A Bad Penny Turns Up Again in the Third Department

CGL – ADDITIONAL INSURED – DUTY TO DEFEND – WAIVER – PRIORITY OF COVERAGE
Village of Brewster v. Virginia Sur. Co., Inc.
(3rd Dept., decided 2/18/2010)

Readers:  this is an interactive post.  Can you spot the bad penny in this decision?  The ruling that diverges from established tenets of New York insurance coverage law?  The part that raises one or both of your eyebrows and evokes an audible "huh?" when you read it?  One of the components of this decision stands alone as the Third Department's own rule of law.  I'll give you a hint.  It's the issue for which the Third Department cites only its own cases, perpetuating what I believe is a relatively longstanding error of insurance coverage law, at least in the Third Department.  It's like a bad penny that keeps showing up.  You know what they say about repeating something often enough. 

If you think you've spotted the peculiar rule, leave a comment on this post.  First correct answer wins something.  I don't know what yet, but it'll be something.  Let me make this a multiple choice quiz.  The component issues/rulings from this decision, and thus your answer choices, are:

1. Regardless of whether it must ultimately indemnify the additional insured Village of Brewster in the underlying property damage actions, Virginia Surety Company must defend the Village because the allegations of the underlying complaints are what trigger Virginia Surety's exceedingly broad duty to defend.
2. Having failed to establish as a matter of law that there is no possible factual or legal basis on which it might eventually be obligated to indemnify the Village under any policy provision, Virginia Surety must defend the Village in the underlying actions, with the issue of indemnification to await the proof at trial in those actions.
3. Virginia Surety waived or is precluded from asserting any policy exclusions not raised or invoked in its original disclaimer.
4. Coverage for the Village under Virginia Surety's policy is primary and must be exhausted before the Village's own insurer is required to contribute under its policy.
5. Virginia Surety must reimburse the Village's insurer for costs incurred to date in defending the underlying actions.  

See?  You already have a 20% chance of picking the right issue.  Answers without explanations, however, won't count.  I'll re-post this case one week from today, on Friday, February 26th, with my identification and explanation of the bad penny.  Until then, have a look at the decision by clicking on its link above and let us know what you think.