Blogs

Insurance Coverage Blog

Commentary on Insurance Coverage Litigation in New York
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.

Posted: July 10, 2018

Insured Entitled to Attorneys’ Fees in Coverage Action Filed by Insurer

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).

Posted: July 9, 2018

“One cannot be a construction contractor without a construction contract”: Professional Liability Exclusion Precludes Coverage Under CGL Policy

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.

Posted: July 6, 2018

Additional Insured Endorsement Not Triggered Where Injuries Were Not “Proximately Caused” by Named Insured

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).

Posted: July 2, 2018

Commercial Liability Policy Properly Rescinded Based on Material Misrepresentation in Insurance Application

On June 18, 2018, Justice Bannon of New York County Supreme Court issued a decision in Union Mut. Fire Ins. Co. v. 72nd Forest Hills Ass’n, 2018 NY Slip Op 31265(U), holding that an insurance carrier properly rescinded a commercial liability policy, under Insurance Law § 3105(a), based on material misrepresentations in the insurance application.  The Court also granted summary judgment for the carrier on the separate ground of “accord and satisfaction,” finding that the insured consented to the rescission by accepting and depositing a check from the insurance company returning the policy premium.

72nd Forest Hills Ass’n, involved a commercial liability policy purchased by the owner of a property in Queens, New York.  The insured submitted a claim after a tenant at the building fell on an interior staircase and suffered injuries.  The insurer disclaimed coverage, claiming that the insurance application materially misrepresented the nature of the risk.  The underwriter testified that “after an applicant submits an on-line application, a computer program assigns a classification code . . . which represents the classification of the risk, or type of property, to be insured.”  Based on the insured’s description of the property as “three apartment units and a commercial unit,” the computer program designated the subject property as a three-family dwelling.”  In the course of investigating the claim, however, the insurer determined that the building had “four rooms for rent where tenants shared a common kitchen and bathroom,” and a commercial tenant occupied the ground floor.  The underwriter “likened such arrangements to student housing or boarding or rooming houses,” and stated that the insurer “would not have issued an insurance policy to the defendant if it had been aware of these facts, as the underwriting guidelines specifically excluded student housing.”

Justice Bannon granted summary judgment to the insurer on the claim for rescission, explaining:

“A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false.” Insurance Law§ 3105(a). A misrepresentation is considered “material” if an insurer would not have issued the policy had it known of the misrepresented facts. Insurance Law § 3105(b) (1). The materiality of a misrepresentation is ordinarily a question of fact for a jury, but if there is clear and uncontradicted evidence concerning materiality, then the question becomes a matter of law for the court.

Insurance Law § 3105 permits an insurer to rescind a policy where the application contains a material misrepresentation. Rescission may be based upon an intentional misrepresentation or an innocent misrepresentation. An insurer need only show that a misrepresentation substantially thwarts the purpose for which the information is demanded and induces action which the insurance company might otherwise not have taken. . . .

Any ambiguity in the language of an insurance policy must be construed against the insurer and in favor of coverage. Thus, an answer to an ambiguous question on an insurance application cannot form the basis for a claim of misrepresentation. Here, however, the defendant has not demonstrated that the application question requesting information as to the total number of apartment units
was ambiguous. Moreover, contrary to the defendant’s assertion, the plaintiff was entitled to rely on [] sworn testimony [from the insured’s in-house counsel] that the subject premises consisted of four single rooms and a commercial unit. . . .

In any event, the defendant did not submit an affidavit from [the insured] attesting to his understanding of the questions or asserting that he was misled by unclear language. The quote for the insurance premium and the policy itself reveal unequivocally that [the insured] represented on the application that there were three discrete apartment units in the building.

(Citations omitted).

The Court also granted summary judgment to the insurer on the separate ground of accord and satisfaction, explaining:

An accord and satisfaction will only be found where there is a clear manifestation of intent by the parties that the payment was made, and accepted, in full satisfaction of the claim. The defendant does not deny having accepted and cashed the check tendered to it by plaintiff in full refund of its insurance premium. The letter accompanying the plaintiff’s remittance of the check in this action clearly stated that cashing of the check was “an accord and satisfaction, meaning that you do not dispute [plaintiff’s] rescission of the policy.” Under no view of the facts is it reasonable to conclude that the defendant was unaware of the consequence of cashing the check.

Thus, even if the policy were not deemed to be void ab initio, the policy must be deemed rescinded as of July 12, 2016, which is the date that the defendant cashed the refund check.

(Citations omitted).

The insured here could definitely have benefited from the advice of coverage counsel early in the process.  This was not a case of fraud — which is not required to rescind a policy for material misrepresentation — but very likely an honest misinterpretation of the online insurance application (is a “habitable unit” a stand-alone apartment, or a room available for rent?).

The acceptance of the premium refund check was also ill-advised, if the insured wanted to challenge the rescission of the policy.  Notably, New York law is evenhanded on this point:  an insurer can waive a rescission claim if it accepts premium payments from the insured after learning of facts that it believes entitles it to rescind the policy.  See, e.g., Security Mutual Life Ins. Co. of N.Y. v. Rodriguez, 65 A.D.3d 1, 7, 880 N.Y.S.2d 619, 623 (1st Dep’t 2009).

Posted: June 18, 2018

Schlam Stone Partners Bradley Nash and Solomon Klein to Speak at the Winning Edge Executive Business Conference

Schlam Stone Partners Brad Nash (the editor of the Insurance Blog) and Solomon Klein (editor of the EDNY Blog) will be speaking on June 18, 2018 at the Winning Edge 2018 Executive Business Conference at Montclair State University.

Law and The Entrepreneur: Legal Challenges and Opportunities on the Path to Success

Solomon N. Klein and Bradley Nash — partners at the law firm Schlam Stone & Dolan LLP — will lead a discussion on how business leaders can navigate the legal landscape. Today’s entrepreneur faces a number of legal challenges — from private lawsuits to regulatory barriers to innovation. Topics will include: Strategies to reduce litigation risk when creating your business; Dealing with industry-specific regulations; Arbitration; Insurance coverage; and management of litigation and regulatory risk. Finally, the panel will share tips and ideas on being a savvy consumer of legal services.

Posted: May 31, 2018

Insured Not “Indispensable Party” In Insurer’s Subrogation Action Where Joinder Would Defeat Diversity Jurisdiction

On May 25, 2018, Judge Furman of the SDNY issued a decision in American Ins. Co. v. Kartheiser, Case No. 17-CV-5545 (JMF), denying a motion to dismiss a subrogation action for failure to join the insured as a party.

In American Ins. Co., an insurer brought a subrogation action in federal court, seeking to recover amounts it paid to the insured for property damage caused by the defendant.  Joining the insured — which was was separately suing the defendant in state court for amounts not covered by the insurer — would have defeated diversity jurisdiction in the insurer’s federal subrogation action.  The Court held that insured need not be joined as a party, since it was not an indispensable party for purposes of Fed R. Civ. P. 19:

Under long-settled Second Circuit law, Watson Photography is “clearly” not an indispensable party and Defendants’ motion must be denied. See Arkwright-Boston Mfrs. Mut. Ins. Co. v. City of N.Y. (“Arkwright-Boston”), 762 F.2d 205, 209 (2d Cir. 1985). In Arkwright-Boston, as here, an insurer sued in federal court to recover for payments made to its insured, while the insured sued the same defendants in state court to recover its deductible. On appeal, the Second Circuit affirmed the district court’s denial of the defendants’ motion to dismiss pursuant to Rule 12(b)(7). “In a subrogation case,” the Court explained, “the insurer and the insured are ‘necessary’ parties, but clearly they are not indispensable parties.” Id. at 209 (citing United States v. Aetna Cas. & Sur. Co., 388 U.S. 366 (1949)). The insured’s “state action,” the Court continued, “seeks only its . . . deductible, while [the insurer’s] federal subrogration suit is for the [money] it paid to [the insured]. These two claims are separate and distinct, and . . . [t]he fact that the defendants may be required to defend more than one action arising from the same tort is not grounds for finding the insured an indispensable party to its insurer’s partial subrogation action.” Id.; see also St. Paul Fire & Marine Ins. Co. v. Universal Builders Supply, 409 F.3d 73, 81 (2d Cir. 2005) (“[I]f joinder of the absent insured or insurer would deprive the court of jurisdiction over the subject matter of the action, the court may properly proceed in accordance with Rule 19 to adjudicate the rights of the suing plaintiff alone; the consequence is that the defendant may have to defend two or more actions on the same tort.” (internal quotation marks omitted)).

Arkwright-Boston compels denial of Defendants’ motion. As in Arkwright-Boston, AIC seeks only to recover the money it paid to Watson Photography. (See Am. Compl. ¶ 3). By contrast, Watson Photography seeks to recover in its state-court action only the “damages [that] are not covered under [Watson’s] insurance policy.” (Docket No. 18, Ex. 7, at ¶ 11). Accordingly, there is no danger of double recovery. And in the absence of such a danger, the mere risk that a finding in one action would be given collateral estoppel effect in the other does not alone render Watson Photography an indispensable party. See, e.g., Arkwright-Boston Mfrs. Mut. Ins. Co. v. City of N.Y., No. 84-CV-5724 (CSH), 1984 WL 1263, at *2 (S.D.N.Y. Nov. 21, 1984) (“Although defendants may be collaterally estopped from denying liability in a subsequent state court trial if found liable in negligence in the trial of this action, there is no possibility of double recovery against defendants.”), aff’d, 762 F.2d 205; see also, e.g., Allstate Ins. Co. v. Choi, No. 06-CV-3870 (CPS), 2007 WL 29384, at *3 (E.D.N.Y. Jan. 4, 2007) (“Resolution of the action between [the insurance company] and the defendants for the amounts paid by [the insurance company] on the policy will not impede the [the insured’s] ability to pursue their state court remedies.”).

Posted: May 29, 2018

Property Owner Entitled to Defense Coverage as Additional Insured Under General Contractor’s CGL Policy; Fact Issues Preclude Summary Judgment on Indemnity Coverage

On May 11, 2018, Justice Lebovits of New York County Supreme Court issued a decision in Touro College v. Arch Specialty Ins. Co., Index No. 652642/2016, holding that a property owner was entitled to defense coverage for a personal injury action as an additional insured under a general contractor’s CGL policy.  The Court ruled that the issue of indemnity coverage, however, would have to await the determination of the contractor’s liability in the underlying injury action.

This case involves a policy provision that was the subject of a recent Court of Appeals decision covered on this blog – the blanket “additional insureds” endorsement to a contractor’s liability policy.  In connection with construction projects, project owners typically require contractors to obtain liability coverage for “upstream” parties (e.g., construction managers or property owners).  The contractor accomplishes this by purchasing a blanket additional insured endorsement covering any party the insured is contractually obligated to name as an additional insured.  Thus, determining who qualifies as an additional insured requires examining both the language of the endorsement and the underlying contracts.

In Touro College, the college sought coverage as an additional insured under the CGL policy of its general contractor (All Pro) for a personal injury lawsuit filed by an employee of a subcontractor for injuries suffered when a piece of sheet rock fell on him at the construction site.

All Pro’s CGL policy (issued by ARCH Specialty Insurance Company) contained the following blanket additional insured endorsement:

SECTION II – WHO IS AN INSURED is amended to include as an additional insured those persons or organizations who are required under a written contract with you to be named as an additional insured, but only with respect to liability for ‘bodily injury’, ‘property damage’, or ‘personal and advertising injury’ caused, in whole or in part, by your acts or omissions or the acts or omissions of your subcontractors:

In the performance of your ongoing operations or ‘your work’, including ‘your work’ that has been completed; or 

In connection with your premises owned by or rented to you.

(Emphasis added).

Thus, to qualify for additional insured coverage under All Pro’s CGL policy, Touro had to establish (1) that it was “required under a written contract with [All Pro] to be named as an additional insured” in the policy; and (2) that the claim involved “‘bodily injury . . . caused, in whole or in part, by [All Pro’s] acts or omissions or the acts or omissions of [its] subcontractors.”

With regard to the first element, Touro’s contract with All Pro required All Pro to name “Touro College” as an additional insured under “[All Pro]’s insurance policies, such insurance to include:  (i) all risk builder’s insurance . . . and (ii) hazard (including fire) insurance.”  ARCH declined to provide defense or indemnity coverage to Touro for the personal injury claim, asserting that All Pro was not contractually required to name Touro as an additional insured under the CGL Policy, but only the all risk builder’s insurance and hazard insurance policies specially referenced in the contract.  Justice Lebovits rejected this argument, explaining:

The plain language of the Construction Contract’s policy procurement provision requires All Pro to name Touro as an additional insured on its policies, which is all that the plain language of the Additional Insured Endorsement calls for. That the policy procurement provision goes on to specify the types of policies that All Pro must provide does nothing to restrict the preceding independent clause, calling for additional insured coverage under All Pro’s policies generally. As English Oxford Living Dictionaries explains, while the word “include” may be used to imply that the items listed comprise the whole, “it is also used in a non-restrictive way, implying that there may be other things not specifically mentioned that are part of the same category.” English Oxford Living Dictionaries (2018) (Note: online version). Here, the appearance of “to include,” after the language requiring All Pro to list Touro as an additional insured on its insurance policies, conveys such non-restrictive usage of the phrase. Therefore, contrary to ARCH’s reading, the Construction Contract requires that Touro be named as an additional insured on All Pro’s policies, including the Policy. 

As for the second element, Justice Lebovits held that it was “premature to decide whether ARCH has a duty to indemnify Touro as an additional insured,” as “there has not been a determination of All Pro’s liability” in the underlying action.  However, Justice Lebovits held that the allegations in the personal injury action were sufficient to trigger ARCH’s duty to defend Touro as an additional insured, explaining:

While it may be that All Pro’s acts or omissions were not the proximate cause of Padilla’s injury, the allegations in the Underlying Action “suggest . . . a reasonable possibility of coverage”, which triggers the duty to defend. Therefore, ARCH has a duty to defend Touro in the Underlying Action and it is in breach of that obligation.

(Citations omitted).

As a remedy for ARCH’s breach of the duty to defend, the Court ordered ARCH to pay the “costs and expenses incurred in defending the Underlying Action.”  What about the fees Touro incurred suing ARCH to enforce its rights as an additional insured under the policy?  Those fees were not recoverable.  Under a quirk in New York law, fee-shifting is available in a coverage litigation only when the insurance company commences a declaratory judgment action, thus, “cast[ing]” the insured “in a defensive posture.”  Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979).  Insureds generally “may not recover the expenses incurred in bringing an affirmative action against an insurer to settle its rights under the policy.”  New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 324 (1995).

In a decision covered on the Commercial Division Blog, Justice Kornreich of the New York County Commercial Division questioned the wisdom of this double standard and took the unusual step of encouraging the plaintiff to appeal her decision denying fee-shifting, so that the Court of Appeals might revisit the issue.  For now, however, it remains the law.

Posted: May 16, 2018

Injury Not Covered Occurrence under Automobile Liability and Personal Umbrella Policies Because It Was “Intentionally Caused”

On May 11, 2018, the Second Circuit issued a decision in Hough v. USAA Casualty Ins. Co., Case No. 17-1073, holding that a collision between a driver and a “flagman” at a construction site was not a covered “occurrence” under the driver’s automobile liability and umbrella policies because the injury was “intentionally caused.”  The policies contained the standard definition of a covered “occurrence” as an “accident,” which under the case law connotes “unintended damage.”  Olin Corp. v. Insurance Co. of North America, 221 F.3d 307, 317 (2d Cir. 2000) (citing McGroarty v. Great American Ins. Co., 26 N.Y.2d 358 (1975)).  The Second Circuit affirmed the finding of the bankruptcy court, and the district judge that the underlying incident did not qualify as an “accident” under this standard.

The Court summarized the facts as follows:

Margulies [the insured] was driving a car north on Sixth Avenue, on his way to a meeting with former Governor Mario Cuomo, and running late.  Hough was managing traffic.  Margulies was stopped by Hough, his car first in the line.  Hough continued to hold traffic, even though it seemed no vehicles were entering or exiting the construction site.  Margulies became increasingly impatient as he watched the traffic light at 23rd Street pass through two full cycles without seeing any trucks enter or leave the site.  Margulies testified he made eye contact with Hough to communicate his intention to proceed when the light turned green regardless of Hough’s instructions.  When the light changed to green, Margulies lifted his foot off the brakes and his car rolled forward slowly.  Hough was not in Margulies’s lane when the car started moving forward, but stepped back into the lane when the car was about a car length away.  Hough did not move, and the car continued to move forward.  Margulies testified that he expected Hough to move, and thought Hough was staying put “simply to annoy” Margulies.  Margulies continued to allow the car to move forward toward Hough, and did not apply the brakes until after the car hit Hough.  Margulies saw Hough fall and get back up, stated he assumed Hough was unhurt, and continued up Sixth Avenue to his meeting.  Margulies subsequently pled guilty to misdemeanor assault in the third degree. . . .

(Citations omitted).

The Second Circuit held that this incident was not a covered occurrence, explaining: 

Under New York insurance law, an injury is “intentionally caused” and thus not accidental if the “damages . . . flow directly and immediately from an intended act” rather than “a chain of unintended though expected or foreseeable events that occurred after an intentional act.” Brooklyn Law Sch. v. Aetna Cas. & Surety Co., 849 F.2d 788, 789 (2d Cir. 1989) (citation omitted). Hough’s injuries flowed directly and immediately from Margulies’s decision not to apply the car’s brakes until after the car struck Hough. The incident was not an accident within the meaning of New York law, and thus was not an occurrence as defined in the USAA policies.

(Emphasis added).

Covered “accidents” can result from intentional acts, even where the ultimate harm is arguably foreseeable.  For example, in a case covered previously on this blog, the Second Circuit ruled that a car accident caused by a driver to whom the insured had served alcohol when he was visibly intoxicated was a covered accident, even though the insured acted intentionally in serving the alcohol.  What seems to have set Hough apart from other cases involving intentional acts is the “direct and immediate” connection between the insured’s act (i.e., his decision not to apply the brakes until after colliding with the flagman) and the foreseeable injury that followed.