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Announcements
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Counselor
WINTER 2008 • Vol. XLVII
- Understanding the Costs When Your
Insurance Company Pays For Your Legal Defense
- The Importance of Zoning Due Diligence
- Identity Theft Protection - The
Things You Should Know
- The Firm Highlights
- The Firm News, Appearances and
Articles
Understanding the Costs When Your Insurance Company Pays
For Your Legal Defense
By Donald Jay Schwartz
If you are sued and you have liability insurance
that covers one or more claims made in that lawsuit, usually
your insurance company will provide you with a legal defense
by attorneys of their choice. This duty to defend arises
when a complaint against an insured party alleges any facts
or grounds which fall within the policies coverage, even
if those allegations are false or groundless.
While having your insurance company provide you with free
legal defense may appear to be a good thing on the surface,
in the end, you may be getting exactly what you pay for.
Often there are times when your interests and those of the
insurance company are in conflict. For instance, if you
are sued for both compensatory damages and punitive damages,
an inherent conflict of interest most likely exists requiring
the insurance company to allow you to choose your own attorney,
which it will pay for. This conflict exists because by law,
an insurance carrier is forbidden from paying an insured
with respect to a punitive damages judgment. So, although
the insurance company is required to provide you with legal
defense, if you are found responsible for punitive damages,
the insurance company will not pay that portion of the judgment.
Therefore, the argument can be made that the insurance company
has an inherent conflict of interest since it would be to
its benefit if you were found liable for punitive damages
as opposed to compensatory damages, which it is responsible
for paying. Therefore, by allowing the insurance company
to use and pay its own attorneys, the possibility exists
that the loyalties of these attorneys might favor the party
paying them (the insurer), and you may find yourself liable
for punitive damages, which the insurance company does not
have to cover.
New York State’s highest Court has held that because
an insurance carrier's duty to defend is broader than its
duty to indemnify, both covered and non-covered claims contained
in the same complaint ordinarily must be defended by the
insurance company. However, the Court has also held that
the assertion of punitive damages against an insured party
places the carrier in an inherent conflict of interest;
and, therefore, the insured is entitled to a defense by
an attorney of his or her own choosing, whose reasonable
fees are to be paid for by the insurer.
If you believe that you are involved in a case where this
inherent conflict may exist (it may present itself in a
“reservation of rights” letter sent to you by
your insurance company) call our Litigation Department so
that we may properly advise you.
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