Friday, November 13, 2009

First Department Upholds Primary Insurer's Coverage Denial Based on Designated Ongoing Operations/Construction Exclusion

American Guar. & Liab. Ins. Co. v. State Natl. Ins. Co., Inc.
(1st Dept., decided 11/12/2009)

State National Insurance Company insured S&W Realty, LLC, under a $1 million per occurrence CGL policy, which contained this Designated Ongoing Operations/Construction Exclusion:
Description of Designated Ongoing Operation(s):

Construction Exclusion:  Construction of buildings or structures including, but not limited to, erection ... painting, leaning or pointing, and all work or activity in connection with the foregoing.  This exclusion does not apply to incidental repair and maintenance performed by the named insured on buildings owned and operated by the named insured.

This insurance does not apply to “bodily injury” or “property damage” arising out of the ongoing operations described in the Schedule of this endorsement, regardless of whether such operations are conducted by you or on your behalf or wliether the operations are conducted for yourself or for others.
S&W was also insured under a $50 million purchasing group commercial umbrella liability policy issued by American Guarantee & Liability Insurance Company. 

On March 30, 2004, a contractor's employee fell from a scaffold and was injured while doing pointing work on an apartment building owned by S&W.  Within days of the accident, both State and American were notified of the employee's fall and injuries.  Weeks later, the employee commenced a personal injury action against S&W, alleging causes of action sounding in common law negligence and violations of New York Law Law §§ 200, 240(1) and 241(6).

Presumably based on the possibility that the employee's injuries had arisen from incidental repair and maintenance of the insured's building, defendant Tower Risk Management Company, acting as State's general managing agent, issued a reservation of rights letter and retained defense counsel to defend S&W in early May.  On May 21, 2004, Tower received a letter from S&W's managing agent which indicated that S&W and the injured party's employer did not have a written contract for the job “as it was a minor building repair, a leak into two apartments[.]"

In a November 2004 bill of particulars report letter, S&W's retained defense counsel advised Tower that it appeared "likely" that the injured employee would be able to sustain a Labor Law § 240(1) cause of action.  By letter dated November 6, 2006, defense counsel advised Tower that the court had granted partial summary judgment to the underlying plaintiff on his Labor Law § 240(1) claim, and that it had been determined "that the job was much larger and [they] did 'pointing work' on the entire front facade of the building."

By letter dated January 30, 2007, Tower disclaimed coverage on State’s behalf to S&W based on the policy's construction exclusion.  American subsequently sent a letter to Tower on behalf of S&W, requesting that State withdraw its coverage disclaimer based on what American asserted was the inapplicability of the construction exclusion and untimeliness of State's coverage denial in violation of Insurance Law § 3420(d).

In May 2007, the matter went to mediation and settled, without State's participation,  for $2.1 million.  American funded the entire settlement and commenced this action to recover State's $1 million in primary coverage, plus interest.

On the parties' motion and cross motion, New York County Supreme Court Justice Michael Stallman granted summary judgment to State and Tower, dismissing the complaint.  Justice Stallman rejected American's arguments that the construction exclusion was ambiguous, and that State had failed to issue a disclaimer in a timely fashion, in violation of Insurance Law § 3420(d).  American appealed.

In AFFIRMING the award of summary judgment to State and Tower, the First Department  held:
Plaintiff, the excess insurance carrier, sought a declaration that the coverage disclaimer by defendant State National, the primary insurer, for reimbursement of funds advanced by the excess insurer on the insured's behalf to settle the underlying personal injury action, was untimely as a matter of law, and that the primary insurer's policy exclusion was inapplicable and ambiguous. The court properly found that the primary insurer's "construction" exclusion was unambiguous and applied to the activities being performed by the injured party at the time of his accident. The exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case (see Continental Cas. Co. v Rapid-Am. Corp., 80 NY2d 640, 652 [1993]). The court also properly found that the protections of Insurance Law § 3420[d] were inapplicable to one insurer's claim for reimbursement from another insurer (see Bovis Lend Lease LMB, Inc. v Royal Surplus Lines Ins. Co., 27 AD3d 84, 91-92 [2005]).
It apparently did not matter to either the motion court or the First Department that, unlike in Bovis Lend Lease LMB, the mutual insured was a nominal party in this coinsurance recovery action, settlement monies had already been paid on behalf of the mutual insured, and American was proceeding against State, in part, as the mutual insured's subrogee.  Thus, the Insurance Law § 3420(d) argument of untimeliness American was making against State was being made as much on behalf of S&W as for itself.

Contrast this decision with the First Department's ruling in JT Magen v. Hartford Fire Ins. Co., 64 AD3d 266 (1st Dept., 5/14/2009), in which the court clarified its holding in Bovis Lend Lease LMB and held that a tender letter which one insurer sends to another insurer — asking that their mutual insureds be provided with a defense and indemnity as additional insureds under the latter insurer's policy — fulfills that policy's notice-of-claim requirements so as to trigger that insurer's obligation to issue a timely disclaimer pursuant to Insurance Law § 3420(d).  The First Department made no mention of its JT Magen decision in this case presumably because both State and American became aware of the underlying accident and injuries at the same time, there was no tender from American to State (American being the excess/umbrella rather than a co-primary insurer), and State assumed S&W's defense in the underlying personal injury action.

1 comment:

max gershweir said...

Roy, as you know, I represented State National in this case. I can't agree with your commentary that "the Insurance Law § 3420(d) argument of untimeliness American was making against State was being made as much on behalf of S&W as for itself." Since S&W was fully indemnified by American, the 3420(d) claim was American's alone since only American stood to gain from it. As for your reference to S&W as American's "subrogee," on which you base this commentary, I leave you with my argument on that issue in my reply memorandum of law before the trial court(American abandoned its subrogee argument on appeal):

American Guarantee’s claim that it proceeds as S&W’s subrogee is of no moment. In each case on which State National relies involving § 3420(d)’s applicability, the insurer was naturally seeking recovery for amounts it had expended or might expend on its insured’s behalf, and thus, by American Guarantee’s definition, at least, qualified as the insured’s “subrogee.” Nevertheless, in each case, the courts found that the insurer was not entitled to “stand in the shoes” of the insured with regard to § 3420(d).
None of those cases discuss whether their finding in this regard stems from the fact that the insurer does not, in fact, proceed as the insured’s subrogee under such circumstances, or that equitable principles involving § 3420(d)’s intent dictate that, despite proceeding as the insured’s subrogee, that equitable doctrine should not apply. Either way, however, the cases establish that an insurer seeking recovery for amounts expended on its insured’s behalf simply may not rely on § 3420(d).
For what it is worth, there is support for both rationales. First, “[s]ubrogation is an equitable principle [that] entitles an insurer to ‘stand in the shoes’ of its insured to seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse.’” Fed. Ins. Co. v. N. Am. Specialty Ins. Co., 47 A.D.3d 52, 62, 847 N.Y.S.2d 7 (1st Dep’t 2007) (emphasis added) (quoting N. Star Reins. Corp. v. Cont’l Ins. Co., 82 N.Y.2d 281, 294, 604 N.Y.S.2d 510 (1993)). Thus, where the loss for which the insurer seeks recovery resulted solely from the insured’s own wrongdoing, e.g., violating the Labor Law, rather than that of the party against whom the insurer seeks recovery, the insurer may not recover as a subrogee. Id. Since that is the case here, American Guarantee may not proceed against State National as S&W’s subrogee.
Even if subrogation might otherwise apply, however, it is, as quoted above, “an equitable principle” and thus may not apply under circumstances where other equities militating against its application outweigh it. Thus, for example, the courts created the anti-subrogation rule so that an insurer otherwise subrogated to its insured’s rights may not proceed against another party it insures for the same loss due to the conflicts of interest that may arise. See, e.g., N. Star Reins. Corp. v. Cont’l Ins. Co., 82 N.Y.2d 281, 294-95, 604 N.Y.S.2d 510 (1993). Likewise here, applying § 3420(d) would be inequitable because it would be inconsistent with that statute’s intent and come at the expense of an insurer whose policy actually excludes coverage.
As stated above, however, whatever the rationale may be, the courts have made it clear that no insurer, no matter the consequences, may reap the benefit of § 3420(d).