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Posted: April 1, 2019

Coverage Action Stayed As to Insurer’s Duty to Indemnify, But Not Duty to Defend, Pending Resolution of Underlying Civil and Criminal Proceedings Against Insured

On March 28, 2019, Judge Crotty of the SDNY issued a decision in Federal Ins. Co. v. Weinstein, Case No. 18 Civ. 2526 (PAC), granting an insured’s motion to stay a coverage action on the issue of the insurer’s duty to indemnify, pending the resolution of underlying civil and criminal proceedings against the insured, but denying the stay motion as to the duty to defend.

This coverage action arose from the numerous civil and criminal actions (some eighteen in total) against Hollywood producer Harvey Weinstein.  Chubb commenced the action seeking a declaration that it is not obligated to defend or indemnify Weinstein in the underlying actions.  Weinstein moved to stay Chubb’s coverage action on the ground that the coverage issues were intertwined with the issues to be resolved in the underlying dispute.  Judge Crotty denied the motion in part (as to the duty to defend), and granted it in part (as to the duty to indemnify), explaining:

It has long been well-established that a liability insurer may bring an action for a declaratory judgment against the parties in an underlying lawsuit involving its insured without waiting for the underlying action to proceed to judgment.  Nonetheless, federal courts have stayed declaratory judgment actions, or even declined to exercise jurisdiction at the onset, after finding that issues raised in the actions before them either turn on, or would be resolved in part by, determinations of liability yet to be made in the parallel proceedings. . . .

A stay is not warranted here as to Chubb’s duty to defend claims. Weinstein argues that the insurance coverage issues “overlap with, and are derivative of underlying liability issues,” but when it comes to the duty to defend, that is squarely not true. Under both New York and Connecticut law, an insurance provider’s duty to defend is determined solely by comparing the allegations on the face of the underlying complaint(s) to the terms of the policy.  Thus, questions of fault and liability in the Underlying Lawsuits are wholly irrelevant, and in fact, inadmissible evidence, to the duty to defend inquiry the Court will make in this action. . . .

As to the duty to indemnify, however, a stay is warranted in this action. Under both New York and Connecticut law, the duty to indemnify is narrower and distinct from the duty to defend.  In contrast to the duty to defend, “a duty to indemnify cannot be triggered by the mere possibility of coverage; rather, it is triggered by an independent factual finding that the insured’s liability is within the coverage provided by the policy.  As such, courts considering actions for declaratory relief have generally declined to rule on the issue of indemnity until resolution of the underlying liability claim.  Consistent with these cases, the Court will exercise its discretion and order the duty to indemnify claims stayed until resolution of the Underlying Actions.

(Citations omitted).

An insurer is generally precluded from litigating in a coverage action matters that are at issue in the underlying proceedings for which the insured seeks coverage.  Here, the insurer was allowed to proceed with a declaratory judgment action as to its duty to defend, while the underlying actions were pending, but only because the insurer’s arguments for avoiding coverage did not rely on any disputed facts, but rather only the language of the policies and the allegations in the underlying actions.  By contrast, in another case I litigated, Freedom Specialty Ins. Co. v. Platinum Mgt. (NY), LLC, 2017 NY Slip Op 32728(U), Justice Sherwood of the New York County Commercial Division stayed discovery altogether, holding that “the demand for discovery in furtherance of the Excess Insurers’ putative defenses against coverage” was “premature” because “[a] declaratory judgment action cannot be used to conduct discovery regarding the very facts at issue in the EDNY Indictment and the SEC Complaint.”

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