Insurance Coverage Blog

Commentary on Insurance Coverage Litigation in New York
Posted: February 5, 2018

Law Firm Entitled to Business Interruption Coverage Even Though Its Contingency Fees Would Not Have Been Earned Until After the Policy Period

On January 23, 2018, Justice Masley of the New York County Commercial Division issued a decision in Bernstein Liebhard LLP v. Sentinel Ins. Co., Ltd., 2018 NY Slip Op 30169(U), holding that a law firm was entitled to business interruption coverage for the loss of new matters, even though its contingency fees for those matters would not have been received during the policy period.

The plaintiff, Bernstein Liebhard LLP (“Bernstein”), a mass tort law firm, sought coverage for loss of business income after a fire destroyed its offices. The firm’s business insurance policy covered “Net Income . . . that would have been earned or incurred if no direct physical loss or physical damage had occurred.” However, recovery for such business income losses was limited to 12 months after the date of the damage. As the Court explained, the law firm “had the capacity, lawyers, and staff to prosecute the cases for which it would have been retained during the applicable period, but the equipment damaged by the fire prevented it from taking those cases. Thus, but for the fire, Bernstein would have earned its fees when those cases settled or were tried to verdict, possibly years later.”

The insurer, Sentinel Insurance Company (“Sentinel”), argued that Bernstein was not entitled to any recovery for new matters for which the firm would have been retained, but for the fire damage, during the 12-month period because it would not have earned any contingency fee for those cases until years later. Justice Masley disagreed, explaining:

[R]ecovery is not precluded where there is a certain loss within the applicable period, even if the loss cannot be quantified until sometime thereafter. Here, an economist or other expert could identify the relevant existing mass tort cases during the 12-month period, and opine as to the present value of those cases, despite the fact that the amount of the loss may not have been determinable until years after the fire. . . .

To deny Bernstein coverage would be to punish it for its business model; that is, a mass tort business that is paid on a contingency-fee basis, as opposed to a traditional hourly basis. . . .

The business that Sentinel provided insurance coverage to, Bernstein, is a law firm; nothing it does concludes in one year. Sentinel accepted Bernstein’s payments and insured its business income losses. When it issued the Policy in July 2013 for the period August 1, 2013 to August 1, 2014, Sentinel knew that Bernstein was in the business of representing mass tort clients on a contingency-fee basis. Applying Sentinel’s theory of the coverage in this matter, there is no circumstance under which it would actually pay out for business income losses under the Policy. Sentinel’s interpretation of the Policy, therefore, renders the insurance illusory.

Justice Masley’s decision invokes the general principle that “an illusory contract – that is, an agreement in which one party gives as consideration a promise that is so insubstantial as to impose no obligation – is unenforceable.” Lend Lease (US) Const. LMB Inc. v. Zurich American Ins. Co., 28 N.Y.3d 675, 684 (2017) (citations omitted). “[A]n insurance policy is not illusory if it provides coverage for some acts subject to a potentially wide exclusion.” Id. at 685 (citations omitted). In this case, however, Justice Masley found that, under the insurer’s interpretation of the policy, the law firm would never be able to claim business interruption coverage. Thus, the policy had to be read in a manner that would give the coverage provision meaning in light of the realities of the firm’s business.

Posted: January 31, 2018

Insurer Not Entitled to Rely on Facts Outside Complaint to Avoid Duty to Defend

On January 18, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Zurich Am. Ins. Co. v. Don Buchwald & Assocs., Inc., Index. No. 655533/2016, holding that an insurer could not rely on “extrinsic discovery” to avoid its duty to defend.

In Zurich, an insurer sought a declaratory judgment that it had “no duty to defend or indemnify defendants in an action proceeding in Florida on the grounds that . . . the acts alleged in the underlying action were outside the scope of defendant Tony Burton’s . . . employment with defendant Don Buchwald & Associates, Inc.”  The insurer sought discovery “relating to the issue of whether Burton’s actions were outside the scope of his employment.” But Justice Sherwood denied the insurer’s motion to compel, explaining:

The discovery plaintiff seeks fails with respect to plaintiff’s duty to defend. Under New York law, plaintiff is required to provide a defense unless it can demonstrate that the allegations of the complaint in the underlying action cast that pleading solely and entirely within the policy exclusions, and, further, that the allegations, in toto, are subject to no other interpretation. So long as the allegations in that complaint suggest a reasonable possibility of coverage, plaintiff must provide a defense. Importantly, such a duty remains even though facts outside the four corners of the pleadings indicate that the claim may be meritless or not covered. Accordingly, the extrinsic discovery plaintiff seeks has no bearing on its duty to defend, as its duties there are determined solely by examining the allegations of the complaint in the underlying action.

(Citations omitted.)

Notably, although an insurer may not look to evidence outside the “four corners” of the complaint to avoid its duty to defend, 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). In other words, extrinsic facts cannot be used to avoid the duty to defend, but in some circumstances must be considered to establish a duty to defend.

Posted: January 29, 2018

Undefined Term in Policy Exclusion Not Ambiguous Where it Has a “Clear Meaning in Federal Law”

On January 22, 2018, the Second Circuit issued a decision in Beazley Ins. Co. v. ACE American Ins. Co., Case No. 16‐2812‐cv, holding that an undefined term in a policy exclusion was not ambiguous because it had a “clear meaning in federal law.” Beazley Ins. Co. is an insurance coverage action relating to investor lawsuits against NASDAQ in connection with Facebook’s IPO. At issue was a “professional services” exclusion in NASDAQ’s D&O policy, which provided that the insurer “shall not be liable for Loss on account of any Claim . . . by or on behalf of a customer or client of the Company, alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services.” (Emphasis added).

The D&O carrier argued that this exclusion applied because the investors who traded in Facebook shares were “customers” of NASDAQ (and their claims arose from NASDAQ’s “rendering professional services”). The policy did not define the term “customer,” and the plaintiff – an E&O carrier to which NASDAQ had assigned its rights under the D&O Policy – argued that the term was ambiguous and should be construed against the insurance company, especially because it appeared in a policy exclusion.

However, the Second Circuit affirmed the district court’s holding that the term “customer,” as applied to retailer investors who traded on NASDAQ, was not ambiguous, explaining:

The district court properly relied on custom and usage of the term[] “customers” in determining that the retail investors were “customers” of NASDAQ within the meaning of the ACE D&O policy. . . . [S]ecurities law is paradigmatically a federal field. In assessing whether there is a prevailing federal definition, we consider not whether there is complete unanimity among the courts that have addressed the question, but rather whether there is an overwhelming current of judicial opinion, that is, a meaning used by the vast majority of federal courts.

We have little trouble finding that the vast majority of federal courts to consider the issue find retail investors to be “customers” of a stock exchange. In Lank v. New York Stock Exchange, our Court held that “[t]he primary purpose of the Exchange Act was to protect customers of the stock exchanges that is, public investors.” 548 F.2d 61, 64 (2d Cir. 1977) (emphasis added). “One method of effectuating this was to impose on the exchanges a statutory duty to protect investors by regulating (the exchanges’) members.” Id. (citation and internal quotation marks omitted). District courts also regularly characterize retail investors as “customers” of stock exchanges. . . . It appears most federal courts take the meaning of “customer” in this context as a given.

*        *        *

[T]he fact that the professional services exclusion is a standard clause does not alter the analysis here. The parties are not required to tailor language for every policy in order for terms to have industry-specific meanings. Who counts as a customer of a particular insured within the meaning of the generic exclusion will often depend on the nature of the industry in which the insured does business. What is relevant here is that the insurer sold the policy to its insured, a stock exchange, against the backdrop of well-established federal securities law that unambiguously considers retail investors to be customers of the exchange.

(Some citations omitted).

This decision illustrates that the absence of an express definition for a term used in an insurance policy does not automatically render the term ambiguous. In an appropriate case, courts will look to outside the policy to custom and usage in the insured’s industry to define policy terms.

Posted: January 23, 2018

Generalized Request for Coverage Not Sufficient to Establish Claim Against Insurance Broker for Failure to Procure Policy Covering a Specific Risk

On December 21, 2017, the Third Department issued a decision in Cromer v. Rosenzweig Ins. Agency Inc., 2017 NY Slip Op 08926, affirming the dismissal on summary judgment of negligence and breach of contract claims against an insurance broker because the plaintiff failed to establish that the insured made a specific request for coverage that was not provided in the policy.

Individuals and businesses frequently obtain insurance coverage through brokers, and may rely on the broker’s advice as to what coverage to purchase. An insured who suffers a loss that turns out not to be covered may blame the broker for procuring the wrong policy or misrepresenting the scope of coverage. But can the insured bring a claim against the broker? In some cases, yes. The Third Department’s decision in in Cromer provides a useful overview of the law in this area, explaining:

As a general rule, an insurance broker has a common-law duty to provide requested coverage within a reasonable time and may be held liable for negligence or breach of contract when a client establishes that a specific request was made for coverage that was not provided in the policy.

*             *             *

Although an insurance broker’s common-law duty to his or her clients does not include a continuing duty to advise the clients on appropriate coverage or to recommend additional coverage that the clients did not request, an insurance broker may nevertheless be found liable for failing to provide appropriate advice regarding insurance coverage where it is determined that a special relationship has been established with his or her client. Whether such a special relationship exists is best determined on a case-by-case basis upon consideration of such factors as whether the broker received compensation for his or her consultation services distinct from the payment of premiums, whether the broker and the client had a specific interaction with respect to the insurance coverage such that it was apparent that the client was relying on the advice of the broker or whether there existed a course of dealing over an extended period of time that would have put an objectively reasonable insurance broker on notice that his or her advice and/or expertise were being relied upon.

(Citations omitted).

In Cromer, the insured had no claim against the broker because he made only a generalized request for a commercial general liability policy, and the broker satisfied any “duty of advisement” by informing the insured that the policy he was buying did not cover injuries to construction workers, and explaining how the insured could obtain that coverage if he wanted it.

Posted: January 16, 2018

Court Grants Preliminary Injunction Directing Excess Insurers to Advance Defense Costs in Prosecution for Alleged Securities Fraud

On December 27, 2017, Justice Sherwood of the New York County Commercial Division issued a decision in Freedom Specialty Ins. Co. v. Platinum Mgt. (NY), LLC, 2017 NY Slip Op 32728(U), granting a preliminary injunction directing three excess D&O insurers to advance defense costs for the defense of a federal securities fraud prosecution, and related civil actions. (N.B. Our firm represents one of the insureds in this case, and I argued the preliminary injunction motion on behalf of all the insureds. See Law360’s coverage of the oral argument on the preliminary injunction motion here.)

The insureds in Freedom Specialty are former officers and employees of Platinum Partners, a New York hedge fund, who sought advancement of defense costs under Platinum’s D&O policy and four excess policies (each for $5 million) for a securities fraud prosecution in the EDNY, and a related SEC enforcement proceeding. The primary insurer and the first-tier excess insurer acknowledged coverage and advanced defense costs up to the limits of those policies. However, the insurers responsible for the top three excess tiers (the “Excess Insurers”) filed suit, seeking a declaratory judgment that they had no obligation to provide coverage.

Among other defenses, the Excess Insurers claimed breaches of “Warranty Statements” signed in connection with the applications for the policies, which stated, in substance, that “No Insured has knowledge . . . of any wrongful act of any Insured,” or of any “fact, circumstances or situation which (s)he has reason to suppose might result in a claim being made against any of the Insureds.” The Excess Insurers alleged that the Warranty Statements were breached because the Insureds did not disclose “information contained in the EDNY Indictment and SEC Proceeding” – that is, the very allegations of wrongdoing that the insureds deny and for which they seek insurance coverage to mount their defense.

The insureds filed counterclaims, and moved for (1) a preliminary injunction directing the Excess Insurers to advance their defense costs, and (2) a stay of discovery in the coverage action pending the resolution of the underlying criminal proceedings.

Justice Sherwood granted the insureds’ motion in full. Citing the First Department’s seminal decision in Federal Ins. Co. v. Kozlowski, 18 A.D.3d 33 (1st Dep’t 2005), Justice Sherwood explained that, “under a directors and officers liability policy calling for the reimbursement of defense expenses . . . insurers are required to make contemporaneous interim advances of defense expenses where coverage is disputed, subject to recoupment in the event it is ultimately determined no coverage was afforded.” The Court found that the Insureds had shown a likelihood of success on their claim for advancement because the Excess Insurers could not rely on the Government’s unproven allegations to establish a breach of the Warranty Statements, or any other purported defenses to coverage. As Justice Sherwood explained, “[t]he Insureds have not been found guilty of any of the charges contained in either the EDNY Indictment or the SEC Complaint,” and “until there has been a final adjudication of wrongdoing by the Insureds, the Excess Policies remain in effect and the Excess Insurers are required to pay the legal defense costs of their insureds.”

Justice Sherwood further concluded that the Insureds “face irreparable harm without advancement of Defense Costs,” in that they “will be unable to mount adequate defenses, particularly in the EDNY criminal proceedings, where . . . the government has already produced approximately 15 million pages of documents with discovery still ongoing, and the Insureds are in need of funds to pay for the expert witnesses and consultants that are essential to their defense.” The Court also found that the balance of equities favored granting the injunction because “[t]he harm that the Insureds may suffer stemming from being unable to adequately defend themselves, including personally losing their liberty, outweighs any possible economic loss that the Excess Insurers may experience.”

Finally, the Court granted the Insureds’ motion to stay discovery, 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.”

This decision illustrates the important distinction between the duty to advance defense costs, and the ultimate duty to indemnify. The duty to advance attaches whenever there is a “possibility of coverage.” Westpoint Int’l, Inc. v. Am. Int’l S. Ins. Co., 71 A.D.3d 561, 563 (1st Dep’t 2010). Thus, the fact that the insurer asserts coverage defenses does not relieve it of the duty to advance – particularly where the purported defenses depend on facts that are at issue in the underlying proceedings for which the insured seeks coverage.

Posted: January 15, 2018

New York Insurance Law Does Not Preempt Claim Against Insurer for “Deceptive Practices” under Section 349 of the General Business Law

On November 8, 2017, the Second Circuit issued a decision in Nick’s Garage, Inc. v. Progressive Casualty Ins. Co., Case No. 15-1426-cv, holding that Section 2601(a) of the New York Insurance Law, which prohibits insurers from “engag[ing] in unfair claim settlement practices,” but provides no private right of action, does not preempt a claim against an insurer for “deceptive acts or practices” under Section 349 of the General Business Law.

In Nick’s Garage, a car repair shop (the “Garage”) brought suit against an automobile insurer as assignee of certain claims for repairs to damaged vehicles that the insureds brought to the Garage to be fixed. Among other things, the Garage alleged that the insurer engaged in “deceptive acts in handling the claims”, including by “falsely representing . . . that it was willing to pay prevailing competitive labor rates” for the repairs.

Unlike many other states, New York does not recognize a tort claim for bad faith claims handling. Section 2601 of the Insurance Law expressly forbids certain specified “unfair claim settlement practices,” including “knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue”, which would seem to cover the Garage’s theory in this case. However, 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).

The plaintiff in Nick’s Garage found another way to bring the claim, alleging that the insurer’s misrepresentations about “prevailing wages” were “deceptive acts” prohibited by GBL § 349, a consumer protection statute that allows a prevailing plaintiff to recover treble damages and attorneys’ fees. The insurance company argued that this claim was an improper attempt to work an end-run around Section 2601, which prohibits the same conduct, but does not provide for a private right of action. The district court agreed and dismissed the claim on preemption grounds.

However, the Second Circuit reversed, explaining:

In [Riordan v. Nationwide Mut. Fire Ins. Co., 977 F.2d 47, 51 (2d Cir. 1992)], an insurer argued to us that § 2601, forming part of a “pervasive statutory scheme regulating unfair and deceptive acts and practice by insurance companies,” precludes a private claim against insurance companies under GBL § 349. We rejected the argument, observing that it “ignores the plain language of GBL § 349(g), which states that ‘[t]his section shall apply to all deceptive acts or practices declared to be unlawful, whether or not subject to any other law of this state.'” Id. at 52. The New York courts agree. See New York Univ. v. Cont’l Ins. Co., 87 N.Y.2d 308, 321 (1995) (“[R]elief under [GBL § 349] is not necessarily foreclosed by the fact that the transaction involved an insurance policy . . . .” (citing Riordan)); see also Joannou v. Blue Ridge Ins. Co., 289 A.D.2d 531, 532 (2d Dep’t 2001) (“An insurance carrier’s failure to pay benefits allegedly due its insured under the terms of a standard insurance policy can constitute a violation of General Business Law § 349.”).

In this case, GBL § 349 proved to be an effective vehicle for asserting a tort claim against an insurance carrier. But this statute has its own limitations. A GBL claim must be based on “conduct that is consumer oriented,” and “[p]rivate contract disputes unique to the parties . . . would not fall within the ambit of the statute.” New York University v. Continental Ins. Co., 87 N.Y.2d 308, 320 (1995) (citations omitted). Thus, a GBL § 349 claim will only work if the insured has evidence of conduct by the insurer directed to consumers generally.