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This is an archive of older coverage news that was mentioned earlier on my Coverage News page.
March, 2009
A [premature] happy Saint Patrick's Day to you.
In Utica Mut. Ins. Co. v. Berkoski Oil Co., __ N.Y.S.2d __ , 2009 WL 142987, 2009 NY Slip Op 00371 (2nd Dep't, January 20, 2009), the Appellate Division, Second Department, dealt with an allegation that an insurer negligently disposed of important physical evidence, constituting spoliation. In March, 2003, the owners of a home discovered the premises had sustained extensive water damage. Their homeowners carrier ─ Utica Mutual ─ paid more than $700,000 for the property damage. As the insureds' subrogee, Utica then sued a heating oil delivery service and a security service for negligence. Utica's theory was that the water damage occurred because the house had run out of heating oil during the winter, a plumbing pipe had frozen and burst, and the water damage occurred when the pipe thawed. Utica alleged the heating oil company negligently allowed the house to run out of heating oil during the winter. Utica's theory against the security service was that it had installed a "low temperature sensor alarm" in the house; either that alarm was negligently installed, or the security company negligently failed to monitor it. In the subrogation action, the defendants sought production of the burst pipe. Despite a court order to produce the pipe, Utica neither produced it nor disclosed its whereabouts. [The decision does not make clear whether Utica ever had possession of the pipe to begin with, or what happened to the pipe. I presume Utica must have had possession or control of it at some point; the decision would make little sense otherwise.] Because Utica failed to produce the pipe, the trial court struck Utica's complaint and dismissed the action. On appeal, the Second Department concluded the trial court had gone too far. Although striking a party's pleadings and dismissing its claims or defenses can be appropriate remedies for spoliation of evidence, in this case there was no evidence Utica had discarded the pipe intentionally or in bad faith, or that the absence of the pipe left the defendants with no way to defend themselves. Instead of dismissing Utica's action, the Second Department ordered that (a) Utica would be precluded from offering evidence of any inspection it might have done of the pipe and (b) the trial court should instruct the jury that it could draw an adverse inference against Utica because of the missing pipe.
Bennett, who owned and operated a painting business, was hired by James and Joan Catlett to apply a protective sealant to cedar siding on the exterior of their home. As the sealant was being applied, drop cloths were used to catch any of the solution that dripped from the siding. The drop cloths were then stored in an enclosed porch at the rear of the Catletts' home. Later, the home was damaged by a fire. The Catletts claimed the fire was caused by the spontaneous combustion of chemicals in the sealant that had collected on the drop cloths. The Catletts were reimbursed for their loss under their homeowners policy with Central Mutual Insurance Company. Central Mutual then sued Bennett, to recover the money it had paid for the Catletts' property damage. Bennett was insured under a commercial liability policy issued by Nova Casualty Company. Nova disclaimed coverage because of two policy exclusions that, in its view, excluded any possibility of a duty to indemnify Bennett. Nova also sued Central Mutual, the Catletts, and Bennett, seeking a declaration that it was not obligated under the terms of its policy to indemnify or defend Bennett in the Catletts' action. A trial court held the exclusions in the policy did not apply, granted a motion by the Catletts and Central Mutual for summary judgment dismissing Nova's complaint, and declared Nova was obligated under the terms of its policy to defend and indemnify Bennett in the Catletts' action. Nova appealed. In Nova Cas. Co. v. Central Mut. Ins. Co., 2009 NY Slip Op 00617 (3rd Dep't, February 5, 2009), the Appellate Division, Third Department, affirmed the trial court's decision. The first of the two exclusions Nova tried to rely on was one providing that coverage did not apply to any "bodily injury and property damage arising out of Spray Painting Operations." The court held that exclusion did not apply, because:
The second exclusion Nova tried to rely on was one saying coverage would not apply to property damage "to that specific part of real property on which work is being performed ... if the 'property damage' arises out of such work." The court rejected that argument as well:
Lima v. NAB Construction Corp., 2009 NY Slip Op 00653 (2nd Dep't, February 3, 2009), grew out of a breach of a construction subcontract. Under that subcontract, Tower Painting Co., Inc., promised to procure CGL coverage naming NAB Construction Corp. as an additional insured. Unfortunately, the coverage Tower procured for NAB failed to comply with some of the subcontract's insurance specifications. Therefore, when an accident occurred in the course of the project and led to a bodily injury claim against NAB, NAB found itself with less coverage than Tower had promised to procure for NAB. NAB therefore sued Tower for breach of contract; i.e., breach of the contract to procure insurance, which was part of the subcontract. The court granted summary judgment to NAB on that breach of contract claim. The court also held that NAB could recover from Tower all costs incurred to defend NAB in the bodily injury action. On appeal, the Second Department affirmed the grant of summary judgment to NAB, but modified that part of the judgment concerning the measure of NAB's compensable damages. NAB, you see, also had its own CGL coverage, separate and apart from whatever coverage had been procured by Tower. Where, as here, the promisee (NAB) has its own insurance coverage, recovery for breach of a contract to procure insurance is limited to the promisee's out-of-pocket expenses to obtain and maintain that coverage; e.g., premiums and any additional costs incurred, such as deductibles, co-payments, and increased future premiums. If NAB had not had its own coverage, but had relied exclusively on the coverage procured for it by Tower, then Tower might have ended up having to foot the entire bill for NAB (both defense and indemnity), up to whatever limits of insurance were required by the subcontract.
The Sagemark Cos., Ltd. v. Arch Ins. Group, __ N.Y.S.2d __, 2009 WL 279113, 2009 NY Slip Op 29045 (Sup.Ct., Nassau Co., February 4, 2009), presents an unusual scenario: an insured seeking to rescind its own liability policies. The insureds were limited liability companies that managed radiology services at various locations. The policies were a series of medical malpractice policies issued by Arch. In a nutshell, the insureds argued that, since they were only medical administrators and managers ─ but not medical practitioners ─ they were incapable of committing medical malpractice. According to the insureds, since the policies purported to cover a "risk" that was actually non-existent and legally impossible, the policies should be deemed void ab initio. Arch moved to dismiss. After examining the pleadings, the policies, the insureds' operations, and relevant NY medical malpractice law, the court rejected the insureds' arguments, refused to void the policies, and dismissed the complaint. Not until the end of the court's decision are we given a hint about why the insureds wanted to void their own policies:
In other words, the insureds here apparently waited to see whether any claims would be made before the applicable policy periods expired. When no claims were made they figured they had no further need for the insurance, so they sued to rescind the policies and get their premiums back. Fortunately, this judge nipped that idea in the bud. Let's hope he's affirmed.
Rafi v. Rutgers Cas. Ins. Co., 2009 NY Slip Op 00905 (4th Dep't, February 6, 2009), involves an insurer's contention that it did not have to cover a loss because the insured had misrepresented a material fact in its application for the policy and, therefore, the policy was void ab initio. The case was tried to a jury, and the trial court instructed the jury that the carrier had the burden of proving the insureds' alleged misrepresentations were intentional. The jury found for the insureds (quelle surprise!), the court entered judgment in accordance with the verdict, and the carrier appealed. The Fourth Department vacated and ordered a new trial. Under NY law, rescission of a policy is appropriate whenever the insured's misrepresentation in the application was material. The insured's state of mind when it made the misrepresentation is irrelevant. That is, it does not matter whether the misrepresentation was made knowingly, deliberately, intentionally, with a specific intent to deceive, or carelessly, negligently, unknowingly, accidentally, unintentionally, or even innocently. The trial court's instructions to the jury were therefore erroneous as to a key element of the case. [Please note: the rule is different for other kinds of insurance-related misrepresentations, such as misrepresentations in connection with a claim or loss. In such other scenarios, the speaker's state of mind is relevant.] Policy rescission because of misrepresentation in the application for insurance is one of the very few legal scenarios in which the state of mind with which one makes a misrepresentation is irrelevant. I know many people ─ like the trial judge in Rafi ─ either cannot or will not accept that distinction. Nevertheless, that's the law of NY. I believe it's also the law of California and many other states, so NY is not some kind of outlier on this point.
In Trupo v. Preferred Mut. Ins. Co., __ N.Y.S.2d __, 2009 WL 281682, 2009 Slip Op 00896 (4th Dep't, February 6, 2009), the Trupos' home and personal property were allegedly damaged when about seventy-five gallons of a chemical mixture were released into the atmosphere because of an incident at a nearby chemical plant. The policy provided coverage for direct physical loss caused by specified perils, including "explosion." In the cited decision, a majority of the Appellate Division, Fourth Department, held (a) the incident at the plant constituted an "explosion" within the meaning of the policy and (b) the alleged contamination of the Trupos' home was directly caused by that explosion. The carrier argued the claimed loss was nevertheless excluded from coverage by a "wear and tear" exclusion, providing that the insurance did not apply to "loss which results from wear and tear, marring, deterioration, inherent vice, latent defect, mechanical breakdown, rust, wet or dry rot, corrosion, mold, contamination or smog" [emphasis added]. The Fourth Department held the exclusion was ambiguous and did not bar coverage:
Two justices dissented from the majority's views on the "wear and tear" exclusion:
Long-time readers of this page will recall that one of my pet peeves is cases arising out of construction contracts or subcontracts, in which judges determine the coverage or priority of the parties' various insurance policies by referring to the construction contract or subcontract, rather than by referring to the policies themselves. Now, in David Christa Construction, Inc. v. American Home Ins. Co., 2009 NY Slip Op 01040 (4th Dep't, February 11, 2008), the Fourth Department holds that "[t]he scope of insurance coverage obtained by a general contractor and subcontractor must be determined by the terms of the policies, not the terms of the subcontract." That's right! (There's nothing all that remarkable about the rest of the decision, as far as I can see, so I won't bore you with a detailed description of the case.)
Dalton v. Harleysville Worcester Mut. Ins. Co., __ F.3d __, 2009 WL 399211 (2nd Cir., February 19, 2009), turns on the meaning of collapse in an all-risk first-party property policy. The Daltons owned a three-story brownstone in Brooklyn. It was insured by an all-risk policy issued by Harleysville. In 2004, while the policy was in effect, damage to an interior common party wall between the Daltons' building and an adjacent building was discovered. The Daltons immediately reported the damage and claimed under the policy. A few months later, the NYC Department of Buildings ordered that the building be vacated Both Harleysville and the Daltons agreed to rely on the report of a specific inspecting engineer. In his report, the engineer observed that the party wall exhibited large bulging of the masonry wall, movements, deteriorating masonry, and crumbling mortar joints. The conditions were hidden from view by a wall finish, which had prevented earlier observation of the deterioration. The engineer concluded that the "structural failure of the Party Wall resulted from the deteriorated mortar joints" and that "the deterioration of the mortar joints that resulted in the Collapse of the Party Wall was hidden from view by a finish which completely covered the Party Wall." The policy excluded coverage for loss caused by "decay, deterioration, ... or any quality in [the] property that causes it to damage or destroy itself." The policy also excluded coverage for "settling, cracking, shrinking or expansion," and for "collapse, except as provided in the Additional Coverage for Collapse." The Additional Coverage for Collapse afforded coverage for "risks of direct physical loss involving collapse of a building or any part of a building caused... by ... hidden decay." The policy did not define collapse, except that the Additional Coverage for Collapse noted collapse did not include "settling, cracking, shrinkage, bulging or expansion." The Daltons characterized the damage to their building as a collapse loss, and sought coverage for it on that basis. Harleysville declined to pay the Dalton's loss, citing three main reasons:
The U.S. District Court agreed with Harleysville, and granted summary judgment to the insurer. On appeal, the Second Circuit vacated the trial court's decision and remanded for further proceedings, for the following reasons:
Olvie Vincent owned a two-family residential premises in Brooklyn. She shared the upstairs apartment with her sister, Martha Mezier. A third sister, Paulette Gayot, lived in the downstairs apartment. Martha was injured when she fell on the first floor of the premises. Martha sued Olvie (the owner), and Olvie sought a defense from her liability insurer, Allstate. Allstate declined to defend or indemnify on two grounds: (a) late notice and (b) a "resident relative" exclusion in Olvie's policy. Martha eventually obtained a default judgment against Olvie. When the judgment remained unsatisfied for more than thirty days, Martha sued Allstate to collect on the judgment. Martha and Allstate eventually made reciprocal motions for summary judgment, which were recently decided in Merzier v. Allstate Ins. Co., 2009 WL 399989, 2009 NY Slip Op 50259(U) (Sup.Ct., Kings Co., February 18, 2009). On the late notice dispute, the court held genuine issues of material fact precluded awarding summary judgment to either side. As to the "resident relative" exclusion, the court granted summary judgment in favor of Allstate. The exclusion applied to the insured's "relatives who reside within the same household." Martha argued that, although she and Olvie both occupied parts of the same apartment, they were not members of the same household. Martha pointed out that she rented a room as Olvie's tenant, and that the two of them had separate belongings, separate bedrooms, and separate cookware, meal times, and shopping arrangements. The court rejected Martha's argument. NY courts have been willing to find separate households where individuals lived in separate apartments within the same building, had their own kitchens and bathrooms, paid separate utility bills, and entered their respective apartments through separate locked doors. None of those factors was present in this case. Here, although the two sisters had separate bedrooms, they shared the remainder of the apartment, including the kitchen, bathroom, and living room. They also shared the same gas and electric connections, telephone service, and a common entrance to the apartment. Furthermore, only Olvie paid the utility bills and financed repairs to the premises; Martha did not receive separate bills. Therefore, they were members of the same household, the exclusion applied, and Allstate's coverage did not apply to Martha's injury.
In a "lost" or "missing" policy case, how can a carrier base a disclaimer on a policy provision? I mean, the policy is lost, right? No one can find a copy of it, so there is nothing the carrier can quote from or point to. The carrier may believe any policy it might have issued would probably have contained a particular kind of exclusion, condition, or other limitation on coverage, but it can't really know whether a lost policy did, right? So, the carrier should not have a duty to disclaim on the basis of a specific policy provision until the policy is found, right? Well, not exactly; at least, not as respects a disclaimer on grounds of late notice. So says a unanimous First Department in Estée Lauder v. OneBeacon Ins. Group, __ N.Y.S.2d __, 2009 WL 398879, 2009 NY Slip Op 01313 (1st Dep't, February 19, 2009). Estée Lauder received various environmental claims involving two landfills. It sought defense and indemnity from OneBeacon, under a policy that had been in effect from 9/19/68 to 9/19/71. Although Lauder was able to provide a policy number and policy period for that policy, it could not locate a copy of the policy itself. OneBeacon also was unable to find such a policy. OneBeacon therefore wrote to Lauder, declining to defend or indemnify and notifying Lauder that OneBeacon was "terminating its investigation of this matter and closing its file." The sole ground OneBeacon asserted for declining to defend or indemnify was that it could locate no evidence such a policy had ever existed. OneBeacon did not assert Lauder had failed to give timely notice of a claim or occurrence, and did not base its declination on late notice. However, OneBeacon's letter did include a "sweeping reservation of all of its rights," presumably to preserve the carrier's rights if the policy were ever found. Lauder then sued OneBeacon. OneBeacon pleaded a number of affirmative defenses, including one to the effect that, assuming such a policy had ever existed in the first place, coverage should be barred because Lauder failed to give OneBeacon timely notice. OneBeacon successfully moved for summary judgment on that late notice argument, and Lauder appealed. In the decision cited above, the First Department focused principally on whether OneBeacon, by failing to assert late notice as a ground for declining to defend, had waived its right to assert late notice as an affirmative defense in the suit. The court held that OneBeacon, by failing to assert late notice in its original disclaimer letter to Lauder, had waived both (a) its right to disclaim for late notice and (b) its right to assert late notice as an affirmative defense in the action. OneBeacon argued that where, as here, no copy of the policy has been located by either side, and the parties dispute whether such a policy ever existed, a carrier cannot waive a policy provision, because it cannot know the policy's actual terms. The court rejected that argument in this case. In the court's view, neither an insured's duty to provide prompt notice, nor a carrier's duty to disclaim promptly, is based only on policy provisions; rather, the court held each of those duties is also imposed by law (either case law or statutory law), even in the absence of policy language. Under that view, when a carrier disclaims coverage, but omits mentioning a ground for disclaiming that is created by law (as opposed to one created only by policy language), and that the carrier knew or should have known existed, the carrier conclusively waives that ground. The court held that a general reservation of rights to disclaim on the basis of any policy provision ─ if and when the policy is ever found ─ will not preserve such a coverage defense. OneBeacon also argued that its letter to Lauder was not a "disclaimer" at all, so it did not waive anything. Rather, OneBeacon tried to characterize its letter as just a factual business communication, notifying Lauder that OneBeacon had been unable to find the policy, but taking no position on coverage. The court rejected that argument, too: the letter made clear that OneBeacon (a) was not willing to defend or indemnify the claims against Lauder and (b) was closing its file on the matter. Even though the letter did not use the word disclaim, it was clearly a denial of coverage. Moreover, the First Department held that Lauder had come forward with sufficient secondary evidence of the policy's existence to justify summary judgment in Lauder's favor. Specifically, Lauder was able to produce a copy of another policy from the same carrier, the declarations page of which said it was issued as a renewal of the missing policy. Lauder was also able to produce two certificates of insurance ─ issued by the carrier itself ─ attesting to the missing policy's existence. That was enough to satisfy Lauder's burden of going forward as to the existence of the missing policy. As to the terms of the missing policy, Lauder was able to rely on a presumption that a renewal policy's terms are the same as those of the policy being renewed. In rebuttal, OneBeacon was unable to produce anything other than unsupported speculation and assumptions. Result: judgment below reversed, summary judgment for OneBeacon denied, summary judgment for Lauder granted. Under NY law, it does not take a whole lot of secondary evidence to prove the existence of a "lost" or "missing" policy. Finding such secondary evidence can be difficult and expensive, but, once you've found it, a little goes a long way. Those with an interest in that topic can read this.
That's all for this month. There will be no NY Update in April, because I will be away during late March and early April. This page will next be updated in early May.
February, 2009
Happy Groundhog Day! Groundhogs live in my back yard. Although I love the wildlife around here, I have to admit these particular groundhogs are unattractive, ungainly, unsociable, and not-very-loveable creatures. Their only apparent virtues are that they are quiet and do not eat our flowers. I'm fairly sure any of them not hibernating will see their shadows on February 2nd, signifying the weather will be just as lousy for the second half of this winter as it has been so far. Ah, well... cabin fever, anyone? Without further ado, here is this month's round-up of recent New York coverage case law.
Where a policy requires an insured to undergo an independent medical examination by "a physician," can the carrier require the insured to undergo an IME by a non-MD psychologist? That was the question in Five Boro Psychological Services, P.C. v. AutoOne Ins. Co., __ N.Y.S.2d __, 2008 WL 5273734, NY Slip Op 28510 (N.Y. City Civ. Ct., December 8, 2008). The insured under a personal auto policy received treatment from Five Boro Psychological Services, allegedly because of injuries sustained in an auto accident. When Five Boro made a claim (as the insured's assignee) for payment of its fee, the carrier demanded that the insured appear for an IME by a psychologist of its selection, to determine whether Five Boro's services had been medically necessary. When the insured failed to appear for the IME, the carrier denied the claim and Five Boro sued. Five Boro's argument was simple: the policy required the insured to submit to an IME by "a physician" selected by the carrier. Having unambiguously specified in its policy that an IME had to be conducted by a "physician," the carrier should not be permitted to require an IME by a non-physician psychologist. The court, viewing the issue as one of first impression, held the word physician should not be strictly construed against the carrier, if doing so would permit evasion of the clear, reasonable, and customary requirement of an IME to verify the medical necessity of claimed treatment. Since the treatment had been rendered by a non-physician psychologist, it was reasonable for the carrier to demand that the IME be conducted by the same kind of health care provider.
It's been more than seven years, but the coverage litigation arising from 9/11 keeps rolling along. In In re September 11th Litigation, __ F.Supp.2d __, 2008 WL 5205971 (December 11, 2008), the court addressed a motion for partial summary judgment in the "aviation liability" claims; i.e., the tort claims against the airlines and other aviation-related defendants for property damage and bodily injury. The major issue addressed in this decision was the proper measure of tort damages the leaseholder (World Trade Center Properties, "WTCP") could recover for the destruction of the World Trade Center. WTCP sought to recover the replacement value of the towers, plus its lost future rental income during its 99-year leasehold, plus additional amounts. In a nutshell, the aviation defendants argued that, even assuming the defendants' liability, the most WTCP could recover would be the market value of its leasehold as of 9/11/01. For a number of reasons (too many to describe here in full), the court essentially agreed with the defendants on that issue.
Tower Ins. Co. of New York v. Duarte, Index No. 100083/08 (Sup.Ct., N.Y.Co., December 19, 2008), deals with coverage for a wrongful death claim under a CGL policy. The underlying claim grew out of an altercation just outside Duarte's delicatessen. Mr. Alvarado -- allegedly a patron of the deli -- assaulted and stabbed Mr. Salguerro. Salguerro died of his wounds. Alvarado was eventually convicted of assault. Salguerro's widow then sued Duarte, the owner of the deli, alleging that Duarte had negligently (a) failed to maintain order within his deli and (b) sold alcohol to Alvarado. Duarte's CGL carrier, Tower Insurance, denied a duty to defend or indemnify because Duarte's policy had an "Assault and Battery Exclusion" that excluded coverage for bodily injury "arising from, due to or caused by:"
Tower sued both Duarte and Salguerro's widow, asking the court for a declaration of non-coverage. Based on the exclusion quoted above, the trial court granted summary judgment to Tower. Under New York coverage law, the phrase arising from in a policy exclusion is usually understood to embody "but-for" causation; i.e., if Mr. Salguerro's injuries and death would not have occurred "but for" the assault and battery, then they "arose from" the assault and battery. The exclusion therefore unambiguously excluded coverage for each and every aspect of Mrs. Salguerro's claim and Tower had no duty to defend or indemnify Duarte.
Sometime before 2001, Jonathan Bloom bought a "SCOPE" umbrella policy from one of the St. Paul Travelers companies. The SCOPE umbrella policy afforded supplemental underinsured motorist (SUM) coverage. In connection with Bloom's 2001 renewal, the carrier substituted a "PLUS" umbrella coverage form for the SCOPE umbrella form. The PLUS form did not afford SUM coverage. Bloom brought a class action, seeking reformation of the PLUS form to make it provide the same SUM coverage the earlier SCOPE form had provided. A trial court awarded summary judgment in favor of the carrier and dismissed Bloom's complaint. In Bloom v. St. Paul Travelers Companies, Inc., 2008 NY Slip Op 10112 (2nd Dep't, December 23, 2008), the Appellate Division gave Bloom a nice Christmas present: it reversed the trial court and granted summary judgment in Bloom's favor. N.Y.Ins.Law §3425(d)(3) requires a carrier intending to change its coverage form to give the insured notice of that intention. Such notice must be "accompanied by a full and clear comparison of the differences between the policy form last issued and the substitute policy form." Although the carrier had sent Bloom a "Summary of Major Coverage Changes" in connection with changing its form, the Second Department held that document failed to comply with the requirements of §3425(d)(3). (Unfortunately, the decision does not explain how or why the Summary of Major Coverage Changes failed to comply with the statute.) The carrier's failure to provide the statutorily required notice of the change in coverage entitled Bloom to reformation of the PLUS form, to make it afford the same SUM coverage he had enjoyed under the SCOPE form.
In or about 1993, Constantino Monroy bought a house in Brooklyn. Although Mr. Monroy's name appeared on the deed as the owner of the house, and although all the mortgage and tax documents relating to the property referred to him as the owner, he never lived in the house or intended to do so. Instead, he bought the house for his brother Carlos, whose credit was not good enough to qualify for a mortgage loan. For the next fifteen years, Constantino never lived in the house, or even visited it. Instead, Carlos lived there with his own family. Although the mortgage, insurance, tax, and utility bills relating to the property were sent to Constantino at the house's address, he never paid (or even saw) any of them. Instead, all such bills were received and paid by Carlos, who actually lived there. After this state of affairs had continued for several years, one Frieda Dennis sued Constantino, claiming she had been injured in a mishap in front of the house. Constantino sought a defense from his liability carrier, Tower Ins. Co. of N.Y., but Tower denied any duty to defend or indemnify. Tower also brought an action, seeking a declaration that it owed no coverage. In Tower Ins. Co. of New York v. Monroy, 2008 NY Slip Op 33518(U) (Sup.Ct., N.Y.Co., December 24, 2008), a trial court granted summary judgment to Tower and declared it had no duty to defend or indemnify Monroy in the underlying Dennis action. The policy ─ described as a "Dwelling Fire Policy" ─ specifically excluded coverage for bodily injury:
The policy defined "insured location" as the "residence premises." It defined "residence premises," in pertinent part, as:
Tower's position ─ with which the court agreed ─ was that the house was not a "residence premises" because the named insured, Constantino, did not live there. In fact, he had never even visited the premises during the preceding fifteen years. Since it was not a "residence premises," the house was also not an "insured location" and exclusion d. excluded any duty to defend or indemnify Constantino in connection with the underlying Dennis suit. Constantino made three arguments for coverage, each of which the court rejected:
Back in July, 2007, I noted the trial court decision in Continental Cas. Co. v. Employers Ins. Co. of Wausau, 2007 WL 1345692, 2007 N.Y. Slip Op. 27188 (Sup.Ct., N.Y.Co., May 8, 2007), which had then made headlines in the insurance press. The case was an asbestos coverage class action, in which the class consisted of over twenty thousand individuals claiming asbestos-related injuries and who had actions pending against a CNA insured: the now-defunct Robert A. Keasbey Company. The case was unusual in that the class was not the plaintiff, but a defendant. CNA brought the action seeking a declaration that the asbestos claims against Keasbey were covered, if at all, only under the products hazard/completed operations coverage of CNA policies, and were therefore subject to aggregate limits of liability that had already been exhausted. The claimants' position was that their claims were also covered under the premises/operations coverage of CNA's policies, which was not subject to any aggregate. The trial court concluded the bulk of the claims were covered under the premises/operations coverage and, therefore, were not subject to any aggregate limit of liability. At the time, the claimants estimated that, unless the trial court's decision was reversed or substantially modified on appeal, it could end up costing CNA between $100,000,000 and $250,000,000, or possibly more. Well, the trial court's decision has now been reversed in Continental Cas. Co. v. Employers Ins. Co. of Wausau, __ A.D.2d __, __ N.Y.S.2d __, 2008 WL 5396869, NY Slip Op 10227 (1st Dept, December 30, 2008). In a nutshell, the Appellate Division held that:
Mr. Clayburn and
Mr. Tamsett became involved in an altercation on a public sidewalk. While some
of the details surrounding the incident were disputed (namely, who initiated
each aspect of their physical contacts), it was undisputed that Tamsett pushed
Clayburn to the ground. When Clayburn got up, he advanced on Tamsett. Tamsett
grappled with Clayburn and held Clayburn in a bear hug. As they struggled, they
lost their balance and fell through the plate glass window of a nearby store.
Clayburn and Tamsett then sued Nationwide, seeking a declaration that the carrier was obligated to satisfy the judgment against Tamsett. In the declaratory judgment action, Nationwide argued that coverage was excluded by both the "intentional acts" exclusion and a separate exclusion for "criminal acts." The trial court held that Nationwide was obligated to satisfy the judgment. In Clayburn v. Nationwide Mut. Fire Ins. Co., 2009 NY Slip Op 00169 (3rd Dep't, January 15, 2009), the Appellate Division, Third Department, affirmed:
The basic facts of Simmons v. Dryden Mut. Ins. Co., 2009 NY Slip Op 50088(U) (Sup.Ct., RensselaerCo., January 21, 2009), were uncontroverted. The plaintiff insureds owned a multi-family rental property. They bought insurance for it from Dryden Mutual. On January 30, 2004, a city water main ruptured, leaking large quantities of water into the ground around the insured property. The massive amount of water caused a large area of ground to collapse into what would likely be considered by most people to constitute a "sinkhole." The erosion and sinkhole undermined the foundation of the house, causing a portion of the foundation to collapse. The water also infiltrated plaintiffs' basement, causing significant water damage. The declarations page of Dryden's policy expressly said it was a "special multi-peril" policy, and not an "all-risk" policy. The declarations page also expressly said that coverage was subject to specific enumerated forms and endorsements. Those forms provided insurance only for losses caused by specific enumerated perils: fire or lightning, removal, explosion, windstorm or hail, riot or civil commotion, aircraft, vehicles, smoke, vandalism, sinkhole collapse, and volcanic action. The policy also contained an exclusion for water damage caused by flood, surface water, waves, tides, tidal water or overflow of a body of water, water which backs up through sewers or drains, and water below the surface of the ground pressing on or flowing or seeping through foundations or basements. Shortly after plaintiffs notified defendant of their loss, defendant disclaimed coverage on the ground that water damage was excluded by the policy. After Simmons sued Dryden Mutual, both sides moved for summary judgment. In the decision cited above, the trial court denied plaintiffs' motion and granted only a small part of Dryden's motion:
An asbestos abatement subcontractor was hired to work on a City project. The City's bid package for the project provided that all asbestos abatement work "shall be governed by" certain terms and conditions, among which was a requirement to name the City as an additional insured. However, no such provision ever made it into the written subcontract between the City's general contractor and the abatement subcontractor. The abatement subcontractor was insured under a liability policy issued by American Alternative Ins. Corp. That policy afforded "additional insured" status to "any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy." The City claimed it was an additional insured under the subcontractor's policy, even though (a) there was no written contract or agreement between the City and the subcontractor and (b) the written subcontract between the subcontractor and the general contractor did not require the City to be named as an additional insured. The City argued that the abatement subcontract should be deemed subject to the requirements of the City's bid package, whether the subcontract actually included such provisions or not. A trial court rejected that argument. In Illinois National Ins. Co. v. American Alternative Ins. Corp., 2009 NY Slip Op 00308 (1st Dep't, January 22, 2009), the Appellate Division, First Department, unanimously affirmed the trial court: the City's bid documents did not constitute an agreement "in writing in a contract or agreement that [the City] be added as an additional insured on [the subcontractor's] policy." The City also argued that it was an additional insured because the subcontractor's broker had issued a certificate of insurance describing the City as an additional insured. That argument was summarily rejected for the usual reason: where, as here, a broker's certificate expressly says it "confers no rights on the certificate holder," then... it confers no rights on the certificate holder.
Last month I wrote about GuideOne Specialty Ins. Co. v. Admiral Ins. Co., 57 A.D.3d 611, 869 N.Y.S.2d 565 (2nd Dep't 2008), in which the Second Department rejected an argument that a letter from a liability carrier was, in effect, a modification of the policy. This month a federal district court rejected a similar argument in the context of disability insurance, in Dekel v. Unum Provident Corp., __ F.Supp.2d __, 2009 WL 144047 (E.D.N.Y, January 20, 2009). After issuing a disability policy to Dr. Dekel, the carrier sent him a "Specialty Letter," briefly describing a feature of his policy. The letter recited it was sent to the insured "to clarify what we mean in your policy by 'Your Occupation.'" Thereafter, Dekel submitted a claim for disability benefits under the policy. The carrier made disability payments for several months, but then declined to pay any more. Dekel sued. Dekel believed the Specialty Letter helped his position in the lawsuit and wanted to introduce it into evidence. Conversely, Unum did not much care for the Specialty Letter and moved in limine to exclude it from evidence. The court decided to exclude the Specialty Letter, because:
GuideOne Specialty Mut. Ins. Co. v. Congregation Adas Yereim, __ F.Supp.2d __, 2009 WL 143707 (E.D.N.Y., January 15, 2009), ought to be subtitled "Rescission: How to Waive It in One Easy Lesson." Omitting the details and bickering in the case, I'll just list the carrier's acts and omissions that ultimately led to waiver of its rescission claim:
So, not only did the insurer unreasonably delay making a rescission claim for seven months after it learned of the grounds for rescission, but it also did at least two things during those seven months that were inconsistent with an intent to rescind. The combination of all that was too much for the court, which held the carrier had waived any rescission claim it might have had.
That's all for now. Stay warm, everyone!
January, 2009
Happy 2009, everyone. Here is this month's round-up of recent case law and other developments.
KK&J owned commercial premises at 2912, 2914, and 2916 Third Avenue in the Bronx. In September, 2002, a fire broke out in 2916 Third Avenue, which was then occupied by a Burger King fast food joint. The fire was allegedly caused by KK&J's negligence in the course of preparing those premises for a new tenant. At the time of the fire, 2912 Third was occupied by a Footlocker store and 2914 Third was occupied by a Duane Reade drugstore. The fire eventually reduced 2912, 2914, and 2916 to rubble. As a result of the fire damage to its store at 2914 Third, Duane Reade received $2,785,910.51 from St. Paul, its commercial property carrier. St. Paul, as Duane Reade's subrogee, then sought to recoup that sum from KK&J. KK&J argued St. Paul's subrogation claim was barred by a waiver of subrogation provision in the lease between KK&J and Duane Reade. In response, St. Paul attacked the waiver of subrogation clause on a number of grounds; to wit:
In Footlocker, Inc. v. KK&J, LLC, 2008 WL 5206306, 2008 NY Slip Op 52502(U) (Sup.Ct., N.Y.Co., November 13, 2008), a trial court rejected each and every one of those arguments, and granted summary judgment in favor of KK&J. The court held (following the same numbering as above) that:
Federal Ins. Co. v. North Amer. Specialty Assur. Co., 2008 NY Slip Op 33349(U) (Sup.Ct., NY Co., December 5, 2008), presents a tangled web of facts, claims, and proceedings, culminating in summary judgment for an excess carrier that alleged bad faith against an underlying primary. It's a long story, which I will try to shorten a bit. Upon being hired to act as contractor for a construction project, Galaxy General Contracting Corp. purchased two insurance polices from Commercial Underwriters Ins. Corp. ("CUIC") and one from Federal. One CUIC policy provided Galaxy with primary insurance of up to $1 million per occurrence. The other CUIC policy provided the Owners of the site with primary insurance, also with a limit of $1 million per occurrence. Both CUIC policies insured against the same risks. The Federal policy provided Galaxy (but not the Owners) with excess insurance of up to $10 million per occurrence, once Galaxy's damages exceeded the primary coverage provided by its underlying $1 million CUIC policy. Rafael Bermejo, an employee of a subcontractor on the project, was injured at work and commenced an action against Galaxy and the Owners, alleging violations of Labor Law §§ 240 and 241(6) and common law negligence. CUIC undertook to defend Galaxy and the Owners, and assigned their defense to the same law firm. In February, 2002, Bermejo filed a note of issue indicating his case was ready for trial. In June, 2002, CUIC requested that another law firm ─ Rivkin Radler ─ defend Galaxy in the Bermejo action. Allegedly, the reason for assigning new counsel for Galaxy was that CUIC realized there was a conflict of interest between the Owners and Galaxy. In December, 2002, the Owners moved to amend their answers in the Bermejo action to add cross-claims for common law and contractual indemnification and breach of contract against Galaxy. At the same time, the Owners moved for summary judgment on their indemnity claims. Galaxy, through its new counsel, Rivkin, opposed the motion. By order dated March 18, 2003, the trial court in Bermejo allowed the amendment and awarded the Owners a conditional grant of summary judgment. That court determined that Galaxy, not the Owners, controlled and supervised Bermejo's work and that the Owners did not cause Bermejo's accident. Pursuant to the Labor Law, any liability for Bermejo's accident imputed to the Owners would necessarily be vicarious. Therefore, if a jury determined that the Owners owed Bermejo damages pursuant to the Labor Law statutes, Galaxy would have to indemnify the Owners. No one appealed. Shortly after that decision, Galaxy moved (through its counsel, Rivkin) to reargue or renew the Owners' motion on the ground that the antisubrogation rule barred Galaxy from indemnifying the Owners. The trial court denied that motion because Galaxy should have raised the antisubrogation argument in opposition to the Owners' earlier motion, but had not done so. The court found that Galaxy had no reasonable excuse for failing to raise the antisubrogation issue at the appropriate time. No one appealed from that determination, either. After some negotiations, Bermejo agreed to a $3 million settlement. Galaxy was the only defendant to enter into the settlement with Bermejo. The Owners' cross-claims against Galaxy were not settled. CUIC paid Bermejo $1 million, the limit of the primary policy it issued to Galaxy. Federal paid $2 million, pursuant to the excess policy it issued to Galaxy. According to Federal, it agreed with CUIC that: a settlement of $3 million was reasonable; if Bermejo's case were tried, the jury would find the owners and Galaxy liable under the Labor Law statutes; and the settlement was without prejudice to Federal's right to recover from CUIC. Federal decided not to oppose the settlement when it was made, but to recoup its alleged losses from CUIC in a later action. Federal then sued CUIC. The gist of Federal's complaint was that CUIC had manipulated the litigation in the Bermejo action, so the entire settlement was against Galaxy only. If the $3 million settlement had been against both the Owners and Galaxy, CUIC would have paid Bermejo $2 million: $1 million on behalf of Galaxy and $1 million on behalf of the Owners. Federal's excess coverage would then have applied to the extent of $1 million only. But, as the settlement involved Galaxy alone, CUIC had to pay only $1 million under Galaxy's policy and Federal had to pay $2 million under its excess coverage. Federal therefore sought to recover $1 million of the $2 million it had paid on behalf of Galaxy. Federal also alleged that CUIC failed to take any measures to avoid or limit Galaxy's liability to the Owners in the Bermejo action. For instance, Federal alleged that CUIC made no effort during discovery to find evidence that would contribute to Galaxy's defense. Federal argued that CUIC engaged in such practices during the time that the Owners and Galaxy had the same attorneys, as well as after Rivkin became Galaxy's counsel. Federal further alleged the settlement was unfair to Galaxy, because CUIC caused Galaxy to bear the entire brunt of the settlement. CUIC thus violated the antisubrogation rule, by acting against the interests of its insured, Galaxy. If Rivkin had asserted the antisubrogation rule at the proper time, the Owners' claims for indemnity against Galaxy would have been barred and the settlement would have included the Owners, along with Galaxy. Federal moved for summary judgment, and CUIC cross-moved to dismiss Federal's complaint on the basis that it failed to state a cause of action. The citation above is the trial court's decision disposing of those motions. The court began its analysis by considering the purposes of the antisubrogation doctrine:
The court then had to determine whether the facts alleged by Federal stated a cognizable claim:
The court then considered whether CUIC had offered any facts that might constitute a defense to Federal's claim:
In American Tr. Ins. Co. v. Rechev of Brooklyn, Inc., 2008 NY Slip Op 09639 (1st Dep't, December 9, 2008), the Appellate Division, First Department, upheld American Transit's disclaimer for late notice. Although American Transit's insured appears not to have given the carrier notice of anything, the claimant gave American Transit prompt notice of both the original occurrence and of her claim against the insured. The claimant eventually sued the insured, but neither she nor the insured gave prompt notice of that suit to American Transit. Instead, the claimant gave American Transit notice of the suit only after she had already secured an order for a default judgment against the insured. American Transit then disclaimed for late notice of the suit against its insured, so the claimant then sued the carrier. The majority's brief opinion notes that, because the late notice of suit had deprived American Transit of an opportunity to appear and interpose an answer for its insured (i.e., actual prejudice), its disclaimer was proper. A concurring opinion explains the court's reasoning in more detail: a carrier that has received timely notice of both an occurrence and of a claim resulting from that occurrence, will ordinarily not be permitted to disclaim for late notice of a later suit based on that same occurrence and claim, unless the carrier can demonstrate it suffered actual prejudice because of the late notice of suit. This is not really a new development; the First Department has been following that rule for at least the past year. Remember folks: a completely new late notice regime goes into effect in New York State on January 17, 2009, for all new and renewal policies incepting on or after that date.
In Chiang v. Public Service Mut. Ins. Co., 2008 WL 5137081 (Sup.Ct., Queens Co., December 4, 2008), Public Service Mutual issued a named-peril Dwelling Policy covering a three-family residential property owned by the plaintiff. The insured's property was damaged during excavation and construction work on an adjoining lot, due to a failure to provide proper shoring or bracing. The insured claimed the lack of shoring or bracing resulted in the cracking and collapse of a third of her driveway, plus cracking of the foundation and several interior walls and ceilings of the insured dwelling. The insured submitted a claim for the damages to her property. Public Service Mutual disclaimed coverage on the grounds that (a) “Earth Movement” was not a covered peril, but an excluded cause of loss, and (b) the loss claimed was not a collapse of a building resulting from a named peril. After the insured sued Public Service Mutual, both sides moved for summary judgment. In a section entitled "Other Coverages: Collapse,” the policy provided that the carrier “insure[s] for risk of direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following: * * * (f). use of defective material or methods in construction * * *if the collapse occurs during the course of the construction * * *.” However, “[l]oss to * * * pavement, * * * foundation, retaining wall, * * * is not included under items * * * (f) unless the loss is the direct result of the collapse of a building." “Collapse” was also specifically defined as not including settling, cracking, shrinkage, bulging or expansion. The insured argued two ambiguities existed in that section. First, she maintained the term "collapse" was ambiguous, because New York courts have found a “substantial impairment of the structural integrity of the building” to constitute a "collapse" without the need for the building to actually fall down. The second ambiguity she asserted is that the policy did not specify where the defective construction (an expressly identified cause of a collapse) had to take place for coverage to apply; i.e., whether it had to take place on the insured premises, or could take place off the insured premises. The court found no ambiguity in the term collapse in this case. Even if the undefined word collapse might sometimes be ambiguous in the abstract, here the policy specifically defined it as not including "settling, cracking, shrinkage, bulging, or expansion," which were the only kinds of damage alleged to have occurred to the insured building. Even deeming the term collapse to be ambiguous and accepting plaintiff's argument that a substantial impairment of a building's structural integrity can constitute a "collapse," here there was no evidence of such an impairment. As to the damage to the driveway, that was not covered because the "Other Coverage: Collapse" applied to only the collapse of "a building or any part of a building," and the driveway was neither of those. Moreover, the policy expressly excluded loss to pavement unless directly caused by "the collapse of a building," which was not what caused the driveway damage in this case. Since the court determined the plaintiff's property did not sustain a collapse within the meaning of the policy, the issue of whether an ambiguity existed as to the location of the construction which causes a collapse was irrelevant. Final result: plaintiff loses, carrier's motion for summary judgment is granted. My thanks to reader Michael Savett, Esq. (of Weber Gallagher Simpson Stapleton Fires & Newby LLP, in Philadelphia), for sending me a copy of this decision.
In 2002, a construction company contracted to build an addition to a private school's building. As required by the construction contract, the contractor had the school named as an additional insured under the contractor's liability policy (issued by Admiral Ins. Co.). However, although the construction contract required the "additional insured" coverage to be for no less than $2M/person and $5M/occurrence, the actual limits of the Admiral policy were for only $1M per person and occurrence. Meanwhile, the school also had its own separate coverage under a policy issued by GuideOne Specialty Ins. Co. In September, 2003, a construction worker was injured while working on the project, and eventually sued the school. In a letter dated October 10, 2005, GuideOne asked Admiral's claims superintendent for an assurance that Admiral would provide a "full defense and indemnification" to the school in that suit. GuideOne asked Admiral's claims superintendent to sign a copy of that letter and return it. The letter contained the following sentence: "[A]dmiral is providing [the school] with a full defense and indemnification in this matter." Before signing and returning the letter, Admiral's claims supervisor amended that sentence by hand, so it read: "[A]dmiral is providing [the school] with a full defense and indemnification in this matter, as it conforms with the contract between [the contractor and the school]." After Admiral returned the amended letter to GuideOne, the injured worker settled his claim for $1.225 million; i.e., $225,000 in excess of Admiral's applicable limit. Admiral paid its $1M and GuideOne paid the balance of the settlement. GuideOne then sued Admiral (and unidentified others). Against Admiral, GuideOne argued that the letter signed by Admiral's claims supervisor was, in effect, a written modification by Admiral of the limits of its own policy, to make it conform to the higher limits required by the construction contract. Admiral moved to dismiss the complaint, arguing that it failed to state a cause of action and, even if it did state a cause of action, that Admiral had a complete defense founded on documentary evidence. The trial court denied Admiral's motion to dismiss, so Admiral appealed. In GuideOne Specialty Ins. Co. v. Admiral Ins. Co., __ A.D.2d __, __ N.Y.S.2d __, 2008 NY Slip Op 09751, 2008 WL 5174774 (2nd Dep't 2008), the Appellate Division, Second Department, reversed the trial court and dismissed GuideOne's complaint against Admiral. Here's the money quote:
I'll bet that's the last time that claims supervisor signs-off on such a "Trojan horse" letter. If and when a carrier wants to acknowledge a duty to defend and indemnify, there are tried and true ways to do so; ways that neither expand coverage nor create grounds for a new lawsuit.
On 11/18/03, Carmelo Mazarese rented a car from Enterprise Rent-A-Car. He intended to use the rented car as a replacement vehicle while his regular car was in in the shop. The rental agreement provided that Mazarese (a) was the only authorized driver of the rental car and (b) was to return the car to Enterprise by 12/18/03. On 1/12/04, the rental car was involved in an accident while being driven by Lisa Martinez (Mazarese's cousin). Even though Martinez had borrowed the car with Mazarese's permission, she was not an authorized driver under the rental agreement. Mazarese returned the car to Enterprise the day after the accident. A child injured in the accident then sued Martinez, Mazarese, and Enterprise. Enterprise eventually settled that suit by paying $1.1 million on behalf of itself and Mazarese. After the settlement, Enterprise sued Mazarese, Martinez, and GE Capital Insurance Company. Enterprise sought, among other things, a declaration that Mazarese was covered for the accident under an auto insurance policy issued by GE to Mazarese's mother, and that GE should therefore reimburse Enterprise for some part of the settlement. Enterprise argued that GE covered Mazarese for the accident under the non-owned auto coverage provision of its policy. That provision stated, "[a]ny relative of [the named insured] who resides in your household is also protected when using a nonowned auto provided that ... [t]he relative is using the nonowned auto with the owner's permission and for the purpose the owner intended." The policy defined "nonowned auto" as an auto that is "not owned by or registered to the [named insured] or a resident of your household; and is not furnished or available to [the named insured] or any resident of your household for regular use." The policy defined "use" of an auto as "owning, operating, loading, unloading and maintaining the auto." When Enterprise and GE made reciprocal motions for summary judgment, the trial court denied GE's motion, but granted Enterprise's motion to the extent of holding that Mazarese was covered for the accident under his mother's policy from GE, because his having lent the car to his cousin . On appeal, the Second Department reversed. Elrac, Inc. v. GE Capital Ins. Co., 2008 NY Slip Op 10120 (2nd Dep't, December 23, 2008). The appellate court noted the purpose of a provision affording coverage for a non-owned vehicle ─ a vehicle not for the regular use of an insured ─ is to protect the insured for the occasional or infrequent use of a vehicle not owned by him; i.e., it is not intended as a substitute for insurance on vehicles furnished for the insured's regular use. A policy's exclusion of coverage under certain conditions for a relative residing with an insured when using a non-owned auto was designed to protect the carrier from being subjected to greatly added risk without the payment of additional premiums. In determining whether a non-owned auto has been furnished for "regular use," two important criteria are (a) the car's general availability for the relative's use and (b) the frequency with which he actually uses it. In this case, the evidence showed that Mazarese rented the car from Enterprise as a temporary replacement for his regular car. He kept the rental car for a total of fifty-five days, during which it was always available for his use. During that period he used it daily, just as if it were his regular car. Accordingly, the appellate court held the rental car in this case did not meet the definition of a "nonowned vehicle" under the GE policy, because it was "furnished or available to [Mazarese] for regular use." The Appellate Division also rejected the trial court's holding that Mazarese, by lending the car to his cousin, was "maintaining" it. "Maintaining" refers to the performance of work on an intrinsic part of a car's mechanism and its overall function; it does not mean entrusting the car to another. Accordingly, there was no coverage for the accident under GE's policy.
In Circular Letter No. 27 (2008), issued on November 21, the Department expressed its position on coverage for same-sex couples who have been married in jurisdictions where such marriages are legal. In a nutshell, the Department's view is that a marriage that is lawful at the place where it was performed should be recognized as lawful (for coverage purposes) in New York. The specific case that spurred the issuance of this Circular Letter involved a woman (a New York resident) who had recently been married to another woman in Ontario, where such marriages are lawful. When she sought to add her new spouse to her employer-sponsored group health insurance, the carrier declined to comply because same-sex marriages are not lawful in New York. The Department's Office of General Counsel issued a lengthy opinion (OGC Op. No. 08-11-05), concluding that parties to same-sex marriages validly performed outside of New York must be treated as "spouses" for purposes of the New York Insurance Law, including all provisions governing health insurance. The Department's Circular Letter apparently applies that view to all licensees, in all lines of insurance in which rights or duties can turn on whether one is "married," a "spouse," a "relative," a "member of your family," or anything similar.
If you Google the words profligate, corrupt, self-serving, irresponsible, power-mad, insatiable, self-perpetuating, dysfunctional, cronyism, and kleptocracy, you might wind up with a lot of links to New York State government. Continuing what appears to be a decades-long policy of driving people and businesses to other states and countries, while systematically impoverishing those who remain here, our new Governor has proposed closing the state's budget shortfall by hiking taxes on insurance policies (along with new or higher taxes on just about everything else you can think of). Yes, that should help a lot. Happy new year everybody!
December, 2008
Continental Cas. Co. v. Employers Ins. Co. of Wausau, __ N.Y.S.2d __, 2008 WL 4587262 (Sup.Ct., N.Y. Co., October 14, 2008), decides one facet of a much larger and more complicated declaratory judgment class action concerning insurance coverage for the liabilities of Robert A. Keasbey Company (a now-defunct asbestos insulation company) in more than ten thousand underlying asbestos personal injury cases. The main issue addressed in this decision was how to allocate defense and indemnity between two insurers, one of which (Continental) was paying to defend the claims against Keasbey and the other of which (OneBeacon) was not. At the risk of grossly over-simplifying the court's decision, here is a brief summary of what it eventually determined:
In Mirabelli v. Merchants Ins. Co. of New Hampshire, __ N.Y.S.2d __, 2008 NY Slip Op. 08302, 2008 WL 4742649 (2nd Dep't, October 28, 2008), a first-party property carrier denied coverage for a fire loss because the insured failed to comply with (a) a policy provision requiring a particular type of fire alarm at the property and (b) the policy's cooperation clause. The trial court granted summary judgment to the carrier and, in the decision cited above, the Appellate Division affirmed. Unfortunately, the decision does not state any of the facts or relevant policy language. From a policy-drafting standpoint, it would be interesting to know exactly where in the policy, and in what specific language, the fire alarm requirement was stated. It would also be nice to know exactly what the insured did, or failed to do, that constituted a breach of the cooperation clause. Alas, the Appellate Division writes opinions to decide cases, not to satisfy our intellectual curiosity.
Briarwood Farms, Inc. v. Central Mut. Ins. Co., 2008 NY Slip Op. 28435 (Sup.Ct., Orange Co., October 29, 2008), turned on dueling "other insurance" clauses and the meaning of the word primary, as in the phrase "primary insurance." The dispute arose out of a construction accident in which a subcontractor was killed while working on a project owned by Briarwood Farms, Inc. Briarwood and its CGL carrier (Indian Harbor Ins. Co.) settled the resulting wrongful death action. Although Briarwood was also an additional insured under a Central Mutual CGL policy issued to the subcontractor, Central Mutual did not pay any part of the settlement. Briarwood then sued Central Mutual, seeking to force Central Mutual to reimburse all of the defense costs and all of the wrongful death settlement. Central Mutual objected to paying any part of either defense costs or the settlement because, in its view, its coverage of Briarwood Farms as an additional insured applied only in excess of Briarwood's own CGL coverage from Indian Harbor. Central Mutual based that view on a provision in its policy, saying the additional insured coverage would be "excess over any other valid and collectible insurance available to the additional insured whether primary, excess, contingent or any other basis unless a contract specifically requires that the insurance be primary or you request that it apply on a primary basis." The court held that, absent a showing that Briarwood Farms had actually sought excess coverage rather than primary coverage, the construction contract calling for coverage of the owner as an additional insured would be deemed to require the subcontractor to provide primary coverage. By agreeing to add the owner as an additional insured pursuant to such a contract, the subcontractor's carrier would be deemed to have agreed to afford primary coverage for the additional insured, not excess coverage. In this case, then, the Central Mutual additional insured coverage was deemed to be primary coverage. However, that was not the end of the matter. Saying the additional insured coverage was "primary" did not mean it was "most primary," or "more primary" than any other primary coverage. Saying the additional insured coverage was "primary" meant only that it was primary insurance as opposed to excess insurance. It did not mean the Central Mutual additional insured coverage necessarily applied ─ and had to pay ─ before the Indian Harbor coverage. To determine the priority of coverage between the Indian Harbor (owner's) and Central Mutual (subcontractor's) policies, the court still had to compare the respective business purposes, premiums, and "other insurance" clauses of the two policies. Having done so, the court concluded Indian Harbor and Central Mutual were co-insurers, each of which had to bear a share of defense costs and indemnity.
In 426-428 W. 46th St. Owners, Inc. v. Greater N.Y. Mut. Ins. Co., 2008 NY Slip Op. 08257 (1st Dep't, October 30, 2008), the insured was the owner of rental premises. The insured failed to give its carrier notice of a tenant's slip-&-fall. Ten months later, the tenant sued. Then the insured gave first notice to its carrier, and the carrier disclaimed for late notice of the occurrence. The insured sued for a declaration of coverage and the carrier moved for summary judgment. To oppose the carrier's motion for summary judgment, the insured offered evidence of a reasonable excuse for its late notice, i.e., a reasonable belief in non-liability:
Result: the carrier's motion for summary judgment was denied. In the decision cited above, the Appellate Division affirmed the trial court's denial of the motion. The reasonableness of the insured's excuse for the late notice will now have to be decided by a trial.
Picone v. Great Northern Ins. Co., 2008 NY Slip Op. 33029(U) (Sup.Ct., Suffolk Co., November 3, 2008), provides a cautionary tale of what can happen to an insured that tries to insure multiple business and personal risks through an uncoordinated gaggle of policies from different carriers. Mr. Picone apparently owns a group of separate properties in Suffolk County. One is the location of the family residence. Others are the locations of Picone's businesses. At least one is vacant, undeveloped land. At least one of these properties he owns in his own name; others are in the name of one or another business owned or controlled by him. In 2005, a guest was injured on a vacant, undeveloped parcel owned by one of Picone's businesses. The guest was injured while riding as a passenger on an ATV. The ATV was owned by another of Picone's businesses, but was driven by Picone's son at the time of the accident. Picone notified numerous carriers of the accident. All of the carriers disclaimed coverage, so Picone and two of his businesses ended up suing five different carriers and three different brokers. As regards the carriers, Picone sought declarations of coverage. As regards the brokers, Picone alleged breaches of fiduciary duty and negligence. When one of the brokers moved to dismiss the complaint as to himself, four of the five insurers joined in with cross-motions to dismiss the complaint as to each of them, too. The broker moved to dismiss because Picone's complaint alleged no facts or special circumstances that would create a fiduciary duty, or that would obligate the broker to do anything other than comply with its ordinary common law duty to place the coverage sought by the insured or promptly notify the insured that it could not do so. Apparently foreseeing his complaint would be dismissed as to the broker, Picone sought leave to replead and allege additional facts. In support of that application, Picone alleged the broker had affirmatively advised him to cancel his pre-existing coverage for the ATV involved in the accident, because it was duplicative of other coverage. Picone said he had relied on that advice and cancelled his ATV coverage before the accident. Accepting those claims as true for the purpose of a motion to dismiss, the court permitted Picone to amend his complaint to allege them. As regards the carriers' motions to dismiss, Picone was less successful:
Mr. Picone is apparently a successful businessman: he has multiple businesses, operating at multiple locations and kinds of locations. However, his business and personal risks are confusingly intermingled (e.g., an ATV owned by one Picone business is in an accident on premises owned by another Picone business, while being driven by Picone's son), and those intermingled risks are insured by a patchwork of different kinds of policies, issued by multiple carriers and apparently placed by up to three different brokers. In other words, he has a collection of insurance policies, but not a coordinated insurance program. He needs a risk manager.
While filling-up the gas tank of his mother's car, Harold Hammond accidentally spilled some gas on his clothing. He then went inside the gas station and bought a pack of cigarettes. (You can already see where this story is going, right?) After buying the cigarettes, Hammond got back in the car (as a passenger) and the car drove away from the gas station. When he tried to light a cigarette, Hammond's clothes went up in flames and he suffered severe burns. He applied to his mother's personal auto carrier for no-fault benefits, but the carrier denied coverage on the ground that Hammond's injuries did not "arise out of the use or operation of a motor vehicle." From the carrier's viewpoint, nothing about the use or operation of the car caused the burns; Harold would have been burned even if he had not got back into the car, but had just stood there and watched it being driven away. Hammond sued the carrier. After discovery was complete, Hammond moved for summary judgment and the carrier cross-moved for a declaration that it owed no coverage. The trial court denied Hammond's motion, but granted the carrier's cross-motion. So, who's right? That was the question for the Appellate Division in Hammond v. GMAC Ins. Group, 2008 NY Slip Op. 08396 (3rd Dep't, November 6, 2008). In the decision cited above, the Third Department affirmed the trial court's determination that the carrier owed no coverage because Hammond's injuries did not "arise from the use or operation of a motor vehicle." I'm not a "no-fault guy," nor even a "personal auto guy," but isn't filling a car's gas tank an essential part of its "use or operation"? Apparently not for no-fault purposes; not in the Third Department, anyway. I sure wish I had a car like that.
In Board of Hudson River-Black River Regulating District v. Praetorian Ins. Co., 2008 NY Slip Op. 08586 (3rd Dep't, November 13, 2008), the insured (a governmental body) received a notice of claim from a lady who claimed to have been injured on land controlled and maintained by the insured. The insured did not report either the notice of claim or the underlying occurrence to its liability insurer. A year later, the lady sued. Only then did the insured notify its carrier. The carrier promptly disclaimed coverage because of the insured's late notice of both the occurrence and the notice of claim. The insured sued for a declaration of coverage. When both sides moved for summary judgment, the trial court granted summary judgment in favor of the carrier. In the decision cited above, the Third Department affirmed the trial court's decision. The insured's one-year delay in giving notice was unreasonable as a matter of law. The only excuse offered by the insured was a statement to the effect that its general counsel "should have" forwarded the notice of claim to the carrier, and it had assumed [incorrectly] that the general counsel had done so. Sorry, Mr. Insured, but you lose: your general counsel's neglect or inadvertence may have been the reason for your late notice, but it is not an excuse for it.
The coverage dispute in Pav-Lak Indus., Inc. v. Arch Ins. Co., 2008 NY Slip Op. 08528 (1st Dep't, November 13, 2008), arose from a construction accident. Pav-Lak was the general contractor on a construction project. As GC, Pav-Lak contracted for B&J Steel to do the steel fabrication and erection. B&J, in turn, subcontracted the steel erection work to Ranger Steel Corp. Pav-Lak was insured by a Zurich policy. B&J was insured under an Arch policy. The Arch policy contained a Blanket Additional Insured endorsement that included Pav-Lak as an additional insured. However, the Arch policy also contained a separate exclusion that excluded coverage for any claim or suit arising out of the operations of Ranger Steel ─ the very sub that was doing the steel erection work for B&J. The Arch policy also contained an endorsement providing for a $1 million deductible. A Ranger Steel employee was injured in the course of the work. The injured worker sued Pav-Lak (among others). Pav-Lak notified Zurich of the suit. Zurich tendered the suit to Arch for defense and indemnification. Zurich's letter tendering the suit to Arch expressly identified the plaintiff in the suit as "an employee of... Ranger Steel." Forty-five days after Arch received that letter, it issued a written disclaimer of coverage based on its policy's "Ranger Steel exclusion." Pav-Lak and Zurich then brought a declaratory judgment against Arch, seeking a declaration that Arch owed a duty to defend Pav-Lak as an additional insured. The trial court agreed with Arch that its "Ranger Steel" exclusion applied and excluded any possibility of coverage for the suit. On appeal, the First Department reversed, holding that Arch's disclaimer ─ issued forty-five days after Arch first learned of the suit ─ was untimely as a matter of law. The grounds for disclaiming were apparent from the face of Zurich's tender letter and, in the court's view, there was simply no reason for Arch to have taken so long to disclaim. Moreover, because the construction contract between B&J and Pav-Lak expressly provided that B&J's coverage was to be primary and Pav-Lak's coverage would apply only in excess of B&J's, the court held the Zurich policy should apply to the suit only in excess of Arch's applicable limit. Pav-Lak and Zurich also argued that, because Arch had not specifically asserted the $1 million deductible in its disclaimer letter, that amounted to a waiver of the deductible as well. Here, the Appellate Division disagreed with Pav-Lak and Zurich. Arch's deductible provision was neither an exclusion nor a bar to coverage; rather, it was simply a deductible (albeit a very large one) and Arch did not waive it by failing to assert it in its disclaimer.
In Geico Indem. v. Roth, 2008 NY Slip Op. 08946 (4th Dep't, November 14, 2008), Geico argued it had no obligation to defend or indemnify its insured in an underlying car accident case, because it had cancelled the policy before the accident. Geico was able to demonstrate that it had strictly complied with all the requisite formalities for an effective cancellation. In response, the insured failed to come up with any evidence to the contrary. Instead, the insured testified only that he did not recall having received the notice of cancellation. Sorry, but that's not enough: once an insurer has shown strict compliance with the requisite formalities for an effective cancellation, the insured is presumed to have received the notice of cancellation. To avoid that presumption, the insured has to come up with evidence that the formalities were not complied with. A statement to the effect of, "Gee, I don't remember having got the cancellation notice," is just not enough.
Nationwide Mut. Ins. Co. v. Posa, NY Slip Op. 08791 (4th Dep't, November 14, 2008), arose from a claim for bodily injuries sustained in a car accident. Kathleen Baughman claimed she was injured in a collision between her car and a pickup truck owned and driven by Robert Posa. Posa left the scene of the accident without identifying himself. Later, he submitted a property damage claim to his own auto carrier (Nationwide), claiming he had damaged his truck by accidentally driving into it with his garden tractor. Poor Mr. Posa: a former girlfriend snitched on him and turned him in to the police. Once she knew whom to sue, Baughman sued Posa. Posa eventually pleaded guilty to leaving the scene of an accident. When Nationwide learned of all this, it promptly disclaimed any duty to defend or indemnify Posa in connection with Baughman's suit. Nationwide also sued for a declaration to that effect. In the cited decision, the Appellate Division, Fourth Department, held Nationwide had no duty to defend or indemnify: Posa's failure to make fair and truthful disclosures in reporting the accident constituted a breach of the cooperation clause, and of the fraud and misrepresentation clause, of Nationwide's policy as a matter of law.
Mr. Prave sued Mr. Henderson, alleging that he [Prave] had been injured when Henderson negligently struck him with a car door. (Henderson was exiting the car at the time and somehow managed to hit Prave with the driver's side door while getting out of the car.) Henderson tendered the Prave suit to his personal auto carrier, New York Central Mutual, but the carrier disclaimed any duty to defend or indemnify. Why? Because its policy promised coverage only for damages "for which any 'insured' becomes legally responsible because of an automobile accident" and, according to the carrier, hitting someone with a car door while getting out of the car is just not an "automobile accident." The Hendersons sued their carrier. A trial court agreed with the carrier that it had no duty to defend or to indemnify, so the Hendersons appealed. In Henderson v. New York Central Mut. Fire Ins. Co., 2008 NY Slip Op. 08790 (4th Dep't, November 14, 2008), the Appellate Division reversed. The policy did not attempt to define the phrase "automobile accident," so the meaning of that phrase was unclear. However, New York statute requires personal auto policies to cover liability for bodily injury resulting from negligence in the use or operation of a motor vehicle, and Henderson's act of opening his car door was clearly part of such use or operation. Therefore, the underlying Prave action alleged facts suggesting at least a possibility of coverage, sufficient to trigger a duty to defend. The Appellate Division also noted it was premature to decide whether there was a duty to indemnify; rather, that determination should abide the results of the Prave action. It's interesting to contrast this case with Hammond v. GMAC Ins. Group, 2008 NY Slip Op. 08396 (3rd Dep't, November 6, 2008), summarized a few bullet-points above. Some eager law student could write a law review article on why opening a car door is "use or operation" in the Fourth Department, but putting gas in the tank is not "use or operation" in the Third Department. (That such a question even occurs to me tells me I have been practicing law for far too long.)
Back in March, 2008, I wrote about Briggs Avenue L.L.C. v. Ins. Corp. of Hannover, in which an insured failed to notify the Secretary of State of a change in its mailing address. (The insured, like most forms of business organization doing business in New York, was required by statute to notify the Secretary of such address changes.) When a suit against the insured was commenced by service of papers on the Secretary of State, the Secretary forwarded the suit papers to the insured's old mailing address. The delivery of the suit papers to an incorrect address meant the insured's carrier did not receive notice of the suit until eight months after commencement. By that time, the plaintiff's motion for a default judgment was already pending. The carrier disclaimed coverage because of the late notice of suit, so the insured sued for a declaration of coverage. The key dispute was when the insured's notice obligation arose under the circumstances of this case: when the suit was begun by service on the Secretary of State, or when the insured finally learned of it some eight months later? The case eventually got to the U.S. Court of Appeals for the Second Circuit, which noted there was a split on this question among lower courts, with the result seeming to turn on the precise wording of each policy's notice provisions. Since New York law applied, and New York's highest court had never ruled on the issue, the Second Circuit certified the question to the New York State Court of Appeals. Just in case the state Court of Appeals rejected the certification (or perhaps to encourage the state court not to reject it), the Second Circuit noted that, if it were to decide the issue on its own, it would hold the insured's notice obligation had been triggered when the Secretary of State received notice of the suit, regardless of when the insured itself received notice. Well, the NYS Court of Appeals accepted the certification and, on November 20, answered the certified question in Briggs Ave. LLC v. Ins. Corp. of Hannover, 2008 NY Slip Op. 09004 (November 20, 2008). The first sentence of the Court's decision says it all: "We hold that a liability insurer is entitled to disclaim coverage when the insured, because of its own error in failing to update the address it had listed with the Secretary of State, did not comply with a policy condition requiring timely notice of a lawsuit." The main reason the Court identified for coming out this way was that the insured's delay in learning of the suit (and the resulting delay in notice to the carrier) was entirely the insured's own fault: it was required by statute to notify the Secretary of any change in its mailing address, precisely so the Secretary would know where to forward legal documents. Only the insured's failure to comply with that requirement had prevented its timely receipt of the suit papers. The Court's decision acknowledges that, because of recent statutory changes, New York's current common law late notice rules will become history as of January 17, 2009. In the interim, however, the Court sees no reason to depart from the current common law rules in this case.
Back in July, 2007, I wrote about Rodless Props., L.P. v. Westchester Fine Ins. Co., 40 A.D.3d 253, 2007 N.Y. Slip Op. 03835 (1st Dep't. 2007), in which the First Department had to interpret the word executed in the context of an endorsement affording coverage for an additional insured "as required by contract, provided the contract is executed prior to loss." In the particular circumstances of that case, the Appellate Division observed the word executed, when used to modify the word contract, could have two alternative meanings, either of which would be reasonable. That is, one could reasonably understand executed to mean either (a) "signed" or (b) "fully performed." Under the facts of that case, the two different possible meanings did not make the endorsement's requirement of an "executed" contract ambiguous: the contract involved in the case was oral and had not been fully performed, so it did not qualify as an "executed" contract under either meaning and there was therefore no coverage under the endorsement. Now, a trial court in the Second Department has just revisited the meaning of executed contract in Burlington Ins. Co. v. Utica First Ins. Co., 2008 NY Slip Op 33075(U) (Sup.Ct., Nassau Co., November 10, 2008), and employed different reasoning to reach a different result. Manlyn Development Corp. (insured by Burlington) was the construction manager for the renovation of a commercial building. Manlyn subcontracted the drywall and ceiling work to New York Interiors (insured by Utica First). The subcontract was in the form of a purchase order issued by Manlyn. The following sequence of events occurred:
The injured pedestrian sued Manlyn and New York Interiors. Manlyn and Burlington asked Utica First to defend and indemnify Manlyn. Utica First declined to do so, because its policy afforded additional insured coverage only if New York Interiors was required to name Manlyn as an additional insured under a written contract "executed prior to the bodily injury...." Here, the written contract was not signed by Manlyn until almost two weeks after the injury had occurred, and was not executed by New York Interiors until three weeks after the injury had occurred. Burlington therefore defended Manlyn. After the pedestrian's case had been settled, Burlington and Manlyn sued Utica First, seeking a declaration that Utica First had been obligated to defend Manlyn and should reimburse Burlington for its defense costs and what it paid to settle the claim. Eventually, both sides moved for summary judgment. The trial court could have followed the First Department's decision in Rodless Props., L.P. v. Westchester Fine Ins. Co. Instead, it charted a new and different course. The court found a third meaning for executed: "to perform all the necessary formalities [to make a contract], as to make and sign the contract." Reading executed as if it meant made, the court observed that many contracts are made ─ become legally binding agreements ─ without any signature, and even without any writing. In this case, the subcontract was made in that sense no later than when New York Interiors began its work. Moreover, the court observed that the fundamental purpose of the "executed prior to the bodily injury" language in Utica First's policy was to prevent a fraudulent scheme in which the contractors collude to name one of them as an additional insured after an accident has occurred. So, in the court's view, if there is no evidence of fraud, a writing memorializing a prior agreement to name an additional insured ought to qualify for additional insured coverage, so long as it is eventually signed "within a reasonable time after the loss." In this case, the "unusual chronology of the documents" and gaps in the evidence (e.g., there was no indication when the certificate of insurance had been tendered to Manlyn) led the court to conclude there was a triable issue of fact as to whether New York Interiors had fraudulently agreed to name Manlyn as an additional insured after the fact. Accordingly, both sides' motions for summary judgment were denied. If appealed, this case will go to the Second Department, not the First. It will be interesting to see what the Second Department makes of it.
Speaking of the Second Department, its decision in Antoine v. City of New York, 2008 NY Slip Op 09010 (2nd Dep't, November 18, 2008), is a wonderful example of what I call the Humpty Dumpty School of insurance policy interpretation. Why Humpty Dumpty? In Through the Looking-Glass, it was Humpty Dumpty who said, in a rather scornful tone, "When I use a word, it means just what I choose it to mean, neither more nor less." Carroll, Lewis, Through the Looking-Glass and What Alice Found There, ch. 6 (1871). Ocpard Realty was insured under a liability policy issued by American Safety Indemnity Co. Marie Antoine was allegedly injured when she tripped and fell on a defective public sidewalk abutting Ocpard's premises in New York City. Antoine sued Ocpard because, under the City's Administrative Code, a property owner is responsible for maintaining abutting sidewalks and is liable for its failure to do so. Because a New York City property owner is responsible for abutting sidewalks, courts hold the owner's premises liability insurance also applies to those abutting sidewalks by implication, whether the policy specifically says so or not. The American Safety policy that applied to Ocpard's premises (and, by judicial implication, to the abutting sidewalk where Antoine fell) contained a provision under which the insured warranted that the "insured premises, including but not limited to all buildings, structures and parking lots, are in compliance with all federal, national, state and local codes and/or requirements as respects fire, life safety..., building construction and building maintenance." American Safety eventually learned that, when it had issued its policy, there were already outstanding citations against Ocpard relating to trip hazards on the very sidewalk where Antoine would later be injured. Those violations remained uncured, up to and including when Antoine tripped and fell because of one of those very trip hazards. Therefore, American Safety denied coverage because of Ocpard's breach of the policy warranty. Ocpard then sued American Safety. Eventually, the coverage dispute wended its way to the Second Department, which held that (a) even though sidewalks were not mentioned in the policy's insuring agreement, the word premises in the insuring agreement extended coverage, by implication, to the abutting public sidewalk, but (b) the word premises in the policy's warranty provision did not encompass sidewalks, because it did not specifically mention sidewalks. So, even though the carrier obviously intended the scope of the warranty to be coextensive with the scope of the insured premises, the court nevertheless interpreted the word premises to mean two different things in the same insurance policy. That is contra proferentem with a vengeance!
Since at least 1963, Second Department case law has been to the effect that the unmodified word relative or relatives in an insurance policy (e.g., "your relatives," "a relative who resides in the insured premises," etc.) is inherently ambiguous, because it could reasonably be understood either to refer only to blood relatives, or to encompass in-laws. Since relative was inherently ambiguous, it has normally been accorded whatever reasonable meaning works best for the insured in a particular case. That's changed now, with the Second Department's decision in Smith v. State Farm Fire & Cas. Co., 2008 NY Slip Op 09064 (2nd Dep't, November 18, 2008). The decision is almost cryptically brief regarding the facts, but this much is clear: Andrea Smith was the daughter-in-law of Leonard Smith. Claiming to have suffered some kind of injury while a resident in his household, she sued him. She eventually obtained a judgment against him, but he had died by then and the administrator of his estate either could not or would not satisfy the judgment. She therefore sued State Farm ─ her father-in-law's homeowner's carrier ─ to recover on the judgment. State Farm defended on the basis that its policy excluded coverage for bodily injury to one who was a resident "relative" when the injury occurred. Giving no particular reason for its decision, the Second Department held the exclusion applied to the daughter-in-law because she resided in the Named Insured's home at the time of the incident and was therefore a resident "relative." The court expressly holds that its prior decisions (i.e., on the ambiguity of whether relative encompasses in-laws) should not be followed in the future.
Under New York law, an insurer wishing to disclaim for an insured's breach of a cooperation clause is often caught on the horns of a dilemma, or what some refer to as a "Catch-22 situation." The first horn of the dilemma is that the insurer bears a heavy burden of proving the insured's non-cooperation. It is not enough to show that the insured failed to cooperate in some way. Rather, the insurer must be able to prove (a) that the insured displayed an attitude of willful refusal to cooperate, sufficient to show an avowed intent to obstruct or frustrate the defense of the claim or suit, (b) that the insurer made exhaustive, targeted efforts to secure the insured's cooperation, and (c) that, despite the insurer's having made such efforts, the insured still refused to cooperate and further efforts would be futile. The second horn of the dilemma is that, if the claim or suit is based on a death or bodily injury that occurred in New York, the insurer has to issue a written disclaimer "as soon as is reasonably possible" under Insurance Law § 3420(d). So, if the carrier jumps the gun and disclaims too soon, the carrier faces a risk that a court may find it has not satisfied its heavy burden of proving the insured's non-cooperation. But, if the carrier waits to disclaim until it has amassed overwhelming evidence of non-cooperation, a court may find it waited too long and its disclaimer was untimely. In Continental Cas. Co. v. Stradford, 2008 NY Slip Op 09256 (Ct.App., November 25, 2008), Continental insured Terrance Stradford, a dentist, under a professional liability policy. The policy contained a cooperation clause that required Stradford to "fully cooperate" in the defense and settlement of claims and suits. Such cooperation was specifically to include such matters as attending hearings and trials, giving and securing evidence, and obtaining the attendance of witnesses. Stradford was sued in two related dental malpractice actions. Over the next six years, Stradford cooperated only sparsely and sporadically with Continental's efforts to defend the suits. He typically ignored correspondence, telephone calls, and requests for documents; failed to show up for meetings with defense counsel; repeatedly failed to attend his own deposition; failed to execute documents; and so forth. Every once in a while, though, Stradford would acknowledge his duty to cooperate and promise to comply with it in the future. His promises were empty ones, however. Finally, Continental got fed up with Stradford: on July 8, 2004, it mailed him two detailed letters (one for each suit), reviewing his history of noncompliance, evasion, and broken commitments. The letters demanded that Stradford schedule a meeting with his defense counsel on or before August 13 and warned that further non-cooperation could imperil his coverage. On August 11, both letters were returned to Continental marked "unclaimed." Two months later, on October 13, Continental issued a written disclaimer in each suit. Two days later, on October 15, it commenced a declaratory judgment action, seeking a declaration that it had no further duty to defend or indemnify Stradford. Stradford never appeared in the d.j. action. However, the plaintiffs in the two underlying dental malpractice cases appeared and opposed Continental's request for a declaratory judgment. Both sides moved for summary judgment. The trial court granted Continental's motion and denied the motion by the dental malpractice plaintiffs. On appeal, the Second Department reversed. The Second Department unanimously agreed that Continental had carried its burden of proving Stradford's non-cooperation. However, a 3-2 majority of the court held that Continental had had clear grounds to disclaim when its letters were returned to it on August 11 and, because Continental had then taken an additional two months to issue its disclaimer letters, those disclaimers were untimely as a matter of law. Continental appealed to the Court of Appeals. In the Court of Appeals, all parties agreed Stradford had breached the policy's cooperation clause, so the only question to be decided was the timeliness (or lack thereof) of Continental's disclaimers. The Court held the timeliness of the disclaimers presented a question of fact, precluding summary judgment for either side:
[Citations omitted.]
On October 16, 2008, the NY Department of Insurance issued its Circular Latter No. 20 (2008), calling for contract certainty in insurance contracts. "Contract certainty" refers to having the complete and final agreement of all terms to an insurance policy or reinsurance contract by the date of inception, and the issuance and delivery of the policy or contract before, at, or promptly after inception. As an example of why such prompt contract certainty is desirable, the Circular Letter points to the six years of litigation required to clarify coverage for the World Trade Center because no final policy documentation was in place at the time of the 9/11 attacks. To prevent repetitions of that sort of thing, the Department now expects all insurers and reinsurers to have full and final contract language in place and delivered to the insured/cedent promptly. In the Department's lexicon, "promptly" should be understood to mean within thirty days after inception, and any extensions beyond that period should be carefully documented by issuing companies. Licensees should strive for such prompt contract certainty in at least ninety percent of policies that are not already subject to a more stringent requirement. Insurers and producers doing business in New York should, no later than October 16, 2009, develop and implement practices to assure that policy documentation is delivered to the insured before, at, or promptly after inception. The Department intends to verify progress toward such contract certainty through the examination process, inquiries to licensees, or information obtained from insureds or other parties affected by the transaction. Some might point out that it took the Department more than seven years after 9/11 to issue a Circular Letter calling for contract certainty within thirty days after policy inception. Personally, I would never make such a cynical observation. No, never.
On November 18, 2008, the NY Department of Insurance issued its Circular Letter No. 26 (2008), summarizing the recent statutory changes in New York's late notice regime and the Department's interpretation of what those changes require. A copy of the circular letter is available at http://www.ins.state.ny.us/circltr/2008/cl08_26.htm. Anyone writing third-party liability coverage on filed forms in New York should read it.
November, 2008
In Ramos v. OneBeacon Ins. Co., 2008 NY Slip Op. 32726(U) (Supreme Ct., Queens Co., September 2, 2008), OneBeacon issued a homeowner's policy to Mr. and Mrs. Scuderi. The policy covered their personal residence, plus two other houses they owned as rental properties. The Scuderis never described those rental premises as their own secondary residences. Rather, they described them as residential properties they owned, but held for rental to others. That is exactly how they were described in OneBeacon's policy: "Additional Residences Rented to Others." One of the rental properties, about five or ten minutes away from the Scuderis' residence, was rented to the Ramos family. The Ramoses were related to the Scuderis: Mrs. Ramos was the Scuderis' daughter. A plumber was injured while doing some work at the Ramos house, and sued Mr. Ramos. Mr. Ramos sought a defense from OneBeacon under the Scuderis' policy. OneBeacon disclaimed coverage on the ground that Mr. Ramos was not an insured under the Scuderis' policy. The policy defined an insured as:
Mr. Ramos's argument for coverage was that, because he was married to the Scuderis' daughter, he was a "resident of [their] household." Nice try, but it didn't work. The Ramos family did not live in the Scuderis' residence, and the Scuderis had never lived in the rental premises. Their households were separate and distinct. For purposes of coverage under the policy, Mr. Ramos was just a rent-paying tenant in the rental premises, even though he also happened to be the Scuderis' son-in-law. Moreover, Ramos bought renter's insurance only after the plumber's accident, even though such coverage would have been readily available before the accident.
Remember the "Graves Amendment" ─ a/k/a the Transportation Equity Act of 2005, 49 U.S.C.A. § 30106? That is the federal statute providing that a car rental or leasing company is not vicariously liable for the negligence of the renter or lessee in the absence of negligence or criminal wrongdoing by the rental or leasing company. That statute was intended to pre-empt pre-existing New York law, under which the rental or leasing company was liable for the negligence of a renter, a lessee, or anyone the renter or lessee permitted to operate the car. The basic idea of New York law was to make the rental or leasing company (or its insurer) a deep-pocket defendant that would always be on the hook to pay for the negligence of people who rented or leased their cars. The Graves Amendment was intended to do away with that feature of New York law. However, the Graves Amendment does not say anything specific about taxicabs. In New York City, the taxicab industry is highly regulated. The right to operate a cab is represented by a taxi "medallion" issued by the City. These medallions are just that: little metal plates, issued by the City and attached to the body of each "yellow" (licensed) cab. (Cabs that have no medallion ─ unlicensed or so-called "gypsy" cabs, which are typically not yellow ─ are supposed to be illegal, but there seem to be thousands of them anyway.) Each medallion is usually owned by a corporation, but many cabs are operated by someone else; i.e., someone who leases the medallion from that corporation. The New York City Administrative Code provides that, regardless of who operates a medallioned cab, the owner of the medallion is fully and ultimately responsible for the cab's operation. In Lexington Ins. Co. v. G&K Taxi, Inc., 2008 NY Slip Op. 32648(U) (Supreme Ct., N.Y. Co., September 22, 2008), two cabs collided and one of them was pushed into a building, damaging the building. Lexington, which insured the building, paid the building owner for the damage. Lexington then sued, among others, the medallion owner of one of the cabs. The medallion owner moved to dismiss, pointing to the Graves Amendment. The court rejected that argument: the Graves Amendment says it applies when "the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles," but it says nothing about renting or leasing medallions.
Long-time readers of this space know N.Y.Ins.Law §3420(d) often requires that a liability insurer wishing to disclaim coverage must give written notice of the disclaimer "as soon as is reasonably possible." If it fails to do so, the carrier is presumed to have waived any ground for disclaiming of which it knew or should have known. In Doyle v. Sido, 2008 NY Slip Op. 07207 (2nd Dep't, September 30, 2008), the question was whether that requirement also applies to a title insurer seeking to disclaim coverage for a title dispute. Answer: no. By its express terms, Ins.Law § 3420(d) applies only when a liability carrier seeks to disclaim liability "for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state," which had nothing to do with the claim under the title policy in this case. When § 3420(d) does not apply, courts normally use ordinary common law principles of waiver, laches, and estoppel to determine the effects ─ if any ─ of an alleged delay in disclaiming.
So, if a carrier disclaims promptly, but its disclaimer is based on the wrong policy provisions, can it then go back and change the basis of its disclaimer? That's apparently what happened in Adames v. Nationwide Mut. Fire Ins. Co., 2008 NY Slip Op 07597 (2nd Dep't, October 7, 2008). The underlying case began after Adames slipped and fell in front of a commercial building owned by Nationwide's insured. The insured had a homeowner's policy and a personal umbrella, both issued by Nationwide. Nationwide disclaimed under both of those policies. For the homeowner's policy, Nationwide based its disclaimer on the fact that the building was not an "insured location" as defined in that policy. For the umbrella, Nationwide disclaimed on the basis of that policy's definition of "business property" and an exclusion for "business pursuits." Adames eventually obtained a default judgment against the insured, then sued Nationwide to enforce that judgment. To defend against Adames' suit on the judgment, Nationwide apparently abandoned its reliance on the policy provisions cited in its disclaimer letter. Instead, it relied on two different exclusions, both of which were in the homeowner's policy but neither of which had been cited in the disclaimer letter. Adames moved for summary judgment, but the trial court denied her motion. She then appealed. In the decision cited above, the Appellate Division held that Nationwide, by not having mentioned them in its original disclaimer letter, had waived the provisions it now sought to rely on:
Thus, by the time Adames got her default judgment, it no longer mattered whether Nationwide would eventually hit on the correct coverage position: it had conclusively waived that coverage position when it failed to assert it in its original disclaimer letter.
Does the antisubrogation rule apply to an insurer's subrogation action against a permissive driver who damages the insured auto? "Of course it does," says the Second Department in Motors Is. Corp. v. Africk, 2008 NY Slip Op 07636 (2nd Dep't, October 7, 2008). While his own car was being repaired by a Chevrolet dealer, Mr. Africk was permitted to use a "loaner" car owned by the dealer. Africk damaged the loaner in a one-car collision. Motors Ins. Corp. ─ the dealer's insurer ─ paid for the damage under the dealer's policy, then sued Africk as the dealer's subrogee. The subrogation claim was dismissed, and the dismissal was affirmed in the cited decision. Pursuant to Motors' policy, a permissive user of an insured auto (in this case, Mr. Africk) is an "insured" under the policy. The antisubrogation rule says an insurer may not pursue subrogation against its own insured for a claim arising from the very risk for which the insured was covered. For purposes of that rule, an "insured" who is a permissive user of the car is treated no differently from a Named Insured.
Back in March, 2008, I wrote about the Court of Appeals' then-recent decision in Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (2008), which permits insureds to sue carriers for "consequential damages" resulting from bad-faith breach of an insurance contract. The Court's decision purported to draw a distinction between such consequential damages and punitive damages: consequential damages were to be awarded ─ not to punish the carrier ─ but only to compensate the insured in cases where the payment of such damages could be said to have been contemplated by the parties to the insurance contract. In Bi-Economy, the specific nature and purpose of the disputed coverage (i.e., business interruption) led the Court to conclude that the specific kind of damage allegedly caused by the bad-faith breach of contract (i.e., financial failure of the insured's business) was, or should have been, within the contemplation of the parties to the insurance contract and, therefore, should be compensable through "consequential damages." At the time, I predicted we would see claims for such consequential damages alleged promiscuously "in nearly every garden-variety coverage dispute, involving either property or liability coverage." Well, that's apparently starting to happen. Case in point: Silverman v. State Farm Fire & Cas. Co., 2008 NY Slip Op 32859(U) (Sup.Ct., Nassau Co., October 8, 2008). The coverage dispute in Silverman grew out of an underlying action in which a dentist's former employee alleged the dentist had sexually assaulted her. (The dentist denies that. He says the two had a consensual sexual encounter, initiated by the employee for the purpose of later extorting money from him.) Whatever actually happened, the employee sued the dentist. The dentist sought coverage under four separate policies, each issued by a different carrier: a homeowners policy, two CGL policies, and a business owners policy. For reasons not specified in the decision, all four carriers disclaimed a duty to defend or indemnify the sexual assault claim. The dentist sued all four carriers, seeking a declaration that each of them had a duty to defend and indemnify. The dentist's declaratory judgment complaint also demanded "punitive damages and statutorily mandated damages...." The carriers moved to dismiss those specific prayers for relief. The trial court granted those motions:
Apparently foreseeing that outcome, the insured's lawyer sought leave to replead, so he could assert a demand for consequential damages of the kind contemplated by Bi-Economy. The court granted leave to replead:
In a footnote, the court observed it was not holding such damages compensable in the case before it. Rather, it was merely permitting the plaintiff to plead a demand for such damages, leaving for another day the question of whether such a claim was viable: "This is not to say that the Court has determined that a claim for consequential damages is in fact viable in this case, and the defendants are not barred from moving to dismiss this claim after sufficient discovery has been had." So, one has to ask, what kind(s) of harm might the insured have suffered ─ as a result of the carriers' alleged bad-faith breach of a duty to defend ─ that should be compensated by such "consequential damages"? What is there about the purpose and nature of these four liability policies that would bring harm of that kind within the contemplation of the parties to those insurance contracts? If and when I find out, I'll let you know.
I've lost count of the number of cases I've seen involving bogus certificates of insurance; e.g., certificates "certifying" the existence of a non-existent policy, or that someone is an additional insured when he's not. There are two such cases to report this month. The first, Home Depot U.S.A., Inc. v. National Fire & Marine Ins. Co., 2008 NY Slip Op 07867 (2nd Dep't, October 14, 2008), has an interesting twist to it. Home Depot hired Westward Contracting to work on a construction project. Under its contract with Home Depot, Westward promised to obtain liability insurance naming Home Depot as an additional insured. Westward gave Home Depot a certificate of insurance, reciting that Home Depot was an additional insured under Westward's liability policy from National Fire. During the work, a Westward employee was injured. The employee sued Home Depot. Home Depot impleaded both Westward (on an indemnification claim) and National Fire (seeking a declaration of coverage). National Fire disclaimed coverage as to Westward (for reasons not explained in the court's decision). It also disclaimed as to Home Depot, because Home Depot had never been added to the National Fire policy as an additional insured. Westward defaulted in the third-party action, and Home Depot got a judgment against Westward. Then, Home Depot and Westward entered into an agreement. Under that agreement, (a) Westward assigned to Home Depot its (i.e., Westward's) coverage claims against National Fire and (b) Home Depot agreed to "limit any levy or execution or any process of any kind, relating to the Default Judgment against Westward... solely to any and all claims or causes of action of whatever nature or kind which Westward might have or possess against" National Fire. Then, Home Depot, both individually and as Westward's assignee, started a separate declaratory judgment action against National Fire, seeking declarations that National Fire was (1) obligated to defend and indemnify Westward in Home Depot's underlying third-party action and (2) obligated to defend Home Depot (as an additional insured) in the employee's underlying action. National Fire eventually moved for summary judgment in the declaratory judgment action. National Fire's motion argued that Home Depot (a) was not an additional insured under Westward's policy and (b) lacked standing to pursue coverage for Westward as Westward's assignee. The trial court granted the first branch of that motion, but denied the second branch. In the decision cited above, the Appellate Division affirmed and made the following points:
In other bogus certificate cases, I've seen would-be additional insureds sue the Named Insured, or the broker who issued the certificate, or both. Home Depot's idea of taking over the Named Insured's coverage claim against the carrier is something I've never seen before. It would not make sense where the Named Insured is being defended and there is no coverage dispute between it and the carrier, but it worked in the context of this case.
Zizersky v. Life Quality Motor Sales, Inc., 2008 NY Slip Op 28390 (Sup.Ct., Kings Co., October 14, 2008), is another recent decision interpreting the Graves Amendment. This time, the fundamental issue was whether the Amendment applies to "loaner" cars; i.e., a car lent to a customer while his primary auto is being worked on. Symantha Mitchell took her BMW to the dealer for some repair work. While the dealer worked on her car, it gave her the use of another BMW, owned by either the dealer or one of its affiliates. The paperwork for the loaner car was written on a preprinted car rental contract. However, the part of that agreement providing for a rental fee was crossed-out. Instead, the contract said, "If Your vehicle is being serviced by Us under BMW warranty Our right, or the right of Our affiliate, to repair your vehicle during this rental is considered by Us as the rental fee. No additional consideration is necessary except for fuel You use and do not replace." Ms. Mitchell would be required to pay a $40.00/day fee for the loaner car, but only if she kept it for more than twenty-four hours after being notified her own car was ready. While driving the loaner car, Ms. Mitchell collided with another car, driven by Mrs. Zizersky. Zizersky sued Mitchell, the BMW dealership, BMW of North American, and BMW Financial Services. The BMW defendants moved to dismiss the action as to themselves, relying on the Graves Amendment. The trial court, in the decision cited above, denied that motion. The court's decision noted a number of minor grounds that might have served for denying the motion (e.g., incomplete copies of exhibits, inconsistencies between affidavits, and so forth), but the court decided the main dispute between the parties: whether a loaner car is "rented" or "leased" within the meaning of the Graves Amendment. The court held the loaner car in this case was neither "rented" nor "leased." In the court's view, the agreement's recitation of a "right to repair" Mitchell's BMW as "consideration" was a transparent fiction. Since there was no other consideration supporting the loaner agreement, the dealer's no-fee loan of the car to Mitchell was nothing more than a gratuitous bailment, and the Graves Amendment did not apply. It's not hard to think of ways to try to avoid this result in future "loaner" car cases. If anyone from BMW is reading this, give me a call.
Although New York's current late notice regime is due to end in January, we're inevitably going to see a few years of late notice run-off cases decided under current law. It's therefore worth noting decisions such as 2130 Williamsbridge Corp. v. Interstate Indem. Co., 2008 NY Slip Op 07768 (1st Dep't, October 16, 2008). A tenant of a residential building allegedly fell in the building's lobby on December 28, 2004. The tenant's lawyer notified the owner of the accident by letter dated March 8, 2005. The owner immediately forwarded that letter to his insurance broker. When a summons and complaint were served on the owner, he personally hand-delivered them to the broker. Unfortunately, the broker did not notify the carrier of either the accident or the suit until October 24, 2005, more than seven months after receiving notice of the accident. The carrier promptly disclaimed for late notice. In the decision cited above, the First Department held the insured's notice to his broker did not satisfy the policy's requirement of prompt notice to the carrier. That was especially so because the policy itself contained an "Important Notice," listing a special telephone number for reporting claims, and noting that other correspondence should be send to the broker. As the court put it, the insured "had only to read the policy to determine how to fulfill the condition precedent."
Is notice of an accident also notice of whatever claim or suit may later result from that accident? "No," says the Appellate Division, Third Department, in Liberty Moving & Storage Co., Inc. v. Westport Ins. Corp., 2008 NY Slip Op 07833 (3rd Dep't, October 16, 2008). The accident occurred on April 5, 2001, when a moving company employee was hurt on the job. The moving company gave prompt notice of the accident to its WC carrier, the NYS Insurance Fund. The injured worker thereafter sued the owner of the property where the accident occurred. In June, 2005, the property owner impleaded the moving company into that action. The moving company promptly notified its general liability carrier of that suit, but did not notify the NYS Insurance Fund of the suit. The Fund learned of the suit only a year later, in June, 2006. Once the Fund learned of the suit, it promptly disclaimed coverage under the employer's liability coverage of its policy. The moving company sued the Fund, seeking a declaration of coverage. Result: the insured loses. Where a policy requires both (a) notice of accidents (or occurrences) and (b) notice of claims or suits, those are two separate requirements. Complying with one of them does not constitute compliance with the other, or make such compliance unnecessary. Here, the insured's long delay in reporting the suit was unreasonable as a matter of law, and the insured offered no justification or excuse for that delay.
Our second bogus certificate case this month is Tishman Constr. Corp. v. American Safety Indem. Co., 2008 NY Slip Op 3288(U) (Sup.Ct., N.Y. Co., October 16, 2008). Based on a certificate of insurance, Tishman was under the [erroneous] impression that it was an additional insured under a policy issued by American Safety. American Safety disagreed, because no one had asked it to designate Tishman as an additional insured and it had not done so. Tishman sued American Safety and the broker shown on the face of the certificate. American Safety was awarded summary judgment in 2007, but Tishman's action against the broker lived on. Tishman pursued two theories against the broker: negligent misrepresentation and fraud. Although the broker and Tishman agreed the certificate was incorrect, that's all they agreed on. Specifically, the broker denied it had issued the certificate at all. The broker moved for summary judgment, denying it had ever issued the certificate, or that it had even been asked to do so. The broker also offered a reasonably persuasive body of circumstantial evidence, suggesting that someone other than the broker had issued the certificate, using the broker's name as a pseudonym. In opposition, Tishman was unable to controvert that evidence. The court granted the broker's motion for summary judgment. In the court's own words:
D&R Plaza Jewelry v. Those Lead Underwriters at Bellmarine, S.A., 21 Misc.3d 1113(A), __ N.Y.S.2d __, 2008 WL 4602354, 2008 NY Slip Op 52060(U) (Sup.Ct., N.Y. Co., October 16, 2008), arose out of a theft claim under a jeweler's block policy. The premium for the policy was financed, under an agreement that gave the finance company the right to cancel the policy if the insured missed a payment. The insured missed a payment, and the finance company issued a notice of cancellation. A few days after the cancellation was to be effective, the insured reported a $500,000 theft loss. Because the cancellation was "iffy" (the finance company apparently failed to comply with some of the technical requirements for an effective cancellation), the carrier proceeded to investigate the reported theft loss. For the next year, the insured ignored the carrier's repeated requests for meetings, copies of inventories and other documents, and a copy of a security camera video showing the theft. Shortly before expiration of the policy's one-year suit limitations period, the insured sued the carrier. Even after bringing suit, the insured continued to ignore the carrier's requests for documents to back-up the insured's claimed loss. Finally, the carrier moved for summary judgment dismissing the insured's complaint. The trial court held:
Accordingly, the insured's complaint was dismissed. Under prevailing New York law, a carrier seeking to deny coverage for an insured's failure to cooperate bears a heavy and exacting burden of proof. This is one of the few cases I've seen in recent years, in which a trial court held that burden to have been satisfied. I am at a loss to understand why an insured that thinks it has a valid claim for a $500,000 loss would act this way.
In Korson v. Preferred Mut. Ins. Co., 2008 NY Slip Op 08298 (2nd Dep't, October 28, 2008), the court had to decide what the word household means in an exclusion in a homeowners policy. Although the word household often appears in personal lines policies, I've never seen anyone try to define it. That's probably because household is an inherently "fuzzy" word; i.e., it resists precise definition and its meaning can vary depending on the detailed circumstances of each case. In Korson, the two Korson brothers ─ Steven and Dean ─ lived together in a house. Also living in the house were Dean's wife, the wife's daughter (Dean's stepdaughter), and the wife's granddaughter (Dean's step-granddaughter). The house was insured by a homeowner's policy issued by Preferred Mutual, under which Steven and Dean were the two Named Insureds. Like most such policies, this one excluded coverage for bodily injury to "you [i.e., Steven and Dean], and if residents of your household, your relatives, and persons under the age of 21 in your care or in the care of your resident relatives." The policy did not attempt to define household. Such exclusions are intended to avoid an obvious moral hazard by precluding coverage for claims by one member of a household against another member of the same household, because such claims are too often fraudulent and collusive. Dean's stepdaughter sued Steven and Dean, alleging that her daughter had sustained injuries from exposure to lead while living in the house. Preferred Mutual disclaimed a duty to defend or indemnify, citing the exclusion quoted above. Steven sued Preferred Mutual, seeking a declaration of coverage. After discovery was complete, Steven moved for summary judgment against Preferred. The trial court denied his motion, finding there were genuine issues of material fact. Steven appealed. On appeal, the Second Department affirmed the trial court's denial of Steven's motion. However, the Second Department went further than that: it searched the entire record and awarded summary judgment to Preferred. As the Second Department viewed the case:
In other words, the court ─ like the policy itself ─ did not attempt to define household. Rather, the court looked at the facts and decided that, whatever household meant, all of the people who lived in the Korson house were members of the same one.
And last, but not least, on the late notice front the NYS Court of Appeals has weighed-in with its decision in Sorbara Constr. Corp. v. AIU Ins. Co., 2008 Slip Op 07949 (Ct.App., October 21, 2008). Sorbara Construction Corp. had both WC and excess liability policies issued by AIU. When a Sorbara employee was injured on the job, Sorbara gave AIU prompt notice of the accident under its WC policy. However, it did not give notice under the liability policy until it was impleaded into the employee's bodily injury lawsuit, some five-and-a-half years after the accident. You're out of luck, Sorbara: notice under the WC policy did not fulfill the liability policy's separate notice requirement, even though both policies were issued by the same carrier, so AIU has no duty to defend or indemnify under the liability policy.
October, 2008 I'm pleased to announce the LexisNexis Insurance Law Center has selected this page as one of the 2008 LexisNexis Top 50 Blogs for Insurance. According to the LexisNexis Insurance Law Center:
Personally, I think they're laying on the praise too thick. (But who am I to complain?) Now, on to this month's cases.
That is the question the Appellate Division, Fourth Department, was asked to decide in State Farm Fire & Cas. Co. v. Whiting, 53 A.D.3d 1033, 862 N.Y.S.2d 420 (4th Dep't 2008). The Whiting residence (covered under a State Farm homeowner's policy) was the site of a social gathering at which alcohol was provided ─ apparently in copious amounts ─ for underage people. After hours of drinking, one of the partygoers (young Mr. Lang) became belligerent, shoved Whiting, and then advanced on Whiting in a threatening manner. Whiting, believing Lang was about to hit him, preemptively punched Lang in the face, causing bodily injury. After sobering up, Lang sued Whiting, alleging battery and negligence. The alleged negligence consisted of (a) serving alcohol to underage guests, (b) failing to limit the amount of alcohol consumed, and (c) failing to supervise the gang of drunken louts (including Lang himself). State Farm declined to defend or indemnify Whiting, arguing that, because the punch had been deliberate, Lang's alleged bodily injury had not been the result of an "occurrence." State Farm also brought a declaratory judgment action, seeking a declaration that it need not defend or indemnify Whiting. The trial court agreed with State Farm and granted summary judgment in the carrier's favor. Whiting appealed. On appeal, a majority of the Fourth Department agreed with State Farm's position and affirmed the trial court. Two judges dissented, citing the 2006 Court of Appeals decision in Automobile Ins. Co. of Hartford v. Cook, in which an insured intentionally shot a threatening intruder who had broken into the insured's home. In Cook, even though the facts indicated the insured had shot the intruder deliberately (in self-defense), the Court gave controlling weight to the fact that the complaint against the insured included allegations of negligence. Because of those allegations, it was conceivable (although highly unlikely) that a jury could find the insured liable for negligence but not liable for any intentional tort. Therefore, Cook held the insurer had a duty to defend. Following that reasoning here, the two dissenters argued that, because Lang's complaint alleged both battery and negligence, it was conceivable Whiting might be found liable only for negligence and, therefore, State Farm ought to have a duty to defend.
Back in July, I wrote about the Faragon decision, which discussed whether one can "occupy" an auto while being outside of it. Rosado v. Hartford Fire Ins. Co., 2008 NY Slip Op 32468(U) (Sup.Ct., KingsCo., August 18, 2008), is in a similar vein. Mr. Rosado was a truck driver for a beer distributorship. He drove a route, stopping at various places to deliver cases of bottled beer to customers and pick up their empty cases. At one stop, he was away from his truck for about ten minutes. He then returned to the truck with a bunch of empty cases. He was standing in the street next to his truck, looking into it. His hands were within the truck's cargo bin, maneuvering some empty cases already there to make room for the empties he had just picked up. At that point, he was struck by a passing truck, pushed ten to twelve feet, and pinned between his own truck and the passing truck. The passing truck was covered under a Countrywide policy with a liability limit of $25,000, which Countrywide paid. Rosado then sought benefits under the SUM endorsement of a Hartford policy covering his employer's truck. The Hartford SUM endorsement defined an "insured" as "[a]ny...person while occupying" the beer truck. The policy defined "occupying" to mean "in, upon, entering into, or exiting from a motor vehicle." Hartford took the position that Rosado was not "occupying" the truck, because he was not "in, upon, entering into, or exiting from" it. He had already exited the truck completely, had been away from it for a significant time, had not re-entered it, and was not in the process of re-entering it. Hartford brought a declaratory judgment action to determine the parties' rights under the policy, and both Rosado and Hartford moved for summary judgment. Result: both motions for summary judgment were denied because of the presence of questions of fact. On the facts presented, the court could not say, as a matter of law, whether Rosado was "upon" the truck at the time of the accident, or whether his activities at the scene had been sufficiently "vehicle oriented" to deem him an "occupant" of the truck. A jury will have to decide those questions. (I'll give you three guesses how a jury of insureds is likely to come out on that question.)
Medrano v. State Farm Fire & Cas. Co., 2008 NY Slip Op 06699 (2nd Dep't, September 2, 2008), grew out of a food fight in a New York City public school cafeteria. During the food fight, a kid named Robert Filer threw a garbage can into the air. When it came down, the garbage can hit a teacher's aide (Mrs. Medrano) and injured her. She sued Filer. Filer was an insured under his parents' homeowner's policy, issued by State Farm. State Farm disclaimed any duty to defend or indemnify Filer in connection with Medrano's lawsuit because, in State Farm's view, Medrano's claimed injuries did not result from an "occurrence" (which the policy defined as "an accident..."). State Farm also relied on an exclusion for bodily injury that was either expected or intended by the insured, or that was a result of the insured's "willful and malicious acts." Medrano sued State Farm, seeking a declaration that State Farm had a duty to defend and indemnify Filer in Medrano's bodily injury action. In that declaratory judgment action, the trial court granted summary judgment to Medrano and ordered State Farm to defend Filer. The trial court reasoned, in part, that (a) the complaint in Medrano's action against Filer alleged he had been negligent and (b) Filer testified he had not intended to hit Medrano with the can or to injure her. In short, there was no evidence ─ and no one even alleged ─ that Filer had "intended or expected" to injure Medrano or hit her with the garbage can; his conduct may have been stupid and reckless, but it was not "willful and malicious." Rather, Medrano's suit against Filer alleged an injury that was an unintended and accidental result of Filer's negligent conduct; i.e., the bodily injury was alleged to have been the result of an "occurrence." State Farm appealed and, in the decision cited above, the Appellate Division, Second Department, affirmed the trial court's decision.
Many claims-made policies repeatedly use the word claim in important provisions, yet never define it. When a claims-made policy does not define the word claim, what meaning should a court ascribe to it? That's a fun issue to argue about (I've written a short article about it, which you can find here). It's also the main issue in The Yale Club of New York City, Inc. v. Reliance Ins. Co., __ A.D.3d __, __ N.Y.S.2d __, 2008 WL 4007507, 2008 NY Slip Op 06690 (1st Dep't, September 2, 2008). The precise facts and order of events is important here, so please bear with me while I describe them at length. The Yale Club had claims-made D&O coverage under consecutive policies issued by Lloyd's (effective 11/23/92-93) and Reliance (effective 11/23/93-94). The court's decision does not tell us anything about what the Lloyd's policy said, but Reliance's policy (a) covered only claims that were "first made against the insured" during Reliance's policy period and (b) did not define the word claim. During the Lloyd's policy period, the Club was embroiled in a labor dispute with some of its employees (waiters), who claimed the Club was illegally withholding money they had earned from tips and overtime. About a dozen of the employees declined union representation in that dispute and, instead, hired private counsel to represent their interests. The Club was aware of that. The Club and the union continued to fight over the waiters' wage claims for many months. Meanwhile, in August, 1993 (i.e., during the Lloyd's policy period), the lawyer representing the small group of waiters sent the Club a letter beginning as follows: "Please be advised that our office represents the above named employees of the Yale Club with respect to wage claims...." The letter went on to say the waiters had been "deprived of tips and bonuses which amount to hundreds of thousands, and probably, millions, of dollars," and "deprivation of these monies constitute[s] criminal violations, as well as civil RICO and the New York State Labor Law, and fraud and conversion." The letter asked the Club to provide various kinds of documents and information, including insurance information, to enable the lawyer to comply with his "obligation to make a reasonable inquiry into the facts before filing a pleading with the courts." The Club apparently never notified Lloyd's of that letter. In February, 1994 (i.e., six months after the letter and three months into Reliance's policy period), that same lawyer commenced an action against the Club on behalf of the same small group of waiters. The Club notified Reliance of that suit in March, 1994. After looking into the matter, Reliance disclaimed coverage in April, 1994. Reliance disclaimed because, in its view, the claim had been "first made" by the August, 1993, letter, which the Club received before the inception of Reliance's policy period. In April, 2000, the Club and the small group of waiters settled for $370,000. In 2001, Reliance was ordered into liquidation. The Club then submitted a proof of loss to the NYS Superintendent of Insurance (in his role as ancillary receiver of Reliance's estate) for that $370,000, plus more than $400K in attorneys' fees, plus 9% interest. The Superintendent continued to deny coverage on the same basis that Reliance had asserted, so the Club sued. The trial court eventually ruled, in effect, that the August, 1993, letter did not constitute a first making of the claim before Reliance's policy period, so Reliance had to pay. The Superintendent appealed. On appeal, the Appellate Division identified the fundamental issue as this: did the August, 1993, letter, constitute the making of a claim within the meaning of the Reliance policy? A majority of the court held it did not. The majority's reasoning begins with the recognition that, because the policy did not attempt to define claim, the meaning of that word could be uncertain and ambiguous. Under ordinary rules of policy interpretation, any such uncertainty or ambiguity would have to be resolved in favor of the insured. In this case, the parties contended for two different meanings of claim, neither of which was unreasonable. In Reliance's view, the word claim should be given a relatively expansive meaning and, under that meaning, anyone reading the August, 1993, letter would understand it to be making a claim against the Club:
The majority, however, agreed with the Club's arguments that the word claim could be reasonably understood in a narrower sense and, under that view, the letter did not make a claim:
Two members of the court dissented from the majority. In addition to accepting Reliance's arguments, the dissenters raised an additional issue that Reliance had ignored. That is, the Reliance policy contained a notice of claim provision that apparently required the Club to notify Reliance if, during the policy period, the Club "shall receive written or oral notice from any party that it is the intention of [such] party to hold [the Club] responsible for a wrongful act...." The dissenters argued that, since the Club never told Reliance about the letter before the lawsuit began, the Club had violated that notice requirement. The majority rejected that argument, for two reasons:
Even though it's only early October, I am confident King's Gym Complex, Inc. v. Philadelphia Indem. Ins. Co., 2008 WL 4222524 (2nd Cir., September 15, 2008), will end the year as a prime contender for Dumbest Coverage Suit of 2008. On 11/13/03, a severe windstorm damaged the roof of King's Gym and some of the building's interior. King's Gym was insured by Philadelphia Indemnity, under a policy affording coverage for building damage, business personal property, and loss of business income. The policy included a two-year contractual limitations period, to the effect that any suit the insured wanted to bring on the policy had to be commenced no later than 11/13/05. By July, 2004, Philadelphia had paid the Gym for the building damage. (Philadelphia eventually paid the Gym a total of more than $190,000 for all its property damage.) Later that summer, the owner of the Gym expressed some concern that he might incur a loss of business income once he began repairs to the premises. Philadelphia attempted to meet with the insured to discuss that concern, but the owner cancelled the meeting. Philadelphia then retained an accountant to meet with the insured to discuss any potential business income loss. Over the next several months, the accountant made repeated efforts to have such a meeting and generate a discussion with the insured, but to no avail. In June, 2005, the accountant wrote a letter to the insured, stating that its file was deemed inactive and, "We will assume that you no longer wish to place a claim of business interruption on King's Athletic Club. If you still wish to place a claim, please contact us at your earliest convenience." The Gym never responded, and never submitted any claim, documentation, or other proof concerning any loss of business income. On 11/9/05 ─ four days before the end of the policy's two-year limitations period ─ the Gym sued Philadelphia for breach of the insurance policy. Specifically, the Gym alleged that, although it had complied with all applicable terms of the policy, Philadelphia had breached the policy's provisions regarding coverage for loss of business income. The Gym alleged it had incurred $150,000 in lost business income as of the date of the suit, with additional losses expected to accrue in the future. After receiving the suit, Philadelphia checked its records but was unable to find any indication the insured had ever claimed any loss of business income or requested payment for such a loss. The insured was also apparently unable to come up with any evidence it had ever made such a claim. In fact, when it began the lawsuit the Gym had not even started repairs to its building and had suffered no interruption to its operations! Philadelphia therefore moved to dismiss the action for non-justiciability. In essence, Philadelphia's position was this: the Gym never presented us with a business income claim, so we never denied such a claim; if no such claim was ever made or denied, then there's no actual dispute between us for the court to decide and, hence, the court has no subject matter jurisdiction here. The Gym eventually conceded it had not yet suffered any loss of business income, but insisted its suit should not be dismissed because it might still suffer such a loss in the future. The trial court dismissed anyway, because the case was non-justiciable and there was no subject matter jurisdiction. The Gym appealed and, in the decision cited above, the Second Circuit affirmed the dismissal. I'm no mind-reader, so it's hard for me to be sure what the Gym thought it might accomplish by suing Philadelphia. The Gym's suit seems to have been a cock-eyed attempt to extend the policy's two-year limitations period, just in case a loss of income might occur in the future. It is dismaying to think of all the time, effort, money, aggravation, and tax dollars wasted on a garbage case like this.
That was the question in 1700 Broadway Co. v. Greater New York Mut. Ins. Co., 2008 NY Slip Op 06881 (1st Dep't, September 16, 2008). The answer: a resounding "usually, yes; but sometimes, maybe not." Here, the Named Insured under a GNY policy was a tenant in an office building. The building's owner ─ an out-of-possession landlord ─ was an additional insured on the tenant's policy. The policy language imposed a duty on each insured ─ whether the Named Insured or any other insured ─ to give GNY prompt notice of any suit. When the tenant and landlord were both named as defendants in the same personal injury action, the tenant gave GNY prompt notice of the suit. The landlord, for reasons not explained in the court's decision, delayed giving notice to GNY for eight months. GNY undertook to defend the tenant, but disclaimed a duty to defend the landlord because of the landlord's late notice. The landlord sued GNY, seeking a declaration that GNY was obligated to defend it in the underlying personal injury action. Rather than try to offer a colorable excuse for its late notice, the landlord instead took the position that it had no duty to give prompt notice of the suit, because the Named Insured had already done so. Here is what the court said of that argument:
In a footnote, the court also reminded the parties what my readers already know: as respects policies issued after mid-January 2009, an insurer wishing to disclaim for late notice of suit will bear the burden of proving it suffered actual prejudice by reason of the late notice.
In Executive Risk Indem. Inc. v. Pepper Hamilton LLP, 2008 NY Slip Op 07044 (1st Dep't, September 23, 2008), the Appellate Division, First Department, had to decide how to interpret and apply a "prior knowledge" exclusion in a law firm E&O policy. The court ended up sharply limiting ─ some might even say "rewriting" ─ the exclusion. Pepper Hamilton's clients included an outfit called Student Finance Corporation ("SFC") and its principal, Andrew Yao. SFC was in the business of financing loans to students in trade schools. SFC would then pool the loans into certificates or securities and sell them to investors, using private placement memoranda prepared by Pepper Hamilton. To make its loan operations appear more successful ─ and its securities more valuable ─ SFC allegedly misrepresented to investors the extent to which its student loans were delinquent or in default. To make the securitized loans appear to be performing better than they actually were, SFC even made payments from its own cash reserves on loans that would otherwise have been declared in default. In March, 2002, Yao revealed to Pepper Hamilton that SFC had been using its own reserves in that way. The following month, Pepper Hamilton withdrew from its representation of SFC. SFC was eventually forced into bankruptcy. In April, 2004, the bankruptcy trustee asked Pepper Hamilton to consent to a tolling agreement while he considered whether to bring any claims against the law firm. Pepper Hamilton then gave notice of the potential claim to its primary and excess professional liability insurers. In November, 2004, the bankruptcy trustee sued the firm, alleging (a) negligence in the firm's failure to have discovered its client's fraud and (b) actual complicity in the fraud itself. A similar action was thereafter brought against the firm by Royal Indemnity, which had provided credit risk insurance for SFC's pooled loans. During the period 2001-2004, Pepper Hamilton had professional liability coverage from multiple carriers, in a series of one-year layered excess programs. Each of the firm's excess insurers either denied coverage or sued for rescission of its policy. Although the ensuing coverage litigation involved numerous issues of law and fact, the only one I want to write about is the "prior knowledge" exclusion. Two of the firm's excess carriers argued that coverage under their policies was excluded by a "prior knowledge" exclusion, providing that the policies would not apply to any claim "arising out of any act, error, or omission committed prior to the inception date of the policy which the insured knew or should have known could result in a claim, but failed to disclose to the Company at inception." Pepper Hamilton apparently became aware of SFC's potential liability for fraud in March, 2002, at the latest, but did not notify its insurers of any potential claim until November, 2004. Pepper Hamilton presumably knew during that entire period that its representation of SFC "could result in a claim" against the firm, but chose not to inform its carriers of that possibility until the bankruptcy trustee contacted the firm. Therefore, the insurers argued, the "prior knowledge" exclusion ought to preclude coverage under their policies that incepted during that 3/02-11/04 period. The excess insurers moved for summary judgment on that basis (among others), and the trial court agreed. Pepper Hamilton appealed. On appeal, the First Department held it would be unreasonable to apply the "prior knowledge" exclusion too broadly or literally. In the real world, lawyers often become aware a client is or may be committing some kind of misconduct. In many such cases, it is possible ─ perhaps even likely ─ that the lawyer might get drawn into litigation over the client's misconduct, if only as a potential "deep pocket" to satisfy the client's creditors. It would be unreasonable to require a lawyer to report that client's misconduct to the lawyer's insurer (under most circumstances, lawyers are prohibited from disclosing a client's misconduct to anyone). Instead, the "prior knowledge" exclusion should be understood to require notice to the insurer only if the insured has knowledge from which another objective, reasonable lawyer would conclude that the insured itself committed some impropriety that will subject it to a professional liability claim. Here, although the underlying claims against Pepper Hamilton alleged the firm had committed such an impropriety, there was not enough evidence to conclude those allegations were true as a matter of law (remember: this was an appeal from a grant of summary judgment). Therefore, the trial court's grant of summary judgment was reversed. That's all for this month.
September, 2008 Only a few new decisions caught my interest this month. Here they are. Coverage by audit? Moncrief v. DiChiaro, 52 A.D.3d 789, __ N.Y.S.2d __, 2008 WL 2522078 (2nd Dep't, June 24, 2008), deals with a claim of "coverage by audit." Purchase Land Development Corp. (PLDC) was a house builder. It had a liability policy issued by Sirius America Ins. Co. for a policy period of March 28, 2002-03. On November 5, 2002 (i.e., during Sirius's policy period) a minor was injured in an unfinished house owned by PLDC. At the time, Sirius's policy did not list that house as an insured location. On March 26, 2003 -- two days before the end of the policy period and months after the accident had occurred -- PLDC's broker asked Sirius to add the unfinished house as an insured location under the policy. (The decision does not state whether that policy change was ever made or, if it was made, whether it was effective from policy inception, from the date of the broker's request, or from some other date.) When the injured minor sued PLDC, Sirius refused to defend or indemnify PLDC, on two grounds: (a) the policy did not apply to the unfinished house when the accident took place and (b) late notice. When PLDC sued Sirius for a declaration of coverage, Sirius moved for summary judgment on both of those grounds. The trial court eventually issued an order that denied the branch of Sirius's motion on ground (a), because of the existence of a question of fact. That order did not address ground (b) at all. Sirius appealed. On appeal, the Second Department held Sirius had established, prima facie, that it was not obligated to defend or indemnify PLDC. Nevertheless, the Second Department affirmed the trial court's decision on ground (a) because there was a question of fact, and this is where we come to the "coverage by audit." PLDC's insurance broker testified that, after the policy had expired, Sirius audited the policy and thereafter charged PLDC "a premium for all the work associated with [the subject premises]" during the entirety of the policy period. The broker conceded the audit may not have specifically listed the subject premises as a location covered under the policy during the policy period, but he insisted the coverage was related to PLDC's construction of a home and, during the policy period, the only home owned and being built by PLDC was at the subject premises. PLDC's theory of coverage was that, because Sirius had accepted premium payments based on an audit that included work on the subject premises, Sirius was estopped from arguing it had not covered those premises. In the court's view, that raised a genuine issue of fact, sufficient to defeat Sirius's motion for summary judgment. (Because the trial court's order had not addressed the branch of Sirius's motion based on late notice, the Appellate Division also did not address it.) This "coverage by audit" theory raises obvious opportunities for (a) mischief and (b) inadvertent expansions of coverage through simple auditing errors. The purpose of an audit is supposed to be the calculation of a fair and accurate premium. Audits are not intended to second-guess underwriters or claims staffs, or to make unintended, retroactive changes to policy coverage. Where a policy's coverage extends only to some locations or operations, but excludes others, auditors have to be especially vigilant, so they audit only the covered locations or operations. Perhaps one way to avoid this problem would be to require the insured to agree that coverage cannot be expanded by an audit, or by the insurer's receipt of premium, and that the insured's sole remedy for any premium overcharge is a refund of the overcharge. Wording to that effect might even be built into a policy form or endorsement. Antisubrogation rule Pesta v. City of Johnstown, 53 A.D.2d 884, __ N.Y.S.2d __, 2008 WL 2756544 (3rd Dep't, July 17, 2008), centers on a dispute concerning the antisubrogation rule. Peter Luizzi & Brothers Contracting (Luizzi) was a contractor for a road-paving project for the City of Johnstown. Luizzi was the Named Insured under a series of Harleysville Mutual policies: a CGL policy, a commercial auto policy, and a commercial umbrella. The City was an additional insured under each of those three policies. Luizzi also had a separate owners & contractors protective (OCP) policy from Harleysville, which did not insure the City. During the work, a Luizzi employee was severely injured when he was hit by a dump truck owned by Luizzi and operated by another Luizzi employee. The injured employee sued the City, which impleaded Luizzi on a theory of common law indemnification. Luizzi, relying on the antisubrogation rule, moved to dismiss the City's impleader claim to the extent of the coverage of the four Harleysville policies. In the decision cited above, the Third Department held the antisubrogation did not apply to any of the four policies. For readers not already familiar with it, New York's antisubrogation rule is to the effect that an insurer has no right of subrogation against its own insured for a claim arising from a risk for which it covered the insured. In this context, Luizzi argued that, because the City was insured under the Harleysville policies, the City's third-party claim was an attempt by Harleysville to subrogate itself against Luizzi for a claim arising from a risk for which Harleysville also insured Luizzi. In the cited decision, the Third Department held the antisubrogation rule did not apply to any of the Harleysville policies:
Since none of the Harleysville policies would cover both the City and Luizzi for the employee's bodily injuries, the antisubrogation rule also did not apply to the City's claim for common law indemnification. Choice of law In Appalachian Ins. Co. v. General Electric Co., 2008 WL 2840354, 2008 N.Y. Slip Op. 51585(U) (Sup.Ct., N.Y.Co., July 17, 2008), a trial court had to decide what state's law should apply to a dispute concerning coverage for GE's environmental liabilities at numerous locations. The dispute involves multiple years of coverage, issued by multiple carriers from multiple states, covering events throughout the United States. The insured conducted operations in numerous states, and its liabilities arose in numerous states. This scenario can be a recurrent nightmare for lawyers and judges. To try to avoid or simplify that nightmare, New York courts came up with a simpler and more definite rule in Certain Underwriters at Lloyd's, London v. Foster Wheeler Corp., 36 A.D.3d 17, 822 N.Y.S.2d 30 (1st Dep't 2006), aff'd, 9 N.Y.3d 928, 844 N.Y.S.2d 773, 876 N.E.2d 500 (2007), which I wrote-up in November, 2006, and November, 2007 (see my Old Coverage News page). Under that rule, a New York court confronting this kind of situation should apply the following reasoning to select the applicable law:
In this case, the trial court applied that reasoning and held New York law will apply to all of GE's liability policies involved in the case. That's all for this month.
August, 2008 Antisubrogation rule / additional insureds / different policies In Utica Mut. Ins. v. Brooklyn Navy Yard Dev. Corp., 2008 NY Slip Op 05922 (2nd Dep't, June 24, 2008), Ares Printing & Packaging leased commercial space in a building managed by Brooklyn Navy Yard Development Corp. and owned by the City of New York. Ares had a CGL policy from Utica Mutual, plus 1st-party commercial property coverage under a separate Utica Mutual policy. Under the CGL policy, the City and Brooklyn Navy Yard Dev. Corp. were additional insureds, but "only with respect to liability arising out of the ownership, maintenance or use of that premises leased to [Ares]." A water pipe suspended from the ceiling in those premises burst, damaging Ares' business property, and Utica paid Ares more than $2.5 million for the property damage. Then, in its capacity as Ares' subrogee, Utica turned around and sued the City and the Dev. Corp. The City and Dev. Corp. moved to dismiss Utica's subrogation claim, citing the antisubrogation doctrine. The antisubrogation doctrine prohibits an insurer from subrogating against its own insured for a claim arising from the very risk for which that insured was covered. Here, the City and Dev. Corp. argued that, since they were additional insureds under Utica's CGL policy, the antisubrogation doctrine precluded any attempt by Utica to sue them to recoup what it had paid Ares under the property policy. The Second Department rejected that argument:
The Second Department's analysis misses the point here. The key question, it seems to me, is not under which policy Utica paid Ares' property claim. The key question is whether Utica insured the City and Dev. Corp. for their alleged liability for that property damage; a point the Second Department's decision does not address. For a much more persuasive way to analyze cases like this, see the Third Department's decision in Ins. Corp. of N.Y. v. Cohoes Realty Assoc., L.P., 2008 N.Y. Slip Op. 02937 (3rd Dep't, April 3, 2008), which is summarized in my June, 2008, update, below. Late notice of suit / reasonable belief in non-liability / lack of knowledge of insurance policy Notwithstanding the imminent statutory revolution in New York's "late notice" regime (see my July, 2008, update, below), late notice decisions are still worth reporting in this space. The new statute says it will apply only to policies issued 180 or more days after its effective date, so earlier policies will remain subject to New York's current rules. We should therefore not expect to run out of late notice disputes for many years. Travelers Cas. and Surety Co. v. Dormitory Authority-State of New York, 2008 WL 2567784 (U.S.D.C., S.D.N.Y., June 25, 2008), explains some important distinctions in analyzing late notice issues under current law:
In this case, when the court applied those distinctions, there was no reasonable excuse for a seven-month delay in giving notice of a suit. In the absence of a reasonable excuse, the insured's seven-month delay was held unreasonable as a matter of law. Redlining reports as public records NY's Reg. No. 90 requires insurers to file annual reports of voluntary auto policies issued, renewed, cancelled, or non-renewed, organized by ZIP Code. These reports are intended to help the Department of Insurance determine whether carriers might be "redlining"; i.e., refusing to write, canceling, or non-renewing policies exclusively because of the geographic location of the risk. In Markowitz v. Serio, 2008 NY Slip Op 05775 (Ct. App., June 26, 2008), the Court of Appeals held insurers' reports under Reg. No. 90 must be released in response to a request under NY's Freedom of Information Law. The Department, supported by several carriers, had refused to release such reports because they contained commercially valuable information, the release of which to a competitor could cause substantial competitive injury to reporting companies. The Court of Appeals held that the Department and carriers had failed to present specific, persuasive evidence that disclosure of the reports would result in competitive injury. Instead, they had presented only speculative and conclusory arguments that disclosure might potentially cause harm. In a concurring opinion, one justice expressed the view that the insurers had made an ample, detailed, and persuasive showing of how release of the reports would cause competitive harm, but he thought Reg. No. 90 required the reports to be released anyway. Priority of umbrella policy vs. primary policies Tishman Constr. Corp. of New York v. Great American Ins. Co., 2008 NY Slip Op 06177 (1st Dep't, July 8, 2008), is the latest in a recent spate of decisions addressing how to assign priority of coverage among multiple liability policies that apply to the same construction project. In this case, Tishman was hired to manage the construction of a new music hall for the Carnegie Hall Corporation. Tishman had a CGL policy from National Union, with limits of $1 million/occurrence subject to a $2 million aggregate. That policy named Carnegie Hall as an additional insured. Much of the heavy construction work was contracted to Schiavone Construction Co. As part of the construction contract, Schiavone agreed to indemnify Tishman and Carnegie for claims arising out of Schiavone's own negligence. Schiavone also had a National Union CGL policy with limits of $1 million / $2 million occ/agg. However, Schiavone also had a $25 million commercial umbrella policy from Great American. Both of the Schiavone policies designated both Carnegie and Tishman as additional insureds. During the work, two Schiavone employees were injured when a hoist failed. Both employees sued Tishman and Carnegie. Employee #1 settled for $785,000. National Union paid that entire amount from Schiavone's primary CGL policy. Employee #2 then got a judgment for $2,324,146. National Union, Tishman, and Carnegie agreed that National Union should pay what remained of its $1 million per-occurrence limit under Schiavone's primary policy, and then Great American should step in and pay the remainder of Employee #2's judgment. By a not-so-curious coincidence, this would have (a) let National Union's primary CGL policy for Tishman completely off the hook and (b) effectively turned Great American into Tishman's primary carrier. Great American apparently declined to see things that way, and a lawsuit began. Based on the reasoning of its recent decision in Bovis Lend Lease LMB, Inc. v. Great American Ins. Co., 2008 N.Y. Slip Op. 03150 (1st Dep't, April 10, 2008), which was summarized in my update for June, 2008 (below), the Appellate Division, First Department, held that Tishman's primary policy had to respond to the occurrence first; only after that primary policy's applicable limit was exhausted would Great American's umbrella apply. Contractual limitations period / waiver In Vitrano v. State Farm Ins. Co., 2008 WL 2696156 (U.S.D.C., S.D.N.Y., July 8, 2008), a State Farm policyholder sued for coverage under a renter's property policy. The insured had been arrested by federal agents in April, 2005. He claimed personal property was thereafter stolen from his apartment while he remained in federal custody. (No, the opinion does not say why he was arrested or what happened to the criminal charge.) When his claim was denied, the insured sued State Farm. State Farm moved to dismiss because, among other things, the insured did not bring suit within the two-year limitations period stipulated in the policy. The court agreed the insured had blown the two-year deadline for bringing suit but refused to dismiss his claim, because the insured succeeded in raising a question of fact. According to the insured's account, a State Farm adjuster had visited him to conduct a tape-recorded claim interview. The insured swore that, at some point during the interview, the adjuster had turned off the tape recorder, assured him the claim would be paid, and asked him to "please be patient." The court held this was enough to raise a question of fact concerning whether State Farm had waived, or should be equitably estopped from relying on, the policy's two-year limitations clause. Legislation Governor Patterson has signed the legislation doing away with New York's prior common law rules on late notice. It will not apply to policies incepting before January, 2009. Identity theft coverage is now a permitted type of P&C coverage in New York. July, 2008
In June, each house of the NYS legislature enacted a bill sounding the death-knell of New York's common law "no prejudice" rule in late notice cases. Since Governor Patterson requested the bill's enactment, he is expected to sign it. Here's a quick-and-dirty general summary:
Note that, although an insured's late notice is now to be forgiven in the absence of "prejudice," the same benefit is not conferred on insurers. In many cases, N.Y.Ins.Law §3420 obligates carriers to provide notices of disclaimer "as soon as possible," and a late disclaimer will be rejected even if the insured was not prejudiced by its lateness. This new law does nothing to change that. Note also that, although the bill expressly says it does not apply to policies in effect now or in the past, I predict it will nevertheless have collateral effects on such policies. That is, judges who already do not like the common law "no prejudice" rule will now be emboldened to reject even prompt disclaimers for late notice under older policies unless the carrier makes a showing of prejudice. (There's no need to write and tell me that's not what the statute says. I am predicting only that some judges will react to it that way.) Those who want to see the full text of the bill will find it here.
A life insurance company lawyer once told me there are very few interesting coverage cases in life insurance: either the insured is dead, or he isn't; either it was suicide, or it wasn't; that's about it. Well, John Hancock Life Ins. Co. v. Perchikov, __ F.Supp.2d __, 2008 WL 1787711 (U.S.D.C., E.D.N.Y., April 17, 2008), is one of the interesting ones. In her application for a $1-million life policy from Hancock, the insured said she was a self-employed commercial artist, had an annual income in excess of $100,000, and had no other life insurance in force. Because the insured spoke no English, the application was actually filled-out by a friend of hers, who also happened to be the policy's sole beneficiary. The truth was that the insured was a "home attendant" for a housekeeping company, made less than $20,000 a year, and already had two other $1-million life policies in force from other companies. Hancock learned the true facts only after the insured's death. Claiming the decedent had been murdered by the beneficiary to collect on the Hancock policy, the executrix of the insured's estate sued Hancock for having issued its policy negligently, thereby furthering the alleged murder plot. (That claim was ultimately rejected.) Hancock counter-sued the estate for rescission of the policy, on two grounds: (a) by the estate's own theory of the case, the policy had been procured as part of a murder plot to defraud Hancock out of $1 million and (b) the policy had been procured through false material statements in the application. The court ultimately granted summary judgment to Hancock, and made a number of interesting observations along the way:
Hence, summary judgment for Hancock.
Last month I discussed the decision in Bovis Lend Lease LMB, Inc. v. Great American Ins. Co., 2008 N.Y. Slip Op. 03150 (1st Dep't, April 10, 2008), and its approach to determining the priority of coverage among multiple primary policies. Lest anyone suspect that decision was a fluke or outlier, another intermediate appellate court recently endorsed the same approach in B.F. Yenny Constr. v. One Beacon Ins. Group, 2008 NY Slip Op. 03745 (4th Dep't, April 25, 2008): "...[T]he court [below] erred in determining, without reference to the terms of the... policies, that coverage of plaintiff as an additional insured under the One Beacon policy was exclusively primary and that Selective's coverage was excess. ...[T]o determine the priority of coverage among different policies, a court must review and consider all of the relevant policies at issue. ...[T]he terms of the... policies are controlling, not the terms of the subcontract between [the general contractor and subcontractor]." [Citations and internal quotation marks omitted.]
Is a four-wheeled ATV a "motor vehicle" for purposes of an auto policy's uninsured motorist endorsement? Nope. So says Progressive Northeastern Ins. Co. v. Scalamndre, __ A.D.2d __, __ N.Y.S.2d __, 2008 WL 2132120 (2nd Dep't, May 20, 2008). It's also not a "motorcycle." If it had been a three-wheeled ATV, it could have been deemed a "motorcycle," but it still would not have been a "motor vehicle." Everybody clear on that now?
Assume a lease requires the tenant to maintain property insurance at least as broad as that afforded under the terms of the New York Standard Fire Insurance Policy and Extended Coverage Endorsement in effect as of 1989. The tenant procures a policy that is consistent with the NYSFIP in all respects, except that it excludes coverage for any loss or damage caused by or arising out of terrorism. Has the tenant breached the lease? Yes, says a unanimous Court of Appeals in TAG 380, LLC v. ComMet 380, Inc., __ N.Y.3d __, __ N.Y.S.2d __, 2008 NY Slip Op. 04899 (June 3, 2008). [Note that the policy involved in this case was issued not long after the 9/11 terrorist attacks, before TRIA, and before the NY Superintendent of Insurance had ruled all terrorism exclusions contrary to New York's public policy. No form with such an exclusion would be accepted for filing in New York today. Even if it were written on unadmitted paper, a lot of judges would be tempted to hold out-of-hand that such an exclusion is unenforceable as contrary to public policy.]
In response to widely publicized allegations by Customer No. 9 (a/k/a ex-Attorney General and ex-Governor Spitzer), several large carriers and brokers made settlements in which they promised to cease using contingent commission arrangements. Now, in People ex rel. Cuomo v. Liberty Mut. Ins. Co., __ A.D.2d __, __ N.Y.S.2d __, 2008 WL 2445577 (1st Dep't, June 19, 2008), the Appellate Division, First Department, holds that, in the context of an ordinary insured-broker-carrier relationship, there is nothing inherently illegal about contingent commissions per se. The Attorney General's suit against Liberty Mutual included allegations to the effect that its mere participation in undisclosed contingent commission arrangements constituted a fraudulent business practice, common law fraud, unjust enrichment, and inducement of producers to breach their fiduciary obligations to insureds. Not so, says the First Department: (a) contingent commission agreements are not inherently illegal, (b) producers are not normally "fiduciaries" of their customers, and (c) in the absence of a "special relationship" between the producer and its client, the producer is under no obligation to disclose the existence of a contingent commission arrangement. Although the court dismissed some of the Attorney General's claims against Liberty Mutual, it left intact the central claims of alleged bid-rigging.
If a property insurer pays a loss, then successfully pursues a subrogation action against a responsible tortfeasor, who gets the money recovered from that tortfeasor: the insured or the insurer? As is usually the case with legal issues, the correct answer is, "It depends." In SR Intern. Business Ins. Co., Ltd. v. World Trade Center Properties LLC, 2008 WL 2358882 (U.S.D.C., S.D.N.Y., June 10, 2008), Allianz was an excess property carrier for the World Trade Center, and is currently pursuing subrogation actions against parties allegedly liable for the destruction of the WTC. A dispute arose between Allianz and its insured, concerning who ought to get first crack at any recoveries that might accrue from those actions. The insured argued, on the basis of a number of legal and equitable theories, that any recoveries ought to be paid to it until it has been made whole, and only then should any remaining recoveries be paid to Allianz. The court disagreed, because the Allianz policy included a clear and unambiguous "priority of recovery" provision, providing that Allianz should be paid first to the extent of its payments under the policy, and only then should the remainder be paid to the insured.
A medical malpractice insurer followed a policy of not advising its insureds that they were entitled to independent counsel at the carrier's expense when a conflict of interest arose between the carrier and the insured. If an insured appropriately requested such counsel, then the carrier would provide it, but it would not affirmatively notify its insureds when such a right was available. In a 2005 decision, the Appellate Division, Third Department (comprising part of upstate New York), held the carrier had an affirmative obligation to advise its insureds of their right to independent counsel whenever such a right arose. Notwithstanding that 2005 decision, the carrier persisted in its earlier policy. Now, the Third Department holds the carrier's practice of not affirmatively notifying its insureds constituted a deceptive business practice under General Business Law § 349. Elacqua v. Physicians' Reciprocal Insurers, __ A.D.2d __, __ N.Y.S.2d __, 2008 WL 2277860 (3rd Dep't, June 5, 2008). There's just one little problem with this: the Third Department seems to be the only one of New York's four judicial departments that has held such an affirmative obligation exists, and the First Department (comprising Manhattan and the Bronx) has expressly held such an affirmative obligation does not exist. So, if a carrier defending a case in the First Department follows the First Department's rule in that case, is the Third Department going to say that's a "deceptive business practice"? Or does the Third Department intend its rule to apply only to cases a carrier is defending within the Third Department? Or, does the choice of the correct rule depend on where the insured lives, or where the insured does business, or on whichever court the General Business Law claim happens to wind up in? The Elacqua decision does not say. Somebody ought to take this up to the Court of Appeals soon, so all carriers (and coverage lawyers) in New York State will have a single statewide rule to guide them in such circumstances.
An insured's unexplained forty-day delay in notifying his auto carrier of an accident is unreasonable as a matter of law. So holds the First Department in Young Israel Co-op v. Guideone Mut. Ins. Co., 2008 NY Slip Op. 05002 (1st Dep't, June 5, 2008). The insured tried to excuse his delay by arguing he had had a "reasonable belief in non-liability." In this case, that argument could not pass the red-face test: the insured had been at fault in a rear-end collision, and the injured occupant of the other car had been transported from the scene by ambulance. Given the impending demise of New York's "no prejudice" rule (see this month's first item, above), in a few years cases like this are likely to be of interest only to legal antiquarians. In the meanwhile, it's still the law.
For purposes of supplementary uninsured/underinsured motorist coverage, under what circumstances can an injured person be said to "occupy" (or not "occupy") an insured vehicle? Usually, the term "occupy" is applied liberally in this context, to afford broad coverage. There are limits to that, however, as illustrated by Faragon v. American Home Assur. Co., __ A.D.2d __, __ N.Y.S.2d __, 2008 WL 2278093 (3rd Dep't, June 5, 2008). The injured person in Faragon was a truck driver who was struck by a hit-&-run driver while outside his truck. Being outside the truck very briefly, for a purpose connected with the truck, would normally not, in and of itself, preclude a finding that the driver was still "occupying" the truck. Here, however, the driver had been outside the truck for at least twenty to thirty minutes when the accident took place. The purpose of his trip was to deliver a large machine to his employer's customer. When he arrived at the customer's premises, the driver spent a substantial amount of time unloading the machine from the truck. He then started giving one of the customer's employees detailed instruction in how to use the machine. The hit-&-run accident occurred while the truck driver was still instructing the customer's employee. Since he had been outside the truck for more than a brief time, and since his activities outside the truck had ceased to be "vehicle-oriented," he was not "occupying" the truck at the time of the accident.
Where a policy contains a clear, unambiguous, and enforceable exclusion, that exclusion should be enforced even if the policyholder testifies that he did not expect the policy to contain such an exclusion. So says a trial court in Burlington Ins. Co. v. Galindo & Ferreira Corp. Co., 2008 WL 2369791 (Sup.Ct., Queens Co., June 9, 2008). The insured was a construction contractor that bought a liability policy. The policy clearly excluded coverage for claims of bodily injury to: any insured's employee, any contractor hired or retained by or for any insured, or any employee of such a contractor. The insured was apparently unaware of that exclusion until after it was sued by a subcontractor's employee. The insured argued the exclusion should not be enforced, because it had "purchased the policy upon a reasonable belief that the policy provided... a defense or indemnification of [claims by] subcontractors alleging work-related injuries." Sorry, Galindo: you lose. Since the exclusion is clear, unambiguous, and enforceable, your self-serving "reasonable belief" about what it ought to have said, or what you now wish it had said, does not count. I suspect Galindo will now try to sue his broker, if he has one.
In New York, the employer's liability coverage part of a workers' comp policy normally has no limit of liability. However, that is not necessarily true where New York is listed on the policy only as a an "Item 3.C." state. In Preserver Ins. Co. v. Ryba, __ N.E.2d __, 2008 WL 2338635 (Ct.App., June 10, 2008), the policy was underwritten and issued in New Jersey, to a New Jersey insured. New Jersey was the only "Item 3.A." state, but New York was listed as a "3.C." state. The policy included a number of New Jersey endorsements, but no New York endorsements. Under applicable New Jersey law, the employer's liability coverage was not required to be unlimited and, in fact, this particular policy limited that coverage to $100,000 per accident. The policyholder was sued because of a grave injury that took place at a job in New York; an injury worth far more than the policy's $100K limit of liability. The policyholder therefore argued that the distinction between Items 3.A. and 3.C. was illusory and, since the accident had occurred in New York, New York's rule requiring unlimited coverage should apply. The Court of Appeals disagreed: the carrier had not been notified the insured was operating in New York and, therefore, was under no obligation to endorse its policy to afford the unlimited coverage required by New York law. Apparently for the guidance of insureds and brokers, the Court added the following cautionary language at the end of its opinion:
In Rael Auto. Sprinkler Co. v. Schaefer Agency, 2008 NY Slip Op. 05668 (2nd Dep't, June 17, 2008), an insurer's third-party claims administrator ("TPA") first learned of possible grounds for disclaiming coverage, and began investigating them, on or about March 5, 2002. The TPA did not issue a notice of disclaimer until August 8, 2002. The disclaimer did not involve anything complicated or arcane, but was based on straightforward, commonplace policy provisions. The unexplained six-month delay in issuing the disclaimer was therefore fatal to the carrier's rights: its policy defense were deemed to have been conclusively waived by the TPA's delay.
Many liability policies include endorsements that limit coverage to particular premises, operations, or projects. TenSeventyOne Home Corp. v. Liberty Mut. Fire Ins. Co., 2008 WL 2464187 (U.S.D.C., S.D.N.Y., June 18, 2008), is one of the few reported cases discussing the meaning of such endorsements under New York law. The insured — TenSeventyOne Home Corp. — owns, operates, and maintains a number of rental properties in New York City, but its central administrative operations are conducted from a building at 3001 Arlington in the Bronx. A visitor was injured at 3001 Arlington when a Mr. Yuter lowered a garage door onto the visitor's head. TenSeventyOne had CGL coverage from Greenwich Ins. Co. The Greenwich policy contained an exclusion or limitation, entitled "Limitation of Coverage to Designated Premises or Project," providing that the policy's coverage was limited to liability "arising out of... [t]he ownership, maintenance or use of the premises shown in the Schedule and operations necessary or incidental to those premises...." The Schedule listed a number of rental properties managed by TenSeventyOne, but did not list or refer to 3001 Arlington (the insured's administrative headquarters). Greenwich took the position that its policy meant exactly what it said, 3001 Arlington was not a covered premises, and, if the insured had wanted to buy coverage for that location, it could have had it added to the Schedule and paid the necessary additional premium. One of TenSeventyOne's other liability carriers (Liberty Mutual) tried to get Greenwich to share in the defense and indemnification of the underlying suit, so it attacked Greenwich's position. Liberty Mutual's arguments are interesting, even though they were ultimately unsuccessful:
As an aside, it always makes me nervous when I see a carrier attack commonly-used policy provisions to gain an edge over another carrier on a particular claim. What if Liberty Mutual had been successful in this case? It would probably have changed the meaning and effect of every endorsement similar to Greenwich's "Limitation of Coverage to Designated Premises or Project" endorsement subject to New York law, and a lot of carriers (including Liberty Mutual) would then have had to scramble to revise their forms to further clarify their actual intent going forward.
Ever hear of a policy provision called a "Misdirected Arrow" clause? Neither had I, until I read Trident Internat'l. Ltd. v. American Steamship Owners Mut. Protection and Indem. Assn., Inc., 2008 WL 2498239 (U.S.D.C., S.D.N.Y., June 19, 2008). The plaintiff, Trident, provides food and beverage services aboard cruise vessels. Trident contracted to provide such services aboard a vessel owned and operated by Imperial Majesty Cruise Lines. As part of their agreement, Imperial promised to secure "Risk Insurance insuring TRIDENT against all liability to its own employees or liability to third persons and all other risks normally covered under the terms and conditions of a standard Protection and Indemnity policy where such risks are applicable to TRIDENT...," and Trident was to pay Imperial a $5 fee for each Trident employee aboard the vessel, presumably to help defray Imperial's premium cost for the additional coverage. Imperial had P&I coverage from American Steamship Owners, a P&I mutual insurance "club." To try to satisfy its contract with Trident, Imperial asked (and the Club agreed) to add Trident as a co-assured under Imperial's coverage. That was done by a document called a "Certificate of Entry." Neither Imperial nor Trident seems to have recognized at the time that the Certificate of Entry, consistent with the Club's rules, included a "Misdirected Arrow" clause, providing:
During the voyage, one of Trident's employees became ill and had to be hospitalized ashore. A few weeks later, he died. Under maritime law and its employment contract with the deceased, Trident was liable for his medical bills and a death benefit to his next of kin. Trident sought coverage for those liabilities from the Club. The Club refused to pay, because of the "Misdirected Arrow" clause quoted above. The court held the clause means just what it seems to say: coverage applies only if the co-assured concessionaire (Trident) is mistakenly sued for the negligence of a member of the vessel's crew not employed by Trident. That is, if the "arrow" of a claim is misdirected at Trident, coverage is provided by the Club. However, if Trident is sued for something for which it is actually responsible, the "arrow" is not "misdirected" and the Club provides no coverage for the co-assured. So, in this case, Trident lost: it was actually liable for its deceased employee's medical costs and death benefit, and had not been incorrectly sued. Now, all this may sound purely maritime, and most of us will happily live out our entire lives without being involved in a maritime claim. However, among Trident's arguments was one that could (and does) come up in many non-marine contexts. Trident argued the Club's coverage was much narrower than what Imperial had promised to procure for Trident, so the Club ought to be required to afford the much broader coverage that Trident had bargained for. This same argument often comes up in situations where a policyholder promises to procure some kind of insurance for a customer, but ends up either (a) procuring much narrower coverage than promised or (b) not procuring any coverage at all. In this case, the court concluded that, although Trident's reading of its agreement with Imperial might be sound, the Club could not be bound by a contract between its insureds. That is because an insurance policy is a contract between the insurer and the insured; the extent of coverage is controlled by the relevant policy terms, not by the terms of a separate contract between insureds, or an underlying trade contract that requires an insured to purchase coverage for one of its customers. Trident's remedy, it seems to me, should be a breach of contract claim against Imperial.
Precision Auto Accessories, Inc. v. Utica First Ins. Co., __ N.Y.S.2d __, 2008 WL 2314503 (4th Dep't, June 6, 2008), is a straightforward rescission case: the application for a 1st-party commercial property policy misrepresented the insured's loss history by omitting mention of a number of fire and theft losses that had occurred over the preceding three years. After a fire loss occurred during the policy period, the carrier sued for rescission. What makes the case interesting is the number of arguments the insured advanced (unsuccessfully) to try to prevent rescission, even after conceding its application had been materially false:
On the regulatory front, June saw a number of additional interesting developments:
It seems odd, but nothing much appeared to be happening on the New York coverage law front during June. By the end of the month, though, I ended up with a lot of new developments to talk about. Let's hope the remainder of the summer turns out to be quieter. June, 2008 With one thing or another, I have not been able to post an update since early March, so there's quite a bit of recent case law to survey this month. Without further ado, here it is:
In American Guarantee and Liability Ins. Co. v. Moskowitz, __ N.Y.S.2d __, 2008 WL 612083, 2008 NY Slip Op. 28079 (Sup.Ct., N.Y.Co., February 28, 2008), the question was whether a lawyer's E&O carrier was responsible for its insured's defense costs, or whether the insured was. Mr. Moskowitz (a lawyer) and one of his long-time corporate clients were co-defendants in an underlying action (the "Conopco action"). The complaint in the Conopco action alleged that, among other things, Moskowitz and his client had committed fraud and racketeering activities, in violation of the federal RICO statute. The complaint also alleged that Moskowitz, in addition to being his client's long-time lawyer, was so deeply enmeshed and influential in the client's business decisions that he functioned as a de facto officer of the corporation. Moskowitz's E&O carrier, American Guarantee, defended him under a reservation of rights, but also brought a declaratory judgment action, seeking a declaration that it was not actually required to defend him. While the declaratory judgment action was pending, the Conopco plaintiff voluntarily discontinued that action as against Moskowitz, with prejudice. Moskowitz neither paid nor received anything in connection with the discontinuance. The discontinuance mooted much of the declaratory judgment action, but left open the question of which party -- i.e., Moskowitz or American Guarantee -- should be responsible for defense costs already incurred. American Guarantee's policy afforded coverage for damages "based on an act or omission in the Insured's rendering or failing to render Legal Services for others." That coverage was subject to an exclusion for claims based on, or arising out of, in whole or in part, the insured's "capacity or status as an officer, director, partner, manager or employee of a business enterprise." Moskowitz offered evidence -- not disputed by American Guarantee -- that he had represented the client for several years; that he and his firm were compensated for their legal work on the basis of hourly rates, plus expenses; and that Moskowitz was never a director, officer, etc., of his client. On that record, the court determined the claims against Moskowitz had triggered a duty to defend and, therefore, that American Guaranty was responsible for them. Although the complaint contained allegations of fraud and racketeering activity, the complaint as a whole alleged that Moskowitz's misconduct had been committed in the course of his legal work for the corporation, and the Conopco action was therefore "based on an act or omission in the Insured's rendering or failing to render Legal Services for others." Moreover, the complaint's characterization of Moskowitz as a "de facto officer" of his client did not trigger the policy's "no officer" exclusion. The evidence (as opposed to the complaint's abandoned allegations) was clearly to the effect that Moskowitz's potential liability to Conopco had not arisen from his status as an officer, director, etc. American Guarantee was therefore responsible for all of Moskowitz's defense costs in the Conopco action. Moreover, because it had initiated the declaratory judgment action, but had then lost it, American Guarantee was also responsible for Moskowitz's attorneys' fees in the declaratory judgment action.
Let's say debris and mortar from a neighboring building fall onto your building and clog your roof drains. The next time it rains, the rain fills up your roof and infiltrates inside your building, damaging the interior and contents. Is that a loss caused by rain, or a loss caused by falling debris and mortar? For purposes of applying a rain exclusion, it's a loss caused by rain. So says the Appellate Division, First Department, in Kennel Delites v. T.L.S. NYC Real Estate, LLC, 2008 NY Slip Op. 02008 (1st Dep't, March 6, 2008). In first-party property coverage, most courts try to focus on immediate causes (here, the rain), and to eschew the kind of reaching for remote causes that one sees in tort law, for example.
In ePlus Group, Inc. v. Travelers Property & Cas. Co. of America, 06-5222-cv (2nd Cir., March 11, 2008), the Second Circuit held that, under the facts of the case, an insured's breach of warranty was not an "occurrence" under a CGL policy. ePlus made a contract with Cyberco Holdings, under which ePlus would acquire financing for computer servers that ePlus would then make available to Cyberco. ePlus secured financing from a pair of banks, and the banks then provided the financing to pay for the transfer of the servers to Cyberco. As part of the transaction (a) each of the banks took a security interest in the servers and (b) ePlus warranted to the banks that the servers met certain specifications. Long story short: Cyberco was a fraud and defaulted on the loans, and the servers (which ePlus had apparently never inspected) turned out to be junk. The banks then sued ePlus, and ePlus sought coverage from Travelers. After Travelers denied coverage, ePlus brought a declaratory judgment action. The trial court held for Travelers, on the grounds that various policy exclusions precluded coverage. ePlus appealed. The Second Circuit affirmed, but not on the basis of any exclusion. Instead, the Second Circuit said there had been no "occurrence":
Under New York law, an insured's late notice of an "occurrence" can be excused if the insured proffers a reasonable and meritorious excuse for the late notice. Insureds often proffer an excuse that lawyers and judges loosely [and incorrectly] refer to as "a reasonable belief in non-liability." Like much jargon, the actual meaning of that excuse is different from what that legal shorthand suggests. That point was made in Donovan v. Empire Ins. Group, 2008 NY Slip Op. 02100 (2nd Dep't, March 11, 2008), which arose out of a sidewalk slip-&-fall claim. The accident took place on 9/9/01. A month later, on 10/10/01, the injured person's lawyer sent a claim letter to the insured property owner. Over four months later, on 2/26/02, the injured person sued the City of New York, but not the property owner. Just over a year later, on 3/5/03, the City impleaded the insured property owner. Over two months after that -- nineteen months after the original accident -- the property owner finally gave notice to her carrier, Empire, which promptly disclaimed for late notice. The insured asserted that her late notice should be excused because she had had "a reasonable belief in her non-liability." The trial court agreed, but the Appellate Division reversed in the decision cited above. In the context of late notice, a "reasonable belief in non-liability" does not mean an insured reasonably believes it is not liable. Instead, it means the insured has a good-faith belief, reasonable under the circumstances, that the injured party will not even seek to hold the insured liable. I.e., the insured believes, reasonably and in good faith, that there will not even be a claim against him. For example, if someone slips and falls, picks himself right up, dusts himself off, tells everyone he's all right, and goes merrily on his way, then one could easily form a reasonable, good-faith belief that no claim will be made as a result of the incident. In this case, of course, the insured could not sell that excuse: she received a claim letter from the injured person's lawyer shortly after the accident, but ignored it. Even after receiving that claim letter she made no investigation into the accident, so she had no basis -- whether reasonable or not, in good-faith or not -- for concluding anything about her "non-liability." Therefore, her excuse was rejected and Empire's disclaimer was sustained. This is further illustrated by the recent decision in Tower Ins. Co. of N.Y. v. Lin Hsin Long Co., 2008 N.Y. Slip Op. 03057 (1st Dep't, April 3, 2008), involving a slip-&-fall in a restaurant. After falling in the restaurant, a patron had to be carried out on a stretcher and was then removed by ambulance. The restaurant manager was not present at the time but, based on what the staff told him about the incident, he somehow concluded it had all been the customer's fault, the restaurant was not liable, and no claim would be made. He persisted in that erroneous belief despite receiving two claim letters from the customers' lawyer, eventually followed by service of a summons and complaint. Months after receiving the summons and complaint, he finally forwarded them to his insurance carrier. When the carrier disclaimed for late notice, the restaurant tried to use the "reasonable belief in non-liability" excuse as in Donovan, but lost for the same reasons.
In 2002, Bear Stearns (remember them?) was subjected to multiple state and SEC regulatory investigations concerning its investment banking activities. On December 20, 2002, Bear Stearns signed a settlement-in-principle agreement, acknowledging that each regulator would commence an action or administrative proceeding against it and that Bear Stearns would "consent to the action and the relief sought without admitting or denying the allegations. Bear Stearns also agreed to pay a total of $80 million for various kinds of relief. A few months later, on April 21, 2003, Bear Stearns executed a consent agreement in which it consented to the entry of a final judgment against it in the SEC's federal lawsuit, pursuant to the settlement-in-principle agreement. Three days after signing the consent agreement, Bear Stearns wrote to its professional liability insurers, asking their consent to the settlement. The insurers (three carriers affording a total of $50 million in limits above a $10 million self-insured retention) disclaimed on a number of grounds. In Vigilant Ins. Co. v. Bear Stearns Cos., Inc., __ N.Y.2d __, __ N.Y.S.2d __, __ N.E.2d __, 2008 WL 656260, 2008 N.Y. Slip Op. 02080 (Ct.App., March 13, 2008), the NYS Court of Appeals found it necessary to address only one of those grounds before holding there was no coverage for the settlement. The primary and following-form excess policies all contained a provision requiring the insured not to settle any claim in excess of $5 million without the insurers' consent, and providing the insurers would not be liable for any settlement entered into without their consent. By signing the 4/21/03 consent agreement, Bear Stearns had bound itself to a settlement without even asking for the insurers' consent, so there was no coverage for that settlement. It seems odd that an experienced, sophisticated insured like Bear Stearns would blow its coverage on such a high-exposure matter through such a bush-league error, but it did.
Ins. Corp. of N.Y. v. Cohoes Realty Assoc., L.P., 2008 N.Y. Slip Op. 02937 (3rd Dep't, April 3, 2008), deals with the insurance consequences of a fire at commercial premises owned by Cohoes Realty. The tenants included Arcy Plastic Laminates, Inc. Arcy was insured under a Travelers policy that afforded both CGL and business owners' property coverages. Cohoes, the building owner, was an additional insured under Arcy's CGL coverage part, but not under the property coverage part. After paying Arcy's property claim, Travelers sued Cohoes as Arcy's subrogee. Cohoes' liability insurer -- Insurance Corporation of N.Y. objected, arguing that:
The Third Department rejected both of those arguments. First, the court noted that Travelers CGL policy expressly excluded coverage for property damage to property owned by Arcy. That exclusion applied to Cohoes' "additional insured" coverage under the policy just as much as it did to Arcy itself. Moreover, Cohoes' additional insured coverage applied "only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to [Arcy.]" The court held that provision referred only to liability alleged in third-party actions, not to actions between the landlord and tenant; for actions between Arcy and Cohoes, Cohoes was not an additional insured at all. As regards the antisubrogation argument, the court noted the antisubrogation rule precludes an insurer from subrogating against its own insured only if the claim arises out of the same risk for which the insurer covered that insured. Here, Travelers did not cover Cohoes' potential liability for property damage to Arcy's property, and Cohoes was not an insured under the property coverage part. Therefore, the antisubrogation rule was simply inapplicable.
Something that never fails to annoy me is the way some people try to assign priorities of coverage in construction accident cases according to what the construction contracts say, as opposed to what the insurance policies say. A lot of lawyers have persuaded a lot of judges to do it that way, but I've never thought it was correct. A recent decision that sees things the right way is Bovis Lend Lease LMB, Inc. v. Great American Ins. Co., 2008 N.Y. Slip Op. 03150 (1st Dep't, April 10, 2008). The case was a typical construction accident coverage quagmire, with more owners, contractors, subcontractors, construction contracts, insurance policies, additional insured endorsements, and "other insurance" clauses than you can shake a stick at, and everybody pointing fingers at everybody else. When it came time to determine the priority of coverage, all the carriers did their best "After you, Alphonse" routine. The trial court analyzed the situation by referring to the construction contracts, specifying that contractors and subcontractors were to procure coverage for the owner and construction manager, which would apply before any of the owner's or construction manager's own coverage. "Not so fast," said the First Department, "That's not the right way to look at it. The insurance companies were not parties to those construction contracts, and may have known nothing about what those contracts said." To determine the priority of coverage among multiple applicable policies, a court has to compare the policies themselves: their purposes, the kinds and limits of coverage they provide, their respective "other insurance" clauses, their respective premium rates, etc. I won't bore you with the nitty-gritty details of the case -- they're too intricate to go into here -- but I do want to highlight and applaud the First Department's choice of the correct approach for how to analyze the priority issue.
ExxonMobil Co. v. Certain Underwriters at Lloyd's, 2008 N.Y. Slip Op. 03309 (1st Dep't, April 15, 2008), dealt with the number of "occurrences" presented by multiple product liability claims arising from two different ExxonMobil products: polybutylene resin (apparently used in municipal water systems) and AV-1 (an aircraft engine lubricant). The Lloyd's policy defined occurrence as "an accident, an event or a continuous repeated exposure to conditions which result in personal injury or property damage, provided all damages arising out of such exposure to substantially the same general conditions existing at or emanating from each premises location of the Assured shall be considered as arising out of one occurrence." ExxonMobil argued that language reflected an intention to aggregate individual claims for the purpose of subjecting them all to a single policy deductible. The court summarily rejected that contention. In the absence of a specific claim-aggregation provision, precisely identifying the operative incident or occasion giving rise to liability, the court applied the "unfortunate events" test. Under the "unfortunate events" test, the manufacture and sale of the two products did not constitute a single occurrence. Rather, each installation of polybutylene resin into a municipal water system, and each introduction of AV-1 into an aircraft engine, constituted a separate occurrence.
Desir v. Nationwide Mut. Fire Ins. Co., 2008 N.Y. Slip Op. 03578 (2nd Dep't, April 22, 2008), dealt with coverage for an underlying assault claim. The decision does not identify the type of coverage involved, but quotes a typical CGL policy's definition of the word "occurrence," so I am assuming the dispute involved a CGL policy. To no one's surprise, the court held an intentional assault cannot be an "occurrence" and, even if it could, the policy excluded "intentional acts." To try to avoid that result, the plaintiff had also pleaded causes of action for negligence, alleging carelessness, to dress up the intentional assault as a covered claim for negligence. The court rejected that effort out of hand.
47 Mamaroneck Ave. Co. v. Hartford Fire Ins. Co., 2008 N.Y. Slip Op. 03585 (2nd Dep't, April 22, 2008), addresses an issue I've never seen litigated before. 47 Mamaroneck Ave. Co. owned property that it leased to Rent-A-Center, Inc. ("RAC"). After a couple of years their relationship apparently soured, because the owner allegedly started a campaign of harassment and intimidation to try to get RAC to terminate its lease. Among other things, the owner allegedly started showing up at the premises uninvited and unannounced, with local fire and health inspectors in tow, trying to catch RAC in a citable violation. RAC therefore sued the owner. Eventually, that case was resolved and 47 Mamaroneck asked its carrier, Hartford, to reimburse its defense costs. 47 Mamaroneck argued that the allegation described above fit within the CGL coverage for personal and advertising injury liability, since it would constitute the "wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor." The Second Department, focusing on the words "a person" in that part of the Coverage B insuring agreement, held that it applies only to claims brought by an individual person, not to claims of violating space that a business occupies.
When a policy refers to "your customer," does that include your customer's customer? Not when the phrase "your customer" is used in an exclusion. So says the Appellate Division, Fourth Department, in Graphic Arts Mut. Ins. Co. v. John Russell, 2008 N.Y. Slip Op. 03911 (4th Dep't, April 22, 2008). Mr. Russell wanted to buy a car, so he hired a consultant to find him one. (Who knew there was such a thing as a "car consultant"? I sure didn't.) After the consultant found the right kind of car at a dealership, he arranged to borrow it -- with a set of dealer plates on it -- and take it to Mr. Russell so he could test-drive it. The plan was that, if Russell did not like the car, the consultant would bring it back to the dealership. If Mr. Russell did like the car, then the consultant would buy it from the dealer and re-sell it to Mr. Russell. There was no contact or agreement of any kind between Russell and the dealer; nor was there intended to be any, whether Russell bought the car or not. Well, you can guess what happened: Russell was in an accident while test-driving the car, and he got sued. He asked the dealer's carrier (Graphic Arts) to defend him, but that carrier declined to do so. The Graphic Arts policy afforded coverage for permissive users, but excluded coverage for four specific kinds of permissive users. One of those categories was "[y]our customers" who had sufficient personal auto coverage of their own. Graphic Arts relied on that exclusion to deny a duty to defend Russell. Sorry, Graphic Arts, but you lose: exclusions are narrowly and strictly construed against insurers and in favor of coverage. Here, Mr. Russell was not the dealer's customer at all. He may have been a customer of the car consultant, but he had had no contact or dealings with the insured dealership itself. The exclusion therefore did not apply to him and he was owed a defense.
In insurance policies, the phrases arising from and arising out of are usually construed very broadly, to mean something like "flowing from," "incident to," having connection with," or "originating from." That is, they are taken to refer to "but-for" causation, not proximate causation: if event B would not have happened "but for" the prior happening of event A, then event B "arises from" or "arises out of" event A, even if their but-for causal relationship is so slight, tenuous, and indirect that it does not constitute proximate causation. In Worth Constr. Co. v. Admiral Ins. Co., __ N.Y.2d __, __ N.Y.S.2d __, __ N.E.2d __, 2008 WL 1899978 (Ct.App., May 1, 2008), the N.Y.S. Court of Appeals recently imposed some limits on that otherwise very broad meaning. The facts of the case are straightforward. Worth Construction was the general contractor of a construction project in White Plains, New York (just a few minutes by car from bucolic Briarcliff Manor, if you're interested). Worth hired a subcontractor -- Pacific Steel -- to erect a welded steel staircase and handrails. Under its contract, Pacific was to erect the staircase first, then leave the job site for some time, while other subcontractors did additional work on and around the stairs (e.g., filling the individual treads with concrete, erecting walls around the staircase, installing fireproofing, etc.). When that other work had been done, Pacific was to come back and install the handrails. In the interim, while Pacific Steel was not at the site, a construction worker was injured when he tripped on fireproofing that had been applied to the stairs by another subcontractor (Fasciano Iron Works) in Pacific's absence. Pacific played no role in contracting for or applying the fireproofing, and had not subcontracted with Fasciano to do that work. The construction worker sued the project owner and Worth, the general contractor. Because the complaint alleged the worker had been injured on the staircase installed by Pacific, Worth demanded that Pacific's GL carrier (Farm Family) defend and indemnify Worth. When Farm Family did not respond, Worth (a) impleaded Pacific on theories of contribution and indemnification and (b) brought a declaratory judgment action against Farm Family, seeking defense and indemnification in the underlying action and reimbursement of attorneys' fees it had incurred in defending itself. Pacific's policy from Farm Family included an additional insured endorsement, providing, in pertinent part:
The policy also defined your work to mean:
Worth eventually conceded Pacific had not been negligent, and consented to dismissal of any claim alleging negligence in its third-party action against Pacific. Family Farm then argued that, since Worth had conceded Pacific was not negligent, there was no way any of Worth's potential liability could be said to "arise out of [Pacific's] operations" and, therefore, the additional insured endorsement did not apply. Worth, on the other hand, argued that arising out of has a very broad, "but-for" meaning and, therefore, it did not matter whether Pacific had been negligent. That is, Worth argued that, for coverage purposes (as opposed to liability purposes under tort law), since the accident occurred on stairs Pacific had built, it necessarily "arose out of" Pacific's operations as a matter of law. The trial court agreed with Farm Family, but the Appellate Division held for Worth. Finally, the case was heard by the Court of Appeals, which wrote as follows:
So, what does all this mean, exactly? Is the Court of Appeals changing the usual meaning of arising from and arising out of, so they no longer require only "but-for" causation, but also require something like proximate causation? No, I don't think so. The Court seems to be hinting at the concept of an "antecedent contributing circumstance"; i.e., a circumstance that merely provides a time or place for an accident to happen, but that in no real sense either causes that accident to happen, or makes it more likely to happen, or makes its effects more severe when it finally does happen. In this case, Pacific's work may have created the place where the accident occurred -- the staircase -- but creating that staircase is precisely what Pacific had been hired to do. Nothing about Pacific's work or operations caused the fall itself, or even made it likely that someone would fall. The Court seems to be saying that, if a Named Insured's work or operations are merely an antecedent contributing circumstance for an accident, and everyone agrees that nothing about the work or operations was negligent or caused the accident, then the accident cannot be said to "arise from" that work or operations for coverage purposes. Something more is required -- something the Court does not try to define or describe in its decision. What that "something" is will have to be fleshed-out in future cases.
In Perkins v. Allstate Ins. Co., 2007-04159, 2008 NY Slip Op. 04332 (2nd Dep't, May 6, 2008), a plaintiff found himself in the embarrassing position of having procured a judgment against someone who was not insured, because he neglected to sue the right party. The plaintiff (Perkins), a New York resident, was injured in a car accident in Maryland. He sued the other vehicle's driver (Shoffner) and owner (a company called Riggin Master). The vehicle was insured by Allstate, under a policy issued to one Lucy Carr as the Named Insured, but Carr did not own the vehicle and was not driving it at the time of the accident. Perkins sued Shoffner and Riggin Master. In his suit, Perkins alleged that Riggin Master owned the vehicle and Shoffner had been driving it at the time of the accident. Shoffner and Riggin Master never answered the complaint, so Perkins was awarded a default judgment against each of them. However, Perkins never sued Carr, never alleged anything about her in the lawsuit, and did not get any judgment against her. When the default judgments against Shoffner and Riggin Master remained unsatisfied for more than thirty days, Perkins sued Allstate to recover on the judgment. Allstate's theory of the case was straightforward: "We don't insure either Shoffner or Riggin Master, so go away and leave us alone." Neither Shoffner nor Riggin Master was a Named Insured under the Allstate policy, and neither of them fit within the policy's descriptions of insured persons. Allstate's only insured in this case was Carr, but (a) the default judgments in the earlier bodily injury lawsuit conclusively established as a matter of law that she did not own or operate the vehicle at the time of the accident and (b) no one had sued her anyway. Perkins' reply to that argument was that Allstate had waited too long to disclaim: under N.Y. Ins. Law §3420(d), Allstate was required to disclaim coverage "as soon as possible," but it had not done so. The trial court rejected Allstate's position and accepted Perkins'. However, in the decision cited above, the Appellate Division, Second Department, reversed. Regarding Perkins' argument under §3420(d), the Appellate Division pointed out (a) that statute expressly applies only to accidents in New York, not accidents that occur in other states, and (b) a long line of cases establishes that the "as soon as possible" requirement applies only to disclaimers based on breach of a policy exclusion or condition. Where the disclaimer is based on an "absence of coverage" (i.e., the claim is outside the insuring agreement, as it was here), the statute's "as soon as possible" requirement does not apply. As far as I can see, this entire coverage dispute seems to have arisen out of the fact that the vehicle was covered under a policy issued to an individual who did not own the vehicle, rather than a policy issued to the owner.
A golfer was hurt when he slipped and fell on a newly built deck at a golf club. He sued the club, but the litigation then expanded and dragged in contractors who had worked on the construction of the new deck. OneBeacon Ins. v. Travelers Prop. Cas. Co. of America, 503818, NY Slip Op. 04263 (3rd Dep't, May 8, 2008), deals with one of the coverage disputes that arose out of the slip-and-fall case. The subcontractor that built the deck was insured by Great American, under a CGL policy that included an additional insured endorsement. The additional insured endorsement afforded coverage to the club owner and general contractor for "liability arising out of [the Named Insured subcontractor's] ongoing operations." Great American moved for summary judgment, arguing that its additional insured endorsement did not apply here, because the deck had been built and put to its ordinary use before the golfer slipped and fell on it. Nice try, but Great American loses: the club's president had testified that construction of the deck was not yet complete at the time of the accident, plus there was an architect's punch-list showing some work on the deck remained undone at that time. Therefore, even though the deck may have been substantially complete at the time of the accident, and had even been put to its intended use before then, there was enough evidence in the record to raise a legitimate question of material fact whether the Named Insured's operations were over and done with or still "ongoing." Great American also argued that coverage under its policy was vitiated by late notice. Everyone appears to have conceded that Great American did, in fact, get late notice. However, each of the other parties was able to argue (successfully) that either (a) Great American had failed to issue a disclaimer "as soon as possible" as required by N.Y.Ins.Law §3420(d), or (b) Great American had never issued any disclaimer as to them specifically, or (c) whatever disclaimer Great American had issued as to them had not mentioned late notice as a ground for disclaiming.
Tex Dev. Co., LLC v. Greenwich Ins. Co., 2007-04003, 2008 NY Slip Op. 04504 (2nd Dep't, May 13, 2008), provides yet another example of a carrier waiving a coverage defense by failing to assert it promptly. A fatal construction accident occurred on October 10, 2003. The property owner, Tex Development Co., reported the accident to its insurance broker three days later, on October 13, 2003. The broker promised to report the accident to Tex Development's CGL carrier (Greenwich), but apparently never did so. A year and a half later, on April 5, 2005, the administrators of the decedent's estate commenced a wrongful death action against Tex Development. Tex Development reported the suit to Greenwich two weeks later, on April 18, 2005. Greenwich disclaimed (on late notice grounds) on June 2, 2005, about six weeks after it received first notice of the occurrence and the suit. Tex Development then sued Greenwich, seeking a declaration that Greenwich was obligated to defend and indemnify it in the wrongful death suit. Tex Development also sued the insurance broker, for negligent failure to have given the carrier notice of the occurrence. Tex Development and the broker both moved for summary judgment against Greenwich, arguing that, because the underlying claim was for a death that occurred in New York State, N.Y. Insurance Law §3420(d) required Greenwich to have issued its written disclaimer "as soon as reasonably possible." Although the late notice should have been apparent to Greenwich very quickly after it received initial notice on April 18, the carrier nevertheless took forty-five days to issue a disclaimer. In opposition to the motions, Greenwich had the burden of offering evidence that would explain or justify its delay in disclaiming, sufficient to raise a triable issue of fact. Although Greenwich failed to do so, the trial court denied the motions anyway. In the decision cited above, the Appellate Division, Second Department, reversed the trial court and held that Greenwich is obligated to defend and indemnify Tex Development in the underlying suit. Note that the court specifically held the carrier had a duty both to defend and to indemnify. This is a departure from normal practice. Normally, when a court finds a duty to defend its insured in a pending action, it defers ruling on whether there is also a duty to indemnify until there is an actual judgment against the insured. The opinion does not explain why that departure was deemed appropriate in this case.
April, 2008 I am traveling for a couple of weeks, so there will be no update this month. Apart from l'affaire Spitzer, not a lot happened anyway. March, 2008 New York courts have been working overtime on coverage issues recently, so there's a lot (a lot) to write about this month.
This month's big news comes from a pair of Court of Appeals decisions issued the same day: Bi-Economy Market, Inc. v. Harleysville Ins. Co., __ N.E.2d __, 2008 WL 423451, 2008 N.Y. Slip Op. 01418 (February 19, 2008); and Panasia Estates, Inc. v. Hudson Ins. Co., __ N.E.2d __, 2008 WL 420014, 2008 N.Y. Slip Op. 01419 (February 19, 2008). Those decisions make a substantial change in New York coverage law. Both cases were decided on 5-2 votes, with separate majority and dissenting opinions. Both cases involved losses under first-party commercial property policies:
In each case, the insured sued the carrier and demanded, in addition to whatever amounts may have been due under the policy, an additional sum for what the majority opinion describes as "consequential damages" for bad faith. In each case, the defendant carrier had moved for summary judgment dismissing the claims for such "consequential damages," and the appeals were from decisions on those motions. In each case, the Court of Appeals held:
The two dissenters filed their own opinion, deploring the result and the reasoning by which the majority reached it. [A note to readers from states where such claims of consequential damages -- or even punitive damages -- are commonplace features of coverage disputes: in New York, this is a big deal. Before now, New York law made it difficult for an insured to allege, let alone prove, a claim for damages over and above whatever might be owed under the policy, plus interest.] Now that a majority of the Court of Appeals has put its imprimatur on such claims in these two cases, I expect to see them alleged in nearly every garden-variety coverage dispute, involving either property or liability coverage.
Liability policies typically require insureds to give carriers reasonably prompt notice of suits, using words like "promptly," "immediately," "as soon as possible," "as soon as practicable," or the like. Most policies, however, do not specify when an insured's duty to give such notice begins. That is usually not a problem: in most cases, an insured gets actual notice of a suit at or about the time the suit is commenced, and the insured's duty to give notice is reasonably presumed to begin when it actually learns of the suit. Occasionally, though, an insured first learns of a suit only months after the suit was brought. For example, if a business fails to notify the Secretary of State (its statutory agent for receipt of process) of a change of address, and the Secretary therefore forwards suit papers to the wrong address, the business might not learn it has been sued until months after the suit was brought. When does that business's notice obligation begin to run: when the Secretary of State receives notice of the suit, or only months later when the insured learns of it? That was the scenario confronting the Second Circuit Court of Appeals in Briggs Avenue L.L.C. v. Ins. Corp. of Hannover, __ F.3d __, 2008 WL 398983 (February 15, 2008), in which an incorrect address led to an eight-month delay in notice to the insured's carrier. The court noted there was a split on this question among lower courts, with the result seeming to turn on the precise wording of each policy's notice provisions. Since New York's highest court had never ruled on the issue, the Second Circuit certified the question to the New York State Court of Appeals. Just in case the state Court of Appeals rejects the certification (or perhaps to encourage the state court not to reject it), the Second Circuit noted that, if it were to decide the issue on its own, it would hold the insured's notice obligation had been triggered when the Secretary of State received notice of the suit, regardless of when the insured itself received notice. I agree with the Second Circuit that the different outcomes among lower courts are partly because of differences in policy language, but I do not agree that is the only factor. It seems to me that another element influencing the outcome in these cases (either explicitly or sub silentio) is whether the insured was itself to blame -- in whole or in part -- for its having received late knowledge of the suit. New York statutes and regulations require businesses to notify the Secretary of State of address changes. Where an insured fails or refuses to do so, the insured is largely responsible for any resulting delay in learning it has been sued, and therefore for the delay in notice to its carrier.
A recurrent theme of New York coverage law is that, when an insurer intends to disclaim coverage for a claim of death or bodily injury, it must issue its disclaimer "as soon as possible." If it does not, it waives its grounds for disclaiming, even if those grounds would otherwise be perfectly sound. That is what happened in Transcontinental Ins. Co. v. Gold, 2008 WL 482505 (Sup.Ct., Nassau Co., January 24, 2008). Transcontinental was an excess insurer. It apparently received late notice of a wrongful death claim arising from an auto accident. Thirty or thirty-four days later (the parties disagreed as to the precise timing), it issued a disclaimer based on the late notice. The court rejected the disclaimer as untimely: "A thirty-day delay is unreasonable as a matter of law where the sole ground on which coverage is disclaimed is obvious from the face of the notice of claim and the accompanying complaint, and there existed no need to conduct an investigation before determining whether to disclaim." Transcontinental argued that, because it was an excess carrier, it had needed to conduct a brief investigation to determine the underlying limits, whether those limits had been eroded, and the facts of the underlying accident. The court summarily rejected that argument: regardless of any of those considerations, either the notice of claim was late or it was not, and Transcontinental should have been able to determine that without any other information.
In insurance insolvency proceedings, reinsurers usually wind up on the short end of things. A liquidator is often permitted to run roughshod over the insolvent company's reinsurers and their contractual rights, doing things no solvent ceding company would be permitted to get away with. In some insolvencies, courts that are supposed to supervise the liquidator end up rubber-stamping whatever he does. Occasionally, however, a court is willing to listen to the gripes of reinsurers who have had enough. In In re Liquidation of Midland Ins. Co., 18 Misc.3d 1117(A), __ N.Y.S.2d __, 2007 WL 151786, 2008 N.Y. Slip Op. 50110(U) (Sup.Ct., N.Y.Cty, January 14, 2008), a group of reinsurers moved to lift an injunction against suing the liquidator and the insolvent estate, so they could sue to vindicate the rights stipulated in their treaties and facultative certificates. The trial court refused to go that far. However, the court ordered Midland's liquidator to change the liquidation's procedures to afford reinsurers an opportunity to review records and to interpose defenses to claims (i.e., claims against the insolvent estate) if they wish. The decision is long and detailed, and addresses too many points to discuss here. If you're interested in the subject, you should read the whole thing. (A historical aside: this April will mark the twenty-second anniversary of Midland's entering liquidation. I don't expect the estate to be wound-up in my lifetime.)
Does the covenant of "good faith and fair dealing" -- a provision the law implies into most contracts -- require a carrier to pay a policy dividend to an insured that cancels its policy before expiration? "No," says a trial court in Towne Bus Corp. v. Ins. Co. of Greater New York, 18 Misc3d 1121(a), 2008 WL 216070, 2008 N.Y. Slip Op. 50149(U) (Sup.Ct., N.Y.Cty., January 18, 2008). Towne Bus had a Greater New York policy for workers comp and employer's liability. Eight months into the policy period, Towne cancelled on one month's notice and bought a replacement policy from another carrier. When the final premium was audited, Greater New York calculated a return premium of $18,375.95, which it paid to Towne. After Towne had cancelled its policy, but before that cancellation had become effective, Greater New York's directors declared a policyholder dividend. However, the board expressly stipulated the dividend would not be payable to policyholders who had cancelled midterm, unless they had immediately replaced the cancelled policy with another Greater New York policy. When Towne learned it would get no dividend, it sued. Towne based its argument on a policy provision that said, "Dividend: You shall participate in the earnings of the Company to such extent and upon such conditions as shall be determined by the Board of Directors of the Company in accordance with Law and as made applicable to this policy provided that you shall have complied with all of the terms of this policy with respect to the payment of premium" [underlining added]. In a nutshell, Towne argued, because it had "complied with all of the terms of [the] policy with respect to the payment of premium," the policy provided that Towne "shall [i.e., must] participate in the earnings of the Company." To do otherwise, Towne argued, would breach the carrier's implied obligation of good faith and fair dealing. You probably noticed that Towne ignored an important part of the policy language: "...to such extent and upon such conditions as shall be determined by the Board of Directors of the Company in accordance with Law and as made applicable to this policy...." Well, the court noticed that too. Since there was nothing illegal about conditioning the dividend on a policyholder's having paid premiums for a full year, the court refused to order payment of a dividend to Towne.
Res judicata (law Latin for a thing decided) is a legal doctrine that prevents relitigating a matter that's already been decided in a prior proceeding. It takes center stage in Employers' Fire Ins. Co. v. Brookner, __ N.Y.S.2d __, 2008 WL 193269, 2008 N.Y. Slip Op. 00448 (2nd Dep't, January 22, 2008). The facts are straightforward. Landlord owns a commercial building with three tenants, "A," "B," and "C." In tenant A's space is a machine with a water hose. The hose fails, causing water damage throughout the building. Employers has the 1st-party property coverage for Landlord and tenant B, so Employers pays for the water damage to their property. Tenant C then sues Landlord and A, demanding compensation for the damage to C's property. In that suit, Landlord cross-claims against A on theories of indemnity and contribution. That suit is settled: A pays $30,000 to C and the case is discontinued "with prejudice." No payment is made to Landlord. Then Employers sues A. In this suit, Employers demands reimbursement of the money it earlier paid for the damage to Landlord's and B's property. Tenant A moves to dismiss, arguing this latest suit by Employers is just a rehash of the earlier suit by tenant B, and is therefore barred by the earlier discontinuance "with prejudice" and the doctrine of res judicata. Tenant A loses in a heartbeat. Why? Because, apart from the fact that they both arose from the same failed hose, Employer's suit had nothing to do with the first suit, that's why. The first suit was based on C's claim for damage to her property. Employer's suit has nothing to do with C's property or any damage to it. Employer's suit is based on its separate and distinct claim to recoup the money it paid for damage to Landlord's and B's property. A's earlier settlement with C would not have barred either Landlord or B from suing A for their own property damage, so it should also not bar Employers when it sues as their subrogee. The stipulation discontinuing C's claim "with prejudice" meant only that C could never again sue A on that same claim. No reasonable person would understand that stipulation to have extinguished A's liability for the separate damage to Landlord's and B's property.
Few insurance policies contain "forum selection" or "choice of law" clauses. So, although there is a lot of case law about such clauses, not much of it is directly insurance-related. One coverage case that involves both of those clauses is Lumbermen's Mut. Cas. Co. v. Commonwealth of Pennsylvania, 18 Misc.3d 1122(a), 2008 WL 223274, 2008 N.Y. Slip Op. 50161(U) (Sup.Ct., N.Y.Cty., January 24, 2008). For the uninitiated, a forum selection clause is a contractual provision that says where disputes concerning the contract are to be litigated. A choice of law clause is a contractual provision that says what jurisdiction's law is to govern disputes concerning the contract. Under many circumstances, both of those kinds of clauses are enforceable in New York, but there are also many caveats, wrinkles, and exceptions. Lumbermen's, id., presents one of the exceptions. Lumbermen's issued pollution liability coverage for a highway project owned by the Pennsylvania Department of Transportation ("PennDOT"). The project led to a lot of environmental damage from contaminated water run-off, and PennDOT was looking at clean-up claims estimated to total $60 million. The Lumbermen's policy had forum selection and choice of law clauses, specifying that any coverage dispute was to be (a) litigated in a court in the State of New York and (b) decided according to New York law. Lumbermen's decided to start a declaratory judgment action. Relying on the forum selection and choice of law clauses in its policy, it sued in New York. Twelve days later, PennDOT started its own action in Pennsylvania. In the New York action, PennDOT moved to dismiss; Lumbermen's opposed that motion and cross-moved to stay the Pennsylvania action. The court's resolution of that motion and cross-motion are in the decision cited above. The court acknowledged that reasonable forum selection clauses are usually enforceable, but ended up not enforcing this one. It refused to enforce it because PennDOT -- an agency of the Commonwealth of Pennsylvania -- never had a legal right to accept or agree to it. Under the Pennsylvania Constitution, only the General Assembly of the Commonwealth can designate a forum where the state and its agencies can be sued. Pursuant to that constitutional power, the General Assembly had designated a Board of Claims for adjudicating this kind of dispute with the Commonwealth; PennDOT, on its own authority, could not bind the Commonwealth to a different forum. Because PennDOT never had the legal authority to agree to the forum selection clause, the court refused to enforce it (especially because New York has a similar constitutional provision, under which no New York state agency can bind the state to a forum other than one authorized by the New York Legislature). In the absence of an enforceable forum selection clause, there was simply no reason for the suit to proceed in New York: there was no other New York connection to either the policy or the underlying claims. Therefore, the New York suit was dismissed and PennDOT's suit in Pennsylvania will go forward. Because the New York suit was dismissed, the court had no occasion to rule on whether the choice of law clause was enforceable in this case: that decision will have to be made in Pennsylvania.
In Tradin Organics USA, Inc. v. Maryland Cas. Co., 2008 WL 241081 (U.S.D.C., S.D.N.Y., January 29, 2008), a court had to decide who was to pay for eighty metric tons of contaminated "raspberry crumble" (apparently a kind of foodstuff; sounds yummy, but not in this particular case). Tradin Organics contracted to provide the raspberry crumble to Crofter's, a Canada-based food company. To fill the order, Tradin contracted with a supplier in Serbia to ship the crumble directly to Crofter's in Canada. After Crofter's accepted delivery, it found the crumble contained plastic, pits, cherry stems, glass, and other materials that were not supposed to be there. The Canadian government ordered the crumble recalled. Tradin agreed to compensate Crofter's and paid it more than $214,000 for the contaminated crumble. Tradin then filed a claim under its GL coverage with Maryland Casualty, arguing it was entitled to coverage for the amount it had paid Crofter's because the contamination constituted covered property damage under the policy. Maryland Casualty disagreed and rejected the claim, citing the policy's exclusion for property damage to "'your product' arising out of it or any part of it." The policy defined "your product" to include "any goods or products... manufactured, sold, handled, distributed or disposed of by" Tradin. Tradin then sued Maryland Casualty. Both sides moved for summary judgment. In the cited decision, the court granted the carrier's motion and dismissed the action. The court applied a mixture of New Hampshire law (the policy had been issued through an agent in New Hampshire, where Tradin had its sole place of business) and New York law (for issues New Hampshire's courts had not yet decided). As a result, the main issue was decided under New York law, because New Hampshire's courts have not yet interpreted the "your product" exclusion. The court agreed with Maryland Casualty that the "your product" exclusion clearly and unambiguously excluded coverage for the contaminated crumble and for Tradin's settlement with Crofter's. For some reason, Tradin appears to have spent much of its litigation effort trying to establish that the "your work" exclusion did not apply. From reading the court's decision, I cannot tell whether Tradin (a) confused the two exclusions or (b) was trying to distract the court from the "your product" exclusion.
In Metropolitan Heat & Power Co., Inc. v. AIG Claims Services, Inc., __ N.Y.S.2d __, 2008 WL 82621, 2008 N.Y. Slip Op. 00091 (2nd Dep't, January 8, 2008), Metropolitan Heat & Power contracted to provide and install a new boiler in a commercial building. Metropolitan bought the boiler from Easco and arranged for Easco to do the actual installation. During the installation, an Easco employee allegedly caused an explosion and fire, causing injuries and property damage. Metropolitan was sued (of course) and sought coverage from its liability carrier, Tower Ins. Co. Tower denied coverage on the basis of an exclusion for damages "arising out of operations performed for any insured by independent contractors." So, the first question in the case was whether Easco was an independent contractor (as Tower argued) or something else (as Metropolitan argued). The court's decision does not inform us what that "something else" might have been. Instead, the court held Easco was clearly an independent contractor and, therefore, the exclusion applied to operations it performed for Metropolitan: Easco performed the work with its own employees and according to its own methods, without being subject to Metropolitan's control or direction except as to the result of the work. So, the court granted summary judgment in favor of Tower and against Metropolitan. That was not the end of the case, however. Metropolitan also sought coverage as an additional insured under Easco's separate liability policy, issued by AIG. AIG denied any duty to defend or indemnify, because Metropolitan (a) was not a named insured under the policy, (b) did not fall within the policy's description of an insured, and (c) was not an additional insured. In response, Metropolitan offered only a certificate of insurance (apparently supplied by Easco), describing Metropolitan as an additional insured under the AIG policy. Sorry, Metropolitan: under New York law, a broker's certificate of insurance, issued for information only, is not enough to raise a genuine issue of material fact and, in any event, confers no rights on the certificateholder. Result: summary judgment for AIG.
Ocean Partners, LLC v. North River Ins. Co., 2008 WL 142863 (U.S.D.C., S.D.N.Y., January 14, 2008), is yet another 9/11 commercial property loss. The first issue the court addressed in this case involved particulates from the destruction of the World Trade Center. Those particulates infiltrated a nearby building and its systems. The property owner sought coverage for the damage and the costs of removing the particulates from the building. The carrier, North River, argued that the particulates constituted "contamination," which was expressly excluded from coverage by the policy's pollution exclusion. Following the Second Circuit's decision in Parks Real Estate Purchasing Group v. St. Paul Fire & Marine Ins. Co., No. 05-5890-cv (2nd Cir., December 21, 2006), the District Court held the word contamination was ambiguous in this non-environmental context. As a result, the court held neither side was entitled to summary judgment; rather, each party will be permitted to introduce extrinsic evidence at trial to support its interpretation of the word contamination. North River also argued that its policy's collapse exclusion should preclude coverage, because the collapse of the World Trade Center had been the efficient proximate cause of the insured's property damage. To determine whether the collapse exclusion applied, the court looked to see whether the WTC's collapse had been the efficient proximate cause of the damage. Ultimately, the court concluded the WTC's collapse had been only a remote cause of the damage; the efficient proximate cause was the particulates themselves, not the collapse that generated them.
Zurich American Ins. Co. v. Felipe Grimberg Fine Art, 2008 WL 394808 (U.S.D.C., S.D.N.Y., February 13, 2008), involved an art swindle. The insured, Grimberg, was an art dealer, insured under a fine arts policy issued by Zurich.
In or about July,
2000, another dealer (Cohen) contacted Grimberg regarding Cohen's interest
in buying a painting by an artist named Botero. With the intention of
selling it
to Cohen
for $785,000, Grimberg traveled to Italy to buy the Botero for $720,000.
Grimberg asserted that, consistent with custom and practice in the fine arts
business, and consistent with business dealings between him and Cohen over
the previous decade, he arranged to have the Botero shipped to Cohen on the
strength of a verbal agreement. In connection with that shipment, Grimberg
requested and received an endorsement increasing the transit limit of
insurance coverage for the Botero for the trip from Pisa, Italy, to New York
City. Grimberg paid the additional $300 insurance premium, and the painting
was insured for the duration of its transit from Pisa to New York at the
intended selling price of $785,000.
In or about September, 2000, the Botero arrived in New York and was delivered to Cohen's warehouse. Cohen informed Grimberg that he had a client who wanted to buy the Botero, and they agreed Cohen would pay Grimberg for the painting when Cohen had received payment from that client. Several weeks later, Cohen informed Grimberg that he had two Marc Chagall paintings available for sale if Grimberg was interested in buying them. After seeing photographs of the Chagalls, Grimberg agreed to buy them by forgiving Cohen's debt of $785,000 for the Botero and paying Cohen an additional $885,000. On or about October 30, 2000, Grimberg wired the $885,000 to Cohen's bank account. Cohen then told Grimberg he would send the Chagalls to him as soon as he (Cohen) received them. In or around late November or early December, 2000, Cohen called Grimberg to tell him he had the Chagalls and asked Grimberg what to do with them. Grimberg decided to fly from his home in Miami, Florida, to Cohen's apartment in New York. He saw the paintings in Cohen's apartment, and was prepared to take them back to Miami, but Cohen asked Grimberg to leave the paintings with him because there was a potential buyer for them. Because Grimberg had not yet secured a buyer for the Chagalls, he agreed, and flew back to Miami without the paintings. He viewed the paintings once more in Cohen's apartment before the end of the year, but again did not take the paintings with him. Cohen continued to assure Grimberg that he would pay him when the Chagalls were sold. In January, 2001, Grimberg heard for the first time that Sotheby's was filing suit against Cohen for a $10 million debt. Upon hearing that news, Grimberg repeatedly tried to contact Cohen. When Grimberg finally reached Cohen, Cohen reassured him that he would be paid soon. Cohen and the two Chagalls disappeared soon thereafter, and Grimberg was never paid any of the proceeds from any sale of the Chagalls. Grimberg demanded that Zurich pay for the Botero (not the Chagalls) as a theft loss. Zurich's policy "insure[d] antiques and object of art of every nature and description usual to the conduct of the Insured's business, being the property of the Insured; or held by them in trust; or on memorandum; or on consignment; or sold but not delivered; or owned on joint account with others; or belonging to others and for which the Insured may be liable; or for which the Insured has assumed liability prior to loss." The court agreed with Zurich that the Botero painting was not property insured under the policy. It was not "property of the Insured," because Grimberg had sold it to Cohen. Grimberg had testified repeatedly that the missing Chagalls were his property, because he had bought them from Cohen. If he had bought them from Cohen, what had he bought them with? With $885,000 plus forgiveness of the $785,000 Cohen had owed him on the Botero. However, Grimberg then argued he had never really "sold" the Botero, because Cohen acquired it by trick or larceny, and therefore (a) there had been no consideration for a sale and (b) title to the Botero had never actually passed to Cohen. The court disagreed: whatever fraud had occurred between Grimberg and Cohen happened only after the delivery of the Botero and transfer of title to Cohen. Grimberg had willingly delivered the Botero to Cohen at a place and in a manner consistent with a longstanding business custom between them (i.e., delivering merchandise on the basis of a handshake agreement, then waiting for payment to be made later). The sale of the Botero was therefore complete when it was delivered to Cohen, even though actual payment was deferred. Although Grimberg's informal way of doing business presented a substantial risk of nonpayment, that was not a risk Zurich had agreed to insure.
Accessories Biz, Inc. v. Linda and Jay Keane, Inc., __ F.Supp.2d __, 2008 WL 282269 (U.S.D.C., S.D.N.Y., January 31, 2008), involved a dispute over costume jewelry. Accessories Biz designs, produces, and wholesales costume jewelry. L&J Keane is (or, more accurately, was) a customer of Accessories Biz. In April, 2005, Accessories Biz provided L&J with samples of its designs, allegedly worth about $250,000. L&J refused to return the samples. Instead, L&J allegedly contracted with other producers to manufacture competing costume jewelry based on Accessories Biz's samples. Accessories therefore sued L&J. L&J sought coverage under a CGL policy issued by Maryland Casualty. When Maryland refused to defend or indemnify, L&J impleaded it into Accessories Biz's pre-existing action as a third-party defendant. Long story short, Maryland won for the following reasons:
February, 2008 Thought we'd heard the last of 9/11 coverage litigation? Think again. In Cosmetics Plus Group, Ltd. v. American International Group, Inc., __ B.R. __ 2007 WL 3197417 (Bkrtcy.S.D.N.Y., 2007), yet another policyholder with a retail store in the World Trade Center argued that the "period of restoration" for its business interruption coverage should be deemed to last until the World Trade Center is rebuilt. Courts hearing "September 11th cases" have been unreceptive to that argument; regardless of differences in policy language, courts have generally limited an insured's period of restoration to the time reasonably required to replace its operations at a reasonably equivalent location. The court in this case saw no reason to give the insured a period of restoration any longer than that. Indeed, in this case the facts required the period of restoration to be shorter: the insured had already declared bankruptcy and was in the process of winding up its operations before the Twin Towers fell on 9/11. The final act in that winding-up was to have been a court-approved "going out of business" sale, scheduled to have ended on 12/24/01. Therefore, the period of restoration was held to end no later than that date. In City of Kingston v. Harco Nat'l. Ins. Co., 848 N.Y.S.2d 455 (3rd Dep't, 2007), a municipal sewer line broke, discharging a large volume of water and raw sewage that flooded a number of properties. Numerous claims (for both bodily injury and property damage) were made against the City. Harco, the City's liability insurer, disclaimed coverage on the sole basis of the policy's pollution exclusion. The City then sued Harco, seeking a declaration that Harco was obligated to defend the claims. In the coverage action, Harco asserted an additional exclusion (a "fungi" or "bacterial" exclusion) as an additional basis for disclaiming. Sorry, Harco: by disclaiming on the sole basis of the pollution exclusion, you implicitly waived any other ground for disclaiming of which you knew or should have known at the time. The court therefore disregarded the fungi/bacterial exclusion. As to the pollution exclusion, the court noted some of the claims, and some of the alleged damage, had nothing to do with any pollutant or contaminant: they were based only on the discharge of water (variously described as having been like a "flood," a "river," or "Niagara Falls") on the claimants' properties. Although the pollution exclusion might exclude a duty to indemnify some of the claimed damages, it did not exclude a duty to indemnify all of them. Therefore, Harco had a duty to defend. The New York State Attorney General's "contingent commissions" suit against Wells Fargo has suffered a setback: in People ex rel. Cuomo v. Wells Fargo Ins. Services, 2008 WL 162147 (Sup.Ct., N.Y.Co., January 14, 2008), a trial court dismissed the AG's complaint. The complaint alleged four legal theories:
The problem with the AG's complaint was that, although it purported to describe and characterize Wells Fargo's contingent compensation arrangements in a general sort of way, it alleged very few specifics. Fraud, for example, is supposed to be pleaded with particularity, but the complaint alleged no specific instance of fraud and provided no particulars of any fraud that might have occurred. Similarly, the claim for breach of fiduciary duty failed to allege facts indicating the existence of a fiduciary relationship between Wells Fargo and any of its customers. (Under NY law, a broker is not ordinarily a fiduciary for its customers, but may become one as to a specific customer if there is a "special relationship" with that customer.) The unjust enrichment claim failed to allege any particulars concerning any specific instance of unjust enrichment. Because of that kind of broad-brush, "impressionistic" pleading -- i.e., lots of general accusations, characterizations, and pejoratives, but no specifics -- the court dismissed the AG's complaint. The AG's Office asked for leave to replead, which the court granted, so this dismissal is not necessarily the end of the case. January, 2008 Happy new year to all of you. You may have noticed that this site was down for part of December. Some malicious moron apparently decided it would be fun to bombard the site with huge amounts of data (about 100 megabytes a pop!) until my monthly data transfer quota was exceeded and my Web host shut me down. My apologies for the disruption. Now, on to the recent decisions. In White v. Continental Cas. Co., __ N.Y.2d __, __ N.Y.S.2d __, __ N.E.2d __, 2007 WL 4165127, N.Y. Slip Op. 09310 (November 27, 2007), the Court of Appeals had to decide whether a disability policy's definition of "total disability" was clear and unambiguous. The policy's definition of "total disability" included a requirement that the insured be unable to "[perform] the duties of any gainful occupation for which [he is] reasonably fitted by education, training, or experience." The insured argued that requirement was unclear and ambiguous, and rendered coverage illusory. The insured, an orthopedic surgeon, was disabled by a hip condition and could no longer perform surgery. However, he continued to render second opinions, perform independent medical examinations, and serve as an expert witness. The Court held the policy's definition was clear and unambiguous. Because the insured was able to -- and actually did -- perform the duties of a gainful occupation for which he was reasonably fitted by education, training, and experience, he was not "totally disabled" within the meaning of the policy. The decision notes that, once a policy provision is determined to be clear and unambiguous (and, of course, assuming it is not unenforceable for some other reason), "a court is not free to alter the contract to reflect its personal notions of fairness and equity." In Romano v. Whitehall Properties, LLC, __ N.Y.S.2d __, 2007 WL 4105723, 2007 N.Y. Slip Op. 27477 (Sup.Ct., Kings County, November 19, 2007), the plaintiff was a construction worker who was injured at a job site. He sued the owner and general contractor, each of whom was insured under an Owner-Controlled Insurance Program ("OCIP") or "wrap-up" program -- i.e., the owner had procured GL, employer's liability, XS, and WC coverages to protect itself and all the contractors and subcontractors working on the project. Under the OCIP, Travelers provided the GL, employer's liability, and WC coverages, and Westchester Fire Insurance Company provided excess coverage. The case was eventually settled for a total of $4 million ($2 million from Travelers' GL policy and $2 million from Westchester's XS policy). In the meanwhile, the plaintiff had been collecting WC payments under the Travelers WC policy, so Travelers asserted -- and collected -- a $71,500 lien against the settlement proceeds. The owner and general contractor then argued that Travelers' recovery of its WC lien was prohibited by New York's antisubrogation rule. The court rejected that argument, for a couple of reasons. First, Travelers' WC lien was a creation of statute (Workers Compensation Law § 29); it did not stem from an insurance contract or from the common law doctrine of subrogation. Second, the antisubrogation rule applies where a carrier attempts to subrogate against its own insured for the very risk for which it covered that insured. It does not apply where, as here, the same carrier covers two distinct risks under separate policies. That is, Travelers -- in its role as a WC carrier -- could assert its statutory lien against the recovery to which it had contributed in its separate and distinct role as a GL insurer. The defendants also argued that Travelers should be required to contribute "fresh money" to the settlement. The court's opinion does not explain exactly what it means by the phrase fresh money, but the context suggests the defendants argued that, because the settlement relieved Travelers of the obligation to pay future benefits under its WC policy, Travelers ought to reimburse Westchester (the XS carrier) for some portion of its $2 million contribution to the settlement. Under Workers Compensation Law § 29, the plaintiff would have had a statutory right to demand an apportionment of part of his attorneys' fees to Travelers, and it was this right that the defendants were trying to assert for themselves. Again, the court rejected that argument: under the statute, the right to such an apportionment belonged to the plaintiff, not to the defendants and not to Westchester. Nothing in the settlement agreement indicated the plaintiff had intended or agreed to assign that right to anyone. Therefore, the defendants had no standing to seek such relief. Some recent New York decisions have treated "earth movement" exclusions pretty harshly, but Labate v. Liberty Mut. Ins. Co., __ A.D.2d __, __ N.Y.S.2d __, N.Y. Slip Op. 09366, 2007 WL 4183024 (2nd Dep't. November 27, 2007), shows such exclusions are still alive and kicking when the facts are right. In this case, the insureds' house suffered substantial damage when the basement slab settled: the slab itself cracked and so did some walls. The owners' homeowner's policy excluded coverage due to "Earth Movement... earth sinking, rising or shifting," or due to the "[s]ettling, shrinking, bulging or expansion, including resultant cracking, of pavements, foundations, walls, floors, roofs or ceilings." Liberty Mutual denied coverage on the basis of that exclusion, so the insureds sued. Both the carrier's expert and the insureds' own engineers, hired to fix the conditions, testified the damage had been caused directly or indirectly by earth movement or settlement. Liberty Mutual moved for summary judgment, but the trial court denied that motion (for reasons not stated in the cited decision). Liberty Mutual then appealed. In the decision cited above, the Appellate Division held there was no material question of fact, the exclusion applied, and Liberty Mutual's motion for summary judgment should have been granted. It sure does tend to undercut an insured's case when its own engineers testify that property damage was caused by an excluded cause of loss. MCI LLC v. Rutgers Cas. Ins. Co., 2007 WL 4258190 (U.S.D.C., S.D.N.Y., December 4, 2007), follows a twisting factual path to reach some interesting conclusions. The saga begins in July, 2003, when an excavation contractor (Pelcrete) severed two underground fiber-optic telecommunications cables. MCI and Sprint (the owner and lessee of the cables, respectively) contacted Pelcrete the next day and asked for the name of its liability carrier, but Pelcrete refused to disclose it. Over a year later, in September, 2004, MCI and Sprint sued Pelcrete. In January, 2005, MCI and Sprint learned that Pelcrete's insurer was Rutgers Casualty. Sprint and MCI promptly gave Rutgers notice of the occurrence and of the pending suit. In response, Rutgers promptly disclaimed coverage because Pelcrete had never notified it of either the occurrence or the suit. Rutgers never defended Pelcrete and Pelcrete ultimately defaulted in the suit. In May, 2006, the plaintiffs were awarded a default judgment against Pelcrete totaling in excess of $2 million, plus pre- and post-judgment interest. The plaintiffs then sued Rutgers to recover on the default judgment against Rutgers' insured. In August, 2007, the District Court awarded the plaintiffs summary judgment against Rutgers (for reasons not immediately relevant and which need not detain us here) and a judgment for $1 million (Rutgers' per-occurrence limit) was entered the next day. So far, so good. Now comes the interesting part. Ten days after entry of the judgment against Rutgers, plaintiffs moved to amend that judgment by adding about $500,000 in pre- and post-judgment interest. Rutgers opposed that motion by pointing to its policy's supplementary payments provision, which provided for the payment of pre- and post-judgment interest only "[w]ith respect to any claim that we investigate or settle, or any 'suit' against an insured we defend." The court characterized that language as creating a condition precedent: Rutgers could be required to cover interest only if it had investigated or settled the claim, or defended a suit. Everyone agreed Rutgers had neither settled the underlying claim nor defended the underlying suit. The plaintiffs argued, however, that Rutgers had "investigated" the underlying claim, so it should be on the hook for interest. The court held Rutgers had not "investigated" the claim, because the word investigate refers to making a detailed, close, systematic, thorough, careful, official, or methodical inquiry or examination. Rutgers had done nothing of the sort here: it had merely reacted to the initial notice it received and issued a quick disclaimer. It never contacted its insured or inquired into the merits before issuing the disclaimer, and had done nothing thereafter that could reasonably be construed as an "investigation." Plaintiffs then fell back on secondary arguments: even if Rutgers had not investigated the claim, its failure to have done so was a breach of the covenant of good faith and fair dealing, so Rutgers should not be able to rely on the failure of a condition precedent where only its own conduct frustrated or prevented the fulfillment of that condition. The court rejected those arguments, too. The court framed the issue as being whether an insurer, when it receives notice of a claim it believes to be clearly not covered -- whether because of late notice or some other reason -- can make a good-faith business judgment not to expend resources conducting an investigation of it. Here, Rutgers had assumed the truth of all the facts alleged in plaintiffs' complaint against Pelcrete, but concluded there was no coverage because of late notice, so there was no reason for Rutgers to have conducted any further "investigation." Rutgers' disclaimer letter had invited the submission of further information if anyone thought it had overlooked something, but no further information had been sent to it. Although Rutgers had been mistaken about the effectiveness of its disclaimer vis-à-vis the plaintiffs, it had been mistaken in good faith, and the court found no New York authority for the proposition that an insurer must always make an investigation of a claim where it believes that claim to be clearly not covered. Sexual misconduct claims against physicians are, alas, not as uncommon as they ought to be. Usually, such claims are made by patients. In Elashker v. Medical Liability Mutual Ins. Co., __ A.D.2d __, __ N.Y.S.2d __, 2007 N.Y. Slip Op. 09638, 2007 WL 4258843 (3rd Dep't, December 6, 2007), however, such a claim was made by a nurse who worked for the nursing home where the doctor was an attending physician. (No carrier likes defending such claims, regardless of who makes them.) In Elashker, the nurse claimed she and the doctor had been working on patient files in a conference room. Somehow (the opinion is short on graphic detail) the doctor allegedly engaged in intentional (and unwelcome) sexual contact while purporting to palpate the nurse's thyroid. The nurse sued the nursing home and the doctor, and the doctor turned the claim over to his medical malpractice carrier, Medical Liability Mutual. MLM denied a duty to defend or indemnify, so the doctor sued for a declaration of coverage. The med mal policy's insuring agreement encompassed claims "brought against [the insured] because of Professional Services which [he] provided (or should have provided)." The nurse's claim alleged only an intentional sexual assault perpetrated by the doctor as a co-worker while she was performing her duties in her place of employment. She made no claim regarding his having provided, or failed to provide, any kind of professional service, or that his alleged misconduct had constituted medical malpractice. Under the circumstances, both the trial court and the Appellate Division held the doctor's purported thyroid examination had merely provided the occasion for the alleged assault, and did not convert the doctor's acts into medical malpractice within the scope of the insuring agreement. Transportation Ins. Co. v. AARK Construction Group, Ltd., __ F.Supp.2d __, 2007 WL 4284161 (U.S.D.C., E.D.N.Y., December 7, 2007), dealt with a construction defect claim. AARK was the general contractor for the construction of a parking structure for Dollar Rent-A-Car. A few months after the garage had been completed, the pre-cast concrete floor collapsed, precipitating a fuel delivery truck from the first floor into the basement. The president of AARK visited the site and concluded the floor had collapsed because the fuel truck was too heavy and should not have been allowed into the garage. He then wrote to the subcontractor that had designed and manufactured the floor, advising that contractor to "notify all appropriate parties." Unfortunately, he never followed his own advice: AARK's CGL carrier (Transportation) remained blissfully unaware of the above events. Nearly two years later, Dollar's property insurer notified AARK that it had paid for Dollar's property loss and intended to pursue subrogation against AARK. AARK then -- at last! -- notified Transportation of the above events and of the threatened subrogation claim. In response, Transportation reserved all its rights, but began an investigation of the claim. About a year later, Dollar's property insurer sued AARK. Transportation defended AARK in that suit, subject to its earlier reservation of rights. After defending AARK for more than two and a half years, Transportation started a declaratory judgment action, seeking a declaration that it was not required to defend or indemnify AARK because (1) the damage to the garage had not been the result of an "occurrence" and (2) even if it had been the result of an "occurrence," AARK had not given prompt notice of that "occurrence." In response, AARK argued that it had had a reasonable belief in its own non-liability, which ought to excuse its late notice. AARK also argued it would be unreasonably prejudiced if Transportation were permitted to drop its defense after two and a half years. AARK also impleaded its insurance broker into the declaratory judgment action, alleging that, if Transportation had no duty to defend or indemnify, it would only be because of broker malpractice: AARK claimed it had sought "full coverage," and that is what the broker had agreed to procure. The court disposed of this welter of arguments as follows:
In Catholic Health Services of Long Island, Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa., __ N.Y.S.2d __, 2007 WL 4328737, N.Y. Slip Op. 09715 (2nd Dep't, December 11, 2007), the parties disputed whether an investigative subpoena constituted a "claim" within the meaning of a policy. That topic interests me (see here). I wish I could say this decision actually addresses it, but it does not. Here's why.
In 1998, Catholic
Health Services of Long Island, its five subsidiary hospitals, and several
other parent corporations and their subsidiary hospitals, formed a joint
venture to deliver health care on Long Island. Catholic Health Services
provided 43% of the stated capital for the venture. The joint venture was
called Long Island Healthcare Network ("LIHN"), but was not registered as a
separate legal entity. Meanwhile, Catholic Health Services was insured under
a not-for-profit insurance policy issued by National Union. Catholic Health
Services and its five subsidiary hospitals were named insureds under that
policy. The policy provided defense coverage for “claims” against an
“insured” for “wrongful acts.” A “claim” was defined to encompass, among
other things, “a formal administrative or regulatory proceeding commenced by
the filing of a notice of charges, formal investigative order or similar
document.” A “wrongful act” was defined to include a violation of the
Sherman Antitrust Act or similar federal or state law. Unfortunately, that
policy was never amended to identify LIHN as an insured.
In November, 2002, the New York State Attorney General (now our Governor) addressed an investigative subpoena to LIHN. The subpoena said the material was sought for “a confidential investigation into whether the activities of [LIHN] and the joint activities of hospitals within LIHN” violated the Sherman Antitrust Act or the Donnelly Act (NY's home-grown version of the Sherman Act). Subsequently, the U.S. Department of Justice also served interrogatories on LIHN. By the time the investigation was over, Catholic Health Services had paid $2.3 million as its 43% share of LIHN's cost to respond to the subpoena and interrogatories. Catholic Health Services sought coverage for that sum under the National Union policy, on the theory that the subpoena and interrogatories were “claims” within the meaning of the policy. National Union disclaimed coverage, so Catholic Health Services sued. On reciprocal motions for summary judgment, the trial court held for National Union, reasoning that (a) because LIHN was the designated recipient of the subpoena and interrogatories, it was the target of the investigation, and (b) because LIHN was not an insured under the policy, Catholic Health Services' claim for its 43% share of LIHN's costs and attorney's fees was not covered under the policy. The court reasoned that Catholic Health Services had incurred attorney's fees and costs only indirectly, and “solely by virtue of an independently imposed contractual obligation contained” in the joint venture agreement to pay a proportionate share of LIHN's fees. The court therefore held it was unnecessary to reach the issue of whether the subpoena constituted a “claim” within the meaning of the policy. In the decision cited above, the Appellate Division, Second Department, agreed: since LIHN was not named, described, or otherwise referred to as an insured in the policy, the coverage did not apply to it and National Union had no duty to defend, whether or not the subpoena constituted a "claim." [My thanks to insurance consultant Jerome Trupin, CPCU, CLU, ChFC, of Briarcliff Manor, New York, for bringing this decision to my attention. Thanks, Jerry!] Again, here's wishing you a great new year. December, 2007
Although not about insurance coverage per se (it's actually about the rule against hearsay), the decision in Hochhauser v. Electric Ins. Co., __ N.Y.S.2d __, 2007 WL 3105684, N.Y. Slip Op. 08037 (2nd Dep't, October 23, 2007), is a cautionary tale for claim-handlers. It shows how an apparently careful claim investigation can nevertheless sometimes lead to a bad result when it runs into the law of evidence. In this case, a Mrs. Hochhauser was hit by a car and was injured as a result. The driver had no insurance, so Mrs. Hochhauser submitted a claim for uninsured motorist benefits under her son's personal auto policy. That policy required that, to be entitled to such benefits, Mrs. Hochhauser had to have been a resident in her son's household at the time of the accident. The carrier's claim-handler interviewed the son (the Named Insured) concerning Mrs. Hochhauser's status as a resident of the household and, based on what the son told him, concluded she had not been a resident of the household at the time of the accident. The claim-handler made a contemporaneous written memorandum of the conversation for his claim file, but never spoke with Mrs. Hochhauser herself. The company then denied coverage, and Mrs. Hochhauser sued. At the trial, the claim-handler's report was admitted into evidence and the claim-handler was permitted to testify about his conversation with the son. Mrs. Hochhauser lost. She then appealed, and the decision cited above is the result of that appeal. The Appellate Division held that neither the claim-handler's memo nor his testimony about the conversation should have been admitted: each of them was inadmissible hearsay and neither of them was subject to an exception from the hearsay rule. The file memo was not admissible as a business record, because the initial declarant (the son) was not a part of the same business enterprise as the claim-handler and, in any event, was not operating under a "business duty" to report accurate and truthful information when he spoke with the claim-handler. The son's statements to the claim-handler were not admissible against Mrs. Hochhauser as declarations against interest, because they were not her statements and the son had not been authorized to speak for her. The result: without either the memo or the claim-handler's testimony about what the son had told him, the only evidence in the case was Mrs. Hochhauser's own trial testimony that she had so been a resident of the household, so she won. To try to avoid that result, it would have been necessary to pin down Mrs. Hochhauser herself, in her own words, either by interviewing her in the claim investigation or by deposing her in the action. After all, she was the insured and it was her claim, not the son's. Apparently, neither of those things was done. In Axelrod v. Magna Carta Companies, 2007 WL 3378346, Slip Copy, 2007 WL 3378346 (Table), 2007 N.Y. Slip Op. 52165(U) (N.Y.Sup., November 7, 2007), an insured apparently got hoist on its own petard. The insured (Axelrod) manufactured and sold charms (i.e., the jewelry kind, not the magic kind). It was sued for copyright infringement by Quest (another charm manufacturer), which alleged Axelrod had copied Quest's charm designs. Axelrod tendered the suit to its CGL insurer, Public Service Mutual. Under the Public Service policy, copyright infringement was one of the predicate offenses for "advertising injury," but only if the infringement was "committed in the course of advertising your goods, products or services." The complaint neither alleged nor implied that Axelrod had committed any copyright infringement in the course of advertising, so Public Service denied a duty to defend. When Axelrod notified Quest of the disclaimer, Quest promptly amended its complaint to try to allege a covered advertising injury. Axelrod received Quest's amended complaint, but never asked Public Service to defend against the amended complaint and, in fact, never notified Public Service the complaint had been amended. Instead, Axelrod continued to defend the claim through its own privately-retained counsel and, eventually, settled for $100,000. Axelrod then brought a declaratory judgment action against Public Service Mutual, demanding that Public Service reimburse Axelrod's defense costs in the underlying action, the $100,000 Axelrod had paid to settle that action, and Axelrod's attorneys' fees in the declaratory judgment action. In the cited decision, a trial court rejected all of Axelrod's claims: Public Service's disclaimer of a duty to defend had been correct under the allegations of the original complaint. Whether Public Service might have had a duty to defend under the allegations of the amended complaint was essentially irrelevant: Axelrod had itself elected not to tell the carrier about that amended complaint until after it had settled the underlying action and started the declaratory judgment action. The decision does not say so, but the circumstances lead me to suspect Axelrod may have been trying to have the best of both worlds: it wanted to be able to plead a lack of insurance coverage so it could try to settle at a lower number with Quest, but then demand that the carrier pay for the settlement anyway. [My thanks to Mike Savett of Weber Gallagher Simpson Stapleton Fires & Newby LLP, for bringing this decision to my attention. Mike represented Public Service Mutual in the case.] Federal Ins. Co. v. North American Specialty Ins. Co., __ N.Y.S.2d __, 2007 WL 3306577, N.Y. Slip Op. 08391 (1st Dep't, November 8, 2007), delves into the often-murky area of the "tripartite relationship" -- the mix of sometimes conflicting duties of loyalty and independence that a defense counsel owes to its client (i.e., an insured) and that client's insurers. The facts of the case are too complex to describe in detail here. Suffice it to say that Federal was an excess insurer that was required to pay $2 million (in excess of an underlying $1 million primary CGL policy) to settle a construction accident claim. Federal believed the underlying claim had been badly defended, in that the defense counsel (Rivkin Radler) selected by the underlying CGL carrier had failed to allege the applicability of New York's antisubrogation rule. In Federal's view, had Rivkin Radler alleged that rule in a timely fashion, Federal's policy would have ended up attaching excess of $2 million, rather than excess of $1 million, and Federal would have had to pay $1 million less to settle the construction accident claim. Federal therefore sued Rivkin Radler. In the decision cited above, the Appellate Division, First Department, dismissed all of Federal's claims:
On the regulatory front:
That's it for
December, folks. That's also it for 2007. Thanks to all of you for reading these
monthly Updates. Please accept my sincere best wishes to you and yours for a
very merry Christmas, happy holidays, and a great 2008. November, 2007 The New York State Court of Appeals issued two insurance-related decisions in October. The first, Certain Underwriters at Lloyd's, London v. Foster Wheeler Corp., __ N.Y.3d __, __ N.Y.S.2d __, __ N.E.2d __, 2007 WL 2947419, N.Y. Slip Op. 07501 (October 11, 2007), deals with how a court should choose the applicable law of decision in complex coverage disputes involving multiple years of coverage, policies issued by multiple carriers from multiple states, policies 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. This kind of scenario frequently arises in coverage disputes involving mass torts or class actions. Trying to decide which state's law should apply to coverage issues in that kind of scenario can be a real mind-bender. Because the Court of Appeals' decision is just a one-sentence affirmance of the Appellate Division's earlier decision in the case (which I wrote-up here last November), it is necessary to revisit the Appellate Division's decision. The Appellate Division announced a sort of bright-line rule by which courts should pick the applicable law in this kind of situation:
Now that the Court of Appeals has endorsed that holding, it should be followed by (a) all New York State courts and (b) all federal courts sitting in New York State in diversity cases. The second Court of Appeals decision deals with the status of the New York Liquidation Bureau. Dinallo v. DiNapoli, __ N.Y.3d __, __ N.Y.S.2d __, __ N.E.2d __, 2007 WL 2947397, 2007 N.Y. Slip Op. 07497 (October 11, 2007). The specific question the Court had to decide was "whether the New York State Comptroller has the constitutional and/or statutory authority to audit the New York State Insurance Department Liquidation Bureau." The Court held the Comptroller has no such authority. To reach that answer, however, the Court also held that, in his capacity as a liquidator or rehabilitator of distressed companies, the Superintendent of Insurance is not a "state officer," the Liquidation Bureau is not a "state agency," and the assets of distressed insurers that the Bureau controls are neither "money[s] of the state" nor "money[s] under state control." Although the Court thus immunizes the Liquidation Bureau from much of the oversight and control under which state officers and agencies must operate, it also makes clear that the Legislature can do something about that if it wants to: "Although the Legislature does not have the authority...to assign to the Comptroller the task of auditing the Bureau, it does have the authority to require the Bureau to retain independent auditors." The Superintendent is reportedly going to urge the Legislature to do so, as part of his recently announced program to reform the Bureau. Whether the Legislature will do so remains to be seen. United States Liability Ins. Co. v. Trance Nite Club, Inc., 2007 WL 2782714 (U.S.D.C., E.D.N.Y., September 24, 2007), shows how to build a good case for rescission of an insurance policy, based on a misrepresentation in the application. Here, the insured (Trance) was a bar/nightclub that had liquor liability coverage from U.S. Liability. When Trance was sued for a wrongful death under New York's Dram Shop Law, U.S. Liability agreed to defend. During the litigation, the owner of the club testified at a deposition. Some of his testimony contradicted information he had put on the application for U.S. Liability's insurance. After investigating, the carrier determined the information on the application was a material misrepresentation. The carrier then decided to rescind the policy, tendered the premium back to the insured, and commenced a d.j. action to get a judicial declaration that the policy was rescinded ab initio. In the decision cited above, the carrier won summary judgment in its favor and the court declared the policy rescinded. To achieve this result, U.S. Liability did a number of things right -- things some carriers fail to do:
Penna v. Peerless Ins. Co., __ F.Supp.2d __, 2007 WL 2769668 (W.D.N.Y., September 24, 2007), is another reminder to insureds and their lawyers that contractual limitations periods in insurance policies are enforceable -- and enforced -- under New York law. Here, the policy contained a two-year contractual limitations period (often called a "time for suit" or "suit limitations" clause). The insured's property claim was investigated and adjusted for longer than two years; the insured made some small partial payments during the two years, and conducted an EUO shortly after the two years had run. The adjustment then came to a dead stop. After hearing nothing further from the carrier, the insured brought suit some nine months after the two-year period had expired. The carrier moved for summary judgment on the basis of its "time for suit" clause, and won. The carrier had repeatedly reserved all its rights and had done nothing to suggest it intended to waive the two-year suit limitations clause. Such waivers are not lightly presumed: merely continuing to investigate or negotiate, or making partial payments, is not enough to show waiver. Although such waivers have been found in a small number of cases, those cases are few and far between. If an insured fears its claim will not be fully and finally resolved before the end of a limitations period, it should either (a) get a written waiver from the carrier, (b) get a written extension of time from the carrier, or (c) start a lawsuit. If it does none of those things, it's taking a big risk. International Business Machines v. United States Fire Ins. Co., 17 Misc.3d 1108(A), 2007 WL 2891408 (Sup.Ct., N.Y. County, September 24, 2007), illustrates that "additional insured" endorsements are not fungible: their precise wording matters, and can matter a lot. The dispute dealt with a bodily injury claim by a subcontractor's employee after he twisted his knee at a work site. There were multiple parties, multiple policies, and multiple versions of multiple construction contracts, so the facts and issues of the case are too complicated to set out here in detail. The one thing I want to focus on is the wording of one additional insured endorsement that was at issue. It was an endorsement on a CGL policy issued to a subcontractor (the injured worker's employer). It designated as an additional insured "any person or organization whom you are required to add as an additional insured to this policy by a written contract...." For such an additional insured, the endorsement afforded coverage "with respect to liability caused by your [i.e., the Named Insured subcontractor's] negligent acts or omissions at" the job site. Under that language, there would be coverage for the additional insured only if the liability were alleged to have been "caused by" the Named Insured subcontractor's "negligent acts or omissions." In this case, no one alleged that any act or omission by the subcontractor had contributed in any way to the accident, so there was no additional insured coverage. The outcome would probably have been different if the endorsement had afforded coverage "with respect to liability arising from your work for that additional insured." Another additional insured provision was the subject of N.Y.C. Housing Auth. v. Merchants Mut. Ins. Co., 2007 Slip Op. 07996 (1st Dep't, October 25, 2007). In this case, Merchants Mutual issued a policy to Stonewall, which installed an electromagnetic locking system on a Housing Authority building. The additional insured endorsement afforded coverage to the Housing Authority, "but only with respect to liability arising out of [Stonewall's] ongoing operations performed for" the Housing Authority. Stonewall installed a locking system on the Housing Authority building in 1995, and contracted to maintain and guarantee that system (except for malfunctions caused by vandalism) for two years after the date of installation. During the two-year guarantee period, a man was shot at the building, allegedly as a result of the locking system's failure to keep out an intruder. The shooting victim sued the Housing Authority, and the Housing Authority sought coverage from Merchants Mutual. The court decided, without extended analysis, that Stonewall's "ongoing operations" for the Housing Authority included both installation of the system and Stonewall's two-year maintenance and guarantee obligation. Although the shooting had occurred during that two-year period, the court held there was no additional insured coverage for the Housing Authority: there was no evidence of any failure of the system as a result of faulty installation or poor maintenance. The only evidence of system failure was as a result of vandalism, which had been specifically excluded from Stonewall's contract and was therefore not part of its "ongoing operations." Alex & Alex Diamonds, Inc. v. Certain Underwriters at Lloyd's, London, 2007 WL 2844912 (U.S.D.C., S.D.N.Y., September 27, 2007), is a cautionary tale for (a) policy drafters and (b) lawyers who make unsupported motions for summary judgment. The case involves a theft claim under a jeweler's block policy. The policy listed different limits of liability that might apply, depending on where the property was, or by whom it was held, at the time of loss. For example, one limit would apply if the property was lost while in transit by Registered Mail, another if the property was held at the insured's own premises, another if it was in a bank or safe depository, etc. The schedule of limits indicated there would be "No liability" if the property was in the hands of "commission salesmen or selling agents." Lloyd's decided this particular theft had occurred while the merchandise was in the hands of a commission salesman, and therefore refused to pay anything. The insured sued, arguing that the person from whom the jewelry had been stolen was not a commission salesman, but a salaried employee (albeit one who also received commissions in addition to a salary). Even though the insured testified the person was a salaried employee, and even though there was little or no documentation to suggest otherwise, Lloyd's moved for summary judgment. Of course, the court said there was an obvious question of fact and denied Lloyd's motion. So, the first moral (the one for litigators) is: unless you are trying to secure some indirect tactical benefit (and I don't see one here), don't waste your time and your client's money moving for summary judgment when there are obvious disputed factual issues. The second moral (the one for policy drafters) comes from the court's holding that the undefined term "commission salesman" in the Lloyd's policy was ambiguous. In fact, the policy and its attachments used the terms selling agents, salesmen, commission salesmen, and independent commission salesmen, without defining them or explaining how to distinguish any of them from the others, and without saying whether any of them could also be a salaried employee. None of those terms has a single, precise, well-understood meaning. Rather, each of them is reasonably susceptible of being understood and applied in multiple ways in different contexts. Since deciding which of those labels to stick on a particular individual could determine who would get (or get to keep) a lot of money, it should have been worth someone's time to define or explain -- right in the policy -- what they were actually intended to mean. Now, a jury will get to decide that. Swell. State Ins. Dept. Liquidation Bureau v. Generali Ins. Co., __ A.D.2d __, __ N.Y.S.2d __, 2007 WL 2993807 (1st Dep't, October 16, 2007), deals with how to allocate loss and defense costs among multiple coverage periods. The insured, Rosan Realty Corp., owned a premises from March, 1988, to July, 1992. Rosan was then evicted and, in 1994, the corporation was dissolved. While it owned the premises, Rosan had two different liability insurers, at different times: Generali (for 5.5 months) and Transtate (for 10.2 months). During the remaining 35 months, Rosan had had no liability insurance on the premises. In 1993, shortly before Rosan Realty was dissolved, it was sued for bodily injuries allegedly sustained by a tenant's child as a result of exposure to lead paint at the premises. Generali disclaimed any duty to defend or indemnify the suit. Transtate was by then in liquidation, but the Liquidation Bureau defended the suit on Transtate's behalf and ultimately settled it. The Liquidation Bureau paid 100% of (a) Rosan's defense costs and (b) Rosan's share of the settlement. Then, the Liquidation Bureau went after Generali for contribution. A trial court held that Generali had owed a duty to defend and indemnify Rosan with respect to the lead paint suit. It therefore allocated to Generali responsibility for 50% of the defense costs the Liquidation Bureau had paid. It also allocated to Generali responsibility for a share of the settlement paid by the Liquidation Bureau. Generali's share of the settlement was based on a "time on the risk" ratio: Generali's 5.5 months was the numerator and the sum of Transtate's 10.2 months and Generali's 5.5 months (a total of 15.7 months) was the denominator, yielding a 35% share for Generali. Generali appealed, arguing that (a) its share of defense costs should also have been based on a "time on the risk" ratio, not on a per capita division based on the number of carriers, and (b) a correct "time on the risk" ratio should include the insured's bare period of 35 months in the denominator. According to its argument, Generali should have been responsible for only 10.8% of both defense costs and indemnity. In the cited decision, the Appellate Division rejected Generali's argument and affirmed the trial court's decision. First, nothing about the 50:50 split of defense costs seemed unfair to the Appellate Division: each carrier had had a duty to defend the entire claim. Transtate (the Liquidation Bureau) had done so, but Generali had unjustifiably defaulted on its duty to defend. Requiring Generali to reimburse half of the defense costs was not unfair or unreasonable. With respect to allocating indemnity, although there have been some cases in which loss has been allocated by a pure "time on the risk" method that included uninsured periods, no New York court has ever held that is the only way, or even the default way, to allocate loss among multiple coverage periods. In this case, the insured no longer existed and the estate of Transtate had already actually paid the entire settlement. Under the circumstances, there was nothing unfair about the trial court's allocation based on the ratio of Generali's coverage period to the total of insured periods, with no account taken of bare periods. (Two of the five justices dissented. The minority, like the majority, rejected Generali's position on defense costs, but would have accepted Generali's position on allocating loss.) In International Flavors & Fragrances, Inc. v. Royal Ins. Co. of America, __ A.D.2d __, __ N.Y.S.2d __, N.Y. Slip Op. 08122, 2007 WL 3146945 (1st Dep't, October 30, 2007), the Appellate Division, First Department, had to decide how to apply a per-"occurrence" deductible where multiple claimants alleged they had been injured by prolonged exposure to a chemical used in their workplace. The claimants worked at a factory that packaged microwave popcorn. Thirty of them brought a class action, alleging they had developed a collection of respiratory ailments (sometimes referred to as "popcorn lung") as a result of prolonged workplace exposure to diacetyl and other chemicals used to impart a buttery flavor to microwave popcorn. The defendant (the manufacturer of the chemical) was insured under a series of AIG CGL policies. The first two policies provided for per-claim SIRs; the remainder provided for per-"occurrence" deductibles. The court assumed the per-claim SIRs "would require application of the [SIRs] to each of the...injured workers' claims." (That is by no means self-evident in the context of a class action, in my opinion, but the court apparently thought it was.) As regards the per-"occurrence" deductibles, the court held each claimant's exposure to the chemicals constituted a separate "occurrence," requiring a separate application of the deductible to each claimant. That was because each claimant's exposure had been independent of the others', and their exposures had occurred at different times and for different lengths of time. The parties to the insurance contract were both sophisticated commercial entities and, had they intended the deductible to apply on any other basis -- such as an aggregate basis -- they could have said so in the policy. October, 2007 I recently got a nice e-mail from the folks at LexisNexis. It says:
So, I gather this page is deemed a blog, which makes me a blogger. Who knew? One post a month does not seem like much of a blog to me; a slow-motion blog, maybe. In any event, it's gratifying to get such compliments. Now, on to the news. The Court of Appeals recently weighed in on the meaning of a CGL policy's "auto" exclusion in Guishard v. General Security Ins. Co., __ N.Y.3d __, __ N.Y.S.2d __, __ N.E.2d __, 2007 WL 2592414 (September 11, 2007). The insured owned a van, which it was in the process of converting into a "Mr. Softee" ice cream truck. In the course of that conversion, a worker severely injured his eye while riveting metal to the van. The worker sued the owner. The owner sought a defense from his CGL carrier (General Security). General Security denied a duty to defend, because the policy excluded coverage for BI "arising out of the ownership, maintenance, use or entrustment to others of any...'auto'...owned or operated by or rented or loaned to any insured." The owner then sued General Security, seeking a declaration that there was a duty to defend and indemnify. General Security's position was that the van conversion constituted maintenance, so any BI arising from it was excluded. The trial court disagreed, and held there was a duty to defend and indemnify. The appellate Division affirmed, because General Security had failed to submit the definitions section of its policy, and so had failed to show that the van was an "auto" within the meaning of the policy. The Court of Appeals also affirmed, but for a different reason. The Court of Appeals held the word maintenance refers to work on "an intrinsic part of the mechanism of the car and its overall function." In the Court's view, riveting metal to the van in furtherance of its conversion to an ice cream truck was not maintenance, as that word is used in the policy. About all this, a few observations:
When is a representation not a misrepresentation? When it's true, of course! That is the tautological moral of First Unum Life Ins. Co. v. Gravante, __ A.D.2d __, __ N.Y.S.2d __, 2007 WL 2389672 (1st Dep't, August 23, 2007). Mr. Gravante applied to First Unum for a disability policy. In his application, he stated that he already had a disability policy from Provident, but intended to cancel it if First Unum issued one to him. First Unum issued its policy. Gravante then wrote to Provident, asking for cancellation of the Provident policy. For some reason, Provident did not cancel its policy. Sometime thereafter, Gravante presumably made a claim to First Unum. When First Unum investigated and learned the Provident policy had not been cancelled, it brought an action for rescission of its own policy. First Unum's argument for rescission was that Gravante had made a material misrepresentation in his application. Both the trial court and the Appellate Division rejected that argument: Gravante had made no misrepresentation -- material or otherwise -- in his application. He had disclosed the existence of the Provident policy and stated his intention to request its cancellation if First Unum issued a policy. His subsequent letter requesting such a cancellation was conclusive proof that he had not misrepresented his intentions on the application. Provident's failure to have cancelled its own policy did not make anything Gravante had said a misrepresentation. (I have a nagging suspicion there must be more to this story than is revealed by the court's decision. If that's all there really was to it, surely First Unum could have figured this out for itself, without the time and expense of a lawsuit.) Liberty Mut. v. Ins. Co. of the State of Pa., 2007 N.Y.Slip Op. 06576 (1st Dep't, September 6, 2007), dealt with the allocation of a settlement between primary and excess insurers, in the context of a construction accident. A subcontractor's employee was injured on the job and sued the project owner and construction manager. Those defendants then impleaded the injured plaintiff's employer ("General," the subcontractor). The injury claim was eventually settled for $2.5 million, of which Diamond (General's primary GL carrier) paid $1 million and Liberty Mutual (General's excess liability carrier) paid $1.5 million. General also had primary employer's liability coverage through AIG. Although AIG's policy afforded General unlimited primary coverage for common law liability for BI to an employee in the course of employment, AIG refused to participate in defending or settling the underlying claim. After the settlement, Liberty Mutual sued AIG. Liberty Mutual's position was simple: AIG was primary and Liberty Mutual was excess, AIG's refusal to defend or indemnify had been wrongful, and AIG's applicable limit of liability was unlimited, so AIG had to reimburse Liberty Mutual for Liberty's $1.5 million contribution to the settlement. AIG threw up a number of roadblocks in Liberty Mutual's path to recovery, some of which worked and some of which did not:
Here's a dangerous little case about arbitration clauses. In Sozzi v. Moishe's Moving Systems, Inc., 16 Misc3d 1121(A), 2007 WL 2295401, 2007 N.Y. Slip Op. 51530(U), (Sup.Ct., N.Y.Co., August 7, 2007), Mr. Sozzi contracted with a moving company to move his household goods from New York to Italy. As part of the transaction, the movers arranged, on Sozzi's behalf, for insurance on the goods. When the goods were delivered in Italy, some items were found to be damaged. Sozzi submitted a claim for $59,500, but the insurer (Fortis Corporate Insurance N.V.) offered to pay only $7,275.19. Sozzi then sued everybody: the mover, the insurance broker, and Fortis. When Fortis answered Sozzi's complaint, it asserted as an affirmative defense the existence of a mandatory arbitration clause in its policy. It then moved to compel arbitration of the dispute between Fortis and Sozzi. Sozzi's position was simple: he had never seen, signed, or agreed to any arbitration clause, either expressly or by implication; the mover and the broker had arranged for placing the insurance on his behalf, and he had had nothing to do with it; indeed, he had never even seen a copy of the policy until after he had taken delivery of the damaged goods in Italy, and could not have known it contained an arbitration clause. The court held that, simply by suing on the policy and relying on some of its terms, Sozzi had necessarily assented to the arbitration clause and evinced an intent to be bound by it. The court therefore ordered the dispute to be resolved by arbitration under AAA rules. This reasoning seems dangerous to me: is it really true that suing under a contract one had never seen necessarily proves assent and an intent to be bound by each and every provision in it? An earth movement exclusion was the focus of Cali v. Merrimack Mut. Fire Ins. Co., __ A.D.2d __, __ N.Y.S.2d __, 2007 WL 2317457, 2007 N.Y. Slip Op. 06415 (2nd Dep't, August 14, 2007). Cali bought HO coverage from Merrimack. During the coverage period, the house's slab foundation settled, causing substantial damage to the structure. Merrimack denied coverage on the basis of an earth movement exclusion, excluding coverage caused by "earth movement...earth sinking, rising or shifting" and due to "settling, shrinking, bulging or expansion, including resultant cracking, of pavements, patios, foundations, walls, floors, roofs or ceilings." The policy excluded coverage for such loss "regardless of any other cause or event contributing concurrently or in any sequence to the loss." Cali sued. Her argument was that the loss was not a result of earth movement at all, but had been caused by "hidden decay" -- a peril specifically covered under the policy. Her theory (supported by the testimony of an engineer) was that decayed wood buried in the earth under the foundation had created a void in the soil and a resultant "collapse" of the foundation. The Second Department agreed [reluctantly, it seems] with the carrier: "[W]e are...constrained to conclude that this policy's language specifically excluded coverage for damages resulting from earth movement 'even though the cause of the earth movement is a covered peril.'" An insurer is usually required to comply strictly (very strictly) with all applicable cancellation requirements, or its attempted cancellation of a policy will be deemed ineffective. Allstate Ins. Co. v. Ochoa, __ Misc.2d __, 2007 WL 2416192, 2007 N.Y. Slip Op. 27349 (Sup.Ct., NassauCo., August 27, 2007), is one of the few reported decisions relieving an insurer of the consequences of failing to make strict compliance. Bernetha Jeffrey was the insured under a Liberty Mutual personal auto policy. In April, 2003, her nephew called Liberty Mutual to advise that Ms. Jeffrey had died and that he (the nephew) was her executor. He also told Liberty the car would henceforth be driven by a cousin, and that the cousin would contact Liberty to be added to the policy as an additional driver until the estate was settled. Liberty Mutual told the executor and the new driver that the old policy would have to be cancelled and a new policy issued. Liberty asked the new driver to send a cancellation request and turn in the car's license plates. The original policy was supposed to expire on 6/11/03. Before then, Liberty issued a "renewal" policy to "The Estate of Bernetha Jeffrey," at the same address, with an inception date of 6/11/03. Liberty also mailed two premium statements for the "renewal" policy, but never received any payment. Finally, on 7/7/03, Liberty Mutual mailed a notice of cancellation for non-payment, effective 7/27/03. Although Vehicle & Traffic Law § 313(1)(a) required the cancellation notice to be mailed to the Named Insured at the address shown on the policy, this cancellation notice was mailed to the attention of "Bernetha Jeffrey," rather than "The Estate of Bernetha Jeffrey." No premium was paid, and no further contact was had from the family. Neither the executor nor the cousin (the new driver) ever changed the car's registration, turned in the car's plates, paid the premium, or applied for a new policy. A couple of weeks after the effective cancellation date, the car was involved in an accident while the cousin was driving it. The only question before the court was whether Liberty's attempt to cancel the policy should be deemed ineffective because it had mailed the cancellation notice to "Bernetha Jeffrey," instead of to "The Estate of Bernetha Jeffrey." Under these unusual facts, the court held the notice of cancellation had been sufficient, and the cancellation had been effective as of 7/27/03. On the regulatory front:
September, 2007 I guess a lot of New York judges must have been away in August, because interesting coverage decisions have been thin on the ground during the past month. There was one, though; plus some regulatory/political developments. US Pack Network Corp. v. Travelers Property Cas., __ N.Y.S.2d __, 2007 WL 2003411 (1st Dep't, July 12, 2007), is a sequel to a case I discussed over a year ago: US Pack Network Corp. v. Travelers Property Cas., 23 A.D.3d 299, 808 N.Y.S.2d 153 (1st Dep't, 2005). In the earlier decision, a carrier disclaimed coverage for late notice of two losses. The insured then sued both the carrier and the broker, claiming it had given oral notice to the broker shortly after each loss. The insured did not (or could not) specify the person to whom such oral notices had been given, or the dates on which the alleged conversations had occurred. The trial court held the insured's uncorroborated and vague assertions of oral notice were insufficient to raise an issue of fact, and entered summary judgment for the insurer. The Appellate Division, First Department, affirmed. The insured's claim against the broker survived, however, because the insured also claimed the broker had breached a contract, because the broker had procured a policy that failed to provide the full coverage the plaintiff had sought. Now, almost two years later, the Appellate Division has finally dismissed the insured's claim against the broker. The broker's argument -- which the Appellate Division accepted -- was that, even if the broker had breached a contract to procure a specific kind of coverage, that breach would be irrelevant and not a proximate cause of the insured's damages: "...[T]he damages plaintiff claims here as a result of the alleged breach of contract were not caused by the breach of that contract. They would have been suffered in any event, since even had the broker obtained more inclusive coverage, plaintiff itself failed to provide the timely notice necessary to obtain the benefits." I suppose the plaintiff could also have alleged the broker was supposed to procure a policy with no "prompt notice" requirement, but who would believe that? Governor Spitzer recently vetoed legislation that would have prohibited the use of a consumer's inquiries to creditors for mortgage or auto financing rate quotes in determining the consumer's credit score. The Property Casualty Insurers Association of America was one of the industry groups that asked him to veto the bill. On the med mal front, Governor Spitzer has recently convened a task force to review the state of New York's med mal market and propose ways to improve it. After years of negative earnings, the state's biggest med mal carrier is reportedly in bad shape. Even a recent 14% rate increase is seen as just a band-aid, with no long-term relief in sight and no one eager to jump into the market. The task force will reportedly consist of representatives from physician and hospital associations, the insurance industry, consumer groups, health plans, trial lawyers, and the Legislature, all led by the Superintendent of Insurance. If anyone thinks this cast of characters is likely to work an improvement in the med mal situation, I've got a very nice old bridge for sale. New York's recent package of WC changes (inevitably touted as "reforms" by Albany) includes an amendment to WC Law sec. 50(2). The amendment apparently requires WC coverage from a New York-licensed carrier for all employers with any employee in New York, as of September 7, 2007. Here is the complete text of the WC Board's announcement concerning the change:
The announcement is available at http://www.wcb.state.ny.us/content/main/SubjectNos/sn046_198.htm. Now, what does that mean, exactly? Does it mean an out-of-state employer's employee, visiting New York for a day or two on business (or perhaps just passing through on the way to somewhere else), will have to be covered by a WC policy from a NY-licensed carrier? Even if the employer has no other operations and no payroll in New York? As of this writing, nobody seems to know. Maybe the folks at the WC Board know, but, if so, they're not saying yet. Is it just my imagination, or does it sometimes seem to you that NY State's government is deliberately trying to discourage people from having anything to do with New York? Are they in the pay of the New Jersey Business Development Commission? It often seems that way to me. August 2, 2007, Extra: Yesterday, Governor Spitzer vetoed the legislation discussed in my August update, below. His veto message says:
My thanks to Ann Kramer, Esq., of Anderson Kill & Olick, PC, for bringing the Governor's veto to my attention. August, 2007 In late June, both houses of the New York State Legislature enacted bills (S6306 in the Senate, A8363-A in the Assembly) making significant changes in New York coverage law. The new legislation has been sent to Governor Spitzer. If and when he signs it (I do not know whether he has done so at this writing, but I expect he will), it will be part of the statutory law of New York. The legislation makes two substantial changes to current law. One of those changes is procedural, the other substantive. First, the procedural one. The legislation amends CPLR § 3001 (concerning declaratory judgment actions) to provide that "[a] party who has interposed a claim against another party may bring a declaratory judgment action for a determination of the existence or extent of coverage by an insurer subject to the provisions of article 34 of the insurance law [i.e., property & casualty insurers] to the party against whom the original claim is interposed." Under current case law, a plaintiff is usually unable to sue for a declaration of the defendant's insurance coverage; only the insured or the carrier can do that. Where neither the defendant nor its insurer takes the initiative and starts a d.j. action, the plaintiff currently cannot do so. Instead, the plaintiff has to wait until it has an unsatisfied judgment against the defendant. At that point, the plaintiff steps into the shoes of the insured and can sue the carrier to recover on the judgment. This way of proceeding often creates prolonged uncertainty, confusion, and inefficiency, because it can leave important coverage issues unresolved until after the underlying lawsuit is already over, even if it would make more sense for everyone to have resolved those issues earlier. The legislation is intended to cure that problem by giving plaintiffs an opportunity to start d.j. actions to resolve defendants' coverage issues, whether or not there has been a judgment in the underlying action. The substantive aspect of the legislation abolishes New York's "no prejudice" rule for late notices of claim. More precisely, it adds a new § 3451 to the Insurance Law, providing as follows:
There is a lot in this legislation for insurers and insureds to argue about. Off the top of my head, here are some issues I predict we will see addressed in future coverage battles:
I won't try to analyze or resolve any of these issues here (that's the kind of thing clients pay me to do in real life), but I will keep an eye out for cases addressing them and post here about any I find interesting. The only case that caught my eye this month was Merchants Mut. Ins. Co. v. Esposito, 2007 WL 2080888, 2007 N.Y. Slip Op. 51401(U) (Sup.Ct., Nassau Co., June 7, 2007), which discusses the meaning of the phrase "residents of your household" in a homeowner's policy. The Esposito brothers -- Salvatore and Giuseppe -- owned a house on Long Island. The two of them lived there with Salvatore's wife (Angela) and children. In 1998, Sal and Angela decided to divorce and the brothers moved out of the house, leaving Angela in possession. Four years later, while her divorce from Sal was still pending, Angela fell down some stairs in the house and was injured. She sued the Esposito brothers, who still owned the house. They turned the claim over to their HO carrier, Merchants Mutual. The carrier refused to defend them, citing an exclusion for BI to an "insured." The policy defined "insured" to include relatives of a Named Insured (Sal and Giuseppe) who were members of the Named Insured's household. So, the issues were whether Angela was (a) a relative of a Named Insured and (b) a member of the household of a Named Insured. The policy did not define either relative or household. The court assumed Angela was probably a relative of a Named Insured, since she and Sal were still married at the time of the fall. However, everyone agreed neither of the brothers had lived in the house with Angela for the preceding four years, and Sal had maintained his own separate household elsewhere. Accordingly, on the facts presented, Angela was not a member of a Named Insured's household, the exclusion did not apply, and the carrier had a duty to defend. One last thing. I am going to be upgrading my computer systems within the next few months and am seriously considering switching from PC to Mac. I'm not especially dissatisfied with Windows or PCs, but have heard a lot of very good things about Macs. If any of you is a lawyer with hands-on experience using a Mac in a law practice, I'd appreciate any guidance or helpful information you can offer. (Please spare me the kind of "Windoze peecees suck" and "Macs are for sissies" stuff one often hears from operating system partisans. I am looking for practical, useful information on hardware and software, not OS zealotry.) July, 2007
A belated happy Independence Day. Back to the one-column format. Two-column was supposed to be easier to read, but turned out to be harder for most people to read and harder for me to compose. Plus, I thought the two-column format was just plain ugly. I was too busy to do an Update for June, so there's a lot to cover this month. Here goes: Let's assume a CGL policy affords coverage to an additional insured (AI), but only with respect to liability "arising out of" the Named Insured's work for that AI. There is then a loss, and both the Named Insured and the AI are sued. At the end of the case, the Named Insured is found not to be liable for any part of the loss, but the AI is liable. Can the Named Insured's carrier be on the hook because of its AI coverage, even though the Named Insured itself was not liable? That is, if the Named Insured was not liable, then how can the AI's liability be said to "arise out of" the Named Insured's work? That is the main issue addressed in Turner Constr. Co. v. American Manufacturers Mut. Ins. Co., __ F.Supp.2d __, 2007 WL 1288611 (S.D.N.Y., May 2, 2007). The short answer is, "Yes, the Named Insured's carrier can owe the AI both a duty to defend and a duty to indemnify, even if the Named Insured itself was not liable." The main point to understand here is that the phrase arising out of the Named Insured's work (and similar language) does not mean proximately caused by the Named Insured's negligence, or proximately caused by the Named Insured's liability, or anything like that. Under New York law, the phrase arising out of usually means something much broader than proximate cause: the equivalent of "but for" causation. Therefore, the phrase arising out of in the typical AI endorsement does not focus on the precise cause of the accident, but on the general nature of the operation in the course of which the accident occurred. Although it is possible to write an AI endorsement that would afford much narrower coverage for AIs, most AI endorsements in general circulation use arising out of language or its functional equivalent. In BP Air Conditioning Corp. v. One Beacon Ins. Group, 2007 N.Y. Slip Op. 05581 (Ct.App., June 27, 2007), the Court of Appeals weighed-in on a related issue of additional insured coverage. The case involved another of those additional insured endorsements that can be read as an attempt to make the AI coverage contingent on there first having been a finding of liability. It provided that the AI was to be "an additional insured only with respect to liability arising out of [the Named Insured's] ongoing operations for that insured." The Named Insured and the AI were both sued in connection with an accident. When the AI asked the carrier for a defense, the carrier (One Beacon) declined to defend. Under One Beacon's reading of the AI endorsement, One Beacon was not obligated to defend the AI unless and until someone had first determined that the injury arose out of the Named Insured's work for the AI. The Court of Appeals rejected that reading: so long as the case presents a possibility of a covered liability for the AI, the carrier must defend and no preliminary finding of liability is required to give the carrier a duty to defend. Another question concerning AI coverage was considered in Rodless Props., L.P. v. Westchester Fine Ins. Co., 2007 N.Y. Slip Op. 03835 (1st Dep't, May 3, 2007). This time, the question was the significance of the word executed in an endorsement affording AI coverage "as required by contract, provided the contract is executed prior to loss." In Rodless Props., the contract the policy referred to was a construction contract between a general contractor (Westchester's Named Insured) and Rodless (another contractor claiming to be an AI under Westchester's policy). One obvious problem with Rodless's position was that there was no written contract: the agreement was completely oral and there was no writing to "execute." Rodless therefore argued the word executed was reasonably susceptible of two different meanings, because the phrase executed contract means either (a) a written contract signed by the parties or (b) a contract that has been fully performed by the parties. The First Department noted that, although executed contract could have either of those meanings, that did not make the policy ambiguous in this case. Whichever meaning one assigned to executed contract, there would still be no coverage here: (a) the contract was not written and had not been signed and (b) the parties had not completed their performance at the time of the accident. In Town of Massena v. Healthcare Underwriters Mut. Ins. Co., __ N.Y.S.2d __, 2007 WL 1287894 (3rd Dep't, May 3, 2007), the Appellate Division, Third Department, held that a "hospital professional liability" policy afforded a duty to defend the insureds against a federal civil rights action, even though the action alleged only deliberate, intentional misconduct. Briefly, the underlying action alleged that a municipal hospital and several of its personnel had undertaken a deliberate campaign to punish, or retaliate against, a physician who had incurred their displeasure by advocating greater use of nurse-midwives at the hospital. The defendants included the hospital and several members of its peer review committee. Healthcare Underwriters Mutual ("HUM") had issued a "hospital professional liability" policy to the hospital. The policy covered "injury to any person arising out of the rendering of...professional services," including "service by any person as a member of a formal accreditation or similar professional board or committee of the named insured." Under the policy, HUM assumed a "duty to defend any suit against the insured..., even if any of the allegations of the suit are groundless, false or fraudulent." Although the decision does not describe HUM's coverage position clearly or in detail, the carrier apparently argued it owed no coverage because the suit alleged only intentional harm, deliberately inflicted by the defendants. The court held there was a duty to defend, for the following reasons:
Empire Ins. v. Ins. Corp. of N.Y., 2007 N.Y. Slip Op. 04068 (2nd Dep't, May 8, 2007), is a case from the Department Of Summary Judgment Motions That Should Never Have Been Made. The case was a dispute between two insurance companies (Empire and Ins. Corp. of N.Y.), concerning which of them should be deemed primary to the other for the purpose of defending a construction company. The parties made reciprocal motions for summary judgment and Empire apparently got most of what it asked for. On appeal, the Second Department held neither company had made out a case for summary judgment:
These are motions that should never have been made. There are sometimes sound tactical reasons to move for summary judgment, even if one expects to lose. However, it is usually better not to move for summary judgment at all, rather than to make motions as half-hearted and unsupported as these appear to have been. Please don't give a judge reasons to write a decision like this about you, dear reader. It's embarrassing. Physicians' Reciprocal Insurers v. Jordan, __ N.Y.S.2d __, 2007 WL 1365639 (2nd Dep't, May 8, 2007), deals with a subject that has been a trap for many unwary physicians: the distinction between med mal coverage for a group medical practice vs. med mal coverage for individual physicians who are part of the group. In 1999, an ophthalmologist named Jordan became one of the members of a professional LLC doing business as LaserOne. At the same time, he entered into a separate employment agreement with LaserOne. In the employment agreement, Dr. Jordan agreed to perform laser vision correction procedures at LaserOne on a part-time basis, for which he was to be compensated. Both the LLC's operating agreement and the employment agreement expressly required Dr. Jordan to maintain his own separate med mal coverage. Thereafter, Physicians' Reciprocal Insurers ("PRI") issued an excess professional liability policy to LaserOne (the LLC). The PRI excess policy defined an insured to include "any...stockholder...of [LaserOne] while acting within the scope of his or her duties." However, the PRI policy did not cover any full-time or part-time physician "employee" engaged in the practice of medicine, and defined "employee" as any individual hired by LaserOne to perform services on either a full-time or part-time basis and to whom compensation was paid. During the PRI coverage period, three different patients treated by Dr. Jordan brought malpractice claims against LaserOne and Dr. Jordan. When Jordan sought a defense from PRI, the carrier disclaimed on two grounds: (a) Dr. Jordan had failed to provide prompt notice to PRI and (b) Dr. Jordan was not an insured under the PRI excess policy. The decision cited above holds that Dr. Jordan was not an insured under PRI's excess policy, because none of the three malpractice claims was brought against him in his capacity as a LaserOne "stockholder." Rather, each of the claims was based on his performance of his work as a part-time surgeon-employee, so PRI did not have a duty to defend or indemnify him. Continental Cas. Co. v. Employers Ins. Co. of Wausau, __ N.Y.S.2d __, 2007 WL 1345692, 2007 N.Y. Slip Op. 27188 (Sup.Ct., N.Y.Co., May 8, 2007), made headlines in the insurance press a few weeks ago. The case is an asbestos coverage class action. The class consists of over twenty thousand individuals who claim asbestos-related injuries and had actions pending against a CNA insured: the now-defunct Robert A. Keasbey Company. The case is unusual in that the class is not the plaintiff, but a defendant. CNA brought the action seeking a declaration that the asbestos claims against Keasby were covered, if at all, only under the products hazard/completed operations coverage of CNA policies, and are therefore subject to aggregate limits of liability that have now been exhausted. The claimants' position is that their claims are covered under the premises/operations coverage of CNA's policies, which are not subject to any aggregate. Long story short: the trial court concluded the bulk of the claims are covered under the premises/operations coverage and, therefore, are not subject to any aggregate limit of liability. The claimants estimate that, unless the decision is reversed or substantially modified on appeal, it could end up costing CNA between $100,000,000 and $250,000,000, or possibly more. In Seward Park Housing Corp. v. Greater New York Mut. Ins. Co., __ N.Y.S.2d __, 2007 WL 1365368, 2007 N.Y. Slip Op. 04055 (1st Dep't, May 10, 2007), the Appellate Division, First Department, discussed whether a carrier's denial of coverage should be considered merely a disclaimer of liability or a "repudiation of the contract." The court, recognizing that the phrase repudiation of the contract is now thrown around far too loosely in coverage disputes (including, on some occasions, by courts themselves), decided to clarify things. The distinction between a denial of coverage and a repudiation of the policy can be important, because a carrier "repudiating" a policy may deprive itself of the right to rely on some of the provisions of that policy. According to the court, a carrier's denial of coverage may be deemed a "repudiation" of the policy only when it evinces an intent to disregard the policy and not to abide by its provisions. In the context of non-insurance contracts, this kind of repudiation is usually called an "anticipatory breach" of a contract; i.e., a rejection of the intention or duty to shape one's conduct in accordance with the contract's provisions. As the court's discussion makes clear, a garden-variety denial of coverage based on a policy's terms and conditions is generally not a "repudiation" of the policy, even if the carrier and the insured differ over the meaning or application of those terms and conditions. Hereford Ins. Co. v. Segal, 2007 N.Y. Slip Op. 04262 (2nd Dep't, May 15, 2007), deals with a personal auto policy's "expected or intended" exclusion. The insured, Segal, was involved in an auto accident. When a police officer stood by the car and started to question him, Segal grabbed the officer's arm through the open driver's side window, accelerated the car, and dragged the officer about forty feet, causing his car to strike the officer's body. The officer allegedly sustained permanent injuries as a result. The insured was thereafter convicted of third-degree assault for "recklessly" causing the officer's injuries. However, the criminal conviction for "reckless" conduct was not dispositive of the coverage question. Under the policy's "expected or intended" exclusion, there was no coverage if the insured had expected that his conduct would cause the resulting injury, or if those injuries could not be fairly characterized as an unexpected, unusual, or unforeseen consequence of Segal's actions. In this case, the trial court held the exclusion applied and precluded coverage. In the decision cited above, the Appellate Division affirmed. In the Update for April, 2007, I mentioned Latha Restaurant Corp. v. Tower Ins. Co., __ N.Y.S.2d __, 2007 WL 764486 (1st Dep't, March 15, 2007), and the insured's "my PA made me do it" defense. Well, another insured recently tried the same thing in federal court, in Crum & Forster Ins. Co. v. Goodmark Industries, Inc., __ F.Supp.2d __, 2007 WL 1548989 (E.D.N.Y., May 22, 2007). This latest case was even worse, though: in connection with their fraudulent insurance claims, the insureds were criminally convicted of mail and wire fraud, money laundering, and associated conspiracies. Then, when Crum & Forster brought a civil action against them, the insureds alleged they had done nothing wrong and brought a third-party claim against their PAs, alleging that any fraud had been committed by those PAs. The court quickly rejected the insureds' position: having already been convicted beyond a reasonable doubt, they could not relitigate their claims of innocence in the civil action. Retail Brands Alliance, Inc. v. Factory Mut. Ins. Co., __ F.Supp.2d __, 2007 WL 1549050 (S.D.N.Y., May 30, 2007), is the most recent decision I've seen addressing how to compute the length of business interruption coverage in the context of the 9/11 WTC attack. The decisions I have seen boil down into two basic groups: (a) those in which the insured was a commercial tenant of the WTC (or other destroyed building) and (b) those in which the insured's business involved providing a service for the ph |
