Insurance Coverage Committee Case Review

New York State Bar Association Insurance Coverage Committee’s Fall Review of the Issues and Cases that Shape New York Insurance Coverage Law

In the ever-changing and evolving world of New York coverage law, the Insurance Coverage Committee will keep you informed of the decisions and trends that affect your practice with its quarterly newsletter.

If you have an item you would like to contribute to our next issue, please contact editor Joanna  Roberto at jroberto@goldbergsegalla.com or co-editor Alan C. Eagle, alan.eagle@rivkin.com.

NEW YORK SUPREME COURTS

No Coverage For Construction Manager That Did Not Have Written Contract With Insured Providing It Would Be Named An Additional Insured

A project’s construction manager was sued in a personal injury action allegedly arising from the project.  The manager sought coverage as an additional insured under an insurance policy that had been issued to a subcontractor which had been hired to perform steel work on the project.  The court observed that, for the manager to qualify as an additional insured, the subcontractor must have agreed in writing with the manager to add it as an additional insured on the policy, but the court found that no such agreement existed.  The court ruled that, contrary to the manager’s contention, the contract between the general contractor and subcontractor was not such an agreement because the manager was not a party to it.  Skanska USA Bldg Inc. v. Burlington Ins. Co., 2010 N.Y. Slip Op. 31954(U) (Sup. Ct. N.Y. Co. July 15, 2010)

Spoilage And Resulting Loss Of Income Allegedly Due To Blackout Are Not Recoverable Under Equipment Breakdown Insurance Policy

An insured fruit and vegetable store in New York City asserted claims under its “equipment breakdown” insurance policy.  The insurer acknowledged that coverage existed for damage to the insured’s refrigeration units and other systems caused by a power surge.  However, the repair of the equipment was halted by an unrelated power outage at the premises, and the insurer denied coverage for the spoilage and loss of income resulting from the power outage.  The court sustained the denial, explaining that coverage required an “accident” to covered equipment, and the policy excluded “tripping off line” from the definition of accident.  The court found that the electric company’s equipment had “tripped off line” as a result of its automatic relay protection systems responding to a grid disturbance.  Accordingly, the court ruled that the insured was not entitled to coverage for spoilage and loss of income.  Fruit & Vegetable Supreme, Inc. v. The Hartford Steam Boiler Inspection & Ins. Co., 2010 N.Y. Slip Op. 20267 (Sup. Ct. Kings Co., July 7, 2010).

Court Upholds One-Year Time Limit For Suit Against Homeowners Insurer

A homeowner brought suit on March 26, 2010 to recover benefits under a homeowners insurance policy with respect to an alleged theft from her home on January 5, 2007.  The insurer maintained that the action was time barred because it had not been brought within one year as required by the policy.  In finding for the insurer, the court explained that the parties to an insurance contract may agree to a “shorter limitations period than that proscribed by law,” and that a “12-month limitations period in a policy has been found to be reasonable, valid and enforceable.”  The court rejected the homeowner’s contention that the insurer had misled her into delaying institution of her suit.  The court also rejected the homeowner’s contention that her bad faith claim survived.  Schindler v. Travelers Companies, Inc., No. 103947-2010 (Sup. Ct. N.Y. Co. Aug. 12, 2010).

Allegations Sufficient To Find Obligation To Defend Additional Insured Under “Caused By” Provision

An employee of Metal Sales Company, Inc., who was working on the construction of the Manhattan Family Court building, brought a personal injury suit against the project’s general contractor, which then brought a third-party action against Metal Sales and W&W Glass Systems, Inc.  The general contractor alleged that, in the event the general contractor was held liable for the injuries to the Metal Sales employee, such liability was caused by the negligence of W&W and/or Metal Sales, rendering these third party defendants liable to the general contractor.  The insurance policy obtained by Metal Sales included an additional insured endorsement providing coverage “with respect to liability caused by your ongoing operations performed for that insured.”  W&W claimed to be an additional insured under the endorsement.  The court held that the allegations of the third-party complaint were sufficient to trigger the insurer’s duty to defend W&W.  W&W Glass Sys., Inc. v. Admiral Ins. Co., 2010 N.Y. Slip Op. 32120(U) (Sup. Ct. N.Y. Co. July 29, 2010).

Court Finds Additional Insured Coverage Under Policy of Claimant’s Employer

An electrician alleged that he was injured when he tripped while exiting the restroom at a construction project.  He brought suit against the general contractor which sought coverage as an additional insured under the general liability policy of the electrician’s employer.  The policy provided additional insured coverage where required by contract for liability arising out of the employer’s work.  The court noted that its “earlier decision, saying that the provision in the purchase order regarding contractual indemnification is void against public policy, is not determinative of the validity and enforceability of the insurance procurement provision.”  The court held that the claimant’s injury arose out of the employer’s work on the project and, therefore, the general contractor qualified as an additional insured.  Lehr Constr. Co. v. Continental Cas. Co., 2010 N.Y. Slip Op. 32165(U) (Sup. Ct. N.Y. Co. Aug. 13, 2010).

In-House Counsel May Invoke Attorney-Client Privilege In Medical Doctor’s Suit Seeking Payment Of Disability Claims

Before his medical license was revoked, a medical doctor filed disability claims with a number of insurance carriers.  The insurers denied the claims and the doctor filed suit.  He deposed the in-house counsel for one of the insurers and objected when the outside law firm representing the insurer invoked the attorney-client privilege.  The doctor contended that the attorney waived the privilege by answering some of the questions posed to him.  The court rejected that argument, explaining that a blanket invocation of the privilege would have been improper and the insurer was “required to invoke it question by question.”  The court also rejected the doctor’s assertion that the in-house counsel was working as a non-lawyer, finding that, viewing the lawyer’s role in the case and judging by his sworn testimony, he had “been consulted and provided services as an attorney, not as a non-attorney.”  Desai v. Provident Mut. Life Ins. Co. of Phila., 2010 N.Y. Slip Op. 32058(U) (Sup. Ct. N.Y. Co. Aug. 2, 2010).

NEW YORK DISTRICT COURTS

OPMC Created Materials Not Subject To Disclosure In Fraud Cases Filed Against Doctor By Various Insurers

These are two separate cases in which insurers sought orders directing the defendant physician to produce documents created by the NY Office of Professional Medical Conduct (OPMC) in its investigation of him.  The court stated PHL § 230(10)(a)(v) provides OPMC’s “files relating to misconduct shall be confidential and not subject to disclosure at the request of any person.”  The fact the insurers sought the materials from the doctor rather than OPMC does not affect the enforceability of the protection from disclosure of OMPC created materials. Allstate Insurance Company v. Liguori and State Farm Mutual Automobile Insurance Company v. Liguori (E.D.N.Y., June 24, 2010)

Allegations Of Fraud Do Not Serve To Reform An Agreement

The plaintiff had filed personal injury suit. The defendant was insured by an insurer in liquidation.  The plaintiff obtained a judgment of $900,000, and then, rather than wait, plaintiff entered into an agreement with the defendant.  The defendant paid the plaintiff $67,000 and plaintiff assigned it all of his “rights, title and interest” to a claim against the insurer in liquidation. Thereafter, the plaintiff learned that the defendant received the interest payments on the $900,000. The plaintiff alleged fraud in that it did not assign his rights to interest.  The court held that there was no fraud but only a better deal for the defendant than the plaintiff, and as such, it would not reform the agreement.  O’Brien v Argo Partners, Inc (E.D.N.Y., August 23, 2010)

Appellate Division, First Department

Four-Month Delay In Disclaiming For Failure To Notify “As Soon As Practicable” Deemed Unreasonable

An electrical contractor obtained liability coverage naming a construction manager as an additional insured.  An employee of the contractor allegedly was injured at the construction site in March 2007 and brought suit against the manager on November 21, 2007; the manager notified the insurer on January 7, 2008.  On January 25, 2008, the insurer stated it would investigate whether the manager was covered and whether the notice was timely.  The insurer disclaimed coverage on May 8, and the manager brought suit.  The court explained that the insurer’s contention that the manager had not notified it “as soon as practicable” would have been apparent upon examination of the manager’s January 7, 2008 tender.  Accordingly, it concluded, the insurer’s four-month delay in disclaiming on this ground was unreasonable as a matter of law pursuant to §3420(d) of the New York Insurance Law.  Hunter Roberts Constr. Group, LLC v. Arch Ins. Co., 2010 N.Y. Slip Op. 05861 (1st Dep’t, July 1, 2010)

Appellate Division, Second Department

Homeowner’s Policy Deemed “Ambiguous” As To Limitations Period For Actions Seeking Additional Living Expenses

After a fire in the insured’s home rendered it uninhabitable, the insurer reimbursed the insured for some, but not all, of her claims for additional living expenses, and she filed suit to collect the balance.  The insurer contended that the action was time barred because it had not been filed within two years “after the loss.”  The court ruled that the term “loss” was ambiguous as to the applicable limitations period respecting actions seeking additional living expenses.  Accordingly, the court found the insured’s action was not time barred.  Villa v. Sterling Ins. Co., 2010 N.Y. Slip Op. 20284 (2d Dep’t, July 16, 2010).

Employee Exclusion Bars Coverage for Additional Insured

The owner of premises filed suit against its lessee’s insurer, seeking additional insured coverage. Although the owner qualified as an additional insured under the policy, the court held that the employee exclusion barred coverage inasmuch as the claimant was employed by the owner when the accident occurred. Howard & Norman Baker, Ltd. v. American Safety Cas. Ins. Co. (2nd Dept., July 13, 2010)

Policy of Vehicle Involved in Accident Higher Priority than Policy of Accident Victim

A school bus passenger was injured when an uninsured motorist struck the school bus. The court compared the “other insurance” clauses of the passenger’s and school bus company’s policies and found that the “other insurance” clause of the school bus company’s policy was inapplicable because it did not address a situation where the insured under another policy was injured while a passenger on the school bus. Thus, the court concluded that the school bus company’s policy responded to the loss first. In the Matter of State Farm Mut. Auto. Ins. Co. v. Thomas (N.Y.A.D. 2nd Dept., July 27, 2010).

Assignor’s Failure To Timely File Claim With MVAIC Dooms Its Action

After a health care provider brought suit against the Motor Vehicle Accident Indemnification Corp. (MVAIC) to recover assigned first-party no-fault benefits, MVAIC moved for summary judgment on the ground that there was no coverage due to the failure of the provider or its assignor to file a timely notice of claim.  The court explained that the filing of a timely affidavit providing MVAIC with notice of intention to file a claim was a condition precedent to the right to payment from it.  Because the submissions in support of MVAIC’s summary judgment motion showed that the provider’s assignor had failed to timely file a notice of claim, and given that the provider failed to demonstrate that its assignor had sought leave to file a late notice of claim, MVAIC was entitled to summary judgment, the court concluded.  Central Radiology Servs., P.C. v. MVAIC, 2010 N.Y. Slip Op. 51454(U) (2d Dep’t App. Term. Aug. 12, 2010).

Appellate Division, Third Department

Parked Truck Was Being “Used” To Transport Sheet Metal That Allegedly Cut Insured

An employee returning to work after taking a break in her employer’s parking lot allegedly was injured when she walked into a piece of sheet metal extending beyond the tailgate of a co-worker’s parked truck, which the co-worker had planned to deliver to a junkyard after work.  Thereafter, the employee demanded arbitration as a named insured under her insurance policy’s supplemental underinsured motorists provisions.  The insurer contended that the woman’s injuries did not arise out of the “ownership, maintenance or use” of the co-worker’s truck, and it asked the court to stay the arbitration. The court ruled that although the truck was not being operated at the time of the accident, it was being “used” by the co-worker to transport the sheet metal to the junkyard after work. The court denied the application to stay arbitration, concluding that the employee’s claim fell within the scope of the insurance policy.  Matter of Liberty Mut. Fire Ins. Co. v. Malatino, 2010 N.Y. Slip Op. 06204 (3rd Dep’t July 22, 2010).

Appellate Division, Fourth Department

Insurer Directed To Produce Investigative File In Suit Alleging Fraudulent Settlement

The plaintiff was injured when he fell at work. The insurer’s investigator visited plaintiff, settled case and obtained a signed release. The plaintiff later alleged the release was obtained by fraud and fraudulent misrepresentations and filed a motion to obtain all claim files. The appellate court held plaintiff was entitled to insurance documents from date of accident until date release signed subject to court’s in camera review. Litvinov v. Foy and New York Central Mutual Insurance Company (4th Dept., June 18, 2010).

United States Court of Appeals, Second Cercuit

Statute of Limitations for Fraud Triggered by “Storm Warnings”

A reinsurer alleged fraudulent inducement, asserting the cedent misled it into believing the reinsurance facilities operated on a facultative obligatory basis, while the cedent treated them as purely facultative and off-loaded bad risks on reinsurers. The jury found fraud and awarded over $34 million in damages.  The 2nd Circuit, however, held there were sufficient “storm warnings” to place the reinsurer on notice of fraud long before suit was filed and, thus, the action was barred by statute of limitations. The court vacated the award and remained the matter to the trial court to enter judgment in favor of defendants. AXA Versicherung v. New Hampshire Ins. Co. (2nd Cir.(N.Y.), August 23, 2010).

Article of Interest

New York's Appellate Division First Department Continues to March to the beat of its Own Drummer When it Comes to the Timely Disclaimer Requirements in "Insurer Versus Insurer" Situations. 

A recent body of case law in the Appellate Division, First Department has held that the timely disclaimer rules under Insurance Law §3420(d) do not apply to claims between primary insurers in the contribution context.  The First Department has recently extended that ruling to all claims between insurers in a case by an excess insurer against a primary insurer.

The First Department’s insurer vs. insurer exception initially arose in a series of cases involving additional insured tenders submitted by one carrier to another.  This was exemplified by the decision in Sixty Sutton Corp. v. Illinois Union Insurance Co., 34 A.D.3d 386, 825 N.Y.S.2d 46 (1st Dep’t 2006), where Illinois Union, which insured the general contractor Tower Building and was defending it against a construction accident claim, submitted the claim to Utica First Insurance Co., insurer of the injured worker’s employer, Jerez Renovations.  Illinois Union sought additional insured coverage from Utica for Tower based on the provisions of the contract between Tower and Jerez.  When Utica rejected Illinois Union’s tender based on a policy exclusion, Illinois Union sued alleging that Utica’s disclaimer was invalid because it was untimely under 3420(d).  The court rejected that argument holding that “because Illinois was requesting defense and indemnification from a co-insurer, the requirements of § 3420(d) are inapplicable.”  825 N.Y.S.2d at 48.

In Sixty Sutton, the Court cited to its prior decision in AIU Insurance Co. v. Investors Insurance Co., 17 A.D.3d 259, 793 N.Y.S.2d 412 (1st Dep’t 2005), in which this court also held § 3420(d) inapplicable to a tender between co-insurers because “the purpose of Insurance Law § 3420(d) is to protect the insured, the injured person, ‘and any other interested party who has a real stake in the outcome’ from the prejudice resulting from a belated denial of coverage.”  793 N.Y.S.2d at 413.  In AIU, the court noted that the tendering carrier, AIU, had received timely notice, had fully investigated the matter, and had undertaken the defense of its insured for four years.  Under such circumstances, the Court concluded that AIU “has not been prejudiced by any late disclaimer by Investors.”  Id.

In Bovis Lend Lease LMB, Inc. v. Royal Surplus Lines Insurance Company, 27 A.D.3d 84, 806 N.Y.S.2d 53 (1st Dep’t 2005), the Court held that the same rule applied even where the carrier tendering for additional insured coverage seeks primary and non-contributing insurance from the other insurer rather than merely co-insurance.  In that case, National Union tendered a construction accident claim on behalf of its insured, Bovis, to Royal seeking additional insured coverage under Royal’s policy issued to the injured plaintiff’s employer, Millennium.  Royal issued an untimely disclaimer of coverage to National Union based on a policy exclusion.  Nevertheless, the court held that the strict time requirements of § 3420(d) did not apply because National Union was not “within the zone of interest which the statutory requirement of notice to the injured parties seeks to protect.”  806 N.Y.S.2d at 60.  The Court further noted that National Union suffered no prejudice by virtue of Royal’s delay in disclaiming coverage since “National Union apparently has been providing the defense of the underlying action for nearly three years.”  Id.  The court did note in Bovis, however, that Royal’s untimely disclaimer was invalid as against National Union’s insured, Bovis, and therefore Bovis itself was entitled to coverage under Royal’s policy.  806 N.Y.S.2d at 58.

More recently, in J.T. Magen v. Hartford Fire Insurance Co., 64 A.D.3d 266, 879 N.Y.S.2d 100 (1st Dep’t 2009), the Court reiterated its holding in Bovis that the insurer making the tender for additional insured coverage was not entitled to the benefit of the strict time requirements of § 3420(d) but that the insured itself was.  Thus, while J.T. Magen’s additional insured tender to defendant Hartford had been made by its own carrier, Travelers, and Hartford’s untimely disclaimer had been sent to Travelers, the First Department held that J.T. Magen itself was entitled to coverage under the Hartford policy due to the untimeliness of Hartford’s late notice disclaimer.  In so holding, the Court noted that no claim was being asserted against Hartford by Travelers itself to recover previously expended defense costs in the action.

Prior to these recent First Department decisions, there was only one other New York case to ever directly address the insurer vs. insurer issue.  This was a 1999 decision by the Appellate Division, Fourth Department which similarly held that the timely disclaimer rules did not apply to a claim by one insurer against another seeking contribution.  See Tops Markets, Inc. v. Maryland Casualty, 267 A.D.2d 999, 700 N.Y.S.2d 325 (4th Dep’t 1999).  However, until recently, this Fourth Department decision was virtually unknown and had not been followed by any other court.

Most recently, the First Department extended the insurer vs. insurer exception beyond the contribution scenario and held it applicable to all cases involving disputes between insurers.  Thus, in American Guarantee & Liability Ins. Co. v. State National Ins. Co., 67 A.D.3d 488, 887 N.Y.S.2d 842 (1st Dep’t 2009), the primary carrier State National issued an untimely disclaimer to the insured under an exclusion not contained in American Guarantee’s umbrella policy.  In light of State National’s disclaimer, American Guarantee was required to drop down as primary insurance under Coverage B of its policy.  After settling the claim for $2,100,000, American Guarantee filed suit against State National seeking to recover the $1 million primary limits based on the untimeliness of State National’s disclaimer.  The lower court dismissed American Guarantee’s action based on the insurer vs. insurer exception to the timely disclaimer requirements.  American Guarantee appealed, and the Appellate Division, First Department affirmed, stating that the lower court had “properly found that the protections of Insurance Law §3420[d] were inapplicable to one insurer’s claim for reimbursement from another insurer.”  No further appellate review was sought, and thus, the decision stands. 

In determining strategy, it is important to keep in mind that the First Department’s insurer exception does not affect the insured’s right to enforce the Insurance Law’s timely disclaimer requirements.

S. Dwight Stephens
MELITO & ADOLFSEN P.C.
233 Broadway – 28th Flr.
New York, NY  10279
212-238-8900