45-Day Delay in Disclaiming Additional Insured Coverage Held to be Unreasonable as a Matter of Law

CGL – ADDITIONAL INSURED – UNTIMELY DISCLAIMER – PRIORITY OF COVERAGES
Pav-Lak Indus., Inc. v. Arch Ins. Co.
(1st Dept., decided 11/13/2008)

Arch Insurance Company insured B&J Welding  & Iron Works, n/k/a Mid Island Steel Corporation.  Zurich American Insurance Company insured Pav-Lak Industries.  Pav-Lak was the general contractor on a high school construction project and contracted with B&J for steel fabrication and erection work.  B&J did the fabrication work and subcontracted the erection work to Ranger Steel Corporation.  An employee of Ranger Steel was injured during that project and sued Pav-Lak and other parties.  On behalf of Pav-Lak, Zurich tendered that claim for defense and indemnification to Arch under B&J's policy. 

The Arch policy contained a Blanket Additional Insured endorsement, which amended the "Who Is An Insured" clause of the Arch policy "to include as an insured the person or organization as an insured where required by contract but only with respect to liability arising out of your [the named insured's] operations ... or your [the named insured's] work".  The policy defined "your work" as "(a)(1) work or operations performed by you or on your behalf; and (a)(2) materials, parts or equipment furnished in connection with such work or operations".  By its contract with Pav-Lak, B&J was required to obtain general liability insurance coverage of at least $6 million, naming Pav-Lak as an additional insured to that coverage. The Arch policy also contained a “Designated Operation or Entities Exclusion Endorsement", which excluded liability coverage  for any claims arising out of the “operations” of Ranger Steel ("the Ranger Steel exclusion").

Zurich tendered Pav-Lak's defense and indemnification to Arch by letter dated March 22, 2005, which Arch received on March 28, 2005.  In its tender letter, Zurich informed Arch that the "claimant, an employee of your subcontractor, Ranger Steel, fell from a height[.]"   Forty-five days later, on May 12, 2005, Arch sent a letter to B&J advising that because the claimed injuries were sustained by a Ranger Steel employee while working for Ranger Steel, the injured party's claims arose out of Ranger Steel's operations and thus were excluded by the Ranger Steel exclusion.  The disclaimer letter was copied to Pav-Lak and other parties.

Pav-Lak and Zurich commenced this declaratory judgment action for primary additional insured coverage under the Arch policy.  New York Supreme denied plaintiffs' motion and granted Arch's cross motion for summary judgment, declaring, among other things, that Zurich's policy was primary to Arch's policy, and that Arch was not obligated to defend Pav-Lak in the underlying personal injury action.

The First Department REVERSED, holding that Pav-Lak was entitled to liability coverage from Arch as an additional insured under B&J's policy:

The additional insured coverage endorsement of Arch's policy extends coverage to injuries sustained by the sub-subcontractor's employee, because those injuries arose out of the operations or work of the subcontractor (see Tishman Constr. Corp. of N.Y. v CNA Ins. Co., 236 AD2d 211 [1997]; Consolidated Edison Co. of N.Y. v Hartford Ins. Co., 203 AD2d 83, 83-84 [1994]). Thus, Arch was required to disclaim coverage. Arch's disclaimer letter dated May 12, 2005 was effective as against Pav-Lak because Pav-Lak received a copy of it (see Schlott v Transcontinental Ins. Co., Inc., 41 AD3d 339 [2007], lv denied 9 NY3d 817 [2008]), and, further, the grounds of disclaimer were stated with sufficient specificity (see Realm Natl. Ins. Co. v Hermitage Ins. Co., 8 AD3d 110 [2004]). However, Arch's 45-day delay in disclaiming coverage was unreasonable as a matter of law.  There was no need for an investigation, because the basis for the disclaimer was readily apparent from Zurich's tender letter, which Arch received on March 28, 2005 (see West 16th St. Tenants Corp. v Public Serv. Mut. Ins. Co., 290 AD2d 278 [2002], lv denied 98 NY2d 605 [2002]; McGinley v Odyssey Re (London), 15 AD3d 218 [2005]).

By failing to give Pav-Lak timely notice of its disclaimer, Arch waived its reliance on the Ranger Steel exclusion as a basis for disclaiming coverage (see Markevics v Liberty Mut. Ins. Co., 97 NY2d 646, 648-649 [2001]). In any event, however, resolving the ambiguity of the language of the exclusion against Arch, the exclusion does not apply to Pav-Lak (see Belt Painting Corp. v TIG Ins. Co., 100 NY2d 377, 383 [2003]).

Arch's policy with B&J contained an endorsement that provided for a $1 million deductible.  Pav-Lak and Zurich argued that by not timely asserting that deductible in a disclaimer letter, Arch waived its right to rely on that deductible in accordance with Insurance Law § 3420(d).  Both the lower court and the First Department disagreed, holding: 

Arch did not waive the $1 million deductible in its policy, because the deductible endorsement does not bar coverage or implicate policy exclusions and therefore is not subject to the time requirements for disclaiming coverage under Insurance Law § 3420(d) (see Power Auth. of State of N.Y. v National Union Fire Ins. Co. of Pittsburgh, 306 AD2d 139 [2003]).  Nor is the endorsement a warranty under Insurance Law § 3106(a), since it contains no condition precedent to coverage.

Finally, with respect to the priority of coverage between the Arch and Zurich policies, the First Department looked to both contract and policy language in holding that Arch's policy was primary and Zurich's was excess:

In its contract with Pav-Lak, defendant B&J Welding & Iron Works agreed to name Pav-Lak as an additional insured on a primary basis and agreed that Pav-Lak's own general liability insurance would be excess only and non-contributory to B & J's policy. In accordance with that contract, B&J obtained the Arch policy, which contained an additional insured endorsement providing coverage to any entity that B&J was contractually required to insure for liability arising out of B&J's work or operations. This additional insured endorsement unambiguously applied to Pav-Lak (see e.g. Tishman Constr. Corp. of N.Y. v American Mfrs. Mut. Ins. Co., 303 AD2d 323, 324 [2003]). Pav-Lak's commercial general liability policy, the Zurich policy, provided that its coverage would be excess over "[a]ny other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement." Thus, the Zurich policy is excess to the Arch policy (see id.).

Many of the background facts of this DJ action come not from the First Department's decision, but from the July 14, 2008 decision of New York County Supreme Court Justice Doris Ling-Cohan in what must be a related DJ action, also entitled Pav-Lak Industries, Inc. v Arch Ins. Co., 2008 NY Slip Op 31987(U) (Sup. Ct., New York Co., decided 7/14/2008).  The First Department's decision in this case mirror's Justice Ling-Cohan's decision in that matter.