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WINTER 2008 • Vol. XLVII
- Understanding the Costs When Your Insurance Company Pays For Your Legal Defense
- The Importance of Zoning Due Diligence
- Identity Theft Protection - The Things You Should Know
- The Firm Highlights
- The Firm News, Appearances and Articles


Understanding the Costs When Your Insurance Company Pays For Your Legal Defense

By Donald Jay Schwartz

If you are sued and you have liability insurance that covers one or more claims made in that lawsuit, usually your insurance company will provide you with a legal defense by attorneys of their choice. This duty to defend arises when a complaint against an insured party alleges any facts or grounds which fall within the policies coverage, even if those allegations are false or groundless.

While having your insurance company provide you with free legal defense may appear to be a good thing on the surface, in the end, you may be getting exactly what you pay for. Often there are times when your interests and those of the insurance company are in conflict. For instance, if you are sued for both compensatory damages and punitive damages, an inherent conflict of interest most likely exists requiring the insurance company to allow you to choose your own attorney, which it will pay for. This conflict exists because by law, an insurance carrier is forbidden from paying an insured with respect to a punitive damages judgment. So, although the insurance company is required to provide you with legal defense, if you are found responsible for punitive damages, the insurance company will not pay that portion of the judgment. Therefore, the argument can be made that the insurance company has an inherent conflict of interest since it would be to its benefit if you were found liable for punitive damages as opposed to compensatory damages, which it is responsible for paying. Therefore, by allowing the insurance company to use and pay its own attorneys, the possibility exists that the loyalties of these attorneys might favor the party paying them (the insurer), and you may find yourself liable for punitive damages, which the insurance company does not have to cover.

New York State’s highest Court has held that because an insurance carrier's duty to defend is broader than its duty to indemnify, both covered and non-covered claims contained in the same complaint ordinarily must be defended by the insurance company. However, the Court has also held that the assertion of punitive damages against an insured party places the carrier in an inherent conflict of interest; and, therefore, the insured is entitled to a defense by an attorney of his or her own choosing, whose reasonable fees are to be paid for by the insurer.

If you believe that you are involved in a case where this inherent conflict may exist (it may present itself in a “reservation of rights” letter sent to you by your insurance company) call our Litigation Department so that we may properly advise you.

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