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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).
Tuesday, January 19, 2010
Monday, December 21, 2009
Where An Owner is an Additional Insured on Multiple Policies Is One Excess to the Other?
William Floyd School Dist. v. Maxner
--- N.Y.S.2d ----, 2009 WL 4852416
N.Y.A.D. 2 Dept., 2009.
This Second Department case involves a interesting question of priority of coverage as between two policies which both insured a school district as an additional insured.
The school district had contracted with a general contractor (“GC”) to build a new middle school. The contract required the GC to provide the school district with primary insurance coverage. The GC had a policy with QBE Insurance Corp. (hereinafter QBE), and provided the school district with a certificate of liability insurance listing it as an additional insured on the QBE policy. The GC subcontracted with a sub-contractor ("Sub") to supply kitchen equipment, which required the Sub to provide the GC and the school district with insurance. The Sub held a policy with Royal Insurance Company of America, (hereinafter Royal)which contained an additional insured endorsement.
An employee on the job was injured and brought suit against the school district and the GC. The school district and their insurer, Transportation Insurance Company commenced a DJ action, seeking a judgment declaring that the school district was an additional insured under the GC’s policy with QBE. The GC and QBE then commenced a third-party action against Royal, seeking a judgment declaring that the school district and GC were additional insureds under the sub’s policy with Royal, and that Royal’s policy was primary to the QBE policy.
After motions, the Supreme Court granted the school district’s motion declaring that QBE and Royal were co-insurers of the school district. On appeal the Second Department reversed finding that the QBE policy was excess to the Royal policy.
After a discussion confirming the status of the school district and the GC as additional insureds on the Royal policy pursuant to the terms of the sub-contract, the Court addressed the issue of priority between the policies.
The Royal policy provided:
“When an additional insured is added under this provision, and the written contract, written agreement or written permit requires the insurance to be primary and noncontributory, then this insurance is primary except when the Excess Provision under condition 4. Other Insurance in Section IV Commercial Liability Conditions applies. If this insurance is primary our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the Method of Sharing provision under condition 4.”
The Court found Royal’s coverage to be primary pursuant to the terms of the above provision and the subcontract which required the additional insured coverage be primary.
The QBE policy issued to Aurora provided:
“4. Other insurance
If other valid and collectible insurance is available to the insured for a loss we cover ... our obligations are limited as follows: ...
“ b. Excess Insurance
This insurance is excess over: ...
“(2) Any other insurance, whether primary, excess, contingent or any other basis that is valid and collectible insurance available to you as an additional insured under a policy issued to:
(a) A contractor performing work for you.”
While it was clear that this provision made the QBE policy excess with respect to the GC, it was not altogether clear whether this provision was applicable to an additional insured, such as the school district. Royal and the school district argued that the other insurance provision did not apply because the additional insured endorsement by its own terms, provided that it was primary, not excess coverage.
While not addressed by the Court, there were other more substantial arguments which were presumably made by Royal and the school district. They also presumably argued that the term “you” in the “other insurance” provision, refers to the named insured. The term "your work" refers to the work of the named insured, not the additional insured. Further, Royal and the school district had on their side the Court of Appeals’ decision General Motors Acceptance Corp. v. Nationwide Ins. Co., 4 NY3d 451 (2005). In General Motors, the Court of Appeals declined to find that one primary policy excess over another, in part because both insurers “could reasonably have expected to share the expense of the defense.” 4 NY3d at 457. Further, as pointed out by this author in First Department Decisions in Conflict Over ‘Other Insurance’ Provisions, NYLJ, July 13, 2009, p. 4 col. 1, the Court of Appeals in General Motors, commented that the limiting language from the “other insurance” provision was directed at the obligation to contribute to a settlement or judgment, not the duty to defend. Thus, a convincing multi-faceted argument could have been presented to the Court for the proposition that the other insurance provision should not apply to additional insureds. 4 NY3d at 457.
The Second Department however, rejected this contention, citing to the well-worn boiler-plate that an additional insured “enjoy[s] the same protection as the named insured.” (Pecker Iron Works of N.Y. v. Traveler's Ins. Co., 99 N.Y.2d at 393). The Court rightly held that the language in the additional insured endorsement providing for primary coverage needed to be read together with the “other insurance” provision. The Court concluded that “since the school district…and [GC] are additional insureds under the Royal policy issued to a subcontractor, the QBE policy provides them with coverage excess to that provided to them under the Royal policy.
The Court however, neither addressed the fact that the other insurance provision appears to be specifically directed at the named insured, nor did it address the Court of Appeals’ decision in General Motors. It is noteworthy, that now both the First and Second Departments have ignored the Courts of Appeals’ statement in General Motors that the "other insurance" provision does not apply to the obligation to defend -- the subject case, William Floyd, v. Maxner, as well as the recent SportRock Intern., Inc. v. American Cas. Co., 65 A.D.3d 12, 878 N.Y.S.2d 339 (1st Dep’t 2009) and Fieldston Prop. Owners, Assn., Inc. v. Hermitage Ins. Co., Inc., 873 NYS2d 607 (1st Dep’t 2009).
--- N.Y.S.2d ----, 2009 WL 4852416
N.Y.A.D. 2 Dept., 2009.
This Second Department case involves a interesting question of priority of coverage as between two policies which both insured a school district as an additional insured.
The school district had contracted with a general contractor (“GC”) to build a new middle school. The contract required the GC to provide the school district with primary insurance coverage. The GC had a policy with QBE Insurance Corp. (hereinafter QBE), and provided the school district with a certificate of liability insurance listing it as an additional insured on the QBE policy. The GC subcontracted with a sub-contractor ("Sub") to supply kitchen equipment, which required the Sub to provide the GC and the school district with insurance. The Sub held a policy with Royal Insurance Company of America, (hereinafter Royal)which contained an additional insured endorsement.
An employee on the job was injured and brought suit against the school district and the GC. The school district and their insurer, Transportation Insurance Company commenced a DJ action, seeking a judgment declaring that the school district was an additional insured under the GC’s policy with QBE. The GC and QBE then commenced a third-party action against Royal, seeking a judgment declaring that the school district and GC were additional insureds under the sub’s policy with Royal, and that Royal’s policy was primary to the QBE policy.
After motions, the Supreme Court granted the school district’s motion declaring that QBE and Royal were co-insurers of the school district. On appeal the Second Department reversed finding that the QBE policy was excess to the Royal policy.
After a discussion confirming the status of the school district and the GC as additional insureds on the Royal policy pursuant to the terms of the sub-contract, the Court addressed the issue of priority between the policies.
The Royal policy provided:
“When an additional insured is added under this provision, and the written contract, written agreement or written permit requires the insurance to be primary and noncontributory, then this insurance is primary except when the Excess Provision under condition 4. Other Insurance in Section IV Commercial Liability Conditions applies. If this insurance is primary our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the Method of Sharing provision under condition 4.”
The Court found Royal’s coverage to be primary pursuant to the terms of the above provision and the subcontract which required the additional insured coverage be primary.
The QBE policy issued to Aurora provided:
“4. Other insurance
If other valid and collectible insurance is available to the insured for a loss we cover ... our obligations are limited as follows: ...
“ b. Excess Insurance
This insurance is excess over: ...
“(2) Any other insurance, whether primary, excess, contingent or any other basis that is valid and collectible insurance available to you as an additional insured under a policy issued to:
(a) A contractor performing work for you.”
While it was clear that this provision made the QBE policy excess with respect to the GC, it was not altogether clear whether this provision was applicable to an additional insured, such as the school district. Royal and the school district argued that the other insurance provision did not apply because the additional insured endorsement by its own terms, provided that it was primary, not excess coverage.
While not addressed by the Court, there were other more substantial arguments which were presumably made by Royal and the school district. They also presumably argued that the term “you” in the “other insurance” provision, refers to the named insured. The term "your work" refers to the work of the named insured, not the additional insured. Further, Royal and the school district had on their side the Court of Appeals’ decision General Motors Acceptance Corp. v. Nationwide Ins. Co., 4 NY3d 451 (2005). In General Motors, the Court of Appeals declined to find that one primary policy excess over another, in part because both insurers “could reasonably have expected to share the expense of the defense.” 4 NY3d at 457. Further, as pointed out by this author in First Department Decisions in Conflict Over ‘Other Insurance’ Provisions, NYLJ, July 13, 2009, p. 4 col. 1, the Court of Appeals in General Motors, commented that the limiting language from the “other insurance” provision was directed at the obligation to contribute to a settlement or judgment, not the duty to defend. Thus, a convincing multi-faceted argument could have been presented to the Court for the proposition that the other insurance provision should not apply to additional insureds. 4 NY3d at 457.
The Second Department however, rejected this contention, citing to the well-worn boiler-plate that an additional insured “enjoy[s] the same protection as the named insured.” (Pecker Iron Works of N.Y. v. Traveler's Ins. Co., 99 N.Y.2d at 393). The Court rightly held that the language in the additional insured endorsement providing for primary coverage needed to be read together with the “other insurance” provision. The Court concluded that “since the school district…and [GC] are additional insureds under the Royal policy issued to a subcontractor, the QBE policy provides them with coverage excess to that provided to them under the Royal policy.
The Court however, neither addressed the fact that the other insurance provision appears to be specifically directed at the named insured, nor did it address the Court of Appeals’ decision in General Motors. It is noteworthy, that now both the First and Second Departments have ignored the Courts of Appeals’ statement in General Motors that the "other insurance" provision does not apply to the obligation to defend -- the subject case, William Floyd, v. Maxner, as well as the recent SportRock Intern., Inc. v. American Cas. Co., 65 A.D.3d 12, 878 N.Y.S.2d 339 (1st Dep’t 2009) and Fieldston Prop. Owners, Assn., Inc. v. Hermitage Ins. Co., Inc., 873 NYS2d 607 (1st Dep’t 2009).
Tuesday, November 24, 2009
In DJ Action Plaintiff Cannot Recover Costs of Defendant's Appeal. Appeal does not Cast Plaintiff in "Defensive Posture"
Thomas Johnson, Inc. v. State Ins. Fund
--- N.Y.S.2d ----, 2009 WL 3790596
N.Y.A.D. 4 Dept.,2009.
This case involved whether the trial court erred in granting the plaintiff judgment declaring that defendant was obligated to pay all costs and fees incurred by plaintiff in the defense of an appeal taken by defendant in connection with a declaratory judgment action. The State Fund argued that the trial court erred in ordering reimbursement of plaintiff’s costs and attorneys fees given that it was plaintiff who commenced the declaratory judgment action citing the well settled rule that “an insured may not be awarded attorney fees incurred in the prosecution of a declaratory [judgment] action against the insurer to determine coverage” ( Penn Aluminum v. Aetna Cas. & Sur. Co., 61 A.D.2d 1119, 1120, 402 N.Y.S.2d 877), unless the insured was “cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations” (Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 21, 416 N.Y.S.2d 559, 389 N.E.2d 1080). The Fourth Department was not swayed by appellant’s argument that it was cast in a defensive posture by defendant’s appeal (see generally Crouse W. Holding Corp. v. Sphere Drake Ins. Co., 248 A.D.2d 932, 670 N.Y.S.2d 640, affd. 92 N.Y.2d 1017, 684 N.Y.S.2d 480, 707 N.E.2d 435).
--- N.Y.S.2d ----, 2009 WL 3790596
N.Y.A.D. 4 Dept.,2009.
This case involved whether the trial court erred in granting the plaintiff judgment declaring that defendant was obligated to pay all costs and fees incurred by plaintiff in the defense of an appeal taken by defendant in connection with a declaratory judgment action. The State Fund argued that the trial court erred in ordering reimbursement of plaintiff’s costs and attorneys fees given that it was plaintiff who commenced the declaratory judgment action citing the well settled rule that “an insured may not be awarded attorney fees incurred in the prosecution of a declaratory [judgment] action against the insurer to determine coverage” ( Penn Aluminum v. Aetna Cas. & Sur. Co., 61 A.D.2d 1119, 1120, 402 N.Y.S.2d 877), unless the insured was “cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations” (Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 21, 416 N.Y.S.2d 559, 389 N.E.2d 1080). The Fourth Department was not swayed by appellant’s argument that it was cast in a defensive posture by defendant’s appeal (see generally Crouse W. Holding Corp. v. Sphere Drake Ins. Co., 248 A.D.2d 932, 670 N.Y.S.2d 640, affd. 92 N.Y.2d 1017, 684 N.Y.S.2d 480, 707 N.E.2d 435).
Tuesday, November 10, 2009
Despite Custom in the Industy, Insured Who Gives Notice of an Occurrence to his Broker Does so at his Peril
American Safety Indem. Co. v. 612 Realty LLC,
Slip Copy, 2009 WL 2407822 (N.Y.Sup., J. Marcy Friedman 2009)
This declaratory judgment action dealt with the question whether an assured who provides first notice of occurrence and/or suit papers to his broker has fulfilled his obligation to provide the carrier with timely notice of the claim. In American Safety, the commercial umbrella carrier moved for summary judgment on its disclaimer for the insured’s failure to provide timely notice of the underlying action.
The infant plaintiff was first diagnosed with lead poisoning on August 27, 2003. The complaint was filed on or about September 25, 2003. The verified bill of particulars plead $40 million in damages. In opposition to the motion, the insured’s argued that its managing agent provided notice to their broker “with the expectation that he would ‘take whatever steps [were] necessary’.” The American Safety court however, held that “this assertion is insufficient to raise a triable issue of fact” based on Security Mut. Ins. Co., 31 N.Y.2d at 442 n 3. The court further commented:
Notwithstanding that it is a “common practice” for insureds to notify their brokers rather than their carriers of claims, an insured who notifies only its insurance broker does so at its own peril, as “the policy requirement that the notice must be provided to the carrier trumps any informal arrangement or practice” between the insured and its broker. (Gershow Recycling Corp. v. Transcontinental Ins. Co., 22 AD3d 460, 462 [2nd Dept 2005].)
Incredibly, I currently have a case with the identical facts. It even involves a lead case with the same insurance carrier. Can we depend on stare decisis? We shall find out.
Slip Copy, 2009 WL 2407822 (N.Y.Sup., J. Marcy Friedman 2009)
This declaratory judgment action dealt with the question whether an assured who provides first notice of occurrence and/or suit papers to his broker has fulfilled his obligation to provide the carrier with timely notice of the claim. In American Safety, the commercial umbrella carrier moved for summary judgment on its disclaimer for the insured’s failure to provide timely notice of the underlying action.
The infant plaintiff was first diagnosed with lead poisoning on August 27, 2003. The complaint was filed on or about September 25, 2003. The verified bill of particulars plead $40 million in damages. In opposition to the motion, the insured’s argued that its managing agent provided notice to their broker “with the expectation that he would ‘take whatever steps [were] necessary’.” The American Safety court however, held that “this assertion is insufficient to raise a triable issue of fact” based on Security Mut. Ins. Co., 31 N.Y.2d at 442 n 3. The court further commented:
Notwithstanding that it is a “common practice” for insureds to notify their brokers rather than their carriers of claims, an insured who notifies only its insurance broker does so at its own peril, as “the policy requirement that the notice must be provided to the carrier trumps any informal arrangement or practice” between the insured and its broker. (Gershow Recycling Corp. v. Transcontinental Ins. Co., 22 AD3d 460, 462 [2nd Dept 2005].)
Incredibly, I currently have a case with the identical facts. It even involves a lead case with the same insurance carrier. Can we depend on stare decisis? We shall find out.
Friday, October 23, 2009
First Department Holds That Out of Pocket Damages Are Requirement to Claim for Common Law and Contractual Indemnification
Osowski v. AMEC Const. Management, Inc.
--- N.Y.S.2d ----, 2009 WL 3200042
N.Y.A.D. 1 Dept.,2009.
In a case filled with insurance company intrigue and recriminations the First Department issued an eminently reasonable decision, but once again, saw fit to throw the bar another unnecessary head scratcher from left field. As you may recall, I wrote in a NYLJ piece from October 6, 2006, the First Department stated that affirmative defenses which were not complete defenses to an action, such as offsets, comparative negligence and Article 16, were actually counterclaims and suggested they could be dismissed as improperly plead if labeled affirmative defenses!! See
http://www.gordon-silber.com/pdf/7-13-09-NYLJ-1st-Dept-Decisions-in-Conflict-Over-Other-Insurance-Provisions-Jon-Lichtenstein.pdf
Now the Court claims that in order to be able to plead a valid claim for common law or contractual indemnification, you need to be able to show “out of pocket” damages. While “out of pocket” damages has been held to define the scope of damages that may be recovered in a breach of contract to procure insurance cause of action (see Inchaustegui v. 666 5th Avenue, 96 N.Y.2d 111, 725 N.Y.S.2d 627 (2001), I am aware of no prior suggestion that out of pocket damages is a necessary element to a claim for indemnification. Not surprisingly, the First Department did not cite to any authority for its pronouncement. Osowski, 2009 WL 3200042 at *4.
The decision written by Judge James Catterson and joined unanimously by judges David B. Saxe, James M. Mcguire, Karla Moskowitz, and Rolando T. Acosta arose out of a construction accident where the plaintiff lost his left leg and multiples toes from his right foot when a four-ton steel beam fell on him while he was unloading a truck.
Plaintiff brought a claim against the owner of the project (“NYT”) as well as the construction manager (“AMEC”). The plaintiff was employed by the steel erectors (“DCM”). The NYT/AMEC and DCM were all insured under a construction wrap up “OCIP” insurance program which prohibited subrogation actions between the three aforementioned co-insureds. However, when the excess carrier in the OCIP program AIG disclaimed coverage, the manager brought a third-party claim against DCM for common-law and contractual indemnification, on the theory that in the absence of excess coverage the anti-subrogation provision did not apply. NYT/AMEC also commenced a declaratory judgment action against AIG.
During the damages trial in the main action, a Confidential Settlement Agreement” was made between the plaintiffs and NYTB and AMEC for a total of $12 million. Of this amount, $2 million would be paid by the primary carrier (Travelers) and $10 million would be paid by a letter of credit “provided for” by NYTB and AMEC.
When the settlement was announced, the attorneys for DCM smelled something fishy. For one thing, it was unclear who was funding the letter of credit. DCM seemed to immediately comprehend that if the letter of credit was funded by AIG that the third-party action might be barred by the anti-subrogation doctrine as well as the anti-subrogation provision in the OCIP. DCM moved to compel disclosure of the settlement documents and AMEC/NYTB cross-moved to for a protective order. After the judge Jane Solomon reviewed the settlement documents AMEC/NYTB was ordered to turn them over.
It turned out that the terms of the settlement agreement provided that AIG would fund the letter of credit, that AMEC/NYTB would dismiss the declaratory judgment action with prejudice, that AMEC/NYTB would assign AIG its claims against DCM in the third-party action, and that the settlement was without prejudice to AIG's disclaimer of coverage with respect to DCM.
Based on this disclosure the trial court dismissed the third-party action based on the waiver of subrogation provision in the OCIP.
The matter went up on appeal. AMEC/NYTB argued that AIG had not rescinded its disclaimer, and nothing in the settlement agreement implied otherwise.
If the reader is surprised that AMEC/NYTB took such a position in the first place, let alone took an appeal, it might also come as a surprise that AMEC/NYTB appealed the trial judge’s order disclosing the terms of the settlement agreement.
"It is not surprising that the First Department affirmed Judge Solomon’s decision. The settlement agreement clearly smacked of self-dealing. In fact, the First Department went so far as stating that “[w]e believe that counsel's continued prosecution of the third-party action against DCM after AMEC/NYTB entered into the settlement agreements raises substantial questions under the Code of Professional Responsibility.” It also stated that the attempt to prevent the disclosure “cannot be viewed as anything but a clear attempt to perpetrate a fraud on the court.” Osowski, 2009 WL 3200042 at *5.
It thus should have been a simple matter for the First Department. A fairly straight forward affirmance. However, instead of simply affirming the trial court’s finding that AIG’s funding of the settlement constituted a revocation of the disclaimer, thereby triggering the applicability of the anti-subrogation provision, the Court went on to do violence to the ancient law underpinning claims for indemnification. The Court stated:
"…the question…who funded the settlement of the main action [is] critical to whether AMEC/NYTB could continue to maintain the third-party action. In other words, if AMEC/NYTB's alleged losses were not “out-of-pocket,” no suit could be maintained for common-law or contractual indemnification, either by AMEC/NYTB or by AIG as its assignee." Osowski, 2009 WL 3200042 at *4.
Further the court held:
In funding the $10 million for the letter of credit, AIG effectively paid on the policy on which it had disclaimed. As a result, it foreclosed any claims AMEC/NYTB could have pursued against DCM in any third-party action because AMEC/NYTB were not out of pocket in connection with the settlement. Thus, AMEC/NYTB had no claims left to pursue or to assign to any other party, least of all to AIG since the effective payment on the policy triggered the waiver of subrogation clause. Osowski, 2009 WL 3200042 at *5.
The First Department here, seems to be announcing a new and somewhat revolutionary concept: that a party does not have a claim for contractual indemnification in the absence of out-of-pocket damages. It remains to be seen whether this pronouncement will be roundly ignored, reversed by the Court of Appeals or subsequently adopted. In the meantime, this blawger is armed with yet another reason to deny on behalf of my clients, demands for contractual indemnification.
--- N.Y.S.2d ----, 2009 WL 3200042
N.Y.A.D. 1 Dept.,2009.
In a case filled with insurance company intrigue and recriminations the First Department issued an eminently reasonable decision, but once again, saw fit to throw the bar another unnecessary head scratcher from left field. As you may recall, I wrote in a NYLJ piece from October 6, 2006, the First Department stated that affirmative defenses which were not complete defenses to an action, such as offsets, comparative negligence and Article 16, were actually counterclaims and suggested they could be dismissed as improperly plead if labeled affirmative defenses!! See
http://www.gordon-silber.com/pdf/7-13-09-NYLJ-1st-Dept-Decisions-in-Conflict-Over-Other-Insurance-Provisions-Jon-Lichtenstein.pdf
Now the Court claims that in order to be able to plead a valid claim for common law or contractual indemnification, you need to be able to show “out of pocket” damages. While “out of pocket” damages has been held to define the scope of damages that may be recovered in a breach of contract to procure insurance cause of action (see Inchaustegui v. 666 5th Avenue, 96 N.Y.2d 111, 725 N.Y.S.2d 627 (2001), I am aware of no prior suggestion that out of pocket damages is a necessary element to a claim for indemnification. Not surprisingly, the First Department did not cite to any authority for its pronouncement. Osowski, 2009 WL 3200042 at *4.
The decision written by Judge James Catterson and joined unanimously by judges David B. Saxe, James M. Mcguire, Karla Moskowitz, and Rolando T. Acosta arose out of a construction accident where the plaintiff lost his left leg and multiples toes from his right foot when a four-ton steel beam fell on him while he was unloading a truck.
Plaintiff brought a claim against the owner of the project (“NYT”) as well as the construction manager (“AMEC”). The plaintiff was employed by the steel erectors (“DCM”). The NYT/AMEC and DCM were all insured under a construction wrap up “OCIP” insurance program which prohibited subrogation actions between the three aforementioned co-insureds. However, when the excess carrier in the OCIP program AIG disclaimed coverage, the manager brought a third-party claim against DCM for common-law and contractual indemnification, on the theory that in the absence of excess coverage the anti-subrogation provision did not apply. NYT/AMEC also commenced a declaratory judgment action against AIG.
During the damages trial in the main action, a Confidential Settlement Agreement” was made between the plaintiffs and NYTB and AMEC for a total of $12 million. Of this amount, $2 million would be paid by the primary carrier (Travelers) and $10 million would be paid by a letter of credit “provided for” by NYTB and AMEC.
When the settlement was announced, the attorneys for DCM smelled something fishy. For one thing, it was unclear who was funding the letter of credit. DCM seemed to immediately comprehend that if the letter of credit was funded by AIG that the third-party action might be barred by the anti-subrogation doctrine as well as the anti-subrogation provision in the OCIP. DCM moved to compel disclosure of the settlement documents and AMEC/NYTB cross-moved to for a protective order. After the judge Jane Solomon reviewed the settlement documents AMEC/NYTB was ordered to turn them over.
It turned out that the terms of the settlement agreement provided that AIG would fund the letter of credit, that AMEC/NYTB would dismiss the declaratory judgment action with prejudice, that AMEC/NYTB would assign AIG its claims against DCM in the third-party action, and that the settlement was without prejudice to AIG's disclaimer of coverage with respect to DCM.
Based on this disclosure the trial court dismissed the third-party action based on the waiver of subrogation provision in the OCIP.
The matter went up on appeal. AMEC/NYTB argued that AIG had not rescinded its disclaimer, and nothing in the settlement agreement implied otherwise.
If the reader is surprised that AMEC/NYTB took such a position in the first place, let alone took an appeal, it might also come as a surprise that AMEC/NYTB appealed the trial judge’s order disclosing the terms of the settlement agreement.
"It is not surprising that the First Department affirmed Judge Solomon’s decision. The settlement agreement clearly smacked of self-dealing. In fact, the First Department went so far as stating that “[w]e believe that counsel's continued prosecution of the third-party action against DCM after AMEC/NYTB entered into the settlement agreements raises substantial questions under the Code of Professional Responsibility.” It also stated that the attempt to prevent the disclosure “cannot be viewed as anything but a clear attempt to perpetrate a fraud on the court.” Osowski, 2009 WL 3200042 at *5.
It thus should have been a simple matter for the First Department. A fairly straight forward affirmance. However, instead of simply affirming the trial court’s finding that AIG’s funding of the settlement constituted a revocation of the disclaimer, thereby triggering the applicability of the anti-subrogation provision, the Court went on to do violence to the ancient law underpinning claims for indemnification. The Court stated:
"…the question…who funded the settlement of the main action [is] critical to whether AMEC/NYTB could continue to maintain the third-party action. In other words, if AMEC/NYTB's alleged losses were not “out-of-pocket,” no suit could be maintained for common-law or contractual indemnification, either by AMEC/NYTB or by AIG as its assignee." Osowski, 2009 WL 3200042 at *4.
Further the court held:
In funding the $10 million for the letter of credit, AIG effectively paid on the policy on which it had disclaimed. As a result, it foreclosed any claims AMEC/NYTB could have pursued against DCM in any third-party action because AMEC/NYTB were not out of pocket in connection with the settlement. Thus, AMEC/NYTB had no claims left to pursue or to assign to any other party, least of all to AIG since the effective payment on the policy triggered the waiver of subrogation clause. Osowski, 2009 WL 3200042 at *5.
The First Department here, seems to be announcing a new and somewhat revolutionary concept: that a party does not have a claim for contractual indemnification in the absence of out-of-pocket damages. It remains to be seen whether this pronouncement will be roundly ignored, reversed by the Court of Appeals or subsequently adopted. In the meantime, this blawger is armed with yet another reason to deny on behalf of my clients, demands for contractual indemnification.
Tuesday, October 20, 2009
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.
--- 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.
Wednesday, October 7, 2009
Addendum to Last Post Involving P.J.P. Mechanical Corp. v. Commerce and Industry Ins. Co.
The day after my article was published in the NYLJ, the attorney for P.J.P. Mechanical Corp., Arthur Semetis called me. He told me that the article was right on the money. Notably, he stated that the only substantive defense raised by the general contractor against his client with respect to its invoice for $650,000 was PJP's negligence, thus clarifying that the sole issue in the case was the insured's negligence and not other issues relating to contract.
He likewise was mystified by the Court's comment that he should have moved to dismiss the offset affirmative defense early in the case in order to force the issue to be brought as a counterclaim. Despite his close involvement, he also had no clue as to what theory he could have utilized to have the defense dismissed. He agreed with me that presumably the Court believed such a defense was improperly plead and was really a counterclaim.
Mr. Semetis stated that his client was considering seeking leave to appeal to the Court of Appeals. The $930,000 settlement was reflective of the additional costs of being forced to fire PJP's subcontractor and hire a new one. Nice job Artie!
He likewise was mystified by the Court's comment that he should have moved to dismiss the offset affirmative defense early in the case in order to force the issue to be brought as a counterclaim. Despite his close involvement, he also had no clue as to what theory he could have utilized to have the defense dismissed. He agreed with me that presumably the Court believed such a defense was improperly plead and was really a counterclaim.
Mr. Semetis stated that his client was considering seeking leave to appeal to the Court of Appeals. The $930,000 settlement was reflective of the additional costs of being forced to fire PJP's subcontractor and hire a new one. Nice job Artie!
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