Paper Discovery in a Typical First-Party, Water-Damage-From-A-Roof-Leak Property Insurance Action

 Dear First-Party Property Claim Handlers, 

I've written and spoken many times on issues like report writing, claim log notation, privileges that apply (and don't apply) to claim file materials and communications with coverage and insured defense counsel, the scope of discovery in first-party property coverage litigation, and the like.   

Sometimes the best way to understand what could happen, is to see what has happened.  And so, for your review and rumination, I offer the following as what paper discovery typically looks like in a first-party, water-damage-from-a-roof-leak New York state court property insurance action (taken from an actual, pending case):

Plaintiff's Demand for Discovery & Inspection and Combined Demands Directed to [ABC] Insurance Company:

     6. The entire claim file maintained by [ABC] for Plaintiff or in any way relating to Plaintiff, including but not limited to electronic notes, computer entries, emails, memorandum, telephone messages, correspondence, account information, billing information, contact information, file jacket notes, contracts, agreements and applications.

NOTE: “[T]he payment or rejection of claims is a part of the regular business of an insurance company. Consequently, reports which aid it in the process of deciding which of the two indicated actions to pursue are made in the regular course of its business” (Landmark Ins. Co. v. Beau Rivage Rest., 121 A.D.2d 98, 101, 509 N.Y.S.2d 819). Reports prepared by insurance investigators, adjusters, or attorneys before the decision is made to pay or reject a claim are thus not privileged and are discoverable (see Landmark Ins. Co. v. Beau Rivage Rest., supra at 101, 509 N.Y.S.2d 819; see also Bertalo's Rest. v. Exchange Ins. Co., 240 A.D.2d 452, 454, 658 N.Y.S.2d 656; Roman Catholic Church of Good Shepherd v. Tempco Sys., 202 A.D.2d 257, 258, 608 N.Y.S.2d 647; Paramount Ins. Co. v. Eli Constr. Gen. Contr., 159 A.D.2d 447, 553 N.Y.S.2d 127), even when those reports are “mixed/multi-purpose” reports, motivated in part by the potential for litigation with the insured (see Landmark Ins. Co. v. Beau Rivage Rest., supra at 102, 509 N.Y.S.2d 819; see also McKie v. Taylor, 146 A.D.2d 921, 536 N.Y.S.2d 893).

    7. The entire non-privileged underwriting file for this matter stated in the Complaint (or most current pleading, if amended).

     8. True and complete copies of all documentation, correspondence, reports, notes, or memorandum regarding any inspections, or investigations of the instant claim by [ABC] or a third-party on [ABC]’s behalf.

     9. All correspondence regarding the matter alleged in the Complaint sent to any governmental entity, including, but not limited to, the Department of Financial Services or Secretary of State.

     10. A complete electronic copy of each and every audio recording of any representative of Plaintiff or any Defendant herein. If it will be claimed that said recordings are no longer in existence, provide an affidavit with regard to the date and time of their destruction, including the name of the individual who destroyed same, reference to the rule or directive pertaining to the destruction of the recording, and a transcript of said recording.

     11. True and complete copies of all documentation, correspondence, reports, notes, emails, or memorandum between [ABC]and Plaintiff or anyone on Plaintiff’s behalf.

     12. True and complete copies of all documentation, correspondence, reports, notes, emails, or memorandum between [ABC] and any other party (with the exception of post disclaimer communications with legal counsel) with reference to Plaintiff and/or the Subject Claim.

     13. True and complete copy of the entire file maintained with regard to Plaintiff and/or the subject property, previous properties, or vehicles.

     14. True and complete certified copies of each insurance policy issued to the Plaintiff by [ABC] or its agents.

     PLEASE BE ADVISED, to the extent that any documents are claimed privileged, a privilege log is demanded to be furnished.

If you think many or most of these things are not discoverable, think again.  

If you're not familiar with the scope of discovery in coverage litigation, take a few minutes and read my blog posts for the Attorney-Client Privilege label and Discovery label.  See, also, Devaul v. Erie Ins. Co., 2019 N.Y. Slip Op. 34261(U) (Sup.Ct., Onondaga Co., 2019) and my Communications Between Outside Coverage Counsel and His Insurer Client Regarding "the Investigation and Potential Rescission of a Claim" Ordered Disclosed post from this past February.

Be advised and guided accordingly.

Cordially, 

Your Favorite (and Perhaps Only) Logophile Friend, 

Roy

Communications Between Outside Coverage Counsel and His Insurer Client Regarding "the Investigation and Potential Rescission of a Claim" Ordered Disclosed

HOMEOWNERS -- APPLICATION MISREPRESENTATION -- RESCISSION -- ATTORNEY-CLIENT PRIVILEGE -- DISCOVERY

Prorokovic v. United Property & Casualty Ins. Co.

(S.D.N.Y. 02/02/2022)

From time to time I remind my insurer clients that before a first-party insurance claim has been investigated and coverage denied, not everything they or their adjusters write to me or I write to them is protected from discovery by the doctrine of attorney-client privilege.  I also remind them that my role is not to assist them in the investigation of a claim, but to provide a legal advice and opinion to them regarding whether a particular loss and its related claim are covered under the particular policy at issue.  

Why do I remind my insurer clients of this?  Because some New York courts consider outside counsel who assist their insurer clients in investigating first-party property losses and claims to be performing "claim handling activities" that are subject to discovery.  And because of cases like this one.  

On November 5, 2020 the plaintiffs suffered a total fire loss of their recently purchased New City, New York home and initiated a claim with defendant UPCIC under their homeowners insurance policy.  They had applied for and obtained their homeowners policy in August 2020, stating , among other things, on the policy's application that the home's "roof age" was 18 years and that "the dwelling both has a Certificate of Occupancy and is not an incomplete newly constructed home. If under additional construction or renovation, will be completed within the next 90 days."

On October 13, 2020 UPCIC issued a notice of cancellation, citing the policyholder's failure to send requested self-inspection photos to confirm the property's condition.  On October 16, 2020, UPCIC emailed the insured's agent to advise that home inspection photos showed the roof to be in very poor condition, but that UPCIC would rescind the policy cancellation if the roof was fully replaced before the cancellation date of November 17, 2020.  

In investigating the fire, UPCIC learned that:

• the roof was approximately 27 years old; 
• construction of a substantial addition to the home had begun after the September 17, 2020 closing date, was underway at the time of the fire, and was not expected to be complete until January 2021; and
•  the plaintiffs were not occupying the home at the time of the policy's application, but had moved into the house on October 1, 2020.

UPCIC's investigation of the loss and claim included retaining outside counsel on November 17, 2020 to conduct an examination under oath of the policyholder, which was done on December 11, 2020.  

On January 19 2021, UPCIC rescinded the policy and denied coverage, stating, in part: 

UPC has determined that you made material misrepresentations and/or false statements on the Application for Insurance. The misrepresentations identified include, but are not limited to, false statements and/or concealment of the age of the roof, condition of the roof, concealment of renovations and/or construction efforts, questionable habitability of the subject premise, occupancy, etc. Had UPC known the true facts, the policy would not have been issued or would have been written under different terms, conditions, and premiums. As a result, the policy issued by UPC, policy number *****, will be rescinded and any policy premiums paid to date will be refunded. Therefore, there is no coverage available for the above-referenced loss. UPC denies any and all coverage.

According to UPCIC's counterclaim in this action, on January 20, 2021, a UPCIC underwriter signed an affidavit stating that "if the Insured had provided the correct information regarding the roof update year, the occupancy prior to September 17, 2020, the fact that construction on the property would not be completed in ninety (90) days, or answered 'no' in response to a question on the Application regarding the occupancy and roof, then United would either not have written the policy or have written it under different terms."

On January 22, 2021, UPCIC sent the plaintiffs a "Policy Voidance" letter based on “[m]isrepresentation of material facts in obtaining a homeowners insurance policy with UPC Insurance Company for the property located at [address], by falsely providing the incorrect roof age, incorrect occupancy type and number of months the risk is occupied or rented. In addition, there is existing damage to premises which was not disclosed on application."  A week later UPCIC refunded plaintiffs the $1,366.35 they had paid in premiums up to that point by direct deposit into their bank account. 

On March 8, 2021, plaintiffs commenced this action, seeking $600,000 in compensatory damages and $1,000,000 in punitive damages based on UPCIC allegedly having acted "intentionally, maliciously, wrongfully, and in bad faith" in disclaiming coverage.

In the course of discovery plaintiffs sought production of communications between retained outside counsel and UPCIC from when counsel was retained on November 17, 2020  through the date of UPCIC's January 19, 2021 declination.  When UPCIC refused to disclose those communications, plaintiffs' counsel wrote to the court on December 15, 2021 to request a conference, claiming 

Defendant has asserted the frivolous position that virtually its entire claim file, underwriting guidelines and communications with attorneys and non-attorneys pre-dating its declination decision, are protected from disclosure under the attorney-client and work product privileges. The parties have met and conferred in good faith on multiple occasions but have reached an impasse.

This decision is the result of that conference.  

In opposing plaintiffs' demand for production of outside counsel communications in this case, UPCIC argued that these communications were protected by attorney-client privilege because 

they relate to the retention of outside counsel for legal advice relating to the investigation and potential rescission of a claim. This is fundamentally different than advice relating to the processing of a claim, or the denial of a claim, in the ordinary course of business. UPC is in the business of processing claims, but is not in the business of rescinded policies.

Aside from the fact that claims aren't rescinded (policies are), the judge rejected UPCIC's attempted "fine line" distinction, and ordered UPCIC to produce all responsive communications with outside counsel between November 17, 2020 and January 19, 2021: 

"New York law governs the applicability of the attorney-client privilege in this diversity case." Roc Nation LLC v. HCC Int'l Ins. Co., PLC, No. 19 Civ. 554, 2020 WL 1970697, at *2 (Apr. 24, 2020). "[U]nder New York law, an insurance company's claim handling activities are generally subject to discovery even if they were performed by an attorney. Id. This rule is grounded in an obvious principle: "The payment or rejection of claims is part of the regular business of an insurance company." Advanced Chimney, Inc. v. Graziano, 153 A.D.3d 478, 480, 60 N.Y.S.3d 210 (2d Dep't 2017). Thus, "[t]he key question is whether the attorney is predominantly investigating an insurance claim or providing legal advice." Roc Nation, 2020 WL 1970697, at *2 (quotation marks and citations omitted). This approach extends to evaluations of assertions of attorney-client privilege in the context of an insurance company's decision to rescind a policy based upon alleged material misrepresentations made by the insured in the procurement of the policy. See Advanced Chimney, 153 A.D.3d at 479-80. 

Here, defendant attempts to draw a fine line between its handling of plaintiffs' claim and its evaluation of the rescission option. In the first place, defendant's proposition that it is "not in the business of rescinded policies" defies logic. Defendant is in the business of providing insurance coverage; it assesses risk (and determines whether or not to provide insurance) based (at least in part) on a potential insured's application. That is precisely why policy rescissions are often based upon misrepresentations or false statements in insurance applications. Defendant's point — that it makes no money from rescinded policies — is facially true, but ignores situations (like the one at bar) where defendant rescinds a policy and avoids paying a substantial claim. In any event, in this case, defendant's decision to rescind plaintiffs' policy was inexorably intertwined with its denial of plaintiffs' claim. In other words, any advice from outside counsel related to rescission of plaintiffs' policy cannot be parsed from defendant's denial of plaintiffs' claim. Thus, defendant's communications with outside counsel were not predominantly of a legal nature and, therefore, are not protected by attorney-client privilege.[2]

I'm not fond of UPCIC's argument that there's an important difference between claim investigations and potential policy rescission investigations.  The better argument IMO would have been on the nature of each of outside counsel's communications.  

Nevertheless, this decision is another reminder to insurers in New York that not all communications with their outside counsel made prior to a declination of coverage are protected from discovery by attorney-client privilege.  If your outside counsel is not aware of this, PLEASE pass this post along to them.

Bottom line: each of outside counsel's pre-declination communications with insurers should be one of only two, distinct kinds: 

1. routine communications (requesting file materials, scheduling, etc.);
2. communications rendering legal advice that are --key words/concept -- predominantly of a legal nature.  

Not a blend of both.  One or the other. Keeping the communications separate will support  the more forceful and likely convincing argument that outside counsel communications which render only legal advice (are predominantly of a legal nature), even if made prior to the insurer-client's coverage declination, are protected from discovery by the doctrine of attorney-client privilege.  

When Attorney-Client Communications Aren't Attorney-Client Privileged

PROPERTY – BOAT VANDALISM CLAIM – DISCOVERY – REPORTS FROM COUNSEL – EXAMINATIONS UNDER OATH
Melworm v. Encompass Indem. Co.
(Sup. Ct., Nassau Co., decided 7/16/2012)

I could say I told you so.

Plaintiffs made a claim to defendant Encompass for vandalism damage to their dry-docked 1977 40-foot Tollycraft yacht.  Encompass retained counsel to conduct an EUO of its insured(s) and ultimately denied payment to them.  Plaintiffs sued and served interrogatories, seeking, among other things, the contents of Encompass' claim file.  In response, Encompass produced a redacted copy of its electronic claims diary, asserting that the redacted content was protected by attorney-client privilege. Plaintiffs moved to compel Encompass to produce the redacted portions of the electronic claims diary and letters from retained counsel to Encompass.

In ordering Encompass to produce an unredacted claims diary and letters from counsel for the court's in camera inspection, Nassau County Supreme Court Justice Arthur M. Diamond rejected the plaintiffs' argument that the attorney-client privilege at issue belonged to the plaintiffs and not to their insurer, but held that "communications which occurred before the date that the defendants had reasonable grounds to reject the claim ... are not immune from discovery":

In order to raise a valid claim of attorney-client privilege, the party seeking to withhold the information must show that it was a "confidential communication" made between the attorney and the client in the context of legal advice or services. Documents which are "not primarily of a legal character, but [express] substantial nonlegal concerns" are not privileged. However, "[s]o long as the communication is primarily or predominantly of a legal character, the privilege is not lost merely by reason of the fact that it also refers to certain nonlegal matters" (Bertalo's Rest. v. Exchange Ins. Co., 240 AD2d 452 [2nd Dept. 1997]; Rossi v Blue Cross & Blue Shield, 73 NY2d 588, 594 [1989 ]).

Defendants' claim that the internal discovery conducted by retained counsel, such as the examination under oath of the insured, is protected by the attorney client privilege is clearly misplaced. First, in a dispute between the insurer and the insured pertaining to an underlying claim, the claims file is generally not privileged material and the insurer cannot claim confidentiality against the insured. [Diamond State Ins. Co. v. Utica First Ins. Co., 37 AD3d 160; Woodson v. American Transit Insurance Company, 280 AD2d 328 [1st Dept. 2001]; Fireman's Insurance Company of Newark v. Norman Gray et al. and Allstate Insurance Company, 41 AD2d 863]. Second, as stated by the Second Department in Bombard v. Amica Mut. Ins. Co., (11 AD3d 647, 648 [2nd Dept. 2004]):

"[T]he payment or rejection of claims is a part of the regular business of an insurance company. Consequently, reports which aid it in the process of deciding which of the two indicated actions to pursue are made in the regular course of its business" (Landmark Ins. Co. v Beau Rivage Rest., 121 AD2d 98, 101 [1986] [internal quotation marks omitted]). Reports prepared by insurance investigators, adjusters, or attorneys [emphasis added] before the decision is made to pay or reject a claim are thus not privileged and are discoverable (see Landmark Ins. Co. v Beau Rivage Rest., supra at 101; see also Bertalo's Rest. v Exchange Ins. Co., 240 AD2d 452, 454 [1997]; Roman Catholic Church of Good Shepherd v Tempco Sys., 202 AD2d 257, 258 [1994]; Paramount Ins. Co. v Eli Constr. Gen. Contr., 159 AD2d 447 [1990]), even when those reports are "mixed/multi-purpose" reports, motivated in part by the potential for litigation with the insured (see Landmark Ins. Co. v Beau Rivage Rest., supra at 102; see also McKie v Taylor, 146 AD2d 921 [1989]).'[Id.].

 Merely because such an investigation was undertaken by attorneys will not cloak the reports and communications with privilege (see, Spectrum Sys. Intl. Corp. v Chemical Bank, 78 NY2d 371, 377) because the reports, although prepared by attorneys, are prepared as part of the "regular business" of the insurance company. (Bertalo's Rest.v. Exchange Ins. Co., 240 AD2d 452 [2nd Dept. 1997]). Moreover, evaluating the extent of potential liability of the insured, which would necessarily include assessment of damages, is within the ordinary course of business of an insurance company, and therefore is not privileged even though it has been conducted by retained counsel to perform examinations under oath. (Westhampton Adult Home v. National Union Fire Ins. Co. of Pittsburgh Pa., 105 AD2d 627, 628, 481 N.Y.S.2d 358 [1st Dept 1984]).

Justice Diamond concluded that after making his in camera review, "[i]f [the withheld materials] are primarily reports of an investigation of plaintiffs' claim, then they are then discoverable even though prepared by counsel." (Emphasis added.)

This language and verbiage from the Second Department's 1997 decision in Bertalo's Rest. v Exchange Ins. Co. seem to leave open the possibility that not all pre-denial attorney communications to their insurer clients will be discoverable:

In order to raise a valid claim of privilege, the party seeking to withhold the information must show that it was a "confidential communication" made between the attorney and the client in the context of legal advice or services (see, Matter of Priest v Hennessy, 51 N.Y.2d 62, 69; Coastal Oil N. Y. v Peck, 184 AD2d 241). Documents which are "not primarily of a legal character, but [express] substantial nonlegal concerns" are not privileged (Cooper-Rutter Assocs. v Anchor Natl. Life Ins. Co., 168 AD2d 663). However, "[s]o long as the communication is primarily or predominantly of a legal character, the privilege is not lost merely by reason of the fact that it also refers to certain nonlegal matters" (Rossi v Blue Cross & Blue Shield, 73 N.Y.2d 588, 594).

In Bertalo's Restaurant, the property insurer, Exchange Insurance Company, sought to protect "reports" made by the attorneys who had conducted the investigation of the claim for Exchange and communications from Exchange to those attorneys. In spite of its citation to the Rossi v. Blue Cross & Blue Shield proposition, however -- that so long as the communication is primarily or predominantly of a legal character, the privilege is not lost merely by reason of the fact that it also refers to certain nonlegal matters -- it is important to note that the Second Department in Bertalo's Restaurant ordered the disclosure of all documents prepared before the date Exchange contended it had decided to deny its insured's claim.

Both first- and third-party insurers should be guided accordingly, especially within the jurisdictions of the First and Second Departments in New York.

New York Supreme Grants Plaintiff Leave to Assert Consequential Damages in Amended Complaint and Denies Insurer's Motion to Compel Appraisal

COMMERCIAL PROPERTY – BI-ECONOMY – CONSEQUENTIAL DAMAGES – ATTORNEY'S FEES – DISCOVERY – ATTORNEY-CLIENT AND ATTORNEY WORK PRODUCT PRIVILEGES – APPRAISAL
De Martino v. Harleysville Worcester Ins. Co.
(Sup. Ct., New York Co., decided 1/21/2010)

On June 20, 2006, plaintiff's building allegedly suffered substantial damage due to the demolition, excavation and construction work plaintiff's neighbor was performing on property adjacent to plaintiff's building.  Plaintiff made a claim to her commercial property insurer, Harleysville Worcester Insurance Company, and a dispute arose over the value of plaintiff's covered loss.  Plaintiff's initial complaint, filed on October 1, 2008, alleged that Harleysville both failed to respond to plaintiff's claims in a timely manner and undervalued plaintiff's loss.

Three motions were at issue in this matter:  (1) by plaintiff to amend her complaint to assert a claim for consequential damages; (2) by plaintiff to compel the disclosure of certain email and fax communications between Harleysville and its contractor, and its attorneys and the contractor, withheld as privileged; and (3) by Harleysville to compel an appraisal of plaintiff's building loss. 

By memorandum decision and order dated September 9, 2009, New York Supreme Court Justice Marilyn Shafer granted plaintiff's motion to amend her complaint to assert a claim for consequential damages allegedly caused by Harleysville's delay in adjusting and paying her building loss claim:

Recent decisions of the Court of Appeals hold that a claim for consequential damages against an insurer may be asserted “so long as the damages were within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting [internal quotation marks and citation omitted]."  Panasia Estates, Inc. v Hudson Insurance Company, 10 NY3d 200, 203 (2008). The fact that the parties contemplated that plaintiff would be insured for losses sustained by a delay in payment and repair to her premises is found in the policy's business interruption clauses.

"The purpose served by business interruption coverage cannot be clearer-to insure that [plaintiff] had the financial support necessary to sustain [her] business operation in the event disaster occurred. The purpose of business interruption insurance is to indemnify the insured against losses arising from inability to continue normal business operation and functions due to the damage sustained as a result of the hazard insured against [internal quotation marks and citations omitted] ."

Bi-Economy Market, Inc. v Harleysville Insurance Company of New York, 10 NY3d 187, 194 (2008).

Because the proposed amendment is not palpably insufficient or patently devoid of merit, as supported by the reasoning in the above-quoted Court of Appeals cases, and the motion for leave to amend was made less than one year after the action commenced, there is no evidence that granting plaintiff's motion would prejudice or surprise defendant.  

With respect to plaintiff's motion to compel disclosure of the pre-suit communications with Harleysville's damage-estimating contractor, the court held that motion in abeyance and directed that Harleysville submit the withheld documents for the court's in camera review.  This decision followed that inspection and addressed Harleysville's motion to compel appraisal.

On plaintiff's request for clarification of the court's September 2009 decision and order, New York Supreme Court Justice Joan Kenney ruled that plaintiff's complaint "may be amended to include consequential damages for attorney’s fees and costs."  Citing the Court of Appeals' decision in Panasia Estates, Justice Kenney held:

Defendant only argued against inclusion of consequential damages because it asserted that plaintiff could not support the claim. In the instant matter, there are conflicting facts as to the manner in which the claim was handled, so that it cannot be determined at this juncture whether or not any alleged delays were reasonable under the circumstances, or which party caused such delays. However, the allegations are sufficient to place the matter before the trier of fact.

The decision of this court dated September 9, 2009, ordered that the complaint be amended in the proposed form annexed to the moving papers, which included the consequential damages plaintiff seeks. The discussion in that decision was directed only to plaintiff's claim for loss of business, because that was all that was argued by the parties in their papers at that time.

The decision does not specify whether the attorney's fees plaintiff sought were for other than the prosecution of this action.  If they were not, the court's most recent decision in this case on attorney's fees ostensibly conflicts with the courts' rulings in Panasia Estates, especially  New York County Supreme Court Justice Karen Smith's initial decision and order in that case, which granted Hudson's motion only to the extent of precluding plaintiff Panasia Estates from asserting any claims for legal fees incurred in the prosecution of its action.  See, also, Authelet v Nationwide Mut. Ins. Co., 2008 NY Slip Op 32929(U) (Sup. Ct., Suffolk Co., decided 10/24/2008)("The Court further notes, to the extent that the plaintiff seeks consequential damages for 'having been compelled to * * * retain legal counsel to seek redress,' that an insured may not recover attorney’s fees or other legal expenses incurred in bringing an action against an insurer, as here, to determine its rights under a policy (citations omitted). Hence, any consequential damages to which the plaintiff may ultimately be entitled shall be exclusive of such expenses."); and Grinshpun v. Travelers Cas. Co. of Conn., 23 Misc 3d 1111(A) (Sup. Ct., Kings Co., decided 3/11/2009)("In the case at bar, Plaintiffs do not allege that they suffered any damages as a consequence of Defendant's bad faith refusal to pay their claims other than the costs associated with having to commence a legal action to enforce their claims.  Such damages are not consequential damages that were contemplated by the policy as in the situations in Bi-Economy and Panasia.")

After having reviewed the communications submitted for an in camera review, the court ruled that Harleysville's attorneys' pre-suit fax to Harleysville's damage-estimating contractor regarding building estimates, the attorneys' pre-suit email on this same subject, and the contractor's pre-suit email response to Harleysville's attorneys were not immune from disclosure based on the attorney-client and attorney work-product privileges, ostensibly finding that those communications were not made for the purpose of facilitating the rendition of legal advice or services, and were not prepared by counsel acting as such and did not otherwise uniquely reflect a lawyer's learning and professional skills.

In denying Harleysville's motion to compel an appraisal of plaintiff's building loss, Justice Kenney ruled, in effect, that Harleysville had waited too long to demand an appraisal under the policy, not having formally done so until nearly three years after the reported loss date and eight months after plaintiff had commenced this suit:

In the case at bar, the court agrees with plaintiff that the first written demand for an appraisal, as mandated by the provisions of the policy, was not made until May 29, 2009, several years after the occurrence and more than nine months after the initiation of the lawsuit. Defendant's letter of May 2 , 2008, only references the appraisal provision of the policy, which is non-obligatory and is only triggered by a written demand. The May 2, 2008, letter does not indicate that, at that time, defendant is demanding an appraisal; the letter merely implies that it may demand an appraisal if the parties cannot reach agreement.

Defendant's instant motion was made only after the lawsuit was filed and some discovery had taken placed. The plaintiff in this action is a 79-year old woman whose only source of income, allegedly, is revenue from the subject building. At this point, halting these proceedings for an appraisal would unduly delay a determination of the matter, and, therefore, is denied.

I'd hazard a guess that 79-year-old insureds on an allegedly fixed or limited income win more often than their insurers on motions such as these.  Although there are several reported decisions relating to the 9/11 World Trade Center tragedy in which insurers successfully invoked their right of appraisal after suit was commenced, the better practice, from an enforceability standpoint, would be to invoke the appraisal option or mechanism as soon as possible and prior to the insured's commencement of suit. 

Neither the September 2009 decision nor this one indicates whether:  (1) there were or are any coverage disputes affecting the parties' respective positions; (2) Harleysville issued any partial declinations of coverage; or (3) Harleysville made any payment of what it believed it owed for the loss to plaintiff.  What these decisions underscore, however, is that the Court of Appeals' February 2008 decisions in Bi-Economy Market and Panasia Estates will continue to be cited in support of insureds' claims of consequential damages against their property insurers whenever there is a denial of coverage or delay in paying a claim, and regardless of whether the insurance contract at issue contemplated such consequential damages.  As we approach the two-year anniversary of those decisions, the state of the case law in New York on the issue of consequential damages against insurers is:

1. consequential damages have not been limited only to claims arising under commercial property policies; 
2. they have not been limited only to policies that afford business interruption or business income loss coverage; 
3. an allegation of "bad faith" conduct by the insurer is not needed to state a claim for consequential damages; and 
4. in all but one reported decision since Bi-Economy and Panasia Estates were decided, New York courts have granted plaintiffs leave to amend their complaints to state claims for consequential damages against their insurers.
   

Motion Court Erred in Requiring a Showing of Prejudice for Late Notice Disclaimer and in Not Conducting In Camera Review of Documents Listed on Insurer's Privilege Log

CLG – LATE NOTICE – TIMELY DISCLAIMER – PREJUDICE – DISCOVERY – ATTORNEY-CLIENT PRIVILEGE
Sevenson Envtl. Servs., Inc. v. Sirius Am. Ins. Co.
(4th Dept., decided 7/10/2009)

The motion court's rulings against the CGL insurer went 0-3 on this appeal.

Sirius Insurance Company insured Thomas Johnson, Inc. (TJI) under a CGL policy that required TJI to notify Sirius of any accident or occurrence "which may result in a claim" as soon as practicable.  An employee of TJI was injured in a construction accident on October 6, 2003, and TJI learned of the injury within days, but failed to notify Sirius of the accident nearly 15 months later.  Sirius disclaimed coverage based on TJI's late notice 24 days after receiving TJI's notice of claim.

Sevenson Environmental Services, Inc. (Sevenson) and The Goodyear Tire and Rubber Company (Goodyear), commenced this action for a declaration that Sirius was obligated to defend and indemnify them in the underlying personal injury action brought by TJI's employee.  TJI cross-claimed for a declaration that Sirius was obligated to defend and indemnify it also in the underlying action, and moved for summary judgment. Sirius cross-moved for summary judgment with respect to its coverage obligation to TJI.  Plaintiffs also moved to compel Sirius to disclose documents listed in its privilege log.

The motion court granted TJI's motion for summary judgment, finding that Sirius had not been prejudiced by TJI's delayed notice, and that Sirius' disclaimer was untimely and/or defectively unspecific.  The motion court also granted plaintiffs' motion to compel disclosure of documents listed in Sirius' privilege log without first conducting an in camera review of those documents. Sirius appealed, and the Fourth Department unanimously REVERSED all three rulings.

TJI apparently had successfully argued to the motion court that its nearly 15-month delay in notifying Sirius of its employee's accident should be excused because it believed that its employee intended to assert only a workers' compensation claim.  Citing Matter of Travelers Ins. Co. [Delosh], 249 AD2d 924, 925, the Fourth Department held that that excuse was "unreasonable as a matter of law[.]"

With respect to Sirius' disclaimer, the Fourth Department found it to be both timely and sufficiently specific:

We further conclude that Sirius provided TJI with timely written notice of its disclaimer, in accordance with Insurance Law § 3420 (d). Sirius issued its disclaimer letter upon completion of its investigation, 24 days after receiving TJI's notice of the claim (see Dryden Mut. Ins. Co. v Greaser, 269 AD2d 792, 793). Contrary to TJI's contention, the disclaimer letter was valid inasmuch as it " apprise[d] [TJI] with a high degree of specificity of the ground . . . on which the disclaimer [was] predicated' " (Utica Mut. Ins. Co. v Gath, 265 AD2d 805, 806).

 TJI had also apparently convinced the motion court that Sirius' disclaimer was ineffective because it was not prejudiced by TJI's reporting delay.  Correctly noting that the "new" prejudice requirement only applies to liability policies issued on or after January 17, 2009, the Fourth Department reversed the motion court's ruling on this issue, as well, holding:

The court's determination that Sirius was not prejudiced by TJI's late notice of claim is of no moment. As the Court of Appeals wrote, "[w]e have long held, and recently reaffirmed, that an insurer that does not receive timely notice in accordance with a policy provision may disclaim coverage, whether it is prejudiced by the delay or not" (Briggs Ave. LLC v Insurance Corp. of Hannover, 11 NY3d 377, 382).  We note that, in addressing the issue of prejudice, the court erred in relying on amendments to Insurance Law § 3420 that apply only to policies issued on or after January 17, 2009. The policy in question was issued before that effective date, and thus "[t]he common-law no-prejudice rule applies to this case" (id.).

Lastly, the Fourth Department agreed with Sirius that the motion court erred in not first conducting an in camera review of documents listed in Sirius' privilege log before ordering disclosure of those documents to the plaintiffs:

Sirius further contends on appeal that the court erred in granting plaintiffs' motion to compel the disclosure of documents listed in its privilege log without first conducting an in camera review of those documents (see Baliva v State Farm Mut. Auto. Ins. Co., 275 AD2d 1030, 1031). We also agree with that contention. The broad discretion afforded trial courts in supervising discovery is not unlimited (see Hardy v Tops Mkts., Inc., 231 AD2d 879, 880), and here Sirius refused to disclose several documents based upon its contention that they included communications between its attorney and representatives of UTC Risk Management Services, Inc. (UTC), Sirius' third-party claims administrator. Thus, according to Sirius, the documents in question fall within the scope of the attorney-client privilege. As Sirius correctly contends, the attorney-client privilege extends to communications to "one serving as an agent of either attorney or client" (First Am. Commercial Bancorp, Inc. v Saatchi & Saatchi Rowland, Inc., 56 AD3d 1137, 1139 [internal quotation marks omitted]) and, contrary to plaintiff's contention, the record establishes that UTC acted as an agent of Sirius. Significantly, UTC, acting on behalf of Sirius, issued the disclaimer letter to TJI and also sent a similar letter to Goodyear. Moreover, there is no evidence that TJI, Goodyear, or Sevenson questioned UTC's authority to act on behalf of Sirius. The determination whether a particular document is shielded from disclosure by the attorney-client privilege "is necessarily a fact-specific determination . . ., most often requiring an in camera review" (Spectrum Sys. Intl. Corp. v Chemical Bank, 78 NY2d 371, 378). We therefore remit the matter to Supreme Court to determine plaintiffs' motion following an in camera review of the documents in question.  

Notice that in this case, the communications claimed to be privileged were between Sirius' attorneys and its third-party claims administrator, which was acting as Sirius' agent for purposes of investigating and communicating Sirius' coverage position.  Disagreeing with the motion court, the Fourth Department held that such communications may still fall within the disclosure protection of the attorney-client privilege.

How receptive do you think the trial court will be to Sirius' arguments of attorney-client privilege when making the ordered in camera review?  Anyone laying odds on the outcome of the plaintiffs' re-decided motion to compel?