Emerging Issues Analysis: SNR Denton on New York Marine & General Insurance Co. V, Lafarge v. North America, Inc.

Emerging Issues Analysis: SNR Denton on New York Marine & General Insurance Co. V, Lafarge v. North America, Inc.

   By William T. Barker, Partner, SNR Denton

In New York Marine & General Insurance Co. v. Lafarge North America, Inc. (“NYMAGIC”) 593 F.3d 102 (2nd Cir. 2010), the Second Circuit pointed out limits to an insured’s right to be defended by independent counsel, rather than counsel appointed and directed by the insurer.  Some New York cases have overlooked those limits, and the Second Circuit’s opinion should help correct such neglect. This commentary examines independent counsel rights under New York law, against the background of the law elsewhere.

The commentary summarizes the facts and result as follows:

Lafarge owned a barge that allegedly smashed through a levee wall during Hurricane Katrina, contributing to the flooding of New Orleans.  This created potential liability for Lafarge that threatened Lafarge’s existence.  It retained national and New Orleans counsel to investigate and preserve evidence.  Its primary insurer, NYMAGIC, wished to assign counsel from its panel to defend the ensuing litigation.  Lafarge continued to retain its chosen counsel and directed them to cooperate with NYMAGIC’s panel counsel.  The primary limits were exhausted paying panel counsel and retained experts.  The excess insurers refused to pay Lafarge’s chosen counsel, whose fees exceeded $10 million.  The district court ordered the excess insurers to pay those fees.

The Second Circuit determined that some, but not all, of the fees in question were covered.  Specifically, immediate retention of counsel to investigate, retain experts, and preserve evidence was a covered means of loss mitigation.  But NYMAGIC had the right to retain mutually acceptable counsel to defend the litigation, and Lafarge’s refusal to consider any of the firms offered breached the contract.

But Lafarge argued that, even if the contract entitled NYMAGIC to select counsel, Lafarge was nonetheless entitled, pursuant to New York law, to independent counsel of its own selection.  Lafarge argued that there was an inherent conflict of interest between itself and its insurers, because Lafarge’s exposure was billions of dollars and the insurer’s coverage was only $30 million.  The Second Circuit disagreed, because LaFarge and NYMAGIC had a common interest in defeating the claim and there were no alleged noncovered grounds of liability.

The commentary first reviews the law on independent counsel outside New York, and the common legal basis for the independent counsel right in both New York and most other jurisdictions.  As the commentary explains:

The first question that any lawyer must answer when asked to undertake a representation is whether that representation will involve a conflict of interest.  Insurance defense counsel is no different from any other lawyer in this respect.  If representing the insured and the insurer jointly would create a conflict of interest, then joint representation is impermissible, absent informed consents by both.  Independent counsel, representing only the insured, must be paid by the insurer to discharge its duty to defend.  Otherwise, the insured would be put at risk that counsel’s advice about the representation might be affected by counsel’s loyalty to the insurer.  Essentially the same analysis applies even if local law does not consider the insurer to be a co-client.  If there is a conflict that would preclude joint representation, that conflict would also preclude, absent informed consent by the insured, acceptance of insurer direction by counsel.  And if counsel has an ongoing relationship with the insurer, the lawyer’s personal interest in pleasing the insurer may create a conflict in the same way that a legal duty of loyalty does.

The commentary explores when that analysis does and does not indicate that the insured has a right to independent counsel, and notes the minority rule that gives an insured broader rights to independent counsel.  The commentary then discusses the key holdings of the New York Court of Appeals, including the case on which the Second Circuit relied, which is consistent with the majority rule outside New York.  But the Court of Appeals has not addressed the issue in some time, and some cases in the Appellate Division have failed to utilize the proper standard, granting a right to independent counsel broader than that approved by the Court of Appeals.  The Second Circuit’s decision in NYMAGIC calls attention to the correct standard, which the commentary concludes that other courts should now follow.

William T. Barker is a partner in the Chicago office of SNR Denton with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is a co-author (with Ronald D. Kent) of New Appleman Insurance Bad Faith Litigation, Second Edition and author or co-author of chapters of New Appleman on Insurance Law Library Edition and of New Appleman Liability Insurance, Second Edition, has published over 100 articles, and speaks frequently on insurance and litigation subjects. He has been described as the leading lawyer-commentator on the connections between procedure and insurance. See Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 n.4 (1995). He is a member of the Editorial Board of New Appleman on Insurance Law Library Edition and New Appleman Insurance Law Practice Guide. Mr. Barker is a member of the American Law Institute.

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