Posted by Bradley J. Nash, Litigation Partner

On November 8, 2019, Judge Gardephe of the SDNY issued a decision in XL Specialty Ins. Co. v. Prestige Fragrances, Inc., Case No. 18-cv-733 (PGG), holding that issues of fact precluded summary judgment on this issue of whether an insurance broker was an agent of the insurance company such that notice to the broker constituted notice to the insurance company.

Prestige Fragrances involved a first-party insurance claim for losses from a theft at the insured’s warehouse. The insurance company (XL Specialty) denied the claim and asserted that the policy was void ab initio because in applying for the policy, the insured (Prestige Fragrances) had failed to disclosure prior losses it had incurred. In the coverage action, Prestige Fragrances argued that it had disclosed the losses in question to its broker, which it claimed was acting as the XL Specialty’s agent.

Judge Gardephe found that that there was an issue of fact as to whether the broker acted as an agent for the insurance company, and denied summary judgment, explaining:

Under New York law, an insurance broker generally is considered the agent of the insured, not the agent of the insurer. Where a broker is the insured’s agent, notice to the broker is not deemed notice to the insurance company.

The general rule is not without exceptions, however, and a broker will be held to have acted as the insurer’s agent where there is some evidence of action on the insurer’s part, or facts from which a general authority to represent the insurer may be inferred. Prestige contends that the Producer Agreement Frenkel and XL Specialty executed constitutes the requisite “some evidence” from which Frenkel’s authority to represent XL Specialty can be inferred.

The existence of an agreement between a plaintiff-insurer and a broker may raise a material dispute as to whether a broker was acting as an agent for the insurer—or even establish as a matter of law that the broker was acting on behalf of the insurer. In Fid. & Guar. Ins. Underwriters, Inc. v. Jasam Realty Corp., 540 F.3d 133 (2d Cir. 2008), for example, the plaintiff insurance company and a broker had executed an “Agency Agreement”; this agreement gave the broker authority to, inter alia, “accept applications for insurance; . . . bind the [insurance company] on coverages; . . . issue, endorse, provide certificates of insurance and cancel contracts for insurance; . . . [and] pay claims”; the agreement also required the broker to “promptly report all claims and deliver all relevant claims information” to the insurance company, and to “provide reliable underwriting information . . . .” Fid. & Guar. Ins. Underwriters, 540 F.3d at 136-37. The Second Circuit ruled as a matter of law that “[t]hese clear delegations of authority . . . establish [the broker’s] authority to represent [the insurance company].” Id. at 140. . . .

The Producer Agreement between Frenkel and XL Specialty is not an “express agency agreement.” Indeed, the Producer Agreement states that Frenkel “acknowledges that it is an agent of the insured and not an agent of [XL Specialty]. [Frenkel] will at all times act solely in the capacity of a broker on behalf of the insureds.” Nor does the Producer Agreement permit Frenkel to “bind [XL Specialty], alter[,] or cancel any coverage in the absence of specific authorization to do so.” Given this language, XL Specialty maintains that “Frenkel was not XL’s agent as a matter of law.”

The evidence of an agency relationship need not be as strong as in Fid. & Guar. Ins. Underwriters or Travelers Ins. Co. to raise a factual dispute sufficient to defeat summary judgment, however. . . .

In Erie Painting & Maintenance, Inc. v. Illinois Union Ins. Co., 876 F. Supp. 2d 222 (W.D.N.Y. 2012), for example, the district court concluded that the agency status of a broker could not be resolved on summary judgment where an agreement between the insurance company and the broker provided that the broker (1) “must promptly notify [the insurer] if [the broker] receives any notice of claims” and “cooperate with [the insurer] in the investigation, adjustment, and settlement of claims”; (2) “may communicate the terms of the insurance quotations to potential customers if quotations are provided by [the insurer]”; (3) “must collect, account for, and pay premiums on business it writes. . . .”; (4) “must hold such premiums in a fiduciary capacity for [the insurer]”; and (5) “must maintain records and make them accessible to [the insurer] upon [the insurer’s] request.” The agreement also provides that the broker “must indemnify [the insurer] for any violation of th[e] agreement.” Erie Painting, 876 F. Supp. 2d at 230. The district court explained that although other factors weighed against finding that an agency relationship existed between the broker and the insurance company, the “conflicting evidence regarding [the broker’s] and [the insurer’s] relationship precludes summary judgment.” Id.

The Producer Agreement here is very similar to the agreement at issue in in Erie Painting. Indeed, the Producer Agreement contains all of the features the Erie Painting court highlighted as indicative of an agency relationship. . . .

To be sure, XL Specialty has offered evidence indicating that no agency relationship existed between it and Frenkel, including deposition testimony from Frenkel and XL Specialty employees. But “credit[ing] all factual inferences that could rationally be drawn[]in favor of the party opposing summary judgment,” the “conflicting evidence regarding [Frenkel] and [XL Specialty’s] relationship precludes summary judgment” on this issue.

(Some citations omitted).

Often individual and corporate insureds do not deal directly with their insurance carriers but rather procure insurance, and even submit claims through a broker. Some brokers serve as agents for the insurance company, whereas other independent brokers represent the insured. As this case demonstrates, it can be important for the insured to know what type of relationship the broker has with the insurer. Communications with the broker do not necessarily satisfy obligations to give notice to the insurance company unless the broker is an agent.

Posted by Bradley J. Nash, Litigation Partner

On October 28, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Travelers Prop. Cas. Co. of Am. v. ICCO Cheese Co., Inc., 2019 NY Slip Op 33224(U), holding that a CGL carrier had no duty to defend consumer fraud class actions against Walmart because the complaints did not allege claims for “bodily injury” or “property damage.”

Walmart was sued in class actions across the country (consolidated in an MDL proceeding) for allegedly mislabeling parmesan cheese sold under its Great Value brand as “100% grated Parmesan cheese when, in reality, it also contained cellulose and lower grade cheeses.” The class action complaints alleged various causes of action for consumer fraud and false advertising. Walmart sought defense coverage under its CGL policies, but the insurers disclaimed coverage and filed a declaratory judgment action, arguing that the claims against Walmart were not covered because the complaints did not allege that any consumer suffered “bodily injury” or “property damage.” Walmart argued that defense coverage was triggered because certain complaints alleged that additives found in the cheese were “toxic” or “linked to genetic damage in humans”—and such allegations could potentially give rise to “bodily injury” claims.

Justice Borrok rejected Walmart’s argument and granted summary judgment to the insurers, explaining:

[A]s discussed more fully below, the death knell tolls for the Defendants’ position because none of the facts or causes of action alleged in either the Amended Consolidated Complaint or the complaints filed in the Underlying Class Actions relate to claims for bodily injury or property damage. Rather, all of these claims relate to deceptive labeling and overpayment, which are not covered under the Travelers Policies. . . .

Wal-Mart and ICCO argue that there may nevertheless be a possibility of coverage and therefore a duty to defend based on factual allegations of bodily injuries which have not yet been pied but may someday arise. Relying on Harrington Haley LLP v Nutmeg Ins. Co. (39 F Supp 2d 403 [ND NY 1999]), Wal-Mart and ICCO argue that the causes of action alleged in Amended Consolidated Complaint and the underlying complaints are not determinative, and that the court must look to whether there are any facts alleged in any of the complaints or known by the plaintiffs to exist which might give rise to a possibility of coverage based on some potential future injury (id., at 408). Reliance on Harrington is misplaced.

There is a significant difference between Harrington and the instant action. In Harrington, the court found that “the complaint asserted ‘underlying facts’ which, if proven, could have given rise to covered liability” [emphasis added] (id.). In this case, however, there are no facts alleged in any of the complaints from which the possibility of coverage might arise. Simply put, no one has alleged so much as a tummy ache or mild indigestion resulting from the eight percent of this product which is not Parmesan cheese, let alone cognizable bodily injury.

Relying on Medmarc Cas. Ins. Co. v Avent America, Inc. (612 F3d 607 [7th Cir 2010]), the plaintiffs argue that there is no duty defend because the complaints fail to allege any actual bodily injury or any compensable increased risk of future bodily injury. In Medmarc, consumers brought a series of class action lawsuits against Avent America, Inc. (Avent) alleging that Avent used Bisphenol-A (BPA) in its products without informing consumers of the health risks associated with BP A (id., at 607). Avent tendered the lawsuits to its insurance carriers seeking defense and indemnification for the underlying actions (id., at 612). The carriers denied coverage, and the parties brought declaratory judgment actions to determine whether the insurance carriers had a duty to defend Avent in the underlying suits (id.). The district court granted the insurance carriers’ motions for summary judgment, and Avent appealed (id., at 613). The 7th Circuit affirmed, holding that there was no duty to defend because “even if the underlying plaintiffs proved every factual allegation in the underlying complaints, the plaintiffs could not collect for bodily injury because the complaints do not allege any bodily injury occurred” (id., at 614). . . .

Although Medmarc is not controlling, the rationale applied here is equally compelling. In other words, here, like in Medmarc, none of the complaints allege any physical harm whatsoever. And just as the court in MedMarc held that allegations that exposure to an ingredient in the products at issue can cause physical harm were insufficient to give rise to the possibility of coverage, this court holds that allegations that cellulose may cause ear and eye irritation and potassium sorbate may cause genetic damage are insufficient to support a possibility of coverage giving rise to the duty to defend the Underlying Class Actions which are essentially about overpayment and having nothing to do with anything covered under the insurance policies.

The policies at issue here had standard coverage for “Advertising Injury”, which one might expect would cover these claims. However, as is typically the case, such coverage was limited to claims arising from advertisements that “slander[] or libel[] a person or organization or disparages a person’s or organization’s goods, products or services” (or infringes certain intellectual property rights). In other words, a false advertising campaign about a competitor’s cheese would have been covered, but misstatements about Walmart’s own cheese were not.

Posted by Bradley J. Nash, Litigation Partner

On October 18, 2019, Justice Crane of the New York County Supreme Court issued a decision in Cookies on Fulton, Inc. v. Aspen Specialty Ins. Co., 2019 NY Slip Op 33111(U), holding that an exclusion for claims arising from “any construction or renovation-related activity except for janitorial or maintenance related work” did not excuse a CGL carrier’s duty to defend the insured business owner in a lawsuit for injuries sustained in the course of “changing light fixtures.”

The vague allegations in the complaint (typical in personal injury actions) “suggest[ed] that the accident was construction-related[,] which would bar coverage.” However, as readers of this blog know, the duty to defend is triggered “where the insurer has actual knowledge of facts establishing [] a reasonable possibility” of coverage—even if those facts do not appear in the complaint. See City of New York v. Wausau Underwriters Ins. Co., 145 A.D.3d 614, 617 (1st Dep’t 2016). Here, documents outside the complaint suggested that the injured worker “may have been performing routine maintenance work”—“changing light fixtures”—at the time of the injury.  The insurer argued that changing a light fixture (unlike changing a lightbulb) constituted “a construction or renovation activity” for purposes of New York’s Labor Law, and therefore fell within the exclusion.

Justice Crane disagreed, and granted summary judgment to the insured on the duty to defend, explaining:

Aspen’s reliance on cases applying the Labor Law is misplaced. Those cases may be instructive to some degree, but they are not controlling on the question of what distinguishes construction/renovation activity from janitorial/maintenance work in this action. Rather, it is the language of the Policy that governs. In this connection, an insurance agreement is subject to principles of contract interpretation and as with the construction of contracts generally, unambiguous provisions of an insurance contract must be given their plain and ordinary meaning, and the interpretation of such provisions is a question of law for the court. Moreover, when it comes to exclusions from coverage, the exclusion must be specific and clear in order to be enforced and ambiguities in exclusions are to be construed most strongly against the insurer.

The Aspen policy exclusion does not specifically define what constitutes construction, renovation, janitorial or maintenance work. Construing the language against the insurer, the court finds that the changing of light fixtures may fall within the ambit of maintenance work. The ordinary meanings of “construction” and “renovation” implicate [] substantially more ambitious undertakings.

(Citations omitted).

This decision illustrates the important principle that undefined terms in an exclusionary clause are construed narrowly in favor of the insured.

Posted by Bradley J. Nash, Litigation Partner

On September 26, 2019, Judge Abrams of the SDNY issued a decision in Jovani Fashion, Ltd. v. Fed. Ins. Co., Case No. 17-CV-4518, holding that a complaint alleging that a fashion designer’s garment infringed the plaintiff’s copyrighted lace textile design did not trigger “advertising injury” coverage under the designer’s general and excess liability policies.

The insured (Jovani Fashion) argued that “the Subject Design” constituted an “advertisement” under the “the advertising model in the fabric making industry or other industries that use sample swatches or photographs as advertisements.”  Judge Abrams disagreed and granted summary judgment to the insurers, explaining:

Plaintiff’s argument that a product can serve as an advertisement for itself fails in light of the policy’s unambiguous language. Under the policy, an “advertisement” is a “notice, about goods, products, or services, designed for the specific purpose of attracting the general public or a specific market segment to use such goods, products or services.” This language creates a clear distinction between a product and an advertisement for that product. Because the Subject Design was designed, according to Malibu, for “purposes of textile printing”—and not for advertising—samples of the Subject Design or displays of it in a showroom cannot constitute advertisements of that design under the policy’s terms. To allow otherwise would render meaningless the policy’s express distinction between a product and an advertisement of that product.

Moreover, by arguing that the Subject Design is itself an “advertisement,” as that term is defined, Plaintiff asks the Court to employ an understanding of the term that defies “common speech.” In Ecko Group, Inc. v. Travelers Indemnity Company of Illinois, for instance, the First Circuit rejected an insurer’s similar attempt to argue that displaying a product (there, a teapot) served as an ‘advertisement” for itself. 273 F.3d 409, 413 (1st Cir. 2001) (reviewing a policy that defined an “advertising injury” as including a “(m]isappropriation of advertising ideas”). Among the reasons why the insured’s argument failed, the court explained that “[t]o call a real teapot intended for sale as a kitchen utensil an ‘advertising idea’ is not a natural usage.” Id. The “most common” understanding of an advertisement, the court said, is one “where the advertisement is an activity or item distinct from the product being advertised.” Id.

Judge Abrams cited other SDNY decisions that reached a similar conclusion. See, e.g., Accessories Biz, Inc. v. Linda & Jay Keane, Inc., 533 F. Supp. 2d 381, 383 (S.D.N.Y. 2008) (“New York courts have routinely held that the phrase ‘advertising idea’ does not include the product itself.”); Hosel & Anderson, Inc. v. ZV II, Inc., 2001 WL 392229, at *2 (S.D.N.Y. Mar. 21, 2001) (“The product itself is not an advertisement within the meaning of the policy.”). On the other hand, a Fifth Circuit decision, which Judge Abrams found “less persuasive,” supported the insured’s argument.  Mid-Continent Cas. Co. v. Kipp Flores Architects, LLC, 602 F. App’x 985, 994 (5th Cir. 2015) (holding that a home can serve as an advertisement because the “primary means of marketing” is showing the home to prospective buyers).

Notably, under New York law, policy language is not examined in isolation. Rather, “the plain meaning of a clause in an insurance contract is determined according to . . . the understanding of someone engaged in the insured’s line of business.”  K. Bell & Assocs., Inc. v. Lloyd’s Underwriters, 97 F.3d 632, 639 (2d Cir. 1996) (emphasis added). The insurance policy at issue in Jovani Fashion was likely a standard form. However, as the Second Circuit ruled in a decision covered on this blog last year, “[t]he parties are not required to tailor language for every policy in order for terms to have industry-specific meanings.” Beazley Ins. Co., Inc. v. ACE Am. Ins. Co., 880 F.3d 64, 70 (2d Cir. 2018). Thus, the meaning of “advertisement” as used in fashion industry is relevant to the analysis. It will be interesting to see if the insured pursues an appeal here.

On September 23, 2019, Justice Rodriguez of the New York County Supreme Court issued a decision in Wesco Ins. Co. v. Hellas Glass Works Corp., 2019 NY Slip Op 32848(U), holding that two liability insurers were required to share in paying defense costs where facts to be determined in the underlying personal injury lawsuit could trigger indemnity coverage under one of the policies.

The coverage issue in Hellas Glass turned on a fact to be resolved in the underlying personal injury litigation – namely, whether the injury occurred in the course of “loading” or “unloading” glass from a vehicle. If this question was answered in the affirmative, then Plaintiff Wesco Insurance Company’s policy would be triggered; a negative answer would trigger coverage under a policy issued by defendant Massachusetts Bay Insurance Company (“MBIC”).

Justice Rodriguez ordered Wesco and MBIC to share equally in the insured’s defense costs in the underlying action, explaining:

[T]he touchstones of duty to defend analysis are the operative complaint in which allegations against the insured are made. . . .

The third-party complaint and plaintiff Shiryayev’s complaint are utterly silent as to the involvement of an “auto” in the alleged occurrence. Similarly, the two pleadings do not explicitly describe any process of “loading” or “unloading”. Rather, the third-party complaint alleges that defendant Hellas “performed construction work and/or services” at the accident location and that defendant Hellas is liable to defendants/third-party plaintiffs . . . by virtue of contractually assumed indemnification.

Although the operative pleadings do not allege that the accident occurred during a process of loading or unloading an auto, the record also contains plaintiff’s [hearing testimony in a proceeding against the City of New York] and deposition testimony in which plaintiff describes the occurrence. Moreover, plaintiff Wesco’s claims administrator, Am Trust North America, Inc., noted its knowledge of the facts surrounding the claim in its letter dated March 30, 2016, specifically that “Aleksandr Shiryayev, your employee, alleges he sustained injuries on October 10, 2014 when a panel of glass he was unloading from your 2006 GMC Savana fell onto him at 1050 2nd Avenue, New York, New York.” Consequently, the court finds that facts derived from outside the four comers of the operative complaints, specifically, that the accident occurred close in time to the process of unloading and close in proximity to a covered auto, indicate that the claim “arguably arise[s] from covered events” under plaintiff Wesco’s auto policy. . . .

[T]his court finds that, due to the lack of fact finding in the underlying litigation . . . defendant MBIC has failed to carry its heavy burden of establishing that, as a matter of law, there is no possible factual or legal basis on which [the insurer] might eventually be held to be obligated to indemnify the insured under any provision of the insurance policy. It remains possible, given that discovery is ongoing in the underlying action, that the occurrence did not arise out of the act of loading or unloading, but rather was caused entirely by other means.

(Citations omitted).

This decision illustrates two important aspects of the insurer’s duty to defend under New York law. First, the duty is broadly construed and attaches unless there is “no possible factual or legal basis” on which the insured may be obligated to indemnify the insured. Second, although the insurer (with very limited exceptions) cannot rely on facts outside the complaint to avoid its duty to defend, such external facts can trigger a duty to defend, even if, as was the case here with respect to the Wesco policy, the allegations in the complaint, standing alone, would not.

On September 23, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Those Interested Underwriters at Lloyd’s, London v. AU Trading LLC, 2019 NY Slip Op 32803(U), denying an insurer’s motion for summary judgment on a coverage defense based on claim of noncooperation by the insured in the investigation of the claim.

The insured, AU Trading, was “engaged in the business of trading and storing various precious metals for nonparty customers.”  Following a burglary at a safe deposit vault, AU Trading made a claim to its insurer (Lloyds) for $2.53 million in stolen gold.  The claims investigation was complicated, in part, by Swiss privacy laws, which impacted AU Trading’s ability to disclosure certain information concerning its customers.  Lloyds eventually commenced a coverage action, arguing that the insured breached its duty to cooperate and the coverage was therefore void.

Justice Scarpulla found that Lloyds had failed to establish this coverage defense on summary judgment, explaining:

Underwriters seek a declaration that Defendants materially breached their obligations under the Policy to cooperate with Underwriter’s investigation of the claim, thereby voiding coverage under the Policy. In order to establish breach of a cooperation clause, the insurer must show that the insured engaged in an unreasonable and willful pattern of refusing to answer material and relevant questions or to supply material and relevant documents. The insurer must make this showing by a preponderance of the evidence.

The duty of an insured to cooperate with the insurer is satisfied by substantial compliance, and where a delay in compliance is neither lengthy nor willful, and is accompanied by a satisfactory explanation, preclusion of a claim is inappropriate.

Although the [policy] obligates Defendants to provide Underwriters with “all information they require for an evaluation of the loss,” Underwriters have failed to establish as a matter of law that much of the specific information they sought is material and relevant and required to evaluate the loss, or that Defendants have unreasonably refused to produce such information. . . .

Review of the record submitted, including the substantial and extensive correspondence between parties, shows that questions of fact exist as to whether Defendants’ conduct constitutes an “unreasonable and willful pattern” of noncooperation. The record reflects numerous communications and meetings between the parties and that Defendants produced numerous records; Defendants also maintain that they intended to cooperate and provide all information that was reasonably required for the Investigation and that they hired [attorneys] in an attempt to cooperate with Underwriters and comply with their demands. In any event, the record suggests that Underwriters and [the insurer’s claims adjuster] are also at least partially responsible for delaying the Investigation.

(Citation omitted).

To get paid for a covered loss, insureds have to satisfy certain conditions, such giving notice of the claim and cooperating with the insurer’s claims investigation.  As this decision illustrates, these obligations are not boundless.  Insurers cannot manufacture roadblocks to coverage by making unreasonable demands for information, and then invoking the policy’s “cooperation” provision as a basis to deny coverage.

On September 13, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Colony Ins. Co. v. International Contr. Servs., LLC, 2019 NY Slip Op 32717(U), holding that issues of fact precluded summary judgment on a liability insurer’s disclaimer based on the insured’s failure to cooperate with the defense.

In the underlying personal injury litigation at issue in this case, the defendant ICS had its answer stricken based on its failure to cooperate in discovery (including failing to present a witness for a court-ordered deposition and to provide an affidavit supporting a claim that it had no responsive documents to produce).  The resulting default judgment was a pyrrhic victory for the plaintiff because ICS’ liability insurer promptly disclaimed coverage based on the insured’s failure to comply with its duty to cooperate in the defense.  The insurer (Colony) commenced a declaratory judgment action, seeking to establish, inter alia, that it properly disclaimed coverage and that the injured party could not seek a payment from Colony with regard to any “settlement, award, verdict, or judgment rendered in the Underlying Action.”

Although the insured’s conduct in discovery appears to have been pretty egregious here, Justice Borrok held that issues of fact as to the insurer’s diligence in seeking the insured’s cooperation precluded summary judgment, explaining:

In Thrasher [v. United States Liab. Ins. Co., 19 N.Y.2d 159, 168 (1967)], the New York Court of Appeals held that an insurer bears a heavy burden of proving lack of cooperation by its insured and that the insurer must demonstrate that it (1) acted diligently in seeking to bring about the insured’s cooperation, (2) that the efforts employed by the insurer were reasonably calculated to obtain the insurer’s cooperation, and (3) that the attitude of the insured was one of willful and avowed obstruction. . . . In light of the affidavit evidence adduced by Colony, there remain material issues of fact concerning whether Colony acted diligently in seeking ICS’s cooperation in the period of time preceding the denial of coverage issued to ICS.

The Court also found that issues of fact precluded summary judgment on a counter-argument based on the insurer’s delay in disclaiming coverage.  As previously noted on this blog, Insurance Law § 3420(d)(2) requires liability insurers to “give written notice as soon as is reasonably possible” of a denial of coverage based on a policy exclusion, or, as in this case, the insured’s failure to satisfy a policy condition, such as the duty to cooperate.  Failure to do so can result in a waiver of the exclusion or condition.  The statute cannot create coverage where there is none – for example, if there is no policy in place for the relevant time period.  Moreover, this statutory timely-disclaimer requirement only applies to policies “issued or delivered” in New York.  The Court of Appeals has held that this encompasses policies issued to insureds that have a “substantial business presence and create risks in New York.”  Carlson v. American Int’l Group, Inc., 20 N.Y.3d 288, 306 (2017).  Here, Justice Borrok held the summary judgment record contained insufficient “evidence to establish that ICS had substantial business presence in New York.”  Therefore, it remained uncertain whether “Insurance Law § 3240(d)(2) and its timeliness requirements apply to the Policy that was issued to ICS.”

On September 17, 2019, Judge Hurd of the NDNY issued a decision in Lohnes v. Liberty Mut. Ins. Co., Case No. 19-cv-00068, dismissing a claim for bad faith claims handling for failure to plead “specific conduct” by the insurer distinct from the underlying breach of the policy.

As previously discussed on this blog (see here, here, and here), New York law does not recognize a separate tort claim for bad faith claims handling.  However, the courts—beginning with a pair of Court of Appeals decisions, Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200 (2008)—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.  (An example would be a property insurer that stalls the claims handling process following a house fire, as a result of which the house collapses, compounding the insured’s damages.)

In Lohnes, the Court concluded that the complaint failed to plead such a claim, explaining:

Under New York law, there is a covenant of good faith and fair dealing implied in all contracts.  This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.  Generally, under New York law, parties to an express contract are bound by an implied duty of good faith, but breach of that duty is merely a breach of the underlying contract.  To successfully plead a breach of contract under a theory of breach of the implied covenant of good faith and fair dealing, a plaintiff must allege that defendant, in bad faith, engaged in behavior that effectually destroyed or injured the plaintiff’s right to receive the fruits of the contract.  Further, plaintiffs are required to plead specific factual allegations of a party’s bad faith, as conclusory allegations of a party’s failure to act in good faith are insufficient.

Because a breach of this duty is merely a breach of the underlying contract, New York law does not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled. A breaching party’s bad faith in connection with a breach of contract does not provide an independent basis for recovery.  Thus, a claim premised on a breach of the implied covenant should be dismissed as duplicative if it is based upon the same facts underpinning an express breach of contract claim.

Here, as Plaintiff represents in her memorandum of law, the facts underpinning the bad faith claim are the same as those underpinning her express breach of contract claim. Namely, that Liberty refused to defend and indemnify Mr. Terrance. While Plaintiff asserts that this refusal to comply with the terms of the Policy constituted breaches of Liberty’s duties under the contract and amounted to “bad faith insurance practices,” she has not plead specific conduct by Liberty that is different from that underpinning the breach of contract claim. Further, Plaintiff’s assessment in her memorandum of law that this conduct was deliberate and reckless, and amounted to a gross disregard for the interests of Mr. Terrance, does not make out a claim different from the breach of contract claim.  Accordingly, Liberty’s motion is granted to the extent it seeks to dismiss the bad faith claim asserted in the Amended Complaint.

(Citations omitted).

Pleading rules are a procedural matter, and thus may differ in certain respects in state and federal court.  Notably, however, the First Department ruled earlier this year (in a decision covered on this blog) that an insured need not satisfy a “heightened pleading standard” in alleging consequential damages arising from an insurer’s bad faith claims handling.

On August 27, 2019, Judge Pauley of the SDNY issued a decision in Gemini Ins. Co. v. Titan Construction Servs., Case No. 17-cv-8963, dismissing a declaratory judgment claim as premature because the lability insurer’s duty to indemnify would depend on facts to be developed in the underlying lawsuit against the insured.

Judge Pauley explained:

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. However, when the duty to indemnify necessarily depends on the resolution of one or more issues to be determined in the action, a declaratory judgment on that duty is premature.

What caused Mejia’s accident and who was responsible have not yet been established in the State Action. And without any such finding, this Court cannot declare whether Gemini will ultimately be obligated to indemnify Titan or Hudson View.

Accordingly, this Court dismisses all parties’ claims for declaratory judgments on the duty to indemnify as premature.

(Citations omitted).

The same principle applies to the duty to advance defense costs.  In a case previously discussed on this blog (in which I represented the insureds), Justice Sherwood of the New York County Commercial Division granted a preliminary injunction, directing three excess D&O insurers to advance defense costs for a criminal matter, and stayed discovery pending the resolution of the underlying prosecution.  Justice Sherwood held that a “declaratory judgment action cannot be used to conduct discovery regarding the very facts at issue in the EDNY Indictment and the SEC Complaint.” 

On August 29, 2019, the California Supreme Court issued a decision in Pitzer College v. Indian Harbor Ins. Co., Case No. S239510, ruling (in response to a certified question from the Ninth Circuit) that New York’s no-prejudice rule—under which a first-party insurer can avoid coverage based on delayed notice without showing prejudice—is contrary to a “fundamental public policy” of California.

Unlike the majority of states, New York common law does not require an insurer to demonstrate prejudice to disclaim coverage based on late notice by the insured.  As previously discussed on this blog, for liability policies “issued or delivered” in New York, after January 17, 2009, a statute (Insurance Law § 3420(a)(5)) imposes a “notice prejudice” rule.  However the common law no-prejudice rule still applies with regard to first-party insurance coverage.

Pitzer College involved an insurance policy issued to a California college, which had a New York choice of law provision.  As the policy was not “issued or delivered” in New York, the statutory “notice prejudice” rule did not apply.  The insured filed a declaratory judgment action for declaratory relief and breach of contract.  Following removal to federal court, the district court granted summary judgment to Indian Harbor on a late notice defense, ruling that the insured failed to establish that California’s notice prejudice rule was a “fundamental policy” that could override a contractual choice of law provision. 

Addressing a certified question from the Ninth Circuit, the California Supreme Court held that the district court was incorrect, explaining:   

[W]e conclude that California’s notice-prejudice rule is a fundamental public policy of California. The rule is based on the rationale that the essential part of the contract is insurance coverage, not the procedure for determining liability, and that the notice requirement serves to protect insurers from prejudice, not  to shield them from their contractual obligations through a technical escape-hatch.  Prejudice is a question of fact on which the insurer has the burden of proof.  The insured’s delay does not itself satisfy the burden of proof.  The insurer establishes actual and substantial prejudice by proving more than delayed or late notice. It must show a substantial likelihood that, with timely notice, and notwithstanding a denial of coverage or reservation of rights, it would have settled the claim for less or taken steps that would have reduced or eliminated the insured’s liability.  In the context of third party coverage, for example, the insurer must show that timely notice would have enabled it to achieve a better result in the underlying third party action.

(Citations omitted).

This decision underscores the importance of notice requirements under New York insurance law.  It goes without saying that you can’t get coverage if you don’t ask for it. Although a statutory notice-prejudice requirement now applies in some cases, delayed notice can still present traps for the unwary.