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.

On July 7, 2018, Justice Masley of the New York County Commercial Division issued a decision in Jiang v. Ping An Ins., 2018 NY Slip Op 31534(U), holding that coverage under an excess D&O policy was not triggered because the insured settled its coverage claim with the primary insurer for less than the policy limit and did not “absorb the gap” between the settlement amount and the policy limit.

In Jiang, a corporate officer sought coverage for the defense of a federal criminal prosecution and a parallel SEC enforcement action.  The corporation had $5 million in primary D&O coverage (split between two insurers) and $5 million in excess coverage.  The insured entered a settlement with one of the primary insurers for less than the policy limits, and then sought coverage from the excess insurer for defense costs incurred above $5 million.  The excess policy stated that coverage “shall attached only after” the underlying insurance coverage “has been exhausted by payment of claim(s).”  Justice Masley granted the excess insurer’s motion to dismiss, explaining:

The 2010 and 2011 Excess Policies clearly state that “[c]overage [under the Excess Policies] shall attach only after all such Underlying Insurance has been exhausted by payment of claim(s)”.  Once the coverage under the excess policy attaches, it “shall then apply in conformance with the terms and conditions of the Primary Policy as amended by any more restrictive terms and conditions of any other Underlying Insurance, except as otherwise provided by this Policy.”

First, there is no ambiguity in the 2010 or 2011 Excess Policies as to when excess coverage attaches. Affording the language employed in the policies their plain meaning, Chubb’s obligation to provide excess coverage does not attach until all underlying primary policy limits have been exhausted by payment of a claim or claims, not by incurring costs or expenses that may exceed primary policy limits but have not yet been paid. The actual payment of the underlying policy limit is an expressly-stated condition precedent to triggering the excess coverage.

Additionally, where, as here, an insured has settled with a primary insurer for a below-limit amount, the primary policy limits are not deemed exhausted unless the insured “absorbs the resulting gap between the settlement amount and the primary policy limit”; there is no obligation to provide excess coverage until the gap is closed and the primary policy limits are deemed exhausted (cf. J.P. Morgan Chase & Co. v Indian Harbor Ins. Co., 98 AD3d 18, 25 [1st Dept 2012), Iv denied 20 NY3d 858 [2013]). Jiang does not allege that he absorbed the gap that remained following his below-limit settlement of claims with Ping An, thus, the excess coverage contemplated in the 2010 Excess Policy was not triggered.

(Some citations omitted).

Businesses often have multiple tiers of insurance coverage, and the excess tiers are not triggered until the underlying insurance coverage is exhausted.  As the plaintiff in Jiang discovered, settling with the primary insurer for less than the policy limits can affect the availability of excess coverage.  In some cases, the insured may be able to tap into the excess policies by paying the difference between the settlement amount and the primary policy limit out of pocket (“absorbing the gap”).  But depending on the wording of the excess policy, even that may not work.  In the First Department case Justice Masley cited in the excerpt above, the excess policy offered coverage “only after the Primary and Underlying Excess Insurers shall have duly admitted liability and shall have paid the full amount of their respective liability.”  Applying Illinois law, the court held that this condition precedent was not satisfied by the insured “absorbing the gap”, where the underlying insurers settled with the insured without admitting or paying “the full amount of their respective liability.”

On June 28, 2018, the First Department issued a decision in Bernstein Liebhard LLP v. Sentinel Ins. Co., Ltd., 2018 NY Slip Op 04842, reversing a decision by Justice Masley of the New York County Commercial Division that granted summary judgment to a law firm on a claim for business interruption coverage. (See our previous post on Justice Masley’s decision here.)

The plaintiff, a mass tort law firm, sought coverage for loss of business income after a fire destroyed its offices.  Although the policy only covered income that would have been “earned” during the 12 months after fire, Justice Masley held that the law firm could recover for new matters for which it would have been retained during the 12-month period, even though the contingency fees for those matters would not have been received until years later.  The First Department disagreed and reversed the decision, explaining:

The plain language of the lost business income provision at issue . . . provided coverage for any resulting “actual loss” of business income due to the necessary suspension of operations as a result of a covered cause of loss and that would have been “earned” during the 12 months after the fire.  The parties agree that “earned” means “become entitled to.”

The entire fee amounts that eventually result from settlements and judgments in cases foregone by plaintiff would not have been “earned” by plaintiff at the time, within the 12-month cutoff after the fire.  Lost fees from prospective clients that plaintiff law firm had to forego, but which would have resulted from work performed after the 12-month cutoff, are not covered by the policy. Rather, the lost business income provision here covers fees that, if not for the suspension of advertising due to the fire, plaintiff law firm would have earned for services actually performed for such new clients within 12 months of the fire or from such new cases that resolved within 12 months of the fire.  Although plaintiff would have theoretically been entitled to coverage for such fees for services performed within 12 months of the fire or from such cases resolved within 12 months of the fire, plaintiff has acknowledged that the claim was not presented in such a manner and it pursues no such claim in its brief.

(Citations omitted).

One take away here is the importance of obtaining the right coverage for the insured’s business.  As Justice Masley recognized, the business interruption policy at issue in this case was not well-suited to the law firm’s business model, given that it is paid on a contingency fee rather than an hourly basis.  That said, the First Department was prepared to accept a theory that would have awarded coverage for “fees for services performed within 12 months of the fire,” suggesting that their could have been a way to extract some value from the policy.

On July 2, 2018, Justice Edmead of the New York County Supreme Court issued a decision in M&M Realty of N.Y., LLC v. Burlington Ins. Co., 2018 NY Slip Op 31399(U), holding that a property owner was entitled to coverage under a contractor’s CGL policy because extrinsic evidence demonstrated “the parties’ intent to confer additional insured status” on the property owner.

In M&M Realty, a property owner (M&M) sought additional insured coverage under the CGL policy of a contractor (L&M) for a personal injury claim by the contractor’s employee.  L&M’s policy had a standard additional insured endorsement, which provided coverage to “any person or organization for whom you [L&M] are performing operations 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.”  Justice Edmead found that the contract between L&M and M&M was ambiguous as to the obligation to name M&M as an additional insured under the CGL policy.  However, the Court found that extrinsic evidence demonstrated that the parties intended to make M&M an additional insured, explaining:

The Burlington Policy indicates that to be considered an additional insured, L&M must enter into a written contract designating M&M an additional insured. A reading of the proposal/contract indicates that there is no requirement that L&M name M&M as an additional insured. Instead, the proposal/contract requires that “insurance” be provided. However, the provision is ambiguous, since the contract fails to define “necessary . . . insurance.” Accordingly, the Court must look to the extrinsic evidence to determine the intent of the parties at the time of entering into the agreement.

Here, the deposition testimony demonstrates the parties’ intent to confer additional insured status on L&M. Initially, the testimony of M&M’s principal, Abraham Mussafi(“Mussafi”), demonstrates that M&M intended to be an additional insured under the policy. Mussafi testified that he contacted Costel Mirauti, L&M’ s Principal, and requested that M&M be an additional insured on the Burlington Policy.  Mussafi further testified that when he asked Mirauti to designate M&M as an additional insured, Mirauti instructed him to contact L&M’s office and that “they’ll give you [Mussafi] whatever you want.”  Mussafi indicated that he contacted L&M’s office, wherein he requested that he be placed as an additional insured on the Burlington Policy. Mussafi testified that in response L&M sent him a copy of the Certificate of Insurance identifying him as an additional insured. Mussafi additionally testified that he required that M&M was an additional insured under L&M’s policy before permitting L&M to perform any work.

Moreover, L&M believed that it was conferring additional insured status when it furnished its customers, including M&M, with a certificate of insurance. L&M’s office manager, Melanie Gazer (“Gazer”), testified that whenever a customer requested a certificate of insurance, “it was always implied that [the customer] is to be listed as an additional insured.” Gazer testified that whenever L&M got a certificate of insurance for a job, she would include the customer as an additional insured. Mirauti testified that it produced a certificate of insurance for every job. Importantly, Mirauti testified that he believed that the “necessary insurance” referred to in the proposal/contract is the insurance identified to in the certificate of insurance, in other words, the additional insured status. Mirauti further testified that for every job, L&M would procure a certificate of insurance for its customers identifying the customer as an additional insured. Accordingly, M&M did not have to specifically ask to be added as an additional insured-all it had to ask for was a certificate of insurance, since L&M’s understanding was the certificate confirmed additional insured status.

Burlington’s argument that the proposal/contract should not be enforced because there was no written acceptance by M&M is unavailing. Mussafi testified that he signed the proposal/contract upon receiving it and before the accident. In any event, there is no requirement in the agreement that its enforceability was conditioned upon L&M’ s signature, and it is uncontested that all parties operated under the policy/contract.

(Citations omitted).

This decision illustrates the importance of clearly delineating the parties’ insurance obligations in a construction contract.  The standard additional insured endorsement is triggered where the named insured is required by a written contract to name another party as an additional insured.  Here, the property owner was ultimately able to establish the parties’ intend to extend additional insured coverage to it through extrinsic evidence.  Still, it would have been wise to spell that out expressly in the written agreement.

On June 29, 2018, Justice Grossman of the Putnam County Supreme Court issued a decision in Nationwide Mut. Fire Ins. Co. v. Oster, 2018 NY Slip Op 51018(U), awarding attorneys’ fees to an insured in a declaratory judgment action commenced by the insurance company, explaining:

New York has followed the rule that an insured may not recover in an affirmative action to determine its rights, but may do so, where, as here, the insured has been “cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations (see Johnson v. General Mutual Ins. Co., 24 NY2d 42; Glens Falls Ins. Co. v. United States Fire Ins. Co., 41 AD2d 869 [3rd Dept. 1973] aff’d. on opn. below, 34 NY2d 778 [1974]).” Mighty Midgets v. Centennial Ins. Co., 47 NY2d 12 (1979). This holding is in contrast with the so-called American Rule — that absent a contractual provision or statutory basis for recovery, each party is responsible for their own attorneys’ fees. In Johnson, supra, the insured was permitted to recover costs of defending the action, but could not recover the costs of a cross-claim against the insurer, nor could the injured party recovery its costs. The exception is one of policy, and it is not lightly expanded. However, some courts have recognized the recovery also includes not only the costs and expenses of a defense to the insurer’s actions, but also the costs and defenses of the counterclaim to assert the right to coverage. Admiral Ins. Co. v. Weitz & Luxenberg, P.C., 2002 WL 31409450 (SDNY October 24, 2002); Lancer Ins. Co. v. Saravia, 40 Misc 3d 171, 177 (Sup.Ct. [Kings] 2013). The Second Department has made its position clear:

“[A]n insured who is ‘cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations,’ and who prevails on the merits, may recover an attorney’s fee incurred in defending against the insurer’s action” (Insurance Co. of Greater NY v. Clermont Armory, LLC , 84 AD3d 1168, 1171, 923 N.Y.S.2d 661, quoting U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 3 NY3d 592, 598, 789 N.Y.S.2d 470, 822 N.E.2d 777 [internal quotation marks omitted]; see Mighty Midgets v. Centennial Ins. Co., 47 NY2d 12, 21, 416 N.Y.S.2d 559, 389 N.E.2d 1080; Johnson v. General Mut. Ins. Co., 24 NY2d 42, 298 N.Y.S.2d 937, 246 N.E.2d 713). ” ‘It is well settled than an insurer’s responsibility to defend reaches the defense of any actions arising out of the occurrence, and defense expenses are recoverable by the insured, including those incurred in defending against an insurer seeking to avoid coverage for a particular claim.'” (RLI Ins. Co. v. Smiedala, 77 AD3d 1293, 1294-1295, 909 N.Y.S.2d 263, quoting National Grange Mut. Ins. Co. v. T.C. Concrete Constr., Inc., 43 AD3d 1321, 1322, 843 N.Y.S.2d 877 [internal quotation marks omitted]). “Moreover, ‘an insured who prevails in an action brought by an insurance company seeking a declaratory judgment that it has no duty to defend or indemnify the insured may recover attorneys’ fees regardless of whether the insurer provided a defense to the insured'” (RLI Ins. Co. v. Smiedala, 77 AD3d at 295, 909 N.Y.S.2d 263, quoting U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 3 NY3d at 598, 789 N.Y.S.2d 470, 822 N.E.2d 777).”

Some state courts award attorneys’ fees to a successful insured in a coverage action as a matter of course. See, e.g., New Jersey Court Rule 4:42-9(a)(6) (successful claimant may recover attorneys’ fees “in an action upon a liability or indemnity policy of insurance”).  However, under the New York Court of Appeals decision in Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979), attorneys’ fees are generally available only when the insurer commences the declaratory judgment action.

Separately, there is long-standing authority permitting recovery of attorneys’ fees to a policyholder where the insurance company engages in “such bad faith in denying coverage that no reasonable carrier would, under the given facts, be expected to assert it.”  Sukup v. State of New York, 19 N.Y.2d 519, 522 (1967). This standard is hard to satisfy, however: courts have held that if the insurer can demonstrate an “arguable basis” for disclaiming coverage, no fees should be awarded, even if the insured prevails in the lawsuit. See, e.g., Greenberg Eleven Union Free School Dist. v. National Union Fire Ins. Co., 304 A.D.2d 334, 336-37 (1st Dep’t 2003).

On June 27, 2018, Judge Oetken of the SDNY issued a decision in Liberty Ins. Corp. v. WSP USA, Inc., Case No. 17-cv-4398(JPO), holding that coverage under a CGL Policy was excluded by a professional liability exclusion.  The insured, WSP, was hired by the Washington State Department of Transportation to “evaluate the repair or replacement of the Alaskan Way Viaduct, a highway project in Seattle.” WSP “agreed to develop an environmental impact statement and to perform ‘associated design work’ for the viaduct project.”

WSP was sued for negligence by a contractor that worked on a new tunnel to replace the viaduct, and submitted a claim to its CGL carrier (Liberty).  The policy’s “professional liability exclusion” precluded coverage for claims “arising out of the rendering or failure to render any professional services” with respect to “providing engineering, architectural or surveying services to others in your capacity as an engineer, architect or surveyor.”  The exclusion had an exception, however, that carved out from the definition of “professional services” any “services within construction means, methods, techniques, sequences and procedures employed by you in connection with your operations in your capacity as a construction contractor.”

Liberty initially agreed to contribute to the defense of the claim subject to a reservation of rights, but ultimately filed an action for a “declaratory judgment as to whether the [negligence lawsuit] is excluded from coverage under the professional-liability exclusion.”  The principal issue on summary judgment was whether the construction contractor exception to the professional liability exclusion applied.  Judge Oetkin found that the exception was inapplicable and that the professional liability exclusion barred coverage, explaining:

The construction contractor exception exempts “[1] services within construction means, methods, techniques, sequences, and procedures [2] employed by you in connection with your operations [3] in your capacity as a construction contractor.” The [ ] complaint alleges, among other things, that WSP “[f]ailed to remove or otherwise properly decommission [Test Well #2] following its abandonment or discontinued use.” WSP argues that this allegation falls within the construction contractor exception because it relates to work done as a construction contractor.

For the construction-contractor exception to apply . . . WSP must have been acting in “its capacity as a construction contractor.” That term is not defined by the policy. Consequently, the meaning of that term is a matter of law for the court to decide. When attempting to define a term, the insurance policy should be read in light of common speech and the reasonable expectations of a businessperson. . . .

The term “construction contractor” has an unambiguous plain meaning, which is generally understood. Put simply, a construction contractor is “a person or company that agrees to do work . . . for another company” that involves “act[s] of building.” See Contractor, Black’s Law Dictionary (10th ed. 2014); Construction, Black’s Law Dictionary (10th ed. 2014). . . .

The Court concludes that, under the plain meaning of “construction contractor,” the absence of any contract between WSP and any other entity under which WSP was hired to build something precludes WSP from invoking the construction-contractor exemption: one cannot be a construction contractor without a construction contract.

. . . WSDOT engaged WSP “to assist in the process of evaluating the repair and/or replacement of the Viaduct, including the preparation of conceptual engineering studies.” WSP and WSDOT entered into two agreements[.] . . . Neither the agreements nor the task orders obligated WSP to build or construct anything; in other words, none of these contracts required WSP to act in the capacity of a construction contractor.

WSP contends that it was acting as a construction contractor when it allegedly failed to remove or otherwise decommission Test Well #2. But even if this alleged failure to act constitutes “services within construction means, methods, techniques, sequences, and procedures”, the fact that construction methods may have been involved is insufficient, by itself, to bring these allegations within the purview of the construction contractor exemption. The exemption also requires that any construction-related services be “employed . . . in connection with your operations in your capacity as a construction contractor.” WSP’s interpretation of the exemption, which makes its applicability wholly contingent on the kinds of services performed, would render the phrase “capacity as a construction contractor” superfluous. The Court therefore rejects WSP’s strictly work-based interpretation of the exemption.

Given the nature of the Agreements and Task Orders issued by WSDOT, the Court concludes that WSP was acting in a professional engineering capacity. . . . The absence of a contract between WSP and any other entity in which WSP is hired to build anything confirms that it was not acting in the capacity of “construction contractor.”

(Citations omitted).

This decision underscores the need for an insured to obtain the right kind of insurance for its business activities.  The reference in the decision to Liberty “contributing” to the defense suggests that WSP may have had another source of coverage for this claim.  If not, the CGL policy wasn’t doing much for it, given the professional services it was performing.

On May 17, 2018, Justice Lebovits of the New York County Supreme Court issued a decision in Tishman Constr. Corp. of N.Y. v Scottsdale Ins. Co., 2018 NY Slip Op 30991(U), reconsidering a prior order in light of the Court of Appeals’ decision in Burlington Ins. Co. v. NYC Transit Auth., 29 N.Y.3d 313 (2017), and holding that a construction manager was not entitled to indemnity coverage, under a subcontractor’s liability policy, for the settlement of a personal injury lawsuit, where the subcontractor did not proximately cause the underlying injuries.

The subcontractor’s liability policy had a Blanket Additional Insureds Endorsement (see our previous posts on this type of endorsement here and here), which provided coverage to “any person or organization” that the subcontractor was “required to add as an additional insured on this policy under a written contract, written agreement or written permit,” but “only with respect to liability for ‘bodily injury’ . . . caused in whole or in part by” the subcontractor’s acts or omissions.

Relying on First Department precedent, Justice Lebovits initially held that the fact that the employee was injured in the course of his employment with the subcontractor was sufficient to trigger the additional insured coverage.  Subsequently, the Court of Appeals ruled in Burlington that the “caused in whole or in part” language used in the endorsement required a showing that the named insured proximately caused the injury.  Accordingly, on reargument, Justice Lebovits reversed course, explaining:

Scottsdale has demonstrated that Burlington represents a “change in the law that would change the prior determination” in part (CPLR 2221 [e] [2]). In the court’s July 12, 2016, decision, order, and judgment, the court found that Tishman had satisfied the “caused by” language of the endorsement because Cantelmo was working for Ornamental when he was injured. In so holding, the court relied on W & W Glass Sys., Inc. v Admiral Ins. Co. (91 AD3d 530, 530 [1st Dept 2012]), a First Department case pre-dating Burlington, holding that the phrase “caused by” “does not materially differ from the general phrase, ‘arising out of” – an approach that the Court of Appeals rejected in Burlington (see Burlington, 29 NY3d at 324 [‘”caused, in whole or in part,’ as used in the endorsement requires the insured to be the proximate cause of the injury giving rise to liability, not merely the ‘but for’ cause”]). Although Tishman argues that Burlington is distinguishable, Burlington considered the same additional insured endorsement wording as in Scottsdale’s policy (liability for bodily injury “caused, in whole or in part, by” the ”acts or omissions” of the named insured) (see id. at 318). Contrary to Tishman ‘s contention, the Court of Appeals did not indicate that its holding was limited to cases where there was a determination that the named insured did not cause the accident (see id. at 321).