Follow up to Recent Blog - Iacobellis v. A-1 Tool Rental - Counsel Cannot Withdraw as Counsel Where if Status of Coverage is Unclear

Agostino Iacobellis, plaintiff, v. A-1 Tool Rental, Inc., et al., --- N.Y.S.2d ----, 2009 WL 2884726N.Y.A.D. 2 Dept., September 11, 2009.

On September 11, 2009, I blawged about the Agostino v. A-1 Tool Rental case which denied Wilson Elser Moskowitz Edelman & Dicker, LLP's motion to withdraw as counsel on the grounds that such motions are "poor vehicles" to determine coverage issues. Given that it has been the settled law of New York for 40 years that insurance disputes cannot be settled in the context of a motion to withdraw (Brothers v. Burt, 27 N.Y.2d 905, 265 N.E.2d 922 (N.Y. 1970)),it seemed reasonable to assume that Wilson Elser was seeking to withdraw because it was not being paid, an appropriate basis to withdraw as counsel, regardless of whether an insurance dispute is at the foundation of the nonpayment. Galvano v. Valvano, 193 A.D.2d 779, 598 N.Y.S.2d 268 (2d Dep't 1993). In fact, the First Department in Dillon v. Otis Elevator, Inc., 22 A.D.3d 1,4, 800 N.Y.S.2d 385, 387 (1st Dep't 2005) explicitly held that where there is an independent ground to withdraw, it is an insufficient defense to the motion to "merely repeat the refrain that a motion to withdraw is an inappropriate vehicle for testing coverage." Since my blawg, I not only have I confirmed that Wilson Elser was indeed, not being paid, but the firm in addition, claims it submitted evidence to the court that its client had refused to cooperate with its defense and moreover, that the client had sent a letter declaring it did not want Wilson Elser to represent them.

What is going on here?!

New Decision Substantially Limits Insurance Carrier's Ability to Disclaim Duty to Defend

Agostino Iacobellis, plaintiff, v. A-1 Tool Rental, Inc., et al., --- N.Y.S.2d ----, 2009 WL 2884726N.Y.A.D. 2 Dept., September 11, 2009.

What's a defense counsel to do when the carrier who assigned it a case disclaims a duty to defend and ceases paying the attorney's bills? The lawfirm of Wilson Elser Moskowitz Edelman & Dicker, LLP (hereinafter Wilson Elser), did what any defense lawyer would do facing the prospect of not getting paid...it moved to withdraw as counsel. The Supreme Court granted Wilson Elser's motion, a not unexpected result.

The Second Department however reversed in a short decision which may leave defense counsel and liability carriers scratching their heads, and at least a little worried. The Court stated that "[t]he motion of Wilson Elser was a “poor vehicle” to test the propriety of the disclaimer of coverage and withdrawal of defense.... (citing Brothers v. Burt, 27 N.Y.2d 905, 906; see Seye v. Sibbio, 33 AD3d 608; Garcia v. Zito, 242 A.D.2d 258; Pryer v. DeMatteis Orgs., 259 A.D.2d 476). Rather, the Court indicated that the issue of coverage should be decided in a declaratory judgment action (citing Seye v. Sibbio, 33 AD3d 608; Garcia v. Zito, 242 A.D.2d 258; Pryer v. DeMatteis Orgs., 259 A.D.2d 476; Laura Accessories v. A.P.A. Warehouses, 140 A.D.2d 182; Monaghan v. Meade, 91 A.D.2d 1014).

Although the Court was right about a declaratory judgment action being a better forum to determine coverage issues, in the opinion of this blawger, the Second Department nevertheless got it wrong. An attorney's right to receive payment for his services is distinct from the rights between the carrier and its insured. How can an attorney be forced to provide uncompensated services until a declaratory judgment is resolved? This would make defense counsel a necessary party to the declaratory judgment action in order to collect its legal fees. Since when are defense counsel ever named as even nominal parties to a declaratory judgment action? Why should Wilson Elser will be forced to finance the underlying litigation which appears to involve a construction accident? Moreover, this ruling will pit Wilson Elser against the carrier that sent it the case.

This decision will likely have unintended consequences. Unless they are willing to alienate their defense counsel, this decision will force carriers to make determinations of coverage without adequate investigation. This may lead to more disclaimers, not less. It also will likely lead to an increase in carrier initiated declaratory judgment actions as this would be the only way a carrier could extricate itself from defending a case once counsel was assigned.

Erie Supreme Court Fumbles Coverage Decision - Reversal Seemingly Imminent

McCabe v. St. Paul Fire and Marine Ins. Co.
--- N.Y.S.2d ----, 2009 WL 2516860
(N.Y.Sup., August 19, 2009).
Supreme Court, Erie County, New York.

This Erie County Supreme Court case provides an interesting discussion on the applicability of Insurance Law 3420(a) and 3420(d)to a malpractice claims-made policy, but, after laboring to break into the open field, the court fumbles at the goal line, setting itself up for a reversal by the Fourth Department.

The case arose out of a fire that destroyed the plaintiffs’ home. They retained attorney David E. Fretz (“Fretz”) to handle their claim under their homeowners policy. Due to severe depression Fretz allowed the plaintiffs’ claim to lapse. Plaintiff wrote Fretz a letter in January 2007 complaining of his failure to return calls, noting the closure of their case due to his negligence. The letter stated that plaintiffs intended to notify the Attorney Grievance Committee and that “[w]ith or without you we are going forward”. An issue in the case was whether this constituted a "claim" within the policy period.

Thereafter in March 2007 plaintiffs commenced a legal malpractice action against Fretz, after their attorney made several unsuccessful attempts to communicate with Fretz or convince him to provide notice to his carrier or provide his carrier’s contact information. Fretz also failed to report the claim to his malpractice carrier St. Paul Fire and Marine Insurance Company (St.Paul), which held a $1 million claims-made policy. This lead to a default judgment against him for $700,000.

Plaintiffs obtained a court order directing Fretz to provide his insurance information. On June 22, 2007, after plaintiffs provided St. Paul with notice of the claim, advising St. Paul that the claim had been first presented to Fretz on January 2, 2007, without enclosing a copy of the January 2, 2007 letter.

St. Paul accepted on faith that the January 2007 letter constituted a "claim" under the policy, and disclaimed on the alternative ground that the claim was not reported to St. Paul within the time period allowed under the policy. Several months after St. Paul had answered the DJ complaint, St. Paul issued a supplemental disclaimer that the January 2007 letter did not constitute a “claim” within the policy period. Although never explained, St. Paul presumably argued the letter did not request monetary damages, but merely asserted the intent to file a grievance complaint.

The court acknowledged that timely notice of the claim was not provided to St. Paul under the terms of the policy, and that the disclaimer would have to be upheld unless plaintiffs could establish that notice was timely pursuant to Insurance Law 3424(a), which provides in pertinent part that insurance policies “insuring against liability for injury to person...[must] contain[]… [a] provision that notice given… on behalf of the injured person…shall be deemed notice to the insurer.

Section 3420(a) also provides that late notice provisions in such policies “shall not invalidate any claim made by…an injured person…if it shall be shown not to have been reasonably possible to give such notice within the prescribed time and that notice was given as soon as was reasonably possible thereafter.”

St. Paul argued that 3420(a) had no applicability to the case since it only applied to policies that covered “injury to persons” and thus did not apply to malpractice actions. Although the St. Paul policy excluded claims “[a]rising out of bodily injury ‘or property damage’, it did cover claims for damages that “arise out of error, omission, negligent act or personal injury', in the rendering or failure to render legal services'….”

St. Paul cited to several cases for the proposition that malpractice insurance policies are not subject to the provisions of Insurance Law § 3420(d). Plaintiffs countered that the scope of § 3420(d) was narrower than § 3420(a), and cited to the Fourth Department's decision in Romano v. St. Paul Fire and Marine Ins. Co. (65 A.D.2d 941 [4th Dept 1978], for the proposition that § 3420(a) applied to malpractice insurance.

The court agreed with plaintiffs recognizing that the policy was subject to § 3420(a), since it clearly covered claims of “personal injury,” notwithstanding its exclusion for claims of “bodily injury.” The court correctly noted that in the parlance of insurance coverage “personal injury”, as opposed to "bodily injury", refers to false arrest or imprisonment, malicious prosecution, wrongful eviction, defamation, slander or invasion of privacy. Thus, even though plaintiff’s claim against Fretz was not for “personal injury”, Fretz’s policy provided such coverage and thus, was subject to § 3420(a).

Having determined § 3420(a) was applicable, the court was able to conclude as a matter of law that the plaintiffs had provided timely notice after a lengthy recitation of the efforts undertaken by plaintiffs to give notice.

All that was left for the court to do was determine whether St. Paul’s purported disclaimer based on the absence of a claim during the policy period was valid. Here, the court’s analysis suffers a complete break down.

Notwithstanding spilling a large amount of ink on the issues up to this point, the court’s pen and analysis suddenly goes silent. While St. Paul presumably argued that it should not have been foreclosed from adding a second basis to disclaim since § 3420(d) does not apply to malpractice insurance policies, the court fails to even allude to such an argument and simply ignores that § 3420(d) was not applicable. In the absence of § 3420(d), the only way St. Paul could have lost the right to supplement its disclaimer was through either a finding of common law waiver (intention relinquishment of a known right) or through estoppel. Neither of these is addressed by the court.

The court also ignored St. Paul’s reliance on the well settled doctrine that waiver cannot create insurance coverage that never existed. This seems pretty straight forward. If there was no claim during the policy period, coverage would never have been triggered in the first instance. If the policy never covered the claim, then waiver could not have created such coverage. Instead of addressing either of these arguments, the court incredibly, merely concluded its decision with the statement “St. Paul's belated attempt to supplement its disclaimer…cannot avail for obvious reasons, both procedural and substantive.”

I would ask that if anyone out in the blogosphere can discern what these “obvious reasons” are, to please leave a comment to enlighten the rest of us.

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 Discusses Scope of Arising Out Of Lanaguage In Additional Insured Endorsement

Regal Const. Corp. v. National Union Fire Ins. Co. of Pittsburgh
--- N.Y.S.2d ----, 2009 WL 2015419
N.Y.A.D. 1 Dept.,2009.
This First Department case nicely illustrated the breadth of the language in additional insured endorsements requiring that the property or bodily injury claim “arise out of” the work of the named insured for the additional insured. In Regal, the plaintiff, an employee of the general contractor (“GC”), slipped on plywood that he claimed was recently painted by an employee of the construction manager (“CM”). The CM sought additional insured coverage from the GC’s carrier, who took over the defense under a reservation of rights, but then instituted a declaratory judgment action seeking to disclaim on the grounds that the injury did not arise out of the work of the GC, since the complaint alleged the CM was negligent. Not surprisingly, the complaint did not allege any negligence against the employer GC.

The First Department held for the CM and its carrier, finding that notwithstanding the specific allegations of the complaint, the accident arose out of the work of the GC. To support its conclusion the Court noted that the GC “had responsibilities that encompassed all of the demolition and construction work to be done.” It noted that the plaintiff had “testified that it would have been [the GC’s] responsibility to paint the floor…if instructed to do so by [the CM].” Therefore, the Court found a causal connection between the injury and the GC’s work as the prime contractor, the risk for which coverage was provided.

The Court distinguished the the Court of Appeals’ decision in Worth Constr. Co., Inc. v. Admiral Ins. Co. (10 NY3d 411 [2008]), relied upon by the dissent, where involved a plaintiff who was injured on a staircase that had been erected by the defendant’s insured. The Court found that the defendant’s policy did not provide additional insured coverage, because the injury was due to the alleged negligence of another contractor who had applied fireproofing to the stairs. The Court held that the staircase was “merely the situs of the accident,” and ruled that there was no connection between the accident itself and [staircase erector’s] work. (id. at 416).

First Department Decisions In Conflict Over "Other Insurance" Provisions

Sport Rock Intern. Inc. V. American Cas. Co. of Reading PA, __N.Y.S.2d __, 2009 WL 1290266 (1st Dep't May 12, 2009)

Please see my article discussing this case in the July 13, 2009 edition of the New York Law Journal, Outside Counsel feature.

http://www.gordon-silber.com/pdf/7-13-09-NYLJ-1st-Dept-Decisions-in-Conflict-Over-Other-Insurance-Provisions-Jon-Lichtenstein.pdf

Does A Policy For the "Mutual Benefit" of Two Parties Provide Additional Insured Coverage to One?

Kassis v. Ohio Cas. Ins. Co.
--- N.E.2d ----, 2009 WL 1789223 (N.Y.), 2009 N.Y. Slip Op. 05207
In this case, the Court of Appeals addressed the issue whether the provision in a lease requiring a tenant to procure a commercial general liability policy for the “mutual benefit” of the tenant and landlord, was sufficient to allow the landlord to claim additional insured status pursuant to the broad form additional insured endorsement of the policy?

This obviously was not an easy question. After the landlord obtained summary judgment, the Fourth Department reversed with two justices dissenting. The Appellate Division found that the purchase of insurance by the tenant for itself provided a mutual benefit on both the landlord and the tenant, even if the landlord was not an additional insured. If the lease had intended additional insured coverage, it should have so indicated. The Court of Appeals however, in a unanimous decision, reversed the Fourth Department.

It noted that the subject lease provided that the tenant “at its sole cost and expense and for the mutual benefit of Landlord and Tenant, shall maintain a general liability policy ... providing coverage against claims for bodily injury, personal injury and property damage” with specified aggregate and per occurrence coverage amounts.

The Court framed the issue by asking whether the lease required the tenant to ensure the landlord received coverage equivalent to the coverage the tenant enjoyed. The Court of Appeals found that “the natural and intended meaning of the term “mutual benefit” as used in this provision is that [the landlord and the tenant] are intended to enjoy the same level of coverage. The Court found evidence of this in several other insurance related provisions which required either joint or singular coverage. The court found that where coverage for to be joint, it was so noted.

Given the Court’s reliance on other language in the contract to establish the meaning of the term mutual benefit, it is not altogether clear whether the Court was holding that the term “mutual benefit” is now hereinafter the equivalent to the term “shall name an additional insured.” It is assumed that they are now the equivalent, but such might still be challenged where there is some compelling evidence suggesting this was not the intent.