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Duty to Defend Did Not Obligate Insurance Company to Monitor Fees Charged By Defense Counsel to Prevent Exhaustion of Policy Limits Before Criminal Trial

On September 10, 2019, Judge Reiss of the WDNY issued a decision in Korn v. Federal Ins. Co., Case No. 1:17-cv-00188, ruling that an insurance carrier providing a defense to the insured in a criminal prosecution had no obligation to “monitor” the fees incurred by defense counsel to ensure that the coverage was not exhausted prior to trial.

Korn, an insured brought breach of fiduciary duty and breach of contract claims against a liability insurer, alleging that the insurance company failed “to monitor his criminal defense attorneys, audit the legal fees they incurred, and replace counsel when Plaintiff made Defendant aware that the firm was wasting the finances available for coverage,” such that the policy limits were reached with an extensive amount of work left to be done to prepare for trial.

Judge Reiss granted summary judgment to the insurance company on the breach of fiduciary duty claim, explaining:

Generally speaking, a liability insurer may not be held vicariously liable for the lapses of retained counsel exercising independent judgment on behalf of the insured.” The reasons for this exception are twofold:

First, the duty to defend an insured is by its very nature delegable, as all the parties must know from the outset, for in New York an insurance company is in fact prohibited from the practice of law (Judiciary Law § 495). Accordingly, the insurer necessarily must rely on independent counsel to conduct the litigation. Second, the paramount interest independent counsel represents is that of the insured, not the insurer. The insurer is precluded from interference with counsel's independent professional judgments in the conduct of the litigation on behalf of its client. Vicarious liability thus produces an untenable situation here: on the one hand an insurer is prohibited from itself conducting the litigation or controlling the decisions of the insured's lawyer, yet on the other hand it is charged with responsibility for the lawyer's day-to-day independent professional judgments in the “nuts and bolts” of representing its client.

Despite the general rule that an insurer owes no fiduciary duty to the insured, there are instances where a fiduciary relationship springs into existence under circumstances where there is a special relationship of trust and confidence between the parties. But those instances are the exception rather than the rule. In general, a contract of insurance does not otherwise create a fiduciary relationship between the parties. Such a relationship exists and a fiduciary duty is created [only] when the insurer undertakes the responsibility of representing the insured in the context of litigation. The basis for the fiduciary obligation is quite clear in the litigation context, for the insurer is undertaking to represent the insured's interests.

To the extent Plaintiff seeks to hold Defendant liable for the alleged shortcomings of his defense counsel in the Criminal Action or their day-to-day independent professional judgments, given the insurer's inability to provide or control the legal services in issue, and the existence of a remedy for incompetence against counsel the imposition of vicarious liability in the circumstances is unwarranted. Because it is undisputed that Defendant did not represent Plaintiff in the Criminal Action, there is neither a factual nor legal basis for concluding that Defendant assumed responsibility for Plaintiffs defense. Even if Defendant brokered the attorney-client relationship as Plaintiff contends, this is not one of those rare cases in which a fiduciary duty may be found. Defendant's motion for summary judgment on Plaintiffs claim for breach of fiduciary duty/vicarious liability is therefore GRANTED.

The Court also rejected the insured’s breach of contract claim, finding that (1) the policy did not require the insurer “to ensure the Criminal Action reached a final resolution before the Policy limits were exhausted”; (2) the insurer had no duty to enforce its own billing guidelines for the benefit of the insured; and (3) the insurer did not add attorneys to the defense team without the insured’s knowledge and consent.

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