Let's Talk Coverage
Summarizes recent judicial decisions concerning New York Insurance Law.

WEDNESDAY, OCTOBER 7, 2009
Addendum to Last Post Involving P.J.P. Mechanical Corp. v. Commerce and Industry Ins. Co.

The day after my article was published in the NYLJ, the attorney for P.J.P. Mechanical Corp., Arthur Semetis, called me. He told me that the article was right on the money. Notably, he stated that the only substantive defense raised by the general contractor against his client with respect to its invoice for $650,000 was PJP's negligence, thus clarifying that the sole issue in the case was the insured's negligence and not other issues relating to contract.

He likewise was mystified by the Court's comment that he should have moved to dismiss the offset affirmative defense early in the case in order to force the issue to be brought as a counterclaim. Despite his close involvement, he also had no clue as to what theory he could have utilized to have the defense dismissed. He agreed with me that presumably the Court believed such a defense was improperly plead and was really a counterclaim.

Mr. Semetis stated that his client was considering seeking leave to appeal to the Court of Appeals. The $930,000 settlement was reflective of the additional costs of being forced to fire PJP's subcontractor and hire a new one.

Nice job Artie!

WEDNESDAY, OCTOBER 7, 2009
First Department Finds No Duty to Defend Insured Based on Negligence Based Affirmative Defense in Breach of Contract Action
The Court Suggests that Offsets are Counterclaims Not Affirmative Defenses, and thus Subject to Dismissal
P.J.P. Mechanical Corp. v. Commerce and Industry Ins. Co. --- N.Y.S.2d ---, 2009 WL 1687773 N.Y.A.D. 1 Dept., June 18, 2009.

This article can be found online at: www.law.com/jsp/nylj/index.jsp

This controversial case of first impression in New York addresses the question "does an insurer have a duty either to fund or to reimburse for separate litigation commenced by its insured, where the responsive pleadings raise an affirmative defense based on a claim of offset?" The First Department affirmed the decision of Judge Karla Moskowitz that no such duty exists.

However, the decision's real impact will likely result from the unintended consequences of its dual holding, that affirmative defenses that seek to offset damage verdicts are subject to dismissal since they are really counterclaims. Such a proposition if accepted by the trial courts of the First Department, would lead to extreme practical consequences for practitioners of negligence law.

Plaintiff was a contractor retained to perform HVAC work in a commercial building in 2001. A pipe separated from a riser causing $500,000 in damages. The defendant insurance carrier was put on notice of the incident and conducted an investigation. The result of the investigation did not conclusively establish fault. When the plaintiff presented its invoice for services performed in the amount of $650,000, the general contractor refused on the grounds that plaintiff's negligence caused $500,000 in damages which it claimed as an offset to the amount due. (It is unclear whether a payment of $150,000 was made).

Plaintiff requested its carrier to assign counsel to defend the allegation that it was negligent (and presumably to fund the affirmative claim for the balance that was due and owing), which the carrier refused in the absence of a lawsuit. In February 2003, plaintiff hired its own counsel to bring a breach of contract claim against the general contractor and the owner. When the general contractor and owner asserted an affirmative defense of offset, plaintiff again requested a defense from its carrier which was again refused. In November 2004, plaintiff served an amended complaint and this time, the general contractor and owner counterclaimed against the plaintiff for property damage.

When plaintiff presented the counterclaim to its carrier, the carrier offered to assign counsel, but only to defend the counterclaim.

In December 2005, the plaintiff instituted the declaratory judgment action. The First Department affirmed the lower court's decision in favor of the carrier finding "there is nothing in the policy language that requires defendant to either prosecute affirmative claims or reimburse plaintiff for the fees paid its counsel for such affirmative claims" National City Bank v. New York Central Mut. Fire Ins. Co., 6 A.D.3d 1116, 1117, 775 N.Y.S.2d 679 [2004], lv. denied 3 N.Y.3d 605, 785 N.Y.S.2d 21, 818 N.E.2d 663 [2004]; Goldberg v. American Home Assur. Co., 80 A.D.2d 409, 411-12, 439 N.Y.S.2d 2 [1981].

The Court found that the assertion of an affirmative defense did not constitute a "suit" which needed to be defended, since "suit" was defined in pertinent part in the policy as:

"a civil proceeding in which damages to which this insurance applies are alleged."

The issue thus was whether the assertion of an offset was an allegation of damages against the insured. In answering this question as no, the Court focused on the difference between an affirmative defense and a counterclaim. The Court distinguished the former by stating: "[t]he effect of a successful affirmative defense is the dismissal of a plaintiff's complaint or cause of action. It does not give the defendant any affirmative relief against a plaintiff, such as monetary damages." The Court further noted that "a claim that does not defeat the plaintiff's cause of action, but constitutes an independent cause of action for the defendant, should be pleaded as a counterclaim, and not as an affirmative defense." (Citing 84 N.Y. Jur. 2d, Pleading § 166).

If this definition seems a bit off, it should. In defining an affirmative defense as something that defeats or dismisses the complaint, the Court ignored that the affirmative defense in the subject action was one of several affirmative defenses which do not attack the viability of cause of action, but merely seek to reduce the plaintiff's damages. Practitioners are familiar with such affirmative defenses such as those relating to collateral sources, Article 16 and comparative negligence.

Although the First Department in P.J.P. Mechanical Corp. did not broadly address how its decision would affect these types of affirmative defenses, its definition would now seem to exclude them from the pantheon.

As unlikely as this may sound, this is exactly what the Court appears to have had in mind. In colloquy, the Court pointed out that the plaintiff would have been better off if it had:

"move[d] to strike the defense [in order to] force [the general contractor] to replead the claim as a counterclaim. This would have triggered the insurer's duty to defend. Had these steps been taken in the instant action, defendant would have been forced to defend plaintiff at the beginning of the case, rather than when the counterclaim was voluntarily asserted…several months later."

There was no explanation as to why the affirmative defense was subject to dismissal other than the Court's assertion it was really a counterclaim – and thus improperly pleaded.

The Court's decision raises some fairly fundamental questions. If affirmative defenses, such as comparative negligence, Article 16 and collateral sources reimbursement are not proper affirmative defenses and can be stricken if they are not designated as counterclaims, does that mean that negligence practitioners need to amend every answer in their offices?

Before panic sets in, it should be noted that it is doubtful that the First Department has the authority to change the definition of an affirmative defense, given that they are defined by statute by CPLR §3019, which provides in pertinent part:

(b) Affirmative defenses. A party shall plead all matters which if not pleaded would be likely to take the adverse party by surprise or would raise issues of fact not appearing on the face of a prior pleading such as arbitration and award, collateral estoppel, culpable conduct claiming in diminution of damages as set forth in article fourteen A [other examples omitted]…..The application of this subdivision shall not be confined to the instances enumerated.

No where in the statutory definition is there a requirement that the defense result in the dismissal of the complaint. In fact, the definition explicitly cites "diminution of damages" (an offset) as an example of an affirmative defense.

The First Department's attempt to re-define affirmative defenses seems to have been done in an attempt to blunt the fact that from the point of view of its insured, there was no difference between a dollar offset and a dollar claimed in counterclaim. In fact, this was the basis of the only apparent authority on the matter, Construction Protective Servs. v. TIG Specialty Ins. Co., 29 Cal.4th 189, 126 Cal.Rptr.2d 908, 57 P.3d 372 [2002], which plaintiff relied upon. The California court held in Construction that the carrier was obligated to assign counsel precisely because "the effect of pleading a setoff defense is the same as if it were pleaded as a counterclaim…"

In view of the ambiguity in the policy language, the Court should have instead analyzed the issue by addressing the question what was the reasonable expectation of the parties? If so analyzed, plaintiff arguably would have prevailed. The broken pipe and resulting property damage was clearly an occurrence under the policy. Such property damage was a fundamental aspect of the underlying litigation even prior to the assertion of the counterclaims. Indeed, the counterclaims did not fundamentally alter the litigation in any way.

Notably, the underlying action was ultimately settled in plaintiff's favor for $930,000, apparently reflecting years of interest. Ironically, the defendant argued that this was evidence that "plaintiff's demand for reimbursement of legal costs incurred in connection therewith did not constitute a claim for property damage or bodily injury…" It is odd that the Court thought it appropriate to cite this argument since it is the equivalent of claiming that the insured did not deserve a defense, because it was ultimately found not negligent.

Notwithstanding that the First Department's definition of affirmative defenses contradicts CPLR §3019, defense counsel should nevertheless be forewarned that the plaintiff's bar may in the context of an in limine motion, seek to have affirmative defenses seeking reduction in damages based on collateral sources, Article 16 and comparative negligence, dismissed on the ground they were not asserted as counterclaims, pursuant to the authority of P.J.P. Mechanical Corp. v. Commerce.

MONDAY, SEPTEMBER 21, 2009
Follow up to Recent Blog – Iacobellis v. A-1 Tool Rental – Counsel Cannot Withdraw as Counsel Where if Status of Coverage is Unclear
Agostino Iacobellis, plaintiff, v. A-1 Tool Rental, Inc., et al., --- N.Y.S.2d ---, 2009 WL 2884726 N.Y.A.D. 2 Dept. September 11, 2009.

On September 11, 2009, I blawged about the Agostino v. A-1 Tool Rental case which denied Wilson Elser Moskowitz Edelman & Dicker, LLP's motion to withdraw as counsel on the grounds that such motions are "poor vehicles" to determine coverage issues.

Given that it has been the settled law of New York for 40 years that insurance disputes cannot be settled in the context of a motion to withdraw (Brothers v. Burt, 27 N.Y.2d 905, 265 N.E.2d 922 (N.Y. 1970)),it seemed reasonable to assume that Wilson Elser was seeking to withdraw because it was not being paid, an appropriate basis to withdraw as counsel, regardless of whether an insurance dispute is at the foundation of the nonpayment. Galvano v. Valvano, 193 A.D.2d 779, 598 N.Y.S.2d 268 (2d Dep't 1993). In fact, the First Department in Dillon v. Otis Elevator, Inc., 22 A.D.3d 1,4, 800 N.Y.S.2d 385, 387 (1st Dep't 2005) explicitly held that where there is an independent ground to withdraw, it is an insufficient defense to the motion to "merely repeat the refrain that a motion to withdraw is an inappropriate vehicle for testing coverage."

Since my blawg, I not only have I confirmed that Wilson Elser was indeed, not being paid, but the firm in addition, claims it submitted evidence to the court that its client had refused to cooperate with its defense and moreover, that the client had sent a letter declaring it did not want Wilson Elser to represent them.

What is going on here?!

FRIDAY, SEPTEMBER 11, 2009
New Decision Substantially Limits Insurance Carrier's Ability to Disclaim Duty to Defend
Agostino Iacobellis, plaintiff, v. A-1 Tool Rental, Inc., et al., --- N.Y.S.2d ----, 2009 WL 2884726N.Y.A.D. 2 Dept., September 11, 2009.

What's a defense counsel to do when the carrier who assigned it a case disclaims a duty to defend and ceases paying the attorney's bills? The lawfirm of Wilson Elser Moskowitz Edelman & Dicker, LLP (hereinafter Wilson Elser), did what any defense lawyer would do facing the prospect of not getting paid...it moved to withdraw as counsel. The Supreme Court granted Wilson Elser's motion, a not unexpected result.

The Second Department however reversed in a short decision which may leave defense counsel and liability carriers scratching their heads, and at least a little worried. The Court stated that "[t]he motion of Wilson Elser was a "poor vehicle" to test the propriety of the disclaimer of coverage and withdrawal of defense.... (citing Brothers v. Burt, 27 N.Y.2d 905, 906; see Seye v. Sibbio, 33 AD3d 608; Garcia v. Zito, 242 A.D.2d 258; Pryer v. DeMatteis Orgs., 259 A.D.2d 476). Rather, the Court indicated that the issue of coverage should be decided in a declaratory judgment action (citing Seye v. Sibbio, 33 AD3d 608; Garcia v. Zito, 242 A.D.2d 258; Pryer v. DeMatteis Orgs., 259 A.D.2d 476; Laura Accessories v. A.P.A. Warehouses, 140 A.D.2d 182; Monaghan v. Meade, 91 A.D.2d 1014).

Although the Court was right about a declaratory judgment action being a better forum to determine coverage issues, in the opinion of this blawger, the Second Department nevertheless got it wrong. An attorney's right to receive payment for his services is distinct from the rights between the carrier and its insured. How can an attorney be forced to provide uncompensated services until a declaratory judgment is resolved? This would make defense counsel a necessary party to the declaratory judgment action in order to collect its legal fees. Since when are defense counsel ever named as even nominal parties to a declaratory judgment action? Why should Wilson Elser will be forced to finance the underlying litigation which appears to involve a construction accident? Moreover, this ruling will pit Wilson Elser against the carrier that sent it the case.

This decision will likely have unintended consequences. Unless they are willing to alienate their defense counsel, this decision will force carriers to make determinations of coverage without adequate investigation. This may lead to more disclaimers, not less. It also will likely lead to an increase in carrier initiated declaratory judgment actions as this would be the only way a carrier could extricate itself from defending a case once counsel was assigned.

THURSDAY, AUGUST 20, 2009
Erie Supreme Court Fumbles Coverage Decision - Reversal Seemingly Imminent
McCabe v. St. Paul Fire and Marine Ins. Co. --- N.Y.S.2d ----, 2009 WL 2516860
(N.Y.Sup., August 19, 2009).
Supreme Court, Erie County, New York.

This Erie County Supreme Court case provides an interesting discussion on the applicability of Insurance Law 3420(a) and 3420(d)to a malpractice claims-made policy, but, after laboring to break into the open field, the court fumbles at the goal line, setting itself up for a reversal by the Fourth Department.

The case arose out of a fire that destroyed the plaintiffs' home. They retained attorney David E. Fretz ("Fretz") to handle their claim under their homeowners policy. Due to severe depression Fretz allowed the plaintiffs' claim to lapse. Plaintiff wrote Fretz a letter in January 2007 complaining of his failure to return calls, noting the closure of their case due to his negligence. The letter stated that plaintiffs intended to notify the Attorney Grievance Committee and that "[w]ith or without you we are going forward". An issue in the case was whether this constituted a "claim" within the policy period.

Thereafter in March 2007 plaintiffs commenced a legal malpractice action against Fretz, after their attorney made several unsuccessful attempts to communicate with Fretz or convince him to provide notice to his carrier or provide his carrier's contact information. Fretz also failed to report the claim to his malpractice carrier St. Paul Fire and Marine Insurance Company (St.Paul), which held a $1 million claims-made policy. This lead to a default judgment against him for $700,000.

Plaintiffs obtained a court order directing Fretz to provide his insurance information. On June 22, 2007, after plaintiffs provided St. Paul with notice of the claim, advising St. Paul that the claim had been first presented to Fretz on January 2, 2007, without enclosing a copy of the January 2, 2007 letter.

St. Paul accepted on faith that the January 2007 letter constituted a "claim" under the policy, and disclaimed on the alternative ground that the claim was not reported to St. Paul within the time period allowed under the policy. Several months after St. Paul had answered the DJ complaint, St. Paul issued a supplemental disclaimer that the January 2007 letter did not constitute a "claim" within the policy period. Although never explained, St. Paul presumably argued the letter did not request monetary damages, but merely asserted the intent to file a grievance complaint.

The court acknowledged that timely notice of the claim was not provided to St. Paul under the terms of the policy, and that the disclaimer would have to be upheld unless plaintiffs could establish that notice was timely pursuant to Insurance Law 3424(a), which provides in pertinent part that insurance policies "insuring against liability for injury to person...[must] contain[]… [a] provision that notice given… on behalf of the injured person…shall be deemed notice to the insurer.

Section 3420(a) also provides that late notice provisions in such policies "shall not invalidate any claim made by…an injured person…if it shall be shown not to have been reasonably possible to give such notice within the prescribed time and that notice was given as soon as was reasonably possible thereafter."

St. Paul argued that 3420(a) had no applicability to the case since it only applied to policies that covered "injury to persons" and thus did not apply to malpractice actions. Although the St. Paul policy excluded claims "[a]rising out of bodily injury ‘or property damage', it did cover claims for damages that "arise out of error, omission, negligent act or personal injury', in the rendering or failure to render legal services'... . "

St. Paul cited to several cases for the proposition that malpractice insurance policies are not subject to the provisions of Insurance Law § 3420(d). Plaintiffs countered that the scope of § 3420(d) was narrower than § 3420(a), and cited to the Fourth Department's decision in Romano v. St. Paul Fire and Marine Ins. Co. (65 A.D.2d 941 [4th Dept 1978], for the proposition that § 3420(a) applied to malpractice insurance.

The court agreed with plaintiffs recognizing that the policy was subject to § 3420(a), since it clearly covered claims of "personal injury," notwithstanding its exclusion for claims of "bodily injury." The court correctly noted that in the parlance of insurance coverage "personal injury", as opposed to "bodily injury", refers to false arrest or imprisonment, malicious prosecution, wrongful eviction, defamation, slander or invasion of privacy. Thus, even though plaintiff's claim against Fretz was not for "personal injury", Fretz's policy provided such coverage and thus, was subject to § 3420(a).

Having determined § 3420(a) was applicable, the court was able to conclude as a matter of law that the plaintiffs had provided timely notice after a lengthy recitation of the efforts undertaken by plaintiffs to give notice.

All that was left for the court to do was determine whether St. Paul's purported disclaimer based on the absence of a claim during the policy period was valid. Here, the court's analysis suffers a complete break down.

Notwithstanding spilling a large amount of ink on the issues up to this point, the court's pen and analysis suddenly goes silent. While St. Paul presumably argued that it should not have been foreclosed from adding a second basis to disclaim since § 3420(d) does not apply to malpractice insurance policies, the court fails to even allude to such an argument and simply ignores that § 3420(d) was not applicable. In the absence of § 3420(d), the only way St. Paul could have lost the right to supplement its disclaimer was through either a finding of common law waiver (intention relinquishment of a known right) or through estoppel. Neither of these is addressed by the court.

The court also ignored St. Paul's reliance on the well settled doctrine that waiver cannot create insurance coverage that never existed. This seems pretty straight forward. If there was no claim during the policy period, coverage would never have been triggered in the first instance. If the policy never covered the claim, then waiver could not have created such coverage. Instead of addressing either of these arguments, the court incredibly, merely concluded its decision with the statement "St. Paul's belated attempt to supplement its disclaimer…cannot avail for obvious reasons, both procedural and substantive."

I would ask that if anyone out in the blogosphere can discern what these "obvious reasons" are, to please leave a comment to enlighten the rest of us.

TUESDAY, AUGUST 11, 2009
Court Limits Contribution of CGL Policy Based on Policy Provision of Unrelated Policy
State Ins. Fund v. American Hardware Mut. Ins. Co. 882 N.Y.S.2d 300
N.Y.A.D. 2 Dept.,2009.

This case presents an interesting scenario and policy provision. The matter arose from the injuries sustained by an employee of World of Hitches N Rental, Inc. (hereinafter World of Hitches), when a container of kerosene he was filling exploded. The defendants brought a third-party action for contribution against World of Hitches. The action was settled for $1,475,000 which was primarily paid by the plaintiff's workers' compensation carrier State Insurance Fund (hereinafter SIF), because the defendant carriers, which held a commercial general liability policy and a garage policy, had disclaimed coverage based on the employee exclusion provision.

After the settlement, SIF sought a judgment declaring that the defendants were obligated to pay their proportionate share of the settlement and defense costs. The court held in favor of plaintiff, finding that the defendant's disclaimer was untimely under Insurance Law § 3420(d), since the defendants' disclaimer was issued more than four months after receiving notification of the third-party action.

The interesting part of the decision however, was the Court's limitation of the defendants' contribution. Although the Court acknowledged that defendants would normally have to "pay their proportionate share of the settlement (see Hawthorne v. South Bronx Community Corp., 78 N.Y.2d 433, 576 N.Y.S.2d 203, 582 N.E.2d 586) and defense costs incurred in the underlying action," it nevertheless enforced a policy provision in the garage policy which provided that "all of the defendants' policies were mutually exclusive in that if more than one policy applied to the same accident, the maximum limit of liability under all the policies would not exceed the highest applicable limit under one policy. Thus, the maximum amount the defendants were required to contribute to the settlement was $300,000, and the judgment must be modified accordingly.

Presumably, each defendant paid $150,000. This odd but presumably correct result, allowed the commercial general liability carrier to save $150,000 of its $300,000 policy, solely based on a provision of an unrelated policy.

FRIDAY, JULY 24, 2009
First Department Discusses Scope of Arising Out Of Lanaguage In Additional Insured Endorsement
Regal Const. Corp. v. National Union Fire Ins. Co. of Pittsburgh ---- N.Y.S.2d ----, 2009 WL 2015419 N.Y.A.D. 1 Dept., 2009.

This First Department case nicely illustrated the breadth of the language in additional insured endorsements requiring that the property or bodily injury claim "arise out of" the work of the named insured for the additional insured. In Regal, the plaintiff, an employee of the general contractor ("GC"), slipped on plywood that he claimed was recently painted by an employee of the construction manager ("CM"). The CM sought additional insured coverage from the GC's carrier, who took over the defense under a reservation of rights, but then instituted a declaratory judgment action seeking to disclaim on the grounds that the injury did not arise out of the work of the GC, since the complaint alleged the CM was negligent. Not surprisingly, the complaint did not allege any negligence against the employer GC.

The First Department held for the CM and its carrier, finding that notwithstanding the specific allegations of the complaint, the accident arose out of the work of the GC. To support its conclusion the Court noted that the GC "had responsibilities that encompassed all of the demolition and construction work to be done." It noted that the plaintiff had "testified that it would have been [the GC's] responsibility to paint the floor…if instructed to do so by [the CM]." Therefore, the Court found a causal connection between the injury and the GC's work as the prime contractor, the risk for which coverage was provided.

The Court distinguished the the Court of Appeals' decision in Worth Constr. Co., Inc. v. Admiral Ins. Co. (10 NY3d 411 [2008]), relied upon by the dissent, where involved a plaintiff who was injured on a staircase that had been erected by the defendant's insured. The Court found that the defendant's policy did not provide additional insured coverage, because the injury was due to the alleged negligence of another contractor who had applied fireproofing to the stairs. The Court held that the staircase was "merely the situs of the accident," and ruled that there was no connection between the accident itself and [staircase erector's] work. (id. at 416).

MONDAY, JULY 13, 2009
First Department Decisions In Conflict Over "Other Insurance" Provisions
Sport Rock Intern. Inc. V. American Cas. Co. of Reading PA, __N.Y.S.2d __, 2009 WL 1290266 (1st Dep't May 12, 2009)

Please see my article discussing this case in the July 13, 2009 edition of the New York Law Journal, Outside Counsel feature. http://tinyurl.com/l7vfuh

Does A Policy For the "Mutual Benefit" of Two Parties Provide Additional Insured Coverage to One?
Kassis v. Ohio Cas. Ins. Co. --- N.E.2d ----, 2009 WL 1789223 (N.Y.), 2009 N.Y. Slip Op. 05207

In this case, the Court of Appeals addressed the issue whether the provision in a lease requiring a tenant to procure a commercial general liability policy for the "mutual benefit" of the tenant and landlord, was sufficient to allow the landlord to claim additional insured status pursuant to the broad form additional insured endorsement of the policy?

This obviously was not an easy question. After the landlord obtained summary judgment, the Fourth Department reversed with two justices dissenting. The Appellate Division found that the purchase of insurance by the tenant for itself provided a mutual benefit on both the landlord and the tenant, even if the landlord was not an additional insured. If the lease had intended additional insured coverage, it should have so indicated. The Court of Appeals however, in a unanimous decision, reversed the Fourth Department.

It noted that the subject lease provided that the tenant "at its sole cost and expense and for the mutual benefit of Landlord and Tenant, shall maintain a general liability policy ... providing coverage against claims for bodily injury, personal injury and property damage" with specified aggregate and per occurrence coverage amounts.

The Court framed the issue by asking whether the lease required the tenant to ensure the landlord received coverage equivalent to the coverage the tenant enjoyed. The Court of Appeals found that "the natural and intended meaning of the term "mutual benefit" as used in this provision is that [the landlord and the tenant] are intended to enjoy the same level of coverage. The Court found evidence of this in several other insurance related provisions which required either joint or singular coverage. The court found that where coverage for to be joint, it was so noted.

Given the Court's reliance on other language in the contract to establish the meaning of the term mutual benefit, it is not altogether clear whether the Court was holding that the term "mutual benefit" is now hereinafter the equivalent to the term "shall name an additional insured." It is assumed that they are now the equivalent, but such might still be challenged where there is some compelling evidence suggesting this was not the intent.

MONDAY, JULY 6, 2009
First Department Applies New Jersey Law Due to Domicile of Insured
Travelers Cas. and Sur. Co. v. Honeywell Intern., Inc. 880 N.Y.S.2d 66, (1st Dept., 2009)

In a case involving a choice of law between New Jersey and New York, with respect to certain asbestos-related claims, the trial court chose New Jersey law and the First Department unanimously affirmed.

The court reaffirmed the settled doctrine that a contract of liability insurance is generally "governed by the law of the state which the parties understood was to be the principal location of the insured risk" citing to Certain Underwriters at Lloyd's, London v. Foster Wheeler Corp., 36 A.D.3d 17, 822 N.Y.S.2d 30 [2006], affd. 9 N.Y.3d 928, 844 N.Y.S.2d 773, 876 N.E.2d 500 [2007]. In Certain Underwriters, the First Department had held that "where it is necessary to determine the law governing a liability insurance policy covering risks in multiple states, the state of the insured's domicile [at the time of contracting] should be regarded as a proxy for the principal location of the insured risk" (id. at 24, 822 N.Y.S.2d 30), and that, for such purposes, a corporate insured's domicile is the state of its principal place of business, not the state of its incorporation (id. at 25, 822 N.Y.S.2d 30; see also Appalachian Ins. Co. v. Di Sicurata, 60 A.D.3d 495, 875 N.Y.S.2d 57 [2009] ).

Since it was undisputed that the principal place of the insured's business was New Jersey, it was immaterial that the insured had used a New York address on some of the policies, that it had used New York brokers, or that it had used New York amendatory endorsements on some of the policies. The court found it relevant that the "parties knew that the risks were spread nationwide". As such, it was appropriate to apply the law of the insured's domicile.

Practioner's Note: This question of choice of law should not be confused with the issue of whether a policy was "issued for delivery in New York" for the purposes of New York Insurance Law 3420(d). See Preserver Insurance Co. v. Ryba, 10 N.Y.3d 635, 862 N.Y.S.2d 820(2008); American Ref-Fuel Company, v. Employers Insurance Co., 265 A.D.2d 49, 705 N.Y.S.2d 67 (2d Dep't 2000). Seemingly, a court could find that New Jersey law applied, and also find that the policy was issued for delivery in New York as long as there was a New York risk being insured.

MONDAY, JUNE 8, 2009
Execution of Non-Waiver Agreement Did Not Protect Carrier From Insurance Law § 3420[d]
Mayer's Cider Mill, Inc. v. Preferred Mut. Ins. Co., --- N.Y.S.2d ----, 2009 WL 1565160, (4th Dept., 2009).

The above case involved a 12 year old injured 1999, while working at a cider mill. It was unclear whether the infant was an employee or an independent contractor. This was an important distinction as the mill's general liability policy contained an employee exclusion. The mill gave prompt notice to its insurance carrier and signed a "Non-Waiver Agreement" in 1999 pursuant to which the carrier indicated it would investigate the claim and reserved its right to disclaim coverage.

The infant waited until 2007 to file a complaint, claiming to be an independent contractor. The carrier issued a letter advising that it was still investigating the matter and reasserting the policy did not cover the Mill for injury to employees.

On appeal, the Court found that the carrier had "failed to provide the requisite written notice of disclaimer to plaintiff "as soon as [was] reasonably possible" (Insurance Law § 3420[d][2]; cf. Zappone v. Home Ins. Co., 55 N.Y.2d 131, 136-137). The Court noted that "it is incumbent upon the insurance company to conduct its own prompt investigation ( see id. at 1286-1287), and "the burden is on the insurer to demonstrate that its delay [in disclaiming coverage] was reasonably related to its completion of a thorough and diligent investigation" (Tully Constr. Co., Inc. v. TIG Ins. Co., 43 AD3d 1150, 1152-1153).

The court rejected the carrier's claim that its investigation into the employment status remained ongoing as well as the defense that the claim was initially reported "for informational purposes only." Presumably, the carrier also argued that the non-waiver agreement protected it from waiving a policy defense. The Court however, did not address or acknowledge such a defense in the decision. Rather, it merely found that the record neither supported the claim was for "informational purposes" or that the carrier was still investigating the claim. Accordingly, it found that any disclaimer by the carrier was untimely as a matter of law (see Wood, 45 AD3d at 1287).

While this decision involved an extreme delay in time, it raises the question how effective are non-waiver agreements? Recently, the Second Department similarly disregarded a non-waiver agreement in Quincy Mut. Fire Ins. Co. v. Uribe, 45 A.D.3d 661, 845 N.Y.S.2d 434 (2d Dept.,2007), where the agreement set forth a need for additional investigation, but the carrier then could not justify the need for further investigation.

The narrow effectiveness of non-waiver agreements was also demonstrated in Greater New York Sav. Bank v. Travelers Ins. Co., 173 A.D.2d 521, 570 N.Y.S.2d 122 (2d Dept.1991) where the Court held that notwithstanding the existence of a non-waiver agreement, material issues of fact existed with regard to the reasonableness of the carrier's delay in denying coverage. It held the non-waiver agreement executed by the plaintiff "was not dispositive of the claim inasmuch as it merely allowed [the carrier] to ascertain the actual value of the property, to determine the amount of the loss, and to investigate the cause of the fire, without waiving its rights under the policy. It did not permit [the carrier] to unreasonably delay the exercise of those rights, to the detriment of the insured (see, Allstate Ins. Co. v. Gross, 27 N.Y.2d 263, 269, 317 N.Y.S.2d 309, 265 N.E.2d 736).

It should be emphasized that non-waiver agreements and reservations of rights letters do provide carriers with much needed protection and rights. Indeed, in Federated Dept. Stores, Inc. v. Twin City Fire Ins. Co., 28 A.D.3d 32, 807 N.Y.S.2d 62 (1st Dept. 2006) the Court held that a reservation of rights prevented the insured from claiming detrimental reliance on the carrier's defending the case, even where the insurer later disclaimed on a basis different from the ground originally asserted in the reservation of rights (see Village of Waterford v. Reliance Ins. Co., 226 A.D.2d 887, 640 N.Y.S.2d 671 [1996]). The key lesson to be learned here, is that non-waiver agreements and reservations of rights letters, will only protect a carrier to the extent they do not sit on their rights and/or fail to act in a timely manner.

TUESDAY, JUNE 2, 2009
11 Month Delay In Giving Notice Vitiated Coverage to Insured and Injured Party
Sputnik Restaurant Corp. v. United Nat. Ins. Co. 878 N.Y.S.2d 428, (2d Dept., May 5, 2009).

In this recently decided case, the Court reviewed the principals behind the requirement that both the insured and injured parties provide timely notice to insurance carriers. It emphasizes that the late notice defense is very much alive and well in New York. While much of the case merely rehashed well-settled principles, it is good to review them from time to time.

The Court noted: "'[w]here an insurance policy requires that notice of an occurrence be given promptly, notice must be given within a reasonable time in view of all of the facts and circumstances'" (Zeldin v. Interboro Mut. Indem. Ins. Co., 44 A.D.3d 652, 652, 843 N.Y.S.2d 366, quoting Eagle Ins. Co. v. Zuckerman, 301 A.D.2d 493, 495, 753 N.Y.S.2d 128; see Argo Corp. v. Greater N.Y. Mut. Ins. Co., 4 N.Y.3d 332, 339, 794 N.Y.S.2d 704, 827 N.E.2d 762.

The requirement that an insured provide timely notice "operates as a condition precedent to coverage" (see Security Mut. Ins. Co. of N.Y. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 440, 340 N.Y.S.2d 902, 293 N.E.2d 76; Quality Inves., Ltd. v. Lloyd's London, England, 11 A.D.3d 443, 782 N.Y.S.2d 761). Absent a valid excuse for a delay in furnishing notice, failure to satisfy the notice requirement vitiates coverage (see Great Canal Realty Corp. v. Seneca Ins. Co., Inc., 5 N.Y.3d 742, 743, 800 N.Y.S.2d 521, 833 N.E.2d 1196; Eagle Ins., 301 A.D.2d at 495.

" 'Where an insurance policy requires that notice of an occurrence be given promptly, notice must be given within a reasonable time in view of all of the facts and circumstances' " (Zeldin, 44 A.D.3d at 652 quoting Eagle Ins., 301 A.D.2d at 495, see Argo Corp., 4 N.Y.3d at 339; White v. City of New York, 81 N.Y.2d 955, 957, 598 N.Y.S.2d 759, 615 N.E.2d 216). Absent a valid excuse for a delay in furnishing notice, failure to satisfy the notice requirement vitiates coverage (see Great Canal, 5 N.Y.3d at 743; Eagle Ins., 301 A.D.2d at 495).

Here, the defendant United National Insurance Co. (hereinafter United) established its prima facie entitlement to judgment as a matter of law by demonstrating that it was not notified of the accident until approximately 11 months had elapsed. Once United established its prima facie entitlement to judgment, the burden shifted to the plaintiffs to raise a triable issue of fact as to whether there existed a reasonable excuse for their delay in notifying United (see Argentina v. Otsego Mut. Fire Ins. Co., 86 N.Y.2d 748, 750, 631 N.Y.S.2d 125, 655 N.E.2d 166).

Moreover, the Court held that the injured party has an independent right to give notice to an insurer, even though it is not to be charged vicariously with an insured's delay (see Insurance Law § 3420[a]; Maldonado v. C.L.-M.I. Props., Inc., 39 A.D.3d 822, 823, 835 N.Y.S.2d 335; Seneca Ins. Co. v. W.S. Distrib., Inc., 40 A.D.3d at 1070, 838 N.Y.S.2d 99; Becker v. Colonial Coop. Ins. Co., 24 A.D.3d 702, 704, 806 N.Y.S.2d 720). The Court found that the injured defendants, failed to notify United of right claims in a timely manner.

WEDNESDAY, MAY 20, 2009
Are Temporary Employees, Employees?
Nick's Brick Oven Pizza, Inc. v. Excelsior Ins. Co. 877 N.Y.S.2d 359, (2d Dept., April 07, 2009)

In this Second Department case, the Court was presented with the question whether the policy covered a tortious act that was committed by an insured employee, where the policy excluded from the definition of employee, temporary employees who were "furnished to [the insured] to substitute for a permanent 'employee' on leave or to meet seasonal or short-term workload conditions."

The court found that the employee was a temporary employee because he "was hired to meet seasonal ...conditions during the ...summer ... " In doing so, it rejected the carrier's claim that the employee was not a "temporary employee" because he was not "furnished" by a employment agency, but was merely referred by another employee of Nick's Pizza. The Court rejected the argument, finding that the term "furnished" was ambiguous with any ambiguities being resolved in favor of the assured. (See Lee v. State Farm Fire & Cas. Co., 32 A.D.3d 902, 822 N.Y.S.2d 559).

Posted by Gordon and Silber, P.C.

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Let's Talk Coverage Summarizes recent judicial decisions concerning New York Insurance Law.

Let's Talk Coverage
Summarizes recent judicial decisions concerning New York Insurance Law.