When Just a Reservation of Rights Letter Won't Do

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

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

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

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

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

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

*  *  *  *  *

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

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

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

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

Shooting Your Deer Hunting Partner is Not Nice and Possibly Not Covered

HOMEOWNERS – CRIMINAL ACT EXCLUSION – CRIMINAL NEGLIGENCE
Gruninger v. Nationwide Mut. Ins. Co.
(4th Dept., decided 6/11/2010)

While deer hunting together, Nationwide's insured, Jeffrey Harmer (actual name), shot and injured plaintiff Michael Gruninger.  As a result of the incident, Harmer pleaded guilty to assault in the third degree , a class A misdemeanor, in violation of subsection 3 of section 120.00 of the New York Penal Law, which provides:

A person is guilty of assault in the third degree when:

     3.  With criminal negligence, he causes physical injury to another person by means of a deadly weapon or a dangerous instrument.

After being notified of the incident, Nationwide denied liability coverage to Harmer based on, among other things, the criminal act exclusion of his homeowners policy with Nationwide, which negated coverage for bodily injury "caused by or resulting from an act or omission [that] is criminal in nature and committed by an insured."  Gruninger sued and obtained a money judgment against Harmer, and then brought this action pursuant to New York Insurance Law § 3420(a)(2) against Nationwide, seeking payment of the underlying judgment.  Nationwide successfully moved for summary judgment, and the plaintiffs appealed.

In unanimously AFFIRMING Supreme Court's order granting summary judgment to Nationwide, the Fourth Department agreed that the policy's criminal act exclusion applied to negate liability coverage in favor of Harmer:

In Slayko v Security Mut. Ins. Co. (98 NY2d 289, 292), the defendant's insured had pleaded guilty to assault in the second degree (Penal Law § 120.05 [4]), arising from an incident in which he pointed a shotgun at the plaintiff and pulled the trigger, incorrectly believing that the gun was unloaded. The Court of Appeals concluded that a provision in the insurance policy issued by the defendant excluding coverage for liability “arising directly or indirectly out of instances, occurrences or allegations of criminal activity by the insured'” did not violate public policy and that it properly excluded coverage for the plaintiff's injuries (Slayko, 98 NY2d at 294-296). 

Here, plaintiffs correctly concede that the shooting incident falls within the criminal act exclusion in the homeowners' policy and, based on the Court's decision in Slayko, such an exclusion is not barred by public policy.  Plaintiffs contend, however, that this case is of the sort anticipated by the Court when it acknowledged in Slayko that "[a] case may arise in which a broad criminal activity exclusion . . . facially applies, yet works an injustice because the prohibited act involves little culpability or seems minor relative to the consequent forfeiture of coverage" (id. at 294). We reject that contention. Pursuant to Penal Law § 120.00 (3), "[a] person is guilty of assault in the third degree when . . . [w]ith criminal negligence, he [or she] causes physical injury to another person by means of a deadly weapon or a dangerous instrument." Contrary to plaintiffs' contention, criminal negligence as defined in Penal Law § 15.05 (4) is not synonymous with the common-law negligence standard applied in civil cases (see PJI 2:10), and not every hunting accident would be excluded under the criminal activity exclusion inasmuch as such accidents do not necessarily involve criminal negligence. 

New York Penal Law § 15.05 defines "criminal negligence" as:

     4. "Criminal negligence."  A person acts with criminal negligence with respect to a result or to a circumstance described by a statute defining an offense when he fails to perceive a substantial and unjustifiable risk that such result will occur or that such circumstance exists.  The risk must be of such nature and degree that the failure to perceive it constitutes a gross deviation from the standard of care that a reasonable person would observe in the situation.

Is there a fundamental difference between the facts of this case and those of the 55-gallon oil drum wielding drunken college student in Massa v. Nationwide, or do the Fourth and Third Departments merely take differing views on the criminal act exclusion and when it applies?  Apparently key to the non-coverage finding in this case was the fact that the insured pleaded guilty to a crime that involved conduct amounting to criminal negligence, rather than just recklessness.

If there is a set of facts that would fall within what the New York Court of Appeals had in mind for a Slayko exception to application of a liability insurance policy's criminal act or criminal activity exclusion, this is not it.

Jury Must Decide Whether a Drunken College Student's Tossing of a 55-Gallon Oil Drum Out of Second Story Frat House Window Onto Students Below Is "Criminal in Nature" and Excluded from Liability Coverage

HOMEOWNERS – INTENTIONAL ACT EXCLUSION – CRIMINAL ACT EXCLUSION – "CRIMINAL IN NATURE"
Massa v. Nationwide Mut. Fire Ins. Co.
(3rd Dept., decided 6/24/2010)

This is a good news/bad news post.  If you live in the Third Department and are injured when a crazed teenager seeking revenge deliberately drives his car over the tent in which you are sleeping at a state park campsite at 6:15 in the morning, or when a hostile, drunken college student hurls a 55-gallon metal oil drum out of a second-story fraternity house window you just told him to get away from onto your head, there may be liability coverage for your assailants.  Good news if you're the injured person; not so good news if you're the miscreant's auto or homeowners insurer.

In New York Cent. Mut. Fire Ins. Co. v Wood, 36 AD3d 1048 (3d Dept 2007), the Third Department affirmed the Supreme Court's denial of summary judgment to Progressive Northeastern, finding there to be a question of fact as to whether Progressive's insured, defendant Charles Young, knew the tent he deliberately drove over at 6:15 in the morning at a state park campsite was occupied.  Young pleaded guilty attempted reckless assault and was sentenced to 11 years in prison.  Said the Court:

Here, Young's assertion that he did not know that the tent was occupied could provide a sufficient basis for a finding that his conduct was merely reckless, rather than intentional or expected. Although one could conclude that Young must have appreciated the substantial risk that a tent would be occupied at such an early hour of the morning, his conduct would not be intentional, but reckless, if he disregarded that known risk in a desire to wreak havoc and damage property, without forming a specific intent to drive over an occupied tent.

In the view of the Third Department, it could not be said as a matter of law that the underlying plaintiff's crushing injuries from having been driven over by the insured's car at 6:15 in the morning were "bodily injur[ies] caused by an intentional act of an insured person or at the direction of an insured person."

It's a tent.  At 6:15 in the morning.  At a campsite where you know people are camping.  And sleeping.  In tents.

Now find and cue Animal House on your DVR.  In this case, the insureds' college-aged son, David Massa, became very intoxicated at a fraternity house and was asked to leave.  He did so, for a while, but later returned and reentered the frat house, where students who were outside saw him standing at an open upstairs window.  The inebriated David threw a piece of garbage toward the students below and "reacted with confusion and hostility" when they told him to move away from the window, which he eventually did.  Thirty seconds after disappearing from the window's opening, a 55-gallon oil drum exited that window and dropped onto one of the students below, injuring that person.  An eyewitness who was upstairs in the fraternity house stated to police that Massa was "really drunk" and said she saw him at the window, apparently about to "dump" what she described as a garbage can outside. She took it away and told him to stop, and Massa pushed her, causing her to fall.  He then "put the oil drum through the window" and let go; it lodged briefly in the window before dropping to the ground.

Is there liability coverage for the drunken David's drum dropping conduct under his parents' homeowners policy?  Supreme Court, Schenectady County (Aulisi, J.) said absolutely, and granted plaintiffs' motion for summary judgment.  While agreeing with the lower court's finding that the policy's intentional act exclusion was inapplicable, the Third Department ruled that a jury must decide whether David's conduct was "criminal in nature", thereby triggering the criminal act exclusion of the parents' homeowners policy with Nationwide applies to negate coverage. 

In rejecting Nationwide's contention that the resulting harm was inherent in the nature and force of David's wrongful act, the appellate court held that Supreme Court properly determined that the intentional act exclusion, which negated coverage for bodily injury "caused intentionally by or at the direction of an insured, including willful acts the result of which the insured knows or ought to know will follow from the insured's conduct", was inapplicable:

The evidence does not conclusively establish that anyone was directly below the window when plaintiff looked outside, that he saw anyone below, or that he knew there was anyone there when he pushed or threw the drum outside. Therefore, there is a possible basis for a factual determination that, from plaintiff's point of view, it was unexpected, unintended, and unforeseen that the drum would strike someone, despite the fact that other interpretations are also possible. 

Defendant contends that plaintiff's actions were nonetheless intentional within the meaning of the exclusion because the resulting harm "'was inherent in the nature and force'" of the wrongful act (Clayburn v Nationwide Mut. Fire Ins. Co., 58 AD3d at 991, quoting Pennsylvania Millers Mut. Ins. Co. v Rigo, 256 AD2d 769, 770 [1998]). However, as no injuries would have occurred if no one had been below the window, the question as to whether plaintiff knew anyone was there prevents a determination, as a matter of law, that "'to do the act [was] necessarily to do the harm which [was] its consequence'" (New York Cent. Mut. Fire Ins. Co. v Wood, 36 AD3d 1048, 1050 [2007], quoting Progressive N. Ins. Co. v Rafferty, 17 AD3d 888, 889 [2005]). 

David's parents' homeowners policy with Nationwide also contained a criminal act exclusion, which negated liability coverage for injury "caused by or resulting from an act or omission which is criminal in nature and committed by an insured ... regardless of whether the insured is actually charged with, or convicted of a crime[.]"  In this case, David had been charged with second degree assault, a felony, but pleaded guilty only to disorderly conduct, a violation.

In MODIFYING the order appealed from to deny both parties' summary judgment motions on the criminal act exclusion of the Massas' policy, the Third Department held:

Disorderly conduct is a violation rather than a felony or misdemeanor (see Penal Law § 240.20)^[FN1] and, thus, is not a "crime" as defined in the Penal Law (see Penal Law § 10.00 [3], [6]; De Paulo v City of Albany, 49 NY2d 994, 995-996 [1980]). However, conduct may be found to be "criminal in nature" without regard to whether it led to actual criminal prosecution or conviction (see New York Cent. Mut. Fire Ins. Co. v Nationwide Mut. Ins. Co., 307 AD2d 449, 451 [2003]; see also Kehoe v Nationwide Mut. Fire Ins. Co., 299 AD2d 318, 319 [2002]). Defendant contends that plaintiff's conduct was "criminal in nature" even if his intoxication prevented him from forming an intention to cause injury and therefore from committing intentional assault (see Penal Law § 120.00 [2]), because proof of voluntary intoxication does not negate recklessness (see Penal Law § 15.05 [3]; People v Johnson, 277 AD2d 702, 704 [2000], lv denied 96 NY2d 831 [2001]). In defendant's view, plaintiff's conduct was criminally reckless.

"A person acts recklessly . . . when that person is aware of and consciously disregards a substantial and unjustifiable risk of a result, where the risk is of such a nature and degree that to disregard it constitutes a gross deviation from the standard of conduct of a reasonable person" (Allstate Ins. Co. v Zuk, 78 NY2d 41, 46 [1991]; see Penal Law § 15.05 [3]). As previously discussed, there is a triable issue of fact as to whether plaintiff was aware that someone was below the window. Moreover, neither of the two witnesses who described the accident to police has been deposed or cross-examined. Their statements in the police report do not decisively demonstrate that plaintiff necessarily intended to throw the can through the window. Thus, there are triable issues of fact deserving of further inquiry as to whether plaintiff consciously disregarded a substantial risk that his conduct would cause injury. Construing the exclusion narrowly against the insurer (see Pepper v Allstate Ins. Co., 20 AD3d at 635), we find that these factual issues prevent a determination as to whether plaintiff's conduct was "criminal in nature" as a matter of law.

Defendant did not demonstrate "that there is no possible factual or legal basis on which [it] may eventually be held liable under its policy" (First State Ins. Co. v J & S United Amusement Corp., 67 NY2d 1044, 1046 [1986]; accord Allstate Ins. Co. v Kemp, 144 AD2d 853, 854 [1988]). Thus, defendant was not entitled to a declaratory judgment in its favor as to the applicability of the criminal act exclusion, and Supreme Court properly denied its cross motion for summary judgment.    Further, as defendant did not demonstrate that the allegations of negligence in the underlying complaint "cast [the] pleading solely and entirely within the policy exclusions, and, further, that the allegations, in toto, are subject to no other interpretation" (Pennsylvania Millers Mut. Ins. Co. v Rigo, 256 AD2d at 770 [internal quotation marks and citations omitted]), summary judgment was properly granted to plaintiffs as to defendant's broad duty to provide a defense in the underlying action. However, summary determination as to defendant's narrower duty to indemnify was inappropriate, as we find triable issues of fact as to whether plaintiff's conduct was criminal in nature (see Zuckerman v City of New York, 49 NY2d 557, 562 [1980]. That determination must await trial on a full record in the declaratory judgment action (compare Allstate v Zuk, 78 NY2d at 47). 

 It's a 55-gallon oil drum, for Pete's sake.  Pushed or hurled from an open, second story frat house window at a frat party.  Where students are known to congregate, both inside and outside the house.  Not surprisingly striking a student below.  Not intentional?  Not criminal?  Was liability insurance coverage designed to respond to these kind of acts?  I understand the desire to find compensation sources for injured parties, but Wood and this case distort my notion of liability insurance, which I though was meant to cover accidentally and fortuitously caused injuries and damages.

Defensive Bear Hugging Is Covered

HOMEOWNERS – LIABILITY – INTENTIONAL ACTS EXCLUSION
Clayburn v. Nationwide Mut. Fire Ins. Co.
(App. Term, 3rd Dept., decided 1/15/2009)

Although bears may not bear hug, people sometimes do. From the Appellate Division, Third Department, comes this lesson on when harm that results from intentional grappling is and is not covered.

Mark Clayburn and his brother were walking down a street and passed Robert Tamsett. Mark and Robert exchanged what the appellate decision delicately characterizes as "unkind words" (insert cartoon shorthand $#%$!! here). Tamsett then began to follow the brothers, continuing the verbal argument with Clayburn. Although there was some dispute over who intiated each aspect of physical contact, it was undisputed that at some point Tamsett pushed Clayburn to the ground. Tamsett and Clayburn then became "physically engaged", with Tamsett holding Clayburn in a bear hug. They struggled and lost their balance, falling through a plate glass window of a nearby store. Tamsett pleaded guilty to harassment based on his involvement in the incident.

Clayburn sustained severe facial lacerations as a result of the incident and brought a personal injury action based on negligence against Tamsett, who qualified as an insured under his parents' homeowners policy with Nationwide. Despite the negligence allegations, Nationwide disclaimed both defense and indemnification coverage to Tamsett based on the policy's exclusion for bodily injury

caused intentionally by or at the direction of an insured, including willful acts the result of which the insured knows or ought to know will follow from the insured's conduct.

After a bench trial in that underlying action, Montgomery Supreme found Tamsett negligent and entered a judgment against him for his portion of the damages. Clayburn then commenced this action directly against Nationwide pursuant to New York Insurance Law § 3420(a)(2) and Clayburn moved for summary judgment.

In MODIFYING the order appealed from granting plaintiff's motion to declare that Nationwide was obligated to indemnify Tamsett in relation to the judgment rendered against him, the Third Department held:

Supreme Court properly determined that the intentional acts exclusion does not bar coverage here. The policy at issue excludes coverage for bodily injury "caused intentionally by or at the direction of an insured, including willful acts the result of which the insured knows or ought to know will follow from the insured's conduct." To successfully bar coverage under an insurance policy's intentional acts exclusion, the insurer must prove that there is no possible legal or factual basis to support a finding that, from the point of view of the insured, the bodily injuries inflicted were unexpected, unintended and unforeseen (see Agoada Realty Corp. v United Intl. Ins. Co., 95 NY2d 141, 145 [2000]; Pennsylvania Millers Mut. Ins. Co. v Rigo, 256 AD2d 769, 770 [1998]; Home Mut. Ins. Co. v Lapi, 192 AD2d 927, 928 [1993]). Yet courts are wary of claims that intentional acts resulted in unintended injuries where the harm "was inherent in the nature and force" of the wrongful act (Pennsylvania Millers Mut. Ins. Co. v Rigo, 256 AD2d at 771; see New York Cent. Mut. Fire Ins. Co. v Wood, 36 AD3d 1048, 1049 [2007]).

Here, while Supreme Court acknowledged that Tamsett intentionally placed his hands upon plaintiff, the court found that Tamsett did so in an attempt to subdue plaintiff or ward off an attack, "as opposed to beat him." Tamsett and plaintiff did not exchange any punches, or even any words. Tamsett merely wrapped his arms around plaintiff in response to plaintiff approaching him after Tamsett pushed Clayburn to the ground. We accept the court's determination that Tamsett did not expect, intend or foresee that plaintiff would end up crashing through the plate glass window or be injured in any way when Tamsett placed him in a bear hug (see Baldinger v Consolidated Mut. Ins. Co., 15 AD2d 526, 526 [1961], affd 11 NY2d 1026 [1962]; compare Smith v New York Cent. Mut. Fire Ins. Co., 13 AD3d 686, 688 [2004]; Mazzaferro v Albany Motel Enters., 127 AD2d 374, 376 [1987]). Plaintiff's injuries were not inherently likely to result from the nature and force of a defensive bear hug. Under the circumstances, the intentional acts exclusion does not apply (see Slayko v Security Mut. Ins. Co., 98 NY2d 289, 293 [2002]; cf. Allstate Ins. Co. v Zuk, 78 NY2d 41, 46 [1991]).

In defending the 3420(a)(2) action, Nationwide also argued that the policy's criminal acts exclusion negated coverage for the judgment against Tamsett, since he had pleaded guilty to criminal harassment. In rejecting that argument, the court noted that Nationwide could not rely on that exclusion because it had failed to include that ground in its disclaimer letter, citing Maroney v New York Cent. Mut. Fire Ins. Co., 10 AD3d 778, 780-781 (3rd Dept 2004), affd 5 NY3d 467 (2005).

Although wrestlers and mixed martial arts/extreme fighters may use bear hugs in an offensive manner, injuries that result from purely defensive bear hugging are not negated by a homeowners policy's intentional acts exclusion, at least in the opinion of the Third Department.