Wednesday, September 22, 2010

Can Carrier Commit Bad Faith After Successfully Disclaiming for Late Notice?

Cirone v. Tower Ins. Co. of New York
--- N.Y.S.2d ----, 2010 WL 3632360
N.Y.A.D. 1 Dept.,2010.

This recent case contains a rare interesting twist on the issue of late notice, with a touch of bad faith thrown in. The interesting question raised in the title of this blog unfortunately was not addressed by the majority and only obliquely referenced in the dissent. It nevertheless raises an interesting scenario.

The underlying personal injury action involved plaintiffs injured by a restaurant’s delivery man. The restaurant’s carrier disclaimed coverage on the grounds of late notice and obtained a declaratory judgment confirming the propriety of the disclaimer. After the plaintiffs obtained a judgment in the personal injury action against the restaurant they brought their own DJ action against the carrier to recover the judgment pursuant to Insurance Law § 3420(b)(1). The court granted plaintiffs summary judgment, finding they gave the carrier proper notice of the accident, even if the insured did not.

Thereafter, the insured assigned all of its rights and claims against the carrier to the plaintiffs, who commenced an action for the carrier’s alleged bad faith in failing to settle the personal injury action within the policy limits.

The motion court dismissed the bad-faith claims which the appellate court affirmed. Although the result seemed pre-ordained, given the unlikelihood that any carrier would or should consider a substantial settlement after its disclaimer was confirmed on appeal, the Judge Catterson writing in dissent, suggested that the carrier still owed the insured a duty to settle the case within the policy limits given the plaintiffs' success in putting the policy limits in play.

The majority found that the carrier owned its insured nothing, given the late notice, but it is not altogether clear that they really understood the argument. The majority relied on hornbook law that “[A]n assignee never stands in any better position than his assignor” ( Madison Liquidity Invs. 119, LLC, 57 AD3d at 440) [internal quotation marks and Citations omitted]. Thus, plaintiffs' rights were equal to the rights of the insured restaurant, no more. The Court found that since the insured failed to give the carrier timely notice, it would be “estopped” from having a claim of bad faith to assign. The majority's use of the word “estopped” was inappropriate. This author recently pointed out that the First Department has misunderstood the concept of estoppel for decades. See NYLJ, 9/20/10, Outside Counsel, Coverage by Estoppel? It May Depend on the Court, p. 4, col. 1. The reason the court was saying that the insured had no bad faith claim was not due to estoppel, which involves detrimental reliance, but more prosaically, because the carrier owed the insured nothing(not even a defense), much less a duty to settle the case.

While this seems simple enough, is it correct? Judge Catterson, besides a clumsy attempt to distinguish the case relied upon by the majority, Zeldin v. Interboro Mut. Indem. Ins. Co. (44 A.D.3d 652, 834 N.Y.S.2d 366 (2d Dept.2007)), seems to ultimately ask an excellent question. If plaintiffs' notice was timely, does not the carrier owe its insured a duty to settlement within policy limits, even if it does not owe its insured a duty to defend?

The argument goes like this. Since the assignees' notice was timely, the policy provides indemnity coverage to the injured plaintiffs even if does not not provide the insured with a defense. Under such a scenario, Judge Catterson is saying that the carrier would owe its insured a good faith duty to settle the case within policy limits despite the fact it has no duty to defend. What the majority should have addressed is whether the insured’s late notice vitiated such duty? I do not believe this question has been addressed by any New York court, but I have not done the research.

Perhaps the answer is in the timing. Whether the carrier acted in bad faith involves a question of what the carrier knew at the time it was provided with a chance to settle. If at the time of the carrier's opportunity to settle, the plaintiffs had not yet obtained declaratory relief on its claim against the policy pursuant to 3420(b)(1), the underpinning of Judge Catterson's argument would be missing. In fact, the decision suggests that plaintiffs only obtained declaratory relief after they obtained a verdict in excess of the policy. It would not seem likely that a bad faith claim could be predicated on the mere possibility that a third party might establish coverage pursuant to 3420(b)(1), but if plaintiffs put the carrier on notice as soon as reasonably possible, such a legal possibility just might be viable.

If anyone has any thoughts on the matter, your comment would be appreciated.

Tuesday, June 1, 2010

Third-Party Coverage Through Supplementary Payments Provision in CGL Policy?

Hargob Realty Associates, Inc. v. Fireman's Fund Ins. Co.--- N.Y.S.2d ----, 2010 WL 1912249
N.Y.A.D. 2 Dept.,2010.

In this recent case, the Second Department reviewed some well worn concepts of insurance coverage law, but with a creative wrinkle thrown in. Here, Hargob Realty entered into a construction contract with a demolition contractor pursuant to a one-page proposal that contained a hold harmless agreement.

The defendant issued a CGL policy to the demolition contractor with an additional insured endorsement providing coverage to “any entity the Named Insured is required in a written contract to name as an insured….”

Plaintiff brought an action against Fireman’s seeking additional insured coverage based on the one page proposal along with a certificate of insurance provided by the demolition contractor. The Second Department hewing closely to the wording of the policy rejected plaintiff’s claim noting that the hold harmless agreement did not contain any requirement that plaintiff be named as an additional insured. With respect to the certificate of insurance, the Court noted it was “insufficient to alter the language of the policy itself, especially since the certificate recited that it was for informational purposes only, that it conferred no rights upon the holder, and that it did not amend, alter, or extend the coverage afforded by the policy ( see School Constr. Consultants, Inc. v. ARA Plumbing & Heating Corp., 63 AD3d 1029; Home Depot U.S.A., Inc. v. National Fire & Mar. Ins. Co., 55 AD3d 671, 673; Metropolitan Heat & Power Co., Inc. v. AIG Claims Servs., Inc., 47 AD3d 621).

The wrinkle in this case was plaintiff’s argument that the supplementary payments provision of the policy, which obligates the defendant insurer to defend an indemnitee of the named insured when certain specified conditions are met, provided it with liability coverage. The Second Department rejected this contention, finding that the “supplementary payments provision did not demonstrate an intent by the defendant insurer to afford the plaintiff coverage solely on the basis that it is an indemnitee of the named insured, in the absence of the plaintiff's addition as “an insured” under Section II of the subject policy pursuant to the additional insured endorsement ( see Stainless, Inc. v. Employers Fire Ins. Co., 69 A.D.2d at 33). Liability coverage under the policy is afforded by Section I, not the supplementary payments provision.”

Thus, the Court found that plaintiff was not entitled to liability coverage under the subject policy pursuant to the supplementary payments provision.

Wednesday, April 28, 2010

Appellate Division Strikes Down Claim of Good Faith Belief in NonLiability Defense

Tower Ins. Co. of New York v. Christopher Court Housing
71 A.D.3d 500, 897 N.Y.S.2d 63
N.Y.A.D. 1 Dept.,2010.

Although it is generally known that an insured may assert the good-faith belief in nonliability as a defense to a carrier's claim of late notice, there are few good decisions determining what constitutes "good faith." Here, the First Department reversed Judge Louis York’s denial of summary judgment, rejecting as a matter of law, the insured’s claim of good-faith belief in nonliability.

The case involved the claim by a residential tenant in defendant's building that she was assaulted in the hallway outside her apartment. A security guard generated an incident report which was submitted to the defendant property manager. The report indicated that the tenant claimed she was “grabbed” by the assailant and that police and emergency medical personnel were called to the scene, with “no evidence” of the assailant.

There also was a police report, which the property manager did not obtain, which reported that the assailant grabbed the tenant, pulled her hair, knocked off her glasses and scratched her arm leading her to have an “anxiety attack,” for which she was taken to the hospital.

The Court noted that in order to excuse a failure to give timely notice, a good-faith belief in nonliability “must be reasonable under all circumstances, and it may be relevant on the issue of reasonableness, whether and to what extent, the insured has inquired into the circumstances of the accident or occurrence” *65 (Security Mut. Ins. Co. of N.Y. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 441, 340 N.Y.S.2d 902, 293 N.E.2d 76 [1972], see White v. City of New York, 81 N.Y.2d 955, 958, 598 N.Y.S.2d 759, 615 N.E.2d 216 [1993] ).

The insured argued that its delay in giving notice was reasonable given the absence of evidence she was knocked down. It also relied on the fact that security told the property manager that a problematic rear door was closed at the time of the incident, and the property manager observed the tenant to be uninjured and was rebuffed by the tenant when she attempted to talk to her about the incident.

Notwithstanding, the Court found this was unreasonable as a matter of law since had the property manager inquired whether a police report had been filed, she would have learned that the tenant was in distress and had been taken from the building by ambulance. She would have also learned of her knowledge of a fire exit door that was sometimes found propped open. Thus, the Court found that a proper investigation would have have alerted the property manager to the possibility of a claim (see SSBSS Realty Corp. v. Public Serv. Mut. Ins. Co., 253 A.D.2d 583, 677 N.Y.S.2d 136 [1998]).

This case highlights the difficulty with this defense - that the insured cannot hide behind his own incuriousity and ignorance.

Monday, March 1, 2010

Even Baseless Allegations Trigger Duty to Defend

Village of Brewster v. Virginia Sur. Co., Inc.
--- N.Y.S.2d ----, 2010 WL 547082
N.Y.A.D. 3 Dept.,2010.

In a case that nicely emphasizes the extent that even baseless allegations against an insured can trigger the duty to defend an additional insured, the Third Department reversed the trial court's finding that an issue of fact as to whether the defendant carrier owed the plaintiff Village a defense to underlying property claims arising from a water main break. The Village hired the defendant's insured to construct new potable water distribution and wastewater collection systems. As part of its contract, the contractor purchased CGL coverage with an additional insured endorsement naming the plaintiff but “only with respect to liability arising out of [Laws'] work for [the Village].” During the relevant time period, the Village also had its own CGL policy.

Nine days after the completion of the contractor's work on the new water system, the old system suffered a water main break 10 miles from the work of the contractor. When two residents brought action against the Village, it tendered its defense to defendant which disclaimed coverage on the basis that the contractor's operations did not cause or contribute to the property damages claimed in the underlying complaints and, therefore, any alleged loss did not arise out of its insured's work.

The Village commenced a declaratory judgment action and moved for summary judgment. In opposition, defendant argued that it was not responsible for the maintenance and operation of the old water systems and that its insured only worked on the new system, which was void of water and 10 miles away from the site of the main break, that its insured had completed its work on the new system nine days earlier, and that although its insured voluntarily provided the Village with a backhoe to make repairs at the site, but did not perform any work at that site.

Based on such evidence, the trial court found a triable issue of fact sufficient to withstand summary judgment with respect to its duty to defend and indemnify the Village.

Notwithstanding the seemingly baseless nature of the claims against the contractor, the Third Department found that the Supreme Court erred in denying that portion of plaintiffs' summary judgment motion seeking a declaration that defendant was obligated to defend the Village in the underlying actions. The Court noted based its decision on the fact that the the complaint contained allegations of negligence against the contractor. It noted that any allegations that would "bring the claim even potentially within the embrace of the policy, the insurer must defend its insured, “no matter how groundless, false or baseless the suit may be” (Automobile Ins. Co. of Hartford v. Cook, 7 NY3d at 137 [internal quotation marks and citation omitted]; see Town of Massena v. Healthcare Underwriters Mut. Ins. Co., 98 N.Y.2d 435, 443-444 [2002]; Technicon Elecs. Corp. v. American Home Assur. Co., 74 N.Y.2d 66, 73 [1989] ). Further, “ ‘[e]ven where there exist extrinsic facts suggesting that the claim may ultimately prove meritless or outside the policy's coverage, the insurer cannot avoid its commitment to provide a defense’ “ (Durant v. North Country Adirondack Coop. Ins. Co., 24 AD3d 1165, 1166 [2005], quoting Fitzpatrick v. American Honda Motor Co., 78 N.Y.2d 61, 66 [1991]; see Automobile Ins. Co. of Hartford v. Cook, 7 NY3d at 137).

The Court noted that if the allegations in the complaints that the contractor's negligent construction and excavation work caused the water main to break, were proven to be true, such would bring the claims within the ambit of the protection afforded by defendant's coverage, thereby triggering defendant's duty to provide the Village with a defense (see BP A.C. Corp. v. One Beacon Ins. Group, 8 NY3d at 715; Durant v. North Country Adirondack Coop. Ins. Co., 24 AD3d at 1166).

The court ordered the defedant to reimurse the plaintiff's carrier defense costs after finding that the defendant's policy was primary.

Monday, February 8, 2010

Multi-Year Excess Policies' Aggregate Limit Found Not to be Annualized

Union Carbide Corp. v. Affiliated FM Ins. Co.
68 A.D.3d 534, 891 N.Y.S.2d 347
N.Y.A.D. 1 Dept.,2009.

This high profile case determined whether the aggregate limits of multi-year excess policies applied on an annual basis or applied over the three year term. This question involved no small amount of money. The policies had aggregate limits of $30,000,000. Union Carbide argued that the $30,000,000 aggegrate applied annually for an apparent total of $90,000,000 over the three year course of the policy.

The excess policies indicated that they followed form to the underlying insurance and “shall follow all the terms, insuring agreements, definitions, conditions and exclusions” of the applicable underlying insurance policy. The underlying policies each contained an “annual aggregate” limit of liability. Union Carbide argued that the excess policies thus were required to apply the annual aggregate provision set forth in the primary policies, since the excess policies did not expressly state the aggregate was for the life of the policy.

The majority however, adopted the analysis in an unreported federal case Maryland Cas. Co. v. W.R. Grace & Co., 1996 WL 169326, 1996 U.S. Dist. LEXIS 4500 [S.D.N.Y. 1996]. The majority found that the language in the excess policies in both cases were indistinguishable. The majority found no ambiguity and noted that Union Carbide was seeking “to alter the plain terms of the contract by adding the word ‘annual’ where it simply does not otherwise exist” (id. WL at *5, LEXIS at *15; see also Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475, 775 N.Y.S.2d 765, 807 N.E.2d 876 [2004] [“courts may not by construction add or excise terms”] [internal quotation marks omitted] ).

In view of what it found to be unambiguous language, the court was not bothered by the absence of any language that indicated the aggregate was not to be applied annually, citing Nissho Iwai Europe v. Korea First Bank, 99 N.Y.2d 115, 121-122, 752 N.Y.S.2d 259, 782 N.E.2d 55 [2002] [“ambiguity does not arise from silence, but from what was written so blindly and imperfectly that its meaning is doubtful”] [internal quotation marks omitted]).

Justice Tom filed a notable partial dissent. He pointed out some disenguity in the majorities' opinion. While the majority stated that the excess policy in W.R. Grace was indistinguishable, in fact those policies provided that they would follow form "except for limits". Thus, in W.R. Grace the argument the aggregate was annualized was much less cogent since following form with respect to limits was explictly excepted. Indeed, the fact the Union Carbide excess policies did not contain similar language, if anything, was evidence in favor of Union Carbide's position.

To the majority's credit, it did address this argument, but its answer was far from satisfactory. It noted that while the subject excess policy did not contain the phrase "except for limits", it did contain the phrase “subject to the declarations set forth below” of which one was the $30,000,000 aggregate limit. While the majority was right that "except for" and "subject to" are somewhat equivalent, its argument was nevertheless circular, since the meaning of aggregate limit language was what the case was about in the first place.

Justice Tom found the facts in Uion Carbide were more "consonant with those of Travelers Cas. & Sur. Co. v. ACE Am. Reins. Co., 392 F.Supp.2d 659 [S.D.N.Y.2005], affd. 201 Fed.Appx. 40 [2d Cir.2006], in which the court noted that the inclusion of a follow the form clause in a three-year reinsurance certificate creates a presumption of concurrency with the terms of the underlying policy that can only be overcome “through the placement of explicit liability limitations in the certificate itself” ( id. at 665). Thus, the court annualized the aggregate limit of liability, holding that because, as here, “the certificates do not clearly or explicitly limit the coverage terms of the underlying policy, the presumption of concurrency between the excess policy and the Three-Year Certificates is not overridden” ( id.).

Tuesday, January 19, 2010

Disclaimer Letter Only Effective to Defendant Addressee Even Though Other Insureds Were Located at Same Address

Maughn v. RLI Ins. Co.
--- N.Y.S.2d ----, 2009 WL 4985691
N.Y.A.D. 2 Dept.,2009.

In this Second Department case, the insurance carrier issued a disclaimer letter to the defendant real estate management company. In addition to the management company, the underlying complaint named several other related entities all existing at the same address. The disclaimer letter however, was not specifically addressed to these other defendants. It was unclear whether these entities were referred to in the body of the disclaimer letter or not. The defendants brought a declaratory judgment action and sought summary judgment based on Matter of Eveready Ins. Co. v. Dabach, 176 A.D.2d 879, 575 N.Y.S.2d 347). The trial court granted summary judgment to all the defendants including the management company addressee. On appeal the Second Department reversed the judgment in favor of the management company but affirmed as to the other defendants.

The Court found that the disclaimer letter that was addressed to the management company and sent to the attention of the building manager, within three weeks of receiving notice of the accident, established that the notice provided to it was untimely (see DeFreitas v. TIG Ins. Co., 16 A.D.3d 451, 791 N.Y.S.2d 626; Yarar v. Children's Museum of Manhattan, 4 A.D.3d 420, 421, 772 N.Y.S.2d 85; cf. 875 Forest Ave. Corp. v. Aetna Cas. & Sur. Co., 30 N.Y.2d 726, 332 N.Y.S.2d 896, 283 N.E.2d 768).