Insurance Defense Counsel and the Client’s Excess Coverage

By Jeffrey P. Lewis

The carrier appoints defense counsel to represent those covered under the policy. When the underlying matter presents the potential of a verdict in excess of the primary policy’s coverage limits, this raises the issue of whether the insured has any excess policy coverage. Under these circumstances, the primary carrier will typically send a letter to the insured to give notice of the potential excess verdict and suggest, or even urge, that the insured look for any possibly applicable excess coverage. That letter also may suggest that the insured retain separate counsel to advise with respect to the coverage issues. But what duty, if any, does insurance defense counsel appointed by the primary carrier owe his or her client with respect to the issue of potential excess coverage? To this author’s knowledge, no reported Pennsylvania case law exists as of this writing that addresses this issue. Recently, however, a New York state intermediate appellate court offered some thought on this question.

In Shaya B. Pacific, L.L.C. v. Wilson, Elser, Moskowitz, Edelman & Dicker, L.L.P., 38 A.D.3d 34, 827 N.Y.S.2d 231 (2006), a four-judge panel considers whether the trial court correctly granted the defendant law firm’s pre-discovery motion to dismiss (which is somewhat akin to preliminary objections under Pennsylvania state practice). The client’s primary carrier had retained the law firm in the underlying matter, a premises liability personal injury action, to defend the client. The primary carrier sent a letter to its insured, the client, to advise of a settlement demand in excess of its policy limits. It suggests that the client “may wish to engage counsel of [its] own choice at [its] own expense to act on [its] behalf in regards to any potential excess judgments.” The letter also invites the insured to check with its insurance agent to determine the existence of any applicable excess insurance coverage. If excess coverage exists, it also “urges” the insured to notify the excess carrier quickly. The insured did not follow this advice. When it finally notified its excess carrier, the carrier denied the claim for — among other reasons — untimely notice. The underlying lawsuit resulted in judgments against the insured for amounts far in excess of the primary policy’s limits.

Thereafter, the insured sued its insurance defense law firm, contending that counsel should have taken affirmative steps to determine the existence of excess coverage. The law firm defenses include, among others, that it had no duty as insurance defense counsel provided by the primary carrier to advise its client, the insured, concerning coverage issues. As another of its defenses, the law firm contends that at the time it was appointed by the primary carrier the deadline for timely notice to the excess carrier had passed.

In a 3-1 decision, the appellate court reverses the trial court’s dismissal of the action. The majority holds that the letter sent to the insured by the primary carrier regarding excess coverage does not constitute conclusive proof that the scope of representation by the insurance defense firm does not encompass responsibility with respect to excess coverage. Because the letter states that the insured “may wish to engage” separate counsel with respect to coverage and that the law firm will continue to defend the underlying matter, the letter did not shut the door on the law firm’s responsibility for coverage issues. In the context of this preliminary motion, the court finds that the law firm did not conclusively establish that the claim was already stale before the primary carrier appointed it. The court notes that although case law exists suggesting that privately retained counsel owes a duty with respect to potential excess coverage, whether insurance defense counsel owes such a duty presents an issue of first impression. The court concludes that it cannot state as a matter of law that insurance defense counsel owes no duty in this regard. Instead, it its view, the existence of such a duty depends on the facts in each individual case.

The dissent, however, finds that “[t]he insured’s contractual responsibility to notify its … excess carrier can not 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 … the law firm may have been assigned the case after the time to notify the excess carrier had expired.” It emphasizes that under these circumstances, the client has “superior or equal knowledge” of potential excess coverage as insurance defense counsel. Therefore, it would find that, as a matter of law, insurance defense counsel owes no duty with respect to potential excess coverage unless the client has requested that counsel to investigate this issue.

The lesson that this case teaches is that in their engagement letters, which they are now required to send, insurance defense counsel should specifically address this issue to remove all doubt whether excess coverage as an issue falls within the scope of the representation.

Jeffrey P. Lewis is a shareholder in the West Chester office of the Philadelphia-based law firm of McKissock & Hoffman P.C., with offices also in Harrisburg, Doylestown and Westmont, N.J. He serves on the PBA Professional Liability Committee and is a PBA Zone 9 delegate.