In Elacqua v. Physicians' Reciprocal Insurers, 52 A.D.3d 886 (N.Y. App. Div. 2008) (“Elacqua II”), the Supreme Court, Appellate Division held that the insurer engaged in deceptive practices by failing to inform the insureds of their right to select independent counsel to defend them at the insurer's expense.
The court had previously addressed the threshold question of the insurer’s affirmative obligation to inform its insured of its right. In Elacqua v. Physicians' Reciprocal Insurers, 21 A.D.3d 702 (N.Y.A.D. 3 Dept. 2005) (“Elacqua I”), the defense counsel retained for the insured by the insurer had successfully moved to dismiss all of the covered claims, leaving viable only the uncovered claims; a verdict of $3 million was subsequently entered against the insureds on the uncovered claims. The Elacqua I court held that where the existence of both covered and uncovered claims gives rise to a conflict of interest between an insurer and its insured, the insurer has an affirmative obligation to advise the insured of its right to independent defense counsel at the insurer’s expense.
On remittal from Elacqua I, the insureds amended their complaint to add a cause of action for deceptive business practices pursuant to General Business Law § 349 for failing to inform them of their right to select independent counsel of their choosing. All claims ultimately settled except for the § 349 claim, which sought to recover attorney’s fees that the insured had spent in compelling the insurer to indemnify them in connection with the underlying action. The trial court subsequently dismissed the § 349 claim on the ground that the insureds were unable to demonstrate actual harm as a result of not being represented by independent defense counsel.
On appeal (Elacqua II), the court found that the insurer’s failure to inform the insureds of their right to be defended by independent counsel at the insurer’s expense, together with the insured’s showing that undivided and uncompromised conflict-free representation was not provided to them, constituted harm within the meaning of General Business Law § 349. Accordingly, the court remitted the matter for a trial on damages.