Insurance Coverage Blog

Commentary on Insurance Coverage Litigation in New York
Posted: May 9, 2018

Court of Appeals Rules that Additional Insureds Endorsement in General Contractor’s Liability Policy Requires Contractual Privity

On March 26, 2018, the New York Court of Appeals issued a decision by Judge Wilson (Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire & Mar. Ins. Co., 2018 NY Slip Op 02117), holding that an Additional Insured-By Written Contract endorsement in a general contractor’s liability policy did not provide coverage for a construction manager that had no written contract with the general contractor — even though the contractor was obligated under a contract with the property owner to name the construction manager as an additional insured.  Judge Stein wrote a dissenting opinion, joined by Judge DiFiore, arguing that the endorsement was ambiguous, and should therefore be interpreted in favor of coverage.

Construction project owners typically require contractors to obtain liability policies naming “upstream” parties (i.e., general contractors, construction managers, or the property owner) as additional insureds.  The contractor accomplishes this by purchasing a blanket “additional insured” endorsement from its liability insurer, providing coverage for any party “the named insured is obligated to name as an additional insured by virtue of a written contract or agreement.”  3 Couch on Insurance § 40:30.  In Gilbane, the general contactor (Samson) was obligated by its contract with the property owner (DASNY) to provide liability coverage for the construction manager (Gilbane JV).  Samson obtained an additional insured endorsement from its liability carrier (Liberty) that included within the definition of “Insured” “any person or organization with whom you have agreed to add as an additional insured by written contract.”  (Emphasis added).

When Gilbane JV submitted a claim for coverage under Samson’s policy, Liberty disclaimed coverage, arguing that the endorsement did not provide coverage for Gilbane JV because it did not have a written contract with the insured.  The trial court found that Gilbane JV qualified as an additional insured, holding that the policy “requires only a written contract to which Samson is a party” – a requirement that was met by Samson’s contract with DASNY.  The First Department (with one Justice dissenting) reversed, holding that the “policy clearly and unambiguously requires that the named insured execute a contract with the party seeking coverage as an additional insured.”

The Court of Appeals affirmed the First Department’s decision, explaining:

Gilbane JV has no written contract with Samson denominating it an additional insured, but argues no such contract is necessary, because that requirement would conflict with the plain meaning of the Liberty endorsement; with “well-settled rules of policy interpretation”; and with the parties’ reasonable expectations. Alternatively, Gilbane JV argues that the Liberty endorsement is, at most, ambiguous on that point, and therefore must be construed against Liberty and in favor of coverage. Gilbane JV is incorrect; the endorsement is facially clear and does not provide for coverage unless Gilbane JV is an organization “with whom” Samson has a written contract.

Here, the endorsement would have the meaning Gilbane JV desires if the word “with” had been omitted. Omitting “with,” the phrase would read: “. . . any person or organization whom you have agreed by written contract to add . . .”, and Gilbane JV’s position would have merit. But Samson and Liberty included that preposition in the contract between them, and we must give it its ordinary meaning. Here, the “with” can only mean that the written contract must be “with” the additional insured. Gilbane JV proposes other wordings that, in its view, would more clearly require the existence of a written contract between Samson and an additional insured, but those formulations are no clearer and, in any event, the endorsement’s meaning is plain and unambiguous.

In a dissenting opinion, Judge Stein (joined by Judge DiFiore) found that the endorsement was ambiguous, and that Gilbane JV’s reading was reasonable, explaining:

The pertinent language, as written, is awkward and unclear, at the very least. Plaintiff Gilbane JV asserts that the phrase “by written contract” modifies “to add,” and argues that it refers to the act of the named insured, Samson, agreeing to add an additional insured. Put differently, Gilbane JV argues that “by written contract” means only that any agreement by Samson to add an additional insured must be memorialized in a writing — not necessarily a writing between Samson and the purported additional insured. Thus, according to Gilbane JV, the contract between DASNY and Samson — under which Samson agreed in writing to procure a general liability insurance policy for the construction project and to name Gilbane JV as an additional insured — was sufficient to confer additional insured status upon Gilbane JV. Defendant, on the other hand, focuses on the phrase “with whom,” arguing that the named insured must agree with the purported additional insured, in a writing between those parties, to add coverage for that entity under the policy.

Fixating on the word “with,” the majority summarily concludes that the policy does not “provide for coverage unless Gilbane JV is an organization with whom’ Samson has a written contract” (majority op, at 3). In so doing, the majority places the phrase “by written contract” directly after “agreed,” effectively rewriting the policy while altogether failing to address Gilbane JV’s proposed construction. Under this reformulation, the pertinent policy language would confer additional insured status upon “any person or organization with whom you have agreed by written contract to add as an additional insured.” Of course, that is not what the policy says. Moreover, even though the majority’s construction is reasonable, the policy language is ambiguous because the construction proffered by Gilbane JV is also reasonable; indeed, Gilbane JV’s interpretation is consistent with the “reasonable expectations of the average insured” that would seek to procure this type of coverage, whereas defendant’s interpretation is not.

In particular, given the unusual syntax of the endorsement — placing the phrase “by written contract” at the end of the sentence, a placement the majority chooses to ignore — it is reasonable for the average insured to expect that the phrase “by written contract” modifies only the immediately preceding infinitive “to add,” such that the phrase prescribes only that the agreement by which the named insured commits to extend coverage to the purported additional insured must be evidenced in a contract reduced to writing. In any event, because each party’s reading of this language is reasonable, the endorsement is ambiguous and thus should be interpreted in favor of coverage.  It follows, then, that the endorsement should not be interpreted as imposing a requirement of privity between Samson and Gilbane JV to effectuate additional insured coverage of Gilbane JV, and the DASNY-Samson contract was sufficient to satisfy the policy provision and entitle Gilbane JV to such coverage.

(Citations omitted).

Insurance coverage is an important consideration in any construction project.  This decision underscores the need to review the policy language carefully to ensure that the necessary parties are covered.

Posted: May 2, 2018

Pollution Exclusion Did Not Relieve Insurer of Obligation to Defend Personal Injury Claims by Workers at World Trade Center Site

On April 27, 2018, Justice Marcy Friedman of the New York County Commercial Division issued a decision in National Union Fire Ins. Co. of Pittsburgh, PA v. Burling Ins. Co., 2018 NY Slip Op 30741(U), holding that a Total Pollution Exclusion did not excuse an excess liability carrier’s duty to defend personal injury lawsuits brought by clean-up workers at the World Trade Center site, who alleged that they suffered respiratory and other injuries from exposure to toxins dispersed in the area after September 11.

The exclusion at issue in National Union applied to any claim for “‘[b]odily injury’ . . . which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.”  Under New York law, such exclusions are limited to “‘traditional’ or ‘classic’ environmental pollution.”  Thus, for example, the New York Court of Appeals has ruled that a similarly-worded exclusion did not apply to a claim arising from the inhalation of paint fumes in an office, as this did not constitute “pollution of the environment.”  Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377 (2003).  Justice Friedman noted that Court of Appeals has not “articulate[d] comprehensive criteria for determining whether pollution qualifies as classic or traditional environmental pollution for purposes of insurance policy exclusions.”  She declined to resolve the issue in this case, concluding instead that “even if the dispersal [of toxins following 9/11] did constitute classic or traditional environmental pollution, the claimants in the Underlying Actions asserted independent claims that do not fall within the exclusion, thus triggering Burlington’s duty to defend.”

The insurer argued that the “but for” language of the exclusion was satisfied, since the plaintiffs in the underlying lawsuits would not have suffered their injuries “but for the polluted environment.”  Justice Friedman rejected this argument and instead adopted the reasoning of a pair of Southern District decisions holding that pollution exclusions did not bar coverage for similar personal injury claims brought by workers at or around the World Trade Center site.  See WTC Captive Ins. Co., Inc. v. Liberty Mutual Fire Ins. Co., 549 F. Supp. 2d 555 (S.D.N.Y. 2008) (Hellerstein, J.); and 120 Greenwich Development Associates, LLC v. Admiral Indemnity Co., Case No. 08-cv-6491 (S.D.N.Y. Sept. 25, 2013) (Preska, J.).  Justice Friedman held that the pollution exclusion did not apply because the underlying lawsuits did not assert claims against the insured for causing (or failing to abate) the pollution.  Rather, the lawsuits asserted claims under the New York Labor Law and common law negligence for the insured’s failure “to provide the Plaintiffs with a safe place to work,” including “proper and appropriate respiratory protection and protection from exposure to toxins during the time that the Plaintiffs participated in the clean-up.”  Justice Friedman noted that the insurer “failed to cite any New York authority” holding “that a pollution exclusion . . . applies to defeat an insurer’s obligation to defend workplace safety claims stemming from exposure to pollution,” and there was “at least some New York authority to the contrary.”

This decision illustrates both the breadth of an insurer’s duty to defend, and the heavy burden an insurer faces in seeking to invoke a policy exclusion.  Justice Friedman also observed that an insurance policy must be interpreted in light of “the reasonable expectations of a businessperson.”  In this regard, she found it relevant that “the policy was issued after 9/11” when “the clean-up in areas surrounding the World Trade Center would have been expected to occur. . . .  If this sophisticated insurer sought to exclude liability for injuries sustained by workers performing clean-up activities, it could readily have adopted specific language to that effect.”

Posted: April 10, 2018

Indemnity Coverage for Class Action Settlement Not Affected by Covenant Not to Execute Judgment Against Insured’s Assets

On March 8, 2018, Judge Block of the EDNY issued a decision in Illinois Union Ins. Co. v. US Bus Charter & Limo Inc., Case No. 1:16-cv-06602-FB-RLM, holding that indemnification rights under a liability policy survived a class action settlement in which the insured consented to a $50 million judgment against it, subject to a covenant not to execute the judgment against the insured’s assets.  The insured in Illinois Union had sought defense and indemnity coverage under a liability policy for a putative class action in which it was accused of sending unsolicited text messages advertising bus charters.  After the liability carrier denied coverage, the insured proceeded to settle the claim, consenting to the entry of a $50 million judgment against it, subject to a covenant that the judgment could not be “executed on any assets or property” of the insured.  Instead, the insured assigned its indemnification rights under the policy to the plaintiff class, leaving it to the plaintiff to litigate the coverage issue and attempt to satisfy the judgment through the insured’s policy.

Seeking to sidestep liability for the judgment, the insurer brought a declaratory judgment action, arguing, inter alia, that the plaintiff’s covenant not to execute the judgment against the insured’s assets vitiated any indemnification rights under the policy, since the insured was no longer “legally obligated to pay” the judgment.  (Under a standard policy provision, coverage was limited to amounts the insured is “legally obligated to pay as Damages and Claim Expenses.”)  Judge Block disagreed, and granted partial summary judgment to the insured on the issue of coverage, explaining:

The New York Court of Appeals has not addressed whether an insured’s legal obligation to pay survives an assignment to a third party in exchange for a covenant not to execute against the insured. This Court therefore must predict how the New York Court of Appeals would rule by considering the rulings of other state courts and those of intermediate New York courts. . . .

As another judge in this court recently observed, intermediate New York courts have held that an insured remains “legally obligated to pay” despite an assignment of indemnification rights and a covenant not to execute a judgment, so long as the settlement agreement does not include a release of liability. See Intelligent Digital Sys., LLC v. Beazley Ins. Co., Inc., 207 F. Supp. 3d 242, 246 (E.D.N.Y. 2016) (citing Home Depot U.S.A., Inc. v. Nat’l Fire & Marine Ins. Co., 866 N.Y.S.2d 255, 258 (2d Dep’t 2008); Westchester Fire Ins. Co. v. Utica First Ins. Co., 839 N.Y.S.2d 91, 94 (2d Dep’t 2007)). Illinois Union cites no contrary New York state court authority.

Moreover, a majority of courts in other jurisdictions holds that coverage exists in such a scenario. See Intelligent Digital Sys., 207 F. Supp. 3d at 246 (collecting cases) (“New York courts and a majority of courts in other jurisdictions have held that an insurance company remains ‘legally obligated’ to pay a claim under a policy even where, as here, the claim was assigned to a third party, and the third party agreed not to execute a judgment against the insured’s personal assets.”); see also Justin A. Harris, Judicial Approaches to Stipulated Judgments, Assignments of Rights, and Covenants Not to Execute in Insurance Litigation Approaches to Stipulated Judgments, Assignments of Rights, and Covenants Not to Execute in Insurance Litigation, 47 Drake L. Rev. 853, 857-58 & n.22 (1999) (acknowledging majority rule). Given that New York intermediate courts are in agreement with the majority rule, the Court concludes that the New York Court of Appeals would find that an insured remains “legally obligated to pay” despite an assignment of indemnification rights to a third party and the third party’s covenant not to execute against the insured.

This decision illustrates one risk an insurance carrier takes in disclaiming its duty to defend – it loses control of the defense, and can find itself on the hook for a settlement to which it might not have consented had it been at the settlement table.  The insurer can mitigate that risk somewhat by bringing a preemptive declaratory judgment action early on, so that the issue of defense coverage is resolved at an early stage of the underlying litigation.  But that course of action has another downside for the insurer – fee-shifting.  Ordinarily, an insured that prevails in a declaratory judgment action is not entitled to recover legal fees incurred in the lawsuit against the insurance carrier; rather, each side bears its own costs.  However, the New York Court of Appeals has recognized an exception to the so-called “American Rule” on fee-shifting, permitting an insured to recover attorneys’ fees when it prevails in a declaratory judgment action commenced by the insurer.   See Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979).

Posted: April 3, 2018

First Department Denies Motion to Stay Order Directing Excess Insurers to Advance Defense Costs

This blog previously covered Justice Sherwood’s decision in Freedom Specialty Ins. Co. v. Platinum Mgt. (NY), LLC, 2017 NY Slip Op 32728(U), which granted a preliminary injunction directing three excess D&O insurers to advance attorneys’ fees and costs for the defense of a securities fraud prosecution and a related SEC enforcement action.  (N.B. I represent one of the insureds and argued the preliminary injunction motion on behalf of all the insureds.)  On March 22, 2018, the First Department denied the motion of one of the excess insurers (Freedom Specialty) to stay the preliminary injunction pending appeal.  Thus, advancement of much needed funds, pursuant to the order, must commence immediately.

Also of note:  Justice Sherwood’s ruling was recently the subject of an extended article in the New York Law Journal (available here), which analyzes the decision as a “demonstrat[ion] that the courts [] understand the importance of advancement of defense costs related to regulatory proceedings.”

Posted: March 26, 2018

Whether School District is Entitled to Indemnity Coverage under CGL Policy for Religious Discrimination Case Depends on Questions of Fact

On March 9, 2018, the Second Department issued a decision in Graphic Arts Mut. Ins. Co. v. Pine Bush Central School Dist., Index No. 6304/2015, holding that a school district’s entitlement to indemnity coverage under a CGL policy for the cost of settling a religious discrimination case depended on questions of fact.

Graphic Arts arose from a lawsuit filed by a group of students from the Pine Bush School District, alleging that the students were subjected to anti-Semitic harassment and discrimination by other students, which was reported to, but ignored by school officials.  According to the Complaint, the school officials’ conduct gave rise to an inference that they “intended for the harassment to occur.”  After the district settled the lawsuit, its CGL insurance carrier filed a declaratory judgment action arguing that claims arising from “intentional discriminatory conduct” were not covered by the policy.  The trial court granted a motion to dismiss the carrier’s complaint, but the Second Department reversed, explaining:

Whether a loss is the result of an accident must be determined from the point of view of the insured.  Where the loss is unexpected, unusual, or unforeseen from the point of view of the insured, the loss constitutes an accident. An act that is intentionally committed or performed may still be considered an accident within the meaning of an insurance policy, as long as the insured did not expect or intend the harm caused.

Whether an event or series of events qualifies as an accident is a question of fact.  Regardless of the initial intent or lack thereof as it relates to causation, or the period of time involved, if the resulting damage could be viewed as unintended by the fact finder the total situation could be found to constitute an accident. . . .

While it is not legally impossible to find accidental results flowing from intentional causes, i.e., that the resulting damage was unintended although the original acts leading to the damage were intentional, the insurance policies do not conclusively establish that the plaintiff is obligated to indemnify the defendants in the underlying action, and the other evidence submitted by the defendants did not utterly refute the factual allegations set forth in the plaintiff’s complaint. Whether the incidents set forth in the amended complaint in the underlying action were accidents present questions of fact which cannot be determined on a motion to dismiss pursuant to CPLR 3211(a)(1) and (7).

(Citations omitted).

One takeaway from this decision is the important distinction between an insurer’s duty to defend, and the duty to indemnify.  Here, the carrier agreed to provide the insured a defense, but may ultimately be able to establish a defense to coverage.  The standards for defense and indemnity coverage are different.  The duty to defend is “exceedingly broad,” and arises whenever there is “a reasonable possibility of coverage.”  Hillcrest Coatings, Inc. v. Colony Ins. Co., 151 A.D.3d 1643, 1645 (4th Dep’t 2017).  The duty to indemnify often depends on the actual facts developed in the underlying case.

Posted: March 15, 2018

Choice of Law in Insurance Coverage Action Determined by “Principal Location of the Insured Risk”

Determining which state’s law applies is an important issue in any insurance coverage dispute.  Indeed, the outcome may depend on it, as different states have different rules on the interpretation and enforcement of policy provisions, what the claims the insured can bring, and a host of other issues.  Frequently, however, insurance policies do not have choice-of-law provisions.  Thus, the applicable law must be determined under a conflicts of law analysis.  A recent decision from Judge Glenn T. Suddaby of the NDNY (Ben Weitsman & Son of Scranton, LLC v. Hartford Fire Insurance Co., Case No. 3:16-CV-0780 (N.D.N.Y. Feb. 13, 2018)) provides a helpful overview of the conflicts of law rules applied to insurance coverage disputes under New York law.  As Judge Suddaby explains:

In cases involving insurance contracts, courts look primarily at which state “the parties understood was to be the principal location of the insured risk” unless (with respect to the particular issue) some other state has “a more significant relationship” to the transaction and the parties (such as being where the parties resided and/or where the contract was issued and negotiated).  Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 84 N.Y.2d 309, 318 (N.Y. 1994); Colonial Penn Ins. Co. v. Minkoff, 338 N.Y.S.2d 444, 445 (N.Y. App. Div., 1st Dep’t 1972), aff’d, 33 N.Y.2d 542 (N.Y. 1973); Steinbeck v. Aetna Casualty and Surety Co., 81 A.D.2d 382, 385-86 (N.Y. App. Div.,1st Dep’t 1981); Fireman’s Fund Ins. Co. v. Great Am. Ins. Co., 10 F. Supp. 3d 460, 496 (S.D.N.Y. 2014); cf. Munzer v. St. Paul Fire and Marine Ins. Co., 145 A.D.2d 193, 200-01 (N.Y. App. Div., 3d Dep’t 1989) (characterizing the understood location of the insured risk as the “primary factor” in the application of the “grouping of contacts rule” in an insurance case).

When the insured risk is essentially restricted to one state, the understood location of the insured risk is given “overriding consideration in determining applicable law.”  O’Neill v. Yield House Inc., 964 F. Supp. 806, 810 (S.D.N.Y. 1997).  When, however, the understood location of the insured risk is spread across multiple states, the understood location of the insured risk is given “less significance.” O’Neill, 964 F. Supp. at 810. In such a case, the insured’s principal place of business is the primary factor. In re Liquidation of Midland Ins. Co., 16 N.Y.3d 536, 544 (N.Y. 2011); Certain Underwriters at Lloyd’s, London v. Foster Wheeler Corp., 36 A.D.3d 17, 24, 27 (N.Y. App. Div., 1st Dep’t 2006), aff’d, 9 N.Y.3d 928 (N.Y. 2007); Fireman’s Fund Ins. Co., 10 F. Supp. 3d at 496.

Having said all of that, while grouping of contacts is the primary analytical tool in contract cases, in certain instances “the policies underlying conflicting laws in a contract dispute are readily identifiable and reflect strong governmental interests, and therefore should be considered.” Zurich Ins. Co., 84 N.Y.2d at 318-19 (quoting Matter of Allstate Ins. Co., 81 N.Y.2d at 226). Theoretically, in a proper case, a foreign State’s sufficiently compelling public policy could preclude an application of New York law otherwise indicated by the grouping of contacts analysis, particularly where New York’s policy is weak or uncertain.” Zurich Ins. Co., 84 N.Y.2d at 319.

In this case, the Court found no actual conflict between New York and Pennsylvania law with respect to the policy exclusion at issue. Judge Suddaby noted that if there were a conflict, Pennsylvania law would apply because “the parties to th[e] policies clearly understood Pennsylvania to be the principal location of the insured risk,” and “even if the understood location of the insured risk was spread across multiple states (i.e., Pennsylvania and New York),” the Court would give “controlling weight” to the fact that “Plaintiff Ben Weitsman & Son of Scranton, LLC’s principal place of business was in Pennsylvania.”

Posted: March 8, 2018

Standard Policy Forms May Serve as Secondary Evidence of a Lost Policy’s Terms

On February 26, 2018, United States Magistrate Judge H. Kenneth Schroeder of the WDNY issued a decision in American Precision Indus., Inc. v. Federal Ins. Co., Case No. 14-CV-1050-RJA-HKS, holding that an insured could obtain discovery of standard forms used by the insurer as “secondary evidence” of a lost insurance policy’s terms.

An insurance policy is a contract, and the determination whether the insured is entitled to coverage depends on the policy’s terms.  But what if the policy itself goes missing?  This is not as far-fetched as it may sound, particularly with regard to occurrence-based policies, where a covered claim could be made years after the policy period.  In American Precision, the plaintiff sought coverage for asbestos-related claims under a CGL Policy issued in the 1970s.  Neither the insured nor the insurance company could find a copy of the 40 year-old policy, but there was “secondary evidence” of its existence, including “contemporaneous certificates of insurance, correspondence, and premium audits referencing or describing the Policy.”

Showing that the policy exists, however, only gets the insured part way — to grant relief, the court still needs to determine what the policy did (and did not) cover.  Insurers do not prepare insurance policies from scratch, but rather rely on standard forms.  The plaintiff in American Precision brought a motion to compel production of all versions of the forms the insurer used during the relevant time period for the type of liability policy at issue.  Magistrate Judge Schroeder granted the motion, explaining:

An insured seeking coverage under a lost or “missing” policy may rely on secondary evidence (i.e., evidence other than the policy itself) to prove the existence and terms of an insurance policy, provided the insured demonstrates that it has made a diligent but unsuccessful search and inquiry for the missing policy.

District courts within the Second Circuit have relied on “specimen” or standard policy forms as secondary evidence of a lost or destroyed policy’s terms.  Witness testimony connecting vital components of coverage can provide reliable and competent secondary evidence of a lost policy’s terms.

Given that neither party has been able to locate the Policy, and North River’s affirmative defense that API must prove the terms of the Policy’s coverage, the policy forms sought by API are indisputably relevant to its case and must be produced.

(Citations omitted).


Posted: March 2, 2018

Policy’s Anti-Assignment Provision Only Precludes Assignments Before Loss

A recent decision by Nassau County District Court Judge Scott Fairgrieve (M.V.B. Collision Inc. v. State Farm Ins. Co. (Dist. Ct. Nassau Co. Feb. 20, 2018), 2018 NY Slip Op 28043) provides a helpful survey of the case law on the enforceability of a policy provision prohibiting assignment or transfer of the insured’s rights under the policy.  As Judge Fairgrieve explains, the rule in New York is that such anti-assignment provisions are enforceable only as to assignments made before the insured sufferers a covered loss.  Thus, once the insured has a coverage claim, the right to collect that claim can generally be freely assigned or transferred, notwithstanding a policy provision prohibiting, or requiring the insurer’s consent for, any assignments.

A First Department decision cited by Judge Fairgrieve explains that “this principle is based on a judgment that while insurers have a legitimate interest in protecting themselves against additional liabilities that they did not contract to cover, once the insured against loss has occurred, there is no issue of an insurer having to insure against additional risk and, in that circumstance, the only question is who the insurer will pay for the loss.”  Arrowood Indem. Co. v. Atlantic Mut. Ins. Co., 96 A.D.3d 693, 694 (1st Dep’t 2012).  (citations omitted).  Judge Fairgrieve also cites similar decisions from the Second and Third Departments and the federal courts. 

Posted: February 27, 2018

Accident that was the “Unintended Consequence of an Intentional Act” is a Covered “Occurrence” under CGL Policy

On February 21, 2018, the Second Circuit issued a decision in Philadelphia Indemnity Ins. Co. v. Central Terminal Restoration Corp., Case No. 17‐1636‐cv, holding that a car accident caused by a driver to whom the insured had served alcohol when he was visibly intoxicated, in violation of New York’s dram shop law, was a covered occurrence under a commercial general liability policy.

A typical CGL Policy, such as the policy at issue in Philadelphia Indemnity Ins. Co., provides coverage for “bodily injury” resulting from an “occurrence” (defined as “an accident”), unless the injury is “expected or intended from the standpoint of the insured.” In this case, the accident resulted from an intentional act by the insured — selling alcohol to an intoxicated person. The Second Circuit held that it was nevertheless a covered occurrence because the insured did not intend to cause the subsequent injury, even if it was a foreseeable consequence. The Court explained:

We agree with the district court that a violation of the Dram Shop statutes that results in a car accident qualifies as “an occurrence” under New York law. Certainly, CTRC did not intend or expect the accident that followed the fundraising event. That CTRC intended to sell alcohol to Gilray also does not render the subsequent injuries “intended” by CTRC for purposes of excluding coverage, even if those injuries were arguably foreseeable to CTRC.  See Allegany Co-op Ins. Co. v. Kohorst, 678 N.Y.S.2d 424, 425 (4th Dep’t 1998) (holding that “[t]here is coverage if the damages alleged in the complaint arise out of a chain of unintended though foreseeable events that occurred after the intentional act” (internal quotation marks omitted)). . . .

A number of other New York courts, in a line of cases reaching back to then-Judge Cardozo’s opinion in Messersmith v. American Fidelity Co., 232 N.Y. 161 (1921), have also found that CGL policies cover injuries where an accident at issue is the unintended result of an intentional act. See, e.g., Salimbene v. Merchants Mut. Ins. Co., 629 N.Y.S.2d 913, 915 (4th Dep’t 1995) (“Accidental results can flow from intentional acts. The damage in question may be unintended even though the original act or acts leading to the damage were intentional.”); Allegany, 678 N.Y.S.2d at 424-25 (holding that an insurance company was required to defend and indemnify its insured because injuries resulting from an intentionally set fire still constituted an “accident” where the insured did not intend the subsequent injuries).

Posted: February 15, 2018

Court Recognizes “Narrow Exception” to Duty to Defend Where Extrinsic Evidence, Unrelated to the Merits of the Underlying Claim, Negates any Duty to Indemnify

On January 31, 2018, Judge Spatt of the EDNY issued a decision in Striker Sheet Metal II Corp. v. Harleysville Ins. Co. of N.Y., Case No. 16-cv-5916 (ADS)(AYS), holding that an insurance company was relieved of its duty to defend where “extrinsic evidence” (including an email from the insured in response to questions from the insurer) demonstrated conclusively that the accident at issue was excluded from coverage.

In Striker Sheet Metal an employee of the insured company was injured while in the process of unloading HVAC ductwork from the insured’s truck and delivering it to a construction site. The policy at issue excluded coverage for any “bodily injury” “arising out of” the “use” of “any ‘auto’,” owned by the insured, and defined “use” to include the “handling of property . . . [w]hile it is being moved from an . . . ‘auto’ to the place where it is finally delivered.” The complaint in the employee’s personal injury suit was “largely devoid of any of the specific factual circumstances surrounding the incident” and made “no mention that he was in the process of delivering HVAC ductwork when he was injured.” However, in written responses to questions from the insurance company, the insured employer stated that the injury occurred while the employee was “unloading the truck,” which was owned by the insured.

Although the undisputed facts triggered an exclusion to coverage, the insured argued that the duty to defend was governed solely by the allegations in the complaint, which did not plead these facts. Judge Spatt disagreed, explaining:

New York State law recognizes a narrow exception to the duty to defend, which permits a disclaimer of defense prior to litigation or a withdrawal during the course of litigation, if extrinsic evidence to the complaint or insurance policy is unrelated to the merits of the plaintiff’s action and plainly takes the case outside the policy coverage. . . .

The insurer is only relieved of the duty to defend where the extrinsic evidence offered allows a court to eliminate the possibility that the insured’s conduct falls within the coverage of the policy. . . .

(Emphasis added; citations omitted).

Judge Spatt acknowledged “that the precise delineations of the use of extrinsic evidence to prevent an insurer from exercising its duty to defend are unclear under New York law.” One important limitation, however, is that the extrinsic evidence must be “unrelated to the merits” of the case for which the insured seeks defense coverage. City of N.Y. v. Liberty Mut. Ins. Co., 2017 WL 4386363, at *13 (S.D.N.Y. Sept. 28, 2017); see also National Union First Ins. Co. v. Xerox Corp., 6 Misc. 3d 763, 776 (Sup. Ct. N.Y. Co. 2004) (dismissing insurer’s declaratory judgment action where facts relevant to coverage defenses “will likely be fully determined in the context of the various securities actions”); Nationwide Mutual Ins. Co. v. Dennis, 14 A.D.2d 188, 189 (3d Dep’t 1961) (“the policy in this State has been to deny the [insurer’s] declaratory judgment where the matter in dispute can be determined in the [underlying] action”). Judge Spatt concluded it was appropriate in this case to consider “extrinsic evidence, from the insured,” which (1) was “wholly irrelevant to the principal merits of the Underlying Action,” and (2) “conclusively establishes that [there is] no possible factual or legal basis on which Harleysville might eventually be obligated to indemnify its insured under any policy provision.” (Emphasis in original; citations omitted).

This decision illustrates that an insured’s communications with the insurer in the claims handling process can have a significant impact on the availability of coverage. Insureds are, therefore, well advised to seek the advice of coverage counsel early in the process.