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Commentary on Insurance Coverage Litigation in New York
Posted: April 8, 2019

Property Insurance Policy’s Appraisal Procedure Cannot Be Used to Resolve Legal Question Regarding Interpretation of the Policy

On April 3, 2019, the Second Circuit issued a decision in Milligan v. CCC Information Servs. Inc., Dkt. Nos. 18-1405-cv, 18-1407-cv, holding that the appraisal procedure in a property insurance policy could not be used to resolve legal questions regarding the interpretation of the policy, but only to determine the amount of the covered loss.

Milligan is a putative class action, alleging that GEICO “violated Regulation 64, a New York State insurance regulation,” incorporated into the Policy, “which requires an insurer, in the case of a total loss of a current model year vehicle, to reimburse the owner for the reasonable purchase price less any applicable deductible and depreciation allowances.”  GEICO argued that its valuation methodology complied with Regulation 64, and it moved to compel an appraisal of the dispute.  Property insurance policies frequently allow for “appraisal” of a dispute over the value of the loss – a form of ADR that is similar in some respects to arbitration.  The appraisal provision at issue here allowed either party to demand “appraisal” of the amount of the loss.  In the event of such a demand, the insurer and the insured would each pick a “competent appraiser” each of whom would separately determine the amount of the loss.  The appraisers, in turn, would select an “umpire” to resolve the loss valuation if they could not agree.

The district court dismissed GEICO’s motion to compel an appraisal on various grounds, and “suggested that appraisal was inappropriate in this case because the appraisal sought would effectively constitute an opinion on the extent and nature of the coverage provided under the Policy, and under New York law an appraiser may not resolve legal questions regarding interpretation of the Policy.”  The Second Circuit affirmed, explaining:

In Amerex Grp., Inc. v. Lexington Ins. Co., 678 F.3d 193, 204–05 (2d Cir. 2012), we explained that an appraiser may not resolve coverage disputes raising legal questions about the interpretation of an insurance policy. That principle has been applied in several cases decided under New York law. In Kawa v. Nationwide Mutual Fire Ins. Co., 174 Misc.2d 407 (N.Y. Sup. Ct. 1997), for example, the insured residence was damaged in a windstorm. Id. at 407. The defendant insurer contended that the relevant policy required that it indemnify the insured only in a manner that would return the residence to its pre-windstorm condition.  The insured claimed that the relevant policy required replacement of the entire damaged aluminum siding with new vinyl siding. Id. The court deemed this a dispute over the proper interpretation of the policy’s coverage, which could be resolved only by the court’s legal analysis.

Similarly, in Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F. Supp. 2d 235, 241–42 (S.D.N.Y. 2003), aff’d 411 F.3d 384 (2d Cir. 2005), the district court reserved for itself how to interpret the term “Restoration Period” under a policy indemnifying Duane Reade for certain business income losses following the terrorist attacks of September 11, 2001. Duane Reade asserted a right to recover under the policy for business interruption losses for the entire period until the complex which would replace the World Trade Center was rebuilt.  The insurer argued that the Restoration Period terminated when Duane Reade could have restored operations at locations other than the World Trade Center.  Holding that this was not a dispute to be resolved by appraisal, the district court decided as a matter of law that the Restoration Period ended when Duane Reade was able to resume operations in the location where its World Trade Center store once stood.

An appraisal is appropriate not to resolve legal questions, but rather to address factual disputes over the amount of loss for which an insurer is liable. . . .

Applying these principles, we conclude that appraisal is not appropriate in this case. The dispute here concerns a legal issue about the meaning of Regulation 64. Milligan is not claiming simply that the value of her loss was greater than GEICO’s calculation. Rather, her complaint is that by calculating her loss using the average of three comparable vehicles available in the market (the methodology used in the Market Valuation Report), GEICO failed to comply with Regulation 64, which is incorporated into the Policy.

Defendants’ argument that this case does not present a coverage issue because GEICO paid Milligan’s claim under the Policy misses the mark. Whether a loss is covered is not the only legal question presented in an insurance case.  Questions over the extent of coverage and how to define the amount of loss also present legal questions of contract interpretation. The dispute here concerns the meaning of “the reasonable purchase price to the insured on the date of loss of a new identical vehicle.” That is a legal question requiring the interpretation of Regulation 64.

(Some citations omitted).

Appraisal can be a useful tool for resolving valuation disputes with property insurers.  However, as this decision illustrates, the scope of such an appraisal is limited to factual matters relating to the amount of the loss and does not include legal issues concerning the interpretation of the policy, which must be resolved by a Court.

Posted in Appraisal
Posted: April 1, 2019

Coverage Action Stayed As to Insurer’s Duty to Indemnify, But Not Duty to Defend, Pending Resolution of Underlying Civil and Criminal Proceedings Against Insured

On March 28, 2019, Judge Crotty of the SDNY issued a decision in Federal Ins. Co. v. Weinstein, Case No. 18 Civ. 2526 (PAC), granting an insured’s motion to stay a coverage action on the issue of the insurer’s duty to indemnify, pending the resolution of underlying civil and criminal proceedings against the insured, but denying the stay motion as to the duty to defend.

This coverage action arose from the numerous civil and criminal actions (some eighteen in total) against Hollywood producer Harvey Weinstein.  Chubb commenced the action seeking a declaration that it is not obligated to defend or indemnify Weinstein in the underlying actions.  Weinstein moved to stay Chubb’s coverage action on the ground that the coverage issues were intertwined with the issues to be resolved in the underlying dispute.  Judge Crotty denied the motion in part (as to the duty to defend), and granted it in part (as to the duty to indemnify), explaining:

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.  Nonetheless, federal courts have stayed declaratory judgment actions, or even declined to exercise jurisdiction at the onset, after finding that issues raised in the actions before them either turn on, or would be resolved in part by, determinations of liability yet to be made in the parallel proceedings. . . .

A stay is not warranted here as to Chubb’s duty to defend claims. Weinstein argues that the insurance coverage issues “overlap with, and are derivative of underlying liability issues,” but when it comes to the duty to defend, that is squarely not true. Under both New York and Connecticut law, an insurance provider’s duty to defend is determined solely by comparing the allegations on the face of the underlying complaint(s) to the terms of the policy.  Thus, questions of fault and liability in the Underlying Lawsuits are wholly irrelevant, and in fact, inadmissible evidence, to the duty to defend inquiry the Court will make in this action. . . .

As to the duty to indemnify, however, a stay is warranted in this action. Under both New York and Connecticut law, the duty to indemnify is narrower and distinct from the duty to defend.  In contrast to the duty to defend, “a duty to indemnify cannot be triggered by the mere possibility of coverage; rather, it is triggered by an independent factual finding that the insured’s liability is within the coverage provided by the policy.  As such, courts considering actions for declaratory relief have generally declined to rule on the issue of indemnity until resolution of the underlying liability claim.  Consistent with these cases, the Court will exercise its discretion and order the duty to indemnify claims stayed until resolution of the Underlying Actions.

(Citations omitted).

An insurer is generally precluded from litigating in a coverage action matters that are at issue in the underlying proceedings for which the insured seeks coverage.  Here, the insurer was allowed to proceed with a declaratory judgment action as to its duty to defend, while the underlying actions were pending, but only because the insurer’s arguments for avoiding coverage did not rely on any disputed facts, but rather only the language of the policies and the allegations in the underlying actions.  By contrast, in another case I litigated, Freedom Specialty Ins. Co. v. Platinum Mgt. (NY), LLC, 2017 NY Slip Op 32728(U), Justice Sherwood of the New York County Commercial Division stayed discovery altogether, holding that “the demand for discovery in furtherance of the Excess Insurers’ putative defenses against coverage” was “premature” because “[a] declaratory judgment action cannot be used to conduct discovery regarding the very facts at issue in the EDNY Indictment and the SEC Complaint.”

Posted in Duty to Defend
Posted: March 19, 2019

Evidence Inconclusive on Parties’ Intent to Name Property Owner As Additional Insured Under Contractor’s CGL Policy; Order Granting Summary Judgment Reversed

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

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

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

Posted: March 11, 2019

Priority of Coverage Determined By “Other Insurance” Clauses of Applicable Policies

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

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

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

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

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

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

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

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

(Citations omitted).

Posted in Uncategorized
Posted: February 25, 2019

Additional Insured Endorsement Required That Subcontract Be Executed Prior to Date of Underlying Accident

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

This case involves a frequently-litigated coverage issue in construction-related matters:  determining who qualifies as an additional insured under a blanket additional insured endorsement to a contractor’s CGL policy.  Property owners, construction managers and general contractors typically require “downstream” parties on a construction project (i.e., subcontractors) to provide CGL coverage to them.  This is usually accomplished by means of a blanket additional insureds endorsement on the contractor’s policy.

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

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

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

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

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

Posted: February 11, 2019

“Offer for Sale” Can Constitute Advertising Injury Under CGL Policy

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

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

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

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

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

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

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

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

(Emphasis added) (Citations omitted).

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

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

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

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

Posted: February 6, 2019

First Department Finds “No Heightened Pleading Standard” for Consequential Damages in Claim for Bad Faith Claims Handling

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

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

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

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

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

(Citations omitted) (emphasis added).

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

Posted in Damages
Posted: January 7, 2019

Intentional Acts Covered Under CGL Policy Where Insured Did Not Intend “Specific Harmful Result”

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

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

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

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

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

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

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

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

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

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

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

(Citations omitted).

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

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

Posted: December 31, 2018

Plaintiff in Bad Faith Action Against Third-Party Insurer Entitled to Collect Amount of Judgment in Excess of the Policy Limits

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

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

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

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

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

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

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

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

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

(Some citations omitted).

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

As we have discussed in a prior post, in the context of first-party insurance, New York similarly does not recognize a separate tort cause of action for bad faith claims handling.  Section 2601 of the Insurance Law forbids certain specified “unfair claim settlement practices,” including “not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear.”  But the Court of Appeals has held that there is no private cause of action for violations of this statute. See Rocanova v. Equitable Life Assurance Soc’y of the U.S., 83 N.Y.2d 603, 614 (1994).  As in the third-party context, however, the New York Court have sometimes permitted recovery of consequential damages in excess of the policy limits on the ground that bad faith in the adjustment of a first-party insurance claim constitutes a breach of the policy’s implied covenant of good faith and fair dealing.

Posted in CGL Policies, Damages
Posted: December 28, 2018

Insurer’s Conflict of Interest Entitled Insured to Select Independent Defense Counsel

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

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

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

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

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

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

(Record citations omitted).

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