On October 5, 2018, the Fourth Department issued a decision in Pioneer Cent. Sch. Dist. v. Preferred Mut. Ins. Co., 2018 NY Slip Op 06682, holding that a school district was not entitled to coverage under a cleaning company’s CGL policy – either as an additional insured or as the named insured’s contractual indemnitee – because the underlying injuries were not proximately caused by the named insured.

In Pioneer Central, a school sought coverage under a cleaning company’s CGL policy for a personal injury action by an employee of the cleaning company who was injured “when she slipped on snow or ice in the parking lot of Pioneer Middle School after completing her shift.”  The motion court granted summary judgment to the school, but the Fourth Department reversed, explaining:

We conclude that Pioneer is not an additional insured under the policy inasmuch as Ayers’s injuries were not proximately caused by Kleanerz. The policy’s additional insured endorsement provides that the injury must have been “caused, in whole or in part, by” Kleanerz’s conduct, and thus it requires that the insured must have been a proximate cause of the injury, not merely a “but for” cause.  Here, it is undisputed that Kleanerz was not responsible for clearing ice and snow from the parking lot and that Ayers’s fall resulted from her slipping on the ice or snow. Although Pioneer contends that Kleanerz caused the accident by instructing Ayers to exit Pioneer Middle School through a door located near the area where Ayers subsequently slipped, Kleanerz’s instructions to Ayers merely furnished the occasion for the injury by fortuitously placing Ayers in a location or position in which an alleged separate instance of negligence acted independently upon her to produce harm, and were not a cause of the accident triggering the additional insured clause of the policy.

We further conclude that the indemnification provision in the janitorial services contract did not create coverage under the insurance policy. The insurance policy covers liability assumed in an “insured contract” between Kleanerz and a third party. An “insured contract” is defined in the policy as “[t]hat part of any other contract or agreement pertaining to [Kleanerz’s] business . . . under which [Kleanerz] assume[s] the tort liability of another party to pay for bodily injury’ . . . to a third person or organization, provided the bodily injury’ . . . is caused, in whole or in part, by [Kleanerz] or by those acting on [Kleanerz’s] behalf.” Here, the injuries were not “caused, in whole or in part, by” Kleanerz’s acts, and thus the indemnification provision of the janitorial services contract does not fall within the “insured contract” coverage provided by the insurance policy.

(Citations omitted).

CGL policies sometimes provide coverage for parties other than the named insured.  One important example is the Additional Insured Endorsement, which has been the subject of numerous posts on this blog.  CGL policies also often provide coverage for “insured contracts” – i.e., indemnification agreements under which the named insured assumes the tort liability of a third party.  As always, the scope of this coverage is defined by the policy.  Here, coverage for “insured contracts” only extended to claims “caused, in whole or in part” by the named insured.  Thus, there was no coverage, given the Court’s conclusion that the named insured did not proximately cause the injury.

On September 20, 2018, the First Department issued a decision in J.P. Morgan Sec., Inc. v. Vigilant Ins. Co., 2018 NY Slip Op 06146, holding that a disgorgement payment made as part of the settlement of an SEC enforcement action was a “penalty” and therefore did not qualify as a covered “loss” under a CGL policy.

At issue in J.P. Morgan v. Vigilant was a settlement the SEC reached with Bear Stearns, resulting from allegations that “Bear Stearns violated securities laws between 1999 and September 2003 by knowingly facilitating ‘late trading’and deceptive ‘market timing’ for certain hedge fund customers, and affirmatively assisting those customers in evading detection, thereby enabling them to earn hundreds of millions of dollars in profits at the expense of mutual fund shareholders.”  A component of the settlement was a disgorgement payment that included $140 million “allegedly representing the improper profits acquired by third-party hedge fund customers.”  Bear Stearns’ CGL policy excluded “penalties imposed by law” from the definition of a covered loss.  The insurer disclaimed coverage for the disgorgement payment on the ground that it was a “penalty.”  The First Department agreed, explaining:

In Kokesh [v. Securities & Exchange Commission __ U.S. __, 137 S. Ct. 1635 (2017),] . . . the United States Supreme Court held that SEC disgorgement constitutes a penalty, and is therefore subject to the five year statute of limitations of 28 USC § 2462. In so ruling, the Supreme Court reasoned that SEC disgorgement (i) is imposed as a consequence for a wrong committed against the public, rather than a wrong against particular individuals; (ii) is meant to punish the violator and deter others from similar violations; and (iii) in many cases, does not compensate the victims of securities violations; rather, the wrongdoer pays disgorged profits to the district court, which has discretion to determine how and to whom to distribute the money.

The Supreme Court’s rationale as to the nature of disgorgement in Kokesh applies with equal force to the issue of whether the disgorgement paid by Bear Stearns, even if representing third-party gains, was a “Loss” within the meaning of the policy and whether public policy bars insurance companies from indemnifying insureds paying SEC disgorgement. In both instances disgorgement is a punitive sanction intended to deter. To allow a wrongdoer to pass on its loss emanating from the disgorgement payment to the insurer, thereby shielding the wrongdoer from the consequences of its deliberate malfeasance, undermines this goal and violates the fundamental principle that no one should be permitted to take advantage of his own wrong. Thus, as SEC disgorgement is a penalty, it does not fall within the definition of “Loss” and there is no coverage.

(Citations omitted).

As a general matter, New York public policy does not permit indemnity coverage for intentional wrongdoing.  Importantly, however, defendants accused of deliberate misconduct can look to their liability carriers for defense coverage.

On September 21, 2018, the Second Circuit issued a decision in SPARTA Ins. Co. v. Technology Ins. Co., Inc., Case No. 17‐3441, holding that a liability insurer that assumed the defense of a claim was estopped from disclaiming coverage based on a nine-month delay in asserting coverage defenses and resulting prejudice to the insured.

In SPARTA Ins. Co., a subcontractor’s liability carrier (SPARTA) assumed the defense of a property owner and general contractor in an injury lawsuit brought by the subcontractor’s employee, without a reservation of rights.  In later correspondence, SPARTA attempted to make a generic reservation of rights, invoking “the terms and conditions of the policy it issued” but did not “spell what terms and conditions might bear on its obligation.”   More than nine months later, SPARTA “argued that it was not required to indemnify the property owner because the property owner allegedly caused the worker’s injury through its negligence.”  The Second Circuit affirmed the District Court’s holding that SPARTA was estopped from asserting this coverage defense, explaining:

An insurer who undertakes the defense of an insured, may be estopped from asserting a defense to coverage, no matter how valid, if the insurer unreasonably delays in disclaiming coverage and the insured suffers prejudice as a result of that delay.  Prejudice may be presumed where an insurer, though in fact not obligated to provide coverage, without asserting policy defenses or reserving the privilege to do so, undertakes the defense of the case, in reliance on which the insured suffers the detriment of losing the right to control its own defense. In such cases, though coverage as such does not exist, the insurer will not be heard to say so.  These principles apply to coverage allocation disputes between insurers as well as to coverage disputes between insurers and insureds.

SPARTA undertook the defense and indemnification of the general contractor and property owner without asserting policy defenses or reserving the privilege to do so. . . .

SPARTA’s assertion of defenses to coverage for the defense and indemnification came after an unreasonable delay.  The reasonableness of any delay is judged from the time that the insurer is aware of sufficient facts to issue a disclaimer. As the district court observed, SPARTA’s arguments regarding its coverage obligations are based on the terms of SPARTA’s own policy issued to the subcontractor and the contract between the general contractor and subcontractor, facts known to SPARTA at the time it agreed to undertake the defense and indemnification. Yet SPARTA failed to assert that it had reserved its rights‐‐let alone reach its ultimate conclusion regarding the extent of its coverage‐‐until April 28, 2014, more than nine months later. . . . [A] nine‐month delay is plainly unreasonable under New York law.

Finally, allowing SPARTA to assert defenses to complete coverage would prejudice the general contractor and Technology. In reliance on SPARTA’s undertaking of the defense and indemnification, the general contractor chose to forgo filing a third‐party complaint against the subcontractor for indemnification in the underlying tort suit. Because that suit has been readied for trial during SPARTA’s control of the defense, the general contractor and Technology have lost the opportunity to pursue third‐party claims against the subcontractor. The general contractor and Technology would therefore face actual prejudice from SPARTA’s assertion of defenses to coverage after an unreasonable delay.

SPARTA is therefore estopped from seeking reimbursement of past and accruing defense costs in the underlying tort suit.

(Citations omitted).

This decision illustrates the importance of the insurer’s reservation of rights letter.  The failure to issue such a letter, or to invoke specific defenses in the letter, can impact the insurer’s ability to disclaim coverage down the road.

On September 18, 2018, Justice Hagler of the New York County Supreme Court issued a decision in Aspen Specialty Ins. Co. v. Zurich Am. Ins. Co., 2018 NY Slip Op 32328(U), holding that property owners and their construction manager were not entitled to defense coverage under a CGL policy based on a stop work order issued by the New York City Department of Buildings.

The standard CGL policy at issue in Aspen Specialty required the insurer to defend a “suit,” defined as “a civil proceeding in which damages because of . . . ‘property damage’ . . . to which this insurance applies [is] alleged.”  Under New York law, the duty to defend has been described as “exceedingly broad.”  The duty may be triggered before the filing of a formal lawsuit.  Thus, “New York law . . . permits a demand letter to serve as the functional equivalent of a ‘suit’ . . . where the claimant against an insured assumes a coercive adversarial posture and threatens the insured with probable and imminent financial consequences.”  Carpentier v. Hanover Ins. Co., 248 A.D.2d 579, 580-81 (2d Dep’t 1998).  Justice Hagler cited Second Circuit cases holding that an “insurer’s duty to defend may be triggered by an administrative agency’s demand letter that commences a formal proceeding against the insured, advising it that a public authority has assumed an adversarial posture toward it, and that disregard of the demands may result in the loss of substantial rights by the insured.”  Texaco A/S (Denmark) v. Commercial Ins. Co. of Newark, NJ, 160 F.3d 124, 130 (2d Cir. 1998) (quoting Avondale Indus., Inc. v. Travelers Indem. Co., 887 F.2d 1200, 1206 (2d Cir. 1989)).

However, the Court concluded that the stop work order in this case was “insufficiently ‘coercive’ or ‘adversarial’ to constitute the functional equivalent of a ‘suit,’’’ explaining:

. . . [A] stop work order is “an order by the Buildings Department to stop all work at the site, unless otherwise noted on the stop work order.” . . .  The blank form states that “you are hereby ordered to immediately stop all work at the above premises . . . FAILURE TO COMPLY WITH THIS STOP WORK ORDER MAY RESULT IN CRIMINAL CHARGES BEING FILED AGAINST YOU.”  Significantly, Ross [a witness for the DOB] stated that “the stop work order is really the violation itself,” and that “the violation is in itself[] the stop work order.”

The notice of violation issued in this case states that the “Violating Conditions Observed” included “failure to adequately support adjoining ground and/or structures during pile driving operations” and noted that there was “[e]xtensive thru-cracking observed running vertically on side and rear walls of 2-story extension of adjoining” building.  Under the heading “Remedy,” the notice of violation states “stop all work forthwith,” “reevaluate means and methods of installation so as to prevent damage to all property and structures,” and “submit all plans and monitoring reports to SEPEX for eng’g revision.”  The notice of violation indicates that it is designated a “hazardous,” “class l” violation, requiring an appearance before the New York City Environmental Control Board to determine the amount of civil fines and penalties. The purpose of the hearing was to determine the amount of any fines for violations, not to determine whether the stop work order should be lifted.

Notably, third-party plaintiffs were not directed to perform remediation work. Third-party plaintiffs were not advised that they were facing a lawsuit or imminent financial consequences for failure to comply (compare Kirchner v Fireman’s Fund Ins. Co., 1991 WL 177251, *5, 1991 US Dist LEXIS 12244 [SD NY 1991] [insurer was required to defend letter that required insured to conduct an investigation and warned that failure to comply would result in legal action seeking reimbursement for funds expended and penalties]). Third-party plaintiffs point out that the DOB directed that they take affirmative measures to “reevaluate means and methods of installation so as to prevent damage to adj. property and structures,” and to “submit all plans and monitoring reports” for review. However, in Ryan [v. Royal Ins. Co. of Am., 916 F.2d 731 (1st Cir. 1990)], the Court found language in letters requesting that the insured submit plans for approval to be insufficiently adversarial (Ryan, 916 F3d at 742).

Rather, the evidence indicates that the stop work order at issue was more like “an invitation to voluntary action” (Technicon [Elecs. Corp. v. Am. Home Assur. Co., 141 AD2d 124, 146]). Indeed, Rosstestified that “we [the DOB] would require a – request the contractor to do it. If he could not do it or failed to do it, we would have HPD step in and do the work.”  The DOB would “give the owner the option to either get it fixed, or we will fix it”: In the latter case, the DOB would seek to hold the owner financially responsible for the work. The HPD would place liens on the property to insure payment, and would go to court to seek an order of payment. Ross also testified that the purpose of a partial stop work rescind order was to “allow the site to do some work at the site after a stop work order is issued.” When a partial stop work rescind order is issued, the original stop work order is still in effect; “[i]t gives you an allowance under the stop work order.”  There is no evidence that the HPD ever threatened third-party plaintiffs with litigation in this case. “But the mere possibility of future litigation, indefinite and unfocused, cannot trigger the duty to defend under a CGL policy” (Ryan, 916 F3d at 743).

*          *          *

Consequently, Zurich is not obligated to defend the stop work order issued to third-party plaintiffs.

(Record citations omitted).

This decision shows that while the duty to defend is broadly construed, its scope is not limitless, particularly prior to the commencement of formal legal proceedings against the insured.

On September 10, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Freedom Specialty Ins. Co. v. Platinum Mgt. (NY), LLC, 2018 NY Slip Op 32233(U), denying a D&O insurers’ motion for summary judgment based on a prior and pending litigation exclusion (the “PPL Exclusion”).

Freedom Specialty  is a D&O coverage litigation arising from a criminal securities fraud prosecution in the EDNY against officers of Platinum Partners, a New York hedge fund.  Last December, Justice Sherwood issued a preliminary injunction directing three excess D&O insurers to advance up to $15 million in defense costs to the insureds.  (N.B.  I represent one of the insureds in this case.  See our previous posts about the litigation here and here.)

One of the insurers (Berkley Insurance Company) filed a motion for summary judgment, arguing that coverage was barred by a prior and pending litigation exclusion, which provided as follows:

The Insurer shall not be liable to make any payment for Loss in connection with a Claim made against any Insured based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving:

(I) any prior or pending litigation, administrative or arbitration proceeding, or investigation as of November 20, 2015, or

(2) any fact, circumstance, situation, transaction or event underlying or alleged in such litigation, administrative or arbitration proceeding or investigation,

regardless of the legal theory upon which such Claim is predicated.

(Emphasis added).

Berkley argued that PPL Exclusion was triggered by an investigation of a third party (Murry Huberfeld), who was not an insured under the Berkley policy, and who was later prosecuted by a different United States Attorney’s office for different conduct – allegedly paying a bribe to a public official in exchange for an investment in a Platinum fund.  The Court held that the PPL Exclusion was inapplicable, explaining:

[T]o allow an insurer to establish facts regarding an investigation through (as Berkley seeks to do here) subsequent allegations based on that investigation would circumvent the insurer’s burden on summary judgment. . . . Berkley must at minimum show, as a matter of law, that (a) there existed an investigation prior to November 20, 2015, (b) that there was a common “fact, circumstance, situation, transaction or event” between that investigation and the Underlying Prosecution, and (c) that this common “fact, circumstance, situation, transaction or event” was one that was “underlying” the prior investigation, under a strict and narrow interpretation of that term.^[footnote]

Only two of Berkley’s exhibits are of any evidentiary value on any of the three forgoing issues: the May 2015 Subpoenas addressed to Huberfeld and Platinum Partners seeking records relating to transactions between Platinum Partners and COBA, and the sworn statement of FBI Special Agent Blaire Toleman, dated June 7, 2016. The latter concerns the bribery scheme involving Seabrook, Huberfeld and others as well as an urgent need at Platinum Partners for new funds to meet pending redemption requests and makes a reference to the subpoenas. As noted above, the May 2015 Subpoenas merely request documentation regarding “[t]ransactions between any entities controlled by [Huberfeld] or entities for whom you have done work with [COBA] or any of its Executive Board members or union funds” and, from Platinum Partners “[i]nvestments handled for, or monies received from or transferred for, [COBA], any Union funds, Norman Seabrook, or Michael Maiello, including any such transactions involving Centurion Credit Management or any related entities”. Although the investigation references a need for new funds to meet redemption requests at Platinum Partners, there are no indications that as of November 20, 2015 the investigation of Huberfeld and Seabrook in any way included a fact, circumstance, situation, transaction or event of a Ponzi-like scheme within Platinum Partners. Even if one were to accept that Berkley had met the commonality test under the strict standard that applies here, it has not shown that such common “fact circumstance, situation, transaction or event” was one that was underlying the Government’s bribery investigation of Huberfeld and Seabrook. Because the evidence fails to establish a prima facie case that the PPLI Exclusion applies, let alone show that this exclusion applies as a matter of law, the motion for summary judgment must be denied and upon a search of the record, summary judgment shall be granted in favor of defendants dismissing the complaint.

[Footnote: To the extent Berkley argues that the language “alleged in such investigation” applies, that phrase cannot be fairly interpreted to cover also . . . facts adduced in an earlier investigation, as alleged in a later action. At best, the PPLI Exclusion is ambiguous as to whether allegations made after November 20, 2015 can be imputed to a “prior or pending . . . investigation,” and since “any ambiguity is construed in favor of the insured”, even if Berkley could accomplish the herculean task of convincing the court that such an ambiguity exists, Berkley’s motion would still fail.]

This decision illustrates that policy exclusions are narrowly construed in favor of coverage, and an insurer seeking summary judgment based on a policy exclusion bears a heavy burden.

On August 22, 2018, the Second Department issued a decision in Tiffany Tower Condominium, LLC v. Insurance Co. of the Greater N.Y., 2018 NY Slip Op 05886, holding that insureds stated a cause of action against a property insurer for breach of the covenant of good faith and fair dealing based on the failure to pay a claim arising from damage suffered during Hurricane Sandy.

Unlike other states, New York does not recognize a separate cause of action against an insurance company for bad faith claims handling.  Section 2601 of the Insurance Law forbids certain specified “unfair claim settlement practices,” including “not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear.”  But the Court of Appeals has held that there is no private cause of action for violations of this statute. See Rocanova v. Equitable Life Assurance Soc’y of the U.S., 83 N.Y.2d 603, 614 (1994).

In certain circumstances, however, an insured can recover consequential damages above the policy limits based on a breach of the implied covenant of good faith and fair dealing.  In Tiffany Tower Condominium, the Second Department found that the insureds had properly alleged such a claim, explaining:

Contrary to the defendant’s contention, the plaintiffs sufficiently stated a cause of action to recover consequential damages for breach of the implied covenant of good faith and fair dealing based upon the defendant’s refusal to pay the plaintiff’s supplemental claim. This cause of action is not duplicative of the breach of contract cause of action. As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims. Breach of that duty can result in recoverable consequential damages, which may exceed the limits of the policy. Such a cause of action is not duplicative of a cause of action sounding in breach of contract to recover the amount of the claim.

Here, the plaintiffs stated a viable cause of action to recover consequential damages based on the defendant’s refusal to pay the supplemental claim by alleging, among other things, that they did not have the financial resources to repair the damage to the building and that the defendant’s delay in paying the supplemental claim caused the building to continue to deteriorate. Contrary to the defendant’s contention, the plaintiffs, in an affidavit in opposition to the defendant’s motion, specifically identified the consequential damages allegedly suffered, including damage to fireproofing and additional water damage. Accordingly, the Supreme Court correctly declined to direct the dismissal of the second cause of action to the extent that it is based on the defendant’s failure to pay the supplemental claim.

(Citations omitted).

As this decision shows, the key to alleging a claim against an insurer for breach of the implied covenant is identifying the consequential damages the insured suffered as a result of the insurance company’s failure to timely investigate and pay covered claims.  Here, the alleged deterioration of the insureds’ building was a sufficient basis to plead the claim.

On July 23, 2018, Justice Edmead of the New York County Supreme Court issued a decision in Tricon Constr., LLC v Main St. Am. Assur., 2018 NY Slip Op 31721(U), holding that additional insured coverage for a general contractor under a sub-contractor’s CGL policy was primary over the GC’s own liability coverage.

In Tricon, a general contractor (Tricon) sought coverage for a personal injury action as an additional insured under the CGL policy of its subcontractor (Boyle), issued by Main Street America Insurance Company (MSA).  Tricon also had its own CGL policy issued by Grange Mutual Casualty Company.  The question before the Court was:  which coverage was primary – the additional insured coverage under the “Contractors Extension Endorsement” to the MSA Policy, or the coverage under Tricon’s own policy?  The Grange policy specified that it was excess over “[a]ny other primary insurance available to [Tricon].”  The MSA policy likewise provided excess coverage to the named insured.  However, the “Contractors Extension Endorsement” provided that the additional insured coverage would be primary  “[i]f a written contract or agreement . . . requires this insurance to be primary for any person or organization.”  Tricon’s subcontract with Boyle provided that Tricon and the property owner “shall appear as additional insureds on any [] insurance policies maintain or procured by [Boyle].”  Although the subcontract did not explicitly address the issue, Justice Edmead held that the additional insured coverage was primary, explaining:

Plaintiffs argue that there is an implication of primacy in the Tricon/Boyle agreement’s requirement that Boyle procure additional insured coverage for Tricon. In support of this reading of the agreement, plaintiffs cite to Pecker Iron Works of NY v Travelers Ins. Co. (99 NY2d 391[2003]). Pecker Iron Works held that coverage for additional insureds is primary unless the parties unambiguously state otherwise (id. at 393). The Court of Appeals’ holding was based on the meaning of “additional insured,” which, the Court noted, was “well-understood” to be “an entity enjoying the same protection as the named insured” (id. at 393 [internal quotation marks and citation omitted]).

Thus, plaintiffs are clearly correct that, as the parties have not explicitly made Tricon’s additional insurance excess, the agreement between Tricon and Boyle requires the MSA policy to be primary for Tricon. Thus, the “Contractors Extension Endorsement” in the MSA policy is applicable, as is “Other Insurance” provision in the Grange policy. Both point to the conclusion that Grange’s policy is excess over the primary coverage provided to Tricon by the MSA policy.

The result here was sensible — both policies can’t be excess, and it is reasonable to infer that the parties intended for additional insured coverage to be primary.  Still, the Court of Appeals decision Justice Edmead cited (Pecker Iron Works) is arguably distinguishable, since in that case, unlike here, the subcontractor’s policy was primary as to the named insured.  So the Court of Appeals’ reasoning that the additional insured is entitled to “the same protection as the named insured” doesn’t resolve the priority issue in this case where the subcontractor’s policy was excess as to the named insured.

On July 10, 2018, Justice Schecter of the New York County Commercial Division issued a decision in J.T. Magen & Co., Inc. v. Atlantic Cas. Ins. Co., 2018 NY Slip Op 31584(U), holding that an unsigned purchase order could satisfy the requirement of a “written contract with the Named Insured” to qualify for coverage under an Additional Insured Endorsement to a CGL Policy.

J.T. Magen & Co. involves a frequently-litigated coverage issue in construction-related matters – determining who qualifies as an additional insured under a blanket additional insured endorsement to a contractor’s CGL policy.  The plaintiff in this case was a general contractor seeking coverage under a sub-contractor’s CGL Policy.  The policy at issue stated that to qualify as an additional insured, there must be “a written contract with the Named Insured.” Justice Schecter held that an unsigned purchase order that the GC sent to the subcontractor could satisfy the “written contract” condition, explaining:

Where, as here, an insurance policy provides that a condition precedent to becoming an additional insured is a written agreement between the named insured and the additional insured, the existence of an unsigned purchase order can satisfy this condition. Zurich Am. Ins. Co. v Endurance Am. Speciality ins. Co., 145 AD3d 502, 503 (1st Dept 2016) (defendant’s policy required “a ‘written’ contract not a ‘signed’ one”). There is no contrary controlling authority.  Arch’s reliance on Cusumano v Extell Rock LLC, 86 AD3d 448 (1st Dept 2011), is misplaced as that case involved a policy that expressly required an “executed” agreement. Id. at 449; see Zurich, 145 AD3d at 503-04 (“As the motion court in Cusumano found, the insurer analogous to defendant in the case at bar expressly included the word ‘executed’ in[ ] its Policy, thereby requiring that any agreement … be memorialized in a signed contract”) (emphasis added). The Arch Policies have no such requirement; they merely require a written agreement, not an executed agreement. Likewise, while the policy in Nat ‘l Abate men/ Corp. v Nat ‘I Union Fire Ins. Co. of Pittsburgh. PA, 33 AD3d 570, 571 (1st Dept 2006), “like the subject policy, merely required a ‘written contract’ … the issue in National Abatement was whether a written contract existed at the time of the accident.” Zurich. 145 AD3d at 504 (emphasis added). Here, the Purchase Order is dated February 1, 2005 and predates the Arch Policies by more than two months.

That said, the Purchase Order provides spaces for signatures. Though the Arch Policies do not require signatures, Arch suggests that the absence of any signatures establishes that plaintiff and Piermount never formed a binding contract.  Arch is wrong. As plaintiff explains, an unsigned purchase order can evidence a binding agreement if there is evidence that the parties intended to be bound by the unsigned writing. See LMIII Realty. LLC v Gemini Ins. Co., 90 AD3d 1520, 1521 (4th Dept 2011) (“The purchase order was an enforceable agreement despite the fact that it was unsigned because the evidence in the record establishes that the parties intended to be bound by it.”); see also Netherland Ins. Co. v Endurance Am. Specialty Ins. Co., 157 AD3d 468, 468-69 (1st Dept 2018) (holding that “Bid Proposal Document” evidencing agreement in which contractor was obligated to name owner as additional insured satisfied policy’s “written contract” requirement). Plaintiff submitted evidence from which a reasonable finder of fact could conclude that the Purchase Order reflects the terms of a binding agreement with Piermount. See Dkt. 240 at 11 (“Piermount provided certificates of insurance indicating that [plaintiff] was an additional insured on the Arch [Polcies]”: “Piermount performed the work on the Project and was paid for the same”); Dkt 251. Arch, by contrast, proffers no dispositive evidence to the contrary. Plaintiff, therefore, at the very least has raised a question of fact regarding whether it had the “written contract” required by the Arch Policies.

Property owners, construction managers and general contractors typically require “downstream” parties on a construction project (i.e., subcontractors) to provide CGL coverage to them.  This is usually accomplished by means of a blanket additional insureds endorsement on the contractor’s policy.  But the would-be additional insureds need to ensure that their relationship with the named insured is structured to meet the requirements of the additional insured endorsement.  The purchase order was sufficient to avoid summary judgment here – and may ultimately do the trick.  But a formal written contract would have eliminated all doubt, and presumably would have been easy enough to prepare.

On July 2, 2018, Justice Platkin of the Albany County Commercial Division issued a decision in Dan Tait, Inc. v. Farm Family Cas. Ins. Co., 2018 NY Slip Op 28205, holding that a series of thefts by an employee constituted a single “occurrence,” subject to a single $15,000 coverage limit, under the “Employee Dishonesty” section of a business insurance policy.

The employee stole a total of $500,000 from the insured, employing several different methods.  The insured argued that each of the employee’s schemes should be treated as a separate occurrence based on the common law “unfortunate-event” test, which considers “whether there is a close temporal and spatial relationship between the incidents giving rise to the injury or loss, and whether the incidents can be viewed as part of the same causal continuum, without intervening agents or factors.”  Appalachian Inc. Co. v. General Elec. Co., 8 N.Y.3d 162, 170 (2007).  Justice Platkin disagreed and held that the policy’s definition of “occurrence” required  that “[a]ll loss or damage . . . [c]aused by one or more persons; or . . . [i]nvolving a single act or series of acts” be treated as a single “occurrence.”  The Court explained:

It is black-letter law that courts resolving an insurance coverage dispute must first look to the language of the policy.  Thus, the unfortunate-event test is applied only where the language of the policy is silent on the issue of aggregation[.] . . . The Court therefore concludes that it would run counter to settled principles of New York law to apply the common-law definition of “occurrence” to an insurance policy that speaks directly to the issue of aggregation.

Here, of course, the Policy does include language demonstrating a clear intent to aggregate into a single “occurrence” the losses caused by an employee “[i]nvolving a single act or series of acts” (§ I [G] [3] [d]). The Court therefore agrees with Farm Family that all losses resulting from Young’s “series of [dishonest] acts” over a multi-year period must be considered to be “one occurrence” under the plain language of the Policy. Indeed, while arguing in favor of multiple occurrences, Dan Tait does not contend that its losses arose from anything other than a “series of [dishonest] acts” committed by Young. . . .

[W]hile the “series of [dishonest] acts” committed by Young involved several different methods of theft — unauthorized withdrawals from Dan Tait’s credit line, unauthorized purchases with Dan Tait’s credit cards, and unauthorized taking of Dan Tait’s inventory and property for his personal use — the clear and unambiguous language of the Policy requires these theft incidents to be aggregated into one “occurrence.”

(Citations omitted).

Whether a loss constitutes a single “occurrence” or multiple “occurrences” can have a dramatic impact on the available coverage.  In one famous example – with billions of dollars at stake – the attacks on the World Trade Center on 9/11 were found to be one occurrence under certain insurance policies and two occurrences under others.  See SR Int’l Bus. Ins. Co. v. World Trade Ctr. Properties, LLC, 467 F.3d 107, 121 (2d Cir. 2006).  In some instances, it can be in the insured’s interest to aggregate losses into a single occurrence.  For instance, if multiple losses each fall below a per-occurrence deductible, there may be no coverage unless the losses can be aggregated.

On July 6, 2018, the Second Circuit issued a decision in Medidata Solutions Inc. v. Federal Ins. Co., 17-2492-cv, holding that a computer fraud insurance policy covered losses resulting from an email “spoofing” attack.  As the Court explains, “spoofing” is “the practice of disguising a commercial e-mail to make the e-mail appear to come from an address from which it actually did not originate. Spoofing involves placing in the ‘From’ or ‘Reply-to’ lines, or in other portions of e-mail messages, an e-mail address other than the actual sender’s address, without the consent or authorization of the user of the e-mail address whose address is spoofed.”

The policy at issue in Medidata Solutions covered losses resulting from any “entry of Data into” or “change to Data elements or program logic of” a computer system. The insurer argued that the policy did not cover loss from the “spoofing” attack and instead applied only to “hacking-type intrusions” into the insured’s computer system.  The Second Circuit disagreed and affirmed the district court’s decision granting summary judgment to the insured, explaining:

While Medidata concedes that no hacking occurred, the fraudsters nonetheless crafted a computer-based attack that manipulated Medidata’s email system, which the parties do not dispute constitutes a “computer system” within the meaning of the policy. The spoofing code enabled the fraudsters to send message that inaccurately appeared, in all respects, to come from a high-ranking member of Medidata’s organization. Thus the attack represented a fraudulent entry of data into the computer system, as the spoofing code was introduced into the email system. The attack also made a change to a data element, as the email system’s appearance was altered by the spoofing code to misleadingly indicate the sender. Accordingly, Medidata’s losses were covered by the terms of the computer fraud provision.

The Second Circuit also rejected the insurer’s argument that the insured had not suffered a “direct loss” as a result of the spoofing attack, explaining:

The spoofed emails directed Medidata employees to transfer funds in accordance with an acquisition, and the employees made the transfer that same day. Medidata is correct that New York courts generally equate the phrase “direct loss” to proximate cause. It is clear to us that the spoofing attack was the proximate cause of Medidata’s losses. The chain of events was initiated by the spoofed emails, and unfolded rapidly following their receipt. While it is true that the Medidata employees themselves had to take action to effectuate the transfer, we do not see their actions as sufficient to sever the causal relationship between the spoofing attack and the losses incurred. The employees were acting, they believed, at the behest of a high-ranking member of Medidata. And New York law does not have so strict a rule about intervening actors as Federal Insurance argues.

(Citations omitted).

Given the ubiquity of computer systems, cybercrime coverage is an important part of a company’s insurance portfolio. As this case demonstrates, the courts continue to grapple with which types of computer-related frauds qualify for coverage under the standard policies.