No, GEICO Was Not Ordered to Pay $5.2 Million to Woman Who Claimed She Contracted an STD From Sex In Her Ex-Boyfriend’s Car

 

Dontcha just love how the press/media reports insurance coverage stories?  Almost immediately I heard via text messages and emails about this decision from (1) the SIU director of a NY auto insurer, (2) the claims manager of a NY property and casualty insurer, (3) my eldest son, who is an SIU field investigator, and (4) one of my office's legal assistants.  

For their benefit and yours I offer the following context.  

No, GEICO was not ordered to pay $5.2 million to a woman who claimed she contracted HPV after having sex in her ex-boyfriend’s GEICO-insured car.  And no, the Missouri appellate court most certainly did not rule GEICO "must cover" that the woman's allegedly related "injuries and losses".  

Last week's (June 7, 2022's) decision of the Missouri Court of Appeals did only this:

Government Employees Insurance Company and GEICO General Insurance Company (collectively “GEICO”) appeal the judgment of the Circuit Court of Jackson County confirming an arbitration award finding against GEICO’s insured—M.B. (“Insured”)—and in favor of M.O.  Insured and M.O. were in a romantic relationship. After M.O. contracted anogenital human papillomavirus (“HPV”), she submitted a settlement offer to GEICO, asserting Insured negligently infected her with the disease during sexual encounters in his automobile, and that Insured’s GEICO-issued automobile  insurance policy provided coverage for her injuries and losses. GEICO denied coverage and rejected her settlement offer.

Insured and M.O. entered into an agreement pursuant to section 537.065, RSMo,1 and agreed to arbitrate M.O.’s claims. The arbitrator found Insured negligently infected M.O. with HPV and awarded her $5.2 million in damages. Thereafter, M.O. filed this action in the trial court. GEICO moved to intervene and M.O. moved to confirm the arbitration award. The trial court granted both motions on the same date and entered judgment in favor of M.O. consistent with the arbitration award. GEICO appeals, asserting the trial court erred in confirming the arbitration award without giving GEICO a meaningful opportunity to defend its interests. For the reasons stated below, we affirm.

So chillax, you auto claims and underwriting professionals and insurance producers.  The decision merely affirmed a confirmed arbitration award against GEICO's insured, "M.B." (identified identified in GEICO's related DJ action as Martin Brauner).  It did not make any finding of coverage under GEICO's personal auto policy.   That policy, of course, afforded liability coverage for "damages which an insured becomes legally obligated to pay because of (1) bodily injury, sustained by a person, and; (2) damage to or destruction of property, arising out of the ownership, maintenance or use of the owned auto or a non-owned auto."

The MO Court of Appeal's decision provides the factual and procedural background to the arbitration award and GEICO's appeal to that court:

        In November of 2017, M.O. and Insured began a romantic relationship. Effective at that time was an automobile insurance policy issued by GEICO to Insured.

        On February 25, 2021, M.O. submitted to GEICO a copy of a petition she intended to file against Insured, and made a final settlement offer to resolve her “claims against [Insured] for the applicable limits of $1m.”2  The petition attached to the settlement offer alleged that during “November and early December of 2017,” Insured and M.O. engaged in unprotected sexual activities in Insured’s vehicle, and during those sexual encounters, Insured “negligently caused or contributed to cause [M.O.] to be infected with HPV by not taking proper precautions and neglecting to inform and/or disclose his diagnosis,” despite “having knowledge of his condition.” M.O. alleged that as a result of Insured’s negligence, she incurred, and will incur, “past and future medical expenses,” as well as “past and future mental and physical pain and suffering.” On  April 7, 2021, GEICO denied coverage and refused M.O.’s settlement offer. GEICO also initiated a declaratory judgment action in federal court to establish the parties’ rights and obligations under the insurance policy.

2  It is unclear from the record when M.O. first submitted her claim to GEICO. However, in January 2021, GEICO informed M.O. via letter that it had “completed [its] coverage investigation” and  determined “there was no coverage” because the  damages claimed did not arise out of the normal use of the vehicle.” GEICO “disclaim[ed] any and all liability or obligation to [M.O.] and to others under” Insured’s automobile policy and advised that it would “take no further action with respect to any claim . . . and hereby withdraws from the matter entirely.” 

        Meanwhile, on March 11, 2021, M.O. and Insured entered into a Contract to Limit Recovery to Specified Assets and Arbitration Agreement Pursuant to Section 537.065 RSMo (“065 Agreement”).3 On May 17, 2021, M.O. and Insured arbitrated M.O.’s claims, and the arbitrator thereafter issued his “Findings, Conclusions, and Award.”

3  The 065  agreement was not made part of the record on appeal, nor was it presented to the trial court. Any reference to the title or the contents of the 065 Agreement we take from filings that were included in the  record. Section 537.065, which will be discussed extensively in our analysis, allows an injured party and tortfeasor to enter into an agreement to limit the injured party’s recovery to the tortfeasor’s applicable insurance limits if the insurer has refused to defend the tortfeasor.

        The award first described procedural aspects of the arbitration proceeding, including that: (1) Prior to the arbitration, Insured submitted an Arbitration Statement detailing his defense; (2) Both parties presented opening statements at the arbitration; (3) Insured was given the opportunity to cross-examine M.O.’s witnesses and elicit testimony for Insured’s defense; (4) Insured submitted as exhibits three internet articles discussing HPV; (5) M.O. requested an award of $9.9 million in damages in her closing argument; and (6) In his closing argument, Insured disputed that he was aware he could transmit HPV to M.O., M.O. received HPV from him, he had a duty to disclose such diagnosis to M.O., and the amount of damages.

        As to his substantive findings, the arbitrator determined that: (1) “there was sexual activity in [Insured’s] automobile in November/December of 2017 which occurred in Jackson County, Missouri”; (2) the sexual activity in Insured’s vehicle “directly caused, or directly contributed to cause, M.O. to be infected with HPV”; (3) Insured knew he had “been told that his throat cancer tumor was diagnosed as HPV positive”; (4) Insured should have disclosed his diagnosis to M.O. prior to the sexual activity that occurred, but he did not; and (5) Insured “was negligent and is liable for causing M.O. to contract HPV.” The arbitrator found that “an amount that would fairly and justly compensate Plaintiff, M.O., for all of her damages and injuries is $5,200,000,” and entered an award in that amount “in favor of Plaintiff M.O. and against the Defendant [Insured].”

        On May 24, 2021, M.O. provided written notice to GEICO that she and Insured had entered into an agreement pursuant to section 537.065. The following day, M.O. initiated this action by filing her Petition for Damages in the trial court.4 On June 10, 2021, GEICO discovered the existence of this lawsuit by monitoring Case.net (Missouri state courts’ automated case management system). On June 18th, GEICO filed a motion to intervene.

        On June 22nd, M.O. filed a response to GEICO’s motion to intervene and a motion to confirm the arbitration award. In her motion to confirm the award, M.O. asserted she and Insured had agreed “that after an arbitration award is issued, [M.O.] will immediately seek to have the award confirmed . . . and reduced to judgment . . . and that neither party will seek judicial review of the award or attempt to have the award set aside, modified, amended or changed in any way unless by express written agreement of each party.” On June 29th, GEICO filed a reply in support of its motion to intervene. On July 2nd, the trial court granted M.O.’s motion to confirm the arbitration award and entered judgment in favor of M.O. and against Insured in the amount of $5,200,000. The trial court adopted and incorporated the findings and conclusions of the arbitration award, and stated the award was attached to the judgment as Exhibit A. No exhibit was attached to the judgment. Also on July 2nd, after entering judgment, the trial court entered an order granting GEICO’s motion to intervene.

        On July 30th, GEICO filed a motion for leave to conduct discovery, a motion for new trial, and a motion to vacate the arbitration award. In the latter two motions, GEICO asserted that the arbitration award and judgment confirming it should be vacated because the award “was procured by collusion, fraud, [and] undue means,” it was “contrary to public policy and §§ 537.065 and 435.350,” it was the result of an invalid and unenforceable arbitration agreement, and it violated GEICO’s due process rights and right to access the courts. The parties submitted additional briefing on GEICO’s motions. On September 8, 2021, the trial court summarily denied all of the motions and entered a “Judgment Nunc Pro Tunc,” attaching the arbitration award that was inadvertently omitted from the original judgment.

        GEICO appeals, asserting three claims of error relating to the trial court’s confirmation of the arbitration award—specifically, to the timing of the trial court’s confirmation.5 GEICO asserts that by confirming the arbitration award without giving GEICO a meaningful opportunity to defend its interests and develop facts and arguments pre-judgment, the trial court acted in contravention of section 537.065 and Rule 52.12 (Point I), section 435.405 (Point II), and state and federal constitutional provisions guaranteeing due process and access to the courts (Point III).

What most articles and headlines obscure or gloss over is the fact that GEICO commenced an action for a declaration of non-coverage against both the claimant "M.O." and its insured in US District Court for the Western District of Missouri in April 2021.  Not surprisingly, GEICO's primary argument is that contracting an STD from having sex in a car does not constitute bodily injury arising out of the ownership, maintenance of use of the insured motor vehicle.  It arises out of, so to speak, something  else.  

GECIO's Second Amended Complaint for Declaratory Judgment states as the Nature of Action and Relief Sought of its DJ action:

        1.    This is an action for declaratory relief under 28 U.S.C. § 2201 for the purpose of  determining the Parties’ rights and obligations, if any, under a[] [$1 million] automobile insurance  policy (the “Auto Policy”) issued by GEICO General Insurance Company and [a $1 million] umbrella insurance polic[y] (the “Umbrella Policy”) issued by Government Employees Insurance Company (collectively, the “Policies”) to Brauner.

        2.    GEICO seeks a declaration that it has no duty under the Policies to defend or indemnify Brauner for the third party bodily injury liability claim asserted by M.O. (“the subject claim”).

        3.    On February 25, 2021, M.O. demanded that GEICO pay $1,000,000 to resolve  her “claims against [GEICO’s] insured” (i.e., Brauner). She included in her demand letter a proposed state court petition and indicated intent to file it should GEICO not satisfy her demand.

        4.    GEICO denies the existence of coverage under the Policies for the subject claim.

        5.    There is an actual, immediate controversy among the Parties as to whether coverage for the subject claim exists under the Policies.

        6.    All necessary and proper parties are before the Court with respect to the matters in controversy as set forth herein. 

        7.    GEICO has no adequate remedy at law. 

Footnote #1 to GEICO's Second Amended Complaint that for reasons not disclosed, the "Court’s October 20, 2021 order dismissed (previous defendant) M.O. from the case. Dkt. 52."

GEICO's Second Amended Complaint adds some factual context for the claimant's allegations:  

M.O.’s Threatened Tort Lawsuit Against M.B.

    14.    On February 25, 2021, M.O. sent GEICO a demand letter. The body of the letter stated, in its entirety:

Here’s the Petition that will be filed against your insured, [M.B.]. Before doing so, we have been authorized to make one final attempt to resolve [M.O.’s] claims against your insured for the applicable limits of $1m. Let me know.

    15.    M.O.’s proposed state court petition sought from M.B. damages for negligence and negligent infliction of emotional distress.

    16.    In it, M.O. alleges M.B. and M.O. entered into a sexual relationship in November  2017 and early December 2017, including that the two “engaged in unprotected sexual  activities, including intercourse, in Defendant [M.B.’s] home and in his 2014 Hyundai Genesis car.”

    17.    M.O. further alleges that M.B. negligently failed to tell M.O. that he was infected  with anogenital human papillomavirus (HPV), and that he failed to use adequate protection and take proper precautions to prevent its transmission to her.

It appears from the docket of GEICO's DJ action and the Scheduling Order that was filed on May 12, 2022 that discovery in the DJ action is underway and will be bifurcated:

The first phase of discovery in this action shall conclude August 15, 2022. Phase I discovery will include discovery of all issues relating to the parties’ anticipated dispositive motions directed to the threshold coverage issue. Phase II discovery will involve discovery relating to bad faith or extra-contractual claims, as well as any other merits issues. To the extent that issues overlap, the Court directs the parties to undertake discovery within Phase I.

You can mark your calendars as follows: 

July 15, 2022 -- Status report

July 29, 2022 -- Motion to join additional parties 

July 29, 2022 -- Motion to amend pleadings 

August 15, 2022 -- Close of Phase I discovery

August 31, 2022 -- Motions for Summary Judgment On Coverage Issue 

September 21, 2022 -- Motions Responses  

October 5, 2022 -- Motions Replies

I've got a Court Listener alert set up for GEICO's DJ action, and I'll post again when the MSJs are filed.  That should be some interesting reading, there.  Meanwhile, I'm predicting that the Missouri District Court will ultimately find in favor of GEICO and rule that M.O.'s contraction of HPV did not arise out of the ownership, maintenance or use of Brauner's 2014 Hyundai Genesis.  

What I can guarantee is that this case will be in next semester's insurance law course syllabuses in law schools across the country.     

Fun facts to know and tell for coverage nerds (like me):

• the term "anogenital human papillomavirus" has appeared in only one reported case state or federal court decision in the United States ever -- this case; 
• although homeowners insurance policies typically contain a communicable disease exclusion, personal auto policies don't (Extra Credit Q: Because...?); 
• the claimant originally filed a hit-and-run UM claim under her ex-BF's policy with GEICO (okay, that's not true); 
• the insured sought physical damage coverage under his policy's explosion, colliding with bird or animal and/or civil commotion perils (okay, also not true); and 
  
• GEICO originally commenced its DJ action in Kansas, but for "the convenience of the parties and in the interest of justice", the action was fittingly transferred to the show-me (yours and I'll show you mine) state of Missouri, the Kansas district court judge musing in the 2022 frontrunner for masterful understatement, "This isn't the typical insurance coverage dispute." NSS, judge.  NS. 

Rate Evasion/Garaging Fraud -- Obtaining a Declaratory Judgment of No No-Fault Coverage Owed

NO-FAULT – AUTO POLICY – APPLICATION MISREPRESENATION – RATE EVASION – GARAGING FRAUD 

State Farm Fire & Cas. Co. v. AutoRx
(Sup. Ct., NY Co., 11/10/2021)

Here's a good example of successfully investigating, denying and litigating a rate evasion/garaging fraud case.  

Mikheal Bogle applies for an auto policy from State Farm in February 2019, representing on his application that he lives and garages his vehicle in Lake Peekskill, Orange County, New York. 

That was false.  Although he once lived in Lake Peekskill (once, as in 12 years earlier), in reality he lived and garaged his vehicle in Rosedale, Queens County, New York, approximately 60 miles away.  

Problem (for State Farm, not initially for Bogle): had Bogle truthfully disclosed the Rosedale garaging address, his 6-month auto policy premium would have been $4,483.82 more than what it was for the Lake Peekskill address he gave. 

On April 28, 2019, Bogle allegedly was injured in a motor vehicle accident (in New York City, of course) and treated with the defendant medical providers, who took assignments of benefits from him and billed State Farm.  After conducting Bogle's EUO, "State Farm timely denied the numerous claims for benefits (see 11 NYCRR 65-3.8[a][1]), concluding that, based on Bogle's testimony at the EUO and its own investigation, Bogle made material misrepresentations in his initial application for the issuance of the subject insurance policy with respect to where the insured vehicle was usually garaged and maintained in order to lower the cost of obtaining the policy, and that coverage was thus vitiated."

State Farm then commenced this affirmative declaratory judgment action to confirm its no-fault coverage denials.  None of the defendants appeared and State Farm moved for a default judgment against all of them.  

Finding that State Farm had not properly served the FDNY defendant (emergency responder), the court denied State Farm's motion for a default judgment.  

But finding proper service of process against all other defendants, the court reviewed State Farm's burden of proof on its motion and State Farm's proof and GRANTED default judgment to State Farm those non-appearing defendants declaring that State Farm "is not obligated to pay no-fault benefits to the defendant Mikheal Bogle in connection with injuries that he sustained in a motor vehicle accident on April 28, 2019, or to reimburse the defendants Autorx, LLC, CHC Chiropractic, P.C., Ocean Spine and Joint Medical Care, P.C., also known as Comprehensive Chiropractic Center, Kanwarpaul Grewal, D.O., JCB Acupuncture, P.C., Ocean Valley Physical Medicine, P.C., or Stand-Up MRI of Lynbrook for treatment that they rendered or equipment and supplies that they provided to him for those injuries[.]" 

The court explained: 

With respect to the proof of the facts constituting the claim, 

"CPLR 3215 does not contemplate that default judgments are to be rubber-stamped once jurisdiction and a failure to appear have been shown. Some proof of liability is also required to satisfy the court as to the prima facie validity of the uncontested cause of action (see, 4 Weinstein-Korn-Miller, NY Civ Prac paras. 3215.22-3215.27). The standard of proof is not stringent, amounting only to some firsthand confirmation of the facts" 

(Joosten v Gale, 129 AD2d 531, 535 [1st Dept 1987]; see Martinez v Reiner, 104 AD3d 477, 478 [1st Dept 2013]; Beltre v Babu, 32 AD3d 722, 723 [1st Dept 2006]). Stated another way, while the "quantum of proof necessary to support an application for a default judgment is not exacting ... some firsthand confirmation of the facts forming the basis of the claim must be proffered" (Guzetti v City of New York, 32 AD3d 234, 236 [1st Dept 2006]). In other words, the proof submitted must establish a prima facie case (see id.; Silberstein v Presbyterian Hosp., 95 AD2d 773 [2d Dept 1983]). 

"Where a valid cause of action is not stated, the party moving for judgment is not entitled to the requested relief, even on default" (Green v Dolphy Constr. Co., 187 AD2d 635, 636 [2d Dept 1992]; see Walley v Leatherstocking Healthcare, LLC, 79 AD3d 1236, 1238 [3d Dept 2010]). In moving for leave to enter a default judgment, the plaintiff must "state a viable cause of action" (Fappiano v City of New York, 5 AD3d 627, 628 [2d Dept 2004]). In evaluating whether the plaintiff has fulfilled this obligation, the defendant, as the defaulting party, is "deemed to have admitted all factual allegations contained in the complaint and all reasonable inferences that flow from them" (Woodson v Mendon Leasing Corp., 100 NY2d 62, 71 [2003]). The court, however, must still reach the legal conclusion that those factual allegations establish a prima facie case (see Matter of Dyno v Rose, 260 AD2d 694, 698 [3d Dept 1999]). 

Proof that the plaintiff has submitted "enough facts to enable [the] court to determine that a viable" cause of action exists (Woodson v Mendon Leasing Corp., 100 NY2d at 71; see Gray v Doyle, 170 AD3d at 971) may be established by an affidavit of a party or someone with knowledge, authenticated documentary proof, or by complaint verified by the plaintiff that sufficiently details the facts and the basis for the defendant's liability (see CPLR 105[u]; Woodson v Mendon Leasing Corp., 100 NY2d at 71; Gray v Doyle, 170 AD3d at 971; Voelker v Bodum USA, Inc., 149 AD3d 587, 587 [1st Dept 2017]; Al Fayed v Barak, 39 AD3d 371, 371 [1st Dept 2007]; see also Michael v Atlas Restoration Corp., 159 AD3d 980, 982 [2d Dept 2018]; Zino v Joab Taxi, Inc., 20 AD3d 521, 522 [2d Dept 2005]; see generally Mitrani Plasterers Co., Inc. v SCG Contr. Corp., 97 AD3d 552, 553 [2d Dept 2012]). 

Where an insured makes material misrepresentations on his or her application for insurance as to where he or she regularly garages a vehicle sought to be insured, coverage is defeated (see Remedial Med. Care, P.C. v Infinity Prop. & Cas. Co., 2017 NY Slip Op 50391 [U], 55 Misc 3d 130[A] [App Term, 2d, 11th & 13th Jud Dists, Mar. 31, 2017]; Jamaica Dedicated Med. Care, P.C. v Praetorian Ins. Co., 2015 NY Slip Op 50756[U], 47 Misc 3d 147[A] [App Term, 2d, 11th & 13th Jud Dists, May 6, 2015]; see also Liberty Mut. Ins. Co. v Mendez, 2021 NY Slip Op 30071[U], *4, 2021 NY Misc LEXIS 85, *6-7 [Sup Ct, N.Y. County, Jan. 7, 2021]; see generally State Farm Fire & Cas. Co. v Jewsbury, 169 AD3d 949, 950 [2d Dept 2019]). State Farm's proof establishes, prima facie, the facts underpinning its contentions, namely, that when Bogle first applied for insurance coverage on February 2, 2019, he represented that he resided at 93 Hollowbrook Road, Apartment 2, Lake Peekskill, New York 10537, and garaged the insured vehicle there, but actually lived at 244-07 136th Avenue, Rosedale, New York 11422, an address located in Queens County, and kept the vehicle garaged there, where premium rates are substantially higher than those for vehicles garaged in Lake Peekskill. 

As set forth in the affidavit of State Farm's claims specialist Tim Dacey, who investigated the claim, the subject collision occurred in Queens County, Bogle's Queens County address is listed on all no-fault benefit forms submitted by Bogle and the medical defendants, Bogle treated and received therapy in Queens County, Bogle is registered to vote at the Rosedale address in Queens County, and a video search revealed that all sightings of the insured vehicle were in Queens County and western Nassau County, with no sightings at or near Lake Peekskill. In addition, Dacey averred that a State Farm representative visited Bogle's Rosedale address, and confirmed with an occupant of those premises, a neighbor, and a postal delivery employee that Bogle resided there, while another representative visited the Peekskill Lake address, and was informed by a long-time resident at a neighboring address that he had never seen Bogle at the Peekskill Lake address identified on Bogle's application. Dacey further explained that the garaging the vehicle at the Queens County address costs $4,483.82 more, for each six-month period of coverage, than garaging the vehicle at Peekskill Lake. 

In fact, although Bogle procured the policy on February 2, 2019, he testified at his EUO on July 26, 2019 that he had resided solely at the Rosedale address since 2013, and that although he had lived in Peekskill Lake in 2007, he hadn't lived there since for 12 years. He averred that he receives all of his mail in Rosedale, has all of his credit cards issued to that address, and maintains of his personal property there. Bogle admitted that he had never garaged the insured vehicle in Peekskill Lake, but used that address on his application because of his poor driving record and his understanding that he would not be able to procure insurance had he used his actual residence address. 

The denial-of-claim statements show that the relevant denials of coverage were expressly based on the ground that Bogle made material misrepresentations in connection with his application for insurance with respect to the where the vehicle was regularly garaged in order to reduce her insurance premium rates. 

Hence, State Farm is entitled to a declaratory judgment against the defendants that were properly served with process.

See?  Rate evasion on a personal auto policy in New York CAN have negative first-party (physical damage/PIP/UM/UIM) coverage consequences provided, especially in a no-fault claim context, the suspected garaging fraud is timely identified and investigated (and coverage denied).  

The Unopposed Loss -- Court Denies Declaratory Judgment to No-Fault Insurer Based Solely on Default of Non-Answering Defendants

NO-FAULT – HIT-AND-RUN – AFFIRMATIVE ACTION – DEFAULT JUDGMENT – DECLARATORY JUDGMENT – INJUNCTIVE RELIEF

Ameriprise Ins. Co. v. Kim
(2nd Dept., 7/29/2020)

We've run into this before.

Your insurer client brings a global affirmative action against all carbon-based life-form claimants and their health care(less) assignee-providers spawned from a single, reported motor vehicle accident, seeking declaratory and injunctive relief.  All of the defendants are served, but most if not all them don't answer or move against the complaint.  Your client makes a motion for a default judgment against the non-answering defendants, who don't appear and oppose the motion.  Your client proves up good service of the summons and complaint, the non-answering defendants' default, and the facts constituting your client's claim.

Mark it down as a win, right?  Wrong.

In AFFIRMING Supreme Court's denial of Ameriprise's default judgment motion, the Second Department reminded:

"A plaintiff seeking leave to enter a default judgment must file proof of proper service of the summons and the complaint, the defendant's default, and the facts constituting the claim" (Global Liberty Ins. Co. v Surgery Ctr. of Oradell, LLC, 153 AD3d 606, 606; see CPLR 3215[f]). "[A] default judgment in a declaratory judgment action will not be granted on the default and pleadings alone for it is necessary that [the plaintiff] establish a right to a declaration'" against the defendants (JBBNY, LLC v Dedvukaj, 171 AD3d 898, 902, quoting Dole Food Co., Inc. v Lincoln Gen. Ins. Co., 66 AD3d 1493, 1494; see Merchants Ins. Co. of N.H. v Long Is. Pet Cemetery, 206 AD2d 827, 828).

Here, while the plaintiff submitted proof of proper service of the summons and the complaint, the non-answering defendants' default, and the facts constituting the plaintiff's claim, the plaintiff's submissions in support of the motion failed to establish its right to the declarations sought (see JBBNY, LLC v Dedvukaj, 171 AD3d at 903). As such, we agree with the Supreme Court's determination denying that branch of the plaintiff's motion which was for leave to enter a default judgment against the non-answering defendants.

Take-Away Point #1:  Establishing one's entitlement on motion to declaratory relief requires more than what is minimally required to obtain a default judgment.  Insurers must "establish their right" to the declaration, with a quantum of evidence equivalent to what is needed to avoid a directed verdict at trial.

Take-Away Point #2:  Although not apparent from this short memorandum decision, even if the movant establishes its right to a declaration, the decision whether to grant a declaratory judgment rests within the sound discretion of the court (CPLR 3001) and is "dependent upon facts and circumstances rendering it useful and necessary."  Denial of a default judgment is proper if the declaratory relief sought clearly affects the rights of other parties not alleged to be in default.  See Merchants Ins. Co. of N.H. v Long Is. Pet Cemetery, 206 AD2d 827, 828).

No, You May Not Be Excused... Court Denies Insurer's 3211(a)(1)-Based Pre-Answer Motion to Dismiss Declaratory Judgment Action

PERSONAL AUTO – TEMPORARY SUBSTITUTE AUTO – NON-OWNED AUTO – DECLARATORY JUDGMENT ACTION – MOTION TO DISMISS

Bonavita v. Government Employees Ins. Co.
(2nd Dept., 7/22/2020)

Before the Roman Catholic Mass was said in English in Mahwah, New Jersey, my brothers and sisters and I had to ask "May I be excused?" (may, not can) before leaving our assigned seats (assigned theoretically to preserve order in a family of then seven, rivaling siblings) at the dinner table to head back outside to play or into the living room to watch our allotted one hour of television.  The qualifying condition for an affirmative answer from one of our parents was a dinner plate cleared of the meat, starch AND vegetable food groups that made a daily appearance at our dinner table (ask me sometime about the inventive methods my mother came up with to get my brothers and me to finish our green vegetables, especially cellulose-armored asparagus).  There was no leaving our dinner table without finishing your dinner.  Period.  I learned to intensely dislike certain foods, while developing strategies for clearing my plate without eating its unappetizing contents (our family's German Shepherd was one such strategy until she was banned from the dining room during dinner), before I was ten.

Insurers facing declaratory judgment and breach of contract actions sometimes ask to be excused from a lawsuit without getting to the meat and potatoes (and even asparagus) of the action, moving to dismiss the complaints lodged against them before interposing an answer.  In New York state court actions, New York Civil Practice Law and Rules (CPLR) Rule 3211 provides the bases for doing so:

1. a defense is founded upon documentary evidence;  or 
2. the court has not jurisdiction of the subject matter of the cause of action;  or 
3. the party asserting the cause of action has not legal capacity to sue;  or 
4. there is another action pending between the same parties for the same cause of action in a court of any state or the United States;  the court need not dismiss upon this ground but may make such order as justice requires;  or 
5. the cause of action may not be maintained because of arbitration and award, collateral estoppel, discharge in bankruptcy, infancy or other disability of the moving party, payment, release, res judicata, statute of limitations, or statute of frauds;  or 
6. with respect to a counterclaim, it may not properly be interposed in the action;  or 
7. the pleading fails to state a cause of action;  or 
8. the court has not jurisdiction of the person of the defendant;  or 
9. the court has not jurisdiction in an action where service was made under section 314 or 315 ;  or 
10. the court should not proceed in the absence of a person who should be a party; or 
11. the party is immune from liability pursuant to section seven hundred twenty-a of the not-for-profit corporation law .  

Plaintiff Bonavita was driving a vehicle owned by plaintiff Molinari when the vehicle was involved in a multivehicle accident.  As a result of the accident, the plaintiffs were named as defendants in a pesonal injury action (the underlying action).  Plaintiffs subsequently commenced this action against GEICO, seeking a judgment declaring that, pursuant to an insurance policy issued to Bonavita's mother, GEICO is obligated to defend and indemnify plaintiffs in the underlying action. The plaintiffs alleged that Bonavita's use of Molinari's vehicle qualified for "temporary substitute auto" or "non-owned auto" coverage under the policy.

In lieu of answering, GEICO moved pursuant to CPLR 3211(a)(1) and (7) to dismiss the complaint, contending that the plaintiffs were not entitled to coverage under the policy because, among other things, the vehicle being driven by Bonavita on the date of the accident was neither a "temporary substitute auto" nor a "non-owned auto" as defined in the policy. In support of its motion, GEICO submitted, among other things, an affidavit of its claims examiner, an affidavit of its attorney, a letter sent to GEICO from the plaintiffs' counsel, a letter from GEICO disclaiming coverage, a copy of the GEICO policy, and policy "declaration sheets" issued by GEICO during the relevant period. Plaintiffs opposed the motion and submitted, among other things, an affidavit of Bonavita, who averred that he is the son of GEICO's policyholder and resided at her home at the time of the accident.  Supreme Court denied the motion, and GEICO appealed.

In AFFIRMING the denial of GEICO's motion to dismiss, the Second Department reiterated what kind of evidence constitutes "documentary evidence" under subdivision 1 of CPLR 3211(a):

A motion to dismiss a complaint pursuant to CPLR 3211(a)(1) on the ground that a defense is founded on documentary evidence may be appropriately granted only where the documentary evidence utterly refutes the plaintiff's factual allegations, conclusively establishing a defense as a matter of law (see Goshen v Mutual Life Ins. Co. of N.Y., 98 NY2d 314, 326; Leon v Martinez, 84 NY2d 83, 88; Rodolico v Rubin & Licatesi, P.C., 114 AD3d 923, 924). "[T]o be considered documentary,' evidence must be unambiguous and of undisputed authenticity" (Fontanetta v John Doe 1, 73 AD3d 78, 86; see Cives Corp. v George A. Fuller Co., Inc., 97 AD3d 713, 714). "[J]udicial records, as well as documents reflecting out-of-court transactions such as mortgages, deeds, contracts, and any other papers, the contents of which are essentially undeniable, would qualify as documentary evidence in the proper case" (Fontanetta v John Doe 1, 73 AD3d at 84-85 [internal quotation marks omitted]; see Cives Corp. v George A. Fuller Co., Inc., 97 AD3d at 714). Affidavits, deposition testimony, and letters are not considered documentary evidence within the intendment of CPLR 3211(a)(1) (see Rodolico v Rubin & Licatesi, P.C., 114 AD3d at 925; Cives Corp. v George A. Fuller Co., Inc., 97 AD3d at 714).  

*  *  *  *  * 

Here, the affidavits and letters submitted by GEICO in support of its motion did not constitute documentary evidence within the intendment of CPLR 3211(a)(1) (see County of Westchester v Unity Mech. Corp., 165 AD3d at 885; Attias v Costiera, 120 AD3d 1281). Moreover, the GEICO insurance policy and declaration sheets failed to show that the plaintiffs were not, as they alleged in the complaint, entitled to coverage under the temporary substitute auto and/or non-owned auto provisions of the GEICO policy. Therefore, GEICO's submissions did not utterly refute the plaintiffs' allegations or conclusively establish a defense as a matter of law (see 25-01 Newkirk Ave., LLC v Everest Nat. Ins. Co., 127 AD3d 850; AGCS Marine Ins. Co. v Scottsdale Ins. Co., 102 AD3d 899).

An insurance policy is a contract, but the policy and policy declarations by themselves did not "utterly refute" the complaint's allegations and establish that plaintiffs were not entitled to coverage under the GEICO policy.  While I certainly understand an insurer's desire for the earliest possible exit from an insured's DJ or breach of contract action, this case is another example of how challenging it is for an insurer to get a lawsuit dismissed on a substantive coverage defense before answering the complaint.

The Archdiocese of New York v. The 32 Insurance Companies and Groups That Issued Policies to the Archdiocese from September 1956 Through December 2000

Litigation over insurance coverage for CVA-revived (Child Victims Act) lawsuits apparently began even before the CVA went into effort on August 14, 2019.  On July 1, 2019, the New York Daily News reported:

The New York Archdiocese has sued its insurance companies to demand legal protection and coverage as it braces for exposure it will face once sex abuse victims begin filing lawsuits next month under New York’s Child Victims Act. 

The complaint by the archdiocese, filed last week in Manhattan Supreme Court, lists more than two dozen insurers as defendants, and claims "the insurers ... intend to dispute, limit and/or deny coverage for claims and lawsuits alleging sexual abuse and physical abuse.” Several of the defendants listed in the complaint are members of the Chubb Group of Insurance Companies.

Thirty-two insurance companies and groups are named as defendants in that New York County, Supreme Court declaratory judgment action, which seeks:

On Count I, the Archdiocese requests that this Court enter a declaratory judgment in favor of the Archdiocese against each of the Insurers;

On Count II, the Archdiocese requests that this Court enter a judgment awarding the payment of damages in an amount equal to the amount owed under the INA Insurance Policies, to be proven at trial, as well as pre- and post-judgment interest; [and]

On Count III, the Archdiocese requests that this Court enter a judgment awarding its attorneys’ fees, costs, and disbursements in connection with INA’s bad faith refusal to defend the Archdiocese against the Norman Suit, in an amount to be proven at trial, as well as pre- and post-judgment interest[.]

The predicate "justiciable controversy" for the Archdiocese's action relates to Chubb Insurance's declination of coverage for "the Norman Suit", which was commenced on April 18, 2019 against the Archdiocese and other religious corporations (a church, a school, and the Catholic School Region of Staten Island).  By letter dated May 14, 2019, Chubb had denied liability coverage under the INA policies to the Archdiocese for the Norman Suit based on (1) lack of an alleged "occurrence"; and (2) punitive damages not being covered.  Chubb also reserved its right to deny coverage based on: (1) possible late notice; and (2) the possible time-barred nature of the Norman Suit:

The INA Policies provide coverage where the insured shall become legally obligated to pay as damages because of "bodily injury" or "personal injury" to which this insurance applies caused by an "occurrence" as those terms are defined by the policies. The INA Policies generally define "occurrence" as an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage "neither expected nor intended" from the standpoint of the insured. 

In the Norman Action, Plaintiff alleges that the Archdiocese "knew and/or reasonably should have known, and/or knowingly condoned, and/or covered up, the inappropriate and unlawful sexual activities of Father Fernando and Monsignor Brennan[.)" Plaintiff alleges that "[a)t about the time" such alleged misconduct was occurring, the Archdiocese and other Defendants "were notified that Father Fernando was engaging in sexually inappropriate conduct with minor children parishioners[.)" Plaintiff further alleges that Defendants "were put on notice of Father Fernando and Monsignor Brennan's improper and inappropriate actions with minors" and that, "[a]t all times material hereto, Defendants[')...actions were willful, wanton, malicious, reckless, and outrageous in their disregard for the rights and safety of Plaintiff, which amount to conduct equivalent to criminality." 

Based on the foregoing, Plaintiff does not allege an "occurrence" under the INA Policies. Rather, Plaintiff alleges that the Archdiocese acted willfully, wantonly, maliciously, recklessly, outrageously and criminally with respect to the alleged abuse perpetrated against Plaintiff, a minor, by Fr. Fernando and Msgr. Brennan. Thus, Plaintiff alleges to have sustained injury that was expected and/or intended from the standpoint of the Archdiocese. These allegations do not give rise to an "occurrence" under the INA Policies. Therefore, Chubb has no defense and indemnification obligations in connection with the Norman Action and denies coverage accordingly. 

Similarly, Plaintiff seeks punitive damages for Defendants' alleged misconduct. Amounts that are punitive in nature do not constitute damages under the INA Policies. Furthermore, in New York, punitive damages are uninsurable as a matter of law. Accordingly, Chubb denies coverage under the INA Policies in connection with Plaintiff's claim for punitive damages in the Norman Action. 

With regard to the Archdiocese notice obligations under the INA Policies, the INA Primary Policies are amended via endorsement to provide that, in the event of an occurrence, written notice shall be given by or on behalf of the insured as soon as practicable after such notice is received by the "Archdiocesan Service Corporation." Plaintiff's complaint alleges that the Archdiocese had knowledge of the alleged abuse by Fr. Fernando, but does not allege or discuss whether such information was ever received by the Archdiocesan Service Corporation. Similarly, Plaintiff alleges that the Archdiocese knew or should have known of the alleged abuse by Msgr. Brennan, but Plaintiff's complaint contains no allegation that such information was ever given to or received by the Archdiocesan Service Corporation. The INA Excess Policies require notice thereunder when the Archdiocese became aware that those policies might be implicated, but Chubb does not currently possess that information. As a result, Chubb is not in a position at this time to assess whether the Archdiocese complied with the notice provisions under the INA Policies. Therefore, Chubb reserves the right to deny coverage if and when Chubb obtains information that demonstrates that the Archdiocese breached the notice provisions of the INA Policies in this matter. 

Finally, it is not apparent from Plaintiff's complaint whether Plaintiff's action may be barred by the current statute of limitations. As noted above, the INA Policies only provide coverage in connection with the insured's legal obligation to pay damages in circumstances specifically defined by the policies. To the extent that an insured settles a claim for which it has no legal liability, no indemnification would be provided under the INA Policies. Chubb reserves its rights accordingly.

The INA policies at issue spanned the period 1971 to 1974, and careful readers will notice that no policy exclusions are cited in Chubb's declination letter as grounds for denying coverage.  Coverage geeks will know the reason Chubb's declination letter did not cite the expected or intended injury exclusion:  it didn't exist in commercial liability policies in the 1970s.  Pre-1986 ISO CGL policies instead incorporated the "expected or intended" aspect into the policies' definition of "occurrence":

“Occurrence” means an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.

According to Frederick J. Hunt, Jr.'s paper, Homeowners Insurance -- The First Decade, presented at the smoke-filled May 1962 meeting of the Casualty Actuarial Society,

The first true "Homeowners Policy," in the sense that the words are used today, was developed by the Insurance Company of North America. This policy was formally filed with the Insurance Department of Pennsylvania on August 11, 1950 and approved effective September 11, 1950. 

This policy, which was called "Homeowners Policy Multiple Form," was a true multiple line contract providing coverage previously available only under separate policies and described as Fire, Extended Coverage, Theft, Personal Liability, and Medical Payments. Since this was the first real answer to the problem of taking advantage of multiple line opportunities and at the same time coming up with a saleable product, the filing letter submitted with this policy represents a valuable document in any consideration of Homeowners rating.

If anyone has one of those INA policies lying around, please send it to me.  I'll pay the postage (and maybe a reasonable price).  I'm trying to nail down when multi-line homeowners policies began using the expected or intended harm exclusion.

Regardless, interested readers and coverage geeks like me can follow the progress of this DJ action at this NYSCEF docket.  I've set that e-docket to re-open in a Chrome tab one month for now.

09.17.19 Update ~~ Nothing new on the e-docket.  Rolling ahead another month. 

Declaratory Judgment Granted on Default Serves as Res Judicata of Previously Commenced Provider Recovery Claim

NO-FAULT – DECLARATORY JUDGMENT – DEFAULT JUDGMENT – RES JUDICATA
Daily Med. Equip. Distrib. Ctr., Inc. v. American Tr. Ins. Co.
(App. Term, 2nd Dept., decided 12/18/2015)

Collateral estoppel is issue preclusion.  Res judicata, Latin for "a matter [already] judged", is claim preclusion.

Plaintiff provider sued American Transit in Queens Civil for for medical supplies provided to its assignor.  After this action was commenced, American Transit commenced a declaratory judgment action in Bronx Supreme against the assignor and all billing providers.  All defendants defaulted in that Bronx Supreme action, and Supreme Court granted American Transit's motion for a default judgment against all defendants, finding that all defendant providers, including the plaintiff in this action, Daily Medical Equipment Distribution Center, were not entitled to recover no-fault benefits arising out of the subject motor vehicle accident.  American Transit then cross-moved for summary judgment in this action based on the declaratory judgment that had been granted by default in Bronx Supreme.

In AFFIRMING Queens Civil's order that denied plaintiff's motion and granted American Transit's cross motion for summary judgment, the Appellate Term agreed that res judicata applied to preclude plaintiff's claim for recovery, even though the declaratory judgment had been granted on default:

Contrary to plaintiff's contention, the instant action is barred under the doctrine of res judicata based upon the declaratory judgment (see Vital Meridian Acupuncture, P.C. v Republic W. Ins. Co., 46 Misc 3d 147[A], 2015 NY Slip Op 50222[U] [App Term, 2d, 11th & 13th Jud Dists 2015]; EBM Med. Health Care, P.C. v Republic W. Ins., 38 Misc 3d 1 [App Term, 2d, 11th & 13th Jud Dists 2012]). To hold otherwise could result in a judgment in this action which would destroy or impair rights established by the Supreme Court (see Schuykill Fuel Corp. v Nieberg Realty Corp., 250 NY 304, 306—307 [1929]; Ava Acupuncture, P.C. v NY Cent. Mut. Fire Ins. Co., 34 Misc 3d 149[A], 2012 NY Slip Op 50233[U] [App Term, 2d, 11th & 13th Jud Dists 2012]). Moreover, the declaratory judgment is a conclusive final determination notwithstanding that it may have been entered on default (see Lazides v P & G Enters., 58 AD3d 607 [2009]; Matter of Allstate Ins. Co. v Williams, 29 AD3d 688, 690 [2006]; Matter of Eagle Ins. Co. v Facey, 272 AD2d 399 [2000]; Ava Acupuncture, P.C. v NY Cent. Mut. Fire Ins. Co., 34 Misc 3d 149[A], 2012 NY Slip Op 50233[U]). 

Unnecessary Parties and the Privity of Contract Requirement in Declaratory Judgment Litigation

COMMERCIAL UMBRELLA – DECLARATORY JUDGMENT – NECESSARY PARTIES – PRIVITY OF CONTRACT
Brother Jimmy's BBQ, Inc. v. American Intl. Group, Inc.
(Sup. Ct., New York Co., decided 5/18/2010)

I've sometimes thought that if there were a "Roy's Insurance Company",  I'd use the slogan, "Why Think?  Thinking is Hard.  We Insure Stupidity", to niche market companies and businesses that employ those kids from grade school who made the most trips to the local emergency room.  You know, the type who created and acted in the 68th greatest show of the last 25 years, first on MTV, then two and a half times on the big screen, and reportedly coming soon to your local cineplex in 3D.  

Bacardi 151 Bottle with Flame Arrester

Back in March 2008, Brother Jimmy's BBQ would have been my company's kind of risk.  Its Upper West Side Manhattan location, to be precise.  Apparently, when Jerry Lee Lewis' rendition of the early rock classic "Great Balls of Fire" would play on the jukebox, the bartender at Brother Jimmy's would pour Bacardi 151 rum (75.5% ethanol) on the bar and light it on fire.  Unfortunately for 31-year-old financial industry worker Lauren Sclafani, who was seated at the bar with a client to watch some NCAA March Madness basketball, the stunt went horribly wrong when the flame blew back into the bottle (sans its metallic flame arrester?) and turned it into a flamethrower, dousing Sclafani's face, arms and hands with burning rum. After spending three weeks in a burn center for treatment of second- and third-degree burns, Sclafani sued both Brother Jimmy's and Bacardi under theories of negligence and of strict products liability, alleging, among other things, that Bacardi 151 was “defective, hazardous, unreasonably dangerous, and not [a] reasonably safe product.”

But Roy's Insurance Company did not insure Brother Jimmy's in March 2008, Illinois National Insurance Company did, at least under a commercial umbrella liability policy.  When Illinois National allegedly refused to defend the Brother Jimmy's defendants in the underlying Sclafani personal injury action, the Brother Jimmy's entities commenced this declaratory judgment action against Illinois National, American International Group, Inc. (AIG), AIG Domestic Claims, Inc. (AIGDC), various Bacardi entities, and Sclafani.

The Bacardi defendants moved pursuant to CPLR 3211(a)(7) to dismiss plaintiffs' amended complaint against them, contending that they were not necessary parties to this DJ action, were strangers to the plaintiffs' insurance contract with Illinois National, and would not be inequitably affected by a judgment rendered in this action.  Plaintiffs opposed the Bacardi defendants' motion, arguing that they might be "inequitably affected" by a judgment in this action and, as such, were necessary parties because the aggregate total of collectible insurance policies may influence the trial strategy of plaintiff in the underlying action and because there was the potential for joint and several liability in that action. 

In GRANTING the Bacardi defendants' motion to dismiss, New York County Supreme Court Justice Emily Jane Goodman reasoned:

Necessary parties are “[p]ersons who ought to be parties if complete relief is to be accorded between the persons who are parties to the action or who might be inequitably affected by a judgment in the action . . .” (CPLR 1001 [a]; see generally 1-7 Weinstein-Korn-Miller, CPLR Manual 6 7.02). Here, Bacardi is not a necessary party to this action. Plaintiffs do not allege that Bacardi is an insured under the subject policy. Moreover, Bacardi’s potential liability in the underlying action has no bearing on Brother Jimmy’s coverage or the interpretation of the insurance policy. Accordingly, Bacardi’s motion to dismiss must be granted (see Mayer's Cider Mill, lnc. v Preferred Mut, Ins. Co., 63 AD3d 1522, 1523-1524 [4th Dept 2009] [manufacturer and distributor of machine were not necessary parties in insured’s declaratory judgment action against insurer for defense and indemnification in underlying personal injury action]; Silverman v State Farm Fire & Cas. Co., 22 Misc 3d 591, 596 [Sup Ct, Nassau County 2008] [insurer’s motion to dismiss for failure to join former employee (the plaintiff in the underlying action) and her husband as necessary parties was denied; “(g)iven the essential nature of this case, these individuals, strangers to the insurance contracts at issue, are not necessary for any of the current parties to obtain complete relief”]).

AIG and AIGDC moved to dismiss plaintiffs' amended complaint on the ground that they were not parties to the commercial umbrella policy and, thus, plaintiffs lacked privity of contract with them.  They further contended that as the parent corporation of Illinois National, AIG could not be held liable for any breach of contract by its affiliates or subsidiaries, and that AIGDC merely acted as a claims administrator for Illinois National.  Plaintiffs opposed that motion on various procedural and substantive grounds.

In GRANTING AIG's and AIGDC's motion to dismiss, Justice Goodman ruled:

Here, the subject policy states that Illinois National was the insurer that issued the policy (Greensfelder Affirm., Exh. A, Declarations Page). The court must, therefore, consider whether AIG may be held liable for a breach of contract by its affiliates or subsidiaries.

Generally, a party seeking to pierce the corporate veil must show: (1) complete domination and control of the subsidiary by the parent with respect to the transaction at issue; and (2) that such domination was used to commit a fraud or wrong against the plaintiff that resulted in the plaintiff's injury (see Matter of Morris v New York State Dept. of Taxation & Fin. , 82 NY2d 135, 141 [1993]; Do Gooder Prods., Inc. v American Jewish Theatre, Inc., 66 AD3d 527, 528 [1st Dept 2009]; Eastern States Elec. Contrs. v Crow Constr. Co., 153 AD2d 522, 523 [1st Dept 1989]). Notably, “[elvidence of domination alone does not suffice without an additional showing that it led to inequity, fraud, or malfeasance’’ (TNS Holdings v MKI Sec. Corp., 92 NY2d 335, 339 [1998]).

In Town of Smithtown v National Union Fire Ins. Co. (191 AD2d 426 [2d Dept 1993]), the plaintiffs commenced a declaratory judgment action seeking a declaration that their insurers were obligated to defend them in four actions brought by various school districts.  The subject policy was issued by National Union Fire Insurance Company, a subsidiary of AIG. The Court held that “the plaintiffs have failed to allege or tender proof that the parent company, American International Group, Inc., exercised complete dominion and control over National Union Fire Insurance Company in this matter.  Thus, liability of the parent company for the contractual obligations of its subsidiary may not be imposed” (id. at 428).

In the instant case, Brother Jimmy’s does not have a viable cause of action against AIG.  Brother Jimmy’s fails to allege that AIG exercised complete dominion and control over Illinois National. Moreover, Brother Jimmy’s has failed to remedy this defect in opposition to the motion.  AIG is a holding company for Illinois National, and had no involvement in the investigation or denial of plaintiffs’ claims under the policy (Mofsenson Aff., 3, 5).

Nor is there a basis for AIGDC’s liability in this declaratory judgment action.  It is well established that “an agent for a disclosed principal ‘will not be personally bound unless there is clear and explicit evidence of the agent’s intention to substitute or superadd his personal liability for, or to, that of his principal”’ (Savoy Record Co. v Cardinal Export Corp., 15 NY2d 1, 4 [1964], quoting Mencher v Weiss, 306 NY 1,4 [1953]; see also News Am. Mkfg., Inc. v Lepage Bakeries, Inc., 16 AD3d 146, 147 [1st Dept 2005]; Crimmins v Handler & Co., 249 AD2d 89, 91-92 [1st Dept 1998]).  Here, as noted above, the policy states that Illinois National was the company issuing the policy.  AIGDC was not a party to the insurance contract, and there is no evidence that AIGDC intended to substitute its own liability for that of Illinois National.  In addition, the January 9, 2009 disclaimer letter from AIGDC to Brother Jimmy’s NYC Restaurant Holdings, LLC states that “[AIGDC] is the claims administrator on behalf of Illinois National Insurance Company (‘Illinois National')" (Cooper Affirm., Exh. 1 [emphasis supplied]). Thus, AIGDC was acting as agent for Illinois National for purposes of claims administration.

Brother Jimmy's pulled all Bacadi 151 bottles from its bars the day after the accident happened.

Commencement of a Declaratory Judgment Action Can Constitute Timely Written Notice of Disclaimer Under New York Insurance Law § 3420(d)(2)

CGL – TIMELY DISCLAIMER – INSURANCE LAW § 3420(D)(2)
Blue Ridge Ins. Co. v. Empire Contr. & Sales, Inc.
(2nd Dept., decided 5/18/2010)

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

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.  (Emphasis added.)

Must the "written notice" of a liability insurer's disclaimer or denial always take the form of a letter, or can the insurer's commencement of a declaratory judgment action satisfy the written notice requirement? 

In REVERSING the Suffolk County Supreme Court's order granting summary judgment against Blue Ridge Insurance Company, the Second Department reminded:

Here, the plaintiff's commencement of the subject declaratory judgment action on August 15, 2001, constituted timely notice of disclaimer as to Juneau (see Generali-U.S. Branch v Rothschild, 295 AD2d 236, 237-238; see also Continental Cas. Co. v Employers Ins. Co. of Wausau, 60 AD3d 128, 135). 

Insurer's Proof of Fraud on Default Judgment Application Found Insufficient

AUTO – NO-FAULT – FRAUDULENT MISREPRESENTATIONS – DECLARATORY JUDGMENT – PROOF REQUIRED FOR DEFAULT JUDGMENT IN FAVOR OF PLAINTIFF INSURER
New South Ins. Co. v. Dobbins
(2nd Dept., decided 3/2/2010)

It's not easy for plaintiff insurers to obtain default judgments in declaratory judgment actions.  In addition to establishing the defendants' defaults, the plaintiff insurers must establish, prima facie, that they are entitled to the relief sought.  That usually entails demonstrating, in evidentiary form, the merits of the coverage defenses which form the basis of the DJ action.  A verified complaint, by itself, won't suffice if the insurer's coverage defenses are based on facts outside the personal knowledge of the person who verified the complaint.

New South insured Adrienne Dorns, who allowed James Dobbins, Sr., to drive her vehicle.  On July 31, 2006, Dobbins Sr. was involved in a collision with a vehicle owned by Quadrozzi Concrete Corp. and operated by Emanuel Paradiso.  Dobbins Sr., James Dobbins, Jr., Felita Dobbins, and Jamie Dobbins all claimed to be within the Dorns vehicle at the time of the accident, and all made no-fault claims to New South.  In his MV-104 and subsequent interview, Paradiso indicated that there was only one occupant of the Dorns vehicle at the time of the accident.  New South conducted examinations under oath of the Dobbins claimants and then commenced this DJ action against Dorns and the four Dobbins, seeking a declaration that its policy with Dorns afforded no liability, no-fault or uninsured motorists coverage in relation to the July 31, 2006 accident by reason of: (1) Dorns's policy application misrepresentations; and (2) the Dobbins' fraudulent misrepresentations of the identities and numbers of the occupants of the Dorns vehicle.  All defendants failed to appear, and New South moved for a default judgment against all.

Nassau County Supreme Court Justice F. Dana Winslow denied New South's initial motion, based primarily on New South's failure to submit a complete copy of Dorns's insurance policy with New South in support of its motion.  Justice Winslow also found that New South could only cancel the policy prospectively for application fraud and noted:

[A]lthough the DOBBINS defendants' [EUO] testimony seems evasive and inconsistent , and is contradicted, in some respects, by the accident report, the record to date does not unequivocally demonstrate that any individual defendant was not in the vehicle at the time of the accident.  Plaintiff has not sufficiently established that it is entitled to wholesale relief from its obligations under the policy with respect to any individual defendant. To the extent that plaintiff assert that a particular claim is fraudulent, its remedy is to issue a disclaimer pursuant to the Insurance Law and applicable regulations, or to defend against such claim in any
proceeding in which coverage is sought.

New South moved to renew and reargue, this time submitting a complete copy of the insurance policy at issue. On that motion to renew and reargue, Justice Winslow granted New South a default judgment as to no-fault claimant Jaime Dobbins, but denied the motion as to no-fault claimants James Dobbins, Jr. and Felita Dobbins.  The court found that New South had not established via evidentiary material that James Jr. and Felita were not in the Dorns vehicle at the time of the accident:

Plaintiff relies on the Form MV-104 filed by the driver of the adverse vehicle, Manny E. Paradiso, which indicates only one occupant in the vehicle driven by DOBBINS. The Affidavit of Brinton Max Esty, plaintiff's investigator, sworn to on July 17, 2007, refers to Mr. Paradiso's statement, in the MV-104 and in a subsequent interview, that DOBBINS was the sole occupant.  These statements, however, are inadmissible hearsay, and cannot be relied upon to support plaintiff's prima facie showing of entitlement to the relief sought. Although, as plaintiff contends, defaulters may be deemed to have admitted the facts alleged in the complaint, that rule can only apply where the allegations were made or verified by someone with first-hand knowledge. See Woodson v. Mendon Leasing Corp., 100 NY2d 62; State v. Wiliams, 44 AD3d 1149.  In the case at bar, plaintiff's attorney verified the Complaint, and plaintiff's investigator lacked first-hand knowledge of who was in the DOBBINS vehicle at the time of the Incident.

Plaintiff also cites inconsistencies in the testimony of JAMES JR., FELITA and JAMIE in their No-Fault examinations under oath, with respect to the circumstances of the Incident and the description of the adverse vehicle. The Court finds these to be inconclusive and insufficient to demonstrate that the purported passengers were not in the DOBBINS vehicle at the time of the Incident.

In granting New South a default judgment as to Jaime Dobbins, however, the court found that Dobbins Sr.'s admissions in his MV-104 and telephone report to New South supported the inference that there were only two adult passengers -- James Jr. and Felita -- in the vehicle at the time of the accident.

New South appealed the second order to the Appellate Division, and the Second Department AFFIRMED, holding:

The Supreme Court properly, upon renewal and reargument, adhered to so much of its original determination as denied the plaintiff leave to enter judgment against the defendants James Dobbins, Jr., and Felita Dobbins, upon their default in answering the complaint.  In support of its motion, the plaintiff offered the complaint, which was verified by plaintiff's counsel, and an affidavit of the plaintiff's investigator, neither of whom possessed personal knowledge of the facts constituting the claim (see CPLR 3215; Woodson v Mendon Leasing Corp., 100 NY2d 62, 70-71; Hosten v Oladapo, 44 AD3d 1006; Finnegan v Sheahan, 269 AD2d 491). The statements from the driver of the other vehicle that the plaintiff's investigator relied upon in his affidavit constituted inadmissible hearsay (see CPLR 4518[a]; Hochhauser v Electric Ins. Co., 46 AD3d 174, 179-183; Metropolitan Cas. Ins. Co. v Shaid, 23 Misc 3d 1140[A]). Accordingly, entry of a default judgment against these defendants was properly denied on the papers before the Supreme Court. 

If New South had obtained an affidavit from the adverse driver that there was only one occupant of the Dorns vehicle at the time of the accident, would that have been enough?  Perhaps.   But relying on hearsay statements and affidavits from those lacking first-hand knowledge in moving for a default judgment in a insurer-commenced declaratory judgment action will probably never be enough.

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.

Coinsurance Recovery Action Against New York State Insurance Fund Must Be Brought in New York Court of Claims

CGL – COINSURANCE CONTRIBUTION – SUIT AGAINST STATE INSURANCE FUND
Twin City Fire Ins. Co. v. State Ins. Fund
(1st Dept., decided 9/24/2009)

The New York State Court of Claims is the exclusive forum for civil litigation seeking damages against the State of New York or certain other State-related entities such as the New York State Thruway Authority, the City University of New York and the New York State Power Authority (claims for the appropriation of real property only).  Plaintiff's denomination of this action as being one for declaratory relief notwithstanding, the Court of Claims is also the forum in which a commercial general liability insurer must sue the New York State Insurance Fund for recovery of coinsurance contribution of defense and indemnification costs for a mutual insured, holds the First Department in this case.

Motion to Withdraw as Retained Defense Counsel Due to Liability Insurer's Subsequent Disclaimer Is Denied

CGL – DUTY TO DEFEND – WITHDRAWING AS RETAINED DEFENSE COUNSEL – DECLARATORY JUDGMENT ACTION
Iacobellis v. A-1 Tool Rental, Inc.
(2nd Dept., decided 9/8/2009)

It has long been the rule in New York that once a liability insurer retains counsel to defend its insured, only a declaratory judgment relieving the insurer of that defense or the insured's consent will enable retained counsel to withdraw.

James River Insurance Company retained Wilson Elser Moskowitz Edelman & Dicker, LLP to defend its insureds in this personal injury action.  After James River subsequently issued a letter disclaiming coverage and denying that it had a duty to defend its insureds, Wilson Elser moved for leave to withdraw as attorneys of record for them. Kings Supreme granted Wilson Elser's motion. 

In REVERSING the order allowing Wilson Elser to withdraw as defense counsel, the Second Department reiterated New York's long-standing rule:

The motion of Wilson Elser was a "poor vehicle" to test the propriety of the disclaimer of coverage and withdrawal of defense by James River (Brothers v Burt, 27 NY2d 905, 906; see Seye v Sibbio, 33 AD3d 608; Garcia v Zito, 242 AD2d 258; Pryer v DeMatteis Orgs., 259 AD2d 476). An action seeking a declaratory judgment respecting the rights of the insured entities vis-à-vis their insurance carrier pursuant to the subject insurance policy is the appropriate means of resolving the issue of coverage, as it will afford the insured entities an opportunity to adequately litigate James River's disclaimer (see Seye v Sibbio, 33 AD3d 608; Garcia v Zito, 242 AD2d 258; Pryer v DeMatteis Orgs., 259 AD2d 476; Laura Accessories v A.P.A. Warehouses, 140 AD2d 182; Monaghan v Meade, 91 AD2d 1014).

So what is a liability insurer to do if it receives a summons and complaint that appears to trigger a defense obligation and an answer is due in days?  If plaintiff's counsel won't grant an extension?  If there are unanswered coverage questions that warrant inquiry or investigation?

If the insured does not have its own counsel to protect against a default, the liability insurer risks not being able to contest the insured's alleged liability and plaintiff's damages if it does not retain counsel to defend its insured and a default judgment is taken while the insurer is investigating coverage.

In New York, if, however, the insurer retains defense counsel who puts in an appearance and becomes the "attorney of record" for the insured, only a declaratory judgment in a separate DJ action relieving the insurer of that defense or the insured's consent will enable retained counsel subsequently to withdraw.  The insurer may not withdraw its defense by simply instructing retained counsel to make a motion to withdraw.

Personal Umbrella Insurer Found to Have Standing to Commence Declaratory Judgment Action to Challenge Disclaimer of Homeowners Insurer

HOMEOWNERS – PERSONAL UMBRELLA – DECLARATORY JUDGMENT ACTION – STANDING
RLI Ins. Co. v. Steely
(2nd Dept., decided 8/4/2009)

RLI Insurance Company insured William Steely under a personal umbrella policy.  Steely had a homeowners policy with New York Central Mutual Fire Insurance Company.  Steely sought liability insurance coverage for a boating accident under both policies.  Based on its conclusion that Steely owned the boat in question on the accident date, NYCM denied coverage under Steely's homeowners based on a policy exclusion.  RLI then commenced this declaratory judgment action to challenge NYCM's denial, contending that Steely did not own the boat on the date of the accident, and that any coverage provided by RLI's umbrella policy was excess to the coverage provided by NYCM's homeowners policy.  NYCM moved to dismiss the action pursuant to CPLR Rule 3211(a)(3), arguing that RLI lacked legal standing to challenge NYCM's coverage denial.  Westchester Supreme granted NYCM's motion, and RLI appealed. 

In REVERSING the order dismissing RLI's complaint, the Second Department held:

We find that the plaintiff has standing to challenge NY Mutual's disclaimer of coverage to its insured. "A plaintiff need not be privy to an insurance contract to commence a declaratory judgment action to determine the rights and obligations of the respective parties, so long as the plaintiff stands to benefit from the policy" (Mortillaro v Public Serv. Mut. Ins. Co., 285 AD2d 586, 587). Here, the plaintiff clearly stands to benefit from NY Mutual's policy.

Court Declines to Declare Six Informal Opinion Letters of New York State Insurance Department's Office of General Counsel Regarding Services Provided by Independent Contractors to be Irrational

NO-FAULT – FRAUDULENT INCORPORATION – BILLED SERVICES PROVIDED BY INDEPENDENT CONTRACTORS – JUSTICIABLE CONTROVERSY – DECLARATORY RELIEF
State Farm Mutual Automobile Ins. Co. v. Manuel Farescal, M.D., et al.
(Sup. Ct., Queens Co., decided 5/13/2009)

State Farm brought this action against to recover damages for common-law fraud and unjust enrichment, and for a judgment declaring that State Farm had no obligation to pay no-fault claims submitted by the professional corporation defendants as assignees of policyholders. State Farm alleged that defendant professional services corporations were fraudulently incorporated in the name of defendant Manuel Farescal, M.D., a physician, while, in fact, the professional corporations were owned, operated, and controlled by defendants Adnan Munawar and P. Clifford LoBrutto, unlicensed persons, in violation of applicable statutes and regulations. State Farm also alleged that the defendant professional corporations were not entitled to receive such payments because they were not owned and controlled solely by a licensed medical physician and the services provided were not rendered by employees but, rather, by independent contractors in violation of state law.

Defendants moved pursuant to CPLR 3212(e) for partial summary judgment declaring that six “informal opinions” of the office of General Counsel of the State of New York Insurance Department are irrational and not entitled to deference, and to dismiss State Farm's causes of action regarding services provided by independent contractors.

In denying defendants' motion, Queens County Supreme Court Justice Allan Weiss ruled that defendants had failed to assert any counterclaim for such affirmative declaratory relief, and any ruling, in the context of this case, that the opinion letters were irrational and not entitled to deference would constitute an impermissible advisory opinion.

A state court lacks subject matter jurisdiction in cases when no justiciable controversy is presented (see Matter of New York State Inspection, Security & Law Enforcement Employees, Dist. Council 82, AFSCME, AFL-CIO v Cuomo, 64 NY2d 233, 241, n 3 [1984]; Morrison v Budget Rent A Car Systems, Inc., 230 AD2d 253, 258-259 [1997]). It is well settled law that “[t]he courts of New York do not issue advisory opinions for the fundamental reason that in this State ‘[t]he giving of such opinions is not the exercise of the judicial function’ (Matter of State Indus. Commn., 224 NY 13, 16 [1918]) . . .,” (Cuomo v Long Island Light Co., 71 NY2d 349, 354 [1988]).

Any ruling by the court regarding the opinion letters would not be dispositive of a cause of action asserted by plaintiff (citations omitted). * * * Nothing about the opinion letters themselves constitutes a final determination by the State regarding the propriety of plaintiff’s actions, and the Farescal defendants are not aggrieved by their issuance. Rather, the question of whether plaintiff properly may withhold payments of no-fault benefits to defendants All Family, Universal and Painpro in instances where professional health services were rendered by independent contractors, as opposed to their employees, is one of law, which must be decided based upon interpretation of statute and regulation, and case law.

With respect to defendants' motion to dismiss State Farm's causes of action seeking a declaration that defendants were not entitled to recover for services provided by independent contraction, Justice Weiss held:

The Farescal defendants assert an insurer may not deny payment for no-fault benefits on the ground that the professional health services billed to plaintiff were performed by independent contractors. The Farescal defendants, therefore, argue plaintiff cannot obtain a judgment declaring that defendants All Family, Universal and Painpro are not entitled to collect no-fault benefits for charges submitted to it when such professional health services were rendered by independent contractors. The court notes that the Farescal defendants make no factual argument that the professional health services billed to plaintiff were performed by their employees, or that they exercised a particular level of control over the independent contractors. Their motion raises purely legal arguments regarding the propriety of plaintiff’s withholding of payments to the professional corporations based upon the rendering of services by independent contractors.

CPLR 3001, in relevant part, provides: “The supreme court may render a declaratory judgment having the effect of a final judgment as to the rights and other legal relations of the parties to a justiciable controversy whether or not further relief is or could be claimed.” “An action is justiciable when the controversy presented touches the legal relations of the parties having adverse interests from which harm is presently flowing or could flow in the future in the absence of a court determination of the parties’ rights” (Initiative For Competitive Energy v Long Is. Power Auth.,178 Misc 2d 979, 989 [1998]). “The controversy must be capable of disposition and be presented in an adversarial context with a set of concrete facts” (Goodwill Adv. Co. v State Liq. Auth.,14 AD2d 658 [1961]). The complaint herein demonstrates the existence of a controversy between the parties regarding plaintiff’s withholding of payments to defendant professional corporations to the extent the services were rendered by independent contractors, and the practical need for its resolution. The No-Fault Law, which supplants common-law tort actions for most victims of automobile accidents with a system of no-fault Insurance, has as its primary aims to ensure prompt compensation for losses incurred by accident victims without regard to fault or negligence, to reduce the burden on the courts and to provide substantial premium savings to New York motorists (see Medical Society of State v Serio, 100 NY2d 854, 860 [2003]). The Superintendent has promulgated regulations implementing the No-Fault Law, currently contained in 11 NYCRR Part 65. Section 65-3.11(a) of that part (formerly section 65.15[j][1]), in relevant part, provides, “An insurer shall pay benefits for any element of loss, . . ., directly to the applicant or . . . upon assignment by the applicant . . ., shall pay benefits directly to providers of health care services . . . .”

11 NYCRR 65-3.11(a) and its precursor, 11 NYCRR 65-3.15(j)(1), have been interpreted to mean that a medical provider cannot recover assigned no-fault benefits if services were provided by an independent contractor rather than by it or its employees (see Health & Endurance Medical, P.C. v Liberty Mut. Ins. Co., 19 Misc 3d 137[A], 2008 NY Slip Op 50864(U) [NY Sup App Term, 2d and 11th Jud Dists (2008)]). In Health & Endurance, a provider sought to recover assigned first-party no-fault benefits for services which were not rendered by it or its employees, but rather by a treating provider who was an independent contractor. The Appellate Term held that the plaintiff was not a “provider” of the medical services rendered within the meaning of Insurance Department Regulations (11 NYCRR) § 65-3.11[a]), and, therefore, was not entitled to recover “direct payment” of assigned no-fault benefits from the defendant insurer. Such holding is consistent with the holdings in A.M. Medical Services, P.C. v Progressive Cas. Ins. Co., (22 Misc 3d 70, 2008 NY Slip Op 28528, [App Term, 2d, 11th and 13th Jud Dists (2008)]); Health & Endurance Med. P.C. v State Farm Mut. Auto. Ins. Co., (12 Misc 3d 134[A], 2006 NY Slip Op 51191[U] [App Term, 2d and 11th Jud Dists 2006]);Craig Antell, D.O., P.C. v New York Cent. Mut. Fire Ins. Co., (11 Misc 3d 137[A], 2006 NY Slip Op 50521[U] [App Term, 1st Dept 2006]); Rockaway Blvd. Medical P.C. v Progressive Ins., (9 Misc 3d 52, 2005 NY Slip Op 25278 [App Term, 2d Dept 2005]); A.B. Med. Servs. PLLC v Liberty Mut. Ins. Co., (9 Misc 3d 36 [App Term, 2d and 11th Jud Dists 2005]); A.B. Med. Servs. PLLC v New York Cent. Mut. Fire Ins. Co., (8 Misc 3d 132[A], 2005 NY Slip Op 51111[U] [App Term, 2d and 11th Jud Dists 2005]). These opinions of the Appellate Term are persuasive authority, and the court is convinced of their reasoning. Under such circumstances, the third and fourth causes of action asserted by plaintiff state viable claims for declaratory relief.