New Decision Substantially Limits Insurance Carrier's Ability to Disclaim Duty to Defend

Agostino Iacobellis, plaintiff, v. A-1 Tool Rental, Inc., et al., --- N.Y.S.2d ----, 2009 WL 2884726N.Y.A.D. 2 Dept., September 11, 2009.

What's a defense counsel to do when the carrier who assigned it a case disclaims a duty to defend and ceases paying the attorney's bills? The lawfirm of Wilson Elser Moskowitz Edelman & Dicker, LLP (hereinafter Wilson Elser), did what any defense lawyer would do facing the prospect of not getting paid...it moved to withdraw as counsel. The Supreme Court granted Wilson Elser's motion, a not unexpected result.

The Second Department however reversed in a short decision which may leave defense counsel and liability carriers scratching their heads, and at least a little worried. The Court stated that "[t]he motion of Wilson Elser was a “poor vehicle” to test the propriety of the disclaimer of coverage and withdrawal of defense.... (citing Brothers v. Burt, 27 N.Y.2d 905, 906; see Seye v. Sibbio, 33 AD3d 608; Garcia v. Zito, 242 A.D.2d 258; Pryer v. DeMatteis Orgs., 259 A.D.2d 476). Rather, the Court indicated that the issue of coverage should be decided in a declaratory judgment action (citing Seye v. Sibbio, 33 AD3d 608; Garcia v. Zito, 242 A.D.2d 258; Pryer v. DeMatteis Orgs., 259 A.D.2d 476; Laura Accessories v. A.P.A. Warehouses, 140 A.D.2d 182; Monaghan v. Meade, 91 A.D.2d 1014).

Although the Court was right about a declaratory judgment action being a better forum to determine coverage issues, in the opinion of this blawger, the Second Department nevertheless got it wrong. An attorney's right to receive payment for his services is distinct from the rights between the carrier and its insured. How can an attorney be forced to provide uncompensated services until a declaratory judgment is resolved? This would make defense counsel a necessary party to the declaratory judgment action in order to collect its legal fees. Since when are defense counsel ever named as even nominal parties to a declaratory judgment action? Why should Wilson Elser will be forced to finance the underlying litigation which appears to involve a construction accident? Moreover, this ruling will pit Wilson Elser against the carrier that sent it the case.

This decision will likely have unintended consequences. Unless they are willing to alienate their defense counsel, this decision will force carriers to make determinations of coverage without adequate investigation. This may lead to more disclaimers, not less. It also will likely lead to an increase in carrier initiated declaratory judgment actions as this would be the only way a carrier could extricate itself from defending a case once counsel was assigned.