There is a constant struggle between policyholders and carriers concerning the policyholder’s ability to select and control its own counsel with the carrier footing the bill. In New York Marine & Gen. Ins. Co. v. Lafarge North America, Inc., - F.3d -, 2010 WL 891323 (Second Circuit, March 15, 2010), the Second Circuit clarified the policyholder’s right to retain and control independent counsel. In doing so, it established significant precedent in the emerging area of independent counsel litigation and should be scrutinized by counsel for policyholders and carriers alike.

Facts

Ingram Barge Company (Ingram) owned Barge ING 4727, which was one of the hundreds of barges to break away from their moorings during Hurricane Katrina. It came to rest against a house on the levee that protected the Ninth Ward in New Orleans. A September 9, 2005 Wall Street Journal article identified Ingram as Barge ING 4727’s owner and Lafarge North America, Inc. (Lafarge) as the operator responsible for the terminal to which Barge ING 4727 was moored. The article implied that Lafarge may have failed to properly moor Barge ING 4727 in advance of Katrina and was therefore responsible for the devastating flooding of the Lower Ninth Ward. The day before the article appeared, the Wall Street Journal contacted Lafarge for comment. Lafarge immediately retained Goodwin Procter LLP (Goodwin), which had represented Lafarge in class action/mass tort and other complex litigation in the past. Lafarge also retained Holland & Knight LLP (H & K), which had a prominent maritime investigation and litigation practice. The next day, Lafarge retained Chaffe McCall LLP (Chaffe) in New Orleans as local counsel. On September 9th, Lafarge notified its primary carrier, NYMAGIC, about Barge ING 4727 and the possibility of ensuing litigation. However, Lafarge advised NYMAGIC of H & K’s retention only. On September 13th, NYMAGIC acknowledged receipt of the notice and advised Lafarge of its panel counsel. On September 20th, Lafarge responded that it had retained Goodwin, H & K and Chaffe. NYMAGIC objected to Lafarge’s retention of the three firms and submitted a list to Lafarge of six proposed New Orleans firms with expertise in maritime litigation. On September 28th, Lafarge advised NYMAGIC that it would not use any of the six law firms proposed by NYMAGIC and insisted on continuing to use the three firms it had retained instead. NYMAGIC responded that “[w]e 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.” Although H & K completed its investigation into the circumstances surrounding the breakaway of Barge ING 4727 and the failure of the levee structures in early 2006, Goodwin and Chaffe remained on the case. The legal fees charged by the three firms ultimately totaled over $10 million, which exceeded NYMAGIC’s $5 million primary limit. The Second Circuit addressed the issue of whether NYMAGIC and Lafarge’s excess carriers were required to reimburse Lafarge for the legal fees incurred by law firms not chosen by the carriers. Alternatively, the court was asked to consider whether the vast number of potential Katrina-based claims, which exceeded the carriers’ collective $50 million coverage limits, was in and of itself a “conflict” that permitted Lafarge to ignore the language of the policies and select its own counsel.

Policy Language

The resolution centered upon the Second Circuit’s interpretation of two non-standard provisions in NYMAGIC’s policy that allegedly conflicted with each other. The “Naming Clause” stated that NYMAGIC, in consultation with Lafarge, “shall have the option of Naming any mutually acceptable attorneys to defend Lafarge,” while the “Protection Clause” required Lafarge to take all reasonable steps to protect NYMAGIC’s interests in the event that a claim was likely to arise under the policy. Lafarge argued that the Protection Clause trumped the Naming Clause and that it was allowed to engage its own lawyers.

Second Circuit Opinion

The Second Circuit held that under Katrina’s extraordinary circumstances, it was appropriate for Lafarge to immediately engage the three law firms in fulfillment of its obligations under the Protection Clause. However, the court ruled that “[w]hile [the law firms] were reasonably retained to minimize potential liability arising from the extraordinary circumstances here, the Protection Clause does mutually acceptable counsel pursuant to the Naming Clause” “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.” As a result, the court refused to require NYMAGIC to reimburse Lafarge for the defense fees incurred after NYMAGIC had provided a list of proposed defense counsel to Lafarge. The Second Circuit also rejected Lafarge’s argument that the number of anticipated Katrina-based claims created a conflict of interest that afforded Lafarge the right to select independent counsel, regardless of the policy’s language. The Second Circuit noted that Public Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 393, 401 (1981) held that “Independent counsel is only necessary in cases where the defense attorney’s duty to the insured would require that he defeat liability only upon grounds which would render the insured liable.” Unlike Goldfarb, the Second Circuit pointed out that NYMAGIC and Lafarge shared a common interest in defeating Lafarge’s liability in any ensuing barge litigation. The Second Circuit, quoting Goldfarb, observed that the New York Court of Appeals specifically rejected the argument that a conflict was created by Lafarge’s potential exposure as follows: 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.

53 N.Y.2d at 401. The Second Circuit acknowledged that while tension might exist in any settlement negotiations, “such a potential or actual conflict is not apparent in this case.”

The Second Circuit held that Lafarge was only entitled to reimbursement for fees incurred by Goodwin and Chaffe from the time of their retention on September 8th until September 28, 2005. After that date, it became clear that Lafarge was not acting in good faith when it refused to consider any of the six law firms proffered by NYMAGIC on September 22nd and when NYMAGIC advised Lafarge that it would not agree to pay for three sets of attorneys. The court arrived at the same conclusion for the excess carriers. Lafarge argued that these “bumbershoot” policies, which filled any coverage gaps when the underlying primary limits were exceeded or when the underlying insurance covering the risk did not exist, must cover the losses not insured under NYMAGIC’s primary policy. Even though the excess policies did not contain a “Naming Clause” and had just an “Assistance Clause,” which permitted the excess carriers to associate in Lafarge’s defense at their option, the Second Circuit concluded that the excess carriers had no duty to pay for the nonapproved defense fees as they were obligated to reimburse only “reasonable legal expenses.” The court found that the excess carriers were entitled to rely upon Lafarge’s compliance with the requirements of the “Naming Clause” and “therefore reasonably expected Lafarge’s defense counsel to be selected pursuant to the plain terms of the primary policy.” “[W]hile it may have been reasonable for Lafarge to retain its own attorneys to protect against any remote potential conflict of interest between the insurers and Lafarge, the continued retention of [Goodwin and Chaffe] goes well beyond the necessity of filling that modest role.” Accordingly, the court concluded that the excess policies did not cover the fees and expenses claimed by Goodwin and Chaffe on or after September 28th.

Conclusion

Lafarge clarifies that conflicts of interest arise out of coverage concerns that might influence the manner in which counsel defend the policyholder as opposed to the risk that exposures may exceed available limits. Given the prominence of the Second Circuit, states may adopt the reasoning of Lafarge, which may impact the area of mass torts, where carriers are facing increasing demands by policyholders to appoint national coordinating counsel to assist with the defense of these claims.