Thursday, April 30, 2009

No-Fault Retro -- A Persistent Attempt to Roll Back the Clock

New York State Assemblyman Peter Rivera of the Bronx is nothing if not persistent.  Last week, he reintroduced a bill that would enlarge back to "six months"  (which could actually be 182 days long if February in a leap year falls within that six month period) the required time periods for both notice of accident (currently 30 days) and proof of claim (currently 45 days for health service expenses and 90 days for work loss benefits and for other necessary expenses) in New York no-fault claim matters.

Assembly Bill No. A07714, which does not appear to have a matching bill in the state senate this legislative session, was read once and immediately referred to the Assembly's Insurance Committee on April 22nd.  Again.  The prior legislative history for this bill dates back to 2000, with versions having been introduced and referred to the Assembly's Insurance Committee in each year and legislative session since, but apparently  never coming out for a vote.

If this proposed bill has any chance of seeing the legislature's floor for a vote, someone in Assemblyman Rivera's office should freshen it up with some accurate dates and re-write the "Justification" section of his sponsoring memorandum.  When the bill was first introduced in 2000, the February 1, 2000 effective date for Regulation 68's reduced time frames may have been correct, but the Medical Society of New York twice challenged the revised regulation -- once successfully and once not -- in separate Article 78 proceedings, the second of which eventually went all the way up to the New York Court of Appeals in 2003.  In upholding the Insurance Department's authority to revise Regulation 68 by, among other things, reducing the time limits for notice of accident and proof of claim, the Court of Appeals noted:
As represented at oral argument by counsel for respondents, in the year and a half that the regulations have been in effect, petitioners' predictions that thousands of innocent accident victims will fail to meet the new filing deadlines and be denied benefits, or that hospitals or other medical providers will prove unable to bill for services within 45 days, appear not to have materialized. In any event, the Superintendent has determined that the revised regulations are the most effective means of advancing the legislative intent of providing prompt payment of benefits as the loss is incurred, while reducing rampant abuse.  Matter of Medical Society of the State of N.Y. v. Serio, 100 N.Y.2d 854 (2003).
So what has changed?  A good but brief legal history of Regulation 68 can be found on the New York State Insurance Department's website.  The effective date of revised revised Regulation 68 is April 5, 2002, making the sponsoring memorandum's statement that "[t]he regulations were recently changed" inaccurate, unless we're speaking in geological or astronomical terms. Additionally, the current version of Regulation 68 does not, as Assembly Rivera's sponsoring memorandum erroneously states, require a claimant to justify a late notice of accident or proof of claim by "clear and convincing evidence".  What is required is "written proof providing clear and reasonable justification for the failure to comply", which some will recall is a relaxation of the previous requirement in "old" Regulation 68 that an eligible injured person or that person's representative submit written proof "that it was impossible to comply with such time limitation due to specific circumstances beyond such person's control."

I don't dispute that the New York State Legislature has the authority to enact insurance laws such as the one Assemblyman Rivera has proposed six times.  If Assemblyman Rivera believes (which I'm not suggesting he doesn't) and has empirical support for his belief (which I question whether he does) that policyholders, injured persons and medical providers have been negatively affected by the 2002 reductions in notice of accident (90 to 30) and proof of claim (180 to 90 & 45) time limits, he should continuing championing this bill.  If does not, however, the bill is an anachronism that should again be allowed to die in committee and not be reintroduced.

If you support or oppose the idea of this proposed bill, you can let Assemblyman Rivera know about it by contacting him here.  I have. 

Thanks to Claims Counsel Lisa Mahaffey of 21st Century Insurance Company for bringing this reintroduced bill to my attention yesterday.

Tuesday, April 28, 2009

Should Liability Insurers Investigate Coverage Issues in New York?

You've just received first notice of a claim for coverage under a liability insurance policy in New York. The scant paperwork you've received doesn't tell you much. The loss date is months or years ago, but, in good faith, your instinct is to contact your insured and investigate potential coverage issues, including late notice. You know that there is a time imperative in New York to disclaim or deny coverage as soon after first notice as possible. You've heard that delays as short as 30 days in disclaiming have been found to invalidate an otherwise appropriate coverage declination. But you've also heard that what's not in a declination letter cannot later be asserted as a coverage defense in a declaratory judgment action, so, if a coverage declination is warranted, you want to be careful to include all applicable noncoverage grounds, and some amount of investigation seems to be needed in order to to make a conscientious coverage determination. What do you do?

New York's "timely disclaimer statute", Insurance Law § 3420(d)(2) provides:
(d)(2) If under a liability policy delivered or issued for delivery in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.
For this statute to apply there must be four things:
  1. coverage sought under a liability policy
  2. delivered or issued for delivery in New York State
  3. for a death or bodily injury claim
  4. that arose out of a accident that occurred in New York State.
If implicated, this timely disclaimer requirement applies only to exclusion-based or breach-of-condition-based disclaimers or denials. Technically it does not apply to apply to coverage declinations based on lack of coverage (inapplicability of inclusionary terms).

One need only to click the "untimely disclaimer" label of this blog to see that New York courts can be unforgiving of unexcused delays as short as 45 days (exclusion), 45 days (late notice), 55 days (exclusion), and 62 days (exclusion) in disclaiming coverage. Even a 30-day delay (late notice) has been held to be unreasonable as a matter of law. Holy cow. Understand the angst now?

Last Friday, the Appellate Division, Fourth Department, issued two decisions with two opposite results: timely disclaimer (44 days); untimely disclaimer (62 days). Was it just the length of the insurers' delays that determined the outcomes? No. It was the court's acceptance or rejection of each insurer's contention that an investigation of coverage was necessary to reach a coverage determination.

In Matter of GMAC Ins. Co. v. Jones the Fourth Department ruled that Nova Casualty Company's 44-day delay in disclaiming personal auto liability coverage based on late notice was justified given its investigation into the 18-month late notice situation. The court found that the fact that Nova knew of the 18-month late notice upon receipt of the claim did not make it readily apparent that it had the right to disclaim coverage. "Only an investigation of the type ordered by [Nova] would yield [information that it] needed in order to make a good faith decision regarding disclaimer", said the court.

Contrast that outcome with the ruling in Crocodile Bar, Inc. v. Dryden Mut. Ins. Co. in which the court found Dryden Mutual's 62-day delay in disclaiming coverage based on a policy exclusion to be unreasonable as a matter of law, even though Dryden Mutual also argued that it needed time to investigate coverage.  Pivotal to the outcome was the court's observation that "Dryden's claims adjuster was aware when he received the claim ... that the claim was excluded from the policy[.]"

Although some might attribute the different rulings to the fact that UM coverage was still available to the claimant in the GMAC v. Jones case whereas no coverage ostensibly would have been available to the injured underlying plaintiffs had the court sustained Dryden Mutual's disclaimer in the Crocodile Bar case, the Dryden Mutual case underscores an important rule:  when a liability insurer either (1) has sufficient knowledge of facts entitling it to disclaim, or (2) knows that it will be disclaiming coverage, it must do so as soon as reasonably possible or risk invalidation of an exclusion- or condition-based disclaimer as untimely under New York Insurance Law § 3420(d).

Some might say or think that there is an inherent tension between this rule and an insurer's good faith obligation to investigate and evaluate claims for liability coverage. If you say or think that, you're right. There is such a tension. Couple that with the "one bite of the apple" rule that has been applied to preclude liability insurers from asserting in subsequent litigation certain noncoverage defenses not raised in their original coverage disclaimer or denial letters.

The "should we investigate?" question is a good and valid one. Claims professionals and coverage practitioners have seen plenty of cases in which New York courts have been unforgiving of pretty much any delay in disclaiming when, in the opinion of the courts, one or more grounds for disclaiming coverage were "readily apparent" or "obvious" almost immediately upon or after the insurer's receipt of first notice and "before the onset of the delay". How, then, can an insurer know when an investigation of coverage will be deemed necessary and excuse a delay in issuing a disclaimer?

Before answering that question, it is important to bear in mind that when an insurer attempts to explain a delay in disclaiming liability coverage by asserting that there was a need to investigate issues that would affect its decision on whether to disclaim, the burden will be on the insurer to establish that the delay was reasonably related to the completion of a necessary, thorough, and diligent investigation. Necessary, thorough, and diligent.

In the GMAC v. Jones matter, Nova presumably was attempting to determine why its insured never provided notice of the accident. Late notice, although ultimately the ground upon which Nova disclaimed liability coverage to its insured may be excused, and Nova no doubt wanted and needed to know whether its insured had an excuse for not having notified it of the accident 18 months earlier. Necessary, thorough and diligent.

Dryden Mutual, on the other hand, presumably had all the information it needed to disclaim immediately upon receipt of its insured's notice of the three underlying personal injury action, viz, that they sought to impose liability on the insured for alleged violations of New York's Dram Shop laws, a clearly excluded theory of liability. That the insured may have delayed reporting the occurrences or lawsuits to Dryden was inconsequential to the motion and appellate courts because non-compliance with New York's timely disclaimer statute -- Insurance Law § 3420(d) -- in effect excuses late notice. There is no such thing as an excuse to an exclusion, however, and, in the court's opinion, no amount of investigation was necessary to determine whether the policy's liquor liability exclusion applied to negate coverage.

It appears New York courts are less forgiving and tolerant of investigation caused delays where the applicability of a exclusion to deny coverage is "readily apparent" before any investigation is undertaken. Of course, late notice may also be a potential noncoverage ground, but the insurer should be mindful of the invalidating impact of Insurance Law § 3420(d) on any disclaimer found to be unreasonably or unnecessarily delayed. In two cases, courts found as unreasonable only 30-day delays in disclaiming coverage based on late notice that was, in the courts' opinions, "obvious" or "readily apparent" from the notices and pleadings the insurers initially received. W.16th St. Tenants Corp. v. Public Service Mut. Ins. Co., 290 AD2d 278 (1st Dept. 2002); Transcontinental Ins. Co. v. Gold, 18 Misc 3d 1135(A) (Sup.Ct., Nassau Co., 2008). In both cases, the courts held that there no need under such circumstances to conduct a coverage investigation.

With the recent reminder from Kings Supreme in Grinshpun v. Travelers Cas. Co. of Conn. that legal fees and costs can be recovered in actions seeking coverage where it is alleged and proven that this insurer's disclaimer or denial was made in "bad faith", the importance of making a "good faith decision regarding disclaim[ing]" remains important, in spite of seemingly incompatible decisions such as W. 16th St Tenant Corp. and Transcontinental Ins. Co. which suggest that there are situations in which no coverage investigation should be made. If a liability insurer decides it is necessary to investigate coverage issues, however, it must do so thoroughly and diligently, with meticulous documentation of all efforts made in such an investigation.

So should a liability insurer investigate potential coverage issues in New York? Sure they should, especially if those coverage issues are any less than indisputable. Investigate what appears at first blush to be late notice? Yes, but quickly. But if a policy exclusion also clearly applies to negate coverage regardless of late notice, consider how successful one will be of convincing a court that any delay beyond a week or two in disclaiming was, in the first instance, necessary. The insurer's coverage investigation can be the model of thoroughness and diligence, but if it is found not to have been necessary, even a well-documented investigation followed by a delayed disclaimer will be at risk of invalidation.

Monday, April 27, 2009

Prejudice Still Required for Late Notice of SUM Claim Where Timely Notice of Accident Was Given

Bhatt v. Nationwide Mut. Ins. Co.

(4th Dept., decided 4/24/2009)

Guess it may have been a fool's errand, after all.  Where timely notice of the original accident had been given, the claimant's delay of nearly 35 months in notifying Nationwide of her SUM claim was not enough without a showing of prejudice to deny SUM coverage based on late notice of the SUM claim:
"[W]here an insured previously gives timely notice of the accident, the carrier must establish that it is prejudiced by a late notice of SUM claim before it may properly disclaim coverage" (Rekemeyer v State Farm Mut. Auto. Ins. Co., 4 NY3d 468, 476). Here, it is undisputed that plaintiff timely notified defendant of the accident and, shortly thereafter, filed a claim for no-fault benefits. Defendant failed to establish that it was prejudiced by plaintiff's delay in providing notice of the SUM claim (see id. at 475-476).
I argued this case for Nationwide, but apparently did not convince the Fourth Department that the Rekemeyer prejudice-required rule cannot apply to every matter in which timely notice of the injury-causing accident was given.  What persuaded the Court of Appeals to change New York's common law and opt for a prejudice requirement in Rekemeyer was State Farm's opportunity to monitor and manage the claimant's active and longstanding no-fault claim in that case, an opportunity Nationwide did not have in this case.  Nonetheless, it's admittedly hard to ask the Appellate Division to carve out an exception to a Court of Appeals' rule that, in its face, seems so clear and absolute:  if there was timely notice of the accident, there must be prejudice from the late notice of the SUM claim in order to disclaim SUM coverage. 

Insurer Failed to Establish that Its 62-Day Delay in Disclaiming Liability Coverage Was Reasonably Related to the Completion of a Necessary Investigation

Crocodile Bar, Inc. v. Dryden Mut. Ins. Co.

(4th Dept., decided 4/24/2009)

Plaintiff brought this declaratory judgment action seeking defense and indemnification coverage for three underlying personal injury actions and moved for summary judgment, contending that Dryden had failed timely to disclaim liability coverage.

Erie Supreme granted plaintiff's motion and the Fourth Department AFFIRMED, finding that Dryden had failed to establish that its 62-day delay in disclaiming coverage based on the policy's liquor liability exclusion was reasonable:
"[A] timely disclaimer [of coverage] pursuant to Insurance Law § 3420(d) is required [where, as here,] a claim falls within the coverage terms but is denied based on a policy exclusion" (Markevics v Liberty Mut. Ins. Co., 97 NY2d 646, 648-649; see Worcester, 95 NY2d at 188-190; Penn-America Group v Zoobar, Inc., 305 AD2d 1116, 1117, lv denied 100 NY2d 511). "[O]nce the insurer has sufficient knowledge of facts entitling it to disclaim, or knows that it will disclaim coverage, it must notify the policyholder in writing as soon as is reasonably possible" (First Fin. Ins. Co. v Jetco Contr. Corp., 1 NY3d 64, 66; see Republic Franklin Ins. Co. v Pistilli, 16 AD3d 477, 479; Squires v Robert Marini Bldrs., 293 AD2d 808, 810, lv denied 99 NY2d 502). Here, Dryden's claims adjuster was aware when he received the claim on November 10, 2005 that the claim was excluded from the policy, and Dryden failed to establish that its 62-day delay was "reasonably related to the completion of a necessary, thorough, and diligent investigation" (Quincy Mut. Fire Ins. Co. v Uribe, 45 AD3d 661, 662; see First Fin. Ins. Co., 1 NY3d at 70; Morath v New York Cent. Mut. Fire Ins. Co., 49 AD3d 1245).
Rule:  When an insurer attempts to explain a delay in disclaiming liability coverage by asserting that there was a need to investigate issues that would affect the decision on whether to disclaim, the burden is on the insurer to establish that the delay was reasonably related to the completion of a necessary, thorough, and diligent investigation.

Sunday, April 26, 2009

Disclaimer Issued 44 Days After First Notice Held Timely Given Insurer's Investigation

Matter of GMAC Ins. Co. v. Jones

(4th Dept., decided 4/24/2009)

GMAC commenced this special proceeding to stay arbitration of Jones' UM claim.  Jones was injured in a July 3, 2006 motor vehicle accident with Nova Casualty Company's insured, Willoughby.  Nova's first notice of the accident came on January 8, 2008, when it received a letter from Jones's attorney concerning the accident.  On January 14, 2008, Nova sent a letter to Willoughby indicating that there was a "coverage question" based on his "failure to report an accident and cooperate in the investigation." The letter further stated that Nova would continue to handle the claim but that it reserved its right to disclaim coverage.

Thereafter, Nova attempted to locate Willoughby to allow him to explain his failure to notify Nova of the claim. Nova's efforts included sending a letter to Willoughby's last known address, which was returned as undeliverable; calling Willoughby at several of his last known telephone numbers; calling Willoughby's sister, who stated that she had not had contact with Willoughby since April 2007; calling Willoughby's neighbors at Willoughby's known addresses; physically attempting to contact Willoughby at four known addresses; sending letters to Willoughby at his sister's address; attempting to obtain a copy of the police report from the accident; and corresponding with respondent's attorney in an attempt to obtain additional information concerning Willoughby.

Despite those efforts, Nova never received a response from Willoughby, and it disclaimed coverage on February 21, 2008.  Jones then requested UM arbitration with GMAC, contending that Willoughby's vehicle was an "uninsured vehicle" under his policy.

GMAC commenced this special proceeding to stay Jones's UM arbitration, naming Nova as a proposed additional respondent and contending that Willoughby's vehicle was not uninsured because Nova's disclaimer, sent  six weeks after first notice, was untimely.  Erie Supreme denied  GMAC's request for a framed hearing on the timeliness of Nova's disclaimer and denied GMAC's petition.

In AFFIRMING the denial of GMAC's petition, the Fourth Department agreed that Nova had established as a matter of law that its disclaimer of coverage was valid, based on the 18-month delay between the date of the accident and the date on which Nova received notice of that accident.  The appellate court found that Nova was justified in investigating the 18-month late notice before disclaiming:
Contrary to petitioner's further contention, the delay of 44 days between the date on which Nova received notice of the claim and the date on which it notified Willoughby of the disclaimer did not render its disclaimer of coverage untimely. It is well settled that, "[i]n order to effectively disclaim liability or deny coverage . . . under an automobile liability insurance policy, an insurer must give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage' " (Hartford Ins. Co. v County of Nassau, 46 NY2d 1028, 1029, rearg denied 47 NY2d 951). "[A]n insurer's explanation [for a delay in notifying the insured of a disclaimer] is insufficient as a matter of law where the basis for denying coverage was or should have been readily apparent before the onset of the delay" (First Fin. Ins. Co. v Jetco Contr. Corp., 1 NY3d 64, 69). "However, an insurer's delay in notifying the insured of a disclaimer may be excused when the insurer conducts an investigation into issues affecting [its] decision whether to disclaim coverage' . . . In that case, the burden is on the insurer to demonstrate that its delay was reasonably related to its completion of a thorough and diligent investigation" (Tully Constr. Co., Inc. v TIG Ins. Co., 43 AD3d 1150, 1152-1153, quoting First Fin. Ins. Co., 1 NY3d at 69). 

We conclude that Nova's efforts constituted an "investigation into issues affecting [Nova's] decision whether to disclaim coverage" (First Fin. Ins. Co., 1 NY3d at 69; see generally Tully Constr. Co., Inc., 43 AD3d at 1153; Sirius Am. Ins. Co. v TGC Constr. Corp., 37 AD3d 818, 819). Nova therefore established a reasonable excuse for the delay as a matter of law, and there was no reason to conduct a "framed issue hearing" with respect to Nova's disclaimer. The fact that Nova knew on January 8, 2008 that the claim involved an accident that occurred on July 3, 2006 "did not make it readily apparent' that it had the right to disclaim coverage" (Ace Packing Co., Inc. v Campbell Solberg Assoc., Inc., 41 AD3d 12, 15). "Only an investigation of the type ordered by [Nova] would yield [information that it] needed in order to make a good faith decision regarding disclaimer" (id.; see Norfolk & Dedham Mut. Fire. Ins. Co. v Petrizzi, 121 AD2d 276, 278, lv denied 68 NY2d 611).

Happy 1st Birthday to Coverage Counsel

365 days ago I sat down at this computer in my den at home, signed up for Blogger, and started designing this blog.  At 7:12 p.m. on Saturday, April 26, 2008, I published my first post on the Bi-Economy decision.  That decision has proven to be a recurring and fertile source of material for this blog.  359 labels, 474 posts, 18,800 unique visitors, 39,353 visits, 64,614 page views, and innumerable hours in this green leather high back chair bring us to here. 25.67% of you have visited directly.  33.19% of you have come here from or through other blogs or websites.  And 41.14% of you have made it here via a search engine.  "Coverage Counsel" ranks first in search keywords, while "waiver of subrogation" and "Graves Amendment" remain firmly in the top 5.

This blog has been a discovery process for me.  I've discovered how both fun and not fun writing can be sometimes.  I've discovered how a blog can be an excellent vehicle for delivering information.  Most importantly, however, I've rediscovered the enjoyment of following and reporting a body of law as dynamic and sometimes controversial as insurance coverage law is.  I've also met, either in person or electronically, some very smart, very passionate, and very cool people.

Thank you for visiting and reading.  I said at the beginning and will say again:  if you have any suggestions for improving this blog, please let me know.  Using the labels and search tools on this blog will make it easier for you to find the information you're looking for.  And, if you haven't figured out yet how to subscribe to this blog in an RSS reader, consider subscribing to a weekly email newsletter by using the Feedblitz gadget on the right side of this page.  Or just keep coming back via the ways in which you've been coming back.

If you like what you see and find this blog to be useful, please let me know, either in a comment or email.  And pass a link along to someone who may not yet know about or read Coverage Counsel.  Believe it or not, feedback of all kinds helps.   It'd be nice to know from other than my regular commenters, that the hours I devote to this free resource are informative and helpful to folks who make, evaluate, pay, deny or litigate insurance claims.  So, if you'd like to see Coverage Counsel make it to its 2nd birthday, let me know, will ya?  I'm not fishing for compliments; I'm requesting validation, that's all.  Thanks.

Saturday, April 25, 2009

Denial of Class Certification to No-Fault DME Provider Upheld

Globe Surgical Supply v. Allstate Ins. Co.

(2nd Dept., decided 4/21/2009)

Plaintiff no-fault DME provider brought this class action against Allstate for paying less that 150% of plaintiff's "documented costs" for durable medical equipment and supplies.  Plaintiff moved pursuant to CPLR §§ 901 and 902 for an order allowing the action to proceed as a class.

The five prerequisites for a class action under CPLR § 901(a) are:
  1. the class is so numerous that joinder of all members, whether otherwise required or permitted, is impracticable;
  2. there are questions of law or fact common to the class which predominate over any questions affecting only individual members;
  3. the claims or defenses of the representative parties are typical of the claims or defenses of the class;
  4. the representative parties will fairly and adequately protect the interests of the class; and
  5. a class action is superior to other available methods for the fair and efficient adjudication of the controversy.
In deciding whether an action may proceed as a class in New York state court, a court must also consider the five factors of CPLR § 902:
  1. the interest of members of the class in individually controlling the prosecution or defense of separate actions;
  2. the impracticability or inefficiency of prosecuting or defending separate actions;
  3. the extent and nature of any litigation concerning the controversy already commenced by or against members of the class;
  4.   the desirability or undesirability of concentrating the litigation of the claim in the particular forum; and
  5. the difficulties likely to be encountered in the management of a class action.
Nassau Supreme denied plaintiff's motion for certifcation of the class, and plaintiff appealed. 

The Second Department MODIFIED the order  by adding the words "without prejudice to renewal of the motion", holding:
This action is in all material respects identical to Globe Surgical Supply v GEICO Ins. Co. (59 AD3d 129). As in that case, and for the reasons stated therein, Globe Surgical Supply, as assignee of Charles Charlotin, met all of the class certification prerequisites in the instant matter except adequacy of representation (see CPLR 901[a][4]). Accordingly, that branch of its motion which was to certify a class action should have been denied without prejudice to renewal (see Globe Surgical Supply v GEICO Ins. Co., 59 AD3d 129). 
In Globe Surgical Supply v GEICO Ins. Co., 59 AD3d 129 (2nd Dept. 2008), the Second Department addressed "whether it is appropriate to certify a class action challenging the validity, under regulations in effect prior to October 6, 2004, of a no-fault insurer's use of the prevailing geographic rate or the reasonable and customary rate for health care services in calculating first-party benefits due to a claimant or health-care provider."  In that case, the Second Department reversed class certification of Globe Surgical Supply's action without prejudice, finding that plaintiff had not satisfied the fourth prerequisite under CPLR 910, namely, that "the representative parties will fairly and adequately protect the interests of the class[.]"

In that matter, the Second Department found that Supreme Court properly rejected Jean M. Francois, the owner of Globe, as an adequate representative for the class:
Although Globe attempts to couch Francois's problems in terms of "amorphous and generalized suppositions," it is clear that Francois was charged with insurance fraud for attempting to stage accidents and thereafter bill insurance companies. While he may have only pleaded guilty to disorderly conduct, he displayed his attempt to put his interest above others by invoking his Fifth Amendment rights at his deposition, although he later withdrew his invocation of the Fifth Amendment in a subsequently-filed reply affidavit. Moreover, there was adequate evidence that Francois was engaged in recycling invoices. In addition, Francois and the class are subject to a class action counterclaim which may or may not be meritorious.[FN4] In any event, Francois's attempt to defend himself against any such counterclaim by GEICO would preoccupy him and detract from his representation of the class. 
Footnote 2 in the GEICO case explains Francois's insurance fraud arrest:
In his affidavit sworn to April 21, 2006, Christopher J. Jones, a "Detective with the NYPD's Fraudulent Accident Investigation Squad ... for the past 2½ years," stated that "[f]raud by DME suppliers against no-fault insurance companies is widespread. It has been a principal focus of our Squad's investigation . . . On or about June 1, 2005, Mr. Francois was arrested as the result of an undercover investigation in which I was involved. He was arrested for offering to pay an undercover agent to stage a phony automobile accident and refer the alleged 'victims' to a medical clinic. The specific charges were insurance fraud in the third degree and conspiracy in the fifth degree . . . Subsequently, Mr. Francois entered into a plea agreement, pleading guilty to disorderly conduct."
Two actions; neither certified as a class, due to the legal entanglements of plaintiff's owner. Will we see these actions re-sued by different representative plaintiffs?  Or will plaintiff divest its owner and re-move for certification?  Would that be enough to satisfy the Second Department?  Or will Globe simply proceed in these separate actions as a single plaintiff in each and seek to obtain a ruling from Nassau Supreme that it was owed 150% of its alleged documented costs, rather that what GEICO and Allstate decided were reasonable and prevailing reimbursement rates for the geographic billing areas?

Friday, April 24, 2009

Court Sustains Coverage Denial Based on Unexplained Loss Exclusion of Jewelers Block Policy

E. Chabot, Ltd. v Lead Underwriters of Great Lakes Reinsurance (U.K.) Plc.

(Sup. Ct., New York Co., decided 4/15/2009)

Plaintiff Manhattan jewelry company obtained a jewelers block insurance policy from the defendants, which, under its "Insuring Conditions" section, contained the following exclusions:
(i): Loss or damage to property while in or upon any automobile, motorcycle, or any other vehicle unless, at the time the loss or damage occurs, there is actually in or upon such vehicle, the Assured, or a permanent employee of the Assured, or a person whose sole duty is to attend the vehicle, except as may be endorsed hereon[.]

(m): Unexplained loss, mysterious disappearance or loss or shortage disclosed on taking inventory[.]
While visiting plaintiff's customers in Brooklyn, Baroukh Shabot, the father of the plaintiff's principal shareholder, placed jewelry valued at over $150,000 into the locked trunk of his car. While waiting in the car as another employee of plaintiff went to collect money from a customer, Shabot was approached by a man who said that Shabot's car was leaking. The man offered to show Shabot the source of the leak, and Shabot got out of the car, taking the car keys with him. He then opened the hood, and the man indicated several holes in the radiator. Shabot stated that he immediately closed the hood and reentered the vehicle. He further testified that when he got back in the car, the trunk was closed and he did not see a “trunk ajar light” or
my other warning light on. He also stated that the trunk could be released from inside the vehicle, but the release makes a noise, and that while he was outside he did not hear the trunk release, that the area was quiet, and that he did not see anyone approach the car. When the other employee returned, he and Shabot drove back to Shabot’s home, at which time they opened the trunk and discovered that the jewelry was missing.

After Shabot and the other employee discovered that the jewelry was missing, they did not immediately call the police, the plaintiff, or the insurance broker. At his deposition, when asked what happened to the property, Shabot said; “I don’t know. I wish I knew.” The other employee also testified that he did not know what happened to the property or where or when it was lost.

Plaintiff made a claim to defendants for $90,000, the policy's $100,000 limit less its $10,000 deductible. Defendants denied coverage based on the policy's automobile and unexplained loss exclusions, and plaintiff commenced this action. Following discovery, defendants moved for summary judgment based primarily on the policy's unexplained loss exclusion.

In support of their motion, defendants relied heavily on Maurice Goldman & Sons, Inc. v Hanover Insurance Company, 179 AD2d 388 (lst Dept), affd 80 NY2d 986 (1992), which involved an exclusionary clause identical to that set forth in Condition 5(m). In that case, the Appellate Division wrote:
Plaintiff insured, a jewelry company, brought this action to recover on contracts of primary and excess 'jewelers block' insurance entered into with defendants. During a business trip, plaintiffs president realized that a bag containing jewelry was missing but he could not say where or how the loss occurred. We agree with the IAS court that the claim is outside the ambit of coverage on the basis of the policies' exclusionary clause for "unexplained loss, mysterious disappearance or loss or shortage disclosed on taking inventory." ... Clearly, these words ("unexplained loss") are meant to apply to losses, such as this, for which the insured can furnish no explanation whatsoever and, set off as they are from the rest of the sentence, are not limited by the phrase mysterious disappearance or loss or shortage disclosed on taking inventory.
In affirming the First Department's decision, the Court of Appeals held:
Where the provisions of an insurance contract are clear and unambiguous, the courts should not strain to superimpose an unnatural or unreasonable construction (see, e.g., Government Employees Ins. Co. v Kligler, 42 NY2d 863; Ambassador Assocs. v Corcoran, 79 NY2d 871, affg 168 AD2d 281). Contrary to plaintiff's argument, the clause in issue here is susceptible of only one interpretation. Each of the enumerated casualties, i.e., "unexplained loss," "mysterious disappearance," and "loss or shortage discovered on taking inventory," is plainly an independent basis for exclusion. There is nothing in the grammar or syntax of the exclusionary clause to suggest that the phrase "discovered on taking inventory" was intended to modify to each one.
In granting defendants' summary judgment motion in this case, New York County Supreme Court Justice Edward Lehner distinguished this matter from reported cases in which insureds had created triable questions of fact on the applicability of the unexplained loss exclusion, and concluded:
Further, courts have held that the mere fact that the insured property is no longer where the insured placed it does not warrant the inference that the property was lost, much less that it was stolen. General Credit Corp. v Travelers, 288 AD2d 66 (1st Dept 2001); WestCom Corp. v Greater New York Mutual Insurance Company, 41 AD3d 224 (1st Dept 2007).

In light of plaintiffs failure to offer any evidence to explain what happened to the jewelry, other than its employees' speculation unsupported by any specific facts that reasonably support the contention, its claim is clearly an "unexplained loss," and thus not covered by the Policy in light of the said exclusionary clause contained therein.

DMV Abstract Found Sufficient to Require Hearing on Liability Coverage for Offending Vehicle, Staying UM Arbitration

Matter of American Transit Ins. Co. v. Molina

(Sup. Ct., New York Co., decided 4/15/2009)

American Transit commenced this special proceeding to stay the UM arbitration of Molina.  In support of its petition, American Transit offered a police report listing "Vehicle 2" as a 2000 Dodge with a certain license plate that left the scene.  American Transit also offered a DMV abstract showing two matches for that vehicle, and also indicating that Country-Wide Insurance Company insured that vehicle on the accident date. 

In granting American Transit's application for a temporary stay of the claimant's UM arbitration, the court found that American Transit "ha[d] presented evidence that raises a genuine issue as to whether Vehicle 2 was insured on the date of the accident, August 2,2008."  Noting that Country-Wide presented no evidence that it did not insure Vehicle 2 on the accident date, the motion court rejected Country-Wide's objection to the petition due to its pending investigation into the alleged accident and coverage of the vehicle.

Tuesday, April 21, 2009

Kings Supreme Denies Dismissal of Claim for Bad Faith Denial of SUM Claims

Grinshpun v. Travelers Cas. Co. of Conn.

(Sup. Ct., Kings Co., decided 3/11/2009)

The three plaintiffs were involved in a car accident on July 31, 2004. The owner and driver of the car that hit plaintiffs had a GEICO policy with $25,000 per person and $50,000 per accident liability coverage limits.  GEICO tendered the full policy to plaintiffs, who accepted with the approval of their own SUM insurer, Travelers.

The Travelers policy included "Supplementary Uninsured/Underinsured Motorist" (SUM) coverage with $100,000/$300,000 policy limits. Plaintiffs were "covered persons" under the terms of the policy.  Plaintiffs Dimitry Grinshpun and Sergio Rovner alleged they suffered injuries which entitled them to the full $100,000 SUM coverage each under Rovner's policy held with Travelers.  Plaintiff Anna Rovner asserted she was entitled to full coverage of $100,000, as she suffered loss of consortium resulting from the injuries sustained by her husband.

Apparently Travelers did not believe plaintiffs' claims were worth the GEICO policy limits and denied payment to them on their SUM claims.  The decision does not reveal the exact basis of Travelers' declination to pay SUM benefits, but there does not appear to have been any denial of coverage.  Plantiffs commenced this action , each seeking $100,000 in SUM benefits.  In addition to seeking payment of SUM coverage benefits, plaintiffs' complaint alleged that Travelers' refusal to pay SUM benefits was not made in good faith and further sought a judgment "awarding damages" in the sum of $1,000,000 each, plus interest, costs and disbursements of bringing this action.

Travelers moved to dismiss plaintiffs' "bad faith" cause of action and disqualify plaintiffs' counsel from representing the plaintiffs.  Travelers argued that plaintiffs' complaint failed to allege the necessary factual predicates, such as that Travelers acted with "gross disregard" in refusing to settle or pay plaintiffs' claims, to support an insurer "bad faith" claim.  According to the decision, plaintiffs countered that "although this specific cause of action has not yet been recognized in New York, the law is evolving in this area and this court should permit the action to go forward to permit Plaintiffs to seek relief in excess of the policy limits."

In denying Travelers' motion to dismiss the "bad faith" cause of action, Kings County Supreme Court Justice Wayne Saitta relied on the New York Court of Appeals' 1967 decision in Sukup v. State of New York, noting: 
Plaintiffs are seeking damages in excess of the policy limits due to Defendant's alleged breach of its duty under the policy to exercise good faith in paying Plaintiffs' SUM claims.This claim differs from the situation where an insured seeks damages where the insurer refuses to settle a tort action against the insured within the policy limits and the insured is subjected to a judgment in excess of the policy limits. Here Plaintiff seeks extra contractual damages for a denial of a first party claim, not for being exposed to further liability to a third party. Also, this is not a claim for punitive damages as Plaintiffs seek to be compensated for the cost of having to commence a lawsuit to enforce their claim, not to punish the Defendant for its alleged bad faith. 

Despite Plaintiffs' assertion that this is a novel legal theory, the Court of Appeals in Sukup v. State of New York, 19 NY2d 519, 281 NYS2d 28 (1967), established that there is a cause of action for extra contractual damages where an insurer refuses, in bad faith, to pay a claim of its own insured. 

In Sukup, the Court determined that a viable cause of action could be maintained for "extra-contractual damages" from an insurer's bad faith denial of coverage, even though in the case before it, plaintiff did not demonstrate that the insurer denied his worker's compensation coverage in bad faith. 

The Sukup Court held that while an insured cannot recover his legal expenses in a controversy with a carrier over coverage merely because the carrier is held responsible for the loss, or where the dispute is an arguable difference of opinion, it can recover such costs where the denial is made in bad faith. 

The Court of Appeals set forth the standard required in order to prevail on such a claim, holding, "It would require more than an arguable difference of opinion between carrier and insured over coverage to impose an extra contractual liability for legal expenses in a controversy of this kind. It would require a showing of such bad faith in denying coverage that no reasonable carrier would, under the given facts, be able to assert it". Id. at 522. 
The court also cited and relied on several other New York state and federal court decisions which appear to have followed the ruling of the Court of Appeals in Sukup and sustained pleaded claims (but not recoveries) for attorneys' fees and costs of bringing a declaratory judgment or breach of contract action where it is alleged that the insurer denied coverage in bad faith.  Justice Saitta, however, declined to apply the consequential damages rule of the Court of Appeals in the Bi-Economy and Panasia Estates cases:

In the case at bar, Plaintiffs do not allege that they suffered any damages as a consequence of Defendant's bad faith refusal to pay their claims other than the costs associated with having to commence a legal action to enforce their claims. Such damages are not consequential damages that were contemplated by the policy as in the situations in Bi-Economy and Panasia.

However, the expanded recognition of recovering foreseeable consequential damages of Bi-Economy and Panasia did not disturb the Court's recognition in Sukup of a cause of action for the costs of a suit to enforce a claim by an insured where its insurer denies a claim in bad faith.

The motion before the Court is to dismiss for failure to state a cause of action pursuant to CPLR §3211, not for summary judgment. Therefore in deciding this motion the Court does not consider whether Plaintiffs will in fact be able to establish that the insurer acted in bad faith in denying their claims.
One could argue that the court erred in relying on Sukup and its progeny to deny Travelers' CPLR Rule 3211(a)(7) motion to dismiss the bad faith claim. Sukup and the other cases cited have some distinguishing features.  Nevertheless, the decision in this case can and should be considered to be limited to two points: (1) if a complaint alleges that an insurer denied coverage in bad faith, it probably will withstand a motion to dismiss a claim for attorneys' fees and costs related to the commencement and prosecution of the action; and (2) recoverable damages for such an alleged bad faith denial of coverage, if proven, are limited to the legal expenses -- attorneys' fees and costs -- of bringing the action to enforce the insureds' coverage rights. 

Travelers should and probably will move for summary judgment to dismiss the bad faith cause of action following the completion of discovery.  Some quick research failed to uncover any reported New York cases in which Sukup damages -- attorneys' fees and costs of bringing the coverage lawsuit -- have actually been awarded.  In fact, in all the cases cited by Justice Saitta in his decision in this case, Sukup damages were ultimately denied based on the courts' findings that each of the insurers' coverage denials was based on an "arguable difference of opinion".  Although dismissal motions directed to the complaint may not succeed on this limited theory of recovery and type of damages, establishing that the insurer had an "arguable basis" for its disclaimer or denial of coverage should be possible on a motion for summary judgment.

Friday, April 17, 2009

Bi-Economy Burgles Into No-Fault

Savino v. The Hartford

(Sup. Ct., Suffolk Co., decided 3/25/2009)

Judge Smith was so right. In his dissent in the New York Court of Appeals' February 2008 Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y. 5-2 decision, he warned:
The majority's bad policy choice is more important than the flaws in its reasoning. This attempt to punish unscrupulous insurers will undoubtedly lead to the punishment of many honest ones. Under today's opinions, juries will decide whether claims should have been paid more promptly, or in larger amounts; whether an insurer who failed to pay a claim did so to put pressure on the insured, or from legitimate motives, or from simple inefficiency; and whether, and to what extent, the insurer's slowness and stinginess had consequences harmful to the insured. All these very difficult, often nearly unanswerable, questions will be put to jurors who will usually know little of the realities of either the insured's or the insurer's business. The jurors will no doubt do their best, but it is not hard to predict where their sympathies will lie. The result of the uncertainty and error that the majority's opinions will generate can only be an increase in insurance premiums. That is the real "consequential damage" flowing from today's holdings.
The definitions and distinctions of and between "bad faith" and "breach of the covenant of good faith and fair dealing", between punitive damages and consequential, compensatory or extra-contractual damages, have never been murkier in New York. And they just became even murkier.

Bi-Economy and its companion decision, Panasia Estates, were about the recoverability of consequential damages under first-party property insurance contracts. What Judge Smith characterized in his dissent as the majority's conceptual errors in misusing the terms"consequential damages" and "covenant of good faith" have predictably resulted in the migration of Bi-Economy's arguably inexact and ambiguous holding into disputes over disability insurance, commercial general liability insurance, environmental contamination liability insurance, and homeowners insurance. See, the Bi-Economy label, this blog.

Is it any surprise then that Bi-Economy has burgled into no-fault? No.

This matter involved a denial of no-fault benefits based on a pre-operative IME and post-operative peer review. Plaintiff sued Hartford for breach of contract. Her suit included demands for non-economic damages for her alleged pain and suffering due to Hartford's refusal to pay no-fault benefits for surgery costs, and punitive damages. Hartford moved for summary judgment, presumably to dismiss all but the complaint's breach of contract allegations and related contractual damages claims.

Accepting plaintiff's argument that the rule of Bi-Economy can apply to no-fault claims, and without any analysis of whether the alleged extra-contractual and compensatory damages were within the contemplation of the parties at the time the contract was formed, Suffolk County Supreme Court Justice Sandra Sgroi denied Hartford's motion as to the plaintiff's extra-contractual and compensatory damages claims, but granted it as to the complaint's punitive damages claims.

The court's analysis is limited to following paragraphs:
In this matter, the allegations of bad faith or fraud are not pled in a conclusory fashion nor is the complaint insufficient to support any cause of action against The Hartford (see, Batas v. Prudential Ins. Co. of America, 281 A.D.2d 260, 724 N.Y.S.2d 3). There is no allegation much less proof that the Plaintiff has exhausted her no fault benefits under the contract of insurance issued by the Hartford and that this would justify a denial of benefits to the Plaintiff by the Defendant (see, U.S. Fidelity & Guar. Co. v. Pressler, 158A.D.2d 419, 551 N.Y.S.2d 921 order reversed by 77 N.Y.2d 921, 569 N.Y.S.2d 597, 572 N.E.2d 38). In light of the decision in Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York (supra), a recovery for compensatory damages may be viable. The Court will, therefore, deny the motion to dismiss the compensatory damages claim with leave to renew, if warranted, after discovery in this action has been completed.

* * * * *

While the allegations in the complaint and the affirmation of the attorney for the Plaintiff do not allege either “wanton dishonesty as to imply a criminal indifference to civil obligations” on the part of the Defendant or that the salutary purposes of New York Insurance Law Article 51 are in danger of being undermined by the actions of the Defendant as required to support punitive damages (4 N.Y. Pract. Com. Litig. in New York State Courts § 60:22), the complaint and the papers submitted as part of this record do support a finding that The Hartford’s conduct was possibly a breach of good faith and fair dealing.

Since the complaint together with the exhibits submitted on this motion do not support the claim for punitive damages, the motion to dismiss that demand for relief must be granted. A review of the record does however support the claim for compensatory damages and the portion of the Defendant’s motion to dismiss the claim for extra-contractual damages must be denied.
Noticeably absent from the court's decision are: (1) what definition of the "[covenant of] good faith and fair dealing" the court used in determining that there "possibly" was a breach sufficient to support an award of consequential damages; and (2) whether and how pain and suffering damages from a denial of no-fault benefits were within the parties' contemplation when the plaintiff's New York personal auto policy, with its prescribed no-fault endorsement, was issued.

Even the majority in Bi-Economy recognized that before consequential damages from a breach of contract are recoverable, "such unusual or extraordinary damages must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting" and that "[t]o determine whether consequential damages were reasonably contemplated by the parties, courts must look to the nature, purpose and particular circumstances of the contract known by the parties ... as well as what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made[.]"

New York no-fault is a statutory creature. It's mandatory. It provides coverage for basic economic loss. Basis economic loss is defined by statute (Insurance Law § 5102[a]) and is limited to $50,000. Premium rates for no-fault are mandated. Unlike voluntary or optional insurances and endorsements and their "bargained-for benefits", all New York personal auto insurers must afford BEL coverage under a prescribed policy endorsement up to $50,000 per person. Insurers and persons covered under such endorsements contemplate nothing at the time of policy formation or inception. The New York State Legislature and Insurance Department did that for them.

Moreover, under the majority's opinion in Bi-Economy, only consequential damages that are quantifiable are recoverable under a breach of the covenant of good faith and fair dealing theory. Are non-economic, pain and suffering damages quantifiable? Not in the sense the Bi-Economy majority spoke, they're not. Awarding pain and suffering damages to someone whose no-fault insurer denied basic economic loss benefits will not "put that party in as good a position as it would have been in had the contract been performed", a necessary legal predicate for the recoverability of consequential damages. For that reason alone, Justice Sgroi erred in denying Hartford's motion to dismiss plaintiff's claim for such damages.

Much more will be written and said about this decision and its impact on no-fault claims handling in New York. Some already has over at The Rogak Report and No-Fault Paradise.

If the New York courts don't understand the import and scope of the majority's opinion in Bi-Economy, how will juries? Have we reached the point in New York where what once were distinct theories of recovery -- breach of contract, negligence, etc. -- have now melded into a "bad, bad insurance company" standard of recovery in all coverage dispute actions, regardless of the nature and pre-contemplation of certain potentially consequential damages? Judge Smith was so right.

Post Script ~~  Hartford withdrew its appeal of this decision to the Second Department, so this decision will remain in place, unless and until a higher court disagrees with its holding.

Thursday, April 16, 2009

Unqualified Assumption of Additional Insureds' Defense for Two Years Estops Insurer from Seeking Contribution from Co-Insurer

Liberty Ins. Underwriters, Inc. v. Arch Ins. Co.

(1st Dept., decided 4/14/2009)

The City of New York and its Department of Environmental Protection were involved in a construction project with Crescent Contracting Corp.  The DEP entered into a general contract with Yonkers Contracting Company in relation to that project.  As required by that contract, Yonkers purchased CGL coverage from Arch Insurance Company, and the Arch policy contained an additional insured endorsement affording AI coverage to any parties Yonkers was contractually obligated to name as AIs.  The AI coverage endorsement stated that "[c]overage afforded to these additional parties will be primary to, and noncontributory with, any other insurance available to that person or organization."

Crescent had CGL insurance with Liberty, presumably also insuring the City and DEP as AIs in some capacitiy.  The Liberty policy's "Other Insurance" clause provided that "if other valid and collectible insurance [was] available to any insured for a loss [Liberty] cover[ed] * * *, then this insurance [wa]s excess of such insurance and [Liberty would] have no duty to defend any claim or 'suit' that any other insurer ha[d] a duty to defend."

An employee of Yonkers was injured while working on the construction project and brought a personal injury action against the City, DEP and Crescent.  Through its attorneys, Arch initially agreed in April 2006 to defend and indemnify the City and DEP in the personal injury action.  A week later, Arch tendered the City's and DEP's defense and indemnification to Liberty, which Liberty accepted in a May 2006 letter containing no reservation of rights. 

Liberty defended the City and DEP in the personal injury action for two years.  On March 1, 2008, three days after a pre-trial conference was held in that action, Liberty sent a letter to the City's Law Department purporting to reserve Liberty's rights, stating that Liberty would not indemnify the City or DEP in the personal injury action "if there is no liability on the part of Crescent[.]"  Liberty also noted in that letter that its coverage was excess to coverage available to the City and DEP under Yonkers' policy with Arch.

When Arch refused to re-assume the City's and DEP's defense, Liberty commenced this declaratory judgment action seeking declarations that Arch was obligated to defend and indemnify the City and DEP and that Arch's coverage was primary to Liberty's excess coverage.  Finding that Liberty was "estopped from requesting contribution" because it had "unqualifiably" taken over the defense and indemnification of the underlying personal injury action and failed to reserve any rights as against Arch, New York Supreme granted Arch's cross motion for summary judgment and declared that Liberty was obligated to defend and indemnify the City and DEP in the underlying action and reimburse Arch for the costs it incurred in defending the underlying action prior to Liberty's acceptance of Arch's tender.

In MODIFYING the motion court's order, the First Department agreed that Liberty was equitably estopped from seeking coverage contribution from Arch, but held that Arch was not entitled to recover its pre-tender defense costs.  Relying on established Second Department case law, the First Department rejected Liberty's argument that the doctrine of equitable estoppel should only apply to coverage disputes between insureds and their insurers:
"The doctrine of estoppel precludes an insurance company from denying or disclaiming coverage where the proper defending party relied to its detriment on that coverage and was prejudiced by the delay of the insurance company in denying or disclaiming coverage based on the loss of the right to control its own defense" (Merchants Mut. Ins. Group v Travelers Ins. Co., 24 AD3d 1179, 1182 [2005] [internal quotation marks and brackets omitted]). We reject plaintiff's argument that this doctrine should be limited to coverage disputes between insurers and insureds, and not applied to coverage allocation disputes between insurers (see e.g. Fireman's Fund Ins. Co. v Zurich Am. Ins. Co., 37 AD3d 521 [2d Dept 2007]; Donato v City of New York, 156 AD2d 505, 507-508 [2d Dept 1989]). Lumbermens Mut. Ins. Co. v Lumber Mut. Ins. Co. (148 AD2d 328 [1st Dept 1989]), cited by plaintiff, is not to the contrary. Lumbermens merely held that failure by an insurer to reserve its rights under the circumstances of that case did not constitute an intentional relinquishment, or waiver, of the right to seek contribution from another insurer (id. at 330). It did not address the issue of whether an insurer may be estopped, by its unqualified assumption of the defense of an action, from seeking contribution from another insurer. No issues of fact exist as to whether defendants, in tendering the defense to plaintiff, lacked knowledge that plaintiff would ultimately claim to be only an excess insurer, or whether defendants lost control of the underlying defense and were otherwise prejudiced by plaintiff's assumption thereof for two years without reserving a right to disclaim coverage (see Federated Dept. Stores v Twin City Fire Ins. Co., 28 AD3d 32, 39 [2006]). Defendants, however, are not entitled to reimbursement of defense costs incurred before tendering the defense to plaintiff (see Bovis Lend Lease LMB, Inc. v Royal Surplus Lines Ins. Co., 27 AD2d 84, 94 [2005]), and we modify the declaration accordingly. 
 Had there been either a pre-tender discussion between Arch and Liberty about the priority of their respective coverage obligations or a reservation of rights in Liberty's tender acceptance letter, the result may have been different.  Three takeaway points from this case are:
  1. when accepting a tender of defense and indemnification from another insurer, be sure to address and expressly reserve one's rights vis-à-vis coverage priority and defenses;
  2. pre-tender defense costs are not recoverable; and 
  3. equitable estoppel can apply between coinsurers.

Follow-Up Verification Requests Sent on Day 30 Held to be Premature and Ineffective

Alur Med. Supply, Inc. a/a/o Teresa Radriguez v. Progressive Ins. Co.

(App. Term, 2nd Dept., decided 4/7/2009)

Section 65-3.6(b) of Regulation 68, provides:
     (b) Verification requests. At a minimum, if any requested verifications has not been supplied to the insurer 30 calendar days after the original request, the insurer shall, within 10 calendar days, follow up with the party from whom the verification was requested, either by telephone call, properly documented in the file, or by mail. At the same time the insurer shall inform the applicant and such person’s attorney of the reason(s) why the claim is delayed by identifying in writing the missing verification and the party from whom it was requested.
If the no-fault insurer sends the follow-up verification request on Day 30, instead of Days 31 through 41, after the original request, does it "lose" the tolling effect of such verification requests and is it precluded from relying on defenses related to those requests?  The Appellate Term, Second Department, has again said yes, Progressive's follow-up request sent before the expiration of that initial 30-day period was premature and a nullity, rendering Progressive's eventual denial untimely and precluding it from raising most defenses, including lack of medical necessity:
Since defendant's papers established that it mailed its follow-up requests for verification on the 30th calendar day after it mailed its verification requests, the follow-up requests were premature and without effect (see General Construction Law § 20; Insurance Department Regulations [11 NYCRR] § 65-3.6 [b]; Infinity Health Prods., Ltd. v Eveready Ins. Co., 21 Misc 3d 1 [App Term, 2d & 11th Jud Dists 2008]). Consequently, defendant failed to timely deny plaintiff's claim and is precluded from raising most defenses, including its proffered defense of lack of medical necessity (see Fair Price Med. Supply Corp. v Travelers Indem. Co., 10 NY3d 556 [2008]; Presbyterian Hosp. in City of N.Y. v Maryland Cas. Co., 90 NY2d 274, 282 [1997]). Accordingly, the Civil Court properly granted plaintiff's motion for summary judgment, and the judgment is affirmed.  
This is the second time the Appellate Term, Second Department, has construed 65-3.6(b) in this manner to, in effect, penalize a no-fault insurer for sending a follow-up request too soon.  Its Infinity Health Prods. 2-1 decision from July 2008 was the first time (follow-up request mailed on Day 27).   Other than in this case, that decision has not since been cited in any reported New York case on the 65-3.6(b) follow-up verification issue.

Wednesday, April 15, 2009

Wanna Rock? Get Insurance.

Today's Insurance Journal contains an interesting article on the increasing importance of insurance for rock bands who sign "360 deals" with worldwide promoters. No longer talking just trashed hotel rooms.
Often a broker can show that despite a performer's hedonistic image they have a good track record of performing shows over a long period without cancellations.
Will insurance now be blamed also for the taming of our beloved rock artistes? Any of you live in a city beginning with the letter M?

Rock insurance. That'll be my new subspecialty. Concerts will be scene inspections and media purchases will be research.  Can I write off this past Christmas' Guitar Hero World Tour purchase as office equipment?

Willful and Avowed Obstruction -- SUM Arbitration Not Stayed for Claimant's Mistaken Refusal to Submit to Second IME

Matter of New York Cent. Mut. Fire Ins. Co. v. Bradfield

(3rd Dept., decided 4/9/2009)

Claimant was injured while a passenger in a one-car accident in January 2006.  She was covered under her parents' policy with New York Central Mutual, which included a UM/SUM endorsement.  She settled her personal injury claim against the tortfeasor with NYCM's consent, and submitted to an IME requested by NYCM in January 2007. She refused, through counsel, however, to appear for a second IME in both November 2007 and April 2008, claiming that NYCM was not entitled to multiple examinations.  She subsequently demanded arbitration of her SUM claim, and NYCM commenced this special proceeding to stay that arbitration based on its contention that claimant had violated a condition precedent to coverage by refusing to submit to a second IME.  Ulster Supreme denied the application and NYCM appealed.

The SUM endorsement at issue required claimant to "submit to physical examinations by physicians we select when and as often as we may reasonably require."  When NYCM scheduled claimant's first IME in January 2007, her attorney advised NYCM that claimant's treatment was ongoing and suggested that the IME await the completion of treatment. Claimant's attorney further indicated that if NYCM insisted upon an IME at that time, claimant would not participate in a second IME.  According to the claimant's attorney, this refusal was based on his incorrect belief that NYCM was not entitled to more than one IME.

In AFFIRMING the motion court's denial of NYCM's petition for a stay of the SUM arbitration, the Third Department agreed with the lower court that NYCM had not met its
heavy burden of showing "that it acted diligently in seeking to bring about [respondent's] co-operation; that the efforts employed by [petitioner] were reasonably calculated to obtain [respondent's] co-operation; and that the attitude of [respondent], after [her] co-operation was sought, was one of 'willful and avowed obstruction'" (Thrasher v United States Liab. Ins. Co., 19 NY2d 159, 168-169 [1967], quoting Coleman v New Amsterdam Cas. Co., 247 NY 271, 276 [1928] [citations omitted]; see Matter of St. Paul Travelers Ins. Co. [Kreibich D'Angelo], 48 AD3d 1009, 1010 [2008]). 
According to the decision, when claimant's attorney received NYCM's show cause application on April 15, 2008 and became aware that the included SUM endorsement permitted multiple physical examinations, he contacted NYCM's attorney and advised him that the claimant was willing to submit to the second IME, which had been rescheduled to April 21, 2008.  NYCM's attorney, however, declined the offer and proceeded with the application to stay the SUM arbitration based on the claimant's asserted breach of the policy's IME condition.

Characterizing the claimant's attorney's mistaken assumption that NYCM was not entitled to multiple IMEs and his failure to request a copy of the policy "no more unreasonable than [NYCM]'s failure to offer a copy of the policy in the face of [his] obvious misunderstanding", the Third Department held:
In our view, even assuming that petitioner acted diligently and employed reasonable efforts to secure respondent's cooperation, Supreme Court properly determined that petitioner failed to demonstrate that respondent's lack of cooperation rose to the level of willful and avowed obstruction (see Baust v Travelers Indem. Co., 13 AD3d 788, 790 [2004]; Ingarra v General Acc./PG Ins. Co. of N.Y., 273 AD2d 766, 767 [2000]). Although respondent's earlier refusals to submit to a second examination were unequivocal, there is no evidence that either she or her attorney was in possession of the policy and, therefore, aware of the provision permitting multiple examinations [FN2]. Furthermore, respondent did submit to one physical examination, answered questions under oath for three hours and provided petitioner with copies of medical records, as well as numerous authorizations for healthcare providers, employers and insurance companies. Once she was aware of her obligation to submit to a second physical examination, she immediately indicated her willingness to do so. Overall, there is ample evidence that respondent's attitude was one of cooperation and that her conduct was not an unreasonable attempt to obstruct discovery (see Baust v Travelers Indem. Co., 13 AD3d at 790). Therefore, Supreme Court properly denied petitioner's application to stay arbitration. 
The "willful and avowed obstruction" or "Thrasher" standard has always been a high one to prove for insurers in New York.  Conceptually speaking, bona fide ignorance of a policy condition or requirement could, in the right circumstances, be mutually exclusive of willfulness.  In this case, there certainly was "avowed" obstruction -- in that claimant's counsel made his client's refusal to attend a second IME clear and unequivocal -- and yet seemingly missing, at least in the opinion of the motion and appellate courts, was the claimant's willfulness, given her attorney's mistaken assumption or belief that the insurance policy did not permit more than one IME.  If faced with the appearance of such mistake, misunderstanding or ignorance, insurers might consider quoting the policy conditions or providing a copy of the applicable endorsement, to avoid any dispute over what the policy obliges the claimant to do.  Especially in the Third Department.

Tuesday, April 14, 2009

General Obligations Law § 15-108 Applies Only to Joint Tortfeasors, Not Co-Insurers

Scotts Co., LLC v. Pacific Employers Ins. Co.

(1st Dept., decided 4/9/2009)

New York General Obligations Law § 15-108 provides:
Release or covenant not to sue.  (a) Effect of release of or covenant not to sue tortfeasors. When a release or a covenant not to sue or not to enforce a judgment is given to one of two or more persons liable or claimed to be liable in tort for the same injury, or the same wrongful death, it does not discharge any of the other tortfeasors from liability for the injury or wrongful death unless its terms expressly so provide, but it reduces the claim of the releasor against the other tortfeasors to the extent of any amount stipulated by the release or the covenant, or in the amount of the consideration paid for it, or in the amount of the released tortfeasor's equitable share of the damages under article fourteen of the civil practice law and rules, whichever is the greatest. 

(b)  Release of tortfeasor. A release given in good faith by the injured person to one tortfeasor as provided in subdivision (a) relieves him from liability to any other person for contribution as provided in article fourteen of the civil practice law and rules. 

(c)  Waiver of contribution. A tortfeasor who has obtained his own release from liability shall not be entitled to contribution from any other person. 

(d)  Releases and covenants within the scope of this section. A release or a covenant not to sue between a plaintiff or claimant and a person who is liable or claimed to be liable in tort shall be deemed a release or covenant for the purposes of this section only if: 
(1) the plaintiff or claimant receives, as part of the agreement, monetary consideration greater than one dollar; 

(2) the release or covenant completely or substantially terminates the dispute between the plaintiff or claimant and the person who was claimed to be liable; and 

(3) such release or covenant is provided prior to entry of judgment.
Does GOL § 15-108 apply to coinsurance claims among co-insurers?  No, says the First Department in this case.

In 2000, the insured Scotts Company and one of its GL insurers, Pacific Employers Insurance Company (PEIC), entered into a settlement and release resolving DJ litigation over liability coverage for asbestos-related claims. In relation to a 2003 action brought in California state court, Scotts commenced this action and unsuccessfully moved to set rescind and void that release, and the First Department affirmed.  Under the terms of that release, PEIC agreed to pay less than 3% of Scotts' past defense costs and none of Scotts' future defense costs.

The release, in paragraph 15, entitled "Waiver of Rights Against Other Settling Insurers," provided that PEIC waived its right to "seek contribution ... from any of Scotts' other insurers that has a written agreement with Scotts that waives such rights against the ACE Companies."  However, that section went on to provide that:
[a]s against any other company, the ACE Companies will not initiate any action to seek contribution against any such company. In the event any such other company initiates an action against the ACE Companies for contribution or indemnity, the ACE Companies preserve their rights to assert counterclaims for contribution or indemnity from any such company.
In the California action, another one of Scotts' insurers, Wausau, cross-claimed against PEIC, asserting that it was required equitably contribute to the costs of defending asbestos claims against Scotts. In December, 2006, a California state court judge granted Wausau summary judgment, finding that PEIC had such a duty, and that PEIC must reimburse Wausau for 87.4% of past defense costs for the asbestos claims. The Court of Appeals in California denied review of the order in 2007.

PEIC then moved to amend its third-party complaint in this action, in effect, to preclude Scotts' other insurers, including Wausau, from obtaining coinsurance contribution from PEIC.  PEIC based its proposed amended third-party complaint on GOL § 15-108, arguing that that statute immunized PEIC from the co-insurers' contribution claims.  New York Supreme denied PEIC's motion to amend, and PEIC appealed. 

In AFFIRMING the denial of PEIC's motion to amend its third-party complaint, the First Department held:
The court properly denied appellant's motion to amend the third-party complaint since the proposed amendment did not state a viable claim for relief. The amendment sought to enjoin appellant's co-insurers from proceeding against appellant for contribution based upon appellant's settlement agreement with the insured and upon General Obligations Law § 15-108. The court correctly found that the settlement agreement's express contemplation of contribution claims by the co-insurers was a waiver of § 15-108's protections (see Mitchell v New York Hosp., 61 NY2d 208, 213 [1984]). Moreover, § 15-108 applies only to joint tortfeasors, not to co-insurers (HRH Constr. Corp. v Commerical Underwriters Ins. Co., 11 AD3d 321, 323 [2004]).
If insurance coverage litigation can be ironic, this might be an instance.  Although Scotts failed in its attempt to have the release set aside -- memorializing a settlement that had PEIC paying $325,000 to release $80 million in coverage -- Wausau succeeded in recovering 87.4% of Scotts' past defense costs back from PEIC, notwithstanding PEIC's release with Scotts, by which it had paid less than 3% of those past defense costs.  The result in this matter should not be all that surprising.  In settling separately with an insured, it is difficult to provide for and extinguish coinsurance claims of co-insurers.  Perhaps PEIC contemplated later raising GOL § 15-108 to defend against such coinsurance claims at the time it entered into the release with Scotts, which expressly provided that it was to be governed by New York law.  

Consider this text from the motion court's decision:
[I]t has been repeatedly, and long held, that unless public policy is thwarted, parties to a civil dispute are generally free to chart their own litigation course, choose the law to be applied (or, indeed, not applied), and may stipulate away statutory, and even constitutional rights. See e.g. Mitchell v New York Hosp., 61 NY2d at 214 (1984); T. W. Oil v Consolidated Edison Co. of NY, 57 NY2d 574, 579-580 (1982); Rector, Church Wardens & Vestrymen of St. Bartholomew's Church v Committee to Preserve St. Bartholomew's Church, 56 NY2d 71, 76 (1982); Martin v City of Cohoes, 37 NY2d 162, 165 (1975); Matter of New York, Lackawanna & Western R. R. Co., 98 NY 447, 453 (1885). It is also worthy of note that GOL §15-108(c) has specifically been deemed waivable by the Court of Appeals. Mitchell v New York Hosp., 61 NY2d at 214.

Monday, April 13, 2009

Third Department Confirms Revocation of Medical License of Gary Tsirelman Based on Sustained Charges of Fraudulent Medical Practice, Filing False Reports and Moral Unfitness

Matter of Tsirelman v. Danes

(3rd Dept., decided 4/9/2009)

In December 2007, the Hearing Committee of the NYS Health Department's Office of Professional Medical Conduct revoked the medical license of Gary Tsirelman and fined him $100,000, having sustained 51 of 69 charges of professional misconduct, including ones alleging that he conducted a fraudulent medical practice, willfully made or filed false reports, ordered treatment not warranted by the patient's condition and moral unfitness.  Gary Tsirelman is also a New York attorney who maintains a "no-fault collection law" practice in metropolitan New York and whose website borrows liberally from a May 2004 article published in The American Lawyer.  Gary Tsirelman, P.C., was the firm that represented the plaintiff medical provider in East Acupuncture PC v. Allstate Ins. Co., decided by the Second Department on February 17, 2009 (tolling provision of 11 NYCRR § 65-3.9[c] applies to both assignors and assignees). 

The professional medical misconduct charges were based primarily upon Mr. Tsirelman's submission of numerous no-fault bills to Allstate Insurance Company for invasive nerve destruction procedures (NDPs) that were neither medically necessary nor actually performed.  Tsirelman admitted that he had never performed NDPs, but blamed the charges on the billing service that had prepared the bills for his medical clinic. He claimed that the billing service had misread his notes concerning the noninvasive "synaptic" procedure he had regularly performed, assigned an additional billing code for the much more expensive NDPs and then, without his knowledge or authorization, used a stamp bearing his signature to certify those bills. The Hearing Committee found Tsirelman's explanation to be unbelievable, held him responsible for the content of his bills and concluded that he knew that all of the identical billings were false and that he had submitted them to Allstate with the intent to deceive.

Mr. Tsirelman commenced an Article 78 proceeding to challenge his MD license revocation.  The Third Department, Appellate Division, has original jurisdiction of such proceedings, and reviews administrative findings such as the one the OPMC's Hearing Committee made in this matter to determine whether they are supported by substantial evidence.  In doing so in this matter, the Third Department confirmed the Hearing Committee's findings of Tsirelman's guilt on 41 of the 69 charges, sustaining both his MD license revocation and the $100,000 fine.

With respect to Tsirelman's claims that he did not know others were using his signature stamp and that double billings to Allstate were just a mistake, the Third Department held:
The record confirms that petitioner, who has owned a number of clinics over the years, denied ever having or using a signature stamp, yet other evidence showed that his stamp was regularly used to bill for his services. He also testified that, had he ever seen any of the bills for NDPs, he "would certainly not have authorized them." Yet, after he graduated from law school and was admitted to the practice of law in New York, he transferred ownership of his clinic to another physician and, acting as the attorney representing his former clinic in no-fault arbitration proceedings, he sought to collect bills, similar to those at issue here, charging for NDPs and bearing his signature stamp. Further, petitioner initially denied any association with the clinic prior to purchasing it, yet he later conceded that he had previously worked for it for several years. Citing this and other evasive, fabricated and inconsistent testimony, the Committee found that petitioner's claims, including that the double billing amounted to no more than a mistake, completely lacked credibility. 

Applying the standard that physicians are ultimately responsible for the accuracy of their bills, and given the findings of petitioner's long-term relationship with the clinic and his complete lack of credibility, the Committee could infer his knowledge that the bills were false, rather than merely inaccurate, and that he had willfully intended to mislead and deceive the insurer (see Matter of Ross v State Bd. for Professional Med. Conduct, 45 AD3d 927, 929 [2007], lv denied 10 NY3d 701 [2008]; Matter of Ostad v New York State Dept. of Health, 40 AD3d at 1253; Matter of Corines v State Bd. for Professional Med. Conduct, 267 AD2d 796, 799-800 [1999], lv denied 95 NY2d 756 [2000]; Matter of Post v State of N.Y. Dept. of Health, 245 AD2d 985, 987 [1997]). Thus, the evidence presented and the inferences reasonably flowing therefrom amply support the sustained charges of fraudulent medical practice, filing false reports and moral unfitness. 
The Third Department also rejected Tsirelman's contention that he was denied his rights to a fair hearing and due process by the Committee's admission and consideration of patient records that were uncertified and allegedly incomplete:
Inasmuch as "the strict rules of evidence do not apply in administrative proceedings" (Matter of Sundaram v Novello, 53 AD3d 804, 806 [2008], lv denied 11 NY3d 708 [2008] [internal quotation marks and citation omitted]), petitioner was required to show that the lack of certification infected the entire proceeding with unfairness in order to establish a deprivation of due process (see id. at 806-807). This he did not do. As for the assertion that the records were incomplete, petitioner argues that the complete treatment records for his patients would have reflected that he never ordered NDPs or listed them as having been performed. We note, however, that the only documents in the record which listed the NDPs were the bills. Thus, additional treatment records showing their absence would have been redundant and irrelevant to the issues of his knowledge and intent. The record also shows that, with one exception discussed below, the Committee did not sustain any charge where additional patient records could have been exculpatory. The Committee fully explored the discrepancies in the records that were provided and gave petitioner every opportunity to submit additional records (see Matter of Sundaram v Novello, 53 AD3d at 807).  
Finally, the Third Department did annul 10 of the originally sustained 51 of 69 charges against Tsirelman, finding that, with respect to the billed NDPs, "the evidence does not support the Committee's conclusion that petitioner ordered treatment not warranted by the patients' condition."  Even without those 10 charges, however, the Third Department noted that "because the Committee stated that petitioner's fraudulent practice of medicine standing alone warranted the revocation of his license and the fine imposed, the exclusion of those charges does not require reconsideration of the discipline administered here[.] * * * Viewing only the remaining sustained charges, we are not able to say that the penalty imposed is so disproportionate to petitioner's fraudulent behavior that it shocks our sense of fairness[.]"

With the Third Department's finding that the "sustained charges of fraudulent medical practice, filing false reports and moral unfitness" against Mr. Tsirelman were "amply supported" by evidence before the OPMC's Hearing Committee, it remains to be seen whether such findings can or will form the basis of discipline against him under Rule 8.4 and other provisions of New York's new Rules of Professional Conduct applicable to lawyers that went into effect on April 1, 2009. Most of the provisions of the "new" Rule 8.4 existed under Disciplinary Rule 1-102 of the now replaced New York Code of Professional Responsibility.