Insurance Coverage Blog

Commentary on Insurance Coverage Litigation in New York
Posted: September 27, 2018

No Defense Coverage Under CGL Policy for Stop Work Order Issued by NYC Department of Buildings

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

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

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

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

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

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

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

*          *          *

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

(Record citations omitted).

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

Posted: September 26, 2018

Prior Investigation of Third Party Did Not Trigger D&O Policy’s Prior and Pending Litigation Exclusion

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

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

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

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

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

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

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

(Emphasis added).

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

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

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

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

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

Posted: September 2, 2018

Insureds Plead Claim for Consequential Damages Based on Insurer’s Failure to Pay Property Damage Claim

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

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

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

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

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

(Citations omitted).

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


Posted: August 9, 2018

Additional Insured Coverage Under Subcontractor’s CGL Policy Primary Over General Contractor’s Own Policy

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.

Posted: July 23, 2018

Unsigned Purchase Order Could Satisfy “Written Agreement” Condition of CGL Policy’s Additional Insured Endorsement

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.

Posted: July 18, 2018

Series of Thefts by the Same Employee Constitutes a Single “Occurrence” Under “Employee Dishonesty” Coverage

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.

Posted: July 16, 2018

Computer Fraud Policy Covers Losses from Email “Spoofing” Attack

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.

Posted: July 13, 2018

Excess D&O Policy Not Triggered Where Insured Settled Coverage Claim With Primary Insurer for Less Than the Policy Limit

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.”

Posted: July 12, 2018

Law Firm Not Entitled to Business Interruption Coverage for Contingency Fees Not Earned During Policy Period

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.

Posted: July 11, 2018

Extrinsic Evidence Establishes Parties’ Intent to Name Property Owner as Additional Insured Under Contractor’s CGL 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.