Umbrella Carrier's Application Misrepresentation Defense Rejected

CGL – EMPLOYEE INJURY EXCLUSION – MEANING OF "CONTRACTOR" AND "SUBCONTRACTOR" – APPLICATION MISREPRESENTATION – LATE NOTICE
Alcon Bldrs. Group, Inc. v. U.S. Underwriters Ins. Co.
(Sup. Ct., New York Co., decided 7/1/2008)

Alcon Builders Group brought this DJ action to require its primary (US Underwriters Insurance Company) and umbrella (National Union Fire Insurance Company) CGL insurers to defend and indemnify it in relation to an underlying construction accident/personal injury action stemming from a subcontractor's employee's worksite injury. New York County Supreme Court Justice Helen Freeman granted Underwriters' motion for summary judgment with respect to the primary policy, but denied the cross motions of plaintiff and National Union with respect to the umbrella policy.

The primary CGL policy issued by Underwriters contained an "Exclusion of Injury to Employees, Contractors and Employees of Contractors" which provided, in pertinent part:

This policy does not apply to:

* * * (ii) "Bodily injury" to any contractor or any "employee" of any contractor arising out of or in the course of the rendering or performing services of any kind or nature whatsoever by such contractor or "employee"of such contractor for which any insured may become liable in any capacity[.]

In upholding the applicability of this exclusion to negate coverage under the Underwriters primary policy, Justice Freeman noted that "the relevant language of Underwriters' policy has repeatedly been held to be clear, unambiguous and enforceable (citations omitted). Plaintiff's argument that Konieczny does not fall within the exclusion because he was the employee of a 'subcontractor' rather than a 'contractor' has also been considered, and rejected, by the courts[.]" The court also rejected Alcon's attempt to distinguish this matter from the established case law upholding and applying the exclusion on the ground that the primary policy itself gave separate, independent meanings to the terms "contractor" and subcontractor", finding that the only example cited by Alcon weakened rather than strengthened its argument for coverage.

With respect to the umbrella policy, Justice Freeman rejected National Union's defense of application misrepresentation but held that the record was not sufficiently developed to determine whether Alcon provided timely notice of the occurrence to National Union.

National Union had argued that Alcon's "e-Excess application" incorrectly denied that the Underwriters policy was supplemented by manuscripted or exclusionary endorsements. National Union contended that had Alcon correctly reported the nature of the Underwriters policy, the umbrella policy would have been written to "match" all exclusions in the primary policy and would have contained identical ones, including the exclusion for bodily injury to contractors and employees.

Characterizing the affidavit submitted by National Union in support of its application misrepresentation defense as "problematic", Justice Freeman rejected that defense because: (1) the affidavit admitted that National Union did not maintain any written underwriting guidelines regarding the alleged practice of matching exclusions and endorsements; (2) National Union could not have relied on the alleged misrepresentation because the umbrella policy was issued several months before the Underwriters primary policy; (3) the Schedule of Underlying Insurance in the umbrella policy did not meaningfully identify any underlying policy, further confirming that National Union did not issue it in reliance upon the terms of any underlying policy; (4) a comparison of the primary umbrella policies refuted National Union's claim that it had a mandatory "matching" policy; and (5) the umbrella policy specifically anticipated that circumstances might exist where National Union's coverage obligations would be broader that the underlying insurer, National Union obligating itself to defend bodily injury claims which were "covered by this policy but not covered by any underlying insurance."

Although the court rejected National Union's application misrepresentation defense, it denied both Alcon's and National Union's cross motions for summary judgment or dismissal without prejudice, holding that discovery was needed to determine whether Alcon's nearly 18-month delay in providing notice of the accident to National Union breach the umbrella's policy's notice requirement. Alcon claimed that it was not aware of the accident until it was served with the complaint, an assertion Alcon supported with an affidavit from a corporate officer who stated that he questioned plaintiff's employees upon receipt of the pleadings and determined that no one was aware of the incident. Justice Feeeman ruled that National Union was entitled to investigate the lack of knowledge claim by deposing Alcon's officers, employees and the injured worker, and seeking whatever documentary or other evidence may exist regarding the accident and whether it was reported.