Control Of Defense

Control Of DefenseNew York Appellate Division Finds Policyholder Has No Standing To Sue Reinsurer Or Right To Demand Independent Counsel.

A New York appellate court, applying New York law, held that Colgate-Palmolive Company (“Colgate”) cannot sue its carrier’s reinsurers relating to the control of the insured’s underlying defense because Colgate had no contractual relationship with the reinsurers.

The dispute between Colgate and its insurer began over the insurer’s right to control Colgate’s defense against lawsuits alleging personal injury caused by exposure to Colgate’s talc products. The insurer and its reinsurers had entered into a reinsurance agreement that allowed the reinsurers to control the settlement or payment of reinsured claims. The insurer claimed that Colgate did not allow it to control the defense of cases, as required under the insurance policies, and instead insisted on selecting its own independent counsel. The insurer filed suit and Colgate counterclaimed and joined the insurer’s reinsurers.  Colgate alleged that the reinsurers had a conflict of interest because they served a dual role as both the reinsurer of the insurer’s liability under the policies and the claims adjuster under the same policies. Colgate also claimed that the reinsurers wanted to settle the claims to minimize legal expenses while Colgate wanted to defend the cases to deter copycat lawsuits.

The issue before the appellate court was whether a policyholder has rights against its carrier’s reinsurer. The court held that a policyholder does not have contractual rights to sue its carrier’s reinsurers, even if the reinsurers administered the insured’s claims under the policy, because there is no privity between the reinsurers and the insured. The agreements between the insurer and the reinsurers were separate and distinct from the underlying policies. Colgate lacked standing to state a claim against the reinsurers for breach of the underlying policies because the reinsurers are not parties to those contracts. The court found that “[the insurer] remains fully and solely responsible for the performance of its obligations under the policies even if the reinsurers are performing those obligations on its behalf” and that “without language in a reinsurance agreement indicating that the reinsurer intends to be directly liable to the insured, the reinsurer has no obligation to the original insured.”

Colgate argued that it adequately pleaded a separate implied covenant of good faith and fair dealing claim by alleging that the reinsurers refused to communicate with its chosen counsel, to appoint local counsel, or to agree to confidentiality provisions in connection with disclosures about counsel’s work. The court, however, denied this claim and found that these allegations merely constituted a description of how the reinsurers refused to acknowledge Colgate’s choice of independent counsel, which was the subject of the breach of contract claim. OneBeacon America Ins. Co. v. Colgate-Palmolive Co., 2014 NY Slip Op 07315 (N.Y. App. Div. Oct. 28, 2014).

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