Friday, November 6, 2009

Bronx Supreme Reluctantly Declines to Invalidate the Coverage-Negating Employee Injury, Roofing Work and Contractual Liability Exclusions

720-730 Fort Wash. Ave. Owners Corp. v. Utica First Ins. Co.
(Sup. Ct., Bronx Co., decided 11/4/2009)

Plaintiff owned a property on which a subcontractor's employee was injured during construction.  Plaintiff had contracted with DNA Contracting, which had hired the injured party's employer, subcontractor Rauman Construction Company, to do the masonry and roof replacement work. DNA's contract with Rauman required that Rauman purchase CGL and name DNA and plaintiff as additional named insureds. Rauman purchased insurance from Utica First which named those entities as additional insureds, but the policy contained three exclusions at issue:  (1) an "employee" exclusion, (2) an exclusion for "roofing work", and (3) an exclusion for any liabilities assumed under contract or agreement.

The "employee exclusion" provided:
This insurance does not apply to:
(i) bodily injury to any employee of any insured, to any contractor hired or retained by or for any insured or to any employee of such contractor, if such claim for bodily injury arises out of and in the course of his/her employment or retention of such contractor by or for any insured, for which any insured may, liable in any capacity;
(ii) any obligation of any insured to indemnify or contribute with another because of damage arising out of the bodily injury; or
(iii) bodily injury sustained by the spouse, child, parent, brother or sister of an employee of any insured, or of a contractor, or of an employee of a contractor of any insured as a consequence of the bodily injury to such employee, contractor or employee of such contractor, arising out of and in the course of such employment or retention by or for any insured.
The "roofing work" exclusion stated:
It is hereby understood and agreed that such insurance as is afforded by coverage L-bodily injury, property damage coverage and coverage N-products/completed work coverage does not apply to bodily injury, property damage, products or completed work arising out of any roofing operations, which involve any replacement roof or recovering of the existing roof.
The exclusion for liabilities assumed under contract or agreement read:
1. "We" do not pay for "bodily injury", "property damage", "personal injury", or "advertising injury" liability which is assumed by the "insured" under a contract or an agreement.
This exclusion does not apply to:
a. Liability that an "insured" would have had in the absence of the contract or agreement; or
b. "Bodily injury or property damage" covered under the contractual liability coverage, provided that the "bodily injury" or "property damage" occurs after the effective date of the contract or agreement.
The injured employee commenced a personal injury action against plaintiff, alleging causes of action for violations of §§ 200, 240 and 241 of New York's Labor Law, as well as a cause of action for common law negligence.  Plaintiff tendered that action to Utica First for defense and indemnification, and Utica First disclaimed coverage based on the employee injury, roofing work and contractual liability exclusions.  DNA's CGL insurer, Liberty International Underwriters, assumed plaintiff's defense and commenced this declaratory judgment action, in plaintiff's name, against Utica First for coverage under Rauman's policy.

Prior to the completion of discovery, Utica First moved for summary judgment based on the employee and roofing work exclusions.  Plaintiff opposed the motion based on its arguments that: (1) the Utica First policy was illusory and should be held to be against public policy since it does not provide any of the insureds with the usual construction site coverage required under plaintiff's agreement with DNA and Rauman;  (2) discovery has not yet been completed;  (3) questions of fact remained as to whether or not Rauman's employee was, in fact, working in the course of his roofing duties with Rauman at the time of the accident that caused his injuries; and (4) Utica First must defend under the policy even if it need not indemnify, since the duty to defend is greater than the duty to indemnify.

In response to plaintiff's opposition, Utica First argued that since plaintiff had admitted that Rauman's employee was working in the course of his employment with Rauman, and performing roofing operations, no further discovery was necessary since both the "employee" and "roofing" exclusions applied.   As to plaintiff's argument that the Utica First policy was violative of public policy, Utica First argued that exclusions are necessary to precisely define the scope of coverage.  Lastly, Utica contended that, although the duty to defend is broader than the duty to indemnify, it does not attach, when, as here the complaint and claims are so totally baseless.

Noting that plaintiff was not contending that the three exclusions at issue were vague, ambiguous or inapplicable, Bronx County Supreme Court Justice Paul Victor identified the sole issues for determination to be whether those three exclusions are violative of public policy, and whether, despite the language of those exclusions, Utica First might still be obligated to defend the plaintiff.  The court answered those questions with a no, and a no. 

In granting Utica First's motion for summary judgment, Justice Victor reluctantly declined to invalidate the employee and roofing work exclusions of what Justice Victor called Rauman's "worthless" and "inadequate"  policy with Utica First on public policy grounds:
The "public policy of this state when the legislature acts is what the legislature says that it shall be. [citation omitted]. Conversely, when statutes and Insurance Department regulations are silent, we are reluctant to inhibit freedom of contract by finding insurance policy clauses violative of public policy [citations omitted]. When we recently found an exclusion unenforceable because it detracted from the statutorily-mandated minimum fire insurance coverage, we explicitly limited our decision to matters involving fire insurance (see Lane v Security Mut. Ins. Co., 96 NY2d 1, 6, 724 NYS2d 670, 747 NE2d 1270 [2001]). 
*  *  *  *  *
In order to fulfill the requirements of the Labor Law and to indemnify themselves during the course of construction, owners and contractors usually purchase insurance coverage for the additional vicarious liability which has been statutorily cast upon them by Labor Law §240 and the public policy of New York to provide proper protection for construction workers. In addition owners and general contractors often require their sub-contractors and other agents to purchase this insurance on their behalf. See, for example, the proper coverage provided by the general contractor herein, DNA, to Fort Washington via its insurance policy purchased from Liberty National Underwriters; and compare same with the Utica First policy. While on its face the Utica First "general liability insurance" policy appeared to provide adequate coverage, the exclusions buried within its terms, rendered it inadequate for the purposes intended. In other words, as to Fort Washington and DNA, the "general liability insurance policy" issued by Utica First was, in essence, misleading.It was certainly not the insurance policy which provided the coverage necessary to protect them from the construction site risks and the vicarious liability imposed by the Labor Law; and it was not the policy which Rauman was required to obtain by its agreement with Fort Washington and DNA.

However, the issuance by Utica First of this inadequate insurance policy violated no regulation or statutorily declared public policy regarding the contents of an insurance policy. As stated above, "the public policy of this state ... is what the legislature states it should be ... [and] when statutes and Insurance Department regulations are silent, [ the courts] are reluctant to inhibit freedom of contract by finding insurance policy clauses violative of public-policy". (Slayko v. Security Mutual Ins Co., 98 NY2d 289 [2002]; see also, NY Cent. Mut. Fire Ins. Co. v.  Nationwide Mut. Ins. Co., 307 AD2d 449 [ 3d Dept 2003][an exclusion for "criminal acts" held not contrary to public policy, "as the Legislature has expressed a preference to facilitate rather than hinder insurers' efforts to remove coverage for persons who perform criminal acts"];Pfoh v. Electric Ins. Co., 14 AD3d 777 [ 3d Dept. 2005][ "resident-relative exclusion" in automobile policy did not violate legislative intent and public policy underlying the liability insurance coverage for motor vehicles mandated by Vehicle and Traffic Law § 311 (4)(a)]; compare, Lane v. Security Mutual Insurance Co., 96 NY2d 1,6[2001] [ exclusions found unenforceable because they detracted from the statutorily mandated minimum insurance coverage];TAG 380, LLC v. ComMet 380, Inc. 10 NY3d 587 [2008][ exclusion in a fire insurance policy that excluded coverage for an intentional fire set by "an insured" not enforceable as violative of Insurance Law § 3404].

The issuance of this worthless policy, although indirectly an impediment to the achievement of the remedial reforms enacted, is not directly violative of the core objective and declared public policy of the Labor Law to protect construction workers by providing them with additional responsible entities and persons. The requirements of the Labor Law have been fulfilled, since the statutorily mandated responsibility of the owner (Fort Washington) and general contractor (DNA) are not directly impacted by the failure to obtain insurance. The ability or inability of these entities to pay a damage award (although relevant to the core objective) is a separate issue; and there is no corresponding public-policy mandate set forth in the Insurance Law, or its implementing regulations, which would "insure" that funds would be available which would provide the coverage needed by "owners, contractors and their agents" to indemnify them from claims made by injured construction workers. In other words, in those instances where uninsured owners and/or contractors do not have the ability to pay a damage award, the public policy of New York is incomplete, and thus defeated. This weakness in the law could easily be remedied by a statute or regulation which would mandate the issuance of a "uniform construction site insurance policy". Such a mandated uniform insurance policy, of course, should preclude an insurance carrier from incorporating such exclusions, or if included, have them declared unenforceable as violative of public policy. Obviously, there are many construction companies which have no assets beyond the funds provided by insurance to pay a damage award. For them and for their workers, the laudable core objective becomes an empty gesture without insurance coverage. It would certainly seem practical, and reasonable, therefore, to extend the worker-protection public policy goal to the Insurance Law and/or its implementing regulations. However, since the Legislature has not yet chosen to further implement and fortify the Labor Law's core objective by an amendment to the Insurance Law, this Court is powerless to do so.

Caveat Emptor

Unfortunately, the Insurance Law and the Insurance Department regulations are silent and provide no explicit guidance or protections for insureds as to the minimum requirements for a construction site insurance policy. Although the silence of the Legislature seems somewhat inconsistent with the Labor Law's core objective, the only rule applicable here is, "caveat emptor"- let the buyer beware! "This maxim summarizes the rule that a purchaser must examine, judge and test for himself". (Black's Law dictionary, 4th edition). While the insurance policy may have been misleading and rendered meaningless due to the exclusions, Fort Washington and DNA nevertheless had a duty to do a "due diligence" review of the policy presented by Rauman. Had they read the policy when it was first presented they may have observed the exclusions and rejected the policy as not in compliance with the construction contract requirements. Having failed to do so, they left themselves exposed; and there is no public-policy mandate which the Court can utilize to rescue them or the injured worker, if these entities do not have sufficient coverage and/or the ability to pay a damage award. In that regard the Court notes that, because of the absence of any statutory mandate, Utica First, the defendant herein, has been repeatedly successful in having its insurance policy exclusions judicially upheld. See, for example, Bassuk Bros. v. Utica First Ins. Co., 1 AD3d 470 [2d Dept 2003][ exclusion for "bodily injury to an employee of an insured if it occurs in the course of employment", upheld]; Utica First Insurance Company v Star-Brite Painting & Paperhanging , 36 AD3d 794 [2d Dept. 2005][ exclusion in automobile policy for claims of "negligent hiring", upheld]; Ruge v. Utica First Ins. Co., 32 AD3d 424 [2d Dept 2006][ an automobile exclusion under a contractor's insurance policy, upheld]; Massot v. Utica First Ins. Co., 36 AD3d 499 [1st Dept 2007][ denial of coverage on basis of the policy's exclusion for services rendered by an unlicensed employee, upheld]; Sixty Sutton Corp. v. Utica First Insurance Co., 34 AD3d 386 [1st Dept. 2006]["employee exclusion", upheld].

As stated above, the court is sympathetic to the argument advanced by Fort Washington that the exclusions resulted in only an illusion of coverage. Unfortunately, this court is constrained by the decision of the Court of Appeals in Slayko, supra, to enforce the contract with its exclusions, as written by defendant Utica First and accepted by the plaintiff.
Justice Victor also rejected plaintiff's"the duty to defend is broader than the duty to indemnify" argument, holding:
The court finds, under the circumstances of this case, that Utica First need not provide a defense to Fort Washington. While it is axiomatic that the duty to defend is broader than the duty to indemnify, the obligation to defend, is not here even arguable. Coverage, having been rendered moot by the exclusions, there is no legitimate reading of the complaint under which this coverage could be deemed plausible. Thus, it would be manifestly unreasonable to impose a duty to defend.
Interesting run by one CGL insurer at another CGL insurer to obtain defense and indemnification coverage.  Insurers might want to be careful, however.  Inviting the courts to invalidate another insurer's policy provisions on public policy grounds could come back to haunt the invitor.  And possibly all insurers.  I'm with Justice Victor on his point about reading the policy.  Many coverage disputes could have been avoided had the parties read their insurance contracts before the casualty or loss occurred.  Such as perhaps in this case.

Freedom of contract, a la The Age of Enlightenment and John Locke.  And more work for coverage counsel.  Neither a bad thing.

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