Even Baseless Allegations Trigger Duty to Defend

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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).

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).

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.

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.