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.