A unanimous ruling in Elacqua v. Physicians’ Reciprocal Insurers

June 23, 2008

In a unanimous ruling in Elacqua v. Physicians’ Reciprocal Insurers, 502964, decided June 8, 2008, the New York Appellate Division, Third Department went beyond its holding in Elacqua v. Physicians Reciprocal Insurers, 21 AD3d 707 ( “Elacqua I”), that insurers have the “affirmative obligation” to inform insureds of their right to be defended at the insurer’s expense, by counsel of their own choosing, when an insurer reserves its right to deny coverage under a liability policy, and found that an insurer who fails to do so is liable for damages under N.Y. General Business Law § 349.

In the recent Elacqua case (referred to as “Elacqua II”), plaintiffs alleged that the insurer engaged in deceptive business practices by failing to inform them of their right to independent counsel at the insurer’s expense. The Third Department held that failure to inform the insureds of this right supports a claim for damages under N.Y. General Business Law § 349. The Appellate Court remitted the case to the trial court to determine the amount of such damages. This may be the first instance in which General Business Law §349 has been recognized as grounds for damages against an insurer for such conduct.

General Business Law § 349 prohibits “deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state,” and injury caused by such conduct may result in an action to recover damages (General Business Law § 349 [a], [h]). A claim brought under this statute must demonstrate that such act: (1) has the potential to affect the public at large; and (2) was deceptive or misleading in a material way that resulted in harm to the plaintiff. Notably, in finding that the plaintiffs satisfied these requirements, the Court suggests a particular disdain towards the insurer – the same defendants in Elacqua I – and what the court perceived as blatant disregard for its earlier decision. As Justice Karen Peters wrote for the panel, “[h]ere, the partial disclaimer letters sent by defendant to its insureds including plaintiffs failed to inform them that they had the right to select independent counsel at defendant’s expense, instead misadvising that plaintiffs could retain counsel to protect their uninsured interests at their own expense. Equally disturbing is the fact that defendant continued to send similar letters to its insured, failing to inform them of their rights, even after this court’s pronouncement in Elacqua I.” (emphasis supplied). Equally, defendants admitted that these “disturbing”acts were routine practice that affected many similarly situated insureds.

The court’s decision in Elacqua II reinforces the rule enunciated in Elacqua I, that in the Third Department, an insurer must affirmatively advise its insureds of their right to independent counsel, at the insurer’s expense, in cases where a conflict of interest arises upon a reservation of rights. This rule is in direct conflict with the First Department’s decision in Sumo Container Sta. v. Evans, Orr, Pacelli, Norton & Laffan, 278 AD2d 69, 719 NYS2d 223 [1st Dept 2000], where the court supported the insured’s right to independent counsel, but found no affirmative obligation on the part of the insurer to advise the insured of that right.

Given the split between the First and Third Departments in Elacqua 1 and Sumo Container, and the importance of the issue, guidance from the Court of Appeals will be necessary. Because the facts of Elacqua II are unique given that the insurer misrepresented who must pay, rather than remain silent, Elacqua II may prove to be limited on its facts.