Lawyers Are Policyholders (People) Too

In a decision that is sure to warm the hearts of our attorney friends and colleagues, the New York Appellate Division held in favor of our client and attorney in the case of American Guaranty and Liability Insurance Company v. Moskowitz, 870 N.Y.S.2d 307 (App. Div. 1st Dep’t, Jan 6, 2009) (“American Guaranty”). The American Guaranty case involved insurance under a legal liability policy for claims after our client was drawn into litigation filed initially against one of his law firm’s clients. Conopco, Inc. d/b/a/ v. Dina Wein, et al., Civil Action No. 05-CV-9899 (S.D.N.Y.) (“Conopco”). The plaintiffs in Conopco asserted claims for, among other things, RICO violations and fraud.

The insurer, after agreeing initially to defend, denied coverage and filed an action seeking a declaration that it had neither a duty to defend nor indemnify. To make matters worse, the insurer also sought reimbursement of the amounts it had already expended in our client’s defense.

In response to our client’s motion to dismiss, the Magistrate Judge in the underlying Conopco case recommended dismissal, without leave to re-plead, of all claims against our client for failure to state a cause of action. Thereafter, the Conopco plaintiffs dismissed all such claims with prejudice. Notwithstanding the complete exoneration of our client, the insurer continued to insist that it owed no duty to defend and was entitled to reimbursement of all costs expended in our client’s defense.

In response to the parties’ cross-motions for summary judgment, the trial court in the insurance coverage action held entirely in our client’s favor. Not only did that court hold that the insurer had a duty to defend, it also held that our client was entitled to reimbursement of all costs expended in defending against both the underlying Conopco Action as well as the insurance coverage action. Those holdings were thereafter affirmed in their entirety by the Appellate Division.

The holdings in American Guaranty, in and of themselves, are unremarkable. In finding a duty to defend on American Guaranty’s part, the courts applied the nearly universal rule that requires an insurer to defend whenever the allegations of the underlying complaint “suggest [a] reasonable possibility of coverage….” American Guaranty, 870 N.Y.S.2d at 308 (quoting Automobile Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131, 137 (2006)). Likewise, a policyholder in New York is entitled to recover the costs of defending against its insurer’s declaratory judgment action. See U.S. Underwriters Ins. Co v. City Club Hotel, LLC, 3 N.Y.3d 592 (2004); Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12 (1979).

What is remarkable and troubling is the aggressive stand that the insurer took in response to a claim by an attorney who was in a better position than most to protect his rights. In light of the failing economy and the already increased pressure on insurance company profits, tactics like these can be expected to increase, especially in connection with less sophisticated policyholders. As always, vigilance, persistence and occasionally litigation are the best defense to an insurer’s wrongful denial of claims.