or she defeat liability only upon grounds which would render the insurer liable.

With that backdrop in mind, SKSS has consistently argued that ACI is not liable at all. While this defense could harm the personal financial interests of Austin if it succeeds, SSKS has never represented Austin in his individual capacity. The defense advanced by SSKS clearly furthers the corporate interests of ACI, and the record is devoid of any indication that its actual goal is to recoup funds for the insurer’s benefit from ACI or its principals. Because Austin failed to demonstrate the existence of any conflict of interest between ACI and its insurer, the trial court did not abuse its discretion in denying his disqualification motion.

SKSS has plainly acted in furtherance of ACI’s interests, Austin has attempted to direct SSKS to take a litigation position harmful to a corporation of which he is an owner and officer. SSKS properly viewed those efforts with skepticism, as every one, dealing with an officer of a corporation who assumes to act for it in matters in which the interests of the corporation and officer are adverse, is put upon inquiry as to the authority and good faith of the officer.

The trial court order was affirmed.

ZALMA OPINION

Mr. Austin attempted to move his personal liability to the corporation he controls – which had greater insurance coverage limits than his homeowners policy’s personal liability limits – instead of asking corporate lawyers to protect the corporation’s rights. Counsel, recognizing its duty, refused to act contrary to the rights and defenses available to its client and the insurer paying for its defense. If Austin was able to remove counsel and replace them with a lawyer that would follow his instructions to put all liability on the corporation he would have acted in breach of the covenant of good faith and fair dealing owed to his corporation’s insurer to the benefit of his homeowner

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2015, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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