Monday, July 9, 2018

When 5 + 3 = 1

COMMERCIAL PACKAGE POLICY – EMPLOYEE DISHONESTY COVERAGE – NUMBER OF OCCURRENCES – ANTI-STACKING PROVISION 
Dan Tait, Inc. v. Farm Family Cas. Ins. Co.
(Sup. Ct., Albany Co., 7/2/2018)

Over a five-year period, plaintiff's former bookkeeper stole approximately $500,000 from his employer by: (1) making unauthorized purchases with company credit cards; (2) making unauthorized withdrawals from the company's line of credit; and (3) taking company inventory for personal use.  Plaintiff made a claim for employee dishonesty coverage to its commercial package insurer, Farm Family.

Deeming the former bookkeeper's course of dishonest acts committed over multiple policy periods to constitute one "occurrence" under the language of the policy, Farm Family paid $15,000, representing the limit of the employee dishonesty coverage for one policy period.  Plaintiff sued.

Under the subject policy, Farm Family agreed to pay for the direct loss of business property or cash "resulting from dishonest acts committed by [the named insured's] employees acting alone or in collusion with other persons[.]" The policy further provided that "[t]he most [Farm Family] will pay for loss or damage in any one occurrence is [the policy limit of $15,000]" and that "[a]ll loss or damage . . . [c]aused by one or more persons; or. . . [i]nvolving a single act or series of acts . . . is considered one occurrence" under the policy.

The policy also contained what the motion court characterized as "robust anti-stacking language", which provided:
If any loss is covered: (1) Partly by this insurance; and (2) Partly by any prior cancellation or terminated insurance that we or any affiliate had issued to you or any predecessor in interest; the most we will pay is the larger of the amount recoverable under this insurance or the prior insurance. We will pay only for loss or damage you sustain through acts committed or events occurring during the Policy Period. Regardless of the number of years this policy remains in force or the number of premiums paid, no Limit of Insurance cumulates from year to year or period to period.
On the issue of the number of occurrences, Supreme Court rejected plaintiff's asserted reliance on the "unfortunate-event test" and held that the former bookkeeper's series of thefts from plaintiff constituted "one occurrence" under the policy and, therefore, was subject to the $15,000 limit applicable to losses arising from employee dishonesty.

With respect to the anti-stacking issue, Supreme Court rejected plaintiff's argument that the policy was ambiguous and held:
Based on the foregoing, the Court concludes that [plaintiff] cannot recover an amount in excess of $15,000, representing "the larger of the amount recoverable under" any one of the insurance policies that were in effect during the multi-year period in which [the former bookkeeper]'s dishonest acts were committed.
If Supreme Court is right that there are no prior reported decisions of the New York courts that speak directly to the "occurrence" issue, we may see this case head to the Appellate Division, Third Department.  Stay tuned. 

Words Matter -- a Notice of Storage Lien That Lacks the Word "Lien" Is Invalid

AUTO – TOWING/STORAGE CHARGES – STORAGE LIEN  LIEN LAW § 184(5) 
Matter of Nissan Motor Acceptance Corp. v All County Towing
(3rd Dept., 5/18/2018)

On December 22, 2015, at the direction of local law enforcement, respondent All County Towing towed a vehicle to its facility. Shortly thereafter, respondent mailed a notice to the vehicle's owner and to petitioner, the vehicle's lienholder, advising that respondent had taken custody of the vehicle as a result of police impound, that storage fees were accruing daily and that once the vehicle was released from police impound it could be retrieved "upon full payment of all charges accrued" as of the date of release.

In April 2016, by order to show cause and petition, petitioner commenced this special proceeding to declare respondent's lien null and void. Upon petitioner's posting of a $10,000 bond, respondent released the vehicle to petitioner, joined issue and asserted, as an affirmative defense, that it had fully complied with the requirements of the Lien Law and was entitled to a lien in the amount of $6,501.51, which included $200 for towing, $5,750 for 115 days of storage, an administrative fee and taxes.

Supreme Court granted the petition to the extent of adjudging that the purported lien for storage was invalid, dismissed the petition to the extent of declaring that respondent had a valid lien for towing and ordered that, upon petitioner paying respondent the $200 charge for towing, the asserted lien would be satisfied, all stays terminated and the bond released. Respondent appealed.

In AFFIRMING Supreme Court's finding that the storage lien was invalid, the Appellate Division, Third Department, held:
As to the merits, we agree with Supreme Court that respondent's purported lien for storage was invalid. Pursuant to Lien Law § 184 (5), where an entity seeks to assert a lien for the storage of a motor vehicle that it has towed and stored at the direction of a law enforcement agency, such entity must "mail by certified mail, return receipt requested, a notice ... to every person who has perfected a security interest in such motor vehicle or who is listed as a lienholder upon the certificate of title ... within [20] days of the first day of storage." Under the statute, which must be strictly construed (see Matter of Ally Fin. Inc. v Oakes Towing Serv., Inc., 130 AD3d 1355, 1356 [2015]; Grant St. Constr., Inc. v Cortland Paving Co., Inc., 55 AD3d 1106, 1107 [2008]; Phillips v Catania, 155 AD2d 866, 866 [1989]), the "notice shall include the name of the [entity] providing storage of the motor vehicle, the amount being claimed for such storage, and [the] address and times at which the motor vehicle may be recovered" (Lien Law § 184 [5]). In addition, "[t]he notice shall also state that the [entity] providing such notice claims a lien on the motor vehicle and that such motor vehicle shall be released upon full payment of all storage charges accrued on the date the motor vehicle is released" (Lien Law § 184 [5]). 
Here, the notice—which was mailed to petitioner by certified mail, return receipt requested—included respondent's name, address and regular business hours, as well as the total amount being claimed for storage. The notice further stated that the vehicle would "be released to the owner thereof, or his or her lawfully designed [sic] representative upon full payment of all charges accrued to the date that the said motor vehicle is released." Fatally, however, the notice did not state, as required, that respondent "claim[ed] a lien" on the vehicle (Lien Law § 184 [5]). The word "lien" does not appear in the notice at all. Moreover, we are not persuaded by respondent's contention that the requirement was satisfied by the language indicating that the vehicle would be released "upon full payment of all charges." Strictly construed, Lien Law § 184 (5) requires that the notice state both that respondent "claims a lien on the motor vehicle and that such motor vehicle shall be released upon full payment of all storage charges accrued on the date the motor vehicle is released" (emphasis added). Accordingly, as the notice failed to state that respondent claimed a lien on the vehicle, Supreme Court properly found that respondent failed to comply with all of the essential statutory requirements of Lien Law § 184 (5) and, thus, that the purported notice of lien was invalid (see Lien Law § 184 [5]; compare Matter of Ally Fin. Inc. v Oakes Towing Serv., Inc., 130 AD3d at 1357).
What a difference a word -- or lack thereof -- can make. 

Sunday, July 8, 2018

Injured Party/Judgment Creditor Who Obtains Assignment of Insureds' Bad Faith Claim After Conclusion of Direct Action May Bring Second Action Against Liability Insurer

HOMEOWNERS – LIABILITY – EXCESS JUDGMENT – STANDING – BAD FAITH – INSURANCE LAW 3420(A)(2) & (B)(1) 
Corle v. Allstate Ins. Co.
(4th Dept., 6/8/2018)

Sometimes called New York's direct action statute, New York Insurance Law § 3420(b)(1) states:
(b) Subject to the limitations and conditions of paragraph two of subsection (a) of this section, an action may be maintained by the following persons against the insurer upon any policy or contract of liability insurance that is governed by such paragraph, to recover the amount of a judgment against the insured or his personal representative: 
    (1) any person who, or the personal representative of any person who, has obtained a judgment against the insured or the insured's personal representative, for damages for injury sustained or loss or damage occasioned during the life of the policy or contract[.]
Teeter accidentally shoots Corle, and Corle sues Teeter.  Allstate disclaims coverage to Teeter, asserting that the accidental shooting was not a covered loss under the policy.  Corle proceeds with his personal injury action against Teeter and obtains a judgment of over $350,000 against him.

Corle then sues Allstate as a judgment creditor under Insurance Law § 3420 (a) (2) and (b) (1), and Supreme Court grants Corle's motion for summary judgment, holding that the shooting was a covered loss under Teeter's parents' homeowners insurance policy with Allstate, awarding Corle the policy's $50,000 limit.

This is not that action, however.  This is Corle's second action against Allstate, commenced after the Teeters assigned their rights and claims against Allstate to Corle, who then sued Allstate for disclaiming coverage in bad faith.

Allstate moved to dismiss this action, arguing primarily that Corle should have taken the assignment and included his bad faith claim in his first action under Insurance Law § 3420(b)(1) against Allstate -- that Corle's judgment in that action for $50,000 was res judicata, barring any additional recovery against Allstate.

The Appellate Division, Fourth Department, disagreed:
Contrary to defendant's contention, we conclude that the failure of James [Corle] to litigate the bad faith claim in the earlier Insurance Law § 3420 (a) (2) action does not bar litigation of that claim in the instant action. "Under the doctrine of res judicata, a party may not litigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter. The rule applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation . . . Additionally, under New York's transactional analysis approach to res judicata, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy' " (Matter of Hunter, 4 NY3d 260, 269 [2005]; see O'Brien v City of Syracuse, 54 NY2d 353, 357 [1981]).  
Insurance Law § 3420 (b) (1) provides that, "[s]ubject to the limitations and conditions of paragraph two of subsection (a) of this section, . . . any person who . . . has obtained a judgment against the insured or the insured's personal representative[] for damages for injury sustained . . . during the life of the policy or contract" may maintain an action against the insurer "to recover the amount of a judgment against the insured or his personal representative." Such an action may be "maintained against the insurer under the terms of the policy or contract for the amount of such judgment not exceeding the amount of the applicable limit of coverage under such policy or contract" (§ 3420 [a] [2]).  
We conclude that, under Insurance Law § 3420 (a) (2) and (b) (1), an injured party's standing to bring an action against an insurer is limited to recovering only the policy limits of the insured's insurance policy. Contrary to defendant's contention, we conclude that, if an injured party/judgment creditor seeks to recover from the insurer an amount above the insured's policy limits on a theory of liability beyond that created by Insurance Law § 3420 (a) (2), the statute does not confer standing to do so. However, if the insured assigns his or her rights under the insurance contract to the injured party/judgment creditor, then the injured party/judgment creditor may simultaneously bring a direct action against the insurer pursuant to Insurance Law § 3420 (a) (2) along with any other appropriate claim, including a bad faith claim, seeking a judgment in a total amount beyond the insured's policy limits.  
Here, when James [Corle] commenced the prior action pursuant to Insurance Law § 3420 (a) (2) individually and on behalf of [his injured son,] Colin, the Teeters had not yet assigned their rights under the insurance contract to James and Colin. As a result, James did not have standing to bring a bad faith claim against defendant (cf. Bennion v Allstate Ins. Co., 284 AD2d 924, 924-926 [4th Dept 2001]). Thus, because James lacked standing to bring a bad faith claim against defendant at the time he brought the Insurance Law § 3420 (a) (2) action, we conclude that the doctrine of res judicata does not bar this action (see generally Hunter, 4 NY3d at 269; Summer v Marine Midland Bank, 227 AD2d 932, 934 [4th Dept 1996]), and defendant's motion insofar as it sought to dismiss the complaint pursuant to CPLR 3211 (a) (5) was properly denied. 
In so holding, the Fourth Department declined to follow the holding on similar facts of the First Department in a 2010 case:
We recognize that the First Department held otherwise on similar facts in Cirone v Tower Ins. Co. of N.Y. (76 AD3d 883 [1st Dept 2010], lv denied 16 NY3d 708 [2011]).  To the extent that the First Department in Cirone concluded that an injured person/judgment creditor who commenced an action against the insurer pursuant to Insurance Law § 3420 (a) (2) had standing to assert a bad faith settlement practices claim in that action in the absence of an assignment from the insured, we disagree with that conclusion and decline to follow Cirone
The Fourth Department also concluded that. contrary to Allstate's argument, Corle's complaint in this action sufficiently stated a cause of action for insurer bad faith:
We reject defendant's further contention that the court erred in denying its motion insofar as it sought to dismiss the complaint under CPLR 3211 (a) (7), for failure to state a cause of action. Viewing the facts as alleged by plaintiffs in the light most favorable to them and affording plaintiffs all favorable inferences (see generally Whitebox Concentrated Convertible Arbitrage Partners, L.P. v Superior Well Servs., Inc., 20 NY3d 59, 63 [2012]), we conclude that plaintiffs sufficiently stated a cause of action for bad faith against defendant.
With the apparent split in appellate authority on res judicata issue, it remains to be seen whether Allstate will seek leave to appeal this decision to the New York Court of Appeals.

Tuesday, June 26, 2018

May a New York Property Insurer Communicate Directly with Its Insured Who Is Represented by a Public Adjuster?



This was yesterday's question of the day, one I'm asked from time to time.  Each time I get this question I check New York's insurance laws and regulations.  And each time I come to the same conclusion:

There is nothing in New York’s Insurance Law or Regulation 64 (11 NYCRR Part 216) that prohibits an insurer from communicating directly with its insureds who are represented by a licensed public adjuster.  The insured and insurer, after all, are the parties of the first-part and second-part  to the insurance contract.  They should be able to communicate freely with one another.  After all, if a public adjuster is not prohibited from communicating directly with an insurer that is represented by counsel, surely an insurer is not prohibited from communicating directly with its insured who is represented by a public adjuster, right?

Agree or disagree?  Let us know by leaving a comment.


That's Incredible! (as a Matter of Law)

HOMEOWNERS – PROOF OF LOSS CONDITION – SUMMARY JUDGMENT 
Finley v. Erie and Niagara Ins. Assn.
(4th Dept., 6/15/2018)

Russell Finley's home burned down.  As was its contractual right under the policy, his property insurer, Erie and Niagara Insurance Association, requested a sworn proof of loss and denied coverage when it did not receive that proof of loss within the policy's required 60-day period.  Finley sued and testified during his deposition that he had timely submitted the requested proof of loss.

Anyone involved in litigation knows that credibility ordinarily is a issue of fact for the factfinder(s) at trial.  But are there ever instances in which a court may properly determine credibility as a matter of law?

Yes, reminds the Fourth Department, because motion and appellate courts are not required to shut their eyes "to the patent falsity of a defense."

Erie and Niagara successfully moved for summary judgment on its breach of the policy's proof of loss condition defense, and Finley appealed.  In affirming summary judgment to the insurer, the Appellate Division, Fourth Department, held:
We reject plaintiff's contention that the court erred in granting the motion. "It is well settled that the failure to file sworn proofs of loss within 60 days of the demand therefor constitutes an absolute defense to an action on an insurance policy absent a waiver of the requirement by the insurer or conduct on its part estopping its assertion of the defense' " (Bailey v Charter Oak Fire Ins. Co., 273 AD2d 691, 692 [3d Dept 2000]; see Igbara Realty Corp. v New York Prop. Ins. Underwriting Assn., 63 NY2d 201, 209-210 [1984]; Alexander v New York Cent. Mut., 96 AD3d 1457, 1457 [4th Dept 2012]). Defendant, as the party seeking summary judgment, met its initial burden on the motion by establishing that plaintiff failed to provide a sworn proof of loss within the requisite time (see generally Schunk v New York Cent. Mut. Fire Ins. Co., 237 AD2d 913, 914 [4th Dept 1997]), and that defendant did not waive the requirement. In response, plaintiff failed to raise a triable issue of fact whether he substantially complied with the proof of loss requirement (cf. Delaine v Finger Lakes Fire & Cas. Co., 23 AD3d 1143, 1144 [4th Dept 2005]).  
We reject plaintiff's contention that he raised a triable issue of fact by submitting his deposition testimony in which he averred that he timely submitted the requisite proof of loss to defendant, and that the court made an improper credibility determination in rejecting that testimony and his testimony regarding a lack of knowledge of the cause of the fire. Although "we agree with the general premise that credibility is an issue that should be left to a [factfinder] at trial, there are of course instances where credibility is properly determined as a matter of law'" (Sexstone v Amato, 8 AD3d 1116, 1116 [4th Dept 2004], lv denied 3 NY3d 609 [2004]). Neither this Court nor the motion court is " required to shut its eyes to the patent falsity of a defense' " (id., quoting MRI Broadway Rental v United States Min. Prods. Co., 242 AD2d 440, 443 [1st Dept 1997], affd 92 NY2d 421 [1998]). Here, we conclude that the court properly determined that plaintiff's deposition testimony was "self-serving and incredible on these points, permitting summary judgment in favor of" defendant (Curanovic v New York Cent. Mut. Fire Ins. Co., 307 AD2d 435, 439 [3d Dept 2003]; see Rickert v Travelers Ins. Co., 159 AD2d 758, 759-760 [3d Dept 1990], lv denied 76 NY2d 701 [1990]).
That's a lot of rejecting.  Next time someone tells you credibility is always a fact issue, point them here.  Self-serving testimony and patently false defenses do not triable issues of fact create.

You can watch (and listen) to the oral argument of this appeal to the Fourth Department here.  Perhaps my favorite statement from Justice Troutman at 1:26:33:  "So he complied until he didn't."

Sunday, May 20, 2018

How to Abandon Your Complaint in New York (and Kiss Your $22,000 Subro Claim Goodbye)

SUBROGATION – CPLR § 3215(C) – DEFAULT PROCEEDINGS NOT TAKEN WITHIN ONE YEAR 
Selective Auto. Ins. Co. of NJ a/s/o Pine v. Nesbitt
(1st Dept., 5/17/2018)

New York CPLR § 3215(c) states:
(c) Default not entered within one year.  If the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed.  A motion by the defendant under this subdivision does not constitute an appearance in the action.
On March 6, 2014, Selective, as subrogee of its insured, served on defendants a complaint dated February 25, 2012 for $21,705.90 paid in collision damage to its insured's vehicle that was sustained in a July 22, 2011 accident.  Defendants never appeared or answered the complaint and were in default in pleading as of May 14, 2014.  More than a year later, on June 22, 2015, Selective's subrogation counsel wrote to Allstate, the defendants' auto insurer, advising that the defendants had been sued and were in default, and asking that Allstate contact counsel to discuss settlement.  The letter also advised that if counsel did not hear from Allstate and receive defendants' answer to the complaint within 10 days, "we will have no alternative other than to file a default motion."  Counsel wrote again to a different person at Allstate on October 11, 2016, saying nothing about moving or having moved for a default judgment.

By notice of motion dated February 1, 2017, defendants moved for an order pursuant to CPLR § 3215(c) dismissing Selective's complaint as abandoned.  Selective opposed and cross-moved for a default judgment on liability.  Supreme Court DENIED defendants' motion and GRANTED Selective's cross motion.  Defendants (by Allstate) appealed.

In unanimously REVERSING Supreme Court's order and dismissing Selective's complaint, the Appellate Division, First Department, noted:
Under CPLR 3215(c), if a plaintiff fails to seek entry of a judgment within one year after default, the court "shall dismiss the complaint as abandoned ... unless sufficient cause is shown why [it] should not be dismissed." Here, plaintiff failed to show sufficient cause to defeat defendant's dismissal motion because it neither set forth a viable excuse for the delay nor demonstrated a meritorious cause of action (Hoppenfeld, 220 AD2d at 303; Gavalas v Podelson , 297 AD2d 535 [1st Dept 2002]).
Sending "please contact me to discuss settlement" letters to defendants' auto insurer 13 and 29 months after defendants' default and more than one and 17 months after CPLR § 3215(c)'s one-year deadline to take default proceedings does not constitute a "viable excuse for the delay" in moving for a default judgment, at least in the opinion of the First Department.  $22,000 subrogation claim dismissed.

Monday, April 23, 2018

Summary Judgment to Homeowners Insurer on Insured's Failure to Reasonable Care to Maintain Heat Affirmed By Third Department

HOMEOWNERS  – FREEZING EXCLUSION – REASONABLE CARE TO MAINTAIN HEAT 
Stephenson v. Allstate Indem. Co.
(3rd Dept., 4/19/2018)

The insured single-family residence was unoccupied from December 2013 through March 24, 2014, when damages were discovered from  water that had discharged from the plumbing system after a pipe broke when it froze as a result of inadequate heat in the premises.  The home's water supply had not been shut off and the plumbing system had not been drained.  The insured had left her property unoccupied during the winter months without making any arrangements to have it inspected during her absence to ascertain whether the heating system was functioning.

Allstate disclaimed coverage based on several policy exclusions, including one for damage caused by "[f]reezing of plumbing, fire protective sprinkler systems, heating or air conditioning systems or household appliances, or discharge, leakage or overflow from within the systems or appliances caused by freezing, while the building structure is vacant, unoccupied or being constructed unless you have used reasonable care to: (a) maintain heat in the building structure; or (b) shut off the water supply and drain the system and appliances."

The insured sued Allstate for coverage and, after discovery was complete, Allstate moved for summary judgment.  Supreme Court granted Allstate's motion and plaintiff appealed.  Noting that the determinative issue in a freezing exclusion case is whether the insured used reasonable care to maintain heat in the premises, the Third Department AFFIRMED the grant of summary judgment to Allstate:
In support of its motion, defendant submitted plaintiff's deposition testimony and a statement that decedent made to defendant's claims investigator showing that decedent left the property unoccupied during the winter months without making any arrangements to have it inspected during her absence to ascertain whether the heating system was functioning. Defendant also submitted the affidavit of an expert witness showing that consumption of natural gas — the fuel used to heat the premises — from December 7, 2013 through February 6, 2014 was insufficient to maintain a level of heat adequate to prevent freezing of the plumbing system. As defendant met its burden of establishing that the exclusion applied here, the burden shifted to plaintiff to raise a triable issue of fact in this regard.

Plaintiff's proof regarding decedent's arrangements regarding maintenance of the property in her absence was limited to the affidavit of Gerald Whitmarsh, who was responsible for lawn mowing and snow removal. Whitmarsh does not aver that decedent asked him to inspect the interior of the premises to confirm whether it was adequately heated, or that he actually entered the premises during the relevant time. His conclusory allegations that the premises were always heated and that he never noticed that the heat was off — which do not specify when those observations may have been made — are insufficient to rebut defendant's showing that decedent made no arrangements to ensure that the heat continued to work during her absence. Plaintiff's argument that defendant was required to prove the cause of the heating system's failure is misplaced because it fails to address the determinative issue of whether decedent used reasonable care to ensure continued operation of the heating system during her absence. We conclude that decedent failed to use reasonable care, as a matter of law, to maintain heat in the premises while it was unoccupied for three months during the winter heating season, because it is undisputed that she did not arrange for inspection of the premises or take any other action to ensure that adequate levels of heat were actually maintained during that time period (see e.g. Amery Realty Co., Inc. v Finger Lakes Fire & Cas. Co., 96 AD3d 1214, 1216 [2012], lv denied 19 NY3d 812 [2012]; Pazianas v Allstate Ins. Co., 2016 WL 3878185, *5, 2016 US Dist LEXIS 92796, *13-15 [ED Pa 2016]; Jugan v Economy Premier Assur. Co., 2018 WL 1432973, *3-4, 2018 US App LEXIS 7218, *8-14 [3d Cir 2018]). Thus, Supreme Court properly granted defendant's motion. Plaintiff's remaining arguments have been considered and found to lack merit.
Facts supporting summary judgment:
  • home was unoccupied for three months during the wintertime
  • the home's water supply had not been shut off 
  • the plumbing system had not been drained
  • the insured had made no arrangements to have the home inspected while she was gone
  • an expert opined that the home's natural gas consumption was insufficient to maintain a level of heat adequate to prevent freezing of the plumbing system

Sunday, April 15, 2018

Burden of Proving Exception to Exclusion Falls on Insured

COMMERCIAL GENERAL LIABILITY – BURDEN OF PROOF – EXCEPTION TO EXCLUSION 
Corbel Constr. Co. v Arch Specialty Ins. Co.
(2nd Dept., 4/11/2018)

Not much factually to see here.  General contractor (Corbel) sues its own GL insurer (Arch) for defense and indemnification coverage in an underlying personal injury action.  Both parties move for summary judgment.  Supreme Court grants Corbel's motion and denies Arch's cross motion.  Arch appeals, arguing that Supreme Court erred because Arch established on its cross motion that a policy exclusion applied, and Corbel failed to create a question of fact regarding an exception to that exclusion.

In REVERSING Supreme Court's order and granting summary judgment to Arch, the Second Department agreed with Arch and reiterated the well-established principle that while insurers bear the burden of establishing the applicability of policy exclusions, insureds bear the burden of establishing exceptions to those exclusions:
"In determining a dispute over insurance coverage, [courts] first look to the language of the policy" (Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d 208, 221). Although the insurer has the burden of proving the applicability of an exclusion (see Seaboard Sur. Co. v Gillette Co., 64 NY2d 304, 311), it is the insured's burden to establish the existence of coverage (see Lavine v Indemnity Ins. Co., 260 NY 399, 410). Thus, where "the existence of coverage depends entirely on the applicability of [an] exception to the exclusion, the insured has the duty of demonstrating that it has been satisfied" (Borg-Warner Corp. v Insurance Co. of N. Am., 174 AD2d 24, 31). In support of its cross motion, Arch established its prima facie entitlement to judgment as a matter of law by demonstrating the applicability of an exclusion in Corbel's policy (see Platek v Town of Hamburg, 24 NY3d 688, 694; Alvarez v Prospect Hosp., 68 NY2d 320, 324-325).
In opposition to Arch's prima facie showing, Corbel failed to raise a triable issue of fact regarding the applicability of an exception to the exclusion (see Conlon v Allstate Veh. & Prop. Ins. Co., 152 AD3d 488, 491; Copacabana Realty, LLC v Fireman's Fund Ins. Co., 130 AD3d 771, 772; Broome County v Travelers Indem. Co., 125 AD3d 1241, 1244-1245; State Ins. Fund v Hermitage Ins. Co., 256 AD2d 329, 330). Accordingly, the Supreme Court should have granted Arch's cross motion for summary judgment declaring that it is not obligated to defend or indemnify Corbel in the underlying action, and should have denied Corbel's motion for summary judgment declaring that Arch is so obligated.
To review:

BURDENS OF PROOF (in ALL types of coverage disputes)
  • Inclusionary terms (grant of coverage) -- INSURED
  • Exclusionary terms                                -- INSURER
  • Exceptions to exclusions                       -- INSURED
Who remembers my light switch object metaphor from the Mura & Storm annual New York Coverage seminars?  
  • Inclusionary terms (grant of coverage) -- Switch ON
  • Exclusionary terms                                -- Switch OFF
  • Exceptions to exclusions                       -- Switch back ON
Insureds always have the burden (from the loss facts) of turning the light switch on.  Or back on, as the case -- like this one -- may be.    

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

"WRONGFUL ACT" – ANTITRUST LAWSUIT – DUTY TO DEFEND 
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

COMMERCIAL GENERAL LIABILITY – COMMERCIAL UMBRELLA LIABILITY – ABSOLUTE POLLUTION EXCLUSION – CHOICE OF LAW – BODILY INJURY CLAIMS 
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

COMMERCIAL GENERAL LIABILITY – COMMERCIAL UMBRELLA LIABILITY – COINSURANCE RECOVERY 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

GENERAL LIABILITY – "BODILY INJURY" – MENTAL INJURY 
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

NO-FAULT – USE OR OPERATION OF A MOTOR VEHICLE – COURT REVIEW OF ARBITRATION RULINGS
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

PROPERTY – HOMEOWNERS – RESIDENCY REQUIREMENT – POLLUTION EXCLUSION – ASBESTOS CONTROL COSTS – LOSS OF RENTS
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

SOCIAL MEDIA DISCOVERY – DEFENSE OF PERSONAL INJURY CLAIM – 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

PROPERTY – QUESTIONS OF FACT PRECLUDING SUMMARY JUDGMENT – SCOPE OF DISCOVERY 
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.