Burden of Proving Exception to Exclusion Falls on Insured

COMMERCIAL GENERAL LIABILITY – BURDEN OF PROOF – EXCEPTION TO EXCLUSION 
Corbel Constr. Co. v Arch Specialty Ins. Co.
(2nd Dept., 4/11/2018)

Not much factually to see here.  General contractor (Corbel) sues its own GL insurer (Arch) for defense and indemnification coverage in an underlying personal injury action.  Both parties move for summary judgment.  Supreme Court grants Corbel's motion and denies Arch's cross motion.  Arch appeals, arguing that Supreme Court erred because Arch established on its cross motion that a policy exclusion applied, and Corbel failed to create a question of fact regarding an exception to that exclusion.

In REVERSING Supreme Court's order and granting summary judgment to Arch, the Second Department agreed with Arch and reiterated the well-established principle that while insurers bear the burden of establishing the applicability of policy exclusions, insureds bear the burden of establishing exceptions to those exclusions:

"In determining a dispute over insurance coverage, [courts] first look to the language of the policy" (Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d 208, 221). Although the insurer has the burden of proving the applicability of an exclusion (see Seaboard Sur. Co. v Gillette Co., 64 NY2d 304, 311), it is the insured's burden to establish the existence of coverage (see Lavine v Indemnity Ins. Co., 260 NY 399, 410). Thus, where "the existence of coverage depends entirely on the applicability of [an] exception to the exclusion, the insured has the duty of demonstrating that it has been satisfied" (Borg-Warner Corp. v Insurance Co. of N. Am., 174 AD2d 24, 31). In support of its cross motion, Arch established its prima facie entitlement to judgment as a matter of law by demonstrating the applicability of an exclusion in Corbel's policy (see Platek v Town of Hamburg, 24 NY3d 688, 694; Alvarez v Prospect Hosp., 68 NY2d 320, 324-325).

In opposition to Arch's prima facie showing, Corbel failed to raise a triable issue of fact regarding the applicability of an exception to the exclusion (see Conlon v Allstate Veh. & Prop. Ins. Co., 152 AD3d 488, 491; Copacabana Realty, LLC v Fireman's Fund Ins. Co., 130 AD3d 771, 772; Broome County v Travelers Indem. Co., 125 AD3d 1241, 1244-1245; State Ins. Fund v Hermitage Ins. Co., 256 AD2d 329, 330). Accordingly, the Supreme Court should have granted Arch's cross motion for summary judgment declaring that it is not obligated to defend or indemnify Corbel in the underlying action, and should have denied Corbel's motion for summary judgment declaring that Arch is so obligated.

To review:

BURDENS OF PROOF (in ALL types of coverage disputes)

• Inclusionary terms (grant of coverage) -- INSURED
• Exclusionary terms                                -- INSURER
• Exceptions to exclusions                       -- INSURED

Who remembers my light switch object metaphor from the Mura & Storm annual New York Coverage seminars?  

• Inclusionary terms (grant of coverage) -- Switch ON
• Exclusionary terms                                -- Switch OFF
• Exceptions to exclusions                       -- Switch back ON

Insureds always have the burden (from the loss facts) of turning the light switch on.  Or back on, as the case -- like this one -- may be.    

There Are No Such Things -- First Department Affirms Dismissal of CGL Insurer's "Equitable Indemnity" and "Equitable Reapportionment" Causes of Action

COMMERCIAL GENERAL LIABILITY – COMMERCIAL UMBRELLA LIABILITY – COINSURANCE RECOVERY ACTION 

United Natl. Ins. Co. v. Travelers Prop. Cas. Co. of Am.
(1st Dept., 2/27/2018)

Construction site accident.  Injured employee of subcontractor Phoenix Mechanical Piping, LLC, sued the property owner, Metropolitan Tower Life Insurance Company, and general contractor Independent Temperature Control Services, Inc. (ITCS).  ITCS impleaded Phoenix Mechanical, presumably for contribution and/or indemnification.

Plaintiff, Utica National Insurance Company, insured Phoenix Mechanical under a CGL policy with a $1 million per occurrence coverage limit.  Defendant Travelers insured MetLife, Inc. under a CGL policy with a $2 million per occurrence limit.  Defendant Zurich insured MetLife under a commercial umbrella liability policy with a $25 million per occurrence limit.  Defendant National Union insured Phoenix Mechanical under a commercial umbrella liability policy with a $1 million per occurrence limit.

United National defended the personal injury action, allegedly expending over $500,000 in doing so.  Following a jury trial, judgment was entered for the underlying personal injury plaintiff in the amount of $6,697,534.93. United National paid $1,075,000 in indemnification towards that judgment, with Travelers, Zurich and National Union paying the rest.

United National then brought this coinsurance recovery action against the defendant insurers, alleging that because it did not owe defense or indemnification coverage to Phoenix Mechanical at all based on the "Residential Projects Exclusion" contained in United National’s policy, the defendant insurers were obligated to reimburse United National for its defense and indemnification costs.  United National's complaint alleged seven causes of action, styled as:

I.     Equitable Indemnity
II.    Equitable Indemnity
III.   Equitable Contribution
IV.    Equitable Reapportionment
V.     Equitable Subrogation
VI.   Equitable Subrogation
VII.  Declaratory Judgment

Supreme Court granted Zurich's motion to dismiss the first, second and fourth causes of action of the complaint and United National appealed.  In AFFIRMING the dismissal order, the First Department held:

The motion court properly dismissed plaintiff's first and second causes of action for "equitable indemnity" and fourth cause of action for "equitable reapportionment" as against Zurich since there is no recognized cause of action for equitable indemnity or equitable reapportionment under New York law. Furthermore, even assuming that truth of the facts as alleged by plaintiff, these claims do not "state[] the elements of a legally cognizable cause of action" (P.T. Bank Cent. Asia, N.Y. Branch v ABN AMRO Bank N.V., 301 AD2d 373, 376 [1st Dept 2003]; see 1199 Hous. Corp. v International Fid. Ins. Co., 14 AD3d 383, 384 [1st Dept 2005]).

In insurer coinsurance recovery actions, there are no such things as equitable indemnity or equitable reapportionment in New York.

Defending the Insured's Default Without Disclaiming Dooms the Declaratory Judgment Action

COMMERCIAL LIABILITY – LATE NOTICE – PREJUDICE – UNTIMELY DISCLAIMER
Montpelier US Ins. Co. v. 240 Mt. Hope Realty Co.
(SDNY, decided 10/22/2015)

I can see and understand what the insurer was trying to do here, but by not immediately disclaiming for late notice, it in effect conceded coverage.

12/07/12     tenant's pit bull bites a child attending a birthday party at the insured premises
01/07/13     insured served with summons and complaint
07/08/13     default judgment granted against insured
08/19/13     insurer (MUSIC) receives first notice of the incident, claim, suit and default
11/18/13     defense counsel retained by MUSIC succeeds in vacating the default
05/15/14     Appellate Division, First Department, reverses the vacatur and reinstates the default
06/12/14     MUSIC sends letter to insured reserving MUSIC's right to disclaim based on late notice
08/12/14     MUSIC commences declaratory judgment action in state court
02/13/15     MUSIC recommences DJ action in federal court

New York Insurance Law § 3420(d)(2) provides:

(2) If under a liability policy issued or delivered in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.

In GRANTING the insured's cross motion for summary judgment, the District Court agreed that MUSIC was required to defend and indemnify the insured the underlying personal injury action action due to MUSIC's failure to disclaim coverage in a reasonably timely fashion as required by Insurance Law § 3420(d)(2):

Time begins to run for purposes of such disclaimer when the insurer knows the grounds for its entitlement to disclaim. See First Fin. Ins. Co. v. Jetco Contracting Corp., 1 N.Y.3d 64, 66 (2003) ("[O]nce the insurer has sufficient knowledge of facts entitling it to disclaim, or knows that it will disclaim coverage, it must notify the policyholder in writing as soon as is reasonably possible."); accord Liberty Ins. Underwriters Inc. v. Great Am. Ins. Co., No. 11-CV-6973 (DLC), 2012 WL 2359876, at *6 (S.D.N.Y. June 20, 2012). And where Section 3420(d)(2) applies, the insured need not show prejudice from the delayed disclaimer; instead, the only question is whether the delay was "unreasonable." See Adams v. Chi. Ins. Co., 49 F. App'x 346, 349 n.** (2d Cir. 2002) (summary order); Jewish Cmty. Ctr. of Staten Island v. Trumbull Ins. Co., 957 F. Supp. 2d 215, 236-37 (E.D.N.Y. 2013) (citing cases); KeySpan Gas E. Corp. v. Munich Reinsurance Am., Inc., 23 N.Y.3d 583, 590 (2014) (noting that 3420(d)(2) "creates a heightened standard for disclaimer that depends merely on the passage of time rather than on the insurer's manifested intention to release a right as in waiver, or on prejudice to the insured as in estoppel" (internal quotation marks omitted)); First Fin. Ins., 1 N.Y.3d at 67 n.2 (noting that, under Section 3420(d)(2), "prejudice is of no legal relevance"). 

 Here, MUSIC had knowledge of sufficient facts to disclaim coverage when it received notice of the default judgment on August 19, 2013. At that point, MUSIC would indisputably have been entitled to disclaim on the ground that Defendants' notice was untimely and that MUSIC was prejudiced by the delay; in fact, there is an "irrebuttable presumption of prejudice" that applies when, as here, an insurer receives notice of a claim only after the insured's liability has been determined. See N.Y. Ins. Law § 3420(c)(2)(B). But MUSIC elected not to disclaim coverage and did not make any reservation of its right to disclaim coverage, instead taking up Defendants' defense in the underlying lawsuit; indeed, it did not disclaim coverage until nearly ten months later, on June 12, 2014. (See Compl. ¶¶ 30, 34; Defs.' Mem. 4, 6). That ten-month delay, with no explanation, is comparable to — indeed, longer than — unexcused delays that the Second Circuit and other courts have held to be unreasonable as a matter of New York law. See, e.g., Bluestein & Sander v. Chi. Ins. Co., 276 F.3d 119, 122 (2d Cir. 2002) (nine months); Adams, 49 F. App'x at 349 (eight months); First Fin., 1 N.Y.3d at 66 (forty-eight days); West 16th St. Tenants Corp. v. Pub. Serv. Mut. Ins. Co., 736 N.Y.S.2d 34, 35 (1st Dep't 2002) (thirty days); Colonial Penn Ins. Co. v. Pevzner, 698 N.Y.S.2d 310, 310 (2d Dep't 1999) (forty-one days); Hartford Ins. Co. v. Nassau Cnty., 46 N.Y.2d 1028, 1029-30 (1979) (two months); Allstate Ins. Co. v. Gross, 27 N.Y.2d 263, 266-67 (1970) (seven months); see also, e.g., N.Y. State Ins. Fund v. Mt. Vernon Fire Ins. Co., 371 F. App'x 207, 210 (2d Cir. 2010) (amended summary order) (discussing cases involving unexplained delays of two months and forty-eight days); cf. O'Dowd v. Am. Sur. Co. of N.Y., 3 N.Y.2d 347, 355 (1957) ("It is clear that when an insurer defends an action on behalf of an insured, in his stead, with knowledge of facts constituting a defense to the coverage of the policy, it is thereafter estopped from asserting that the policy does not cover the claim."). It follows that MUSIC must defend and indemnify Defendants and the latter are entitled to summary judgment. 

MUSIC unsuccessfully argued that its time to disclaim did not begin to run until the First Department, Appellate Division, reinstatement the default against the insured in the underlying personal injury action:

As the New York Court of Appeals has explained, in enacting Section 3420(d), the New York State Legislature "intended to expedite the disclaimer process, thus enabling a policyholder to pursue other avenues expeditiously." First Fin. Ins., 1 N.Y.3d at 68. Thus, the "timeliness of an insurer's disclaimer is measured from the point in time when the insurer first learns of the grounds for disclaimer of liability or denial of coverage." Id. at 68-69 (internal quotation marks omitted) (emphasis added). Here, MUSIC first learned of the grounds for denial of coverage on August 19, 2013, when it received notice of the underlying lawsuit and the default judgment entered against Defendants. See, e.g., West 16th St. Tenants Corp., 736 N.Y.S.2d at 35 (holding that an insurer's thirty-day delay in disclaiming coverage was unreasonable as a matter of law because the lack of timely notice by the insured "was obvious from the face of the notice of claim" and the insurer "had no need to conduct an investigation before determining whether to disclaim"). At bottom, MUSIC's argument is that it was in the interest of Defendants for it to provide a defense until the appellate process ran its course. But that argument is effectively the same as the policy argument rejected by the New York Court of Appeals in First Financial Insurance Co. See 1 N.Y.3d at 69 (rejecting an argument that delays to explore other sources of insurance for policyholders "should be encouraged because they are for the benefit of the insured," explaining "that they may also be in the insurer's interest in reducing its ultimate risk, and further may detrimentally delay the policyholder's own search for alternative coverage"). And ultimately, in analyzing whether an insurer gave timely notice of its intent to disclaim coverage, it makes more sense to look at the delay in giving such notice and the reasons (or lack thereof) for that delay than it does to the results of litigation thereafter, which could conceivably take months or years to resolve.

In New York, the timeliness of a liability insurer's disclaimer is measured from the point in time when the insurer first learns of the grounds for the disclaimer of liability or denial of coverage.  Write that down.  Or memorize it.

Only Causal Link Between Named Insured's Acts or Omissions and Injury Required for Additional Insured Coverage to Apply

CGL – SCOPE OF ADDITIONAL INSURED COVERAGE – CAUSED BY NAMED INSURED'S ACTS OR OMISSIONS – CAUSAL LINK – ANTISUBROGATION RULE  
Burlington Ins. Co. v. NYC Transit Auth.
(1st Dept., decided 8/11/2015)

If a CGL policy provides additional insured coverage "only with respect to liability for bodily injury ... caused, in whole or in part, by [the named insured's] acts or omissions ... [i]n the performance of [the named insured's] ongoing operations", must the named insured have been negligent or otherwise at fault for causing the bodily injury for such additional insured coverage to apply?

Breaking Solution's policy with Burlington Insurance Company provided that certain entities were additional insureds "only with respect to liability for bodily injury ... caused, in whole or in part, by [the named insured's] acts or omissions ... [i]n the performance of [the named insured's] ongoing operations[.]"

The question addressed by the First Department, Appellate Division, in this case was whether this "acts and omissions" language of the additional insured provision provides additional insured coverage where there is a causal link between the named insured's conduct and the injury, regardless of whether the named insured was negligent or otherwise at fault for causing the accident.  In REVERSING Supreme Court's orders granting Burlington's motion to amend its DJ complaint to assert a contractual indemnification claim against the putative additional insureds --  defendants New York City Transit Authority (NYCTA) and Metropolitan Transit Authority (MTA) -- and then granting Burlington summary judgment on its contractual indemnification claim against the NYCTA, the First Department held:

This Court's most recent precedents have construed additional insured endorsements containing substantially the same "acts and omissions" language as do the endorsements at issue here as providing additional insured coverage where there is a causal link between the named insured's conduct and the injury, regardless of whether the named insured was negligent or otherwise at fault for causing the accident. Adhering to these precedents, we hold that defendants were entitled to coverage as additional insureds in the underlying action under the subject insurance policy. Given that the policy covers defendants for this loss, the anti-subrogation rule bars Burlington from recovering, as subrogee of the City of New York, contractual indemnification from defendant NYCTA, under the lease agreement between the City and NYCTA, for the amounts Burlington has paid to defend and settle the underlying action on behalf of the City.

NYCTA and MTA engaged Breaking Solutions to supply concrete-breaking excavation machines and personnel to operate the machines under NYCTA's direction.  An explosion occurred in a Brooklyn subway tunnel that was being excavated by a Breaking Solutions machine. The explosion occurred when the excavator came into contact with an energized electrical cable buried below the concrete. It is undisputed that it had been NYCTA's responsibility to identify and mark or protect hazards in advance, so as to enable the excavator operator to avoid them, and to shut off power to electrical cables in the work area. An employee of NYCTA was injured in that explosion and sued. In the course of discovery in that action, it emerged that, while the Breaking Solutions excavator had caused the explosion by disturbing the buried cable, there had not been any negligence or other fault on the part of the Breaking Solutions employee who operated the excavator.  NYCTA's internal documents essentially admitted that it was at fault for the incident.

On that basis Burlington, which had defended and indemnified the City of New York in the personal injury action, sought contractual indemnification from NYCTA as the City's subrogee.  Among other grounds, NYCTA argued that because it qualified for additional insured coverage under Breaking Solutions' policy with Burlington, the antisubrogation rule applied to bar Burlington's claims against it.  Based on its finding that the "caused, in whole or part, by [the named insured's] acts or omission" language of the Burlington policy required only a casual link between the named insured's acts or omissions and the injury, rather than proof of the named insured's negligence or fault, the First Department reversed the lower court's orders and granted summary judgment to NYCTA and MTA, dismissing Burlington's complaint.

Different Families Successively Exposed to Lead Paint in Same Apartment Over Several Policy Periods Entitled to Only One Policy Limit Under Policy's Noncummulation Clause

LIABILITY – LANDLORDS POLICY – NONCUMULATION CLAUSE – LEAD PAINT CLAIMS
Nesmith v. Allstate Ins. Co.
(Ct. Apps., decided 11/25/2014)

In Hiraldo v Allstate Ins. Co. (5 NY3d 508 [2005]), the New York Court of Appeals interpreted a so-called "noncumulation clause" contained in a series of successively-issued liability insurance policies, holding that a person suing for exposure to lead paint during the terms of all the policies could recover no more than one policy limit.

In this case the court interpreted a nearly identical clause where members of different families were successively exposed to lead paint in the same apartment, holding that, as in Hiraldo, the insurer's maximum total liability was only one policy limit.

Allstate issued a policy of liability insurance to the landlord of a two-family house in Rochester. The policy was renewed annually for the years beginning September 1992 and September 1993. It stated on the declarations page a $500,000 limit for "each occurrence," and contained the following noncumulation clause:

Regardless of the number of insured persons, injured persons, claims, claimants or policies involved, our total liability under the Family Liability Protection coverage for damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss.

Felicia Young and her children lived in one of the two apartments in the house from November 1992 until September 1993, when Lorenzo Patterson, Sr. and Qyashitee Davis moved in with their two children. Young's children and one of Paterson's children were found to have elevated blood lead levels while living in the apartment.

In 2004, Young, on behalf of her children, and Jannie Nesmith, on behalf of the Patterson children (her grandchildren), brought two separate actions against the landlord for personal injuries allegedly caused by lead paint exposure. Young's action was settled in 2006 for $350,000, which Allstate paid. In 2008, Nesmith settled her claim pursuant to a stipulation that reserved the issue of the applicable policy limit for future litigation. Allstate paid the $150,000 that it claimed was the remaining coverage. Nesmith then brought the present action against Allstate for a declaratory judgment, asserting that a separate $500,000 limit applied to each family's claim, and that her grandchildren could therefore recover an additional $350,000.

Supreme Court granted Nesmith the declaration she sought, saying it could not conclude that the children in the two cases were injured by exposure "to the same conditions." The Appellate Division reversed. The Appellate Division held that, under Hiraldo, the renewal of the policy could not make an additional limit available; that, under the plain terms of the noncumulation clause, the number of claims and claimants could not do so either; and that the injury to Young's children and Nesmith's grandchildren resulted "from ... continuous or repeated exposure to the same general conditions," so that the injuries were only one "accidental loss" within the meaning of the policy.

The Court of Appeals granted leave to appeal and AFFIRMED, reasoning:

Hiraldo involved a single child, who had lived in the building in question for three years while three successive Allstate policies, each with a limit of $300,000, were in force. The plaintiffs claimed that the child had been exposed to lead paint continuously during the terms of all three policies, and that therefore $900,000 in coverage was available to him. We rejected the argument, relying on a noncumulation clause not significantly different from the one involved in this case (see 5 NY3d at 512). (The policy in Hiraldo referred simply to "loss" rather than "accidental loss," but no one suggests that that difference is relevant here.) We found the argument of the Hiraldo plaintiffs to be inconsistent with the policy's plain statement that Allstate's liability was limited to the amount shown on the declaration page, $300,000, "[r]egardless of the number of ... policies involved" (id. [emphasis omitted]). 

Here, Nesmith does not, and could not under Hiraldo, argue that the annual renewals of the landlord's policy increased the limits of the available coverage. And the noncumulation clause is equally clear in saying that the number of "injured persons," "claims" and "claimants" makes no difference. Nesmith's only argument is that the alleged injuries to Young's children and Nesmith's grandchildren were separate losses because they did not result "from continuous or repeated exposure to the same general conditions." 

We reject this argument. Young's children and Nesmith's grandchildren were exposed to the same hazard, lead paint, in the same apartment. Perhaps they were not exposed to exactly the same conditions; but to say that the "general conditions" were not the same would deprive the word "general" of all meaning. Nesmith argues that, because the landlord made an effort to correct the problem after Young's children were exposed and before Nesmith's grandchildren moved in, the "conditions" that injured her grandchildren must have been new ones. But she makes no claim, and the record provides no basis for inferring, that a new lead paint hazard had been introduced into the apartment. The only possible conclusion from this record is that the landlord's remedial efforts were not wholly successful, and that the same general conditions—the presence of lead paint that endangered children's health—continued to exist. Because Young's children and Nesmith's grandchildren were injured by exposure to the same general conditions their injuries were part of a single "accidental loss," and only one policy limit is available to the two families.

Breach of a Liability Insurer's Duty to Defend Does Not Bar Insurer From Asserting Policy Exclusions to Defend Suit for Indemnification Coverage: New York Court of Appeals Vacates Its K2-I Holding

LIABILITY  – DUTY TO DEFEND – EXCLUSIONARY NON-COVERAGE GROUNDS
K2 Investment Grp. LLC v. American Guarantee & Liability Ins. Co.
(Ct. Apps., decided 2/18/2014)

In June 2013 the New York Court of Appeals held, in essence, that if a liability insurer breaches its duty to defend its insured, it may not subsequently assert policy exclusions to deny indemnification coverage.  That decision -- now dubbed K2-I -- sent shockwaves through the insurance industry in New York, with many arguing that the court had upset or ignored its own long-established and controlling precedent on this very question.

The Court of Appeals granted the insurer's motion for reargument and on February 18, 2014 vacated its decision in K2-I and reversed the Appellate Division's order that had affirmed summary judgment in favor of the plaintiffs.

Claims for legal malpractice were brought against American Guarantee's insured, Jeffrey Daniels, which American Guarantee refused to defend. Daniels suffered a default judgment, and then assigned his rights against American Guarantee to the plaintiffs in the suit against him. Those plaintiffs brought this action seeking to enforce American Guarantee's duty to indemnify Daniels for the judgment. In defense, American Guarantee asserted that the loss was not covered, relying on two exclusions in the policy.

The motion court and Appellate Division and Court of Appeals in K2-I held that because American Guarantee had breached its duty to defend Daniels, it was barred from asserting the two policy exclusions in defense of the plaintiffs' claim for indemnification coverage.  That holding appeared to be irreconcilable with the New York Court of Appeals' 1985 holding in Servidone Const. Corp. v Security Ins. Co. of Hartford (64 NY2d 419 [1985]) in which the court unanimously held that a liability insurer's breach of its duty to defend its insured in a personal injury action did not preclude the insurer from asserting policy exclusions to defend itself in a later suit for indemnification coverage.

On reargument, a 4-2 majority of the Court of Appeals  agreed that the Servidone and K2-I holdings cannot be reconciled and declined to overrule Servidone:

Plaintiffs suggest that the cases are distinguishable because in Servidone the insured had settled with the plaintiff in the underlying litigation, whereas here there was a judgment, not a settlement. We do not find the distinction persuasive. A liability insurer's duty to indemnify its insured does not depend on whether the insured settles or loses the case. It is true that a judgment, unlike most settlements, is a binding determination of the issues in the underlying litigation. Thus it can be said here, as it could not in Servidone, that the issues in the suit brought against the insured are now res judicata. But that is irrelevant, because American Guarantee does not seek here, and the defendant in Servidone did not seek, to relitigate the issues in the underlying case. It is well established that such relitigation is not permitted after an insurer has breached its duty to defend (see the authorities discussed in K2-I, 21 NY3d at 390). The issue in Servidone, as here, is whether the insurer may rely on policy exclusions that do not depend on facts established in the underlying litigation.

Plaintiffs also rely, as we did in K2-I, on our decision in Lang v Hanover Ins. Co., 3 NY3d 350, 356 [2004]). We said in Lang that, when an insurer has refused to defend its insured, it "may litigate only the validity of its disclaimer" when it is later sued on a judgment obtained against the insured. But the issue we now face was not presented in Lang. We decided in Lang "that a judgment is a statutory condition precedent to a direct suit against the tortfeasor's insurer" (id. at 352); we did not consider any defense based on policy exclusions. The sentence on which plaintiffs rely was offered as support for our statement that "an insurance company that disclaims in a situation where coverage may be arguable is well advised to seek a declaratory judgment concerning the duty to defend or indemnify the purported insured" (id. at 356). That continues to be sound advice, but Lang should not be read as silently overruling Servidone.

The dissent would read Servidone as being limited to cases in which the defense was "based on noncoverage" rather than "predicated on an exclusion" (dissenting op at 3). It is true, as the dissent says, that we have made such a distinction in cases arising under Insurance Law § 3420, which imposes an obligation of timely disclaimer. It could hardly be clearer, however, that we were not making that distinction in Servidone. Describing the defense asserted by the insurer in that case, we said: "Security responded that, pursuant to an exclusion in the policy, a loss based upon any obligation the insured had assumed by contact was outside coverage" (64 NY2d at 422; emphasis added). Thus, "outside coverage," as Servidone used the term, describes a loss to which a policy exclusion applies.

In short, to decide this case we must either overrule Servidone or follow it. We choose to follow it.

There is much to be said for the rule of K2-I, as our previous opinion shows; but, as the Servidone opinion shows, there is also much to be said for the Servidone rule. Several states follow the Servidone approach (e.g., Sentinel Ins. Co. v First Ins. Co. of Hawai'i, Ltd., 76 Hawaii 277, 290-297, 875 P2d 894, 907-914 [1994]; Polaroid Corp. v Travelers Indemnity Co., 414 Mass 747, 760-766, 610 NE2d 912, 919-923 [1993]), while others adopt a rule like that of K2-I (e.g., Employers Ins. of Wausau v Ehlco Liquidating Trust, 186 Ill2d 127, 150-154, 708 NE2d 1122, 1134-1136 [1999]; Missionaries of Co. of Mary, Inc. v Aetna Cas. and Sur. Co., 155 Conn 104, 112-114, 230 A2d 21, 25-26 [1967]). A federal district judge, writing in 1999, said that "the majority of jurisdictions which have considered the question" follow the Servidone rule (Flannery v Allstate Ins. Co., 49 F Supp 2d 1223, 1227 [D Colo 1999]).

Under these circumstances, we see no justification for overruling Servidone. Plaintiffs have not presented any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985. When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise. In other words, the rule of stare decisis, while it is not inexorable, is strong enough to govern this case.

It is important to note that it remains the rule in New York that a liability which does not defend its insured in an underlying action may not relitigate the issues of that action by relying on policy exclusions that depend on facts established in that underlying action.  But where noncoverage grounds are based on facts not established in the underlying, undefended action, the insurer's breach of its duty to defend will not preclude it from asserting and litigating those noncoverage grounds in an action to recover indemnification coverage.

Absent a Pre-Litigation Settlement Demand Within Policy Limits, Liability Insurer Cannot Be Held Liable for Bad Faith Failure to Enter into Pre-Litigation Settlement Discussions

MEDICAL MALPRACTICE COVERAGE – BAD FAITH – FAILURE TO ENGAGE IN PRE-LITIGATION SETTLEMENT NEGOTIATIONS
CBLPath, Inc. v. Lexington Ins. Co.
(2nd Dept., decided 5/11/2010)

When the insured's liability is not in doubt and the nature of injuries it caused are such that a recovery will likely exceed the policy limit, is it actionable bad faith for a liability insurer to refuse or fail to enter into pre-litigation settlement discussions and negotiations?  In the opinion of the Second Department, Appellate Division, no, not if there's been no pre-litigation settlement demand within policy limits, it isn't. 

Lexington insured CBLPath, a medical diagnostic laboratory, under a $1,000,000 per medical incident medical malpractice liability policy. In March 2006, CBL negligently switched Darrie Eason's biopsy specimen with a biopsy specimen from another individual, which resulted in Eason being erroneously diagnosed with breast cancer, and subsequently undergoing an unnecessary double mastectomy.

From February 2007 through September 2007, Eason's counsel made several attempts to open settlement discussions, but Lexington, which in February 2007 had exercised its right as the sole authority to handle the Eason claim, never made a substantive response to those inquiries. Eason commenced a personal injury action against CBL in October 2007, and her counsel made her first settlement demand of $5,000,000 in December 2007.  That action was settled several months later for the sum of $2,500,000, with Lexington paying the policy limit in the sum of $1,000,000 and CBL paying the balance.

CBL thereafter commenced this action against Lexington, asserting a single cause of action for breach of the covenant of good faith and fair dealing implied in the insurance contract. The gravamen of CBL's complaint was that Lexington, which had asserted sole control over the Eason claim, acted in bad faith by refusing to enter into pre-litigation settlement discussions with Eason's counsel. CBL sought actual and consequential damages, including, inter alia, injury to its business reputation, lost sales, increased sale expenses, lost profits, and lost business opportunities caused by the negative publicity that resulted from the commencement of the underlying action. After answering, Lexington moved for summary judgment dismissing the complaint, and CBL cross-moved to dismiss Lexington's affirmative defenses. The Supreme Court granted Lexington's motion and denied CBL's cross motion. CBL appealed, and the Second Department unanimously affirmed:

An insurer "may be held liable for the breach of its duty of good faith' in defending and settling claims over which it exercises exclusive control on behalf of its insured" (Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 452). The root of this doctrine is that, typically, an insurer exercises "complete control over the settlement and defense of claims against their insureds, and, thus, under established agency principles may fairly be required to act in the insured's best interests" (id.). However, since courts are understandably reluctant to expose insurers to liability exceeding the policy limits, the bad faith must be for conduct that is clearly more than ordinary negligence, i.e., more than merely poor judgment (id. at 453).

"Naturally, proof that a demand for settlement was made is a prerequisite to a bad-faith action for failure to settle. [Additionally,] the plaintiff in a bad-faith action must show that the insured lost an actual opportunity to settle the . . . claim at a time when all serious doubts about the insured's liability were removed.

"Bad faith is established only where the liability is clear and the potential recovery far exceeds the insurance coverage" (id. at 454 [internal quotations marks and citations omitted]; see also Smith v General Acc. Ins. Co., 91 NY2d 648, 653; Soto v State Farm Ins. Co., 83 NY2d 718, 723; Vecchione v Amica Mut. Ins. Co., 274 AD2d 576, 578; cf. United States Fid. & Guar. Co. v Copfer, 48 NY2d 871, 873).

Here, Lexington met its prima facie burden of establishing its entitlement to judgment as a matter of law (see Alvarez v Prospect Hosp., 68 NY2d 320, 324; Zuckerman v City of New York, 49 NY2d 557, 562) by submitting, inter alia, an affirmation of an AIGDC attorney who had handled the Eason claim. In that affirmation, the attorney stated that Eason's counsel did not issue the first settlement demand until after commencement of the underlying action, and that once such demand was made, negotiations ensued, and a settlement was reached, with Lexington paying the policy limit in the sum of $1,000,000, and CBL responsible for the balance in the sum of $1,500,000. Thus, Lexington established that CBL's bad faith claim could not stand, as there was no pre-litigation settlement demand made within the policy limits (see Smith v General Acc. Ins. Co., 91 NY2d at 653; Soto v State Farm Ins. Co., 83 NY2d at 723; Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d at 454).

In opposition, CBL failed to raise a triable issue of fact. CBL submitted, inter alia, an affidavit of its vice president and corporate controller, who indicated that after AIGDC asserted exclusive control over the Eason claim in February 2007, it thereafter refused to contact Eason's counsel to settle her claim and avoid negative publicity to CBL. Notably, however, CBL's opposition did not raise a triable issue of fact as to whether Eason's counsel had made a pre-litigation settlement demand within the policy limits. As such, while it may arguably be some evidence of bad faith that AIGDC failed to enter into pre-litigation settlement discussions with Eason's counsel at a time when CBL's liability was not in doubt and the nature of Eason's injuries indicated that her recovery would exceed the policy limit, we are constrained to find that Lexington was entitled to summary judgment because CBL failed to raise a triable issue of fact as to whether Eason made a pre-litigation settlement demand within the policy limit (see Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d at 453; see also Smith v General Acc. Ins. Co., 91 NY2d at 653; Soto v State Farm Ins. Co., 83 NY2d at 723; Vecchione v Amica Mut. Ins. Co., 274 AD2d at 578). Under the circumstances, CBL cannot show that, because of AIGDC's conduct, it lost an actual opportunity to settle and, thus, any damages it asserts are based on mere speculation (see United States Fid. & Guar. Co. v Copfer, 48 NY2d at 873).

What is sometimes called "third-party" insurer bad faith depends on there having been an opportunity to settle within policy limits after the insured's liability becomes clear and the value of the plaintiff's injuries or damages will likely far exceed the policy limit.  In cases where there is no pre-litigation settlement demand within policy limits, the liability insurer cannot be held liable under a bad faith theory for having failed or refused to enter into pre-litigation settlement discussions.

First Department Chooses Connecticut as Law Governing Commercial Liability Policy

COMMERCIAL LIABILITY – CHOICE OF LAW
Liberty Surplus Ins. Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa.
(1st Dept., decided 11/5/2009)

In this insurer vs. insurer suit, defendant National Union moved to dismiss three causes of action of plaintiff's amended complaint, presumably arguing that New York rather than Connecticut law applied to render those causes of action non-viable. 

In AFFIRMING New York Supreme's order that had denied National Union's motion, the First Department held:

A contract of liability insurance is governed by "the local law of the state which the parties understood was to be the principal location of the insured risk" (Zurich Ins. Co. v Shearson Lehman Hutton, 84 NY2d 309, 318 [1994], quoting Restatement [Second] of Conflict of Laws § 193). Where the covered risks are spread over multiple states, courts will generally locate the risk in one state, namely, "the state of the insured's domicile at the time the policy was issued," and a "corporate insured's domicile is the state of its principal place of business" (Certain Underwriters at Lloyd's, London v Foster Wheeler Corp., 36 AD3d 17, 24-25 [2006], affd 9 NY3d 928 [2007]). The liability policies at issue in this action were issued by defendants to Hontz Elevator Company, which had operations in several states but maintained its principal place of business in Connecticut, the state of its incorporation. Accordingly, the subject policies, which do not contain choice-of-law provisions, are governed by Connecticut law. We further note that the accident giving rise to the underlying personal injury litigation occurred in Connecticut; that the subject policies contain amendatory endorsements required by Connecticut law but no New York endorsements; and that the record, while showing that Hontz had locations in Connecticut, Florida, Massachusetts and Rhode Island, gives no indication Hontz conducted any operations in New York.

DeclaratoryJudgment Not Granted on Default -- Plaintiff Directed to Accept Insurer's Answer

LIABILITY – DECLARATORY JUDGMENT – DEFAULT JUDGMENT
Dole Food Co., Inc. v. Lincoln Gen. Ins. Co.
(4th Dept., decided 10/2/2009)

In this short decision, the Fourth Department reminds insurance coverage litigants that "[a] default judgment in a declaratory judgment action will not be granted on the default and pleadings alone for it is necessary that plaintiff[s] establish a right to a declaration[.]"  Here, the appellate court ruled that plaintiffs failed to establish their entitlement to the declaration sought, and the motion court abused its discretion in denying Lincoln General's cross motion to compel plaintiffs to accept its answer.

Choice of Law by Judicial Estoppel

COMMERCIAL LIABILITY – CHOICE OF LAW
Appalachian Ins. Co. v. Di Sicurata
(1st Dept., decided 3/17/2009)

Question:  If a liability insurance policy does not contain a choice-of-law clause and covers risks in multiple states, which state's law should govern the interpretation application of policy provisions?  Answer:  the state of the insured's "domicile", meaning the principal place of business of a corporate insured.  If an insured has previously obtained judicial rulings in its favor on a particular state being its principal place of business, the doctrine of judicial estoppel applies to preclude the insured from relitigating that issue. 

So held the First Department in this case, with respect to General Electric Company:

We have held that a contract of liability insurance is "governed by the law of the state which the parties understood was to be the principal location of the insured risk ...'" (Certain Underwriters at Lloyd's, London v Foster Wheeler Corp., 36 AD3d 17, 22-23 [2006], affd 9 NY3d 928 [2007]), that "where it is necessary to determine the law governing a liability insurance policy covering risks in multiple states, the state of the insured's domicile should be regarded as a proxy for the principal location of the insured risk" (id. at 24) and that a corporate insured's domicile is the state of its principal place of business (id. at 25). The contracts of liability insurance at issue here, which do not contain choice-of-law clauses and cover risks that are spread through multiple states, were purchased by GE, which, having obtained rulings in its favor as to its principal place of business (see e.g. Gafford v General Elec. Co., 997 F2d 150, 161-163 [6th Cir 1993]; Northeast Nuclear Energy Co. v General Elec. Co., 435 F Supp 344, 347-348 [D Conn 1977]), is judicially estopped from denying that its principal place of business is New York (see e.g. D & L Holdings, LLC v RGC Goldman Co., 287 AD2d 65, 71 [2001], lv denied 97 NY2d 611 [2002]; Bankers Trustee Co. Ltd. v First Mexican Acceptance Corp., 273 AD2d 81, 81 [2000], lv denied 95 NY2d 766 [2000]). Accordingly, we find New York law controlling in this matter. 

Believe it or not, all state courts don't agree on insurance coverage issues -- liability or otherwise.  An insured may want the law of another state to apply to a particular coverage dispute because that law -- usually case law -- is more favorable to the insured on the disputed issue or issues at hand.  In this case, GE apparently sought unsuccessfully to have the law of a state other than New York apply to the coverage issues in this declaratory judgment action. However, in other cases, GE had previously convinced the US 6th Circuit Court of Appeals (Kentucky, Michigan, Ohio and Tennessee) and US District Court of Connecticut that its principal place of business was New York.  New York it was, then, ruled the First Department.

First Department Holds that Injured Party Did Not Act Diligently in Identifying and Timely Notifying Landlord's Liability Insurer of Accident

COMMERCIAL LIABILITY – LATE NOTICE – 5-MONTH DELAY – INJURED PARTY'S LACK OF DUE DILIGENCE
Tower Ins. Co. of N.Y. v. Jaison John Realty Corp.
(1st Dept., decided 3/3/2009)

This case is not especially remarkable for its holding that an insured's 5-month delay in providing notice of an accident is unreasonably late as a matter of law. No, Tower Insurance Company has been obtaining summary judgment in New York courts on similarly short delays -- 7 months, 9 months and 9 months -- for some time. This case is remarkable for its holding that the injured party herself did not act with due diligence in identifying and notifying Tower of the accident.

I blogged this case when New York Supreme decided it against Tower last June. While finding that the insured's notice was unreasonably late, the motion court ruled that "under the circumstances, [the insured party's] counsel was reasonably diligent in his efforts to ascertain the identity of John's insurer."

New York Insurance Law § 3420(a)(3) gives injured parties an independent right to notify tortfeasors' liability insurers of an accident or occurrence. The standard or test used to measure late notice by an injured party is, however, less stringent than the one applicable to insureds. Notice by an injured party, even if much later than what would be expected from an insured, will be deemed timely if the injured party is found to have acted with due diligence to identify the tortfeasor's liability insurer, and then have placed that insurer on notice as soon after learning that insurer's identity as possible. "The sufficiency of notice by an injured party is governed not by mere passage of time but by the means available for such notice." Appel v Allstate Ins. Co., 20 AD3d 367 (1st Dept. 2005), quoting National Grange Mut. Ins. Co. v Diaz, 111 AD2d 700, 701 (1985).

In this case, counsel for the injured party wrote to the insured landlord three months after the accident and commenced this action one month later. In MODIFYING the order appealed from to hold that the injured party had not timely exercised her independent right under Insurance Law § 3420(a)(3) to place Tower on notice of the accident, the First Department ruled:

Concerning the declaration in favor of Dias and against Tower, the December 20, 2006 letter from Dias's counsel to John advised John to notify his insurer of the accident, and that if counsel did not hear from John's insurer or legal representative within 20 days, Dias would commence an action. A month later, on or about January 23, 2007, having received no response and still unaware of the identity of John's insurer, Dias commenced suit against John, and, less than two weeks later, Tower received notice of the accident when John forwarded a copy of the summons and complaint. This is insufficient under Insurance Law § 3420(a)(3). Dias never attempted to ascertain the identity of John's insurer and merely relied on correspondence to John (Tower Ins. Co. of N.Y. v Lin Hsin Long Co., 50 AD3d 305 [2008]).

If counsel's letter had not merely advised the landlord to notify its liability insurer but had also asked the landlord for that insurer's identity, would the result in this case been different? Perhaps, especially in light of the First Department's statement that "Dias never attempted to ascertain the identity of John's insurer[.]"

Of course, New York liability insurers will soon be required to prove prejudice from notification delays of less than two years in order to sustain a late notice disclaimer. Accidents occurring on and after January 17, 2009 submitted for coverage under New York liability policies issued or renewed on and after that date will trigger the new prejudice requirement. See, End of an Era -- The Last Hours of New York's No Prejudice Rule. Under that new rule, liability insurers will be hard pressed to demonstrate coverage disqualifying prejudice from a four or five month delay in accident notification. But for the "old" cases, this holding supports the view that an injured party who sends out only a "put your liability insurer on notice" letter without also asking for that insurer's identity or otherwise taking steps to ascertain that insurer's identity does not satisfy the policy's notice of accident or occurrence requirement.

Post Script ~~ Max Gershweir, whose office represented Tower in this case, answers my question about whether the result would have been different had the injured party's attorney also asked for the identity of the insurer in his letter to the landlord:

Changing the wording in the claim letter in the manner you suggest certainly would have helped the claimant, as it would have signaled that the claimant was seeking to give independent notice rather than relying solely on the insured to do it, but it probably would not have changed the outcome. The other necessary element -- although a couple of decisions in the last few years seem to have dispensed with it -- is that the claimant, once armed with the insurer's identity, actually give notice of some kind to the insurer within a reasonable time thereafter, which did not occur here. The 1st Dep't majority in the Lin Hsin Long decision, another Tower case handled by my office, which the Jaison John court cited, made clear that this other element is indeed required.

Notice Under the Workers' Compensation Policy Is Not Notice Under the Excess Liability Policy, Even If Both Policies Were Written By Same Carrier

COMMERCIAL LIABILITY – LATE NOTICE – NOTICE UNDER WORKERS' COMPENSATION POLICY ONLY
Sorbara Constr. Corp. v. AIU Ins. Co.
(Ct. Apps., decided 10/21/2008)

Is notice of an accident to an insurer under a workers' compensation policy also notice to that same insurer under a liability policy? No, says the New York Court of Appeals.

Although the insured provided prompt notice of a workplace accident to its workers' compensation carrier under its workers' compensation policy, it did not give notice of the accident to that same insurer under its excess liability policy until five and one-half years later, after it was sued in a third-party action.

In AFFIRMING the First Department's order, which had affirmed New York County Supreme's granting of AIU's cross motion for summary judgment, the Court of Appeals held:

It is well settled that when a policy of liability insurance requires that notice of an occurrence be given "as soon as practicable," such notice must be provided within a reasonable period of time; failure to give such notice relieves the insurer of its obligations under the contract, regardless of whether the insurer was prejudiced by the delay (Great Canal Realty Corp. v Seneca Insurance Company, Inc., 5 NY3d 742, 743 [2005]; Argo Corp. v Greater N.Y. Mut. Ins. Co., 4 NY3d 332, 339 [2005]).

Contrary to the insured's contention in this case, notice provided under the worker's compensation policy at the time of the incident did not constitute notice under the liability policy even though both policies were written by the same carrier (see generally Nationwide Ins. Co. v Empire Ins. Co, 294 AD2d 546, 548 [2d Dept 2002]; 57th Street Management Corp v Zurich Ins. Co., 208 AD2d 801, 802 [2d Dept 1994]). Each policy imposes upon the insured a separate, contractual duty to provide notice. Similarly, an additional insured's notice to the carrier under a different policy does not excuse the insured's obligation to provide timely notice under its policy (see Travelers Ins. Co. v Volmar Const. Co., Inc., 300 AD2d 40 [1st Dept 2002]).

Here, the insured did not give notice to the insurer until it was sued in a third party action—some five and one-half years after the accident. Under the circumstances of this case, such notice was unreasonable as a matter of law and relieved the insurer of its obligation to defend or indemnify the insured.