First Department Suggests It is an Insurance Carrier's Obligation to Notify Potential Claimants of its Change of Address

American Transit Ins. Co. v. Brown
--- N.Y.S.2d ----, 2009 WL 3199800
N.Y.A.D. 1 Dept.,2009.

ANDRIAS, J.P., CATTERSON, RENWICK, DeGRASSE, FREEDMAN, JJ.

In a stunning decision, the First Department seems to have held that it is the insurance carrier’s burden to notify potential claimants of a change in its address, not the claimant’s burden to verify the carrier’s current location. The decision contains a stinging dissent from Justices Catterson and Andrias.

This declaratory judgment action arose out of an automobile accident between Arthur Brown (“Brown”) and Albertano Batista (“Batista”) in November 2002. Batista’s insurance carrier, American Transit Insurance Company (“ATIC”) sent a written acknowledgement of Brown’s property damage claim in January 2003 which it subsequently settled (date not supplied).

In November 2005 Brown commenced a personal injury action against Batista. Brown forwarded the summons and complaint to ATIC in January 2006, using the address on ATIC’s acknowledgement letter from three years before. Unbeknownst to Brown, ATIC had moved its offices in November 2003. Upon Batista's failure to appear in the action, Brown obtained a default judgment for $81,830 and served a copy of the unsatisfied judgment with notice of entry upon ATIC at its current offices. ATIC promptly issued a letter of disclaimer and commenced this declaratory judgment action on the ground that neither Batista nor Brown gave it timely notice of the underlying lawsuit as required by the policy. The Supreme Court denied the parties' motions for summary judgment to allow for further discovery.

On appeal, the majority acknowledged that the failure to satisfy a notice requirement “may allow an insurer to disclaim its duty to provide coverage” (see American Tr. Ins. Co. v. Sartor, 3 NY3d 71, 76 [2004]), but also observed that “a failure to satisfy an insurance policy's notice requirement does not vitiate coverage where there is a valid excuse (cf. Matter of Allcity Ins. Co. [Jimenez], 78 N.Y.2d 1054, 1055 [1991]).

Brown claimed a valid excuse, arguing that ATIC had never notified him of its change of address. The Court was not swayed by the fact that the carrier’s new address was printed on the check forwarded to Brown's counsel in settlement of the property damage matter and that ATIC had taken all normal and customary actions to announce and document its current address.

Judge Catterson in dissent, flatly denied that there is a legal obligation for a defendant's insurer to notify a potential plaintiff or plaintiff's counsel of the insurer's change of address. In addition, he harshly criticized the majority’s justification for Brown’s failure to notify ATIC of the pending litigation. He noted that it had been years since ATIC had settled the property damage case with Brown. Moreover, ATIC had sent a mass mailing announcing its change of address at the time of the move, notified the State Insurance Department and the post office of its change of address, and had changed its address on its web site and all phone listings. His withering dissent concludes by stating that “the majority is willing to accept an attorney's lack of diligence in failing to spend three-tenths of a second to verify an address on the Internet as a valid excuse for the failure to satisfy an insurer's notice requirement.”

This reporter wonders whether this case will have the effect of watering down the concept of due diligence in other scenarios. Hopefully, ATIC will take advance of the split decision to appeal the case to the Court of Appeals. I will of course, report on any further developments.

First Department Finds No Duty to Defend Insured Based on Negligence Based Affirmative Defense in Breach of Contract Action

The Court Suggests that Offsets are Counterclaims Not Affirmative Defenses, and thus Subject to Dismissal

P.J.P. Mechanical Corp. v. Commerce and Industry Ins. Co.
--- N.Y.S.2d ----, 2009 WL 1687773
N.Y.A.D. 1 Dept., June 18, 2009.

This article can be found online at:
http://www.law.com/jsp/nylj/index.jsp

This controversial case of first impression in New York addresses the question “does an insurer have a duty either to fund or to reimburse for separate litigation commenced by its insured, where the responsive pleadings raise an affirmative defense based on a claim of offset?” The First Department affirmed the decision of Judge Karla Moskowitz that no such duty exists.

However, the decision’s real impact will likely result from the unintended consequences of its dual holding, that affirmative defenses that seek to offset damage verdicts are subject to dismissal since they are really counterclaims. Such a proposition if accepted by the trial courts of the First Department, would lead to extreme practical consequences for practitioners of negligence law.

Plaintiff was a contractor retained to perform HVAC work in a commercial building in 2001. A pipe separated from a riser causing $500,000 in damages. The defendant insurance carrier was put on notice of the incident and conducted an investigation. The result of the investigation did not conclusively establish fault. When the plaintiff presented its invoice for services performed in the amount of $650,000, the general contractor refused on the grounds that plaintiff’s negligence caused $500,000 in damages which it claimed as an offset to the amount due. (It is unclear whether a payment of $150,000 was made).

Plaintiff requested its carrier to assign counsel to defend the allegation that it was negligent (and presumably to fund the affirmative claim for the balance that was due and owing), which the carrier refused in the absence of a lawsuit. In February 2003, plaintiff hired its own counsel to bring a breach of contract claim against the general contractor and the owner. When the general contractor and owner asserted an affirmative defense of offset, plaintiff again requested a defense from its carrier which was again refused. In November 2004, plaintiff served an amended complaint and this time, the general contractor and owner counterclaimed against the plaintiff for property damage.

When plaintiff presented the counterclaim to its carrier, the carrier offered to assign counsel, but only to defend the counterclaim.

In December 2005, the plaintiff instituted the declaratory judgment action. The First Department affirmed the lower court’s decision in favor of the carrier finding “there is nothing in the policy language that requires defendant to either prosecute affirmative claims or reimburse plaintiff for the fees paid its counsel for such affirmative claims” National City Bank v. New York Central Mut. Fire Ins. Co., 6 A.D.3d 1116, 1117, 775 N.Y.S.2d 679 [2004], lv. denied 3 N.Y.3d 605, 785 N.Y.S.2d 21, 818 N.E.2d 663 [2004]; Goldberg v. American Home Assur. Co., 80 A.D.2d 409, 411-12, 439 N.Y.S.2d 2 [1981].

The Court found that the assertion of an affirmative defense did not constitute a “suit” which needed to be defended, since “suit” was defined in pertinent part in the policy as:

“a civil proceeding in which damages to which this insurance applies are alleged.”

The issue thus was whether the assertion of an offset was an allegation of damages against the insured. In answering this question as no, the Court focused on the difference between an affirmative defense and a counterclaim. The Court distinguished the former by stating: “[t]he effect of a successful affirmative defense is the dismissal of a plaintiff's complaint or cause of action. It does not give the defendant any affirmative relief against a plaintiff, such as monetary damages.” The Court further noted that “a claim that does not defeat the plaintiff's cause of action, but constitutes an independent cause of action for the defendant, should be pleaded as a counterclaim, and not as an affirmative defense.” (Citing 84 N.Y. Jur. 2d, Pleading § 166).

If this definition seems a bit off, it should. In defining an affirmative defense as something that defeats or dismisses the complaint, the Court ignored that the affirmative defense in the subject action was one of several affirmative defenses which do not attack the viability of cause of action, but merely seek to reduce the plaintiff’s damages. Practitioners are familiar with such affirmative defenses such as those relating to collateral sources, Article 16 and comparative negligence.

Although the First Department in P.J.P. Mechanical Corp. did not broadly address how its decision would affect these types of affirmative defenses, its definition would now seem to exclude them from the pantheon.

As unlikely as this may sound, this is exactly what the Court appears to have had in mind. In colloquy, the Court pointed out that the plaintiff would have been better off if it had:

“move[d] to strike the defense [in order to] force [the general contractor] to replead the claim as a counterclaim. This would have triggered the insurer's duty to defend. Had these steps been taken in the instant action, defendant would have been forced to defend plaintiff at the beginning of the case, rather than when the counterclaim was voluntarily asserted…several months later.”

There was no explanation as to why the affirmative defense was subject to dismissal other than the Court’s assertion it was really a counterclaim – and thus improperly pleaded.

The Court’s decision raises some fairly fundamental questions. If affirmative defenses, such as comparative negligence, Article 16 and collateral sources reimbursement are not proper affirmative defenses and can be stricken if they are not designated as counterclaims, does that mean that negligence practitioners need to amend every answer in their offices?

Before panic sets in, it should be noted that it is doubtful that the First Department has the authority to change the definition of an affirmative defense, given that they are defined by statute by CPLR §3019, which provides in pertinent part:

(b) Affirmative defenses. A party shall plead all matters which if not pleaded would be likely to take the adverse party by surprise or would raise issues of fact not appearing on the face of a prior pleading such as arbitration and award, collateral estoppel, culpable conduct claiming in diminution of damages as set forth in article fourteen A [other examples omitted]…..The application of this subdivision shall not be confined to the instances enumerated.

No where in the statutory definition is there a requirement that the defense result in the dismissal of the complaint. In fact, the definition explicitly cites “diminution of damages” (an offset) as an example of an affirmative defense.

The First Department’s attempt to re-define affirmative defenses seems to have been done in an attempt to blunt the fact that from the point of view of its insured, there was no difference between a dollar offset and a dollar claimed in counterclaim. In fact, this was the basis of the only apparent authority on the matter, Construction Protective Servs. v. TIG Specialty Ins. Co., 29 Cal.4th 189, 126 Cal.Rptr.2d 908, 57 P.3d 372 [2002], which plaintiff relied upon. The California court held in Construction that the carrier was obligated to assign counsel precisely because “the effect of pleading a setoff defense is the same as if it were pleaded as a counterclaim…”

In view of the ambiguity in the policy language, the Court should have instead analyzed the issue by addressing the question what was the reasonable expectation of the parties? If so analyzed, plaintiff arguably would have prevailed. The broken pipe and resulting property damage was clearly an occurrence under the policy. Such property damage was a fundamental aspect of the underlying litigation even prior to the assertion of the counterclaims. Indeed, the counterclaims did not fundamentally alter the litigation in any way.

Notably, the underlying action was ultimately settled in plaintiff’s favor for $930,000, apparently reflecting years of interest. Ironically, the defendant argued that this was evidence that “plaintiff's demand for reimbursement of legal costs incurred in connection therewith did not constitute a claim for property damage or bodily injury…” It is odd that the Court thought it appropriate to cite this argument since it is the equivalent of claiming that the insured did not deserve a defense, because it was ultimately found not negligent.
Notwithstanding that the First Department’s definition of affirmative defenses contradicts CPLR §3019, defense counsel should nevertheless be forewarned that the plaintiff’s bar may in the context of an in limine motion, seek to have affirmative defenses seeking reduction in damages based on collateral sources, Article 16 and comparative negligence, dismissed on the ground they were not asserted as counterclaims, pursuant to the authority of P.J.P. Mechanical Corp. v. Commerce.

Court Limits Contribution of CGL Policy Based on Policy Provision of Unrelated Policy

State Ins. Fund v. American Hardware Mut. Ins. Co.
882 N.Y.S.2d 300
N.Y.A.D. 2 Dept.,2009.

This case presents an interesting scenario and policy provision. The matter arose from the injuries sustained by an employee of World of Hitches N Rental, Inc. (hereinafter World of Hitches), when a container of kerosene he was filling exploded. The defendants brought a third-party action for contribution against World of Hitches. The action was settled for $1,475,000 which was primarily paid by the plaintiff’s workers’ compensation carrier State Insurance Fund (hereinafter SIF), because the defendant carriers, which held a commercial general liability policy and a garage policy, had disclaimed coverage based on the employee exclusion provision.

After the settlement, SIF sought a judgment declaring that the defendants were obligated to pay their proportionate share of the settlement and defense costs. The court held in favor of plaintiff, finding that the defendant’s disclaimer was untimely under Insurance Law § 3420(d), since the defendants' disclaimer was issued more than four months after receiving notification of the third-party action.

The interesting part of the decision however, was the Court’s limitation of the defendants’ contribution. Although the Court acknowledged that defendants would normally have to “pay their proportionate share of the settlement (see Hawthorne v. South Bronx Community Corp., 78 N.Y.2d 433, 576 N.Y.S.2d 203, 582 N.E.2d 586) and defense costs incurred in the underlying action,” it nevertheless enforced a policy provision in the garage policy which provided that “all of the defendants' policies were mutually exclusive in that if more than one policy applied to the same accident, the maximum limit of liability under all the policies would not exceed the highest applicable limit under one policy. Thus, the maximum amount the defendants were required to contribute to the settlement was $300,000, and the judgment must be modified accordingly.

Presumably, each defendant paid $150,000. This odd but presumably correct result, allowed the commercial general liability carrier to save $150,000 of its $300,000 policy, solely based on a provision of an unrelated policy.

First Department Applies New Jersey Law Due to Domicile of Insured

Travelers Cas. and Sur. Co. v. Honeywell Intern., Inc.
880 N.Y.S.2d 66, (1st Dept., 2009)

In a case involving a choice of law between New Jersey and New York, with respect to certain asbestos-related claims, the trial court chose New Jersey law and the First Department unanimously affirmed.

The court reaffirmed the settled doctrine that a contract of liability insurance is generally “governed by the law of the state which the parties understood was to be the principal location of the insured risk” citing to Certain Underwriters at Lloyd's, London v. Foster Wheeler Corp., 36 A.D.3d 17, 822 N.Y.S.2d 30 [2006], affd. 9 N.Y.3d 928, 844 N.Y.S.2d 773, 876 N.E.2d 500 [2007]. In Certain Underwriters, the First Department had held that “where it is necessary to determine the law governing a liability insurance policy covering risks in multiple states, the state of the insured's domicile [at the time of contracting] should be regarded as a proxy for the principal location of the insured risk” (id. at 24, 822 N.Y.S.2d 30), and that, for such purposes, a corporate insured's domicile is the state of its principal place of business, not the state of its incorporation (id. at 25, 822 N.Y.S.2d 30; see also Appalachian Ins. Co. v. Di Sicurata, 60 A.D.3d 495, 875 N.Y.S.2d 57 [2009] ).

Since it was undisputed that the principal place of the insured's business was New Jersey, it was immaterial that the insured had used a New York address on some of the policies, that it had used New York brokers, or that it had used New York amendatory endorsements on some of the policies. The court found it relevant that the "parties knew that the risks were spread nationwide". As such, it was appropriate to apply the law of the insured's domicile.

Practioner's Note:
This question of choice of law should not be confused with the issue of whether a policy was "issued for delivery in New York" for the purposes of New York Insurance Law 3420(d). See Preserver Insurance Co. v. Ryba, 10 N.Y.3d 635, 862 N.Y.S.2d 820(2008); American Ref-Fuel Company, v. Employers Insurance Co., 265 A.D.2d 49, 705 N.Y.S.2d 67 (2d Dep't 2000). Seemingly, a court could find that New Jersey law applied, and also find that the policy was issued for delivery in New York as long as there was a New York risk being insured.

Execution of Non-Waiver Agreement Did Not Protect Carrier From Insurance Law § 3420[d]

Mayer's Cider Mill, Inc. v. Preferred Mut. Ins. Co., --- N.Y.S.2d ----, 2009 WL 1565160, (4th Dept., 2009).

The above case involved a 12 year old injured 1999, while working at a cider mill. It was unclear whether the infant was an employee or an independent contractor. This was an important distinction as the mill’s general liability policy contained an employee exclusion. The mill gave prompt notice to its insurance carrier and signed a “Non-Waiver Agreement” in 1999 pursuant to which the carrier indicated it would investigate the claim and reserved its right to disclaim coverage.

The infant waited until 2007 to file a complaint, claiming to be an independent contractor. The carrier issued a letter advising that it was still investigating the matter and reasserting the policy did not cover the Mill for injury to employees.

On appeal, the Court found that the carrier had “failed to provide the requisite written notice of disclaimer to plaintiff “as soon as [was] reasonably possible” (Insurance Law § 3420[d][2]; cf. Zappone v. Home Ins. Co., 55 N.Y.2d 131, 136-137). The Court noted that “it is incumbent upon the insurance company to conduct its own prompt investigation ( see id. at 1286-1287), and “the burden is on the insurer to demonstrate that its delay [in disclaiming coverage] was reasonably related to its completion of a thorough and diligent investigation” (Tully Constr. Co., Inc. v. TIG Ins. Co., 43 AD3d 1150, 1152-1153).

The court rejected the carrier’s claim that its investigation into the employment status remained ongoing as well as the defense that the claim was initially reported “for informational purposes only.” Presumably, the carrier also argued that the non-waiver agreement protected it from waiving a policy defense. The Court however, did not address or acknowledge such a defense in the decision. Rather, it merely found that the record neither supported the claim was for “informational purposes” or that the carrier was still investigating the claim. Accordingly, it found that any disclaimer by the carrier was untimely as a matter of law (see Wood, 45 AD3d at 1287).

While this decision involved an extreme delay in time, it raises the question how effective are non-waiver agreements? Recently, the Second Department similarly disregarded a non-waiver agreement in Quincy Mut. Fire Ins. Co. v. Uribe, 45 A.D.3d 661, 845 N.Y.S.2d 434 (2d Dept.,2007), where the agreement set forth a need for additional investigation, but the carrier then could not justify the need for further investigation.

The narrow effectiveness of non-waiver agreements was also demonstrated in Greater New York Sav. Bank v. Travelers Ins. Co., 173 A.D.2d 521, 570 N.Y.S.2d 122 (2d Dept.1991) where the Court held that notwithstanding the existence of a non-waiver agreement, material issues of fact existed with regard to the reasonableness of the carrier’s delay in denying coverage. It held the non-waiver agreement executed by the plaintiff “was not dispositive of the claim inasmuch as it merely allowed [the carrier] to ascertain the actual value of the property, to determine the amount of the loss, and to investigate the cause of the fire, without waiving its rights under the policy. It did not permit [the carrier] to unreasonably delay the exercise of those rights, to the detriment of the insured (see, Allstate Ins. Co. v. Gross, 27 N.Y.2d 263, 269, 317 N.Y.S.2d 309, 265 N.E.2d 736).

It should be emphasized that non-waiver agreements and reservations of rights letters do provide carriers with much needed protection and rights. Indeed, in Federated Dept. Stores, Inc. v. Twin City Fire Ins. Co., 28 A.D.3d 32, 807 N.Y.S.2d 62 (1st Dept. 2006) the Court held that a reservation of rights prevented the insured from claiming detrimental reliance on the carrier’s defending the case, even where the insurer later disclaimed on a basis different from the ground originally asserted in the reservation of rights (see Village of Waterford v. Reliance Ins. Co., 226 A.D.2d 887, 640 N.Y.S.2d 671 [1996]). The key lesson to be learned here, is that non-waiver agreements and reservations of rights letters, will only protect a carrier to the extent they do not sit on their rights and/or fail to act in a timely manner.

Are Temporary Employees, Employees?

Nick's Brick Oven Pizza, Inc. v. Excelsior Ins. Co.
877 N.Y.S.2d 359, (2d Dept., April 07, 2009)

In this Second Department case, the Court was presented with the question whether the policy covered a tortious act that was committed by an insured employee, where the policy excluded from the definition of employee, temporary employees who were “furnished to [the insured] to substitute for a permanent ‘employee’ on leave or to meet seasonal or short-term workload conditions.”

The court found that the employee was a temporary employee because he “was hired to meet seasonal …conditions during the …summer …” In doing so, it rejected the carrier’s claim that the employee was not a “temporary employee” because he was not “furnished” by a employment agency, but was merely referred by another employee of Nick’s Pizza. The Court rejected the argument, finding that the term “furnished” was ambiguous with any ambiguities being resolved in favor of the assured. (See Lee v. State Farm Fire & Cas. Co., 32 A.D.3d 902, 822 N.Y.S.2d 559).

Village Determination to Demolish After Fire Not Occurrence

Village of Springville v. Reynolds--- N.Y.S.2d ----, 2009 WL 1099695N.Y.A.D. 4 Dept.,2009.

In this interesting coverage decision, the plaintiff Village instituted a declaratory judgment action to obtain coverage under its general liabilty policy seeking defense and indemnity with respect to a suit against it for its decision to condemn property after a fire.

The Fourth Department sided with the insurance carrier that the Village failed to establish that the loss was caused by an occurrence. "Occurrence" being "an accident." The complaint alleged that the decision to demolish the building and the demolition itself were intentional. The court noted that “[a]ccidental results [and unintended damages] can flow from intentional acts ..., when the damages alleged in the [underlying] complaint ‘are the intended result which flows directly and immediately from [the insured's] intentional act, rather than arising out of a chain of unintended though foreseeable events that occurred after the intentional act’, there is no accident, and therefore, no coverage” ( Salimbene v. Merchants Mut. Ins. Co., 217 A.D.2d 991, 994; cf. Automobile Ins. Co. of Hartford, 7 NY3d at 137-138).

Thus, the court granted summary judgment to the carrier. The court also reversed the award of attorneys fees in favor of the village since it was the village that instituted the DJ. Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 21-22).

Policy Issued for Delivery in New York?

Recently, I was faced with the prospect of a plaintiff excess insurance company seeking to amend its complaint to rely on the employee exclusion provision in the policy. They had neither relied on it in the disclaimer nor pleaded it in the complaint. The injured plaintiffs were not employees of my client, an additional insured on the policy, but rather were employees of the named insured. Notwithstanding, the Second Department has held that if the plaintiff is an employee of the named insured, there is no coverage under the policy for the additional insureds, notwithstanding the general rule that "separation of insureds" doctrine. Bassuk Bros., Inc. v. UTICA First Ins. Co., 1 A.D.3d 470 (2d Dep't 2003); but see, U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 2003 WL 2006621.

The principal issue was whether the amendment was futile given the plaintiff's failure to give notice of its reliance on this exclusion within a reasonable period of time pursuant to New York Insurance Law 3420(d). New York is distinct in the draconian penalty of waiver if insurance carriers fail to assert exclusions within a reasonable period of time, which is generally considered to be sixty days.

It was however unclear whether 3420(d) applied since by its own terms it only is applicable with respect to insurance policies "delivered or issued for delivery" in New York. The subject policy however, was issued by a Connecticut insurance company to a named insured with a principal place of business in New Jersey. Upon initial discussions with the court, the presiding judge opined that 3420(d) would not apply and thus, would not bar the amendment.

However, upon further research, I came to a different conclusion. While the policy at issue was not delivered in New York, the question remained whether it was issued for delivery in New York. The Court of Appeals addressed this issue in Preserver Insurance Co. v. Ryba, 10 N.Y.3d 635 where it stated that a policy is "issued for delivery" in New York if it "covers both insureds and risks located in this state." Preserver, 10 N.Y.3d at 642. Also see, Columbia Casualty Company, v. National Emergency Services, Inc., 282 A.D.2d 346 (1st Dep't 2001); American Ref-Fuel Company of Hempstead v. Employers Ins. Co. of Wausau, 265 A.D.2d 49 (2d Dep't 2000).

Although the plaintiff did not pursue the amendment, I was prepared to argue that the policy was in fact issued for delivery in New York because the named insured used a New York address when purchasing its underlying primary insurance policy. In addition, the named insured was revealed in the underwriting file to be working on jobs mainly in New York. When the carrier would have reviewed the named insured's loss history, it would have seen that the only two former claims had occurred in New York.

Presumably, the plaintiff would have countered that the policy itself does not list any New York based insured and did not specifically insure any New York locations. It also would have argued that most of the evidence of the insured's New York work was added to the underwriting file after the effective date of the policy. It is unclear how the court would have framed the issue...would it have looked at the totality of the evidence in deciding whether the policy was issued for delivery in New York, or would it have only looked at the evidence that was available to the carrier at the time the policy was issued? Also unclear is to what degree the carrier had a duty to inquire whether an insured worked in New York. Here, the insured's principal place of business was just outside New York City and accordingly, the carrier had reason to suspect that it would be insuring New York risk.