When Just a Reservation of Rights Letter Won't Do

HOMEOWNERS – INTENTIONAL ACT – UNTIMELY DISCLAIMER – INSURANCE LAW § 3420(D)
Encompass Ins. Co. v. Adelis
(Sup. Ct., Nassau Co., decided 11/23/2010)

Immutable Law of New York Insurance Coverage # 47:  Defending a bar fight case under a reservation of rights for two years without disclaiming coverage under a policy that does not define an "occurrence" as an accident will result in being found obligated to indemnify one's pugilistic insured for the injuries he admitted to have intentionally caused.

In January 2006, Encompass's insured James Adelis was involved in an altercation in a bar.  While pleading guilty to the related criminal charge of second degree assault in August 2006, Adelis acknowledged that he had intended to injure the person he hit, Kevin Smith, when he hit him.  In January 2007, Smith sued Adelis and the bar for personal injuries, alternatively alleging intentional tort and negligence causes of action against Adelis.

In February 2007, Encompass notified Adelis by letter that it was reserving its rights to deny liability coverage based on the policy's exclusion for bodily injury or property damage "[i]ntended by, or which may reasonably be expected to result from the intentional or criminal acts or omissions of one or more covered persons."  Encompass then undertook to defend Adelis in Smith's personal injury action for two years before commencing this declaratory judgment action in 2009 and moving for summary judgment.

In DENYING Encompass' motion for summary judgment and instead declaring that Encompass was obligated to defend and indemnify Adelis in the underlying Smith personal injury action, Nassau County Supreme Court Justice Ute Wolff Lally found that Encompass' attempt to deny coverage by commencing this declaratory judgment action after defending Adelis for two years was "woefully late" and precluded by New York Insurance Law § 3420(d): 

A reservation of rights letter does not constitute a disclaimer of coverage, nor does it negate an insurer's obligation to provide a timely rejection. (Painting v National Union Fire Ins. Co. of Pittsburgh, PA, 2009 WL 1370819 (Supreme Court New York County 2009), citing New York Cent. Mut. Fire Ins. Co. v Hildreth,  40 AD3d 602). In fact, "a reservation of rights letter ... has no relevance to the question of timely notice of disclaimer. (NYAT Operating Corp. v GAN National Insurance Company, 46 AD3d 287, 288, lv den., 10 NY3d 715, citing Hartford Ins. Co. v County of Nassau, supra at p. 1029).

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Encompass never disclaimed coverage for James Adelis.  Assuming, arguendo, that its complaint here constituted its disclaimer, it was untimely as a matter of law.  Encompass has been defending James Adelis in the underlying personal injury action for over two year [sic] and that action was commenced over one year after the defendant James Adelis' [sic] pled guilty to assault in the third degree. Thus, Encompass' disclaimer based upon the plaintiff's allegations in the underlying action, the policy exclusion and James Adelis' guilty plea was woefully late: [sic] All of those facts were known to Encompass for virtually the entire time that it defended James Adelis.  Thus, the pivotal question here becomes whether coverage exists under the policy but for the exclusion relied upon by Encompass.  (See Desire v Nationwide Mutual Fire Insurance Company, supra).

The subject policy covers a claim or suit for "personal injury" or "bodily injury" caused by an "occurrence. "  The policy defines an "occurrence" as, inter alia, "(a)n offense including a series of related offenses, committed during the policy period which results in personal injury."  James Adelis' alleged acts for which coverage is sought under the policy fit the description of an "occurrence." Accordingly, coverage for James Adelis' acts exists under the policy's terms, absent the application of an exclusion.  Since Encompass is relegated to rely solely upon the policy's exclusion to defeat James Adelis' claim for coverage, Encompass' failure to timely disclaim results in coverage.

It is important to note that the subject policy did not define an "occurrence", at least with respect to liability coverage for bodily injury and property damage, as an accident.  Had it done so, Encompass may have been able successfully to argue that its failure earlier to disclaim did not violate Insurance Law § 3420(d) because the underlying plaintiff's intentionally caused injuries did not result from a covered "occurrence" in the first instance, regardless of the policy's intentional or criminal acts exclusion. 

It is also important to note that Justice Lally incorrectly quoted the "occurrence" definition for the policy's "personal injury" coverage, which insurance coverage mavens know is defined as and protects against injury arising out of libel, slander, false arrest, wrongful eviction, wrongful detention, wrongful entry, malicious prosecution, false imprisonment, invasion of privacy or defamation of character.  As applicable to bodily injury and property damage coverage, however, the policy defined "occurrence" to mean "[a]n event, or a series of related events resulting from continuous or repeated exposure to the same general conditions, that causes bodily injury or property damage during the policy period[.]"  Thus, without any policy requirement that an "occurrence" be accidental in nature, Adelis' act of intentionally punching Smith qualified as an "occurrence" under the policy because it was an "event ... that cause[d] bodily injury[.]"