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Current Developments in the Commercial Divisions of the
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Posted: November 28, 2016

Insurance Law § 3420 Does Not Apply to Investment Losses

On November 15, 2016, Justice Singh of the New York County Commercial Division issued a decision in Tuls v. New York Marine & General Insurance Co., 2016 NY Slip Op. 32296(U), holding that Insurance Law Section 3420 does not apply to investment losses, explaining:

Insurance Law § 3420, provides:

(a) No policy or contract insuring against liability for injury to person … or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions or provisions that are equally or more favorable to the insured and to judgment creditors so far as such provisions relate … to judgment creditors: … (b) Subject to the limitations ·and conditions of paragraph two of subsection (a) of this section, an action may be maintained by the following persons against the insurer upon any policy or contract of liability insurance that is governed by such paragraph, to recover the amount of a judgment against the insured or his personal representative: …

The purpose of former § 109 (predecessor to former § 167, now § 3420) is to protect an injured person. Considerations of fairness and public policy originally led to the enactment of§ 109 of the Insurance Law. The statute provides certain judgment creditors with a limited right to litigate coverage issues against a policyholder/judgment debtor’s insurer as though that party were a third-party beneficiary to the insurance contract. However, this statute is subject to strict construction.

Plaintiff argues that the diminished value of his investment account with JTF constitutes “property damage” within the meaning of § 3420. Plaintiff contends that because Insurance Law § 107 does not define the term “property,” that in situations where, as here, a term does not have a controlling statutory definition, courts should construe the term using its usual and commonly understood meaning. . . .

Although not binding, this court finds the decisions in Spengemann v. Twin City Fire Ins. Co., and XL Specialty Ins. Co. v. Lakian, to be persuasive. The Spengemann court graµted the insurer’s motion to dismiss holding that § 3420 did not apply to the investors’ claims because, in part, the nature of the investors’ underlying injury did not involve any personal injury or property damage loss. The Spengemann court found that it could not be reasonably argued that § 3420 was intended by the New York Legislature to serve as a type of safety net for sophisticated investors to recoup their losses on speculative business ventures once the business fails. It is clear that plaintiff’s claim, which was brought as a result of the same kind of loss in Spengemann, should not be covered under § 3420.

Similarly, in XL Specialty, XL Specialty Ins. Co. (“XL”) issued a financial services insurance policy to Capital L Group, LLC (“Capital L”). Capital L and its principals were accused of illicitly siphoning investor money for personal use, which resulted in two investor lawsuits against Capital L, together with claims for unpaid defense costs by Capital L’s and the principals’ attorneys. XL filed an interpleader action in the S.D.N.Y. to determine who was the proper recipient(s) of the remaining money to be paid under the policy, as the outstanding claims exceeded the policy limits. The unpaid attorneys, an unpaid e-discovery firm, and two judgment creditors of Capital L – Knox, LLC and DJW Advisors, LLC (collectively, “Knox and DJW”) – all moved to intervene in the interpleader action to obtain a portion of the remaining insurance policy proceeds. Only Knox and DJW’ s motion was opposed. The district court held that 1) Knox and DJW failed to show that Capital L is entitled to coverage under the Policy, since Capital L had breached the policy rendering it not entitled to coverage thereunder, and thus, standing in its shoes, Knox and DJW could not collect thereunder; and 2) Insurance Law § 3420 did not provide them with a direct right of action against XL because it did not arise from a policy for personal injury or property damage. The district court specifically rejected the argument that § 3420 should be read expansively to inclUde professional’ liability insurance policies, noting that no New York court had ever adopted such a view given the strict construction of the statute and the rigidly narrow cause of action it
created.

(Internal quotations and citations omitted).

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