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This is an archive of older coverage news that was mentioned earlier on my Coverage News page. March, 2007 I will be away for a couple of weeks in March, visiting my in-laws. Luckily for me, I married a girl from Hawaii. In my absence, the following recent decisions may be of interest. In Appalachian Ins. Co. v. General Electric Co., __ N.E.2d __, 2007 WL 470394, N.Y. Slip Op. 01334 (N.Y., February 15, 2007), New York State's highest court, the Court of Appeals, recently took another look at one of my favorite issues in insurance metaphysics: how to determine the number of occurrences under a liability policy. In the 1980s and 1990s, GE received thousands of asbestos BI claims every year. Most of those claims alleged exposure to asbestos used as insulation in GE's turbine products, which were used by customers in tens of thousands of locations across the U.S. The average asbestos claim required GE to pay only about $1,500 in indemnity, but the sheer volume of such claims made for a substantial annual aggregate cost. GE's liability program had a $5 million per occurrence/agg primary layer provided by EMLICO (GE's captive; you may recognize the name because there was a big brouhaha when GE tried to redomesticate it several years ago). GE also had multiple excess layers above EMLICO's primary, but it looked as if the asbestos claims would never reach the excess, because EMLICO's policy defined occurrence as "an accident, event, happening or continuous or repeated exposure to conditions which unintentionally results in injury or damage during the policy period." Applying that definition, EMLICO determined each claim was a separate occurrence. Since EMLICO's primary coverage was retro-rated, the fiscal effect on GE was similar to that of a bottomless annual SIR for asbestos BI claims, year after year after year. GE was unhappy with this state of affairs so, in the early 1990s, it prevailed on EMLICO to start aggregating all asbestos claims by product-type and to treat each product-type's claims as a single occurrence. Since the lion's share of the claims resulted from GE's turbine products, the turbine "occurrence" eventually exhausted the primary layer. GE then sought coverage from its excess insurers. The excess insurers -- none of which had participated in the GE-EMLICO discussions on this topic -- were unhappy with this turn of events, so they sued GE in 1996. Now, eleven years later, we have the final disposition from the Court of Appeals. The Court briefly reviewed each of the competing approaches it has used or rejected in the past to try to determine the number of occurrences:
The Court determined that this case should be governed by the Lemony Snicket "unfortunate event" approach and, under that approach, GE could not aggregate its turbine-related asbestos claims into a single occurrence. The "unfortunate event" in this case was each individual claimant's exposure to asbestos. There was no spatial or temporal relationship between those unfortunate events: they occurred all over the country, at numerous times and places, and under circumstances, that bore no meaningful relationship to one another. The Court emphasized its decision does not mean the "unfortunate event" approach is the equivalent of a one-occurrence-per-injured-party approach:
Thus, the Court retains for itself a great degree of flexibility for future cases. The scope of disclosure in a coverage / bad-faith case was at issue in Diamond State Ins. Co. v. Utica First Ins. Co., __ N.Y.S.2d __, 2007 WL 270432, 2007 N.Y. Slip Op. 00728 (1st Dep't, February 1, 2007). Diamond State provided 1st-party property coverage for an apartment building. Utica First provided liability insurance for a contractor that was doing some work on the roof of the building. During the work, a fire broke out and damaged the building. Diamond State paid the property loss, then sued the roofing contractor on a subrogation claim. Utica First denied coverage for the contractor, relying on a "roofing operating exclusion" in its policy (which the court did not bother to quote for us). The contractor defaulted and Diamond State got a default judgment. Diamond State then gave Utica First thirty days to tender its policy limit. When Utica First failed to do so, Diamond State sued Utica First. In the course of producing documents, Utica First objected to producing two classes of documents: (a) documents from its claim file that post-dated its coverage disclaimer and pre-dated the 30-day deadline for tendering its policy and (b) documents from other claims, concerning interpretation of the same "roofing operating exclusion." In the cited decision, the Appellate Division held that Utica First had to turn over both sets of documents. The court specifically noted that, as regards the first of those sets of documents, Utica First could not rely on the attorney-client privilege, work-product privilege, or litigation materials privilege to shield the documents from disclosure in a "bad faith" action. Only Natural v. Realm Nat'l. Ins. Co., 2007 N.Y. Slip Op. 01097 (2nd Dep't, February 6, 2007), involved two disclaimers for late notice, issued by two different insurers to the same insured. The insured did not take the disclaimers lying down. Rather, the insured argued that both disclaimers were ineffective as a matter of law because they had not been issued "as soon as possible," as required by N.Y. Ins. Law §3420(d). A trial court agreed with the insured and threw out both disclaimers. In the decision cited above, the Appellate Division, Second Department, reversed. In doing so, the Second Department explained a well-known feature of N.Y. Ins. Law §3420(d) that many insureds and claimants (and some trial court judges, apparently) would prefer to ignore. As regular readers of this space know by now, Ins. Law §3420(d) requires an insurer to disclaim "as soon as possible" when the insurer knows, or ought to know, of grounds for disclaiming. Failure to disclaim "as soon as possible" will normally be fatal: the entire disclaimer will be thrown out, regardless of its substantive merits. However, §3420(d) applies only to claims for death or bodily injury, not to other kinds of claims. In this case, the underlying claim was not one for death or bodily injury; rather, it was in the nature of an advertising injury claim, to which §3420(d) does not apply. Therefore, the "as soon as possible" standard did not apply to the carriers' disclaimers. Instead, the court looked to see whether the insurers' alleged delays in disclaiming had prejudiced the insured in any way. Since there had been no prejudice, the disclaimers were deemed timely and effective. Whether a building lessee was obligated to procure terrorism coverage was the main subject of TAG 380, LLC v. Commett 380, Inc., __ N.Y.S.2d __, 2007 WL 446949, N.Y. Slip Op. 01224 (1st Dep't, February 13, 2007). The ground lease, signed in 1989, required the lessee to maintain:
After 9/11, the lessor took the position that the lessee was required to procure insurance that would cover damage from terrorism. "Wrong," said the court. Both the NYSFIP and the Extended Coverage Endorsement are named peril forms, and neither of them says anything about covering (or excluding) terrorism per se. The lessee had procured exactly the kind of insurance the lease required it to procure. In City of New York v. Evanston Ins. Co., __ N.Y.S.2d __, 2007 WL 466254, 2007 N.Y. Slip Op. 01239 (2nd Dep't, February 13, 2007), coverage turned principally on the meaning of one word in a CGL policy's blanket additional insured endorsement. The City hired Scala Contracting to do some work on a sidewalk in Brooklyn. Part of the construction contract required Scala to procure and maintain CGL insurance naming the City as an additional insured. Scala got the coverage from Evanston, which issued a blanket additional insured endorsement that made the City an additional insured, but "only with respect to liability arising out of [Scala's] ongoing operations performed for [the City] and then only as respects any claim, loss or liability arising out of [Scala's] operations...and only if such claim, loss or liability is determined to be solely the negligence or responsibility of [Scala]." During the work, one of Scala's employees was injured when he was struck by two passing cars. The employee sued the two car owners/drivers, and they impleaded Scala and the City on the theory that they had failed to provide the injured worker with a safe place to work. The City tendered the claim to Evanston, but Evanston denied coverage on two grounds:
The main issue the court focused on was the meaning of the word solely in the additional insured endorsement. Did it mean the City was an additional insured only if Scala were found to have 100% of the culpable fault, with no other party having done anything wrong? Or, did it refer to the apportionment of fault between only the City and Scala, without regard to any apportionment of fault to third parties? Under the first of those interpretations (Evanston's), the City would not be an additional insured if either of the drivers was assigned even 1% of the culpable fault. Under the second of those interpretations (the City's), the liability of the drivers was irrelevant and the City would be an additional insured so long as the City itself was not assigned any of the culpable fault. Ultimately, the court agreed with the City's interpretation. Both interpretations of the language were at least arguably reasonable, which made it a classic example of ambiguity; we all know what happens with ambiguous policy language. Even without contra proferentem, the City's interpretation was the more objectively reasonable of the two, and was more in line with the commercially reasonable expectations and intentions of the parties. Having resolved the issue of what solely meant, the court proceeded to find that Evanston had a duty to defend the City, even before there was an apportionment of fault. So long as the possibility existed that Scala might be found liable and the City might be let off the hook, the endorsement's terms might be fulfilled. To escape a duty to defend the City, Evanston would have had to establish as a matter of law that there was no way the endorsement's terms could possibly be fulfilled; Evanston could not do so. I have seen a few similar cases recently, in which a policy grants additional insured status only if certain conditions are fulfilled, and no one can know if all the conditions will be fulfilled until there is a final judgment. In such cases, I have seen carriers argue they should have no duty to defend the additional insured unless and until there has been a final judgment. As far as I know, carriers always lose that argument, and they would probably lose it 99 times out of 100. Don't get me wrong: it is certainly possible to manuscript language that provides for finding a retrospective duty to defend, with the carrier then agreeing to reimburse the additional insured's defense costs after the fact. Such language would be easy to draft, so long as all parties (including regulators, for filed forms) agreed to the idea. However, typical additional insured endorsements with conditions built into them are just not up to doing that job successfully. If there were a prize for the stupidest excuse for late notice, one serious contender for it would be the policyholder in RMD Produce Corp. v. Hartford Cas. Ins. Co., 2007 N.Y. Slip Op. 01464 (1st Dep't, February 22, 2007). Here is the court's description of the underlying incident:
The insured never gave notice of this incident to its GL carrier until it was sued, several months later. The carrier disclaimed for late notice of the occurrence, but the insured started a declaratory judgment action because it believed it had an excuse for its late notice. "What was that excuse," you ask? Well, the insured claimed it had an objectively reasonable, good-faith belief in its own non-liability! The court rejected that one lickety-split. When New York coverage cases talk about an insured's "objectively reasonable, good-faith belief in its own non-liability" as an excuse for late notice, what they really mean is a belief that there will not be a claim or suit; i.e., that the event and its consequences were so innocent or trivial that there is no likelihood anyone would ever make a claim or bring a suit. They do not mean a reasonable belief that "if the other guy sues me, I ought to win"; they do mean a reasonable belief that "no one would ever start a lawsuit over a little thing like this." The first of those beliefs is no excuse at all. The second of those beliefs could be an excuse, but the insured still has to prove it. Well, that's all for now. Until April, aloha! February, 2007 Friday, February 2, is Groundhog Day. We're in for another couple of months of winter, no matter what the critter sees or fails to see. In the meanwhile, to delay the onset of cabin fever, let's consider some recent New York coverage cases. This is kind of interesting: according to a local county court, a no-fault insurer is not required to accept an electronic signature on an assignment of benefits or claim form. DWP Pain Free Medical P.C. v. Progressive Northeastern Ins. Co., __ N.Y.S.2d __, 2006 WL 3904344 (Dist.Ct., SuffolkCo., December 7, 2006). According to this decision, a no-fault insurer may accept an e-signature on such documents, but is not required to do so. I do not recall having seen a New York court deal with e-signatures in an insurance context before. National Cas. Co. v. Vigilant Ins. Co., __ F.Supp.2d __, 2006 WL 3749540 (S.D.N.Y., December 21, 2006), involves two carriers fighting over how to share defense costs. A company called Source Enterprises ("the Source") had concurrent coverage from National (which seems to have issued a CGL policy) and Vigilant (under a D&O policy). When the Source and two of its officers were sued for copyright infringement, National agreed to defend all three of them and hired counsel for that purpose. National also called on Vigilant to pay a share of defense costs under its policy. Vigilant took the position that it had no duty to defend the Source, because a copyright infringement exclusion in the D&O policy excluded coverage for the corporate insured. However, Vigilant acknowledged a duty to defend the two officers and retained separate counsel for that purpose. Eventually, the copyright claim was dismissed, but only after National had spent over $1.1 million in defense costs. National then sued Vigilant on multiple theories of recovery (contribution, subrogation, third-party beneficiary, and breach of an oral contract), seeking to recover some of those defense costs. Vigilant made a pre-answer motion to dismiss, arguing that it (a) had had no duty to defend the Source and (b) had discharged its duty to defend the two officers by retaining counsel to defend them. In the cited decision, the District Court disposed of that motion as follows:
Wider v. Heritage Maintenance, Inc., __ N.Y.S.2d __, 2007 WL 38670 (Sup.Ct., N.Y.Co., January 3, 2007), deals with a dispute under a commercial 1st-party property policy. Along the way, it addresses what appears to be a question of first impression under New York law. Paramount Ins. Co. insured a building that was undergoing cleaning of its limestone facade. During the cleaning project, two incidents damaged the building. In the "August incident," the limestone facade became saturated and water entered the interior of the building at numerous points. In the "September incident," the cleaners hung tarps from limestone finials on the building, and rigged the tarps in such a way that rainwater collected in them. During or shortly after a rainfall, the weight of the collected water snapped-off some limestone finials; the water then cascaded onto the building and some of it seeped inside. On a motion for summary judgment, Paramount argued that (a) damage from both incidents was excluded by the all-risk policy's "faulty workmanship" exclusion and (b) damage from the September incident was also excluded by the "rain limitation." The court held:
(Thanks to reader Mike Savett for bringing Wider to my attention. His firm -- Weber Gallagher Simpson Stapleton Fires & Newby, LLP -- represents Paramount in the action.) A tenant's insurer tried [unsuccessfully] to get around a lease's waiver of subrogation in OneBeacon Ins. Co. v. French Institute Alliance Francais [sic] NYC, 2007 WL 28455, 2007 N.Y. Slip Op. 50009(U) (Sup.Ct., N.Y.Co., January 4, 2007). OneBeacon insured a Dooney & Bourke store on East 60th Street in Manhattan. The store is in a building owned -- and partially occupied -- by the French Institute Alliance Française (which the caption unaccountably gender-changes from Française to Français). The lease included a reciprocal waiver of subrogation, which was permitted by both parties' insurance policies. In January, 2005, the building's sprinkler system froze. When it thawed, the Dooney & Bourke store suffered water damage, for which OneBeacon expects to pay in excess of $100,000. OneBeacon, in its capacity as Dooney & Bourke's subrogee, sued a number of parties potentially liable for the sprinkler freeze, including Alliance Française. Alliance Française then moved for summary judgment on the basis of the waiver of subrogation provisions in the lease and insurance policies. To get around the waiver of subrogation, OneBeacon argued that it was suing Alliance Française for negligence committed in its capacity as a fellow-tenant in the building, not in its capacity as Dooney & Bourke's landlord. The court was willing to entertain the argument, but ended up rejecting it: the complaint alleged negligence only in the performance of duties Alliance Française had as a landlord (maintenance of the building, providing heat, and so forth). If the complaint had alleged an Alliance Française worker left a window open, or left a tap running, the outcome might have been different. New York law provides that a life policy cannot be contested after being in force during the life of the insured for two years from its date of issue. But, can a policy provide for an earlier incontestability date? And, if it does, then which date will courts regard as the "real" incontestability date? According to Security Mut. Life Ins. Co. of New York v. Herpaul, __ N.Y.S.2d __, 2007 WL 45917 (1st Dep't, January 9, 2007), an insurer is free to provide for an earlier incontestability date and, if it does so, that earlier date will be enforced as the actual incontestability date. Reading between the lines of the decision, it appears Security Mutual did not actually intend to provide for an earlier date, but its policy wording nevertheless did so. In addition, the incontestability clause had no exception for fraud. Therefore, the company's suit to void the policy for fraud -- commenced a week after the policy had become incontestable -- was time-barred. The effect of a "classification limitation" endorsement was at issue in Central Synagogue v. Hermitage Ins. Co., 2007 NY Slip Op. 00476 (2nd Dep't, January 23, 2007). The insured was a subcontractor hired to work on the renovation of a synagogue. Its liability policy (issued by Hermitage) classified the subcontractor's operations as "dry wall/wallboard installation" and included an endorsement that limited coverage to only those operations. The subcontract, however, required the insured also to build two "heavy duty, moveable ramps required for access to the lower level by dollies, carts, etc." You can guess what happened: the insured built the ramps and a worker fell from one of them. The worker sued several parties (not including the subcontractor). Those parties settled his claim, then turned around and sued the subcontractor for indemnification. The subcontractor defaulted and the plaintiffs secured a default judgment against it. They then proceeded directly against Hermitage. Hermitage asserted its "classification limitation" endorsement as a defense. The plaintiffs moved to dismiss that defense. The trial court denied the motion and, in the decision cited above, the Appellate Division affirmed. It affirmed because, on the limited record before it, the trial court properly determined there were unresolved factual issues; e.g., it was unclear whether the building of the ramps had been merely incidental to the insured's performance of covered operations or, as Hermitage contended, separate and distinct operations beyond the scope of its coverage. An attempt to circumvent a GL policy's auto exclusion was shot down in Utica First Ins. v. Star-Brite Painting, 2007 NY Slip Op. 00517 (2nd Dep't, January 23, 2007). The insured, Star-Brite, was a one-man corporation in the painting and paper-hanging business. Its president, sole shareholder, and sole employee was a Mr. Doerler. Doerler was apparently in an auto accident while driving the company truck, allegedly in an intoxicated state. Someone injured in the accident then sued Star-Brite and Doerler. Utica First started a d.j. action, seeking a declaration that it had no duty to defend or indemnify either of them, because of the auto exclusion in its policy. The trial court held that, because the underlying complaint alleged a "negligent hiring" claim, the auto exclusion did not completely exclude coverage and Utica First had to defend. In the decision cited above, the Appellate Division reversed: the inclusion of a negligent hiring claim does not alter the fact that the operative act giving rise to any recovery would be the allegedly negligent operation of an auto, which the policy clearly and unambiguously excluded. Unfortunately, the decision does not quote the language of the policy's auto exclusion, but I'd bet it was either the standard ISO CGL auto exclusion or something very much like it. The court did not address the quasi-metaphysical question of what "negligent hiring" means in the context of a one-man business. The claim would probably have morphed eventually into a "negligent failure to hire" claim; i.e., something to the effect that Star-Brite was negligent because it had not hired someone to drive Doerler around. According to Seaport Condominium v. Greater N.Y. Mut. Ins. Co., 2007 N.Y. Slip Op. 00461 (1st Dep't, January 25, 2007), a 1st-party commercial property policy's condition requiring the insured to preserve damaged property for inspection after a loss was clear and unambiguous. In this case, the damaged property was a rooftop cooling tower, allegedly damaged by a pipe freeze. An expert acting for the insurer inspected the damaged tower in situ, but decided he would need to examine it further after it had been replaced. A contractor acting for the insured agreed to retain the cooling tower for further inspection, but then somehow managed to destroy it instead. The insurer disclaimed liability, and the insured sued. In the cited decision, the court held that post-loss breach of the condition precluded any coverage, even though the damaged property had not been destroyed or discarded by the insured, but by a contractor repairing the damage. The court noted that the insured might have a claim against the contractor, but the contractor's destruction of the cooling tower did not excuse the insured's failure to comply with the policy condition. According to news reports, two New York legislators recently introduced "bad faith" legislation in the NYS Assembly and Senate. The legislators say they are reacting to insurers' resistance to some claims arising from the destruction of the World Trade Center. If enacted, such legislation would effect a major sea-change in New York coverage law and claim-handling. You can read more about it here. Last, but not least, someone just drew my attention to a Web site called Insurance is Fun! The Feel-Good Site for Insurance Professionals. The site is in the throes of a redesign at the moment, but check it out here anyway. (Don't miss their Web store.) January, 2007 Happy new year! Courts in New York closed 2006 with a flurry of instructive coverage decisions. In National Abatement Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 33 A.D.2d 570, __ N.Y.S.2d __ (1st Dep't 2006), the Appellate Division, 1st Department, held that, where a policy affords "additional insured" coverage "where required by written contract," there is no such coverage in the absence of an actual written contract in effect at the time of the occurrence for which such coverage is sought. In this case, there was what purported to be a written contract between the insured and the would-be additional insured, but it was unsigned. The would-be additional insured argued that (a) the parties intended to be bound by the contract, even though it was unsigned, and (b) intended the contract to apply to the occurrence retroactively. The court said such considerations had no bearing on whether there had been a "written contract" within the meaning of the policy. The decision is written with the court's typical terseness, and leaves some unanswered questions. For example, it would be nice to know the precise policy language concerning the "written contract" requirement; i.e., did it expressly require the contract to have been made before the occurrence, BI, or PD happened? It would also be nice to know whether the contract -- unsigned at the time of the occurrence -- was ever signed and, if so, when and under what circumstances. In the absence of such details, one can infer the court viewed the case as an attempt to create after-the-fact additional insured coverage for a known loss. Back in September, 2006, I wrote about the decision in Ruge v. Utica First Ins. Co., __ N.Y.S.2d __, 2006 WL 2257127 (2nd Dept.), 2006 N.Y. Slip Op. 06155 (August 8, 2006) (see below). For those interested, the Court of Appeals has denied plaintiff's motion for leave to appeal. Utica First's counsel (Audra Zane, of Farber, Brocks & Zane, L.L.P.) tells me a separate motion for reargument is still pending in the Second Department as of this writing. Utica First had another nice win (courtesy of Farber, Brocks & Zane, L.L.P., again) in Sixty Sutton Corp. v. Illinois Union Ins. Co., __ N.Y.S.2d __, 2006 WL 3438354 (1st Dep't, November 30, 2006). The factual context was a typical New York construction accident case: a construction subcontractor's employee was hurt while working on a building. He sued the building owner and building manager. The owner and manager, in turn, impleaded the general contractor (insured by Illinois Union Ins. Co.). The general contractor then impleaded the injured worker's employer (the subcontractor, insured by Utica First). Illinois Union demanded that Utica First defend and indemnify the general contractor, because (a) the contract between the GC and the sub contained an indemnification provision and (b) the sub had provided a certificate of insurance that indicated the GC was an additional insured under the sub's policy with Utica First. When Utica First refused to assume the GC's defense, Illinois Union and the GC sued it. Instead of answering the complaint, Utica First made a pre-answer motion to dismiss and for summary judgment. When the trial court denied that motion as premature, Utica First appealed. In the decision cited above, the Appellate Division reversed the trial court and awarded judgment to Utica First, because:
For an object lesson in the importance of denying coverage promptly, one need look no farther than Yoda, LLC v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2006 WL 3615293, 2006 N.Y. Slip Op. 52376(U) (Sup.Ct., N.Y.Co., December 12, 2006). The case arose from a construction accident that occurred in late 2002, resulting in apparently severe bodily injury to a construction worker. As a result of the construction contracts, the building owner (Pooh), the general contractor (Yoda), and a subcontractor (Queens Stainless) were all defended under the subcontractor's primary GL policy, which afforded occurrence/aggregate limits of $1M/$2M. The sub also had a National Union commercial umbrella policy that attached excess of the GL and afforded umbrella limits of $2M/$2M. Beginning in October, 2003, National Union monitored the underlying BI claim and communicated with defense counsel. In or about August, 2005, the primary GL tendered its $1 million limit to National Union, and AIG later tendered that sum as a settlement offer. In April, 2006, AIG's counsel appeared at and actively participated in a mediation session in the underlying claim. AIG also offered the $1 million in underlying primary limits in an unsuccessful attempt to settle the case. In late June, 2006, AIG asserted for the first time that it was reserving the right to deny coverage for Yoda and Pooh [I swear to God, folks: I am not making up these names], on the ground that neither of them was an insured under either AIG's umbrella or the underlying primary GL. Finally, in late August, 2006, AIG disclaimed coverage as to Yoda and Pooh, but on a new and different ground: i.e., that coverage for the underlying claim was excluded by an Employers Liability exclusion in AIG's umbrella policy. Yoda and Pooh then sued AIG. In the decision cited above, the court held AIG had waived its exclusion, by failing to assert it (or even mention it) as a basis for denying coverage for almost three years after it first began participating in the case. Had AIG promptly disclaimed on the basis of its exclusion, it might have had a fighting chance. Any such chance was thrown away when AIG monitored and actively participated in the case for three years before first mentioning the exclusion. If a passer-by volunteers to rescue the occupant of a crashed car, and injures himself during the rescue, is that injury covered under the car's auto liability coverage? The answer was "no" in Zaccari v. Progressive Northwestern Ins. Co., 2006 N.Y. Slip Op. 09458 (2nd Dep't, December 12, 2006). According to the Appellate Division, whether an accident results from the use or operation of an auto requires consideration of a three-part test:
In Zaccari, the auto was apparently stationary for some undetermined time before the injured rescuer arrived on the scene. The rescuer offered no evidence to show the car caused his injury; rather, he alleged only that he had injured his back in the act of rescuing the driver. At best, the rescuer showed only that use of the car had been an antecedent contributing circumstance that set the stage for his injury; there was nothing from which one could conclude that use or operation of the car had actually caused the injury. Broad Street, LLC v. Gulf Ins. Co., __ N.Y.S.2d __, 2006 WL 3593049 (1st Dep't, December 12, 2006), arose out of the 9/11 terrorist attacks on the WTC. The insured owns and operates a large building at 25 Broad Street, just three blocks away from Ground Zero. The building was evacuated and completely shut down on September 11, 2001. It remained shut down for the next seven days, while building staff cleaned the interior, replaced air filters, etc. On September 18, when all utilities and building services had been restored, tenants began to move back into the building. Gulf Insurance covered the premises under a commercial 1st-party property policy. Gulf and the insured agreed the period from September 11 through September 17 constituted a "necessary period of suspension" of the owner's business operations within the meaning of the policy. The owner, however, claimed it was entitled to business interruption coverage for an additional period, during which its tenants had been inconvenienced by dust, local transportation disruptions, and bad air quality in the building's neighborhood, and that would end only when all aspects of the building's operations had returned to their "normal" pre-9/11 state. The Appellate Division, First Department, held that:
Spoliation of evidence claims continue to be a popular litigation tool. Sometimes they are even true, as appears to have been the case in State Farm Mut. Automobile Ins. Co. v. AAAA Bestway Tires & Service, Inc., 266 WL 3627093, 2006 N.Y. Slip Op. 52386(U) (N.Y.City Civ.Ct, December 13, 2006), State Farm was pursuing a subrogation claim against a car repair service that, according to State Farm, had done negligent work on a car's engine, resulting in a fire that damaged the car. After paying the insured's loss, State Farm had the car examined by an expert on at least two occasions over a period of months, then sued the repair service. A few months later, State Farm sold the car for salvage, before it had been examined by the defendant or any defense expert. Because State Farm knew or should have known that it was destroying critical evidence in the case before the other side had had a chance to examine it, the court dismissed State Farm's action. Does a law firm, retained by a primary carrier to defend its insured in a pending action, have a duty to investigate whether the insured has excess coverage available and, if so, to give timely notice of the suit to the excess carrier? Most defense lawyers would say, "No. Unless I specifically undertake to do so, it's not my job to investigate the defendant's coverage or give notice to carriers, any more than it is my job to review the defendant's will, pre-nup, mortgage, or other legal affairs. I'm not the defendant's personal or general counsel and don't want to be. I'm retained and paid only to defend a specific suit; I don't want to get involved in any aspect of the defendant's coverage issues unless I absolutely have to. The defendant -- and its broker and coverage counsel, if any -- is responsible for that sort of thing." Most insureds and brokers might disagree. No reported New York decision gives a clear, definitive answer, one way or the other. The latest decision discussing the issue is Shaya B. Pacific, LLP v. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, __ N.Y.S.2d __, 2006 WL 3733752 (2nd Dep't, December 19, 2006). The essential facts are straightforward. In July, 2000, Pacific was sued for bodily injuries sustained in a construction accident. Pacific's primary carrier (Lloyd's) appointed Wilson Elser to defend it. Because the complaint demanded damages far in excess of Lloyd's primary limit, in January, 2001, Lloyd's sent Pacific an "excess letter" that, among other things, urged Pacific to determine whether it had any excess coverage available and, if it did, to notify the excess carrier of the suit quickly. More than two years later, in February, 2003, summary judgment was awarded against Pacific on the issue of liability and a trial on damages was scheduled. In April, 2003, before the damages trial began, Wilson Elser -- acting on Pacific's behalf -- gave notice of the suit to AIG under an alleged excess policy. According to AIG, that was the first time anyone had given it notice of the suit, so it disclaimed coverage on late notice and other grounds. A large judgment -- well in excess of Lloyd's primary limits -- was eventually entered against Pacific in the construction accident case. Pacific then sued Wilson Elser for malpractice. In the malpractice suit, Pacific alleged Wilson Elser had had a duty to investigate whether Pacific had excess coverage available and, if so, to give that excess carrier prompt notice of the suit. Wilson Elser made a pre-answer motion to dismiss the complaint. In the decision cited above, the Second Department held that, because Wilson Elser's motion was a pre-answer motion to dismiss, the appropriate question to be decided was not whether Wilson Elser had had such a duty in this specific case and breached it; rather, the issue was whether New York law recognized the existence of such a duty at all under the facts alleged in the complaint. Or, to put it another way, Wilson Elser's motion could be granted only if it could show there was no set of facts Pacific could prove under its complaint in which Wilson Elser could have had such a duty. A majority of the court held that, under the facts alleged in Pacific's complaint, Wilson Elser could not exclude the possibility that it might have had a duty to investigate coverage and give notice to the excess carrier, so Pacific's complaint should not be dismissed as a matter of law. The minority agreed such a duty might exist in some cases, but that Pacific should be required to plead additional facts establishing its existence in this case. The end result is: (a) Pacific's complaint is not dismissed, (b) the case will go forward for the time being, and (c) the entire panel of judges recognized at least a theoretical possibility that, in some situations, defense counsel appointed by an insurer may have a duty to investigate excess coverage and give notice to an excess carrier. Exactly what those situations may be remains debatable, and will likely be debated for years to come. Not only does this issue potentially involve a lot of money, but it can have substantial implications for the attorney-client relationship, the "tri-partite relationship" that prevails in most insurance defense work, the unspoken expectations and assumptions of both clients and lawyers, how defense firms handle their matters, and how defense lawyers' think of themselves and what they do for a living. The scope of defense counsel's obligations is normally determined by the scope of what it was retained to do. In insurance defense work, a carrier will usually forward a summons and complaint to defense counsel with a general request to "protect the interests of our insured" with respect to that lawsuit, but often with little or no discussion of exactly what that means. Many defense counsel, when retained by a carrier to defend an insured, send only a cursory retention letter to that insured. Thus, defense counsel may see its role as narrowly limited to defending the specific claims made by particular plaintiffs in a particular case, while the insured may assume defense counsel is undertaking to protect a somewhat broader range of interests, including investigating whether additional coverage is available and giving notice to carriers. An easy way to avoid this kind of "expectations gap" would be for defense counsel to send a substantive retention letter to the insured and the carrier, laying out clearly the scope of the representation and what defense counsel will and will not undertake to do for the insured. Realistically, I do not expect most defense firms to adopt such a practice as a part of their own risk management, unless and until courts force them to do so. The Second Circuit gave policyholders a nice Christmas present in Parks Real Estate Purchasing Group v. St. Paul Fire & Marine Ins. Co., No. 05-5890-cv (2nd Cir., December 21, 2006). The insured owned a building a few blocks from Ground Zero. As a result of the WTC's collapse on 9/11/01, a cloud of mixed particulates infiltrated the insured's premises. Nearly every mechanical and electronic building system was affected in some way. St. Paul, which insured the premises under an all-risk policy, viewed much of the damage as contamination, which was excluded by the policy's contamination exclusion. St. Paul denied coverage for it on that basis. The insured sued. On a motion for summary judgment, the U.S. District Court agreed with St. Paul that the particulates' contamination of the building systems was...well, contamination. The insured appealed. In the cited decision, the Second Circuit vacated the District Court's decision and remanded for further proceedings. According to the Second Circuit, the undefined word contamination in St. Paul's exclusion is ambiguous. It is ambiguous because (a) the normal meaning of contamination, if applied literally, unreasonably, and over-broadly, could permit St. Paul to deny coverage for all sorts of losses that are actually intended to be covered (e.g., smoke and soot from a fire, or even a falling object or building collapse, could be deemed excluded "contamination"), and (b) some courts have deemed contamination to be ambiguous when used as part of a pollution exclusion. Therefore, the Second Circuit vacated and remanded to the District Court so the parties can introduce extrinsic evidence on the meaning contamination was intended to have in this policy. In the absence of such evidence, the word will be construed in favor of coverage. Whether one approves or disapproves of that result, the reasoning used to reach it seems [to me] to have been farcical and outcome-driven. Ah, well; even Homer nodded. An insurer's attempt to resist discovery, by asserting the attorney-client and attorney work-product privileges, was rejected in OneBeacon Ins. Co. v. Forman Internat'l, Ltd., 2006 WL 3771010 (U.S.D.C., S.D.N.Y., December 15, 2006). The insurer's outside coverage counsel had been intimately involved in adjusting the loss, and the documents at issue included those prepared by counsel for the insurer or for the firm's internal use in working on the matter. The court's denial of the privilege claims was based on both procedural grounds (e.g., failure to submit a detailed privilege log, failure to specify the privileged documents with particularity, failure to come forward with proof of the privileged nature of each document) and substantive ones (e.g., that the documents had been prepared as ordinary business records in the course of adjusting the loss, even though they involved legal advice by outside counsel). Governor Spitzer's nominee as New York's next Superintendent of Insurance is Eric Dinallo, Esq. Some have made much of the fact that Mr. Dinallo is currently the general counsel of Willis Group Holdings. "Ah-ha!," they say, "This guy knows insurance and must have a mature and real-world understanding of the industry and its ways." Sorry to be the one to tell you this, folks, but Mr. Dinallo has not had a career in the industry. He is a career regulator, prosecutor, and regulatory attorney. His career in the insurance industry consists of less than a year at Willis. According to National Underwriter, "Mr. Dinallo served with the New York Attorney General’s Office until September 2003, when he joined Morgan Stanley as a managing director and head of regulatory matters. In March of this year, Mr. Dinallo joined Willis as general counsel responsible for the firm’s legal and regulatory affairs globally. Before joining the Attorney General’s Office in 1999, he served as assistant district attorney in the New York County District Attorney’s Office. He was a litigation associate at Paul Weiss and clerked for Judge David M. Ebel, U.S. Court of Appeals, 10th Circuit in Denver." Don't get me wrong: Mr. Dinallo might be the greatest thing since sliced bread and turn out to be the greatest Superintendent we have ever had. But, if that is what he turns out to be, it won't be because he's had a long career in the industry. Time will tell.
December, 2006
For purposes of third-party liability coverage of pollution liability, when does PD occur? Does PD occur only when the insured is actively polluting; i.e., only while it is actively releasing or depositing pollutants in the air, ground, or water? Or, can PD continue to occur while previously-released or -deposited pollutants seep, creep, or migrate through the environment, even after the insured has stopped creating and depositing them? The answer to that question can have important effects on trigger-of-coverage and allocation disputes. In Olin Corp. v. Certain Underwriters at Lloyd's London, __ F.3d __, 2006 WL 3206067 (2nd Cir., November 7, 2006), the Second Circuit held that, under New York law, ongoing "passive" environmental contamination — i.e., the seeping, creeping, and migration of previously-deposited or -released pollutants, even after "active" new pollution has ceased — can itself constitute PD under a typical third-party liability policy. Technaoro, Inc. v. United States Fidelity & Guaranty Co., 2006 WL 3230299 (S.D.N.Y., November 7, 2006), is a good example of how expansively federal courts in the Second Circuit view the duty to defend claims of "advertising injury." In the underlying action, Cartier alleged that Technaoro had improperly copied a number of Cartier's designs for jewelry and watches. One of the six counts in Cartier's complaint contained a single passing mention that Technaoro had "promoted" some of the allegedly infringing items of jewelry. Nothing else in Cartier's complaint implicated coverage at all. When USF&G denied a duty to defend it, Technaoro sued. In the cited decision, the District Court recognized that a single passing reference to "promotion" of allegedly infringing goods seemed to be a "tenuous basis on which to hold that [USF&G] has a duty to defend." Nevertheless, under applicable 2nd Circuit precedent, it was enough to raise a possibility of coverage under the typical definition of "advertising injury" and, therefore, to raise a duty to defend. (Don't feel too sorry for USF&G: even though it lost the duty-to-defend issue, it won the d.j. action on late-notice grounds.) Now this sounds interesting. A man is appointed to serve as someone's guardian, for which he receives fees. He is later succeeded by other guardians, who sue to make him disgorge allegedly improper fees he collected as guardian. The same guy is also sued by a law firm trying to collect unpaid legal fees. He tenders both suits to his insurer and seeks coverage under an unspecified policy, about which we are told only that it insures against liability for "personal injury" and "property damage." The carrier tells him to get lost, but he sues instead. A trial court rejects his coverage claims, and they have now been rejected again by an appellate court in Shapiro v. OneBeacon Ins. Co., __ N.Y.S.2d __, 2006 WL 3231407 (1st Dep't, November 9, 2006). The decision notes that a claim for disgorgement of improperly acquired funds is not insurable, and restitution of such funds does not constitute "damages" or "loss" within the meaning of an insurance policy. The claim for unpaid legal fees also did not allege "personal injury" or "property damage" within the policy's coverage. Unfortunately, the decision is written in the First Department's typical laconic fashion, and leaves out all the juicy details. Somewhere behind the court's dry prose is a story of alleged scandal, self-dealing, and malfeasance, but they're not letting us in on it. A former college football player's antitrust suit against the NFL, challenging the League's draft eligibility rule, is not subject to a policy's "employment practices" exclusion, and therefore must be defended by the insurer under an "executive protection insurance policy." National Football League v. Vigilant Ins. Co., __ N.Y.S.2d __, 2006 WL 3290617 (1st Dep't, November 14, 2006). The NFL ran up $850,000 in defense costs before getting the player's antitrust suit dismissed. It asked Vigilant to reimburse those costs. Vigilant declined to do so, citing the "Employment Practices" exclusion of its policy. Under the policy, Vigilant had promised to pay for "all Loss for which [the NFL] becomes legally obligated to pay on account of any Claim first made against the [NFL] during the Policy Period...for a Wrongful Act." The Employment Practices exclusion said the policy would not apply to "Loss on account of any Claim made against [the NFL]...for any Employment Practices." "Employment Practices" was defined as:
(Whew! Talk about deathless prose!) Vigilant argued the player's suit alleged "wrongful deprivation of a career opportunity," which was specifically enumerated as an excluded "employment practice," so there was no duty to defend. The NFL argued the underlying suit was not excluded because:
The trial court agreed with Vigilant but, in the cited decision, the First Department agreed with both of the NFL's arguments, reversed the trial court's decision, and held the exclusion inapplicable as a matter of law. That's it for this year, folks. I can't believe how quickly 2006 seems to have gone by. My next NY Update won't come out until early 2007. In the meanwhile, please accept my best wishes for the holidays and for a happy, healthy, and successful new year. November, 2006 There are several recent decisions to review this month. But first, if you are interested in "lost policy" cases (and who isn't?), the Publications page now includes an article surveying New York "lost policy" case law; jump directly to the article here. Now, on to the recent cases. The big news this past month concerned two decisions in the WTC 9/11 litigation. First was the Second Circuit's affirmance of the District Court verdicts and judgments on the number of "occurrences" issue. SR International Business Ins. Co., Ltd. v. World Trade Center Properties, LLC, __ F.3d __, 2006 WL 2961100 (2nd Cir., October 18, 2006). The decision is long and detailed, but breaks no significant new ground on the "occurrence" issue, which the Second Circuit had already covered thoroughly in its 2003 decision. This new decision reviews that topic, but only to set the stage before discussing each side's claims that the Phase I or Phase II trial was beset with evidentiary errors and erroneous jury instructions requiring a new trial. Finding no such error, the Second Circuit not only affirms the judgments, but notes that "Chief Judge Mukasey did a masterful job shepherding this complex, hotly contested case through both phases of a lengthy jury trial." Next came Judge Baer's decision on the meaning of "replacement cost." SR International Business Ins. Co., Ltd. v. World Trade Center Properties LLC, 2006 WL 3073220 (S.D.N.Y., October 31, 2006). The parties disputed what standard the appraisers in an ongoing appraisal should use to determine the WTC's "replacement cost." Because appraisers cannot determine such legal issues, the District Court did so. The policyholders argued the appraisers should determine "replacement cost" by appraising what it would cost to rebuild the WTC as a "safe, modern, and politically palatable" complex by 2006 standards (subject to applicable limits of liability, of course). The carriers argued "replacement cost" meant what it would cost to replace the covered buildings as they stood immediately before the September 11 attacks, with no extra recovery for improvements or betterments. Finding that "the policies unambiguously support the insurers' position," the court resolved the issue in favor of the carriers. In Lee v. State Farm Fire & Cas. Co., __ N.Y.S.2d __, 2006 WL 2691749 (2nd Dep't, September 19, 2006), the insured owned a residential rental property insured by State Farm. During excavation on an adjoining lot, earth under the insured property was moved or removed, resulting in collapse damage to the insured's building. State Farm denied coverage on the basis of its "Earth Movement" exclusion, which excluded coverage for loss arising out of:
On the basis of that exclusion, the trial court granted State Farm's motion for summary judgment. On appeal, the Appellate Division, Second Department, reversed, granted summary judgment to the policyholder, and remanded for a trial on damages. The Second Department held the exclusion did not clearly and unambiguously apply to the man-made "earth movement" involved here:
Note that this result should not be hard to draft around. Whether such a revised exclusion would be marketable, or be approved for filing, are separate questions. An insurer that participates in an arbitration cannot thereafter move to stay the arbitration on statute of limitations grounds. So says a Manhattan trial court in Allstate Ins. Co. v. Merrick, 2006 WL 2770092, N.Y. Slip Op. 51815(U) (Sup.Ct., N.Y.Co., August 17, 2006). In this case, the arbitration was over a denial of no-fault benefits and the insurer "participated" because its counsel attended the arbitration hearing, made an opening statement, cross-examined the claimant, and presented evidence. Only then did Allstate move in court to stay the arbitration on statute of limitations grounds (an issue it had not raised at the arbitration hearing). "Sorry, Allstate," said the court: under New York's Civil Practice Law and Rules, a party that participates in an arbitration proceeding cannot thereafter move to stay the arbitration as being untimely. Interpleader was the subject of Hartford Life Ins. Co. v. Einhorn, __ F.Supp.2d __, 2006 WL 2699196 (E.D.N.Y., September 19, 2006). The case is not particularly interesting from a legal standpoint. I am describing it here only because interpleader is a procedural device few claim-handlers are familiar with, even though it can sometimes be very useful. In a typical interpleader action, someone (an insurance company, let's say) is sitting on a pile of money. It knows it is supposed to pay that money to someone, but it is confronted with competing claims to the money by multiple parties, and the pile of money is not big enough to satisfy all of them. The insurance company knows it has to pay the money to someone, but if it pays any of the claimants it will probably be sued by the other(s). Also, there might be other potential claimants the insurance company does not even know about; they (and their lawyers) might pop out of the woodwork only after the money has been paid out. What is the poor insurance company to do? Interpleader is often the answer. In an interpleader action, the party sitting on the money is the plaintiff, and it asks the court for permission to deposit the money with the court and have the claimants fight out their claims among themselves in court. If the court grants that request, the interpleader plaintiff can normally pay its money into court, close its books on the matter, and avoid liability to any potential claimant. For example, in Hartford Life Ins. Co. v. Einhorn, Hartford was sitting on the proceeds of a $50,000 life insurance policy it wanted to pay to someone, but the decedent's heirs and her estate disputed who should get how much. Rather than pick a side in that dispute, Hartford brought a successful interpleader action, paid the $50,000 into court, and let the court figure it out. Interpleader can also be used successfully in liability claims (where there are multiple claimants and the applicable insurance is clearly inadequate to satisfy all of them) and property claims (where multiple parties claim the same policy proceeds). Coverage disputes are fertile sources of choice-of-law issues. In Certain Underwriters at Lloyd's, London v. Foster Wheeler Corp., __ N.Y.S.2d __, 2006 WL 2784244 (1st Dep't, September 28, 2006), the Appellate Division, First Department, weighed-in on one frequent choice-of-law scenario: multiple years of coverage, issued by multiple carriers from multiple states, covering events throughout the United States (and most of the rest of the world), an insured conducting operations and selling products in numerous states, and liabilities arising in numerous states. The specific issue as to which there was a conflict of laws was how to allocate millions of dollars of coverage for asbestos BI claims among several policy periods. The insurers favored New York's "time on the risk" allocation method. The insured favored New Jersey's "time on the risk plus limits" approach. Each side pointed to numerous New York or New Jersey "contacts" to support the application of one or the other state's law. Instead of spending the rest of their lives trying to weigh those contacts, a unanimous court fashioned what it apparently intends to be a new bright-line rule for such situations:
Under the facts of the case, that meant New Jersey's allocation method was to be applied. If the court's new rule catches on, then future choice-of-law analyses might consist of nothing more than looking at "the address shown for the Named Insured in Item 1. of the Declarations." I guess we'll have to wait for another case to find out what is supposed to happen if the insured's principal place of business is uncertain, or if it moves from one state to another during the coverage period. If you're a choice-of-law groupie (it was one of my favorite courses in law school), you'll want to read the whole decision. "Other insurance" clauses often generate needless coverage disputes, as exemplified by Cheektowaga Central School District v. Burlington Ins. Co., __ N.Y.S.2d __, 2006 WL 2789156 (4th Dep't, September 29, 2006). In a nutshell, a construction manager's $1 million primary policy (Zurich) provided it was to apply excess of any other insurance -- whether primary or excess -- to which the construction manager was added as an additional insured. The construction manager was an additional insured under a roofing contractor's $10 million umbrella policy (Diamond State), but the umbrella's "other insurance" clause provided it was to be excess over any other applicable coverage. The construction manager took the position that Diamond State was required to defend him under its umbrella policy as if it were a primary policy. Why? Because the two policies' "other insurance" clauses cancelled each other out, so Zurich's primary and Diamond State's umbrella should both be regarded as primary insurers. The court rejected that argument. Although dueling "other insurance" clauses often do cancel each other out, that rule is not followed "when its use would distort the meaning of the terms of the policies involved." Here, the policies and their respective premiums clearly showed the umbrella was intended to apply only after underlying coverage had first been exhausted, and Zurich's over-aggressive "other insurance" clause would not be permitted to defeat that intent. In Catholic Charities of the Diocese of Albany v. Serio, __ N.E.2d __, 2006 WL 2970515 (Ct. App., October 19, 2006), the Court of Appeals (New York State's highest court) upheld the constitutionality of New York's "Women's Health and Wellness Act," N.Y. Ins. Law §§ 3221[1][16] and 4303[cc], which requires that an employer health insurance contract providing coverage for prescription drugs must also include coverage for the cost of contraceptive drugs or devices. Catholic Charities argued the statute infringed on its right to the free exercise of religion under the U.S. and N.Y.S. Constitutions. The Court characterized the Charities as principally social service agencies, not religious organizations. If you are involved in dealing with auto coverages (I seldom am), you might be interested in Raffellini v. State Farm Mut. Automobile Ins. Co., __ N.Y.S.2d __, 2006 WL 3025825 (2nd Dep't, October 24, 2006). A plaintiff was injured in a car accident and sued the tortfeasor. After recovering $25,000 -- the limit of the tortfeasor's auto policy -- the plaintiff sought supplemental underinsured benefits from his own auto insurer (State Farm), which denied his claim. He then sued State Farm for breach of contract. The carrier asserted a number of affirmative defenses, including one to the effect that the plaintiff had not sustained a "serious injury" within the meaning of the no-fault law, N.Y. Ins. Law § 5102(d). In the cited decision, the Second Department held an insurer cannot raise that fact as a defense to a claim for supplementary underinsured benefits. October, 2006 As noted in last month's discussion (see below), the "Graves Act," 49 U.S.C. § 30106, effected a big change in New York law concerning the vicarious liability of car owners. Now, along comes a NY State trial court to tell us the Act is unconstitutional. In Graham v. Dunkley, __ N.Y.S.2d __, 2006 WL 2596327 (Sup.Ct., Queens Co., September 11, 2006), a car lessor moved to dismiss a complaint on the basis of the Graves Act. The trial court denied the motion and held the statute was an unconstitutional exercise of Congressional power under the Commerce Clause of the U.S. Constitution. According to the court, Congress had no power to legislate as it did because there is no reason to believe New York's prior rule of vicarious liability had any significant impact on interstate commerce. (Try telling that to anyone in the car leasing business!) The reality is that our Commerce Clause jurisprudence has been so politicized and outcome-driven for decades that it is now easy for a court to cherry-pick precedential support for just about any position. That is what happened in this case, in my opinion. There will be subsequent rounds of cherry-picking by appellate courts and, one of these days, the solons will let us all in on what the law actually is. Until then, car owners and their insurers wishing to take advantage of the Graves Act would probably be better off in federal court (if they can get there) than in a NY State court. Does the presence of a schedule of values in a commercial property policy automatically mean the policy is a scheduled policy, as opposed to affording a blanket limit? No, according to the decision in Core-Mark Internat'l. Corp. v. Commonwealth Ins. Co., 2006 WL 2501884 (S.D.N.Y., August 30, 2006). The case involved coverage under an excess property policy that included an "Occurrence Limit of Liability" endorsement, to the effect that coverage in the event of loss would be limited to the least of: (a) the adjusted amount of loss, (b) the total value of the property involved as shown on the latest statement of values on file with the company, plus 10%, or (c) the limit of liability shown on the face of the policy. The policy also included a schedule of values for insured property at one of the insured locations (presumably, there were also similar schedules for other locations, but the decision does not say that). The insured suffered a combination burglary-&-fire loss at one location, resulting in a PD claim substantially greater than the scheduled values of the property involved. The insurer argued the policy was, in effect, a scheduled value policy and the amount recoverable should be no more than the scheduled values of the property involved, plus 10%. The court held: (a) the "Occurrence Limit of Liability" endorsement was ambiguous, (b) extrinsic evidence showed the policy was intended to afford a blanket limit per occurrence per location, not to be a scheduled value policy, and (c) the 110% per-occurrence limitation was to be understood to refer to the aggregate values of all scheduled property at the affected location, not to the individual value of each different type of property. In other news, United States Underwriters Inc. Co. v. Kum Gang Inc., __ F.Supp.2d __, 2006 WL 2135792 (E.D.N.Y., July 28, 2006), deals with an interesting dispute over the meaning and effect of the "parking" exception to a CGL policy's "auto" exclusion. Kum Gang owns a restaurant on Long Island. It offers a valet parking service for its customers, at no extra charge. When a customer surrenders his car to one of the restaurant's eight parking attendants, the attendant gives the customer a claim check, drives the car off the restaurant's property, and takes it around the block to a separate parking lot at which the restaurant rents space. In this case, a parking attendant got behind the wheel of a customer's car, drove out into the street, and hit a pedestrian. The restaurant notified its CGL insurer (U.S. Underwriters) of the occurrence. Shortly thereafter, the pedestrian sued the restaurant, the driver, and the car owner. The restaurant's CGL policy had the customary exclusion for BI arising out of the ownership, maintenance, use, or entrustment to others of any "auto." That exclusion was subject to an exception for "parking an 'auto' on, or on the ways next to, premises you own or rent...." On the basis of the "auto" exclusion, U.S. Underwriters denied any duty to defend or indemnify its insureds. U.S. Underwriters also relied on a provision in its policy to the effect that coverage applied only to occurrences taking place at the two specific premises named in the policy (i.e., the restaurant and the parking lot), but not on public streets between the two. Several months after disclaiming coverage, U.S. Underwriters demanded that the car owner's personal auto carrier (Charter Oak) defend and indemnify the restaurant and driver, even though neither the restaurant nor the driver had ever notified Charter Oak of the occurrence or tendered the suit to Charter Oak for a defense. Charter Oak promptly declined to do so, because neither the restaurant nor the driver had ever notified it of the occurrence or the suit. In addition, Charter Oak asserted its own policy's exclusion for "any vehicle while being used or maintained in an auto business," which was expressly defined as "the occupation or business of selling, repairing, servicing, storing, parking or transporting vehicles." U.S. Underwriters then brought a d.j. action against everyone involved in the case. Among other things, U.S. Underwriters sought a declaration that it was not obligated to defend or indemnify the restaurant or driver, but that Charter Oak was. On reciprocal motions for summary judgment, U.S. Underwriter lost and Charter Oak won. The court held:
September, 2006
As we observe the fifth anniversary of the destruction of the World Trade Center, courts are still dealing with the coverage fallout. In SR International Business Ins. Co. Ltd. v. World Trade Center Properties, LLC, __ F.Supp.2d __, 2006 WL 2060464 (S.D.N.Y., July 25, 2006), the District Court held that:
Thus, a win for the Port Authority and Silverstein interests. The decision is long and detailed and turns on the specific language of the relevant policies, binders, and leases. Although I cannot readily summarize it in any more detail here, there is one additional point worth making about it. Like nearly all of the S.D.N.Y.'s decisions in the Silverstein/WTC coverage litigation, this case shows what is possible when one combines well-heeled litigants, several hundred million dollars in dispute, smart, experienced lawyers, and smart, conscientious judges. Mix well, allow sufficient time for serious reflection, and voilà: a serious, enlightening, well-written, and well-reasoned decision. Whether one agrees or disagrees with their outcomes, decisions like this are all too few in real life and [for coverage junkies] a pleasure to read. In Century 21, Inc. v. Diamond State Ins. Co., 2006 WL 2355323 (S.D.N.Y., August 10, 2006), the court dealt with an interesting question of waiver of the attorney-client privilege in the context of a late notice dispute. Century 21 was a non-party witness in a trademark suit Gucci brought against another party. During its involvement as a non-party witness in that case, Century 21 consulted with counsel concerning whether it too might be a litigation target and be liable to Gucci for trademark infringement. However, Century 21 never notified its insurer of any potential trademark claim. Thereafter, Gucci did sue Century 21 for trademark infringement, just as Century 21 had feared. Century 21 reportedly gave its carrier prompt notice of the suit, but the carrier disclaimed because Century 21 had not provided prompt notice of the potential claim, as its policy required it to do. Century 21 then brought a d.j. action to force its carrier to defend and indemnify it in the Gucci suit. In the d.j. action, the carrier sought disclosure of Century 21's pre-suit communications with its counsel, to try to prove Century 21 had known of the potential claim long before the suit was brought, and long before the carrier received notice of that suit. Century 21 objected to that disclosure, relying on the attorney-client privilege. In the cited decision, the court held that, by bringing the d.j. suit, Century 21 had put the timeliness of its notice in issue and had implicitly waived the attorney-client privilege as to any pre-suit communications between it and its counsel in which Century 21's potential liability to Gucci had been discussed. The decision relies heavily on New York's rule to the effect that a policyholder has the burden of pleading and proving the timeliness of its notice; in a state with different rules on that point, the decision might have come out differently. There is one additional argument that could have been made in Century 21, but which the court did not address. That is, the carrier could have argued it was entitled to discovery of the lawyers' internal work-product concerning Century 21's potential liability to Gucci, whether or not that work-product had ever been communicated to or shared with Century 21. Why? Because a lawyer is the agent of his client: any knowledge counsel acquired in the course of representing Century 21 should be deemed to have been known by Century 21 itself, under ordinary principles of agency law. From the opinion, I cannot tell if such an argument was made in this case. The "Graves Act," 49 U.S.C. § 30106, effected a big change in New York law concerning the vicarious liability of car owners. Before that statute took effect a year ago, a car owner in the business of renting or leasing cars was vicariously liable for the negligence of persons renting or leasing its cars, and even for the negligence of those driving leased or rented cars with the lessee's permission. The Act changed all that, by providing that one in the business of renting or leasing cars is not vicariously liable for a driver's negligence unless the business engaged in its own independent negligence or criminal wrongdoing. I.e., a suit against the owner/lessor based solely on vicarious liability is now barred. New York courts (and lawyers) are still feeling their way under these new rules. Murphy v. Pontillo, __ N.Y.S.2d __, 2006 WL 2000121 (Sup.Ct., N.Y.Co., July 18, 2006) is a case in point. In Murphy, the claim was that the lessee/driver of a vehicle ran a red light and injured the plaintiff. The plaintiff sued both the driver and the owner (a Lincoln-Mercury dealership). The dealership moved to dismiss, citing (a) the Graves Act and (b) the complaint's failure to allege any independent wrongdoing by the owner/lessor. The court denied the motion, because:
This decision illustrates that defendants need to present courts with complete and thorough documentation to prove the claims against them come squarely within the express terms of the Graves Act. Even then, a plaintiff will often be able to avoid outright dismissal at the pleadings stage, simply by alleging (or, as in Murphy, merely hinting at the possibility of) a theory of negligent entrustment. Making an immediate motion to dismiss on the pleadings -- although offering a tempting way to end all defense costs -- will often not work. In most cases, the better defense strategy will be to conduct sufficient discovery to flesh-out the details of the plaintiff's claims and, if negligent entrustment is alleged, to put together as compelling a showing as possible that negligent entrustment neither occurred nor was a proximate cause of the accident. If a motorist's carrier becomes insolvent, is he automatically an "uninsured motorist" for the purposes of another driver's UM coverage? That was one of the questions the court addressed in American Transit Ins. v. Barger, __ N.Y.S.2d __, 2006 WL 2056485 (Sup.Ct., N.Y.Co., July 21, 2006). As with so many legal questions, the answer is, "It depends." Normally, when an auto insurer becomes insolvent, the policy itself is deemed to survive and the obligations owed to the insured are assumed by the NY Public Motor Vehicles Liability Security Fund ["PMV Fund"]. So long as the (now insolvent) insurer paid into the PMV Fund, its subsequent insolvency does not make its insureds "uninsured motorists" within the meaning of the Insurance Law. (Ordinary UM coverage does not protect against the risk of being injured by that kind of motorist with an insolvent carrier; under NY law, only Supplemental UM coverage does so.) However, if the insolvent carrier did not pay into the PMV Fund (e.g., it was not licensed in NY), its insureds are "uninsured motorists." In Employers Ins. of Wausau v. News Corp., __ F.Supp.2d __, 2006 WL 2080471 (S.D.N.Y., July 27, 2006), insurers won a race to the courthouse, only to have the court shoot their horse out from under them. The case arose from a coverage dispute between two insurers and News Corp., concerning coverage for a copyright infringement claim under a "Media Special Perils" policy. The underlying copyright claim was pending in a court in California. There was apparently a fairly long delay in notifying the carriers about the claim, but notice was finally given in May, 2005. In February, 2006 (9 months later), the insured was still waiting for the carriers' coverage determination. On February 28, 2006, the carriers filed a d.j. action in the S.D.N.Y., seeking a declaration that there was no duty to defend or indemnify the copyright action because of late notice (and other reasons). On March 2, 2006, the carriers finally notified the insured they disclaimed coverage, and informed the insured of the d.j. action the carriers had filed in New York a few days earlier. Three weeks later, the insured filed its own d.j. action in California and moved to dismiss, stay, or transfer the New York action. Normally, when there is a race to the courthouse, the first-filed action proceeds and the second-filed action is stayed, dismissed, or transferred to the same court as the first-filed action. However, that normal rule does not apply when a court finds there are "special circumstances." In this case, the S.D.N.Y. found "special circumstances," because (a) the NY action was filed before the carriers had even bothered to deny coverage or notify the insured of their coverage position, (b) the carriers had deliberately omitted some of the insureds from the NY suit in order to emphasize the dispute's connections to NY and down-play any potential connection to California, and (c) the carriers were clearly forum-shopping, hoping to take advantage of New York's "no prejudice" rule in late notice cases. The New York action was therefore an improper anticipatory filing, motivated solely by forum-shopping; a "race to the courthouse" in which the insured had no reason to know a race was on. Dear reader, I have been on both sides of this "race to the courthouse" game. Sometimes it works; sometimes it does not. It usually does not work when you do it the way these guys did. A plaintiff made an odd -- albeit unsuccessful -- argument for coverage in Ruge v. Utica First Ins. Co., __ N.Y.S.2d __, 2006 WL 2257127 (2nd Dept.), 2006 N.Y. Slip Op. 06155 (August 8, 2006). The case involved coverage for injuries sustained in what sounds like a horrendous car accident. Coverage was sought under a contractor's liability policy that was subject to an exclusion for BI "that arises out of the ownership, operation, maintenance, use, occupancy, renting, loaning, entrusting, supervision, loading or unloading of...an auto." Based on that exclusion, the carrier denied coverage. The plaintiff argued the exclusion was ambiguous -- not because of anything in the exclusion itself -- but because the policy's separate "products-completed operations" section was subject to an exclusion for "transportation of property," and that exclusion had an exception for "loading or unloading." According to the plaintiff, the fact that there was an exception for "loading or unloading" in one exclusion, but not in the other, made the auto exclusion ambiguous. (Don't feel bad: I don't understand it either. Just to make it even weirder, the accident apparently had nothing to do with loading or unloading anything.) Anyway, the trial court held for the carrier, and so did the Appellate Division: exclusions are to be read seriatim, not cumulatively. If one exclusion bars coverage completely, that's it: there is no coverage. Normally, no exclusion restores coverage excluded by another exclusion, and no one exclusion should be regarded as "inconsistent" with another. Ofori-Tenkorang v. American International Group, Inc., __ F.3d __, 2006 WL 2349169 (2nd Cir., August 51, 2006), is not really a coverage case, but it is tangentially insurance-related and might be of interest to anyone thinking about working at a U.S. carrier's non-U.S. operations. According to this decision, alleged racial discrimination occurring while a U.S. employee is working overseas for a U.S. employer is not subject to Title VII of the Civil Rights Act of 1964. In other words, U.S. law did not give Mr. Ofori-Tenkorang any right to sue AIG for racial discrimination he suffered from his bosses at AIG's operations in South Africa. (One might want to re-think any offers of cushy overseas assignments.) On the contingent commissions front, Marsh and New York State have reportedly agreed in principle that Marsh can collect contingent commissions, but only on business for which it acts as an MGA, not a retail broker. In such MGA business, Marsh must reportedly accept compensation only from the insurer it represents, and can communicate with the insured only through a non-Marsh retail broker. There have been several recent amendments to the New York Insurance Law. They include:
There are some other recent statutory changes, but they are even drier and more
picayune than those listed above. Trying to track all the ways
people in Albany try to micro-manage and manipulate our lives would be a
Sisyphean task. Sisyphus had no choice, but I do, so I don't track Albany's
activities in all that much detail. August, 2006 New York courts have been busy with coverage-related disputes over the past several weeks. A sneaky claim-handling technique was the subject of Fox v. Doe, 12 Misc.3d 1168(A) (Sup.Ct., Kings Co., June 8, 2006). As the result of an auto accident, a Mr. Izzo sustained damage to his car and, allegedly, an unspecified bodily injury. Mr. Izzo retained a lawyer to pursue his BI claim. A few weeks after the accident, the other car's insurer sent Izzo a check for $1,975.80, with a cover letter saying the check was in full settlement of his auto PD and, if Izzo wanted to keep it, all he had to do was sign the enclosed form and send it back to the insurer. Well, of course, Izzo did just that (without mentioning it to his lawyer). The enclosed form turned out to be a general release, releasing the other driver/owner and the insurer from any and all liability for anything and everything, including any potential BI claim. (The cover letter did not mention BI at all.) After Izzo's lawyer started his BI lawsuit, the other driver alleged the general release as an affirmative defense and moved for summary judgment. Izzo opposed the motion for summary judgment, swearing he had had no intention of releasing his BI claim for a measly two grand and thought he was settling only the PD claim. Although one is normally bound by the clear and unambiguous terms of any contract he executes, that is not what happened to Mr. Izzo. Instead, the court denied the defendant's motion for summary judgment, because the circumstances raised a question of fact as to exactly what Izzo had intended when he signed the release. The New York Court of Claims (a specialized court that handles claims against the State of New York) addressed a late notice issue in Turner v. State of New York, __ N.Y.S.2d __, 2006 WL 1867937 (N.Y.Ct.Cl., June 20, 2006). Mr. Turner was a construction worker who alleged he had been injured while working on a state building. Under Court of Claims procedure, a potential plaintiff can buy himself additional time to start a lawsuit by serving a document called a Notice of Intention to File a Claim ("NI"). The NI does not itself make any claim, or commence any kind of proceeding. Rather, it is exactly what its name says: a notice of intent to make a claim later, and is purely a procedural device for extending one's time to make that claim. In Turner, id., the State neglected to tell its insurer about the NI until Turner actually brought suit, some five months later. The carrier then disclaimed because of the apparent violation of the policy condition requiring prompt notice of any claim or suit. The carrier lost: the Court of Claims held that a mere NI -- which neither makes any claim nor commences any suit -- did not trigger the State's notice obligation under the policy's language. Mary Immaculate Hospital v. Countrywide Ins. Co., 12 Misc.3d 1174(A), 2006 WL 1789089 (Sup.Ct., N.Y.Co., June 28, 2006), affords a textbook example of how not to litigate a coverage disclaimer. Countrywide had disclaimed coverage on the basis of an exclusion for BI sustained "while committing an act which would constitute a felony, or seeking to avoid lawful apprehension or arrest by a law enforcement officer." The claimant then sued. When the plaintiff moved for summary judgment, Countrywide submitted no evidence that such an exclusion was even part of its policy. It also submitted only unsubstantiated, conclusory, or inadmissible evidence to show the claimant had been, in fact, committing a felony or avoiding lawful apprehension when he was injured. The court was not impressed, and awarded summary judgment to the plaintiff. One of my pet peeves is policy forms, contracts, and other documents that gratuitously refer to a producer as an "agent." When a carrier gratuitously refers to a producer as an "agent," it is creating documentary evidence that there is, in fact, the legal relationship of principal and agent between the carrier and the producer, regardless of whether such a relationship actually exists. That evidence will sit in a file until, someday, a smart lawyer finds it and rams it down the carrier's throat (or elsewhere). A perfect example of this is the decision in Cohen v. Utica First Ins. Co., __ F.Supp.2d __, 2006 WL 1806512 (E.D.N.Y., June 29, 2006). In the context of a late notice case, it became important to determine whether notice given to an insured's broker should be deemed notice to the carrier. The court ultimately held that the broker had at least apparent authority to receive notice as the carrier's agent, in part because the policy's dec page had a data blank labeled "Agent" and the broker's name had been typed into it. Although I do not buy all of the court's reasoning, the case contains a nice discussion of some of the general principles of agency that apply in this context and would be useful reading for anyone who wants to learn about that. BP Air Conditioning Corp. v. One Beacon Ins. Group, __ N.Y.S.2d __, 2006 WL 1843350 (1st Dep't, July 6 2006), deals with what seems to me to be a simple issue, yet it resulted in a long opinion, a split (3-2) decision, and a spirited dissent. BP Air Conditioning was an additional insured under a subcontractor's CGL policy issued by One Beacon. That policy provided for additional insured status for any "person or organization [but] only with respect to liability arising out of your ongoing operations performed for that insured." A worker was hurt on the construction site and sued BP, the subcontractor (i.e., One Beacon's Named Insured), and other contractors. BP sought a defense from One Beacon, but One Beacon denied a duty to defend. According to the carrier's reasoning, the phrase only with respect to liability arising out of your ongoing operations performed for that insured constituted a condition precedent that had to be satisfied before there would be any coverage for BP. That is, unless and until there had been a determination that BP's liability arose out of [the subcontractor's] ongoing operations performed for BP, there was no coverage for BP and One Beacon had no duty to defend it. According to One Beacon, if and when such a determination were made, One Beacon would acknowledge a duty to indemnify and (retrospectively) a duty to defend; it would then reimburse BP for defense costs BP had already paid. In the meanwhile, however, One Beacon argued it owed BP nothing. Note that nothing about the quoted language suggests it was intended to be a condition precedent to a duty to defend. Also, the plaintiff's complaint indisputably alleged BP was liable for the plaintiff's BI, and that the BI arose out of the subcontractor's ongoing operations performed for BP. Requiring a finding of liability before there could be a duty to defend would turn CGL coverage on its head. I don't buy One Beacon's argument for a second, and neither did the court. The fact that One Beacon got two (out of five) judges to buy its argument and support it in a dissent suggests its appellate counsel did quite a good job with an intrinsically weak argument. Gee, whiz: a jury verdict in favor of a carrier! In State Farm Mut. Auto. Ins. Cos. v. Jackson, __ N.Y.S.2d __, 2006 WL 1871910 (4th Dep't, July 7, 2006), the issue was whether the policyholder's son "resided" in his mother's household (and was therefore an insured) or elsewhere (and was therefore not insured). In this context, New York law defines a resident as one who lives in the household with a certain degree of permanency and intention to remain. State Farm introduced substantial evidence to show the son did not reside in the policyholder's household, and the jury agreed. Since the jury's verdict was supported by a fair interpretation of the evidence, it was affirmed on appeal. Last month I wrote about the decision in Automobile Ins. Co. of Hartford v. Cook, __ N.Y.3d __, __ N.Y.S.2d __, __ N.E.2d __, 2006 WL 1547725 (June 8, 2006) [see discussion below]. That decision has already born fruit. In Merchants Ins. of N.H., Inc. v. Weaver, __ N.Y.S.2d __, 2006 WL 1912809 (3rd Dep't, July 13, 2006), the insured deliberately aimed and fired a loaded flare gun at two people; one of the victims lost an eye. The insured pleaded guilty to 1st-degree attempted assault (i.e., he intended to cause BI). The victim sued his assailant, and the assailant sought coverage from his homeowner's carrier. The carrier disclaimed, on the grounds that there had been no "occurrence" and, even if there had been, any resulting BI would be excluded by the "expected or intended" exclusion. Based on the recent Cook decision, the court rejected the carrier's disclaimer and held there was a duty to defend: the plaintiff's complaint alleged the flare gun had been discharged "negligently," and that allegation was enough to contradict the carrier's bases for disclaiming. The court acknowledged the known facts of the case suggested there might end up being no duty to indemnify at the end of the day, but that was not enough to avoid a duty to defend. Let's say there's an "occurrence" causing BI, but neither the insured nor the injured person tells the carrier about it. Instead, the carrier happens to learn about it from some third party. Does the carrier have a duty to disclaim promptly once it learns of the "occurrence" from any source? Or, can the carrier wait and take a coverage position only when it is put on notice by the insured or a claimant? According to the decision in Hernandez v. American Transit Ins. Co., __ N.Y.S.2d __, 2006 WL 2076996 (1st Dep't, July 27, 2006), the carrier can wait. (The answer may be different, though, if the carrier acknowledges receipt or awareness of the information, such as by reserving its rights before it receives notice from the insured or claimant.) Indemnity Ins. Co. of North America v. Mandell, __ N.Y.S.2d __ (1st Dep't, June 6, 2006), addressed a court's solution to a common issue in arbitrations: a demand by the arbitrators that the parties execute an agreement to hold the arbitrators harmless from liability. Experienced arbitrators almost always request such an agreement, so they do not end up getting sued by a disgruntled losing party. In this case, at least one of the respondents balked and refused to execute such an agreement, effectively bringing the arbitration to a dead stop. (The respondents apparently were unhappy with the umpire and wanted to force selection of a new one.) To resolve the impasse, the court ordered the parties to execu |
