Monday, March 5, 2018

Did You File Your Certification of Compliance with New York State Department of Financial Services Cybersecurity Regulations?

Last Thursday, March 1, 2018, marked the one-year anniversary of the New York State Department of Financial Service's (NYSDFS') promulgation of its trailblazing CYBERSECURITY REQUIREMENTS FOR FINANCIAL SERVICES COMPANIES regulation -- 23 NYCRR Part 500.

As far as I know, large and small insurers alike doing business in New York paid attention and took notice of the regulation's key dates and deadlines:
March 1, 2017 - 23 NYCRR Part 500 becomes effective.  
August 28, 2017 - 180 day transitional period ends. Covered Entities are required to be in compliance with requirements of 23 NYCRR Part 500 unless otherwise specified.  
September 27, 2017 – Initial 30 day period for filing Notices of Exemption under 23 NYCRR 500.19(e) ends. Covered Entities that have determined that they qualify for a limited exemption under 23 NYCRR 500.19(a)-(d) as of August 28, 2017 are required to file a Notice of Exemption on or prior to this date.
February 15, 2018 - Covered Entities are required to submit the first certification under 23 NYCRR 500.17(b) on or prior to this date.  
March 1, 2018 - One year transitional period ends. Covered Entities are required to be in compliance with the requirements of sections 500.04(b), 500.05, 500.09, 500.12 and 500.14(b) of 23 NYCRR Part 500.  
September 3, 2018 - Eighteen month transitional period ends. Covered Entities are required to be in compliance with the requirements of sections 500.06, 500.08, 500.13, 500.14(a) and 500.15 of 23 NYCRR Part 500.  
March 1, 2019 - Two year transitional period ends. Covered Entities are required to be in compliance with the requirements of 23 NYCRR 500.11.
But what about the small-sized licensees of the NYSDFS?  The one- or two-person independent adjusting company or small independent insurance brokerage or agency?  Did they pay attention and comply?

On good authority I understand that late last Friday night the NYSDFS blasted out emails to licensees who had not yet filed their certifications of compliance with the NYSDFS' cybersecurity regulations.  Those who didn't check their work emails over the weekend had quite the not-so-good Monday morning inbox discovery today.

The regulation builds in limited exemptions for certain persons and entities based on size and the type of electronic information collected, processed, maintained, used, shared, disseminated or disposed of, but certain subsections of  Part 500 will apply to all licensees.  For example, for covered entities having fewer than 10 employees and independent contractors or less than $5,000,000 in gross annual revenue in each of the last three fiscal years from New York business operations of the Covered Entity and its Affiliates, only the following subsections of Part 500 apply:
  • 500.03 -- implement and maintain a cybersecurity policy
  • 500.07 -- limit access privileges  to Information Systems that provide access to Nonpublic Information and periodically review such access privileges
  • 500.09 -- conduct periodic risk assessments
  • 500.11 -- implement written policies and procedures for Third Party Service Providers
  • 500.13 -- include within the Covered Entity's cybersecurity program policies and procedures for secure disposal of Nonpublic Information
The regulation is fairly complex.  Many licensees have retained IT companies to assist in complying with certain subsections of the regulation.  Now one year past the effective date of the new regulation, there are plenty of such companies out there claiming to be experienced in doing so.

Passing References Do Not a Covered Claim Make

Carfax, Inc. v. Illinois National Ins. Co.
(1st Dept., 3/1/2018)

Carfax's policy with Illinois National covered loss "resulting from a Claim alleging a Wrongful Act."  The policy defined "Wrongful Act" as "any act, error, omission, ... misstatement or misleading statement by an Insured ... that results solely in ... defamation, libel, slander, product disparagement or trade libel or other tort related to disparagement or harm to character or reputation; including, without limitation, unfair competition" (emphasis added). The policy contained an exclusion from coverage for claims alleging antitrust violations.

Carfax sought coverage for an underlying antitrust lawsuit, contending that Illinois National owed it a defense because the suit alleged disparagement: 
"By contractually committing these two websites to include hyperlinks to Carfax VHRs (vehicle history reports) and to exclude VHRs of any other provider, Carfax has stigmatized any listing without such a link in the eyes of consumers who infer that the absence means that the car has a blemished history."  "Carfax also utilizes its inflated revenues to disparage and falsely malign dealers in order to mislead consumers into believing its VHRs are necessary and accurate."
The Appellate Division, First Department, rejected Carfax's claim that the underlying complaint, by mentioning disparagement, alleged a "wrongful act", triggering coverage:
These passing references to disparagement do not allege a "Wrongful Act." They were made "only in the context of the anti-trust claims, i.e. , as legal jargon pertinent to anti-trust and not as a means of even arguably alleging a separate claim for libel, slander or product disparagement" (see National Union Fire Ins. Co. of Pittsburgh, Pa. v Alticor, Inc. , 2005 WL 2206461, *3, 2005 US Dist LEXIS 29833, *9 [WD Mich 2005], affd 2007 WL 273339, 2007 US App LEXIS 22585 [6th Cir 2007]). In any event, coverage under the policy is barred by the antitrust exclusion, and the exceptions thereto are inapplicable. 
Passing references do not a covered claim or cause of action make. 

Bodily Injuries from Large, White, Environmentally Mobile Cloud of Toxic Chlorine Gas Excluded by Absolute Pollution Exclusion

Ben Weitsman & Son of Scranton, LLC v. Hartford Ins. Co.
(N.D.N.Y., 2/13/2018)

Long decision.  Short outcome.

Plaintiff-insured operated a scrap metal facility.  The failure or rupture of a cylinder or tank on the insured's property allowed a large, white cloud of toxic chlorine gas to escape and drift onto adjoining property where two people working an outdoor Christmas tree lot and three people inside a car were overcome and injured by the gas.  Based on the CGL policies' absolute pollution exclusion and the commercial umbrella liability policies' pollution exclusion Hartford denied coverage both before and again after the claimants brought suit for bodily injuries. 

In GRANTING summary judgment to Hartford, the District Court rejected the insured's arguments that the the polluting event was more analogous to indoor polluting events or ones injuring only a single claimant:
As an initial matter, the Court finds that, although there are certainly some differences between the law of New York and that of Pennsylvania, no actual conflict of law exists as those laws apply to this case because, under both states' law, the outcome of this case would be the same: Defendants have established that the exclusions are stated in clear and unmistakable language, are subject to no other reasonable interpretation, and apply to the environmental pollution that occurred on November 28, 2011, in Scranton, Pennsylvania. 
The provision in the primary general liability policies clearly defines "pollutants" as, in part, "any . . . gaseous . . . irritant or contaminant, including . . . chemicals. . . ." See, supra, Fact No. 33 in Part I.B.1.c. of this Decision and Order. Similarly, the provision in the umbrella liability policies clearly defines "pollution hazard" as "an actual exposure . . . to the corrosive, toxic or other harmful properties of any . . . gaseous . . . [p]ollutants" or "[i]rritants," which include "[c]hemicals." See, supra, Fact No. 35 in Part I.B.1.c. of this Decision and Order. 
Of course, chlorine is a chemical. See, e.g., Webster's New World College Dictionary at 258 (Houghton Mifflin Harcourt 4th ed. 2010) (defining "chlorine" as "a greenish-yellow, poisonous, gaseous chemical element, one of the halogens, having a disagreeable odor and obtained by electrolysis of certain chlorides: it is used as a bleaching agent, in water purification, in various industrial processes, etc.") (emphasis added); Oxford American Dictionary at 109 (Oxford Univ. Press 1980) (defining "chlorine" as "a chemical element used in sterilizing water and in industry") (emphasis added).  
Furthermore, the provision in the primary general liability policies clearly excludes from coverage, in part, the "actual . . . [or] alleged . . . discharge, . . . migration, release or escape of pollutants." See, supra, Fact No. 31 in Part I.B.1.c. of this Decision and Order. Similarly, the provision in the umbrella liability policies clearly excludes from coverage, in part, the "actual . . . injury or damage of any nature or kind to persons or property which arises out of or would not have occurred but for . . . an actual exposure . . . to the corrosive, toxic or other harmful properties of any . . . gaseous . . . [p]ollutants" or "[i]rritants." See, supra, Fact No. 35 in Part I.B.1.c. of this Decision and Order.  
Under the circumstance, the Court finds that a rational fact-finder could not dispute that such a "discharge," "migration," "release," "escape" and/or "exposure" of pollutants was alleged in the Houser complaint. For example, the Houser complaint alleged that "toxic chlorine gas . . . [was] released from a cylinder/tank/vessel stored on [Plaintiffs'] property, releasing the chlorine gas into the air and causing a toxic cloud of chlorine gas to form," which "drifted in the air from the [Plaintiff's] property" to other properties, where Heidi Houser and Dorothy Houser "were over-taken by the cloud and were forced to inhale toxic fumes of chlorine gas from the cloud," and where Mary Ogden, Mary Irwin and Emelie Irwin were "engulfed" by the cloud and "forced to inhale toxic fumes of chlorine gas from the cloud." See, supra, Fact Nos. 15, 17, 18 and 19 in Part I.B.1.b. of this Decision and Order (emphasis added).  
With regard to Plaintiffs' argument that the Fourth Department has "held a nearly identical definition of `pollutant' to be per se ambiguous" (Dkt. No. 28, Attach. 9, and 15 [attaching page "11" of Plfs.' Opp'n Memo. of Law]), that argument overstates the holding of the Fourth Department in Roofers' Joint Training, Apprentice and Educ. Comm. of W. New York v. Gen. Accident Ins. Co. of Am., 275 A.D.2d 90 (N.Y. App. Div., 4th Dep't 2000) ("Roofers"), and ignores the distinction between the facts of Roofers and the facts of case before this Court. In Roofers, the Fourth Department held that "the total pollution exclusion endorsement in the policy is ambiguous as applied to Rickard's claim," because "[a]n ordinary insured in plaintiff's shoes would not understand that the policy does not cover a claim for bodily injuries such as those sustained by Rickard." Roofers' Joint Training, Apprentice and Educ. Comm. of W. New York, 275 A.D.2d at 92 (emphasis added). Moreover, the claim for bodily injuries in Roofers stemmed from "toxic fumes" (caused by heated roofing membrane) which remained in a classroom and injured a single construction worker there during a demonstration. Id. at 91.  
Such a minor amount of fumes confined to their intended area (i.e., indoors) is significantly different from the gaseous substance in this case-a white cloud of chlorine gas large enough to travel outdoors to two adjoining properties and trap and engulf five people (including an automobile) there. Cf. Cataract Metal Finishing, Inc. v. Hartford Fire Ins. Co., 02-CV-0261, 2003 WL 251955, at *2, n.10 (W.D.N.Y. Jan. 2, 2003) (distinguishing Roofers on the ground that the claim in Roofers stemmed merely from noxious fumes that remained inside a building); Gold Fields Am. Corp. v. Aetna Cas. and Surety Co., 295 A.D.2d 289, 289-90 (N.Y. App. Div., 1st Dep't 2002) (distinguishing Roofers on the ground that the claim in Roofers stemmed merely from hazardous substances that were not released "into the open environment").  
Such a large, white, environmentally mobile cloud is also factually distinguishable from the gaseous substances in the other two New York cases relied on by Plaintiffs, which involved (1) a spray of sulfuric acid that remains on a property and affects only one person, or (2) some paint and solvent fumes that remain in an office building and bother one person. Karroll v. Atomergic Chemetals Corp., 194 A.D.2d 715, 715 (N.Y. App. Div., 2d Dep't 1993); Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 388 (N.Y. 2003).  
Indeed, a factually analogous case supports the Court's conclusion that New York law bars coverage under the policies. See Tri-Mun. Sewer Comm'n v. Cont'l Ins. Co., 636 N.Y.S.2d 856, 857 (N.Y. App. Div., 2d Dep't 1996) (applying New York law to find that noxious odors, which emanated from a sewage plant and traveled to an adjoining property, constituted "pollution" for purposes of a pollution exclusion provision in an insurance policy).  
For all of these reasons, the Court grants Defendant's motion for summary judgment.

Tuesday, February 27, 2018

There Are No Such Things -- First Department Affirms Dismissal of CGL Insurer's "Equitable Indemnity" and "Equitable Reapportionment" Causes of Action

United Natl. Ins. Co. v. Travelers Prop. Cas. Co. of Am.
(1st Dept., 2/27/2018)

Construction site accident.  Injured employee of subcontractor Phoenix Mechanical Piping, LLC, sued the property owner, Metropolitan Tower Life Insurance Company, and general contractor Independent Temperature Control Services, Inc. (ITCS).  ITCS impleaded Phoenix Mechanical, presumably for contribution and/or indemnification.

Plaintiff, Utica National Insurance Company, insured Phoenix Mechanical under a CGL policy with a $1 million per occurrence coverage limit.  Defendant Travelers insured MetLife, Inc. under a CGL policy with a $2 million per occurrence limit.  Defendant Zurich insured MetLife under a commercial umbrella liability policy with a $25 million per occurrence limit.  Defendant National Union insured Phoenix Mechanical under a commercial umbrella liability policy with a $1 million per occurrence limit.

United National defended the personal injury action, allegedly expending over $500,000 in doing so.  Following a jury trial, judgment was entered for the underlying personal injury plaintiff in the amount of $6,697,534.93. United National paid $1,075,000 in indemnification towards that judgment, with Travelers, Zurich and National Union paying the rest.

United National then brought this coinsurance recovery action against the defendant insurers, alleging that because it did not owe defense or indemnification coverage to Phoenix Mechanical at all based on the "Residential Projects Exclusion" contained in United National’s policy, the defendant insurers were obligated to reimburse United National for its defense and indemnification costs.  United National's complaint alleged seven causes of action, styled as:
I.     Equitable Indemnity
II.    Equitable Indemnity
III.   Equitable Contribution
IV.    Equitable Reapportionment
V.     Equitable Subrogation
VI.   Equitable Subrogation
VII.  Declaratory Judgment
Supreme Court granted Zurich's motion to dismiss the first, second and fourth causes of action of the complaint and United National appealed.  In AFFIRMING the dismissal order, the First Department held:
The motion court properly dismissed plaintiff's first and second causes of action for "equitable indemnity" and fourth cause of action for "equitable reapportionment" as against Zurich since there is no recognized cause of action for equitable indemnity or equitable reapportionment under New York law. Furthermore, even assuming that truth of the facts as alleged by plaintiff, these claims do not "state[] the elements of a legally cognizable cause of action" (P.T. Bank Cent. Asia, N.Y. Branch v ABN AMRO Bank N.V., 301 AD2d 373, 376 [1st Dept 2003]; see 1199 Hous. Corp. v International Fid. Ins. Co., 14 AD3d 383, 384 [1st Dept 2005]).
In insurer coinsurance recovery actions, there are no such things as equitable indemnity or equitable reapportionment in New York.

Monday, February 26, 2018

Mental Injury Not Resulting from Bodily Injury, Sickness or Disease Is Not Covered

Incorporated Village of Old Westbury v. American Alternative Ins. Co.
(2nd Cir., 2/8/2018)

Those who have attended my law firm's New York Coverage seminars over the years have heard me preach that every coverage analysis starts with the policy or, more particularly, reading and re-reading the policy.

The plaintiff in this case sought indemnification coverage under its general liability policy with the defendant insurer for claims of purely mental injury.  The GL policy at issue defined "bodily injury" as:
"Bodily injury" means bodily injury, sickness or disease sustained by a person. This includes mental anguish, mental injury, shock, fright or death resulting from bodily injury, sickness or disease.
The insured argued that the district court had erred in granting summary judgment to the defendant insurer by failing to apply Lavanant v. General Accident Insurance Co. of America, 79 N.Y.2d 623 (1992), which held under the policy there at issue (which defined "bodily injury" simply as "bodily injury, sickness or disease"), that bodily injuries include purely mental injuries.

In AFFIRMING the District Court's grant of summary judgment to the defendant insurer, the United States Court of Appeals agreed with the district court's conclusion that the second sentence of the GL policy's BI definition would be superfluous if "bodily injury" included purely mental injuries that were not directly caused by an independent physical bodily injury.  With respect to the insured's argument under the Lavanant case, the Second Circuit noted:
The Village relies on the New York Court of Appeals' construction of "bodily injury" in Lavanant, 79 N.Y.2d 623, which concluded that purely mental injuries were bodily injuries under the contract at issue. However, the contract at issue in Lavanant did not limit coverage for mental injury to mental injury that results from bodily injury, as the contract at issue in this case does, and thus allow the inference that bodily and mental injury are distinct.
Words matter.

Sunday, February 25, 2018

Use or Operation of Bus Found to Be Proximate Cause of Passenger's Injury for New York No-Fault Purposes

Matter of New York City Tr. Auth. v Physical Medicine & Rehab of NY PC
(1st Dept., 2/22/2018)

Passenger steps off a bus into a hole and falls, injuring herself.  No-fault compensable?  No, per the New York Court of Appeals in Cividanes v. City of New York. The bus was neither the proximate cause nor the instrumentality of the injury

Passenger with walker boards a bus after the bus driver activates the bus's lift device to assist the passenger.  When exiting, however, the bus driver neither lowers the bus nor again activates the lift device.  Passenger places her walker onto the street and falls while trying to exit the bus, injuring herself.  No-fault compensable? 

Yes, in the opinion of the no-fault arbitrator, master arbitrator, Supreme Court and Appellate Division, First Department:
Contrary to petitioner's arguments, the facts of this case are distinguishable from those in Cividanes v City of New York (20 NY3d 925 [2012]), in which the Court of Appeals found that benefits were not available under the no-fault Insurance Law because the plaintiff's injury did not arise out of the "use or operation of a motor vehicle" (Insurance Law § 5104[a]). In that case, the plaintiff exited a stopped bus and fell when she stepped into a hole in the street. The Court determined that the bus was neither a "proximate cause" nor an "instrumentality" that produced her injury (id. at 926 [internal quotation marks omitted]; see also Walton v Lumbermens Mut. Cas. Co., 88 NY2d 211 [1996]). 
Here, the bus driver activated the lift device of the bus to assist Valerie Mathis when she boarded the bus. Subsequently, when she was exiting the bus, the bus driver refused to activate the lift device or to lower the bus. As a result, she was forced to place her walker out in the street, and then fell over while attempting to exit the bus.  
Thus, the arbitrator and master arbitrator rationally found that the bus was a "proximate cause" of the injury and that the accident involved the "use or operation" of a motor vehicle within the meaning of Insurance Law § 5104(a).

Jury Verdict Finding Named Insured Was Residing in Insured Premises Affirmed

Cotillis v. New York Cent. Mut. Fire Ins. Co.
(3rd Dept., 2/22/2018)

Last month I blogged about a Third Department case in which summary judgment was denied on the issue of the residency requirement of a homeowners insurance policy.  Last week, the Third Department affirmed a jury verdict against a homeowners insurer on the same issue.

In September 2013, a fire damaged plaintiff's two-family house, where plaintiff claimed to lived in the top-floor unit and rent the first-floor unit. NYCM disclaimed coverage on the basis that plaintiff did not reside at the insured premises on the date of loss. Following a trial, the jury found that plaintiff was a resident of the insured premises and awarded damages of $163,938.94 for the dwelling, $7,873,02 for personal property and $39,600 for additional living expenses (loss of rents).  After unsuccessfully moving to set aside the verdict, NYCM appealed.

In AFFIRMING the jury's verdict on the dwelling, the Third Department rejected NYCM's argument that the evidence was legally insufficient for the jury to conclude that plaintiff was a resident of the insured premises at the time of the loss and reiterated the relevant legal principles:
The insurance policy at issue provides coverage to a dwelling on the "residence premises." As relevant here, "residence premises" is defined as "[t]he two, three or four family dwelling where you reside in at least one of the family units." The policy, however, does not define "reside" and, therefore, "[t]he standard for determining residency for purposes of insurance coverage requires something more than temporary or physical presence and requires at least some degree of permanence and intention to remain" (Dean v Tower Ins. Co. of N.Y., 19 NY3d 704, 708 [2012]; see Sosenko v Allstate Ins. Co., 155 AD3d 1482, 1482 [2017]; Fiore v Excelsior Ins., 276 AD2d 895, 896 [2000], lv dismissed [96 NY2d 755 [2001]). Whether a person resides in any particular location is generally a fact-based determination (see Yaniveth R. v LTD Realty Co., 27 NY3d 186, 194 [2016]). 
The Third Department then recapped the trial evidence supporting the jury's residency finding:
At trial, plaintiff's daughter-in-law testified that she and her husband, plaintiff's son, approached plaintiff to see if she could watch their daughter, plaintiff's granddaughter, during the day. The daughter-in-law stated that plaintiff agreed to so "as long as it was temporary." As such, starting in April 2013, plaintiff stayed at her son's house and babysat her granddaughter in the morning. Aside from a bed and a dresser, plaintiff did not bring other household furnishings from the insured premises to her son's house. Approximately two or three times a week, when the daughter-in-law returned early from work, she would take plaintiff to the insured premises where plaintiff would check the mail and perform household chores. Plaintiff testified that she ate meals at the insured premises, stayed at the insured premises during some weekends, did not change her mailing address from the insured premises and planned to return there after her son stopped working. Plaintiff also testified that she considered the insured premises her home. Furthermore, the fire investigator who testified on behalf of defendant stated that his inspection of the unit where plaintiff lived contained items and furnishings indicative of a person living there. In our view, the foregoing proof was sufficient to establish that plaintiff's stay at her son's house was temporary in nature (see New York Cent. Mut. Fire Ins. Co. v Kowalski, 222 AD2d 859, 861 [1995]) and that she was a resident of the insured premises at the time of the loss. 
Homeowners insurers considering denying dwelling coverage based on the named insured's lack of residency would be wise to review what this jury found to be sufficient evidence of such residency:
  • the insured was staying with her son and daughter-in-law temporarily; 
  • she had moved only a bed and dresser to her son's house; all other household furnishings remained behind; 
  • she would return to the dwelling 2-3 times a week to check mail and perform household chores; 
  • she ate some meals at the insured dwelling; 
  • she stayed at the insured dwelling during some weekends; 
  • she had not changed her mailing address; and
  • she considered the insured premises her home.  
NYCM also argued that the amount awarded for the demolition of the insured premises should have been $16,400 and not $28,900, because the latter figure, as testified to by an insurance adjuster, included asbestos control, which NYCM contended was excluded by the policy's pollution exclusion.  That exclusion negated coverage for a loss "caused directly or indirectly" by an ordinance or law requiring an insured "to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, pollutants." In rejecting that argument, the Third Department held that "[e]ven assuming that 'pollutants' in the policy at issue encompassed asbestos, the record does not demonstrate that asbestos directly or indirectly caused the loss."

The Third Department did agree, however, with NYCM that the loss of rents award was double what it should have been, modifying the judgment to reduce it by $19,800.  The trial evidence established that plaintiff intended to derive rental income from only the downstairs unit.  Moreover, to the extent that the jury awarded this amount for monies expended by plaintiff for alternative housing, plaintiff failed to establish that she "incurred" any such expenses as required under the policy.

Monday, February 19, 2018

Go Fish. New York Court of Appeals Rejects Factual Predicate Threshold Requirement for Discovery of Non-Public Facebook Content

Forman v. Henkin
(Ct. Apps., 2/13/2018)

Since 2011, I have included in my social media research presentations a slide setting forth the two-prong showing that most state courts require for a party to obtain another party's protected, "friends-only", or non-public social media content.  Up until last Tuesday, the New York trial and appellate courts followed that two-pronged rule, requiring on a motion to compel or for a protective order that the party seeking disclosure demonstrate to the court's satisfaction:
  1. that the sought social media content is relevant to the plaintiff's injury claims (the "relevance" prong); and 
  2. that the protected social media content being sought actually exists (the "factual predicate" prong).
In the absence of a showing of a factual predicate, the New York appellate courts likened demands seeking non-public social media content to an improper "fishing expedition" and denied the discovery.

The challenge, of course, of the second prong was showing that relevant content was within someone's Facebook account when that person's account was restricted to friends only.  How does one convince the court what furnishings are within a room that has no windows and a solid, locked door?

In a unanimous opinion authored by Chief Judge Janet DiFiore, the New York Court of Appeals has now rejected the "factual predicate" requirement for obtaining non-public Facebook content of a personal injury plaintiff, returning New York courts to New York's traditional CPLR 3101-based rule of discovery in social media content discovery disputes:
A party seeking discovery must satisfy the threshold requirement that the request is reasonably calculated to yield information that is "material and necessary" — i.e., relevant — regardless of whether discovery is sought from another party.
The former two-pronged test for obtaining non-public Facebook content in New York state court civil actions is now a single prong test:

Is the discovery demand appropriately limited and reasonably calculated 
to yield relevant information? 

The plaintiff in this action alleged that she was injured when she fell from a horse owned by defendant, suffering spinal and traumatic brain injuries resulting in cognitive deficits, memory loss, difficulties with written and oral communication, and social isolation. At her deposition, plaintiff stated that she previously had a Facebook account on which she posted "a lot" of photographs showing her pre-accident active lifestyle but that she deactivated the account about six months after the accident and could not recall whether any post-accident photographs were posted. She maintained that she had become reclusive as a result of her injuries and also had difficulty using a computer and composing coherent messages.

Defendant sought an unlimited authorization to obtain plaintiff's entire "private" Facebook account, contending the photographs and written postings would be material and necessary to his defense of the action under CPLR 3101(a). When plaintiff did not produce the demanded authorization, defendant moved to compel, asserting that the Facebook material sought was relevant to the scope of plaintiff's injuries and her credibility, contending that photographs and messages plaintiff posted on Facebook after the accident would likely be material to plaintiff's injury allegations and her claim that the accident negatively impacted her ability to read, write, word-find, reason and use a computer.

Plaintiff opposed the motion arguing that defendant failed to establish a basis for access to the "private" portion of her Facebook account because, among other things, the "public" portion contained only a single photograph that did not contradict plaintiff's claims or deposition testimony.

Supreme Court GRANTED  the motion to compel to the limited extent of directing plaintiff to produce:
  • all photographs of herself privately posted on Facebook prior to the accident that she intended to introduce at trial; 
  • all photographs of herself privately posted on Facebook after the accident that do not depict nudity or romantic encounters; and 
  • an authorization for Facebook records showing each time plaintiff posted a private message after the accident and the number of characters or words in the messages. 
Supreme Court did not order disclosure of the content of any of plaintiff's written Facebook posts, whether authored before or after the accident and defendant, to the seeming surprise of the Court of Appeals, did not appeal.  Only plaintiff appealed, and the Appellate Division, First Department, modified Supreme Court's ruling by limiting disclosure just to photographs posted on Facebook that plaintiff intended to introduce at trial (whether pre- or post-accident).  Two Appellate Division Justices dissented, however, concluding that defendant was entitled to broader access to plaintiff's Facebook account and calling for reconsideration of that court's recent precedent addressing disclosure of social media information as unduly restrictive and inconsistent with New York's policy of open discovery.

On appeal, the Court of Appeals REVERSED the Appellate Division's order and reinstated Supreme Court's ruling, holding:
Disclosure in civil actions is generally governed by CPLR 3101(a), which directs: "[t]here shall be full disclosure of all matter material and necessary to the prosecution or defense of an action, regardless of the burden of proof." We have emphasized that "[t]he words material and necessary,' . . . are to be interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening [*3]the issues and reducing delay and prolixity. The test is one of usefulness and reason" (Allen v Crowell-Collier Publ. Co., 21 NY2d 403, 406 [1968]; see also Andon v 302-304 Mott St. Assoc., 94 NY2d 740, 746 [2000]). A party seeking discovery must satisfy the threshold requirement that the request is reasonably calculated to yield information that is "material and necessary" — i.e., relevant — regardless of whether discovery is sought from another party (see CPLR 3101[a][1]) or a nonparty (CPLR 3101[a][4]; see e.g. Matter of Kapon v Koch, 23 NY3d 32 [2014]). The "statute embodies the policy determination that liberal discovery encourages fair and effective resolution of disputes on the merits, minimizing the possibility for ambush and unfair surprise" (Spectrum Systems Intern. Corp. v Chemical Bank, 78 NY2d 371, 376 [1991]).  
*  *  *  *  *  
In addition to these restrictions, this Court has recognized that "litigants are not without protection against unnecessarily onerous application of the disclosure statutes. Under our discovery statutes and case law competing interests must always be balanced; the need for discovery must be weighed against any special burden to be borne by the opposing party" (Kavanaugh v Ogden Allied Maintenance Corp., 92 NY2d 952, 954 [1998] [citations and internal quotation marks omitted]; see CPLR 3103[a]). Thus, when courts are called upon to resolve a dispute,[FN2] discovery requests "must be evaluated on a case-by-case basis with due regard for the strong policy supporting open disclosure . . . Absent an [error of law or an] abuse of discretion, this Court will not disturb such a determination (Andon, supra, 94 NY2d at 747; see Kavanaugh, supra, 92 NY2d at 954).[FN3]  
Here, we apply these general principles in the context of a dispute over disclosure of social media materials. Facebook is a social networking website "where people can share information about their personal lives, including posting photographs and sharing information about what they are doing or thinking" (Romano v Steelcase, Inc., 30 Misc 3d 426 [Sup Ct Suffolk County 2010]). Users create unique personal profiles, make connections with new and old "friends" and may "set privacy levels to control with whom they share their information" (id.). Portions of an account that are "public" can be accessed by anyone, regardless of whether the viewer has been accepted as a "friend" by the account holder — in fact, the viewer need not even be a fellow Facebook account holder (see Facebook Help: What audiences can I choose from when I share? https://www.facebook. com/help/211513702214269?helpref=faq_content [last accessed January 15, 2018]). However, if portions of an account are "private," this typically means that items are shared only with "friends" or a subset of "friends" identified by the account holder (id.). While Facebook — and sites like it — offer relatively new means of sharing information with others, there is nothing so novel about Facebook materials that precludes application of New York's long-standing disclosure rules to resolve this dispute.  
On appeal in this Court, invoking New York's history of liberal discovery, defendant argues that the Appellate Division erred in employing a heightened threshold for production of social media records that depends on what the account holder has chosen to share on the public portion of the account. We agree. Although it is unclear precisely what standard the Appellate Division applied, it cited its prior decision in Tapp v New York State Urban Dev. Corp. (102 AD3d 620 [1st Dept 2013]), which stated: "To warrant discovery, defendants must establish a factual predicate for their request by identifying relevant information in plaintiff's Facebook account — that is, information that contradicts or conflicts with plaintiff's alleged restrictions, disabilities, and losses, and other claims'" (id. at 620 [emphasis added]). Several courts applying this rule appear to have conditioned discovery of material on the "private" portion of a Facebook account on whether the party seeking disclosure demonstrated there was material in the "public" portion that tended to contradict the injured party's allegations in some respect (see e.g. Spearin v Linmar, 129 AD3d 528 [1st Dept 2015]; Nieves v 30 Ellwood Realty LLC, 39 Misc 3d 63 [App Term 2013]; Pereira v City of New York, 40 Misc 3d 1210[A] [Sup Ct Queens County 2013]; Romano, supra, 30 Misc 3d 426). Plaintiff invoked this precedent when arguing, in opposition to the motion to compel, that defendant failed to meet the minimum threshold permitting discovery of any Facebook materials.  
Before discovery has occurred — and unless the parties are already Facebook "friends" — the party seeking disclosure may view only the materials the account holder happens to have posted on the public portion of the account. Thus, a threshold rule requiring that party to "identify relevant information in [the] Facebook account" effectively permits disclosure only in limited circumstances, allowing the account holder to unilaterally obstruct disclosure merely by manipulating "privacy" settings or curating the materials on the public portion of the account [FN4]. [*4]Under such an approach, disclosure turns on the extent to which some of the information sought is already accessible — and not, as it should, on whether it is "material and necessary to the prosecution or defense of an action" (see CPLR 3101[a]).  
New York discovery rules do not condition a party's receipt of disclosure on a showing that the items the party seeks actually exist; rather, the request need only be appropriately tailored and reasonably calculated to yield relevant information. Indeed, as the name suggests, the purpose of discovery is to determine if material relevant to a claim or defense exists. In many if not most instances, a party seeking disclosure will not be able to demonstrate that items it has not yet obtained contain material evidence. Thus, we reject the notion that the account holder's so-called "privacy" settings govern the scope of disclosure of social media materials.  
That being said, we agree with other courts that have rejected the notion that commencement of a personal injury action renders a party's entire Facebook account automatically discoverable (see e.g. Kregg v Maldonado, 98 AD3d 1289, 1290 [4th Dept 2012] [rejecting motion to compel disclosure of all social media accounts involving injured party without prejudice to narrowly-tailored request seeking only relevant information]; Giacchetto, supra, 293 FRD 112, 115; Kennedy v Contract Pharmacal Corp., 2013 WL 1966219, *2 [ED NY 2013]). Directing disclosure of a party's entire Facebook account is comparable to ordering discovery of every photograph or communication that party shared with any person on any topic prior to or since the incident giving rise to litigation — such an order would be likely to yield far more nonrelevant than relevant information. Even under our broad disclosure paradigm, litigants are protected from "unnecessarily onerous application of the discovery statutes" (Kavanaugh, supra, 92 NY2d at 954).  
Rather than applying a one-size-fits-all rule at either of these extremes, courts addressing disputes over the scope of social media discovery should employ our well-established rules — there is no need for a specialized or heightened factual predicate to avoid improper "fishing expeditions." In the event that judicial intervention becomes necessary, courts should first consider the nature of the event giving rise to the litigation and the injuries claimed, as well as any other information specific to the case, to assess whether relevant material is likely to be found on the Facebook account. Second, balancing the potential utility of the information sought against any specific "privacy" or other concerns raised by the account holder, the court should issue an order tailored to the particular controversy that identifies the types of materials that must be disclosed while avoiding disclosure of nonrelevant materials. In a personal injury case such as this it is appropriate to consider the nature of the underlying incident and the injuries claimed and to craft a rule for discovering information specific to each. Temporal limitations may also be appropriate — for example, the court should consider whether photographs or messages posted years before an accident are likely to be germane to the litigation. Moreover, to the extent the account may contain sensitive or embarrassing materials of marginal relevance, the account holder can seek protection from the court (see CPLR 3103[a]). Here, for example, Supreme Court exempted from disclosure any photographs of plaintiff depicting nudity or romantic encounters.  
Plaintiff suggests that disclosure of social media materials necessarily constitutes an unjustified invasion of privacy. We assume for purposes of resolving the narrow issue before us that some materials on a Facebook account may fairly be characterized as private [FN5]. But even private materials may be subject to discovery if they are [*5]relevant. For example, medical records enjoy protection in many contexts under the physician-patient privilege (see CPLR 4504). But when a party commences an action, affirmatively placing a mental or physical condition in issue, certain privacy interests relating to relevant medical records — including the physician-patient privilege — are waived (see Arons v Jutkowitz, 9 NY3d 393, 409 [2007]; Dillenbeck v Hess, 73 NY2d 278, 287 [1989]). For purposes of disclosure, the threshold inquiry is not whether the materials sought are private but whether they are reasonably calculated to contain relevant information.  
Applying these principles here, the Appellate Division erred in modifying Supreme Court's order to further restrict disclosure of plaintiff's Facebook account, limiting discovery to only those photographs plaintiff intended to introduce at trial [FN6]. With respect to the items Supreme Court ordered to be disclosed (the only portion of the discovery request we may consider), defendant more than met his threshold burden of showing that plaintiff's Facebook account was reasonably likely to yield relevant evidence. At her deposition, plaintiff indicated that, during the period prior to the accident, she posted "a lot" of photographs showing her active lifestyle. Likewise, given plaintiff's acknowledged tendency to post photographs representative of her activities on Facebook, there was a basis to infer that photographs she posted after the accident might be reflective of her post-accident activities and/or limitations. The request for these photographs was reasonably calculated to yield evidence relevant to plaintiff's assertion that she could no longer engage in the activities she enjoyed before the accident and that she had become reclusive. It happens in this case that the order was naturally limited in temporal scope because plaintiff deactivated her Facebook account six months after the accident and Supreme Court further exercised its discretion to exclude photographs showing nudity or romantic encounters, if any, presumably to avoid undue embarrassment or invasion of privacy.  
In addition, it was reasonably likely that the data revealing the timing and number of characters in posted messages would be relevant to plaintiffs' claim that she suffered cognitive injuries that caused her to have difficulty writing and using the computer, particularly her claim that she is painstakingly slow in crafting messages. Because Supreme Court provided defendant no access to the content of any messages on the Facebook account (an aspect of the order we cannot review given defendant's failure to appeal to the Appellate Division), we have no occasion to further address whether defendant made a showing sufficient to obtain disclosure of such content and, if so, how the order could have been tailored, in light of the facts and circumstances of this case, to avoid discovery of nonrelevant materials.[FN7
In sum, the Appellate Division erred in concluding that defendant had not met his threshold burden of showing that the materials from plaintiff's Facebook account that were ordered to be disclosed pursuant to Supreme Court's order were reasonably calculated to contain evidence "material and necessary" to the litigation. A remittal is not necessary here because, in opposition to the motion, plaintiff neither made a claim of statutory privilege, nor offered any other specific reason — beyond the general assertion that defendant did not meet his threshold burden — why any of those materials should be shielded from disclosure.
Under the Court of Appeals' ruling in this case, discovery demands for non-public Facebook content that are appropriately tailored and reasonably calculated to yield relevant information should pass judicial muster and be enforceable.  Although this decision does not represent a one-size-fits-all rule for discovery of non-public social media content, it does give guidance to civil litigants and New York state courts on the scope of permissible social medial content discovery.  The factual predicate (existence) prong is out; limited fishing is in.

Wednesday, February 14, 2018

Court Upholds Insurer's Refusal to Produce in Discovery Information Regarding Claims of Other Insureds

Gray v. Tri-State Consumer Ins. Co.
(2nd Dept., 1/31/2018)

Though not yet 50 shades of Gray, this action is growing some long legs.

The Second Department's affirmance of Supreme Court's denial of summary judgment to the parties on their respective claims and counterclaims in this first-party property coverage case is relatively unremarkable.  What is noteworthy, however, is the appellate court's brief treatment of Supreme Court's conditional granting of plaintiff's motion to strike Tri-State's answer unless it provided a "meaningful" response to plaintiff's supplemental discovery demands within 15 days.  By that supplemental demand, plaintiff had sought discovery of:
     4.  ... true and complete copies of Defendant's claim records for all fire claims for the last three years ... [and] 
     5.  ... true and complete copies of Defendant's  fire claim estimates for the last year.
In REVERSING that part of Supreme Court's order which had conditionally granted plaintiff's motion to strike Tri-State's answer if it did not respond to these supplemental discovery demands, the Second Department held:
The Supreme Court improvidently exercised its discretion in conditionally granting the plaintiff's cross motion pursuant to CPLR 3126 to strike the defendant's answer unless the defendant served a "meaningful" response to the plaintiff's supplemental demand for discovery and inspection within a specified time. "The drastic remedy of striking an answer is inappropriate absent a clear showing that a defendant's failure to comply with discovery demands is willful and contumacious" (Lantigua v Goldstein, 149 AD3d 1057, 1059). Here, the defendant had already complied with the plaintiff's supplemental demand for discovery and inspection, except for items four and five of the demand. The defendant properly objected to items four and five, which called for information regarding the claims of other insureds, as those items sought information that was not necessary and proper to the prosecution of this action (see Diaz v City of New York, 140 AD3d 826, 827; Cabrera v Allstate Indem. Co., 288 AD2d 415, 416).
It is often the case, as it is in this action, that the complaints initiating first-party actions against insurers include in addition to their breach of contract claims, causes of action for "bad faith", consequential damages, and the like.  Insureds in such actions often seek discovery of other claims and other insureds of the defendant insurers.  This decision reaffirms the principle that when something sought by plaintiffs in discovery is not necessary and proper to the prosecution of their actions, an objection to such demands is appropriate and defensible.

Monday, February 12, 2018

Two-Year Suit Deadline Runs from Actual Loss Date, Not from Loss Date Used on Insurer's Correspondence

Kotecki's Grandview Grove Corp. v. Acadia Ins. Co.
(4th Dept., 2/9/2018)

Property insurance policies in New York can limit an insured's time to sue the insurer for breach of the policy to one or two years.  Equitable estoppel is a legal doctrine by which a party to a legal claim or defense can be precluded or "estopped" from taking a legal action that is inconsistent with that party's previous words, claims, or conduct.  For equitable estoppel to apply, however, the party seeking to apply equitable estoppel must have reasonably relied to that party's detriment on the other party's prior words or conduct.

With respect to a suit limitations defense, a defendant may be estopped from pleading such a defense if the plaintiff was induced by fraud, misrepresentations or deception to refrain from filing a timely action.  Plenty of New York insurance coverage cases exist in which insureds have argued -- sometimes successfully and sometimes unsuccessfully -- that their insurers should be estopped from asserting the policy's two-year suit limitations period because they either (1) engaged in a course of conduct which lulled the insureds into inactivity in the belief that their claims would ultimately be processed or (2) induced the insureds by fraud, misrepresentation or deception to refrain from commencing a timely action.

So what if the insurer consistently uses the wrong loss date on all its claim correspondence, including the coverage declination letter that, among other things, advised the commercial insured that it had two years from the reported loss date to sue (per 11 NYCRR § 216.6[c]and the insured commences suit within two years of that date?  Does estoppel apply?

No, says the Appellate Division, Fourth Department, REVERSING Supreme Court's denial of summary judgment to the insurer, Acadia Insurance Company:
Plaintiff commenced this action to recover under an insurance policy issued by defendant Acadia Insurance Company (Acadia) for loss that it allegedly sustained in a "rain and/or windstorm." Plaintiff reported the loss to its insurance broker, defendant First Niagara Risk Management, Inc. (First Niagara). First Niagara prepared a property loss notice listing the date of loss as June 10, 2013. Acadia investigated the claim, partially denied it in October 2013, and reaffirmed that denial in February 2014. All of Acadia's correspondence listed the date of loss as June 10, 2013. The correspondence also advised plaintiff pursuant to New York insurance regulations that, in the event it wished to contest the denial, plaintiff was required by the policy to commence such an action within two years of the reported date of loss. On June 3, 2015, plaintiff commenced this action. During discovery, it was learned that the actual date of loss was May 28, 2013. In response to Acadia's notice to admit, plaintiff admitted that it noticed the damage to its property on May 28, 2013, that it contacted a roofing company on that date to repair the damage, and that it also contacted First Niagara on that date. Acadia then moved for summary judgment dismissing the amended complaint against it as time-barred.  
Supreme Court erred in denying the motion. Acadia met its initial burden of establishing that plaintiff's action was not commenced within two years of the date of loss as required by the policy (see Compis Servs. v Hartford Steam Boiler Inspection & Ins. Co., 272 AD2d 886, 887 [4th Dept 2000]; see generally Nowacki v Becker, 71 AD3d 1496, 1497 [4th Dept 2010]), and plaintiff failed to raise an issue of fact to defeat the motion (see generally Zuckerman v City of New York, 49 NY2d 557, 562 [1980]). Contrary to plaintiff's contention, it did not raise a triable issue of fact whether Acadia should be equitably estopped from relying on the limitations period provided in the policy. "Under the doctrine of equitable estoppel, a defendant is estopped from pleading a statute of limitations defense if the plaintiff was induced by fraud, misrepresentations or deception to refrain from filing a timely action" (Richey v Hamm, 78 AD3d 1600, 1601-1602 [4th Dept 2010] [internal quotation marks omitted]; see Simcuski v Saeli, 44 NY2d 442, 449 [1978]). "A plaintiff seeking to apply the doctrine of equitable estoppel must establish that subsequent and specific actions by defendant[] somehow kept [him or her] from timely bringing suit' " (Putter v North Shore Univ. Hosp., 7 NY3d 548, 552 [2006]). Here, Acadia did nothing to keep plaintiff from commencing the suit in a timely manner. Although Acadia listed the date of loss incorrectly in its correspondence disclaiming coverage, that was the result of incorrect information provided by First Niagara, plaintiff's agent. In any event, plaintiff was always aware of the actual date of loss and that an action had to be commenced within two years of that date. Thus, plaintiff was not induced by Acadia's conduct to refrain from filing this suit in a timely manner.
No inducement because the insured could not and should not have relied on what it knew or should have known was a erroneous loss date in the insurer's correspondence. 

The Million Word March

Was it in 1995 or 1996 that I debuted  my office's annual New York Coverage seminar?  Do any of my readers remember?  I remember that The Law Office of Roy A. Mura opened on November 14, 1994, but I can't remember if I started digesting New York insurance coverage court decisions and presenting them at an annual seminar in 1995 or in 1996.

Whichever year it was, the collection of digested coverage cases has grown.  And grown.  And grown.

How much has it grown, you ask?  The digest is now 935,996 words large and 1,967 pages long (!).  By comparison, Tolstoy's War and Peace is only 1,225 pages long, and the Bible averages around 1,200 pages.  How many of you have read all three?

The digests cover most New York state and federal insurance coverage cases reported from 1995 through the first half of 2016.  Here, as an example, is the first case digest from 1995:
95-001. Williams v. Associated Mutual Ins. Co., 621 NYS2d 206 (3d Dept. 1995) 
Facts:  Insured brought suit against liability insurer for not defending underlying wrongful death suit.  Default judgment entered against insured in u/a. Upon being notified of the default, insurer negotiated and paid settlement on behalf of insured. In the meantime, insured entered into contract of sale for his real property and business. Sales contract contained a "time is of the essence" clause. Title search by buyer revealed the default judgment as a lien against the insured's real property and the buyer rescinded the contract when the insured was unable to have the lien removed within the time required for the closing. Insured sued insurer alleging negligence, breach of contract and unjust enrichment. Claimed damages for legal fees, loss of proceeds from sale of his real estate and business, costs incurred in maintaining the property and business, mental anguish, etc. 
SupCt:  Granted insurer's motion for partial summary judgment, dismissing claims for consequential damages (i.e., everything except legal fees for attempting to vacate default judgment in u/a). 
Held:  Affirmed. "Special" or "extraordinary" consequential damages sought are recoverable in a contract action only if they were foreseeable and within the contemplation of the parties at the time the contract was made. Claimed damages for inability to close on sale, mental anguish, altered standard of living, damage to insured's credit rating, etc. are not recoverable in this breach of contract action. Insured not entitled to attorneys' fees for bringing dj action to compel duty to defend. Counsel fees incurred or expended by insured in attempting to vacate default judgment in u/a, however, are recoverable.
And here's the last case digest from 2016:
16-054.  Flushing Traditional Acupuncture, P.C. v. Auto Club Ins. Association, 2016 WL 1590691 (App. Term 2d, 11th, 13th Dists. 2016) 
Facts:  Health care provider, as assignee of insured, brought action against automobile insurer, seeking to recover assigned first-party no-fault benefits for services rendered to the insured, who had allegedly sustained injuries in a motor vehicle accident. The insurer moved for summary judgment dismissing the complaint.  
SupCt:  Granted the insurer’s motion for summary judgment dismissing the complaint. The provider appealed.  
Held:  Reversed. Under Michigan law, the insurer could not rely on a lack of coverage defense, based on rescission of the policy based on alleged fraud or misrepresentation in procuring the policy, to withhold payment of no-fault benefits to health care provider, who was an innocent third-party.  Contrary to the insurer’s contention, although it does not write insurance policies or conduct business in New York, it is authorized to business in New York State. Therefore, pursuant to Insurance Law § 1212(a), service of process upon the Superintendent of Insurance was sufficient to acquire jurisdiction over the insurer. Accordingly, the order is reversed, and the branch of the insurer’s motion seeking summary judgment on the ground of lack of insurance coverage is denied.
There's lots more where those came from.  Before now I had limited dissemination of the digests to clients and the people who attended our seminar.  Now you can have and make use of the entire set of case digests by clicking HERE.  If you download the digests, you can word-search (Ctrl+F) them using your research term(s).  For example, search "pollution exclusion" or "additional insured" or "late notice" or "untimely disclaimer" for those issues.

Speaking of disclaimers, I must point out a few things about these case digests:

First, if a case was later modified or reversed, it was not so noted on or removed from its inclusion in a previous digest, so be sure to verify that the case you like is still current before relying in its holding (you can use Google Scholar for that).

Secondly, just because a case hasn't been modified or reversed doesn't mean it's still good law.  Sometimes new statutes or regulations or subsequent decisions of higher courts change the law or effectively overrule earlier decisions of lower courts.

Thirdly, although we strove for accuracy in preparing these digests, I pulled some all-nighters in the early years, so please, use the digests as a reference point, but read the actual cases before citing or relying on them.  Again, Google Scholar is good for this.

The 2016-2018 set will follow.  Only 64,004 words to go.

Friday, February 2, 2018

Excess Insurer's Disclaimer 37 Days After First Notice Held Untimely as a Matter of Law

Liberty Mut. Fire Ins. Co. v. Navigators Ins. Co.
(1st Dept., 2/1/2018)

Review points from this decision:
  • Notice Requirement:  An insurer's duty to cover losses of its insured is not triggered unless the insured gives timely notice of loss in accordance with the terms of the insurance contract.

  • Additional Insured's Obligation to Give Timely Notice:  Even if an insurance policy were construed as specifying that only the named insured was required to provide notice of occurrences, demands and suits to the insurer, the duty to give reasonable notice as a condition of recovery is implied in all insurance contracts and is applicable to an additional insured.

  • Timeliness of Notice to Excess Carrier:  Where notice to an excess insurer carrier is at issue, the focus is on whether the insured reasonably should have known that the claim against it would likely exhaust its primary insurance coverage and trigger its excess coverage, and whether any delay between acquiring that knowledge and giving notice to the excess carrier was reasonable under the circumstances.
But even if the additional insured's (or its liability insurer's) notice to the excess carrier is untimely, that late notice can be excused, in effect, if the excess carrier fails to disclaim in a timely manner.  And a delay by the excess insurer (Navigators) of only 37 days in disclaiming based on late notice -- a coverage defense that presumably was readily apparent to the excess insurer at first notice and did not require investigation --  in this case was held to be untimely as a matter of law:
Here, we find that Liberty Mutual's November 17, 2010 letter was sufficient to provide notice of claim to Navigators. However, even if the June 2010 supplemental bill of particulars implicated Navigators' excess policy (see Nova Cas. Co. v Interstate Indem. Co., 42 Misc 3d 1229[A], 2014 NY Slip Op 50250[U] [Sup Ct, Kings County 2014]), and the notice was untimely, Navigators' disclaimer, issued 37 days later, was untimely as a matter of law (see e.g. Bovis Lend Lease LMB, Inc. v Royal Surplus Lines Ins. Co., 27 AD3d 84, 88-89 [1st Dept 2005]; West 16th St. Tenants Corp. v Public Serv. Mut. Ins. Co., 290 AD2d 278 [1st Dept 2002], lv denied 98 NY2d 605 [2002]).
Judgment against Navigators for $850,000 plus statutory interest and costs.  An expensive delay.

The First Department is especially strict with the obligation of New York liability insurers under New York Insurance Law § 3420(d)(2) to "disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state ... as soon as is reasonably possible[.]"

Use it (quickly) or lose it.  The coverage defense based on policy exclusion or breach of policy condition, that is.  See this blog's ... and Sometimes the Bar Eats You post for other examples of  relatively short delays in disclaiming that were held to be untimely as a matter of law. 

Tuesday, January 30, 2018

Deleting the Preantepenultimate and Antepenultimate Paragraphs

Why waste a hyphen when multiple prefixes will do?

This morning I received a batch of Google Scholar email alerts.  I discovered Google Scholar in 2009 and blogged more in depth about it in 2015One of my Google Scholar alerts is "intitle:insurance" in Google Scholar's New York state and federal case databases.  It reports new cases with "insurance" in the case title to me.  I also have "intitle:mutual" and "intitle:casualty" alerts set up and running.

Anyway, one of the cases reported in this morning's Google Scholar alerts email was Toussie v. Allstate, a consolidated, federal court first-party property coverage action involving a flood claim and a theft claim related to Hurricane Sandy.  Now, to someone geographically challenged like me, Brooklyn and waterfront property seem not to belong in the same sentence.  But the plaintiffs lived at the edge of the Atlantic Ocean in the Manhattan Beach area of Brooklyn, just around the bend of Breezy Point Tip.  They claimed flood damage to and the looting theft of personal property, including $350,000 in fine arts, from their home after Hurricane Sandy.

Allstate's investigation of the plaintiff's theft loss uncovered evidence that the plaintiffs may have moved upwards of 190 boxes of personal property from their home to storage before the hurricane and sought access to those boxes.  Motion practice ensued, and ensued, and ensued when plaintiff reportedly resisted and then allegedly obstructed the inspection of boxes of plaintiffs' personal property stored at Christie's.  Within those decisions of the assigned magistrate judge are some interesting and potential useful rulings on the scope and court-supervision of discovery in a first-party property coverage case, so I commend them to your review.   In her first decision the magistrate judge displayed her facility with English composition with statements such as, "Plaintiffs' concerns are not tethered to the realities of these cases."

But what made me pause this morning was spotting two words I had not seen used before in any reported decisions, much less ones relating to insurance claims.  In relation to a motion made by plaintiffs' counsel to withdraw as counsel, the same magistrate judge modified her prior rulings on what was to be filed under seal and what was to be redacted from withdrawing counsel's motion:
Specifically, the Court finds that the preantepenultimate and antepenultimate paragraphs of the motions pose a risk of adversely affecting plaintiffs' interests in other pending litigation not before this Court.  (Bold added.)
Cool.  Before looking those words up (as I did), you can figure out their meanings.  If ultimate means last, and penultimate means next to last, then antepenultimate must mean, that's right, third from last, and preantepenultimate must mean fourth from last, prefixes being what they are and do, that is.  

By the way and in case you're interested (and still reading this), antepenultimate has appeared 41 times in reported case law (that's reported by Google Scholar) and preantepenultimate has appeared only twice.  Alas, propreantepenultimate (fifth from last position) has appeared ... never.

I like words.  Guess that's why insurance coverage work suits me.

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Monday, January 29, 2018

Who Remembers Drop Drafts? Should You Cash Them?

On Friday last week I got a call from an insurer client, who told me that in response to his approximately $21,000 subrogation demand to the insurer of a person who had negligently damaged his insured's home, my client received in the mail a check for approximately $14,000, marked "full and final settlement".

Should my client cash the check?  What if he does?

A Californian law firm says this:
Don´t get drop drafted. One trick adjusters love to do is to send you a check, usually for about $500 and a release for you to sign. They only time an adjuster will drop draft a check is when they are trying to settle for less than it is worth. Simply ignore the check or send it back.
~~from After an Auto Accident Considerations, The Ledger Law Firm blog, March 11, 2010.

That may be the prudent thing to do in California, but what about in New York?

Wait.  You know this one, you say.  You paid attention during training and know that section 216.6(g) of New York's Regulation 64 prohibits drop drafts:
(g) Checks or drafts in payment of claims; releases. No insurer shall issue a check or draft in payment of a first-party claim or any element thereof, arising under any policy subject to this Part that contains any language or provision that expressly or impliedly states that acceptance of such check or draft shall constitute a final settlement or release of any or all future obligations arising out of the loss. No insurer shall require execution of a release on a first- or third-party claim that is broader than the scope of the settlement.  (Emphasis added.)
No drop drafts allowed in payment of first-party claims in New York.  But subrogation claims are, by their nature, third-party claims, not first-party claims.

So should my client cash/deposit the check or not?  

You also recall that New York remains the only jurisdiction in which a check containing "full settlement" or "full and final settlement" or words of that sort on it can be negotiated without prejudice provided you write "under protest", "without prejudice" or words of that sort on the check before cashing or depositing it.  Only in New York can one cash a check offered in full settlement of a dispute and still be able to sue for the unpaid balance.  In all other states the consequences of cashing a check marked “payment in full” even under protest is a settlement (accord and satisfaction) in the amount of the check. 

New York Uniform Commercial Code § 1-308 states:
A party that with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as “without prejudice,” “under protest,” or the like are sufficient.
The seminal New York case on this issue is Horn Waterproofing   Corp. v. Bushwick Iron & Steel Co., Inc., a Court of Appeals’ decision  holding that writing “without prejudice” or “under protest” on a “full settlement” check avoids imposition of the doctrine of accord and satisfaction.

But is a payment offer check on a subrogation claim the type of transaction that New York's Uniform Commercial Code and its section 1-308 govern? 

What say you?  Cash the check or not?

Sunday, January 28, 2018

Leasing Property is Entrusting Property for Purposes of the Dishonest or Criminal Act/Entrustment Exclusion

Winking Group, LLC v. Aspen American Ins. Co.
(SDNY decided 1/18/2018)

Many commercial property insurance policies exclude coverage for loss or damage caused by or resulting from a dishonest or criminal act of the named insured and certain categories of persons related to the named insured:
2.  We will not pay for loss or damage caused by or resulting from any of the following: 
h.   Dishonest or criminal act by you, any of your partners, members, officers, managers, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose:
(1) Acting alone or in collusion with others; or
(2) Whether or not occurring during the hours of employment.
This exclusion does not apply to acts of destruction by your employees (including leased employees); but theft by employees (including leased employees) is not covered.  (Emphasis added.)
If a tenant intentionally trashes the leased property while being evicted, does this exclusion apply to negate property coverage?  If an order of eviction has issued, can it be said that the leased property is still "entrusted" to the tenant?

In this case, the federal District Court said yes to both questions.

Winking Group leased Manhattan premises to Ming Dynasty, Inc, which in turn subleased the premises to East Market, Inc., which occupied the premises with Winking's knowledge and consent from 2009 to early January 2015.

In 2014, Ming Dynasty sued East Market for nonpayment of rent. The parties agreed to a stipulation of settlement whereby East Market was to vacate the premises no later than January 10, 2015. On or around January 10, 2015, a notice of eviction was posted on the door of the premises, and East Market was evicted. After the eviction notice was posted, Winking did not retrieve the keys to the property, and it did not change the locks until January 23, 2015.

Also around January 10, 2015, the premises were vandalized. On January 15, 2015, the property's manager told the New York City Police Department that East Market had caused the damage to the premises.

Aspen denied coverage for the vandalism damage on the basis of the policy's dishonest or criminal act ("entrustment") exclusion.  Winking commenced this breach of contract action, contending in opposition to Aspen's summary judgment motion that the entrustment exclusion did not apply because: (1) it was disputed whether East Market vandalized the premises; and (2) even if East Market did vandalize the premises, it was after Winking had revoked its entrustment of the leased premises.

The District Court rejected both arguments and granted summary judgment to Aspen.  As to Winking's second argument in opposition to the motion, the court held:
Plaintiff argues that the entrustment exclusion does not apply to the facts of this case because Plaintiff terminated its entrustment by evicting East Market from the premises on January 5, 2015. This argument is unpersuasive. Construing the entrustment exclusion in Plaintiff's favor, but interpreting it in accordance with its plain meaning, it is sufficient that the vandalism was causally related to Plaintiff's initial entrustment of the premises to East Market. See, e.g., Lexington Park Realty LLC, 992 N.Y.S.2d at 1-2 (holding that the entrustment exclusion applied where plaintiff's tenant did not return cabinets and appliances after the termination of the lease agreement); see also Easy Corner, Inc. v. State Nat'l Ins. Co., 56 F. Supp. 3d 699, 707 (E.D. Pa. —) (applying Pennsylvania law, granting summary judgment based on a similar entrustment exclusion because "the loss [was] causally connected to the act of entrustment: because of [the employee's] prior management of the bar, [the employee] had a key and was able to access the building easily"). The entrustment exclusion applies broadly to "loss or damage caused by or resulting from" a dishonest or criminal act by "anyone to whom you entrust the property for any purpose," and includes no language suggesting that the parties intended to limit its application to acts occurring before the conclusion of the parties' legal relationship. See, e.g., id. (applying Pennsylvania law, holding that "entrustment exclusions . . . apply even after the temporal termination of an entrustment, provided that there is a causal connection between the between the act of entrustment and the resulting loss"); Su v. New Century Ins. Servs., Inc., No. 12 Civ. 3894, 2013 WL 5775160, at *4 (C.D. Cal. Oct. 25, 2013) (internal quotation marks omitted) (applying California law, finding that "[e]ven if the loss occurs after the entrustment of the property has terminated, the exclusion still applies so long as there is a causal connection between the act of entrustment and the resulting loss"); F.D. Stella Prods. Co. v. Gen. Star Indem. Co., No. 03 Civ. 5151, 2005 WL 3436388 (N.D. Ill. Dec. 12, 2005) (applying Illinois law, holding that an entrustment exclusion "applies even if the dishonest or criminal act occurs after the entrustment has terminated"). Nor has Plaintiff proffered any evidence of the parties' intent to limit the entrustment exclusion's applicability.  
Plaintiff also argues that this case is distinguishable from the cases cited by Aspen because, here, East Market was legally evicted, as opposed to the parties' relationship coming to its natural conclusion, or concluding in some other way. Plaintiff provides no legal authority for the proposition that East Market's formal eviction is legally relevant to the scope of the entrustment exclusion.
This exclusion has been held also to apply to:

Friday, January 26, 2018

The Should-You-Wish-to-Complain-About-Your-Insurance-Company Advisory Paragraph of New York Insurance Regulation 64

This marks the sixth of many times since May 2008 that I've blogged about what I like to call the consumer advisory paragraph of New York Insurance Regulation 64 (11 NYCRR Part 216).  Insurers that do business in New York State should know that Regulation 64 requires certain letters to "prominently set out" a certain paragraph advising those to whom your letters are addressed that they may complain about you or your coverage position to New York's insurance regulator, formerly known as the New York State Insurance Department and now known since October 2011 as the New York State Department of Financial Services

Effective February 1, 2017 the consumer advisory paragraph changed with a new Garden City address for the NYS DFS's Long Island office.  Pursuant to the Sixteenth Amendment to 11 NYCRR Part 216, the paragraph now reads (new language highlighted):
Should you wish to take this matter up with the New York State Department of Financial Services, you may file with the Department either on its website at or you may write to or visit the Consumer Assistance Unit, Financial Frauds and Consumer Protection Division, New York State Department of Financial Services, at: One State Street, New York, NY 10004; One Commerce Plaza, Albany, NY 12257; 1399 Franklin Avenue, Garden City, NY 11530; or Walter J. Mahoney Office Building, 65 Court Street, Buffalo, NY 14202.
As demonstrated by the claim file materials we continue to receive in my office, a number of insurers doing business in New York apparently remain uncertain of what kinds of letters must actually include that advisory paragraph. Under Regulation 64, there are only two kinds of letters that must do so: 
  1. letters "rejecting any element of a claim involving personal property insurance" (11 NYCRR § 216.6[h]); and
  2. letters explaining or rejecting any element of a claim for motor vehicle physical damage (11 NYCRR § 216.7[d][3]).
Let's take these in reverse order. 

11 NYCRR § 216.7(d)(3)'s Requirement

Everyone knows what a "motor vehicle physical damage" claim is, right?  Claims for collision or comprehensive coverage.  We're talking first-party, not third-party claims. Indeed, §216.7 begins by stating that “[t]his section is applicable to claims arising under motor vehicle collision or comprehensive coverages”. Thus, by implication, letters regarding third-party property damage claims need not include the advisory paragraph. Notice also that 216.7(d)(3) is somewhat broader in its scope than 216.6(h) in that the advisory paragraph required by 216.7(d)(3) must be included in both coverage rejection and explanation letters.

11 NYCRR § 216.6(h)'s Requirement

Which brings us to letters "rejecting any element of a claim involving personal property insurance", the first type of letter in which the advisory paragraph must be included. A letter rejecting an element of a personal property claim is not:
  • an acknowledgement letter;
  • an ROR letter;
  • a non-waiver agreement;
  • a letter written solely to explain personal property coverage or payments;
  • a letter forwarding payment to an insured;
  • a liability coverage declination letter; or
  • every single letter that leaves the insurer's office addressed to an insured or claimant.
In a January 6, 2004 opinion letter, the NYS Insurance Department's OGC (Office of General Counsel) opined:
The term "personal property insurance" in Section 216.6(h) limits the applicability of subdivision (h) to personal lines property insurance. Thus, subdivision (h) is not applicable to commercial lines property insurance or to liability insurance.
Letters rejecting commercial property insurance ↔ no advisory paragraph required.
Letters rejecting (disclaiming/denying) liability coverage ↔ no advisory paragraph required.


Over the 23+ years that my office has been open I've seen the advisory paragraph included in letters in which it is not required.  If you don't care about your company's consumer complaint ratios, then by all means continue including the consumer advisory paragraph in everything written that leaves your desk or office.  If, however, after reading this sixth missive you still are not sure whether the paragraph belongs in a certain letter or not, call or email me.  We'll figure it out.