Monday, August 23, 2010

Mura & Storm's New York Insurance Coverage Seminar is a Month Away -- September 23, 2010

For the time being, an abbreviated announcement perches on top of this and every page of this blog.  My law firm's New York Insurance Coverage seminar, free to insurance claims and underwriting professionals and their service providers, is only a month away (scheduled for Thursday, September 23, 2010).  If you would like to register for this seminar, please do so as soon as possible by clicking here.

An Insured's Right to Independent Defense Counsel at the Liability Insurer's Expense

There is a fairly well-defined and well-developed body of case law in New York on the issue of under what circumstances an insured has the right to choose its own defense counsel at its liability insurer's expense.  Most insurance coverage professionals regard the seminal case on this issue in New York to be the New York Court of Appeals' 1981 decision in Public Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392 (1981). That decision's sole footnote, marked with an asterisk not a superscript number, offers guidance to insurers for determining when an insured is entitled to separate or independent counsel:
* That is not to say that a conflict of interest requiring retention of separate counsel will arise in every case where multiple claims are made.  Independent counsel is only necessary in cases where the defense attorney's duty to the insured would require that he defeat liability on any ground and his duty to the insurer would require that he defeat liability only upon grounds which would render the insurer liable.  When such a conflict is apparent, the insured must be free to choose his own counsel whose reasonable fee is to be paid by the insurer.  On the other hand, where multiple claims present no conflict -- for example, where the insurance contract provides liability coverage only for personal injuries and the claim against the insured seeks recovery for property damage as well as for personal injuries -- no threat of divided loyalty is present and there is no need for the retention of separate counsel.   This is so because in such a situation the question of insurance coverage is not intertwined with the question of the insured's liability. 
Over at LinkedIn's New York Insurance group, Joseph Martan, counsel at the Property Research Loss Bureau, recently posed the question "When must [a] liability insurer yield choice of defense counsel?"  In only four days' time, Joseph's question itself yielded 18 comments, including several from me, that explored the important shades and nuances of what seems like a simple question.  But is it?

I commend that thread to any New York insurance professional or practitioner who deals from time to time with a liability insurer's duty to defend and making decisions regarding same.  To view that question and comment thread, however, you'll need to be a LinkedIn member.  You may also need to be a member of the New York Insurance group, I'm not sure.  If you're not already a member of LinkedIn, consider joining (it's free) and, if you do, adding me as a connection if you're so inclined.

Friday, August 20, 2010

Recommended Blogs -- The New York Appellate Law Blog

With the issuance this past Monday of LexisNexis' Top 50 Insurance Blogs for 2009 list, it occurred to me that I should share and highlight some of the blogs that I have and continue to come across in my own blogging endeavors.  Links to these recommended blogs either already are or will listed on the right toolbar of this blog by category.  There will be insurance blogs, New York legal blogs or blawgs, and  other  legal and non-legal blogs.   I won't recommend a blog unless I think it's worth your time, and I'll try to remove links to blogs that have gone dormant.  I presume all will have subscription widgets or gadgets on them so you can subscribe if you like them.  Or there's always an RSS reader like Google Reader.

In the spirit of Twitter's #FollowFriday, I'll endeavor to post about my recommended blogs each Friday.  Today's and my first recommended blog post is about a non-insurance blog, but one New York state personal injury litigators should consider subscribing to.

I recently learned of Mauro, Goldberg & Lilling's New York Appellate Blog and became an instant subscriber.  The blog provides well-written, concise summaries of New York appellate decisions, mostly about personal injury cases and issues, as well as other useful information for New York legal practitioners.  Although somewhat of a recent entry to the blogosphere, with a born-on date of December 29, 2009, the postings in 2010 have been fairly regular.  I hope the folks over at Mauro, Goldberg & Lilling continue to feed this blog and provide its readers with its excellent content.

"Because We Don't Have the Money" -- Andrew Carothers and Former Counsel Fight Over Fees

Collier, Halpern, Newberg, Nolletti & Bock, LLP v. Andrew Carothers, M.D., P.C.

(Sup. Ct., Westchester Co., decided 7/2/2010)

Someone should submit this case to Wikipedia as a footnote for its irony entry.

New York no-faulters will recall that in August 2008, a Richmond County (Staten Island) civil court jury rejected Andrew Carothers MD, PC's $23 million in consolidated claims for MRI services against 50 insurance companies, finding that the corporation rather than being owned by Dr. Carothers had been "fraudulently incorporated", i.e., the Mallela defense.

In Matter of Andrew Carothers, M.D., P.C. v Insurance Cos. Represented by Bruno Gerbino & Soriano, LLP, 26 Misc 3d 448 (NYC Civ. Ct., Richmond Co., decided 10/14/2009), Richmond County Civil Court Judge Peter Sweeney denied the plaintiff PC's post-trial motion to set aside the jury's verdict.  Those wishing to understand what a fraudulent incorporation or Mallela defense looks like should read Judge Sweeney's summary of the trial evidence in that case.  It is my understanding that the verdict has been appealed. 

The plaintiff law firm Collier, Halpern, Newberg, Nolletti & Bock, LLP did not represent Andrew Carothers, MD, PC (ACMDPC) in that case; the once ├╝ber confident Mark W. Smith of Smith Valliere, PLLC, did (and is defending ACMDPC and Dr. Carothers in this action). Collier Halpern brought this action against ACMDPC, Dr. Carothers personally, and other defendants to recover $402,626.44 in legal fees and disbursements ACMDPC and Dr. Carothers allegedly failed to pay.  Collier Halpern had billed the PC and Dr. Carothers a total of $892,190.99 for defending them in 13 actions brought by various no-fault insurance companies.  The total amount of billings at issue in 11 of those 13 actions was $47,937.60. 

On defendants' motions to dismiss, the court dismissed the complaint against the Medtrex defendants and the quantum meruit and fraud causes of action against defendants ACMDPC and Carothers.  The Carothers defendants then answered and asserted nine affirmative defenses.  After discovery and the filing of a note of issue, plaintiff moved for summary judgment on the grounds of breach of the retainer agreement and account stated.  In support of their motion, plaintiff argued that there were no issues fact to preclude summary judgment because at his deposition when asked by plaintiff why its invoices were not paid Dr. Carothers replied "Because we don't have the money." Further, when asked if there was any other reason why plaintiff was not being paid, Dr. Carothers answered "No."

In addition to opposing plaintiff's motion on various grounds,the Carothers defendants cross-moved for leave to amend their answer to assert four counterclaims against the plaintiff for its alleged "gross overbilling" based on breach of contract, unjust enrichment, breach of fiduciary duty, and fraud.  In support of their cross motion, the Carothers defendants contended that in view of the fact that they allege plaintiff misstated the number of hours expended on various matters and marked up out-of-pocket expenses when only the actual cost of the expenses were to be charged, there was a valid claim for fraud.

In denying plaintiff's motion for summary judgment, Westchester County Supreme Court Justice William Giacomo ruled:
Here, there are significant questions of fact regarding the reasonableness of the legal fees billed in this case. There is no dispute that plaintiff charged approximately $900,000 in legal fees for cases worth about $48,000. Notably, the legal fees are about 20 times the value of the no-fault cases! While the Court is mindful of the fact that the avoidance of particular outcome in first party benefit no fault cases can be worth more than the medical reimbursement at stake, to wit, a finding that the health care provider was unlicensed or fraudulently licensed providers (see State Farm Mut. Auto. Ins. Co. v. Robert Mallela, 4 NY3d 313 320-22 [2005][Such a determination renders these entities "not eligible" for reimbursement .], it still seems to this Court that legal bills in excess of 20 times value of the no-fault cases warrants denial of summary judgment as the reasonableness of attorney's fees is always subject to court scrutiny. (See Matter of First Natl. Bank v Brower, 42 NY2d 471 [1977]; D'Antoni v. Ansell, 184 AD2d 678 [2nd 1992]; Reisch & Klar v Sadofsky, 78 AD2d 517 [2nd Dept 1980]).

As the First Department noted in Collier, Cohen, Crystal & Bock v. MacNamara, 237 AD2d 152 [1st 1997]), a similar case in which a law firm [a predecessor firm to the plaintiff?] was trying to collect fees which seemed on their face to be unreasonable, "[f]urther militating against summary disposition of this matter is the question of the reasonableness of the fees the firm is attempting to collect, to wit, $155,000 for less than six months work for defendant's interest in a partnership valued at less than $30,000. It is recognized that the courts possess the traditional authority "to supervise the charging of fees for legal services under the courts' inherent and statutory power to regulate the practice of law" (id at 152; see also Gair v Peck, 6 NY2d 97 [1959], cert denied 361 US 374 [1960]; Finkelstein v Kins, 124 AD2d 92, 100 [1st Dept 1987], appeal dismissed 69 NY2d 1023 [1987]).

Based on the foregoing, summary judgment is DENIED because "[t]he reasonableness of plaintiff's fees can be determined only after consideration of the difficulty of the issues and the skill required to resolve them; the lawyers' experience, ability and reputation; the time and labor required; the amount involved and benefit resulting to the client from the services; the customary fee charged for similar services; the contingency or certainty of compensation; the results obtained and the responsibility involved." (Morgan & Finnegan v. Howe Chemical Co., Inc., 210 AD2d 62 [1st Dept 1994]; see also Matter of Freeman, 34 NY2d 1, 9 [1974]; Marshall v New York City Health & Hosps. Corp., 186 AD2d 542, 543 [2nd 1992]; Gutin v Gutin, 155 AD2d 586, 587 [2nd 1989]; cf., Kramer, Levin, Nessen, Kamin & Frankel v Aronoff, 638 F Supp 714 SDNY 1986]).
The court also granted the Carothers defendants' cross motion to amend their answer to assert four counterclaims against plaintiff, holding:
Here, although the note of issue has been filed there can be no doubt that the allegations raised in the Carothers defendant's counterclaims are not a surprise to plaintiff. The amount and propriety of legal fees billed by plaintiff is the heart of the dispute between the parties. Therefore, the four proposed counterclaims arguable have merit. 
A fraudulent billings counterclaim being asserted by the Carothers defendants against the attorneys who defended them in actions alleging that Carothers fraudulently incorporated and billed under ACMDPC.  See the irony?

Wednesday, August 18, 2010

Top 50 in My 50

Some of you may know that I recently turned 50 and that I subscribe to the "you're only as old as you behave" mentality, which, most of the time, makes me much, much younger than my chronological age. 

After celebrating my elapsing the half century mark with family and friends, an aging thought did occur to me:  most if not all of the seminal New York decisions involving the property and casualty insurance coverage stuff that fuels this blog were decided in the last 50 years.  For those of who may be be arithmetically challenged, that's since 1960, the year of my issuance (inception having taken place sometime in 1959, with annual renewals starting in 1961).  So although some might consider me old, most prevailing New York insurance coverage law certainly is not, relatively speaking.  In fact, the past 50 years have witnessed the issuance of the foundational decisions that support the corpus of the prevailing P&C insurance coverage law in New York.  As I grew, so did New York insurance coverage law.  We're pretty much the same age.  And if New York insurance coverage law is young, so am I, I would argue.

Of course, it's natural for courts to look first to newer rather than older precedent, especially in the area of insurance coverage law.  Policy language, provisions and coverages have developed and evolved over the past 100 years, requiring ever new and updated interpretations and applications.  Who knew there would be such things as asbestos contamination, lead poisoning, cyber liability and Chinese drywall claims back in 1960?  As risks of loss have increased and changed, coverages have adapted, albeit usually more slowly and deliberately, and courts have found it necessary to review and construe established policy terms under sometimes unanticipated loss scenarios.

In any event, I've decided to mark the contemporaneous passing of my 50 years by creating and posting a hyperlinked list of the top 50 New York property and casualty decisions from the past 50 years.  Sorta like a "This Is Your Life" in New York insurance coverage case terms.  My aim is to finish this project by the end of this year, and I'd like your help in doing so.  In comments to the post, or in an email to me, please nominate any number of what you consider to be seminal or important property and casualty (pretty much anything other than life, health, and disability) insurance coverage decisions issued by New York state or federal courts since 1960.  I'd like to give attribution to the contributors to this list, so please use your name in commenting on this post.  Bonus points will be awarded for anyone who nominates a case that make the list in the 1960-1975 time frame.  Don't worry about citations.  Just give me as close to the case's name as possible and, if you're not sure of the name, essentially what it's about. 

I expect the challenge won't be in coming up with a list of the 50 most important New York P&C insurance coverage cases decided in the last 50 years; it will be in coming down to that number.  It'll also provide some good grey matter exercise for me.  And we AARP-eligible types (someone I until recently regarded as a friend presented me with 3-year paid membership as his gift) can use all the grey matter exercise we can get.  Someone's alternative view on aging is that we're only as old as we think.  So please join me in thinking about this.  And look for the list later this year.  If I live that long.  Thanks. 

Great Wall Acupuncture Continues to Control Fees Charged by Licensed Acupuncturists

With the comment period still open on the New York State Insurance Department's proposed amendment to Regulation 83 regarding licensed acupuncture fees, New York no-fault professionals know that most New York acupunturists continue to bill at and litigate over "prevailing geographic rates" for their services. 

Over at Arbiters of NY No-Fault, another legal blog of my law firm, my associate, Scott Mancuso, reports on two recent no-fault arbitration decisions in which the arbitrators adhered to the Appellate Term's holding in Great Wall Acupuncture, P.C. a/a/o Maria Gonzalez v. Geico Ins. Co., 26 Misc.3d 23 (App. Term, 2d Dept., 2009) that no-fault insurers "may use the workers' compensation fee schedule for acupuncture services performed by chiropractors to determine the amount which a licensed acupuncturist is entitled to receive for such acupuncture services".  Check out that post here.  

Tuesday, August 17, 2010

Coverage Counsel Selected to LexisNexis Insurance Law Community's Top 50 Insurance Blogs of 2009

LexisNexis Insurance Law Community 2009 Top Blogs of the Year
I'm pleased to report that this blog has again been honored with selection to LexisNexis Insurance Law Community's Top 50 Insurance Blogs of 2009.  This makes two years in a row on that list.  The 2009 honorees include bloggers from across the spectrum of all lines of insurance coverage.  I will be updating my blogroll to include links to some of those excellent blogs.  Meanwhile, you should check out the list here.

Here, in relevant part,  is how LexisNexis described the selection process:
After some very careful review and a great deal of deliberation, the LexisNexis Insurance Law Community has selected its Top 50 Insurance Blogs for 2009.

We’d like to express gratitude to our Community members for your comments and suggestions. All of you submitted many of the new names on the 2009 Top 50 list and we thank you for infusing so much fresh talent into our Community. We also want to specially thank the LexisNexis Insurance Law Advisory Board for giving us their input.

These top blogs offer some of the best writing out there. They contain a wealth of information for all segments of the insurance industry, and include timely news items, expert analysis, practice tips, frequent postings and helpful links to other sites and sources.

Demonstrating on a daily basis that insurance makes the world go round, these blogs also show us how insurance issues interact with politics and culture. These sites also demonstrate the power of the blogsphere, by providing a collective example of how bloggers can—and do—impact and influence the law and the business of insurance.
Here is how they describe Coverage Counsel on the list of awardees:
Coverage Counsel -

Published by Mura & Storm
Roy A. Mura is the Insurance coverage & fraud attorney, grammarian, blogger, and angler behind this blog, which provides a rolling dialogue about New York insurance coverage cases and issues. The analysis is spot-on, and Mura’s in-depth commentary and quick wit is both engaging and informative.
Many thanks to my friends at LexisNexis for the recognition, kind words, and the award.  While I don't blog for badges, it's nice to be recognized and included among such exceptional blogs and bloggers.  Coverage Counsel has also been climbing the rankings over at Avvo's Top Legal Blogs, currently sitting at 87th of all legal blogs with an Alexa ranking of 864,684. 

Other New York-based insurance blogs making the final 2009 list are:

Tim Dodge's

Jason Tenenbaum's

The retiring David Gottlieb's and aspiring David Barshay's

Marc Lanzkowsky's

and Goldberg Segalla's

Congrats to all the honorees, and thank you for reading Coverage Counsel.

Monday, August 16, 2010

Motor Vehicle Accidents Still Reportable at $1,000 -- Now Surchargable at $2,000

On July 30, 2010, Governor Paterson signed Bill S1700B as part of Chapter 277 of the Laws of 2010,  which raises the aggregate property damage premium surcharge threshold from $1,000 to $2,000 for New York auto policies issued, modified or renewed on and after November 27, 2010.  The new law amends New York Insurance Law § 2335 by adding a new subsection (a) to that statute, providing:
§ 2335 -- Motor vehicle liability insurance rates; prohibition of surcharges for certain traffic infractions
No insurer authorized to transact or transacting business in this state, or controlling or controlled by or under common control by or with an insurer authorized to transact or transacting business in this state, which sells a policy providing motor vehicle liability insurance coverage in this state shall increase the policy premium in connection with the insurance permitted or required by this chapter solely because the insured or any other person who customarily operates an automobile covered by the policy:

(a) has had an accident that does not result in aggregate damage to property in excess of two thousand dollars, provided that any policy surcharge shall be permissible for any accident which results in bodily injury or if the insured has more than one accident in the merit rating experience period.  Nothing in this subsection shall change the dollar amount of the accident reporting threshold of the Department of Motor Vehicles as provided for in paragraph one of subdivision (a) of section six hundred five of the Vehicle and Traffic Law.  (New language underlined.)
Note that premium surcharges are expressly permitted for accidents that result in bodily injury or if an insured has more than one accident during the merit rating experience period.  The reporting threshold of V&T § 605 was left unchanged at $1,000.

If the New York state legislature does not extend Insurance Law § 2335, it will sunset or expire on July 1, 2011

Friday, August 13, 2010

NYSID Circular Letter No. 9 (2010) -- Incorrect Amounts Listed on Cancellation Notices for Non-Payment of Premium

August 9 , 2010


TO:  All Insurers Writing Property/Casualty Policies in New York 
RE:  Incorrect Amounts Listed on Cancellation Notices for Non-Payment of Premium

STATUTORY REFERENCES:  Insurance Law §§ 3425 and 3426 

The purpose of this Circular Letter is to clarify for property/casualty insurers that are subject to Insurance Law §§ 3425 and 3426 that a notice of cancellation for non-payment of premium must clearly inform the policyholder of the overdue amount.

It has come to the Department’s attention that some insurers are sending to policyholders notices of cancellation for non-payment of premium that include installment payments that are not yet in arrears.  Therefore, many insureds believe that they must pay premiums not yet overdue in order to avoid a cancellation for non-payment of premium.  

New York Insurance Law § 3425(c) (McKinney Supp. 2009) states in relevant part as follows:
After a covered policy has been in effect for sixty days, or upon the effective date if the policy is a renewal, no notice of cancellation shall be issued to become effective…unless it is based on one or more of the following: 

(1) With respect to automobile insurance policies: 

(A) nonpayment of premium, provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due;
*          *          *         *
(2) With respect to personal lines insurance policies:

(A) nonpayment of premium, provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due[.]
Regarding commercial lines insurance, Insurance Law § 3426(c) states that:
After a covered policy has been in effect for sixty days unless cancelled pursuant to subsection (b) of this section, or on or after the effective date if such policy is a renewal, no notice of cancellation shall become effective until fifteen days after written notice is mailed or delivered to the first-named insured and to such insured’s authorized agent or broker, and such cancellation is based on one or more of the following:

(1) With respect to covered policies:

(A) nonpayment of premium provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due.
In turn, Insurance Law § 3425(a)(10) and Insurance Law § 3426(a)(3) define “nonpayment of premium” as:
the failure of the named insured to discharge any obligation in connection with the payment of premiums on a policy of insurance or any installment of such premium, whether the premium is payable directly to the insurer or its agent, or indirectly under any premium finance plan or extension of credit.  Payment to the insurer, or to an agent or broker authorized to receive such payment, shall be timely, if made within fifteen days after the mailing to the insured of a notice of cancellation for nonpayment of premium.

Because the language of Insurance Law §§ 3425(c)(1)(A), 3425(c)(2)(A) and 3426(c)(1)(A) is identical, the Department construes these provisions in the same manner.  Thus, an insured may receive a non-payment of premium notice only if the insured has failed to discharge an obligation in connection with the payment of premiums on a policy of insurance.[1]

In addition, in an Office of General Counsel (OGC) Opinion 06-12-08 (December 14, 2006), the Department’s OGC found that a notice of cancellation that failed to correctly inform the insured of the amount that was past due constituted a violation of Insurance Law § 3425(c)(1)(A) because any amount not yet due does not provide legal grounds to cancel for nonpayment of premium.  

Accordingly, a notice of cancellation for non-payment of premium must inform the policyholder of the overdue amount and that the policyholder must pay that amount in order to avoid a cancellation.

While an insurer may notify an insured of an installment payment at the same time that the insurer sends a notice of cancellation, the insurer must make clear that those installment payments are not necessary in order to avoid a cancellation.

Questions regarding this Circular Letter should be addressed to Lisa Bugaj, Examiner, New York State Insurance Department, One Commerce Plaza, Albany, New York 12257, 518-473-8162,


Mitchel Gennaoui
Assistant Deputy Superintendent
and Chief, Consumer Services Bureau

[1] An obligation in connection with the payment of premiums on a policy of insurance may include, in some instances, an installment fee, late payment fee, or reinstatement fee.  For a detailed discussion, please see Office of General Counsel Opinion 03-04-31 (April 29, 2003).

Thursday, August 12, 2010

Nassau Supreme Applies Doctrine of Contra Proferendum to Conclude that Insured's Obligation Not to Impair Its Insurer's Subrogation Rights Applies Only If the Insurer Has Made Payment to Its Insured

Gould Inv., L.P. v. Travelers Cas. & Surety Co. of Am.

(Sup. Ct., Nassau Co., decided 7/26/2010)

If an insurer has not yet made payment of policy proceeds to its insured, must the insured still protect the insurer's potential subrogation rights of recovery in the event the insurer eventually does make payment?

Under the policy language at issue in this case, Nassau County Supreme Court Justice Ira B. Warshawsky said no, the obligations to pay and protect subrogation rights are coextensive and conjunctive, and the question of whether the insured has impaired its insurer's subrogation rights in breach of policy conditions need not be reached in the absence of payment.

Travelers issued a commercial crime policy to Gould Investors, LLP, and its affiliate, One Liberty Properties, Inc.  The policy afforded coverage for employee dishonesty, among other things.  The policy's conditions included  a requirement that the insured
"must transfer to us all your rights of recovery against any person or organization for any loss you sustained and for which we have paid or settled.  You [the insured] must also do everyhing necessary to secure those rights and do nothing after loss to impair them."  (Emphasis added.)
 In July 2005, One Liberty Properties discovered that its president and CEO of approximately six years had allegedly engaged in dishonest conduct during his employment.  In August 2005, Liberty filed a claim under its commercial crime policy with Travelers, and Travelers requested that the plaintiffs substantiate their alleged losses through the filing of a proof of loss statement and other supporting materials.

For reasons not clear from the decision, the claim was not paid.  In August 2005, plaintiffs were simultaneously sued by and brought suit against various persons and entities including Liberty's former CEO and the entities and person from whom he allegedly had received bribes and kickbacks in a numebr of real estate transactions.  In February and March of 2007, both actions were settled -- although not as to Liberty's former CEO -- when the parties executed stipulations of partial settlement and voluntary discontinuances. 

Plaintiffs thereafter commenced this action for declaratory and related relief as against Travelers, alleging that its claim was covered under the policy and that Travelers breached its obligations thereunder by failing to act upon the claim in good faith and/or to pay it.  In its answer, Travelers denied the material allegations of the within complaint and interposed several affrmative defenses, including defenses that the plaintiffs: (1) impaired Traveler's subrogation rights in violation of the policy's general conditions by executing the settlements; and (2) that they also failed to demonstrate the existence of a direct loss within the meaning of the policy.

Liberty's former CEO eventually pleaded guilty to a single count of conspiring to commit wire fraud and was sued by the Securities and Exchange Commission.  After filing a consent to settle that SEC action, the former CEO was ordered to disgorge nearly $900,000 to his victims in relation to two fraudulent schemes, one of which related to the plaintiffs' claim to Travelers.  Plaintiffs subsequently settled their action against Liberty's former CEO, allegedly "reserv[ing] any and all subrogation rights" possessed by Travelers, but not producing a copy of the settlement agreement allegedly for confidentiality reasons.

Travelers moved for summary judgment dismissing plaintiffs' complaint on the ground that plaintiffs had breached the policy's condition regarding Traverlers' subrogation rights by settling the 2005 actions and waiving their right to to seek recovery from the funds disgorged by Liberty's former CEO in the SEC matter.  In denying Travelers' motion, the court found that the policy's subrogation condition was subject to more than one reasonable interpretation, and, consequently, must under the doctrine of contra proferendum be construed against Travelers and in favor of the plaintiffs to mean that the insureds' obligation to protect and not impair Travelers' subrogation rights arose only after Travelers made payment under the policy, which it had not:
It is settled that an insured' s failure to protect the subrogation rights of the carrier may constitute a breach of the policy terms, and that the insured "bears the burden of establishing that a release has not "operate(d) to prejudice the subrogation rights of the insurer (Weinberg v. Transamerica Ins. Co., 62 NY2d 379 384 (1984); see generally, Progressive Ins. Co. v. Sheri Torah, Inc., 44 AD3d 837, 838; State Farm Mut. Auto. Ins. Co. v. Lucano, 11 AD3d 548; In re Allstate Ins. Co. (Richard E. Brown), 288 AD2d 955; Aetna Cas. Sur. Co. v. Longo Production, Inc., 247 AD2d 497; State Farm Fire and Cas. Co. v. Zyburo, 215 AD2d 566 567; Leeds Peninsula Pharmacy, Inc. v. American Nat. Fire Ins. Co., 125 AD2d 551 553).

* * * * *

Plaintiffs' response to the comparison to automobile cases is that they are inapplicable.  The reason is that in those cases the insured released the culpable party, whereas the insured in this case did not provide such a release to the culpable party, and the claim for subrogation remains viable as to the dishonest employee, Fishman. Affirmation of Schlesinger, Exh. "G" to affirmation of Lambert in Support of Motion, at ¶¶ 14-15.  The issue is whether or not this is adequate under the obligations of the policy to take no action which would jeopardize the insurer's rights of subrogation.  More importantly is the question as to whether or not the obligation to take no action which jeopardizes the insurer's rights of subrogation is contingent upon the payment of the claim by the carrier.  Reading ¶ 19 of the policy leads to a reasonable interpretation that the obligation to preserve subrogation rights [is] coextensive with the obligation of the carrier to pay the claim.  While Travelers argues that the obligations to pay the claim and to preserve the rights of subrogation are severable, and equally enforceable, the fact is that they are described in the conjunctive, using the word "and", not in the disjunctive.

When there is more than one reasonable interpretation of the language in an agreement the doctrine of contra proferendem requires the Court to adopt the interpretation which is contrary to the interpretation proffered by the author. In this instance, Travelers, the author of the document, must be bound by the interpretation that the obligation to protect subrogation rights arises only upon payment of the claim. In this case, Travelers was on notice of the claim in August 2005 , while the settlements of which it complains in its affirmative defenses, were in 2007 and 2008.  Had Travelers evaluated the damages sustained under the terms of the policy and made payment, they would have obtained subrogation rights against any and all persons against whom a claim could be made, but they did not do so.

Wednesday, August 11, 2010

Questions of Fact Found to Preclude Summary Judgment For or Against Condo Board Member on CGL Coverage For Injuring Condo's Security Guard in Fight

Kelleher v. Admiral Indem. Co.

(Sup. Ct., New York Co., decided 7/28/2010)

So if you're a member of the board of directors of your condominium and you get into a bit of a tussle with the security guard of your building while returning from Christmas shopping with packages in hand and family in tow, will the condo's CGL policy respond to defend and indemnify you in relation to the guard's inevitable personal injury suit against you?


On Christmas Eve, 2005, Denis Kelleher, who was a member of the board of directors of the Northmoore Condominiums, returned to the Northmoore accompanied by his wife and two young children.  As he approached the building, Kelleher observed through the glass lobby doors Abraham Baawuah (“Baawuah”), an employee of an independent security contractor, sitting behind the lobby desk and speaking on the telephone.  Kelleher and his wife were carrying their children and Christmas packages and were unable to easily open the doors to the building.  Baawuah did not assist the Kelleher family in entering the lobby. After entering the building, Kelleher "rebuked" Baawuah for not having opened the lobby doors.  Thereafter, Kelleher and Baawuah began arguing over whether opening the doors was part of Baawuah’s duties.

During that argument, Kelleher announced that he was going to call the board president to report Baawuah.  While Kelleher was dialing his cellular phone, Baawuah approached Kelleher, slapped his cellular phone from his hand, grabbed Kelleher by the coat, and pulled him toward the front doors.  Kelleher allegedly responded by pushing Baawuah away from him in self-defense, and Baawuah fell to the ground between the two entrance doors.  Kelleher called the police who, after responding to the call, initially suggested that Kelleher and Baawuah drop the matter.  However, the police later returned to the Northmoore and arrested Kelleher, charging him with criminal assault.  The criminal charge was later dismissed.

Less than a month later (of course), Baawuah filed an action against Kelleher in Bronx County Supreme Court, alleging causes of action for intentional assault and battery, intentional infliction of emotional distress, and negligence.  That action was subsequently settled.

Kelleher gave notice to the condo's CGL insurer, Admiral, of the underlying action and requested that Admiral defend and indemnify him.  Kelleher based his request for coverage on his contention that he qualified as an "insured" under the policy, which provided:

(l)  If you are designated in the Declarations as:
(d)  An organization other than a partnership, a joint venture or limited liability company, you are an insured. Your “executive officers” and directors are insureds, only with respect to their duties as your officers or directors.
Kelleher argued that he qualified as an insured because he was operating within the scope of his duties as a Northmoore board member by reporting Baawuah’s failure to perform doorman service to the board president.

In response to Kelleher's request for coverage, Admiral denied coverage on several grounds, including the asserted applicability of the policy's Employment-Related Practices Exclusion (ERPE), which provided in relevant part:
This insurance does not apply to:
“Bodily Injury” to:

(1) A person arising out of any:
(a)  Refusal to employ that person;

(b)  Termination of that person’s employment; or

(c)  Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person[.]
* * * * * .
This exclusion applies:

(1)  Whether the insured may be liable as an employer or in any other capacity (emphasis added)[.]
Kelleher commenced this declaratory judgment action to compel Admiral to defend and indemnify him in the underlying personal injury action, alleging that because he was acting within the scope of his duties as a member of the condo's board of directors, Admiral was required to provide him with coverage under the condo's CGL policy.  Admiral moved for summary judgment, contending:  (1) the ERPE applied to negate coverage because the bodily injury to Baawuah arose from Kelleher’s discipline of Baawuah during the course of Baawuah’s employment at the Northmoore; (2) the clause in the ERPE stating that coverage is excluded whether the insured is liable “as an employer or in any other capacity” indicates that the injured party need not be an employee of the insured in order for coverage of the incident to be excluded under the policy; and (3) as a threshold matter, Kelleher did not qualify as an "insured" under the policy because he was not acting within the scope of his duties as a board member when the altercation occurred.  Kelleher cross-moved for partial summary.

In denying both parties' motions for summary judgment, New York County Supreme Court Justice Saliann Scarpulla ruled that although Baawuah’s injuries arose from the type of employment-related practice contemplated by the ERPE, the ERPE weas ambiguous as to whether it applied to independent contractors:
Although Admiral has established that Baawuah’s injury arose from the type of employment-related practices described in the ERPE, it has not shown that the ERPE clearly and unambiguously applies even if the injured party was not a current, former, or potential employee of the insured.  Here, the term “person” (rather than “employee”) is used in the ERPE to describe the injured individual, but “person” is not expressly defined to include independent contractors.  Both the title of the ERPE and the list of practices enumerated therein - actions commonly associated with those of an employer interacting with an employee - suggest that it is reasonable to interpret the ERPE as being inapplicable to injuries suffered by independent contractors.  
In so holding, the court noted that the policy's BI to employees exclusion also used the "or in any other capacity" language, but clearly applied only to employees of the insured:
Admiral acknowledged in its motion papers that the “Employer’s Liability” exclusion pertained only to injuries to employees of the insured, despite the exclusion’s “or in any other capacity” language. Yet, Admiral also argued that the “or in any other capacity” clause in the ERPE should be interpreted, as a matter of law, in the exact opposite manner, i.e., to encompass non-employees.   
 Justice Scarpulla also denied plaintiff's cross motion for summary judgment:
Here, there are remaining factual determinations to be made that preclude summary disposition of the applicability of the ERPE and require denial of Kelleher’s motion for partial summary judgment.  In particular, Baawuah’s occupational status with respect to the Northmoore is an unresolved issue affecting whether the ERPE applies.  It is undisputed that Baawuah was an employee of an independent security contractor, but there is an issue of fact as to the authority the Northmoore exercised with respect to Baawuah’s employment at the condominium.  Admiral asserts that Baawuah was an “indirect employee” of the Northmoore; the April 4, 2006 letter disclaiming coverage to Kelleher posits that Baawuah might have been a “special employee.” Such a determination could place Baawuah within the narrow interpretation of the ERPE posited by Kelleher. * * *  Kelleher’s argument with Baawuah and his attempt to report Baawuah’s actions to the board president suggest that the Northmoore may have maintained a degree of influence over Baawuah’s employment status.  The parties did not fully brief this issue and submitted insufficient evidence on these motions with respect to Baawuah’s occupational relationship to the Northmoore.  Moreover, because “a person’s categorization as a special employee is usually a question of fact,” Thompson, 78 N.Y.2d at 557, the resolution of this issue is inappropriate for determination as a matter of law.
Finally, with respect to the question of whether Kelleher qualified as an "insured" in the first place under the policy, the court ruled that plaintiff had not affirmatively established that he was an insured:
“The party claiming insurance coverage bears the burden of proving entitlement, and is not entitled to coverage if not named as an insured or an additional insured on the face of the policy.” Nat’l Abatement Corp. v. Nat’l Union Fire Ins. Co., 33 A.D.3d 570, 571 (1st Dep’t 2006) (internal citations omitted).  Here, Kelleher asserts that he is covered as an insured under the Policy because he was acting within the scope of his duties as a member of the Northmoore board of directors.  However, Kelleher has not submitted any by-laws, corporate documents, or an affidavit showing that Kelleher’s duties as a board member encompassed either rebuking Baawuah or reporting Baawuah’s alleged dereliction to the board president.  Because of the lack of admissible evidence as to Kelleher’s board duties, there is a question of fact as to whether Kelleher qualified as an insured under the Policy. See generally Sekulow, 193 A.D.2d at 396.

Monday, August 9, 2010

Another Graves Amendment Update -- New York

For all actions commenced on or after August 10, 2005, the "Graves Amendment" provides vehicle renters and lessors with a statutory basis for dismissing vicarious liability claims in motor vehicle accident lawsuits.  This amendment to the Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005: A Legacy for Users ("SAFETEA") provides in relevant part that:
[a]n owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle (or an affiliate of the owner), for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if-

(1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and

(2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner).  49 U.S.C. § 30106(a)
For purposes of the Graves Amendment, section 30102(a)(6) of Chapter 301 of Title 49 of the United States Code, entitled Motor Vehicle Safety, defines "motor vehicle" as "a vehicle driven or drawn by mechanical power and manufactured primarily for use on public streets, roads, and highways, but does not include a vehicle operated only on a rail line."

Motor vehicle rental and leasing defendants use the Graves Amendment as a tort defense to indirect or vicarious liability under state laws such as New York's Vehicle & Traffic Law § 388.  In pertinent part, that statute provides:
§ 388. Negligence in use or operation of vehicle attributable to owner.

1. Every owner of a vehicle used or operated in this state shall be liable and responsible for death or injuries to person or property resulting from negligence in the use or operation of such vehicle, in the business of such owner or otherwise, by any person using or operating the same with the permission, express or implied, of such owner. Whenever any vehicles as hereinafter defined shall be used in combination with one another, by attachment or tow, the person using or operating any one vehicle shall, for the purposes of this section, be deemed to be using or operating each vehicle in the combination, and the owners thereof shall be jointly and severally liable hereunder.

2. As used in this section, "vehicle" means a "motor vehicle", as defined in section one hundred twenty-five of this chapter, except fire and police vehicles, self-propelled combines, self-propelled corn and hay harvesting machines and tractors used exclusively for agricultural purposes, and shall also include "semitrailer" and trailer" as defined in article one of this chapter, whether or not such vehicles are used or operated upon a public highway. For the purpose of this section, self-propelled caterpillar or crawler-type equipment while being operated on the contract site, shall not be defined as motor vehicles.
In May of this year, Rep. Bruce Braley (D-IA), the former president of the Iowa Trial (aka Personal Injury Plaintiffs’) Lawyers Association, introduced an amendment to the 2010 Motor Vehicle Safety Act that would have repealed the Graves Amendment.  The Braley Amendment did not make it out of committee onto the floor of Congress for a vote, but it may be reintroduced at some point.

From my LexisNexis Alerts on "Graves Amendment" court decisions come these, mostly recent New York cases: 

Brown v. New York City Transit Authority
(Sup. Ct., New York Co., decided 11/24/2008)

Plaintiff claimed that while a passenger on an "Access-A-Ride" vehicle he was caused to fall out of his wheelchair and sustained an injury.  Plaintiff commenced this personal injury action against the New York City Transit Authority (NYCTA), the vehicle's titled owner and lessor, the vehicle's driver, and the vehicle's registered owner, American Transit, Inc.  NYCTA cross-moved for summary judgment dismissing plaintiff's complaint on the ground that the Graves Amendment applied to exempt it from vicarious liability under New York Vehicle & Traffic Law § 388.  Plaintiff opposed that cross motion, arguing that NYCTA was not entitled to summary judgment because the NYCTA is not in the business of renting or leasing motor vehicle, and thus not within the class to which the Graves Amendment applies and/or protects.

In denying the NYCTA's cross motion,  New York County Supreme Court Justice Donna M. Mills ruled that NYCTA had not established that it was "engaged in the trade or business of renting or leasing motor vehicles":
At issue here, however, is 49 USC § 30106.  In the case at bar, plaintiffs dispute that NYCTA is in the business of renting or leasing motor vehicles.  The lease between the NYCTA and American Transit for the subject vehicle in question is not dispositive on the issue of whether the NYCTA is in the business of renting or leasing vehicles.  As such, since no other evidence has been presented by NYCTA to establish that it is in the business of renting or leasing vehicles, its cross-motion must be denied.

Merine v. Darden
(Sup. Ct., Queens Co., decided 6/8/2009)

Plaintiff alleged that he sustained personal injuries when his car was struck in the rear by the car owned by the defendant rental car company, Elrac Inc., and driven by the defendant Jermaine L. Darden.  The complaint specifically alleges that the plaintiff's injuries were a result of negligence on the part of the "defendants in that said motor vehicle was owned, operated, maintained and controlled in a careless, reckless and negligent manner, in violation of the defendants' respective duties of care[.]"  Prior to discovery, Elrac moved to dismiss the complaint against it for failure to state a cause of action pursuant to CPLR Rule 3211(a)(7). 

In denying Elrac's motion, Queens County Supreme Court Justice Devin P. Cohen held that: (1) Elrac failed to attach complete copies of the plaintiff's complaint and Elrac's answer to its motion papers; (2) Elrac failed to introduce a properly authenticated copy of the rental agreement; and (3) the complaint alleged negligent maintenance of the rental vehicle by Elrac, an exception to the Graves Amendment:
A motion to dismiss for failure to state a cause of action is a motion on the pleadings, which requires the court to analyze the sufficiency of the plaintiff's initial complaint. Here, the defendant fails to attach all of the relevant pleadings to its motion. The third page of the plaintiff's complaint is missing from the documents the defendant offers in support of its motion. Defendant also fails to attach a copy of its own answer, but does not state that its motion is one for pre-answer dismissal. Thus, the court cannot determine from defendant's papers whether the defendant asserted a failure of the plaintiff to state a cause of action or cited the Graves Amendment as a defense in its pleading. These reasons alone would be sufficient to deny defendant's motion. 

Even if the defendant had attached the necessary supporting documents, the affidavit by its regional loss control manager is insufficient to authenticate the purported rental agreement between Elrac and the defendant driver as a business record. "[A] requirement of evidence of authenticity...applies to all writings whose relevancy depends upon authorship by a particular person" (Prince, Richardson on Evidence § 9-101 [Farrell 11th Ed]). Here, the affidavit states that Elrac is in the business of renting motor vehicles to the general public, that it uses rental agreements which are created in the regular course of business and that it rented the vehicle involved in the accident to Mr. Darden in the regular course of its business. However, the affidavit fails to authenticate the particular rental agreement annexed to the motion, or to state that it was created in the regular course of business. It is unclear whether this was a mere oversight, or whether the deponent did not have sufficient personal knowledge regarding the document. In either case, the purported rental agreement is not admissible as a business record. Thus, the defendant fails to establish that the subject vehicle was "rent[ed] or lease[d] a person," and that the collision occurred "during the period of the rental or lease" (see 49 USC § 30106[a]). Absent such a showing, the defendant fails to establish by admissible evidence that it qualifies for immunity under the Graves Amendment. 

Furthermore, had the defendant's supporting documents been adequate, the court would still find that the substance of the plaintiff's complaint is sufficient on its face. The Graves Amendment confers immunity from liability upon a rental or leasing owner only if "there is no negligence or criminal wrongdoing on the part of the owner" (see 49 USC § 30106[a]). "On a CPLR 3211 motion to dismiss, the court will accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory" (Nonnon v. City of New York, 9 NY3d 825, 827 [2007] [quoting Leon v. Martinez, 84 NY2d 83, 87-88 (1994)]). In this case, there is no question that plaintiff's complaint alleges that Elrac was negligent in its maintenance of the vehicle in question.

Merchants Insurance Group v. Mitsubishi Motor Credit Association
(U.S Ct. Apps, 2nd Cir., decided 12/16/2009)

In this case, the United States Court of Appeals for the Second Circuit ruled that the Graves Amendment, which applies to "any action commenced on or after the date of enactment of this section [August 10, 2005]", did not apply to this action, which was originally commenced prior to that date.

Plaintiff Merchants originally commenced this action for contribution from defendant Mitsubishi Motor Credit Association (MMCA) on October 20, 2003, prior to the August 10, 2005 effective date of the Graves Amendment.  After the action was removed to federal court, and because no judgment had yet been filed in the related underlying personal injury action by the time Merchants filed its suit for contribution, on July 11, 2005, the district court declared Merchants' suit unripe and dismissed it without prejudice to reopen "if and when a judgment is entered in the state court case and plaintiff makes a payment on that judgment."

Merchants later made payment on that judgment and requested that this action be reopened, which it was in June 2006, after the effective date of the Graves Amendment.  MMCA moved for summary judgment based on the Graves Amendment

Although neither party argued for its applicability, on September 25, 2007, the district court granted MMCA's then-pending motion for summary judgment on the ground that the Graves Amendment precluded Merchants' claims.  The district court reasoned, under state law, that although the instant action was first filed in October 2003, which was before the Graves Amendment's effective date, the suit was prematurely filed and was therefore not justiciable at that time. After acknowledging that there is "no indication on the docket sheet that a new summons and complaint was ever filed when the case was re-opened[,].... the parties to the lawsuit have remained the same, and plaintiff's claim is unchanged," the district court held that the suit "commenced" for purposes of the Graves Amendment only after it became justiciable and was reopened in June 2006.  Since June 2006 is after the effective date of the Graves Amendment, the district court found that the case was preempted by federal law and granted summary judgment in favor of MMCA.

The Second Circuit Court of Appeals disagreed and found that this action was commenced for purposes of the Graves Amendment when Merchants originally filed it in state court in October 2003.  Thus, the district court erred in granting summary judgment to MMCA based on the Graves Amendment:
Here, it was not necessary for the district court to go beyond the face of the statute to discuss the justiciability or prematurity of the suit as originally filed.  If state law applies here by virtue of our construction of the Graves Amendment, CPLR § 304(a) is unambiguous.  Although the district court's concerns about "reward[ing] plaintiff's improper filing and subvert[ing] Congress' decision to bar suits, such as the instant one," Merchants Ins. Group, 525 F. Supp. 2d at 314, are well-taken, the suit at issue commenced when it was originally filed in state court, even though it was later dismissed and then reopened.  We see no reason, moreover, that the result would not be the same with reference to federal procedural principles.  Under the Federal Rules of Civil Procedure, "[a] civil action is commenced by filing a complaint." Fed. R. Civ. P. 3.  Thus, this action "commenced" when it was originally filed in state court on October 20, 2003, and is not barred by application of the Graves Amendment.

Muller v. Gilliard
(Sup. Ct., Suffolk Co., decided 5/26/2010)

Penske Truck Leasing leased a truck to International Paper Company, which in turn allowed the defendant Gilliard, who allegely lacked a valid commercial driver's license, to drive the truck.  Plaintiff was allegedly injured when the leased truck, driven by Gilliard, struck her vehicle in the rear.  Penske moved for summary judgment dismissing the plaintiff's complaint against it based on the Graves Amendment.  Penske argued that plaintiff's negligent entrustment cause of action against it was non-cognizable because it entrusted the truck to International Paper Company, rather than to Gilliard.

In granting Penske's motion, Suffolk County Supreme Court Justice Thomas F. Whelan ruled that the Graves Amendment applied to exempt Penske from vicarious liability under New York Vehicle & Traffic Law § 388:
The Graves Amendment, now codified at 49 USC § 30106, renders the vicarious liability provisions of VTL § 388 inapplicable to an owner or affiliate owners of motor vehicles who are engaged in the trade or business of renting or leasing motor vehicles. "This statute is applicable to all actions commenced on or after August 10, 2005 and has been enforced as pre-empting the vicarious liability imposed upon commercial lessors by Vehicle and Traffic Law § 388." (Graham v Dunkley, 50 AD3d 55, 852 NYS2d 169 [2d Dept 2008]).  The applicability of the Graves Amendment to this action and to the moving defendant is not disputed.  Accordingly, those portions of Penske's motion wherein it seeks summary judgment dismissing so much of the plaintiffs' complaint that charges Penske with vicarious liability for the occurrence of the accident and the damages sued upon, are granted (see Gluck v Nebgen, 72 AD3d 1023, 898 NYS2d 881 [2d Dept 2010]).

The remaining portions of Penske's motion wherein it seeks dismissal of the plaintiffs' second cause of action wherein they seek to hold Penske liable by reason of its purported negligent entrustment of the truck are also granted. While it is clear that the Graves Amendment has no application to claims of negligence against a commercial lessor of vehicles that are not premised on the vicarious liability provisions of VTL § 388 (see Palacios v Aris, Inc., 2010 WL 933754 [ED NY 2010]), the plaintiffs' claims of negligent entrustment on the part of moving defendant Penske are not cognizable.  It is well established that claims for negligent entrustment rest upon the degree of knowledge the supplier of a chattel has or should have had concerning the entrustee's propensity to use the chattel in an improper or dangerous fashion (see Hamilton v Beretta USA Corp., 96 NY2d 222, 727 NYS2d 7 [2001); Zara v Perzan, 185 AD2d 236, 586 NYS2d 139 [1992]).

Here, it is not disputed that Penske did not entrust the subject truck to Gilliard, the operator of such truck.  Rather, Penske leased the truck to International who in turn, entrusted it to Gilliard. The moving papers sufficiently established that Gilliard was not an employee, servant or agent of Penske or otherwise known to it. The opposing papers submitted by the plaintiffs failed to raise any question of fact regarding knowledge, actual or constructive, on the part of moving defendant Penske that its entrustee, International, had a propensity to use leased vehicles in an improper or dangerous fashion. The fact that Gilliard may not have possessed a valid driver's license, pursuant to which, he could legally operate the subject truck does not warrant a denial of Penske's motion as it relates to the plaintiffs' negligent entrustment claims (see generally Hamilton v Beretta USA Corp., 96 NY2d 222, supra ; see also Cook v Shapiro, 58 AD3d 664, 871 NYS2d 714 [2d Dept 2009]; Weinstein v Cohen, 179 AD2d 806, 579 NYS2d 693 [2d Dept 1992]).

Collazo v MTA-New York City Transit
(App. Div., 1st Dept., decided 6/22/2010)

In this action for personal injuries allegedly sustained when a bus in which plaintiffs were passengers was involved in a collision with a truck rented by defendant Cancel from defendant U-Haul Co. of Arizona, U-Haul appealed from Bronx County Supreme Court's denial of its motion to dismiss the complaint.

In AFFIRMING the order appealed from, the First Department ruled that the lower court properly denied U-Haul's motion becauase the plaintiffs' complaint alleged negligent maintenance of U-Haul's truck:
The motion was properly denied because while the Federal Transportation Equity Act of 2005 (49 USC § 30106) (Graves Amendment) bars negligence claims against car-rental companies based solely on a theory of vicarious liability (see Hernandez v Sanchez, 40 AD3d 446, 447 [2007]), here, the complaint alleges, inter alia, negligent maintenance of U-Haul's truck. Such claim is not barred by the Graves Amendment since the statute does not absolve leasing companies of their own negligence (see Novovic v Greyhound Lines, Inc., 2008 WL 5000228, *3, 2008 US Dist LEXIS 94176, *7-9 [ED NY 2008]).

Vinokur v. Raghunandan
(Sup. Ct., Kings Co., decided 6/25/2010)

Following the case law precedent set by Kings County Supreme Court Justice Wayne Saitta in Meigel v. Schulman and Graca v. Krasnik, Kings County Supreme Court Jack M. Battaglia denied the defendant car lessor's motion for summary judgment with leave to renew within 30 days after substitution of counsel for the defendant vehicle driver:
In its Supplemental Affirmation, the Law Firm contends, among other things, that it does not have a conflict of interest since any liability as against PV Holding (the leasing company) would only have been vicarious through Vehicle and Traffic Law § 388, which is barred by the Graves Amendment. In this regard, the Law Firm contends that the other causes of action alleged against PV Holding, i.e., negligent entrustment and respondeat superior, were not addressed in Plaintiff's Bill of Particulars, and do not have any merit. (See e.g. Drake v Karahuta, (2010 WL 376388, *3 [WDNY 2010] ["Plaintiff's failure to allege any basis for independent negligence against [the leasing company] (other than vicarious liability under NY Vehicle and Traffic Law § 388) negates any possibility of independent liability by [the leasing company]. Therefore, defense counsel does not have a conflict of interest in asserting a Graves Amendment defense.") 

The Rules of Professional Conduct, which were promulgated as joint rules of the Appellate Divisions of the Supreme Court, effective April 1, 2009, and which supersede the former Part 1200 (Disciplinary Rules of the Code of Professional Responsibility), govern the resolution of the issue of the Law Firm's potential conflict of interest. Rule 1.7(a) of the Rules of Professional Conduct provides that, "Except as provided in paragraph (b), a lawyer shall not represent a client if a reasonable lawyer would conclude that . . . the representation will involve the lawyer in representing differing interests." (Rules of Professional Conduct [22 NYCRR 1200.0] Rule 1.7 [a].) Paragraph (b) sets forth necessary conditions that allow an attorney to represent parties with differing interests.

The first question, then, is whether, under the circumstances of this case, a reasonable lawyer would conclude that the Law Firm's representation of both the driver Mario Regina and the leasing company PV Holding will involve the Law Firm in "representing differing interests".  In its Supplemental Affirmation, the Law Firm suggests that this determination should be made as of the time when the issue of the potential conflict of interest is raised, i.e., as of now.  In this regard, the Law Firm points out that the issue was raised by the Court sua sponte after disclosure was complete, and only after the Law Firm brought a motion for summary judgment. 

Nonetheless, the language of Rule 1.7(a) requires that the determination be made as of the time it becomes apparent to a reasonable lawyer that the dual representation "will involve the lawyer in representing differing interests." For reasons that will follow, in this case a reasonable lawyer should have been aware of the conflict of interest upon receipt of Plaintiff's Complaint. (See e.g. Graca v Krasnik,20 Misc 3d 1127[A], 2008 NY Slip Op 51640[U], *3 [Sup Ct, Kings County, Saitta, J.]["The conflict exists at the point the attorney recognizes that one of their two clients may have a Graves Amendment defense.")

*  *  *  *  *

In Drake v Karahuta, (2010 WL 376388), a federal magistrate held, under similar circumstances, that a law firm representing both the driver and leasing company does not have a conflict of interest in asserting a Graves Amendment defense where "discovery is complete, and plaintiff has neither alleged nor sought to prove any basis other than vicarious liability for its claim against [the leasing company]." (See id. at *2.)

Although neither Graca, Meigel, nor Drake analyzed the issue of the potential conflict of interest under the new Rules of Professional Conduct, they are still persuasive on the question of potential conflict of interest under the facts presented here. Indeed, it has been noted that the Rules of Professional Conduct "include[s] approximately three-quarters of the former [Code of Professional Responsibility], with the remaining one quarter coming from the ABA's Model Rules", and that the new rules do not necessarily eviscerate the holdings in cases decided based upon the Code of Professional Responsibility. (See Delorenz v Moss, 24 Misc 3d 1218 [A], 2009 NY Slip Op 51519[U], *2 [Sup Ct, Nassau County, Palmieri, J.] 

Graca and Meigel stand for the proposition that a law firm representing both the leasing company and the driver has an inherent conflict of interest where the law firm seeks to move for dismissal of the complaint only as against the leasing company since the driver would be left bearing full liability. Drake stands for the proposition that a law firm, representing both the leasing company and the driver, that raises the Graves Amendment defense to dismiss the action against the leasing company has a conflict of interest only where there are allegations asserted against the leasing company other than vicarious liability under Vehicle and Traffic Law § 388, presumably because the Graves Amendment bars the imposition of liability against the leasing company solely "by reason of being the owner of the vehicle" (see 49 USC § 30106[a].)

This Court agrees with Graca and Meigel that a law firm has an inherent conflict of interest in representing both the leasing company and the driver, regardless of whether the only claim against the leasing company is vicarious liability based upon Vehicle and Traffic Law § 388. As noted in Graca, the fact that a party asserts a Graves Amendment defense does not mean that the driver would have no basis to oppose that party's summary judgment motion. (See Graca v Krasnik, 20 Misc 3d 1127[A], 2008 NY Slip Op 51640[U], at *3.) In this regard, a party asserting the Graves Amendment as a basis for summary judgment dismissal of a Vehicle and Traffic Law § 388 cause of action must establish prima facie that it was engaged in the business of leasing vehicles, a fact which a driver having independent counsel may challenge. (See id. at *3.)

*  *  *  *  *

Even though this Court has concluded that the Law Firm has a concurrent conflict of interest since "a reasonable lawyer would conclude that . . . the representation will involve the lawyer in representing differing interests"(see Rules of Professional Conduct [22 NYCRR 1200.0] Rule 1.7 [a]), the Law Firm may still represent both clients if conditions set forth in Rule 1.7(b) of the Rules of Professional Conduct are met. Rule 1.7(b) provides that, "Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing." (Rules of Professional Conduct [22 NYCRR 1200.0] Rule 1.7 [b].)

In its Supplemental Affirmation, the Law Firm fails to even address the criteria set forth Rule 1.7(b).  In any event, it is clear that the conditions specified in Rule 1.7(b) have not been met because the Law Firm failed to, among other things, attach any writing demonstrating that Mario Regina gave his "informed consent, confirmed in writing." Even if the Law Firm were to have submitted such a writing, it may not be possible, under circumstances here, to show that "the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client", or that the "the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation." (See e.g. Graca v Krasnik, 20 Misc 3d 1127[A], 2008 NY Slip Op 51640[U], at *4 ["Here, the issue giving rise to the conflict of interest, the dismissal of the claim against one defendant shifting liability to the other, rises to a level that full disclosure and consent would not cure."]; see also generally Greene v Greene, 47 NY2d 447, 451-52 [1979] ["Because dual representation is fraught with the potential for irreconcilable conflict, it will rarely be sanctioned even after full disclosure has been made and the consent of the clients obtained]; Tavarez v Hill, 23 Misc 3d 377, 382 [Sup Ct, Bronx County 2009, Victor, J.].) 

*  *  *  *  *

Similarly, as to the third prong set forth in Rule 1.7(b), although neither the driver Mr. Regina nor the leasing company PV Holding has asserted claims against one another, one cannot say that, had they each had separate counsel, they would not have done so under the facts of this case. In any event, the Court need not offer any opinion as to whether "the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal" since two of the other prongs have not been met. 

*  *  *  *  *

Since here the Court raised the issue of disqualification on its own, and respecting the general rule that a party is entitled to be represented by counsel of its own choosing (see Dominguez v Community Health Plan of Suffolk, 284 AD2d 294, 294 [2d Dept 2001]), the Law Firm shall, at this time, only be disqualified from representing defendant driver Mario Regina. 
Over at his New York Personal Injury Law Blog, Eric Turkewicz gives his views on this decision

Scopelliti v. Flakowitz
(Sup. Ct., New York Co., decided 6/29/2010)

Defendant ELRAC moved for summary judgment dismissing plaintiff's complaint based on the Graves Amendment.  In support of its motion, ELRAC submitted an affidavit from a regional risk manager for ELRAC, and a copy of the rental agreement between defendant Flakowitz and ELRAC.  The regional risk manager's affidavit stated that ELRAC d/b/a Enterprise Rent-A-Car, was an automobile rental organization engaged in the business of renting motor vehicles at the time of the accident.

In granting ELRAC's motion for summary judgment, New York County Supreme Court Justice George J. Silver ruled:
The Graves Amendment, regarding rented or leased motor vehicle safety and responsibility, “bars vicarious liability actions against professional lessors and renters of vehicles," as would otherwise be permitted under Vehicle and Traffic Law § 388 (see Graham v Dunkley, 50 AD3d 55 [2008] ). The statute provides in pertinent part: (a) An owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle (or an affiliate of the owner), for harm to persons or property that results or arises out of
the use, operation, or possession of the vehicle during the period of the rental or lease, if (1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and (2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner).  The Graves Amendment thus preempts state statutes to the extent that they hold owners in the business of renting or leasing motor vehicles vicariously liable for the negligence of drivers, except when there is negligence or criminal wrongdoing on the part of the owner in actions commenced after August 10, 2005 (see Graham v Dunkley, 13 Misc.3d 790, 792 [2006], Keating v SS & R Management Co., 59 A.D.3d 176,872 N.Y.S.2d 459 [lst Dept 2009]).  Accordingly, Defendants' motion for summary judgment is granted, dismissing Plaintiffs summons and complaint against Defendant ELRAC. 

Strauss v. BMW Fin. Servs. Veh. Leasing
(Sup. Ct., Kings Co., decided 7/29/2010)

Does the failure to plead the immunity contained in the Graves Amendment (49 USC 30106) in the defendant's answer waive said immunity?  This court holds that the defendant did not waive the affirmative defense of the Graves Amendment by failing to plead it in its answer because the plaintiff had not been prejudiced by any surprise and had had a full opportunity to litigate the issue before the court.

Defendant BMW Financial Services Vehicle Leasing d/b/a Financial Services Vehicle Trust (BMW Financial) moved for summary judgment based on the Graves Amendment.  This action arises out of a motor vehicle accident.  One of the vehicles involved in the accident was leased from BMW Financial by defendant, David Kim. There were no specific allegations of negligence on the part of BMW Financial and BMW was not charged with any criminal acts in connection with the accident or this action. Plaintiff argued that because BMW Financial failed to plead the immunity contained within the Graves Amendment  as an affirmative defense in its answer, that defense was waived.  Plaintiff, however, did not dispute that the Graves Amendment encompasses the defendant had BMW Financial plead it in its answer. 

In granting BMW Financial's motion for summary judgment notwithstanding the lack of a Graves Amendment affirmative defense in its answer, Kings County Supreme Court Justice Herbert Kramer held:
The Graves Amendment precludes liability of an owner of a vehicle who leases or rents a vehicle to another if (1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner). Plaintiff asserts that as the Graves Act should be considered an affirmative defense that if not plead is waived

In support of his contentions Plaintiff relies upon cases in which the discovery of an immunity was made on the eve of, or during trial.  Further, the immunity was not proven in the cases which plaintiff relies upon.  Defendant opposes the plaintiff's motion on the basis that there is no surprise to the plaintiff, federal law preempts state law and that the Graves Act should not be considered a waivable defense. 

In this case the Summons and Complaint were filed on April 4, 2009.  BMW timely answered, but made no assertion of the Graves Act as an affirmative defense.  By correspondence dated October 15, 2009 BMW Financial alerted plaintiff to the applicability of the Graves Act and requested the plaintiff to execute a stipulation of discontinuance based thereon. Plaintiff refused and the instant summary judgment motion was brought by defendant. 

Plaintiff has not claimed any surprise from BMW Financial's invocation of the Graves Amendment.  Rather plaintiff asserts that raising the defense is technically inappropriate at this juncture.  For the foregoing reasons the defendant's motion is granted.  First, simply by the name of defendant "BMW Financial Services Vehicle Leasing d/b/a Financial Services Vehicle Trust" it is apparent or at least not surprising that BMW Financial is in the business of leasing vehicles.  Second, because BMW alerted plaintiffs early in the litigation of their protected status the plaintiffs can make no viable claim of surprise.  Lastly, because BMW Financial raised the affirmative defense in connection with the instant motion the plaintiff has had a full and fair opportunity to address the defense and any prejudice appurtenant to raising this defense for the first time on a motion has been ameliorated. 

This court finds that the defendant BMW Financing has not waived the defense of the immunity contained within the Graves Act. The summary judgment motion is granted as to defendant BMW Financing only. The action is severed as to the remaining defendants.
For all posts on this blog about New York court decisions involving the Graves Amendment, click here.