Significant NY Coverage Decision

June 5, 2008

On June 5, 2008, the Third Department in New York issued a decision in Elacqua v. Physicians’ Reciprical Insurers. The court reviewed the established procedure (set forth in Public Serv. Mut. Ins. Co. v Goldfarb (53 NY2d 392 [1981]) that an insurer must follow when a potential conflict exists between the insurer and the insured. Specifically, when the existence of both covered and uncovered claims gives rise to a conflict of interest between an insurer and its insured, the insured is entitled to independent counsel of his or her own choosing at the expense of the insurer. The insurer thus has an obligation to specifically inform the insured of this right in its correspondence with the insured under such circumstances.

In Elacqua, a conflict of interest existed between the insurer and the insured under which both covered and uncovered claims were alleged against the insured. The partial disclaimer letters sent by the insurer to its insureds failed to inform them that they had the right to select independent counsel at the insurer’s expense and instead misadvised the insured that plaintiffs could retain counsel to protect their uninsured interests "at [their] own expense." The court held that this practice was certainly likely to mislead a reasonable consumer acting reasonably under the circumstances and that the insurer’s failure to inform the insured of this right, coupled with the insured’s showing that undivided and uncompromised conflict-free legal representation was not provided to them as a result, constituted a deceptive practice pursuant to New York General Business Law § 349. The Appellate Division remitted the case to the lower court for a trial on damages.

New York General Business Law § 349 allows an aggrieved person to bring a private right of action against and may recover actual damages. The attorney general is also empowered to bring an action to enjoin such unlawful acts or practices and to obtain restitution of any moneys or property obtained directly or indirectly by any such unlawful acts or practices. Insurers should therefore be cognizant of their obligations when a conflict of interest with their insured arises and follow the procedure set forth in Goldfarb.

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