Q Our co-op board has been sued by a shareholder. We’ve notified our directors and officers (D&O) liability carrier of the lawsuit, and our carrier has in turn appointed a  defense counsel to defend us against the lawsuit. Do we as a board have to  accept our carrier’s choice of counsel, or can we request different counsel?  

-- Manhattan Shareholder

A According to Al Pennisi, president of the Federation of New York Housing  Cooperatives & Condominiums (FNYHC) and a principal with the Manhattan-based law firm Pennisi  Daniels & Norelli, “Very often a cooperative or condominium (or the managing agent) has a  relationship with an attorney or law firm who has expertise in the area of  co-op/condo law—unlike counsel appointed by an insurance carrier. Naturally, being a defendant  in a lawsuit, one would want to have a say about the attorney(s) representing  you.  

 “The crucial fact that determines whether a board has any choice regarding the  appointment of defense counsel is whether their insurance carrier has issued a ‘reservation of rights’ or ‘disclaimer’ letter. These letters are issued by the carrier to its insured, advising the  insured that the carrier is disclaiming coverage with respect to one or more  claims in the lawsuit, because said claim(s) do not fall within the parameters  of the insurance policy, and appoints defense counsel to defend the lawsuit.  

 “This issuance of such a ‘reservation of rights’ or ‘disclaimer’ letter creates a conflict of interest between the insurer and the insured which  triggers the insured’s right to select counsel whose reasonable fee is to be paid by the insurer.  

 Under New York law, an insurer must defend the insured against allegations that  fall within the scope of the risk undertaken by the insurance company. The  insurer must provide a defense regardless of how groundless or false the  allegations might be.  

 “To be relieved of this duty to defend, an insurer must demonstrate that the  allegations of the complaint either plainly do not fall under the policy’s coverage or lie squarely within the policy’s exclusions. Thus, an insurer must defend even where coverage of the claim is  debatable.  

 “When the insurer reserves its right to disclaim liability with respect to one or  more claims in the lawsuit and retains counsel to defend the lawsuit, a  conflict of interest arises. The conflict is between the defense attorney’s duty to the insured—which requires that the attorney defeat liability on all grounds—and the attorney’s duty to the insurer, which requires that he/she defeat liability only upon  grounds that would render the insurer liable. This conflict creates the  incentive for the insurer to shape the defense so that if the insured is found  liable, it will be for the non-covered claims—the ones for which the insurer reserved its right to disclaim liability.  

 “When there is a potential conflict of interest between the insurer and the  insured, the law in New York requires that the insurer’s duty to defend includes a duty to provide independent defense counsel chosen  by the insured, and whose reasonable fee is to be paid by the insurer.”