Western District of New York Grants Summary Judgment to Federal Insurance in Suit Brought by an Insured Seeking Additional Criminal Defense Costs Under Insurance Policy

In Korn v. Federal Ins. Co., the District Court for the Western District of New York addressed a case in which an insuredbrought suit against his insurer seeking additional criminal defense costs under his Directors and Officers liability policy. Under the policy, the limits of liability were reduced by the payment of defense costs. The insured sued Federal Insurance Company after the policy limits were exhausted during six years of litigation by the defense costs and he owed defense counsel additional amounts. After analyzing the evidence submitted by both parties, which included the policy, emails exchanged by the parties, and Federal Insurance’s Guidelines, the court held that the insurer had established a case of entitlement to summary judgment and entered judgment in its favor on each of the Plaintiff’s claims.

The insured was the sole owner of four companies engaged in the business or operation of nursing homes. His insurance policy afforded coverage of $1,000,000 for Directors and Officers Liability coverage, inclusive of defense costs, and an addition $500,000 limit of liability for covered loss resulting from claims against any executive, inclusive of defense costs. The insuredwas indicted in United States District Court for various claims of fraud. The insurer provided outside counsel for the insured’s criminal defense as well as additional counsel at his request. The insured’s criminal action ultimately resolved, but he asserted that he should have received additional coverage raising his policy limit.

In his Complaint, the insured alleged the following five causes of action: (1) breach of fiduciary duty and/or vicarious liability for failing to monitor the criminal defense attorneys retained by the insurer; (2) breach of its duty to defend by failing to ensure that the criminal action progressed at a rate to reach resolution prior to exhaustion of the policy limits; (3) breach of its duty to defend by failing to comply with the insurer’s own defense guidelines; (4) breach of its promise regarding the staffing of the insured’s defense team by adding attorneys and law firms without the insured’s consent; and (5) breach of the implied covenant of good faith and fair dealing.

Defendant filed a motion for summary judgment on all claims arguing that New York law does not recognize a fiduciary duty or vicarious liability premised upon the acts or omissions of outside counsel retained by an insurance company for its insured’s defense. The insurer further argued that the insuredfailed to establish any policy obligation requiring that the criminal action reach a final resolution before the policy limits were exhausted. The insurer asserted that the insured failed to identify any obligation in the policy requiring the insurer to follow its own Guidelines for the insured’s benefit. The insurer also pointed out that the policy gives the insurer the sole right and duty to select outside counsel and that the insured did not establish a legal duty separate from the insurer’s contractual obligations.

The Court found that New York law recognizes no fiduciary duty or vicarious liability for insurers who have retained outside counsel for the insured’s criminal defense. The court held that “there is neither a factual nor a legal basis for concluding that the defendant assumed responsibility for the plaintiff’s defense.” The court also found that the policy was clear that there was no language requiring a “reasonable rate of progression” thus the insured’s claim also failed on that front. Further, the claim that the insurer breached its promise regarding staffing failed because the policy was again clear that the insurer retained all rights and duties to select counsel for the defense of any claim. Finally, the court found that the claim for breach of implied covenant of good faith and fair dealing failed as a matter of law because New York does not recognize a separate cause of action breach of the covenant when a breach of contract claim, based upon the same facts, is pled.

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