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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.
Showing posts with label duty to defend. Show all posts
Showing posts with label duty to defend. Show all posts
Monday, March 1, 2010
Wednesday, October 7, 2009
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.
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.
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