Wednesday, February 24, 2010

Not All Policy Definitions Are Created Equal -- Ones Limiting Coverage By Lack of Inclusion Are Not Subject to New York Insurance Law § 3420(D)(2)

NGM Ins. Co. v Blakely Pumping, Inc.
(2nd Cir., 2/1/2010)

When may a negative or limiting policy definition be considered an exclusion subject to the timely disclaimer and denial requirement of New York Insurance Law § 3420(d)(2)?  When it negates liability coverage that the policy otherwise provides.  In a rare insurance coverage decision from the Second Circuit United States Court of Appeals, the court ruled that not all policy definitions that limit coverage are exclusions.  The two in this case -- the "Hired Auto" and "Non-Owned Auto" definitions -- are not.

New York Insurance Law § 3420(d)(2) provides:
If under a liability policy issued or delivered in [New York 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.
On November 3, 2005, Brian Blakely crashed his pickup truck into Peter Slingerland’s car in Kingston, New York. Blakely was driving the truck in the course of his work for his company, Blakely Pumping, as he frequently did. Slingerland and his wife brought a personal injury action against both Blakely and Blakely Pumping.

In a letter dated March 18, 2006, Blakely Pumping requested that NGM Insurance Company defend the action pursuant to an insurance policy for "Businessowners Liability Coverage” that Blakely Pumping had purchased from NGM. The policy generally covered liability for personal injuries but contained a section entitled “Exclusions” that expressly negated coverage for damages “arising out of the ownership, maintenance, use or entrustment to others of any ... ‘auto’ ... owned or operated by or rented or loaned to any insured.” Blakely Pumping, however, had also purchased an endorsement from NGM that modified the policy; the Endorsement extended coverage to bodily injury arising from the use of a “Hired Auto” or a “Non-Owned Auto” by the company or one of its employees. The endorsement defined those terms as follows:
“Hired Auto” means any “auto” you lease, hire or borrow. This does not include any “auto” you lease, hire or borrow from any of your “employees” or members of their households, or from any partner or “executive officer” of yours.

“Non-Owned Auto” means any “auto” you do not own, lease, hire or borrow which is used in connection with your business. 
On March 23, 2006, NGM disclaimed coverage, based on the policy’s auto exclusion.  In a letter dated July 24, 2006, counsel for the Slingerlands called NGM’s attention to the endorsement’s extension of coverage for bodily injuries arising out of the use of a “Hired Auto” or “Non-Owned Auto.”  Two weeks later, NGM again disclaimed coverage, this time on the ground that Blakely was an executive officer of Blakely Pumping and, therefore, his pickup truck was neither a “Hired Auto” nor “Non-Owned Auto” as defined in the endorsement.

In July 2007, NGM commenced this action, seeking a declaratory judgment that it was under no obligation to defend or indemnify Blakely Pumping in the underlying Slingerland personal injury action.  On March 24, 2009, after the parties cross-moved for summary judgment, the district court entered a judgment declaring that NGM was indeed obligated to defend and indemnify Blakely Pumping.  Although the court concluded that Blakely Pumping had borrowed the auto of one of its officers and that the accident was therefore not covered under the terms of the policy as modified by the endorsement, the district court found that the policy's "Hired Auto" and "Non-Owned Auto" definitions constituted exclusions of general coverage, thereby triggering the timely disclaimer and denial requirement of New York Insurance Law § 3420(d)(2).  Since NGM originally disclaimed coverage based only on the policy's auto exclusion, the district court ruled that it had "waived" its right to disclaim coverage on other grounds.  Thus, the district court held that NGM’s subsequent notice of disclaimer was ineffective.  NGM appealed to the Second Circuit. 

In REVERSING the district court's ruling, the Second Circuit held that the district court erred in finding that the endorsement’s definitions of “Hired Auto” and “Non-Owned Auto” were exclusions triggering the timely disclaimer or denial requirement of New York Insurance Law § 3420(d)(2):
Determining whether there is no coverage by reason of exclusion as opposed to lack of inclusion can be “problematic."  Worcester Ins. Co. v. Bettenhauser, 95 N.Y.2d 185, 189 (2000).  We find guidance in Planet Insurance Co. v. Bright Bay Classic Vehicles, Inc., 75 N.Y.2d 394 (1990), a case that is particularly applicable to the facts before us.  There, the New York Court of Appeals considered whether definitional language that did not appear in the section of an insurance policy entitled “Exclusions” eliminated coverage by reason of exclusion or lack of inclusion. Defendant Bright Bay obtained the policy in question for its fleet of rental cars. The policy defined “covered rental cars” as those rented for periods of less than 12 months.  Id. at 398. One of Bright Bay’s cars was later involved in an accident while being rented for a 24-month period.  The court found that, although the insurance company disclaimed coverage based on the definition of “covered rental cars” as opposed to a provision in the policy’s “Exclusion” section, the definition’s limiting language still amounted to an exclusion.  Id. at 400. The court explained that the car was initially covered by the policy and only “became ‘uncovered’ upon the happening of a subsequent event: i.e., the rental ... for a lease period other than that prescribed in the policy.”  Id. at 401. Since the car was at one point covered, this was not a case where there “was never a policy in effect covering the involved automobile.”  Id.

In the instant case, the principal issue in dispute is whether the district court erred in finding that the Endorsement’s definitions of “Hired Auto” and “Non-Owned Auto” constitute exclusions requiring a notice of disclaimer.  We conclude that the district court did err in so finding.

The Endorsement did not generally cover auto accidents; it covered only accidents arising from the use of a “Hired Auto” or “Non-Owned Auto.”  Those terms were defined in such a way that an employee’s or officer’s vehicle, like Blakely’s pickup truck, could never be covered. This is not a case then where “the happening of a subsequent event” implicated a definitional term that “uncovered” a formerly covered car.  Id.  Rather, it is a case in which “the policy as written could not have covered the liability in question under any circumstances.” Zappone [v. Home Ins. Co.], 55 N.Y.2d [131] at 134.  In short, there was no coverage “by reason of lack of inclusion,” and thus no notice of disclaimer was required. Id. at 137 (internal quotation marks omitted).
The court also discussed but distinguished the New York Appellate Division's decisions in Greater New York Mutual Insurance Co. v. Miller, 205 A.D.2d 857(3d Dept. 1994) (policy definition of an “insured” negated coverage for drivers who used the auto in question without permission) and United Services Automobile Association v. Meier, 89 A.D.2d 998 (2d Dept. 1982) (policy definitions that negated coverage from individuals engaged in automobile businesses).  In distinguishing the Meier case, the Second Circuit noted:
In fact, the Meier court found that other definitions in the same policy – such as the definitions of “owned vehicle,” “newly acquired vehicle,” and “temporary substitute vehicle” – were not exclusions.  Id. at [454 N.Y.S.2d] 320-21.  According to the court, the failure of the vehicle in question to qualify as one of these defined terms meant that there was never a “contract of insurance with the person or for the vehicle involved in the accident.”  Id. at [454 N.Y.S.2d] 321. We employ identical logic in our analysis.
In New York, noncoverage grounds based on a lack of inclusion are not subject to Insurance Law § 3420(d).  Disclaimers or denials based either on policy exclusions or conditions are.  Although somewhat of a fine distinction, the difference between policy definitions that negate coverage and ones that merely state what is covered is an important one.  The Second Circuit correctly analyzed these definitions in concluding that the policy provided no coverage in the first place for the insured's officer's use of his own pickup truck, which did not meet the policy's definitions of either a hired auto or non-owned auto.


Roy A. Mura said...

This comment comes from attorney Max Gershweir:

I'm no auto-coverage expert, but I fail to see how the named-insured employer is not entitled to coverage here through the "non-owned auto" coverage. First, the truck was not owned by "you," i.e., the employer, but rather by an officer/employee, thus satisfying the first part of the "non-owned auto" definition. The decision also states the employee was using the truck in the course of his employment, "as he frequently did," thus seeming to satisfy the second portion of the definition requiring that the auto be "used in connection with your business." What am I missing here? Isn't this exactly what commercial non-owned-auto coverage is for?


Roy A. Mura said...

And here's my reply to Max's comment:

On page 5 of the decision, the Second Circuit noted and impliedly agreed with the fact that "the [district] court concluded that Blakely Pumping had borrowed the auto of one of its officers", which would take it out of the definition of a "Non-Owned Auto":

“Non-Owned Auto” means any “auto” you do not own, lease, hire or borrow which is used in connection with your business.