-- Manhattan Shareholder
“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.