In Pacific v. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP (N.Y. App.Div. Dec. 19, 2006), the plaintiff – who was the defendant in a liability case – sued defense counsel for malpractice – not for dissatisfaction in how the defense case was handled but rather for failing to help in securing coverage in the event the defense mounted was unsuccessful. As the New York court framed the question:

The principal issue presented on this appeal concerns whether a law firm, retained by a primary carrier to defend its insured in a pending action, has any obligation to investigate whether the insured has excess coverage available and, if so, to file a timely notice of excess claim on the insured’s behalf.

In Pacific, the insured was covered under a policy from certain underwriters at Lloyd’s for $1 million. The underlying plaintiff sought damages in excess of $50 million, so in addition to appointing defense counsel to defend the insured against the suit, Lloyd’s advised that the insured might wish to investigate whether additional excess coverage might be available.

The Wilson, Elser firm defended the suit against the insured, but lost a summary-judgment motion establishing the insured’s liability. Two months later, before trial of the damages claim was set to commence, the firm, on behalf of the insured, tendered the defense to AIG, which denied coverage in part on the ground that it had not received prompt notice.

Several months later, the underlying plaintiff obtained a verdict against the insured for roughly $6 million, well in excess of Lloyd’s primary insurance policy limits. “In its [malpractice] complaint, the [insured] claimed that the [law firm] had been negligent in failing to advise [AIG] of the underlying action or, alternatively, that its failure to do so constituted a breach of contract.”

The appellate court (ruling on a motion to dismiss) first examined whether the retention arrangement between the law firm and the insured made clear that the firm would not have any responsibility for investigating or pursuing coverage. The court in effect presumed that when a lawyer is retained to defend a case her responsibility includes investigating the possibility of insurance coverage. Cf. Jordache Enterprises v. Brobeck, Phleger & Harrison (Cal. July 30, 1998). As the court rules:

Thus, a legal malpractice plaintiff need not, in order to assert a viable cause of action, specifically plead that the alleged malpractice fell within the agreed scope of the defendant’s representation. Rather, a legal malpractice defendant seeking dismissal . . . must ender document evidence conclusively establishing that the scope of its representation did not include matters relating to the alleged malpractice.

. . .

We turn, then, to the central question presented on this appeal: Whether a law firm retained by a carrier has any duty to ascertain whether the insured it was hired to represent has available excess coverage, or to file a timely notice of excess claim on the insured’s behalf. The issue is best addressed by examining two questions. The first is whether, under ordinary circumstances, an attorney retained directly by a defendant in a personal injury action has any obligation to investigate the availability of insurance for his or her client and to see that timely notices of claim are served; the second is whether, if such an obligation exists, it also binds an attorney who is retained to defendant a personal injury action, not by the defendant directly, but by the defendant’s carrier.

The law firm argued that because it was appointed by an insurance company to represent the insured in the liability litigation it was plain that the scope of its representation was confined by the scope of the carrier’s duty to defend (which is not ordinarily thought to include insurance-recovery issues) and that there was an implicit conflict of interest when defense counsel in a tripartite relationship is asked to opine on coverage issues. The New York Appellate Decision rejected these arguments, finding that there was no legal rule that prevented a lawyer from being sued for breach of professional duty when he fails to pursue coverage in connection with a matter he is defending.

One judge dissented strongly, writing:

The insured’s contractual responsibility to notify its alleged excess insurance carrier cannot 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, as here, the law firm may have been assigned the case after the time to notify the excess carrier had expired.

Note that Wilson, Elser has not been found to have breached any duty to its former client. The issue on appeal is only whether a duty to investigate insurance coverage did not exist as a matter of law. As a matter of fact, the firm can seek to show that the scope of its representation was confined or that it was reasonable in not pursuing the excess coverage here or that the plaintiff cannot establish causation or damages.

The lessons of the Pacific case for defense lawyers include (i) do not shirk investigating whether there is coverage for the case being defended or (ii) make clear in the retention letter that defense counsel’s representation is limited to the defense of the case and expressly does not include advising on or investigating insurance coverage.

I think that the ordinary policyholder will not react negatively to a retention letter that states that the scope of counsel’s representation is limited by the paying insurer’s duty to defend and does not include advising the insured on the availability of coverage as against the defending insurer or against any other insurance company. But in the absence of an agreement making clear that defense counsel will not be advising about insurance, the lawyer may be exposed to a potential claim of breach of professional duty from the failure to pursue offsetting insurance for the client-defendant-insured. (And the law firm should look to its own E&O or professional-liability insurance for protection in the event a former client makes such a claim.)