Richard Milone and Justin Lavella on Shaya B. Pacific, LLC v. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP: The Duty of Defense Counsel in a Lawsuit to Investigate Fully the Potentially Applicable Insurance
When a lawyer is hired to defend a client in a lawsuit or arbitration, analyzing and pursuing the client’s available insurance coverage is sometimes not expressly included in the scope of the attorney’s engagement. However, according to a decision of the New York Supreme Court, Appellate Division, Second Department, investigating the availability of insurance coverage and, if necessary, taking steps to safeguard this asset, could be fundamental to the effective representation of a client, and the failure to take such steps could lead to a claim for legal malpractice.
In this commentary, insurance recovery specialists Richard Milone and Justin Lavella, attorneys in the Washington, D.C., office of Kelley Drye & Warren LLP, discuss the multiple implications of the opinion in Shaya B. Pacific, LLC v. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, 38 A.D.3d 34 (N.Y. App. Div. 2006). That opinion denied a law firm’s motion to dismiss by finding that an open question of fact existed as to whether a law firm, even one retained by a policyholder’s insurer, that failed to investigate the availability of insurance coverage “exercised the reasonable skill and knowledge commonly possessed by a member of the legal profession.” 38 A.D.3d at 41.
Milone and Lavella write, “As a result of this ruling, it is incumbent upon any attorney defending a lawsuit or arbitration to take inventory of the insurance that might apply to that suit, and to take the steps necessary to preserve the insurance coverage. The harsh result for the law firm in the Wilson Elser case strongly encourages defense counsel to consider insurance issues, including the identification of applicable coverage and the noticing of actual or potential claims, at the outset of their engagement.”
The authors examine both the scope of the Wilson Elser opinion as well as several questions left unanswered by the Appellate Court. With respect to the unanswered question of how extensive is the duty of the law firm to investigate the existence and applicability of potential insurance, the authors write: “The facts of Wilson Elser indicate that the duty may be quite substantial. Unraveling the corporate history of a client and identifying other entities whose insurance might apply to the clients liabilities is a major undertaking. Under the Wilson Elser holding, it appears that defense counsel may be obligated to do so or risk malpractice liability.” The authors also address unanswered questions about who pays for the time spent by defense counsel in identifying and preserving the clients’ potential sources of insurance recovery, as well as a number of other tangential but noteworthy points.
The authors also provide a number of insurance-related practice tips that all defense attorneys should consider adopting when undertaking a new representation. The authors advise tort defendants, insurers, and attorneys to always address insurance issues directly when defining the scope of the legal representation. The authors write: “Law firms are wise to confirm in every engagement letter in which they represent a defendant in any kind of suit that their services will or will not include an examination of potentially applicable insurance.”
The authors also suggest that attorneys defending a lawsuit, whether required by their retainer agreement or not to take a close look at the availability of insurance at the outset of an engagement. The authors write: “Not only should the defendants own insurance be considered, but also other parties coverage under which the client may be an additional insured or otherwise have an ability to claim coverage rights.”
The authors also caution against accepting an insurer’s denial of coverage at face value. The authors write: “Quite often insurers deny claims that they know are covered in the hopes that policyholders will not pursue them. Never assume that coverage is unavailable.”
The authors also suggest that individuals who are unable to perform a complete and thorough analysis of potentially available coverage, either due to an actual or perceived conflict, or due to lack of experience with insurance issues, consult with somebody who is in position to provide such an analysis.
Finally, parties are advised to act quickly. The authors conclude: “Many times, decisions made at the outset of a representation may materially affect not only the amount but also the availability of insurance coverage. One such example is the decision to give notice. As noted in the Wilson Elser decision, under New York law, insurers will argue that coverage is forfeited if notice is not given within 30-60 days, and there is no requirement that the insurer prove that it was prejudiced by the delay. Most other states laws are less strict, but nonetheless, late notice is an issue that can and should be avoided. In addition, most policies require policyholders to satisfy a number of other conditions or risk losing coverage. Such conditions include the duty to seek insurer consent, the duty to keep the insurer informed of developments, and the duty to cooperate.”