The Rare Defense Attorney-Insurance Coverage Legal Malpractice Case

Often, insurance companies seem opaque and distant.  Their decision making is hidden, individuals seem to have significant power over settlement decisions, and the rules that permit denials of coverage are Byzantine.  Here is a rare look into how the defense bar and the insurance companies interact. Insurance Corp. of N.Y. v Smith, Mazure, Director, Wilkens, Young & Yagerman, P.C.   2013 NY Slip Op 30115(U)   January 23, 2013   Supreme Court, NY County
Docket Number: 102485/08  Judge: Saliann Scarpulla.

"In this legal malpractice action, plaintiff The Insurance Corporation of New York ("Inscorp")alleges that, while representing Inscorp, Joel Simon, Esq. ("Simon"), a member of Smith Mazure, negligently rendered legal advice regarding insurance coverage during telephone conversations in late 2004 and early 2005. Inscorp alleges that Simon negligently counseled Michael Weiss (“Weiss”), a claims adjuster employed by Inscorp’s third-party administrator, Ward North America (“Ward”), that Inscorp was contractually obligated to provide a defense and indemnification to West Perry, LLC (“West Perry”) and G.B, Construction, LLC (“G,B. Construction”) in an underlying Labor Law action.

Specifically, Inscorp alleges that Simon improperly advised Weiss that West Perry, the construction site owner, was an additional insured under an Inscorp general liability policy issued to G.B. Construction, a subcontractor at the site, and that the Inscorp late disclaimers of coverage issued by Ward were improper and untimely, and therefore, invalid. Inscorp alleges that the disclaimers were enforceable on the grounds that West Perry was not an additional insured under the Inscorp policy, and that neither G.B. Construction nor West Perry had satisfied the policy’s notice of claim requirements.

Inscorp also alleges that Simon negligently failed to disclose to Weiss that United National Insurance Group (‘UNG’’) had retained Smith Mazure to secure additional coverage for West Perry under the Inscorp policy, following Inscorp’s failure to respond to UNG’s October 15,2004 tender of West Perry’s defense and indemnity. Inscorp further alleges that UNG’s retention of Smith Mazure created a conflict of interest, inasmuch as Smith Mazure had represented UNG and its insureds over a period of years.

Inscorp alleges that, based on Smith Mazure‘s negligent legal advice, it rescinded ts valid disclaimers to West Perry and G.B. Construction, and expended approximately $73,000 in legal fees in defending G.B. Construction and West Perry, and $490,000 in settling the Soto action on behalf of both companies. In the answer, Smith Mazure denies all allegations of wrongdoing. In this motion, Smith Mazure alleges that, at the time that the alleged misconduct occurred, it had not
been retained by Inscorp or Ward to render an insurance coverage legal opinion for either West Perry or G.B. Construction, and had clearly advised Weiss that it was acting on behalf of UNG when Simon contacted Weiss in 2004 and 2005. Smith Mazure explains that, in November or December 2004, Simon had received a request from Cheryl Mawby (“Mawby”), a UNG senior claims examiner, to commence a declaratory judgment action to compel Inscorp to provide a defense to UNG‘s insured, West Perry, in the Soto action, and Simon had contacted Inscorp to verbally request coverage on behalf of West Perry.

An attorney's simultaneous representation of two adverse parties in a matter, or the failure to disclose such a conflict, may form the basis of a valid claim for legal malpractice. See Hearst v. Hearst, 50 A.D.3d 959, 963 (2d Dept 2008). In determining whether such an attorney- client relationship exists, the court may consider the following factors, among others: whether the parties entered into a fee arrangement; whether a written retainer agreement or other contract exists; whether there was an informal relationship in which the attorney performed legal services gratuitously; whether the attorney actually represented the purported client in an aspect of the matter; whether the attorney excluded the purported client from some aspect of the litigation to protect another client's interests; and whether the purported client reasonably believed that the
attorney represented him or her. Catizone v. WON 71 F. Supp. 2d 365, 368 (S.D.N.Y.
1999) (applying New York law).

Here, the record consists primarily of deposition testimony and affidavits by Weiss and Simon, which establish triable issues of fact regarding whether an attorney-client relationship regarding coverage issues existed between Inscorp and Smith Mazure at the time Weiss and Simon spoke in 2004 and 2005, See Terio v. Spodek, 63 A.D.3d 719,721. (2d Dept 2009).

Contrary to Smith Mazure's contention, the lack of a written retainer agreement for a coverage opinion does not conclusively demonstrate that no attorney-client relationship existed, particularly where, as here, such a relationship previously existed between the parties. See Terio, 63 A.D.3d at 721; Moran, 32 A.D.3d at 91 1. Weiss testified that Inscorp and Ward would not disclaim coverage without a legal opinion, and that Ward's coverage counsel often rendered opinions without retainer agreements and would, on occasion, provide verbal and gratuitous coverage opinions. Similarly, Smith Mazure's failure to bill Inscorp for a coverage opinion is not dispositive, given that Smith Mazure also failed to bill UNG for Simon's conversation with Weiss on December 30, 2004, although Smith Mazure contends that it was representing UNG on that date. It is well settled that an attorney owes his continuous clients a fiduciary duty, even in matters for which the attorney is not specifically retained, and that the breach of this duty can also constitute attorney malpractice. See Cavaliere v. Plaza Apts., Inc., 84 A.D.3d 712,713-714 (2d Dept 201 1). The parties here have raised
triable issues regarding whether Smith Mazure simultaneously represented Inscorp and
UNG, expressly disclosed its representation of UNG, and if so, whether Smith Mazure
obtained Inscorp's consent to the simultaneous representation. Tabnsr v. Drake, 9 A.D.3d
606, 610 (3d Dept 2004). Contrary to Smith Mazure's contention that Inscorp did not retain Smith Mazure to represent West Perry until after the alleged legal advice was given, Weiss' statement that
he would consider extending coverage and accepting the tender, if UNG waived its right to recover the attorneys' fees already expended, is not dispositive. It is not clear from the record whether Weiss believed that he was negotiating with counsel for an adversary, or instructing Inscorp's counsel regarding negotiations with the adversary. "

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