Caveat Advocat: Defense Lawyers as Coverage Lawyers
Updated: Oct 20
While insurance-coverage law has developed into a rarefied specialty practice, lawyers who handle the defense of liability cases cannot punt on considering coverage issues—or they risk malpractice claims by their disgruntled clients. The New York Appellate Division confirmed that defense counsel may face such a claim for failing to investigate the possibility of excess coverage—even where defense counsel has been retained by another insurance company for the benefit of the insured defendant.
In Shaya B. Pacific, LLC v. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, 38 A.D.3d 34 (2d Dep’t 2006), the plaintiff—who was the defendant in a liability case—sued defense counsel for malpractice, not for dissatisfaction with how the defense case was handled, but for failing to help secure excess coverage in the event the defense was unsuccessful. As the New York court framed the question:
The principal issue presented on this appeal concerns whether a law firm, retained by a primary carrier to defend its insured in a pending action, has any obligation to investigate whether the insured has excess coverage available and, if so, to file a timely notice of excess claim on the insured’s behalf.
In Shaya, the insured was covered under a policy from certain underwriters at Lloyd’s with a $1 million limit. The underlying plaintiffs sought $52.5 million. In addition to appointing defense counsel, Lloyd’s advised the insured that it might wish to engage separate counsel concerning potential excess judgments and should investigate whether excess insurance was available and notify any such carrier promptly.
The Wilson Elser firm defended the suit against the insured. In February 2003, the injured plaintiff obtained summary judgment establishing the insured’s liability. Approximately two months later, before trial on damages, the firm tendered the matter on the insured’s behalf to National Union Fire Insurance Company for further defense and excess indemnification. National Union denied coverage, citing late notice and a lack of information establishing that the defendant was an insured under its policy.
Several months later, judgments totaling approximately $6.49 million were entered against the insured, well in excess of the primary policy limit. The insured then sued the law firm, alleging that its failure to notify National Union constituted legal malpractice and breach of contract.
The appellate court emphasized that it was reviewing a prediscovery motion to dismiss—not a summary-judgment motion or a determination following trial. It first examined whether the documents conclusively established that the firm’s representation excluded responsibility for investigating or pursuing excess coverage. Lloyd’s letter did not conclusively establish such a limitation. As the court explained:
Thus, a legal malpractice plaintiff need not, in order to assert a viable cause of action, specifically plead that the alleged malpractice fell within the agreed scope of the defendant’s representation.
The court further held that a defendant seeking dismissal on documentary evidence must present evidence conclusively establishing that the scope of the representation excluded the matters underlying the alleged malpractice. The firm had not done so.
The insurance issue is not unique to insurer-appointed defense counsel. In Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison, 18 Cal. 4th 739 (1998), the client alleged that its litigation counsel failed to investigate potential insurance coverage, recognize that its policies potentially covered the underlying action, or notify—or advise the client to notify—the relevant insurers. The California Supreme Court addressed when the client sustained “actual injury” for purposes of the legal-malpractice statute of limitations, not whether counsel ultimately committed malpractice. Nevertheless, the case illustrates the consequences of overlooking insurance: delayed access to an insurer-funded defense, a late-notice defense to coverage, and impairment of the client’s insurance position.
The law firm also argued that its appointment by the primary insurer confined its responsibilities and that advising on insurance coverage would conflict with the tripartite relationship among insurer, insured, and defense counsel. The court rejected that categorical argument in the circumstances presented. It recognized that advice concerning coverage under Lloyd’s own primary policy might raise a conflict, but found no corresponding conflict in advising the insured about available excess coverage from another insurer.
The distinction matters. Both Lloyd’s and the insured wanted to defeat the underlying claim or keep the recovery within the primary limit. Beyond that limit, the insured had an important interest in identifying excess coverage. The court concluded that advising on that coverage would not have breached a duty to Lloyd’s.
The majority did not hold that every defense engagement necessarily includes every insurance-coverage issue. Rather, it explained that potential negligence would turn primarily on the agreed scope of representation and whether, under all relevant circumstances, counsel exercised the reasonable skill and knowledge commonly possessed by members of the profession. The court would not rule that a malpractice action could never arise from a failure to investigate excess insurance or notify the excess carrier merely because the primary insurer had selected and paid defense counsel.
One judge dissented strongly, writing:
The insured’s contractual responsibility to notify its alleged excess insurance carrier cannot be avoided or diminished through the subterfuge of attempting to foist such obligation on an unsuspecting law firm selected by the primary carrier particularly where, as here, the law firm may have been assigned the case after the time to notify the excess carrier had expired.
Wilson Elser had not been found to have breached a duty to its former client. The majority reinstated the malpractice claim so that the relevant facts could be developed. The firm remained free to contest the scope of its engagement, negligence, causation, and damages. The court affirmed dismissal of the separate breach-of-contract claim because it duplicated the malpractice claim.
The lessons for defense lawyers include: do not overlook the possibility of insurance beyond the policy funding the defense, and make the agreed scope of the engagement clear. If coverage investigation and advice are outside that scope, address that limitation expressly rather than assume that the insurer’s appointment of counsel establishes it.
I think that the ordinary policyholder will not react negatively to a retention letter explaining that counsel is being retained to defend the liability case and is not undertaking a separate investigation of available insurance. But in the absence of an agreement making the scope clear, the lawyer may face a claim that a failure to pursue insurance breached a professional duty to the client-defendant-insured. And the law firm should look to its own E&O or professional-liability insurance for protection if a former client makes such a claim.
Originally published in Insurance Scrawl on December 23, 2006. Republished with updated citation information and editorial revisions. This post is not a comprehensive survey of subsequent law.
Related: Insurance Coverage · Professional Liability and Legal-Malpractice Insurance · Marc Mayerson’s biography.
Topics: Professional Liability · Excess Insurance · Defense Counsel
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