On March 5, 2019, the First Department issued a decision in M&M Realty of N.Y., LLC v. Burlington Ins. Co., 2019 NY Slip Op 01513, holding the extrinsic evidence of the parties’ intent precluded summary judgment on a property owner’s status as an additional insured under a contractor’s CGL policy.

The standard additional insured endorsement at issue in this case provided coverage to any “person or organization” for the whom the contractor was performing services if the contractor had “agreed in writing in a contract or agreement that such person or organization be added as an additional insured on [the contractor’s] policy.”  In a decision previously covered on this blog, Justice Edmead of the New York County Supreme Court held that (1) the contract between the property owner and the contractor was ambiguous as to the intent to name the property owner as an additional insured (it required that “insurance” be provided but did not define the “necessary . . . insurance”); but (2) extrinsic evidence in the form of deposition testimony established “the parties’ intent to confer additional insured status” on the property owner.  The First Department reversed, holding that “the extrinsic evidence properly considered by the motion court does not conclusively demonstrate the parties’ intent . . . but presents an issue of credibility to be determined by a factfinder.”

This decision illustrates the importance of ensuring – before work on a construction project commences – that the underlying agreements have the necessary language to trigger the additional insured endorsements in a contractor’s or sub-contractor’s CGL policy.  A great deal of collateral litigation (including depositions, a summary judgment motion, a trip to the First Department, and now a trial on remand) could have been avoided if the property owner had coverage counsel review the agreements and the CGL policy in advance.

On February 20, 2019, Justice Lebovits of the New York County Supreme Court issued a decision in Flintlock Constr. Servs. LLC v. Technology Ins. Co., 2019 NY Slip Op 30392(U), examining the “other insurance” clauses of two applicable insurance policies to determine the priority of coverage.

In some cases, more than one insurance policy may provide coverage for a given loss.  It is therefore necessary to determine the “priority of coverage” – i.e., whether one policy is “primary”, and therefore, must be exhausted before another “excess” policy kicks in, or whether coverage will be apportioned among co-primary policies.  This determination is governed by a standard policy provision, known as the “other insurance” clause.

Justice Lebovits explained how such “other insurance” clauses are interpreted:

Where several policies cover the same risk, each of which was sold to provide the same level of coverage, as here, the priority of coverage between the policies is determined by comparison of their “other insurance” clauses. Such clauses limit an insurer’s liability where other insurance may cover the same loss. This may be accomplished by providing that the insurance provided by the policy is excess to the insurance provided by other policies, in which case the “other insurance” clause is known as an excess clause. On the other hand, an “other insurance” clause may limit the insurer’s liability by providing that, if other insurance is available, all insurers will be responsible for a stated portion of the loss; an “other insurance” clause of this kind is known as a pro rata clause.

In this case, the applicable “other insurance” clause of the Liberty Policy is an excess clause, because it provides that the insurance was “excess of such [other valid and collectible] insurance” and that Liberty had no duty to defend. The “other insurance” clause in the Technology Policy is a pro rata clause, because it provides that where other primary insurance is available, “we will share with all that other insurance,” either by equal shares or in proportion to policy limits. The First Department has held that

where one of two concurrently applicable insurance policies contains an excess “other insurance” clause and the other contains a pro rata “other insurance” clause, the excess clause is given effect, meaning that the coverage under the policy containing the excess clause does not come into play, and the carrier’s duty to defend is not triggered, until the coverage under the policy containing the pro rata clause has been exhausted.

On the other hand, where both policies contain excess “other insurance” clauses, so that if both excess clauses are given effect the result would leave the insured without any coverage, then the clauses are deemed to cancel each other out, and the insurers must cover the loss on a pro rata basis, as co-primary insurers.

Therefore, giving effect to the Liberty Policy’s excess “other insurance” clause, Flintlock’s coverage as a named insured under the Liberty Policy is excess to Flintlock’s additional insured coverage under the Technology Policy. Thus, it is declared that Liberty’s obligation to defend Flintlock in the Underlying Action from this point forward will not be triggered until Flintlock’s coverage under the Technology Policy has been exhausted.

(Citations omitted).

On January 31, 2019, Justice of Engoron of the New York County Supreme Court issued a decision in Southwest Mar. & Gen. Ins. Co. v. Main St. Am. Assur. Co., 2019 NY Slip Op 30240(U), holding that a blanket additional insured endorsement to a subcontractor’s CGL policy required that the subcontract be executed prior to the underlying injury in order to establish coverage.

This case 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.  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.

Here, a general contractor (ADC) sought defense coverage as an additional insured under the CGL policy of a subcontractor (Northstar) for a lawsuit by an injured Northstar employee.  Northstar’s CGL policy, issued by Main Street America Assurance Company (MSA), provided that “Any person(s) or organization(s) for whom you are performing operations is . . . an additional insured, 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.”  (Emphasis added).  Northstar disclaimed coverage and a lawsuit followed.

Justice Engoron denied summary judgment, finding that there was an issue of fact as to whether ADC’s subcontract with Northstar was executed prior to the date of the underlying injury.  The Court explained:

Contrary to the argument advanced by ADC, this Court finds that that clear and unambiguous language of the policy issued to Northstar by MSA requires that ADC and Northstar had to have executed a written subcontract agreement prior to the date of the underlying accident in order to trigger coverage for “[a]ny person(s) or organization(s) for whom you are performing operations.” We reject MSA’s reliance on Travelers Indemnity Co. of America v Royal Insurance Co. of America, 22 AD3d 252 (1st Dep’t 2005), as persuasive on this issue. The policy language at issue in Travelers is distinguishable in that it had a comma between the phrase “written contract” and the word “agreement,” leading the First Department to find ambiguity in the coverage requirements. This Court finds, as a majority of other jurisdictions have found, that use of the words “written contract or agreement” unambiguously requires a written document. Persuasive on this issue is Quincy Mutual Fire Ins. Co. v. Imperium Ins., 636 F. App’x 602, 605 (3d Cir. 2016) (holding that “to read it otherwise would render ‘written’ meaningless”).

However, an issue of fact remains as to when the written agreement between ADC and Northstar was executed, and accordingly, an issue of fact as to whether the additional coverage of Northstar’s policy applies to ADC. MSA met its initial prima facie burden of demonstrating that the contract was executed after the underlying accident, by providing the deposition testimony of Mr. Barcelos, shifting the burden to ADC. However, ADC sufficiently rebutted such a showing by submitting the affidavit of its administrative assistant, Ms. Mehl, who asserts it was her custom and practice to date the documents on the date the subcontractor signs.

This decision highlights the need for would-be additional insureds to ensure that their relationship with the named insured is structured to meet the requirements of the additional insured endorsement.  Here, the court concluded that the language in the additional insureds endorsement requiring that the parties have “agreed in writing in a contract or agreement” means that an executed agreement is a necessary condition of coverage.  However, other courts have distinguished between policy language requiring a “written agreement” and an “executed agreement.”  See, for example, our previous post on J.T. Magen & Co., Inc. v. Atlantic Cas. Ins. Co., 2018 NY Slip Op 31584(U) (Schecter, J.) (unsigned purchase order could be sufficient to trigger additional insured coverage where the policies “merely require a written agreement, not an executed agreement”).

On December 19, 2018, the Second Circuit issued a decision in High Point Design, LLC v. LM Ins. Corp., Docket No. 16-1446-cv, holding that a counterclaim alleging patent and trade dress infringement in an “offer[] for sale” triggered an insurer’s duty to defend under the “advertising injury” provision of a CGL Policy.

This coverage action arose from a dispute over the Fuzzy Babba slipper, manufactured and distributed by High Point.  High Point filed a declaratory judgment action, seeking a declaration that the slipper did not violate a patent held by Buyers Direct Inc., and Buyers Direct filed a counterclaim for patent and trade dress infringement.

High Point then sued its CGL carrier (Liberty), which refused to defend the counterclaim.  District Judge Katherine B. Forrest of the SDNY held that the counterclaims’ use of “the phrase ‘offering for sale’ . . . could be broadly construed as promoting or advertising,” thus triggering the duty to defend a claim for “advertising injury.”  The Second Circuit, in a decision by Judge Pooler, agreed that the CGL carrier was required to defend the counterclaims, explaining:

Whether Liberty owes High Point a defense turns on the meaning of what constitutes an “advertising injury.” There is much confusion in the caselaw concerning when an advertising injury is caused by advertising within the meaning of standard business insurance policies. Courts are to compare the allegations of the complaint to the terms of the policy. If, liberally construed, the claim is within the embrace of the policy, the insurer must come forward to defend its insured no matter how groundless, false or baseless the suit may be.

Here, Liberty argues that the district court erred in finding Liberty owed High Point a duty to defend. We disagree, and find that the “offer[] for sale” alleged in the counterclaim, coupled with the discovery demands seeking advertising materials, triggered Liberty’s duty to defend.

Viewed broadly as required under New York law, an “offer for sale” extends to advertising. We determined in Century 21 [v. Diamond State Ins. Co., 442 F.3d 79, 83 (2d Cir. 2006)] that “marketing,” as used in a similar insurance agreement, extends to advertising. “Marketing” includes activities that are not advertising, but the term also must be understood to refer to activities that accord with the common use of ‘advertising. Similarly, while the term “offer for sale” includes activities that are not advertising, it also includes advertising activity. Indeed, the purpose of most advertising is to “offer for sale” various goods and services. The CGL at issue here recognizes this, defining “Advertisement” to mean “a paid announcement that is broadcast or published in the print, broadcast or electronic media to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” The umbrella policy covers an “injury arising out of paid announcements in the print or broadcast media resulting in . . . [i]nfringement of copyright, title or slogan.”

The phrase “offering for sale” may have multiple meanings, some of which do not implicate advertising activity. For example, simply placing an item on the counter with a sign indicating its price is an “offer for sale” even though it is not advertising. Liberty argues that High Point’s advertising could not have caused any advertising injury within the meaning of the policies because the advertising simply displayed the allegedly infringing product. But Buyer’s Direct’s claim that it was injured by High Point’s “offering for sale” the infringing slippers suffices to demonstrate that an advertising injury may have resulted from the use of the infringing trade dress in advertisements. The slippers were not sold encased in packaging of any kind—they were simply displayed as slippers. Displaying the infringing trade dress in an advertisement is an advertising injury for which damages can be awarded where, as here, it is a means by which the alleged infringer creates customer confusion and trades on the offended party’s goodwill and protected designs. . . .

Even if the counterclaims, standing alone, did not place Liberty on notice of its duty to defend, the discovery demands seeking information related to the paid advertisements place High Point’s advertising squarely at issue.

(Emphasis added) (Citations omitted).

The Court vacated Judge Forrest’s damages award, however, reasoning that the insurer’s duty to defend did not arise when the counterclaims were filed, but only when the discovery demands were served.

Judge Newman issued a concurring opinion, taking issue with the majority’s conclusion that the term “offering for sale” includes advertising.  (“The purpose of most (perhaps all) advertising is to persuade the public to buy the advertised goods and services.  “Offering for sale” is simply the act of making a product available for sale.  It is a distortion of language to say that “offering for sale” sometimes means “advertising.”)  Judge Newman also pointed out an apparent contradiction in Judge Pooler’s opinion:  although the decision states that “an ‘offer for sale’ extends to advertising”, the Court held that the counterclaims (which alleged an “offer for sale”) did not trigger the duty to defend; the CGL carrier only had to pay for defense costs as of the date the demand for discovery of advertising information was served.  (“If the existence of the words “offering for sale” in the patent infringement portion of BDI’s counterclaim, whatever their meaning, triggered liability under the Policy, that liability would have covered defense costs incurred from the date Liberty became aware of BDI’s counterclaim.  That was the District Court’s holding, which is now vacated.”)

This decision demonstrates that New York courts will look outside the four corners of the complaint to determine the duty to defend.  More precisely, New York law does not permit the insurer to employ a “wooden application of the ‘four corners of the complaint’ rule” “when it has actual knowledge of facts establishing a reasonable possibility of coverage” – even if those facts are not pled in the complaint. See Fitzpatrick v. American Honda Motor Co., 78 N.Y.2d 61, 66-67 (1991). On the other hand, as previously explained on this blog, an insurer may not rely on evidence outside the “four corners” of the complaint to avoid its duty to defend.

The majority opinion also offers a close reading of a policy exclusion, demonstrating how to parse what Judge Pooler called the “convoluted structure apparently favored by insurance companies.”  I have written a guide to reading an insurance policy, in which I liken the process to assembling a jig saw puzzle.

On January 17, 2019, the First Department issued a decision in D.K. Prop., Inc. v National Union Fire Ins. Co. of Pittsburgh, Pa., 2019 NY Slip Op 00347, holding that an insured need not satisfy a “heightened pleading standard” in alleging consequential damages arising from an insurer’s bad faith claim handling.

This case involved a claim under a commercial insurance policy for damage to the plaintiff’s office building caused by construction work at an adjoining building.  The plaintiff alleged that “rather than pay the claim,” the insurer “made unreasonable and increasingly burdensome information demands throughout the three year period since the property damage occurred,” and the delay caused the structural damage to the building to worsen.  Further, despite its failure to pay the claim, the insurer sought to intervene as subrogor in the insured’s lawsuit against the owner of the adjacent building, causing the insured “to incur significant, unnecessary legal fees.”

As we have noted in prior posts (see here and here), New York law does not recognize a separate tort claim for bad faith claims handling.  But the courts have permitted insureds to recover consequential damages (above the policy limits) on a theory that the insurer’s bad faith conduct violates the implied covenant of good faith and fair dealing.  Here, the trial court granted a motion to dismiss the insured’s claim for consequential damages (except the claim for attorneys’ fees), concluding that the complaint did not allege, except in a “general conclusory fashion” that the claimed consequential damages “were reasonably contemplated” by the insured and the insurer when they entered into the policy.  The First Department disagreed, explaining:

A plaintiff may sue for consequential damages resulting from an insurer’s failure to provide coverage if such damages (“risks”) were foreseen or should have been foreseen when the contract was made.  Although proof of such consequential damages will ultimately rest on what liability the insurer is found to have “assumed consciously,” or from the plaintiff’s point of view, have warranted the plaintiff to reasonably suppose the insurer assumed when the insurance contract was made, a determination of whether such damages were, in fact, foreseeable should not be decided on a motion to dismiss and must await a fully developed record.  In other words, the inquiry is not whether plaintiff will be able to establish its claim, but whether plaintiff has stated a claim.

Here, plaintiff’s allegations meet the pleading requirements of the CPLR with respect to consequential damages, whether in connection with the first cause of action or the second cause of action for breach of the covenant of good faith and fair dealing in the context of an insurance contract.  Contrary to defendant’s claim, there is no heightened pleading standard requiring plaintiff to explain or describe how and why the “specific” categories of consequential damages alleged were reasonable and foreseeable at the time of contract.  There is no heightened pleading requirement for consequential damages.

(Citations omitted) (emphasis added).

The Court of Appeals first recognized a claim for consequential damages based on bad faith claims handling in a pair of 2008 cases—Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 192 (2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200, 203 (2008).  This decision provides important guidance on the pleading standard for such a claim and clarifies that a complaint need not provide detailed allegations as to the foreseeability of each category of alleged damages.

On December 21, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Zurich Am. Ins. Co. v Don Buchwald & Assoc., Inc., 2018 NY Slip Op 33325(U), holding that an intentional tort could be a covered occurrence, triggering a CGL insurer’s duty to defend.

This insurance coverage case arose from a salacious lawsuit by professional wrestler Terry Gene Bollea (better known by his stage name, Hulk Hogan).  Bollea sued a talent agency (DBA) and its employee (Burton) in Florida state court for their alleged role in the dissemination of a sex tape through the gossip website, Gawker.com.  The complaint asserted claims against DBA for negligent retention of Burton and intentional infliction of emotional distress.  DBA’s CGL carrier (AZIC) disclaimed coverage and refused to provide a defense on the grounds that: (1) the complaint “did not allege ‘bodily injury’ caused by an ‘occurrence’ since all of DBA’s and Burton’s actions were allegedly intentional and not accidental”; and (2) an exclusion for “expected” or “intended” injuries precluded coverage.

In a coverage action filed by AZIC, Justice Sherwood granted partial summary judgment to the insured on the issue of defense coverage, explaining:

In determining whether “an occurrence” has been alleged and whether conduct falls within the “accident language” of a commercial liability policy, it is customary to look at the casualty from the point of the view of the insured to see whether or not, from his point of view, it was unexpected, unusual and unforeseen. In that context, New York courts assess whether the insured intended to cause harmful consequences, not whether the insured, as a general matter, intended to act.  Thus, even a murder committed by the tenant of an insured-landlord has been held to be a covered “occurrence” and an “accident” because from the insureds’ standpoint, it was unexpected, unusual and unforeseeable.

Moreover, an otherwise “intentional” tort may still be “accidental,” triggering a duty to defend, where the plaintiff in the underlying action can succeed on his or her intentional tort claim without actually proving intentional or knowing conduct—i.e., where something less than actual intent suffices to establish liability.

Here, the negligent retention and intentional infliction of emotional distress causes of action asserted in the amended Bollea complaint both allege an “occurrence” within the meaning of the Primary Policies.

In his negligent retention claim asserted against DBA, Bollea alleges that DBA “knew or should have known” that Burton was “predisposed to committing wrongs,” that DBA “failed to take reasonable actions to investigate, prevent and/or avoid” the alleged misconduct of Burton, and that by negligently retaining Burton as an employee and not terminating him, DBA directly and proximately caused Bollea to suffer damages, including “anxiety” and “severe emotional distress”. These allegations unambiguously trigger AZIC’s duty to defend under the Third Primary Policy because, from DBA’s standpoint, Burton’s acts in allegedly aiding and abetting the publication of the racist footage were unexpected, unusual and unforeseeable.

Indeed, New York courts routinely hold that negligent retention claims allege an “occurrence” against an insured-employer because, from the employer’s point of view, the intentional acts of its employee are not intended or expected. . . .

The IIED claim also alleges an occurrence. In his IIED claim asserted against DBA. and Burton, Bollea alleges that DBA and Burton acted with “reckless disregard of Bollea’s rights” and caused him to suffer “severe emotional distress” Under Florida law, Bollea can succeed on this claim in one of two ways—he can demonstrate “deliberate or reckless infliction of mental suffering”

Accordingly, because Bollea has alleged that DBA and Burton recklessly disregarded his rights, and because it is possible for Bollea to succeed on his IIED claim without actually proving “deliberate” or “intentional” conduct, the IIED claim alleges an occurrence, and the “expected and intended acts” exclusion does not apply.

Although AZIC argues that an intentional tort is never “accidental”, the court rejects this argument. It is well-settled that an “intentional” tort can still be “accidental” within the meaning of commercial liability policies, as long as the actor did not intend to achieve the specific harmful results.

(Citations omitted).

As this decision illustrates, although insurance policies generally do not cover intentional wrongdoing, the unintended consequences of intentional acts frequently are covered. (See here and here for previous posts on the issue of coverage for “intentional” acts.)

Another takeaway here: the insured was entitled to recover the legal fees it incurred in the coverage action. Fee shifting is not generally available in New York. But under the Court of Appeals decision in Mighty Midgets, Inc. v Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979), an insurer that initiates a coverage action and loses must pay the insured’s attorneys’ fees.

On December 11, 2018, Judge Garaufis of the EDNY issued a decision in Government Employees Ins. Co. v. Saco, 12-cv-5633 (NGG) (ST), holding that a plaintiff in a bad faith action against a third-party insurer was entitled to collect the amount of a judgment in excess of the policy limits, even if the insured was not actually liable for the full amount of that judgment.

Saco arose from a personal injury case following a car accident.  The defendant in the injury lawsuit (Kusulas) was insured by GEICO.  After GEICO failed to tender the full policy limits to settle the case, a trial ensued, after which the plaintiff (Saco) was awarded a judgment that exceeded the limits of Kusulas’ policy.  A portion of the judgment, totaling $1.2 million, was for future damages.  Under Article 50-B of the CPLR, the defendant’s obligation to pay future economic damages (which are paid periodically rather than as a lump sum) terminates upon the plaintiff’s death.  Saco assigned her rights against GEICO to Kusulas in exchange for a promise that Kusulas would not execute her judgment against Saco or any of her personal assets.  Two years later, Kusulas died, thus terminating the future damages payments owned to her pursuant to the judgment.

Kusulas’ estate, as assignee of Saco’s rights under the policy, pursued a claim against GEICO for bad faith in failing to settle the claim before trial for the full policy limits.  In such a bad faith action, an insured can recover the amount of the judgment against it in excess of the policy limits.  GEICO argued that because Saco would never be obligated to pay the full amount of the future damages awarded to Kusulas, the available damages in the bad faith action should be limited to the amounts for which the insured would actually be liable.  Judge Garaufis disagreed.  His decision provides an excellent overview of the law governing bad faith claims against third-party insurers:

It is a well settled and enduring principle of New York law that an insurer may be held liable for the breach of its duty of good faith in defending and settling claims over which it exercises exclusive control on behalf of its insured.  A bad faith case is established where the liability is clear and the potential recovery far exceeds the insurance coverage.  A bad-faith cause of action cannot lie for conduct amounting to ordinary negligence; rather, success on such a claim requires a showing that the insurer’s conduct constituted a gross disregard of the insured’s interests.  As this court has previously recounted, bad-faith actions sound in contract, not tort, because of the general principle that a covenant of good faith and fair dealing is implied in all contracts, including insurance policies.

But an action based on the breach of the implied covenant of good faith and fair dealing is no ordinary contract action.  In an action where the insurer is accused of violating its implied obligation to act in good faith by failing to make a reasonable settlement of a claim within policy limits, the court may impose compensatory damages in excess of the policy limits.  Although bad-faith actions csound in contract, the New York Court of Appeals has explained that the amount of the excess judgment is a permissible measure of damages in these cases because it is

a class of harm that naturally and foreseeably flows from an insurer’s failure to accept a pretrial settlement offer within the policy limits.  Accordingly, when the harm has been caused by the insurer’s breach of its obligation to perform in good faith, the insurer should be required to remedy that harm by paying the excess judgment.

Soto v. Farm Ins. Co., 635 N.E.2d 1222, 1224 (N.Y. 1994).  By contrast, New York courts have traditionally not permitted the imposition of consequential bad-faith damages for emotional distress, injury to credit, or lost business opportunity, as these injuries are speculative, remote and could not be within the contemplation of the parties at the time of the execution of the insurance contract.

An award of damages exceeding the limits of an insurance policy is often classified as punitive in nature owing to the disingenuous and dishonest behavior necessary to support bad-faith liability on this ground.  This measure of damages is distinct from the normal imposition of punitive damages, which are not permissible in the context of a bad-faith action.

Under controlling circuit precedent, a bad-faith cause of action accrues against an insurer, as soon as the excess judgment against the insured becomes final, regardless of whether the insured has the ability to pay any part of the excess judgment.  In rejecting the countervailing so-called “payment rule,” courts have given three general reasons for extending the cause of action.  First, courts have expressed concern that an insurer who has acted in bad faith should not be able to avoid judgment-thus, effectively, reaping a windfall-simply because its policyholder is judgment-proof.  Second, allowing an insurer to escape liability for the excess judgment if the insured is insolvent would discourage settlement.  After all, why would an insurer that knows its insured is insolvent ever choose to settle a claim at the policy limits? If the case goes to trial and liability is not found, the insurer would end up paying nothing; if the case goes to trial and liability is found, the most the insurer would have to pay is the limit of the policy. Because there would be no possibility in this circumstance that the insurer would end up on the hook for more than the: limits of the policy, the insurer would never have good reason to settle, thereby contradicting the purpose of bad-faith actions.

(Some citations omitted).

The Court concluded that “the measure of damages in a third-party bad-faith action is the amount of the judgment in excess of the policy limits plus interest,” and therefore, “it is the initial adjudication of liability, rather than a subsequently reduced amount, that matters.”  Judge Garaufis acknowledged, however, that the case presented a “close” question, and suggested that at a later stage, “the Second Circuit may find it useful to certify this issue to the New York Court of Appeals.”

As we have discussed in a prior post, in the context of first-party insurance, New York similarly does not recognize a separate tort cause of action 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).  As in the third-party context, however, the New York Court have sometimes permitted recovery of consequential damages in excess of the policy limits on the ground that bad faith in the adjustment of a first-party insurance claim constitutes a breach of the policy’s implied covenant of good faith and fair dealing.

On December 11, 2018, Judge Failla of the SDNY issued a decision in Liberty Mut. Fire Ins. Co. v. Hamilton Ins. Co., 17-CV-2350 (KFP), holding that an insured had the right to select defense counsel because of the insurer’s conflict of interest.

Liberty v. Hamilton arose from an injury at a construction site.  The injured worker sued the construction manager (Gilbane) and the property owner (DASNY).  DASNY filed a cross-claim against Gilbane and a third-party action against the contractor (Preferred), and Gilbane filed its own claims against Preferred.  Gilbane was an additional insured under Preferred’s liability policy and tendered the defense of the claims against it to Preferred’s insurer (Hamilton).  Hamilton initially disclaimed coverage, but two years later agreed to assume the defense, subject to a reservation of rights.  Among other things, Hamilton sought to replace Gilbane’s counsel with counsel selected by Hamilton, and took the position that Gilbane’s additional insured status “applies only to the extent the liability of the additional insured arises out of Preferred Builders’ work.”  Gilbane refused to accept defense counsel selected by Hamilton, citing a conflict of interest:  Hamilton had an economic incentive to establish that the construction worker’s injuries were caused by Gilbane’s negligence, as this would absolve its principal insured (Preferred) of liability, and would also eliminate additional insured coverage for Gilbane under Preferred’s policy.  In addition, Gilbane and Preferred were actually adverse to one another in the underlying litigation, where Gilbane asserted claims against Preferred.

In subsequent coverage litigation between Gilbane’s liability carrier (Liberty Mutual) and Hamilton, Judge Failla held that there was a conflict of interest that entitled Gilbane to select defense counsel of its own choosing to be paid for Hamilton.  The Court explained:

In Public Service Mutual Insurance Co. v. Goldfarb, the Court of Appeals held that, if a conflict exists because “the insurer [is] liable only upon some of the grounds for recovery asserted and not upon others — defendant … is entitled to defense by an attorney of his choosing, whose reasonable fee is to be paid by the insurer.” 53 N.Y.2d 392, 401 (1981). Liberty Mutual argues from this decision that Hamilton had no right to choose Gilbane’s counsel because of a conflict of interest whereby Hamilton “would be liable only on some of the grounds for which recovery was sought in the Underlying Action,” i.e., “only to the extent the liability … arises out of Preferred Builders’ work.”It posits that this limitation on Hamilton’s liability created a conflict: Hamilton “would not only be less interested in defending liability arising from Gilbane’s work; it would want to show that liability arose solely from Gilbane’s work — increasing Gilbane’s exposure and eliminating Hamilton’s exposure both as insurer of Gilbane and as insurer of Preferred.”In addition, Liberty Mutual notes that “Gilbane had cross-claims against and from DASNY, Hamilton’s additional insured, and a third-party action for indemnification against Preferred, Hamilton’s Named Insured.”

Hamilton contends that the issue of conflict “is irrelevant” because, by the time it finally undertook Gilbane’s defense, there was no more conflict.  Specifically, by October 11, 2013, there was no longer any dispute “that Preferred Builders was … solely responsible for Siguencia’s injury”; that Preferred had no plausible claim against Gilbane; and that Gilbane’s sole liability flowed from the negligence of its sub-contractor, Preferred.  Hamilton also asserts that Liberty Mutual was aware of the absence of conflict no later than January 28, 2011, and thus had no basis to refuse Hamilton’s October 11, 2013 acceptance of the tender of defense.  In any event, Hamilton claims, even before the determination of Preferred’s sole liability, Hamilton could have obviated the issue by appointing different counsel for Gilbane, which counsel would have been ethically bound to defend Gilbane against all claims independent of Hamilton’s coverage position.

The Court agrees with Liberty Mutual. Even if the Court could plausibly determine that the conflict posed by the limitations on Hamilton’s liability had evaporated by 2013, Gilbane’s cross-claim and third-party action persisted. “A further justification for representation by attorneys selected by the insureds exists in the instant case by reason of the claims and cross claims of the respondents.… The cross claims indicate true adversity and conflict of interest[.]” Rimar v. Cont’l Cas. Co., 376 N.Y.S.2d 309, 313 (4th Dep’t 1975). Here, the specter of conflict from the cross-claims and third-party action loomed larger due to Hamilton’s repeated, and unsuccessful, attempts to persuade Gilbane to drop those claims.  Under these circumstances, the apparent conflict of interest between Hamilton and Gilbane entitled Gilbane to counsel of its own choosing. Thus, Gilbane’s refusal to accept Hamilton’s offer of defense under the condition of a change of counsel did not absolve Hamilton of its duty to defend.

(Record citations omitted).

Some liability policies (particularly those under which the carrier has a “duty to defend”) give the insurer the right to select defense counsel.  However, as this decision illustrates, a conflict of interest between the insurer and the insured gives the insured the right to select counsel regardless of what the policy has to say on the issue.

On November 30, 2018, Judge Kahn of the NDNY issued a decision in Young Men’s Christian Ass’n of Plattsburgh v. Philadelphia Indem. Ins. Co., Case No. 18-cv-0565 (KEK/DJS), denying an E&O insurer’s motion to dismiss the insured’s claim for amounts it was required to contribute to employee retirement accounts because of the insured’s negligent failure to withdraw contributions from the employees’ paychecks.

Plaintiff YMCA made a claim under an errors and omissions policy after discovering that its executive director had negligently failed to make both employer and employee contributions to the YMCA Retirement Fund.  The policy covered “those sums that you become legally obligated to pay as damages because of a negligent act, error or omission in the administration of your employee benefits program.”  The insurer argued that coverage would be limited to any “lost profits” the employees would have earned on the omitted contributions, but would not include “any principal amounts Plaintiff may be found liable to pay into its employee benefit program, including contributions that the impacted employees would have made but for the error.”

On the insurer’s motion to dismiss, Judge Kahn agreed that the policy did not cover the employer contributions that the YMCA negligently failed to make.  This liability “did not arise ‘because of a negligent act, error or omission in the administration of [Plaintiff’s] employee benefits program’”; YMCA had a pre-existing contractual obligation to make the contributions.  However, the Court denied the motion to dismiss the claim with respect to the employee contributions, explaining:

Plaintiff has plausibly alleged that, in the absence of the executive director’s errors, it would not have “become legally obligated” to pay from its own funds the Employee Contribution. . . .  [T]hat legal obligation arose only “because” of the Executive Director’s “negligent act, error or omission in the administration of [Plaintiff’s] employee benefits program,” and not because of a pre-existing contractual obligation.  Defendant counters that Plaintiff is not, in fact, “legally obligated to pay as damages” the Employee Contribution, because Plaintiff is entitled to reimbursement of this amount from the employees themselves in a claim for unjust enrichment. . . .  Whether Plaintiff has a viable unjust enrichment suit against current and former employees does not change whether or not Plaintiff is “legally obligated” to pay the Employee Contribution to the Retirement Fund. By Defendant’s logic, if a party were insured for a tort, and had insurance to cover that tort, the party would not be deemed to have any legal obligation to pay the victim for damages resulting from that tort. Obviously, though, if Plaintiff does recover Employee Contributions from employees, Plaintiff’s potential claim against Defendant would decrease correspondingly. . . .

Defendant also argues for dismissal of the Employee Contribution claim because the Employee Contribution liability is “contractual in nature,” and under New York law,   liability policies do not provide coverage where the complaint sounds in contract and not in negligence.” Defendant points to a number of cases, though none from the New York Court of Appeals, for the proposition that liability coverage does not cover damages stemming from a breach of contract.  But in those cases, the insured plaintiffs had pre-existing contractual obligations independent of any wrongful act.  With regard to the Employee Contribution, however, Plaintiff seeks coverage not for pre-existing contractual obligations, but for damages that it did not owe until negligent benefits administration caused them.

Defendant also argues for dismissal on public policy grounds, in that an “undeserved gain” would accrue to Plaintiff, and the contract would present a moral hazard if the Employee Benefits Insurance covers the damages at issue here.  But at least with regard to the Employee Contribution, there is no gain or windfall to Plaintiff directly. The Plaintiff is now obliged to pay the Employee Contribution to the Retirement Fund directly, rather from employees’ paychecks; it would not have been required to do so but for the wrongful act. Therefore, insurance coverage will simply make Plaintiff whole. As for moral hazard, the Court is confident that sophisticated insurance companies are capable of drafting contracts and conducting due diligence regarding an insured’s pension policies to avoid such pitfalls.

(Citations omitted).

With certain exceptions (see, e.g., our previous post on “insured contract” coverage), insurance policies do not provide coverage for contractual liabilities.  Thus, in this case, there was no coverage for amounts the insured was contractually obligated to pay independent of its executive director’s negligence.

On December 4, 2018, Justice Lebovits of the New York County Supreme Court issued a decision in Chelsea Piers, L.P. v. Colony Ins. Co., Index No. 150402/2017, holding that a purchase order signed by a contractor triggered coverage for the property owner under the additional insured endorsement to the contractor’s CGL policy.

The policy at issue in this case provided additional insured coverage for “any person or organization for whom you [i.e., the contractor] are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization is an additional insured on your policy.”  (Emphasis added).  The only written agreement was a purchase order, executed by the contractor, which provided that the contractor would indemnify the property owner, and that the contractor’s “general liability insurance shall apply on a primary and non-contributory basis with respect to all protection provided to Chelsea Piers [i.e., the property owner].”

Chelsea Piers tendered the defense of an injury lawsuit by an employee of the contractor to the CGL carrier (Colony Insurance).  Colony denied coverage, arguing that (1) the purchase order was not a “written contract” because it was not signed by both parties; and (2) the purchase order fails to state expressly that the contractor is required to provide additional insured coverage to the property owner.  A coverage action followed.  Justice Lebovits granted summary judgment to Chelsea Piers on the issue of Colony’s duty to defend the lawsuit.

The Court held that the fact “that the Purchase Order is not signed by both parties is of no consequence, where, as here, [the] policy merely requires a written contract not a signed one.”  (Citations omitted).  Further, Justice Lebovits found that the purchase order satisfied the “written contract” requirement of the additional insured endorsement, explaining:

[T]he Purchase Order’s language does not lend itself to more than one interpretation, but unambiguously provides that Chelsea shall have coverage under the contractor’s general liability insurance. Colony argues that, while this appears to be the presumption, because the Purchase Order fails to “expressly and specifcally” state so, no additional insured coverage is available. (Trapani v J O Arial Way Assoc., 30 1 AD2d 644, 647 [2d Dept 2003] [stating that “‘(a] provision in a construction contract cannot be interpreted as requiring the procurement of additional insured coverage unless such a requirement is expressly and specifically stated”] .) It also argues that “contract language that merely requires the purchase of insurance will not be read as also requiring that a contracting party be named as an additional insured.” (Id. [denying additional insured coverage where contract merely required contractor to provide a certificate of insurance demonstrating that contractor had certain types of coverage]; accord Mangano v Am. n Stock Exch. , 234 AD2d 198, 198-199 (1st Dept 1996] [finding no contractual obligation to procure insurance coverage for fourth-party plaintiff, where contract required fourth-party defendant to obtain insurance without requiring it to name fourth-party plaintiff as an insured].)

But, here, the Purchase Order makes express reference to Chelsea and states that Chelsea is to be covered under the contractor’s general liability policy. To interpret it as merely requiring EPS to procure coverage for itself, would render meaningless large portions of the Purchase Agreement, namely:

“Lessee’s, contractors, vendors, etc. general liability insurance shall apply on a primary and non-contributory basis with respect to all protection provided to Chelsea Piers thereunder. In addition, the general liability insurance shall provide that no act or omission of lessee, contractor or vendor will in any way effect or reduce the insurance coverage available to Chelsea Piers thereunder.”

While Colony insists that the language is, at best, ambiguous, Colony fails to provide an alternate interpretation. Therefore, defendants fail to demonstrate the absence of the requisite written contract. (See Christ the King Regional High Sch. v Zurich Ins. Co. of N. Am. , 91 AD3d 806, 808 [2d Dept 2012] [finding that the insurance policy’s written agreement requirement for additional insured coverage was satisfied, where the named insured was contractually required to “to provide a ‘(c]ertificate of [i]nsurance freeing [the plaintiff] of all liability, because “the relevant contractual provision . . . refer[red] directly to the (plaintiff, [and could not] be interpreted as requiring only that [the named insured] obtain liability insurance for itself, as that would render the phrase ‘freeing [the plaintiff of all liability’ meaningless”.)

Determining who qualifies as an additional insured under a contractor’s CGL policy is a frequently disputed issue in construction-related insurance coverage matters.  (See our previous posts here.)  Property owners, project managers and general contractors are well-advised to review the additional insured endorsement in a subcontractor’s CGL policy before work commences to confirm that all the requirements for coverage are satisfied.