Second Circuit Uphold Insurer's Right To Appoint Counsel
In the ongoing struggle between policyholders and liability insurers concerning the scope of the independent counsel doctrine, an emerging battlefield has focused on whether disputes between the parties that are unrelated to insurance coverage issues allow policyholders to dispossess liability insurers of their right to control the insured’s defense and appoint defense counsel of the insured’s own choosing Notwithstanding the consequences of this issue, there has been little or no case law addressing this issue up to this point. Now, the Second Circuit has issued a significant new Katrina opinion that emphatically states an insured cannot reject a proposed defense firm merely because the insured believes that they are too small to handle a "bet the company" case. The opinion also restates New York's interpretation of Cumis that a right to independent counsel should only arise where an insurer has reserved rights on a coverage issues that is of a sort that might influence appointed defense counsel to try the case in such a manner that could result in an uninsured verdict.
The consolidated insurance coverage cases decided in New York Marine & General Ins. Co. v. Lafarge North America, Inc., No. 08-5504 (2nd Cir. March 15, 2010) had their origins in a barge (Barge ING 4727) that broke loose from its moorings on the Mississippi River on August 29, 2005 during Hurricane Katrina and came to rest against a house on the land side of the levee protecting the Lower Ninth Ward of New Orleans. On September 9, 2005, an article in the Wall Street Journal suggested that the barge itself might have been responsible for the disastrous breach of the levee that flooded the Lower Ninth Ward in the days that followed Katrina. As a result, Barge ING 4727 figured prominently in the ensuing flood of Katrina litigation in Louisiana. At the time of this loss, Barge ING 4727 was owned by Ingram Barge Company and was under contract to transport materials for Lafarge, one of the largest suppliers of construction materials in the United States and Canada. Upon reading the Wall Street Journal article blaming Barge ING 4727 for the levee breach, Lafarge immediately engaged the Goodwin Procter law firm to coordinate and plan its defense against anticipated class action and mass tort litigation. Lafarge also retained the Holland & Knight law firm to investigate maritime issues presented by the loss. The following day, at Goodwin Procter’s recommendation, Lafarge hired the New Orleans law firm of Chaffe McCall, which had a sizeable maritime practice, to advise it on local concerns. The day after receiving the Wall Street Journal report (September 9), LaFarge also notified its primary insurer (NYMAGIC) that litigation was likely. At the time, LaFarge only disclosed that it had engaged Holland & Knight to investigate maritime issues. No mention was made of the role of Goodwin Procter or Chaffe MCall. On September 13, NYMAGIC acknowledged receipt of the notice and advised LaFarge that it had excellent law firms in New Orleans ready to defend any resulting suits. It was not until September 20 that LaFarge advised NYMAGIC that it had already engaged both national and local counsel. Two days later, NYMAGIC told LaFarge that it: would not consent to any of the six law firms proposed by NYMAGIC and ... that they intended to continue to employ Goodwin Procter, Chaffe ... and [H&K]." In an e-mail dated September 28, 2005, NYMAGIC advised Lafarge that "[we] can agree to the costs of the experts and surveyors but [we] cannot agree to pay for the three sets of attorneys on the case, none approved by us." In a separate e-mail dated the same day, NYMAGIC also informed Lafarge that "[w]e have decided to appoint Sutterfield & Webb as defense counsel in Louisiana." Lafarge ignored NYMAGIC’s offered list of counsel and continued to insist that NYMAGIC agree to pay for the defense provided by Goodwin Procter, Chaffe and Holland & Knight. As a result, NYMAGIC appointed the New Orleans law firm of Sutterfield & Webb to act as defense counsel, which thereafter associated with these other law firms in the In Re: Katrina Canal Breaches Consolidated Litigation.
Although the Holland & Knight law firm was discharged after completing its initial investigation of maritime issues, its bills, combined with the substantial legal fees charged by Goodwin Procter and local counsel ultimately totalled over $10 million, far more than the $5 million primary limit provided by the NYMAGIC policy. The issued presented to the Second Circuit was whether NYMAGIC and various excess insurers of LaFarge were required to reimburse its insured for fees incurred by law firms that were not of the insurers’ choosing. Alternatively, the court was asked to consider whether the daunting exposure presented by these Katrina claims, which far exceeded the $50 million in total available limits, was in and of itself a "conflict" that would permit the insured to ignore the provisions of the policies and appoint its own counsel. The NYMAGIC policy contained non-standard provisions that were claimed to be in conflict here. The so-called "Naming Clause" stated that the insurer, in consultation with Lafarge, "shall have the option of naming any mutually acceptable attorneys to defend Lafarge." However, the policy also contained a so-called "Protection Clause" which required the policyholder to take all reasonable steps to protect NYMAGIC’s interests in the event that a claim was likely to arise under the policy. The Second Circuit ruled that under the extraordinary circumstances presented by Katrina, as borne out by the successive waves of Katrina litigation since 2005, it was appropriate for Lafarge to immediately engage skilled national counsel (Goodwin Proctor) as well as a law firm with specialized maritime experience (Holland & Knight) and local counsel (Chaffe) in fulfillment of its obligations under the protection clause. The court ruled that the immediate assistance of these firms was vital to promptly identifying and preserving evidence and positioning Lafarge with respect to its strategy for the ensuing litigation. Indeed, the court took the view that the Holland & Knight fees were separately covered under the policy as involving a cost of investigation since Holland & Knight’s role was not so much as defense counsel as providing a specific opinion to Lafarge on maritime issues. Lafarge is correct that in light of the exceptional circumstances of Hurricane Katrina, it was reasonable to act quickly to retain Goodwin Procter, H&K, and Chaffe to preserve evidence, investigate the cause of the breached levee, and minimize exposure to the damages that would be at stake in the foreseeable and inevitable lawsuits. Considering the level of complexity of the case in both procedural and substantive respects, as well as the possibility of being cast in damages that could exceed the value of Lafarge several times over, we agree with the District Court that "it was reasonable for Lafarge to retain at once a large firm such as Goodwin, with complex case and mass tort experience, to take immediate control of Lafarge's defense against the anticipated litigation flood (which in fact materialized). It was also reasonable for Lafarge to retain an admiralty firm such as H&K, with experience in the `rapid response' investigation and evaluation of major marine casualties." On the other hand, the court ruled that nothing in the Protection Clause suggested an intention to trump the significance of the naming clause, even in cases of extreme liability, as here. The court observed that, "While Goodwin Procter, H&K and Chaffe were reasonably retained to minimize potential liability arising from the extraordinary circumstances here, the protection clause does not qualify NYMAGIC’s option to name mutually acceptable counsel pursuant to the naming clause. . . ." As a result, the court found that, "Once NYMAGIC clearly expressed its intention to fulfill its obligations and offered Lafarge a choice of six qualified law firms, it was incumbent upon Lafarge to act in good faith to consider agreeing to retain a firm from NYMAGIC’s list." The Court therefore refused to require NYMAGIC to reimburse Lafarge for those fees that were incurred by Goodwin Procter and Chaffe after NYMAGIC had provided a list of proposed defense counsel to Lafarge. The Second Circuit rejected Lafarge’s argument that the Sutterfield & Webb law firm, which had only five attorneys, had inadequate resources to provide a proper defense to it. The Second Circuit pointed out that the initial list of law firms proposed by NYMAGIC included law firms of between 40 and 160 attorneys specializing in maritime law and experienced in class actions and that it was only after Lafarge refused to consider any of these larger firms that NYMAGIC retained Sutterfield to associate in the defense. In any event, the court rejected any unqualified suggestion that a small law firm is less competent than a larger firm pointing out that the Rules of Professional Responsibility would prohibit a law firm from undertaking a representation that it was unqualified to accept. The court also rejected Lafarge’s suggestion that the sheer size of the anticipated Katrina claims created a conflict of interest that allowed it an independent right to select counsel of its own choosing without regard to the wording of the policies. The Second Circuit pointed out that, under New York law, "Independent counsel is only necessary in cases where the defense attorney’s duty to the insured would require that he defeat liability on any ground and his duty to the insurer would require that he defeat liability only upon grounds which would render the insurer liable." Public Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 401 (1981). In contrast to the issues in Goldfarb, the Second Circuit pointed out that both NYMAGIC and Lafarge shared a common interest in defeating Lafarge’s liability in the barge litigation. The court declined to find that the mere fact that Lafarge’s potential exposure far exceeded the limits of liability was itself a basis for finding a conflict. Indeed, the Second Circuit pointed out that the New York Court of Appeals had implicitly rejected a similar characterization of a "conflict" in Goldfarb when it observed: Where multiple claims present no conflict – for example where the insurance contract provides liability coverage only for personal injuries and the claim against the insured seeks recovery for property damage as well as for personal injuries　– no threat of divided loyalty is present and there is no need for the retention of separate counsel. This is so because in such a situation the question of insurance coverage is not intertwined with the question of the insured’s liability. Id. The court noted that tension might nonetheless exist in settlement negotiations but found that "such a potential or actual conflict is not apparent in this case." Accordingly, the Second Circuit ruled that Lafarge was only entitled to be reimbursed for fees incurred by the Goodwin Procter and Chaffe law firms from the time of their retention in early September through September 28, 2005, when it became clear that Lafarge was not acting in good faith in considering the list of six qualified law firms proposed by NYMAGIC on September 22 and when NYMAGIC advised Lafarge that it would not agree to pay for three sets of attorneys, none of which had been selected or approved by it. The Second Circuit adopted a similar conclusion with respect to certain excess carriers whose policies rested over the $5 million NYMAGIC primary policy. Lafarge had argued that these "bumbershoot" policies must accept coverage for losses that were not insured under the primary policy. Despite the fact that the excess policies did not contain any "Naming Clauses" similar to those contained in the NYMAGIC policy and only contained an "assistance clause" permitting the excess carriers to associate in the insured’s defense at their option, the Second Circuit summarily concluded that the excess carriers nonetheless had no duty to pay for the Goodwin Procter or Chaffe fees as their obligation was only to reimburse "reasonable legal expenses." In this case, the court found that the excess carriers were entitled to rely on the insured’s compliance with requirements in the primary policy with respect to the effect of the naming clause and that, "The excess insurers therefore reasonably expected Lafarge’s defense counsel to be selected pursuant to the plain terms of the primary policy." As a result, "While it may have been reasonable for Lafarge to retain its own attorneys to protect any remote potential conflict of interest between the insurers and Lafarge, the continued retention of Goodwin Procter and Chaffe goes well beyond the necessity of filling that modest role." As a result, the court concluded that the fees charged by the Goodwin Procter and Chaffe law firms after September 28, 2005 were not "reasonable" and therefore fell outside the scope of the coverage obligations of the excess carriers. Despite its convoluted fact pattern and the non-standard wordings at issue in this case, Lafarge sets forth a significant precedent in an emerging area of independent counsel litigation. As the field of mass torts has continued to grow over the last 20 years, carriers have increasingly faced demands by policyholders that they agree to appoint National Coordinating Counsel to assist in the defense of mass tort and class action claims around the country. Some policyholders have also, with the urging of large national policyholder counsel, disputed the qualifications of smaller insurance defense law firms to provide an adequate defense to asbestos, silica and other mass torts. Lafarge
