Feliberty v. Medical Malpractice Insurance Association, 79 N.Y.2d 464 (1992)
An insurer with a policy provision granting it the right to settle claims has no vicarious liability for the malpractice of independent counsel it retains to defend the insured, and the insurer generally has the right to settle claims within policy limits without the insured’s consent.
Summary
Dr. Feliberty sued his malpractice insurer, MMIA, after MMIA settled a malpractice claim against him for $700,000 (within policy limits) without his consent, following an unfavorable jury verdict. He also claimed MMIA was vicariously liable for the malpractice of the law firm MMIA retained to defend him. The New York Court of Appeals held that MMIA had the right to settle the claim as the insurance policy granted it that power. Furthermore, the court found that an insurer is not vicariously liable for the malpractice of independent counsel it retains to defend the insured, as the insurer is prohibited from interfering with counsel’s independent professional judgment. The court affirmed the dismissal of the complaint against the insurer.
Facts
Dr. Feliberty was sued for malpractice for failing to diagnose a patient’s lymphoma. He forwarded the suit to his insurer, MMIA, which retained a law firm to defend him. The insurance policy stated that the company “may make such investigation and such settlement of any claim or suit as it deems expedient.” A medical malpractice panel found against Dr. Feliberty, and the case proceeded to trial, resulting in a $1,239,000 verdict. Before judgment was entered, MMIA settled the claim for $700,000, allegedly without Dr. Feliberty’s knowledge. Dr. Feliberty then sued MMIA, alleging breach of contract, fraud, and vicarious liability for the legal malpractice of the retained attorneys, claiming their negligence destroyed his practice.
Procedural History
The Supreme Court dismissed the complaint against MMIA, holding that it had the right to settle and no vicarious liability for the negligence of independent counsel. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.
Issue(s)
1. Whether an insurer breaches its contract or acts in bad faith when it settles a case within policy limits without the insured’s consent and fails to take an appeal, when the insurance policy grants it the right to settle.
2. Whether an insurer is vicariously liable for the legal malpractice of independent counsel it retains to represent the insured.
Holding
1. No, because the insurance contract unambiguously gave the insurer the unconditioned right to settle any claim or suit without the plaintiff’s consent, and the settlement was within policy limits.
2. No, because the insurer is prohibited from the practice of law and must rely on independent counsel; the paramount interest independent counsel represents is that of the insured, not the insurer; and the insured has a remedy directly against the law firm for malpractice.
Court’s Reasoning
Regarding the settlement, the court emphasized the contract language allowing MMIA to settle as it deemed expedient. The court distinguished Knobloch v Royal Globe Ins. Co., noting that in Knobloch, the insureds had inquired about settlement offers to protect themselves against excess liability, while here, Dr. Feliberty’s request for an appeal did not put MMIA on notice that he wished to be informed of any contemplated settlement to protect against personal exposure. As the settlement was within policy limits, no fraud or breach of contract claim was stated.
Regarding vicarious liability, the court stated the general rule that liability in negligence is based on a defendant’s own fault, not the wrongdoing of another. While there are exceptions, such as nondelegable duties, the court declined to extend this to an insurer’s duty to defend. The court reasoned that insurers are prohibited from practicing law (Judiciary Law § 495) and must rely on independent counsel. The paramount interest counsel represents is the insured’s, and insurers cannot interfere with counsel’s independent professional judgment. To hold an insurer vicariously liable would create an untenable situation where the insurer is responsible for counsel’s actions but cannot control them. The court quoted the California Court of Appeal in Merritt v Reserve Ins. Co., stating that the remedy for negligence of trial counsel should lie in an action against counsel for malpractice, not against the insurer based on vicarious liability. Finally, the court noted that the insured has a direct remedy against the law firm for malpractice.