Copy Compiled from Underwriting Records Ruled Not Best Evidence of the Policy. Judgment for Insurer Reversed and New Trial Ordered.

COMMERCIAL GENERAL LIABILITY – DESIGNATED ONGOING OPERATIONS EXCLUSION ENDORSEMENT – DUTY TO DEFEND & INDEMNIFY – BEST EVIDENCE RULE 
Pennsylvania Lumbermens Mut. Ins. Co. v. B&F Land Dev. Corp.
(2nd Dept., 1/16/2019)

Fatal accident involving a worker on defendant's property formed the basis of the estate's underlying action for personal injuries and wrongful death.

At the time of the accident, defendant B&F had a CGL policy in force with plaintiff, PLM.  PLM received notice of the death on April 15, 2009, issued a reservation of rights on May 4, 2009, and denied coverage under the policy on June 22, 2009.  PLM's coverage declination was based on: (1) the location of the loss not being a location listed on the policy; (2) the policy's exclusion for bodily injury arising out of B&F's ongoing operations; and (3) late notice.

Two months later, PLM commenced this action against B&F and the executor of the decedent's estate for a judgment declaring that PLM was not obligated to defend or indemnify B&F in the underlying action. B&F defaulted, but the executor answered.

In May 2016, PLM proceeded to a non-jury trial against the executor.  PLM called only one witness, its vice president of claims. Over the executor's objection, and after a voir dire examination, Supreme Court admitted into evidence a copy of the policy which was proffered by PLM. The copy of the policy admitted into evidence, which had been compiled by PLM's claims VP based upon information contained in the underwriting file, did not specify a location for which the policy applied. Moreover, the copy of the policy admitted into evidence provided a different description of an endorsement titled "Exclusion- Designated Ongoing Operations" than a copy of the policy that PLM had produced during discovery. When questioned about the discrepancy, PLM's claims VP did not know which version of the endorsement applied to the policy issued to B&F.  The executor did not call any witnesses and, after the parties submitted posttrial memoranda, Supreme Court issued an order granting PLM's application for a judgment declaring that it was not obligated to defend or indemnify B&F in the underlying action. The executor appealed.

In REVERSING Supreme Court's judgment in favor of PLM and ordering a new trial, the Second Department ruled that Supreme Court's admission of the policy copy over objection at at trial violated New York's "best evidence rule":

The best evidence rule requires the production of an original writing where its contents are in dispute and are sought to be proven (see Schozer v William Penn Life Ins. Co. of N.Y., 84 NY2d 639, 643; Stathis v Estate of Karas, 130 AD3d 1008, 1009; Kliamovich v Kliamovich, 85 AD3d 867, 869). Under an exception to the rule, "secondary evidence of the contents of an unproduced original may be admitted upon threshold factual findings by the trial court that the proponent of the substitute has sufficiently explained the unavailability of the primary evidence and has not procured its loss or destruction in bad faith" (Schozer v William Penn Life Ins. Co. of N.Y., 84 NY2d at 643 [citations omitted]). The proponent of the secondary evidence "has the heavy burden of establishing, preliminarily to the court's satisfaction, that it is a reliable and accurate portrayal of the original" (id. at 645).

Here, PLM failed to offer any explanation as to the unavailability of the primary evidence, i.e., the original policy. PLM also did not establish that the copy of the policy proffered at trial was a "reliable and accurate portrayal of the original" (id.). In that regard, during voir dire examination, Santoro acknowledged that he had compiled the copy of the policy proffered by PLM at trial based upon information contained in the underwriting file, and he could not explain the language discrepancy between that copy of the policy and the copy of the policy produced by PLM during discovery. Consequently, the Supreme Court should not have admitted into evidence the copy of the policy proffered by PLM at trial. The error was not harmless since, without the original policy or an accurate replication, PLM could not establish what locations were covered by the policy, what exclusions to coverage, if any, existed under the terms of the policy, or the insured's responsibilities with respect to providing notice of the claim to PLM (see Stathis v Estate of Karas, 130 AD3d at 1011).

At the retrial, if the "original" policy cannot be found and offered, someone needs to do a better job (1) explaining why the original is not available and (2) establishing that the copy is a reliable and accurate portrayal of the original.    

First Department Upholds Primary Insurer's Coverage Denial Based on Designated Ongoing Operations/Construction Exclusion

CGL – COINSURANCE – EXCESS VS. PRIMARY – CONSTRUCTION EXCLUSION – INSURANCE LAW § 3420(D)
American Guar. & Liab. Ins. Co. v. State Natl. Ins. Co., Inc.
(1st Dept., decided 11/12/2009)

State National Insurance Company insured S&W Realty, LLC, under a $1 million per occurrence CGL policy, which contained this Designated Ongoing Operations/Construction Exclusion:

Description of Designated Ongoing Operation(s):

Construction Exclusion:  Construction of buildings or structures including, but not limited to, erection ... painting, leaning or pointing, and all work or activity in connection with the foregoing.  This exclusion does not apply to incidental repair and maintenance performed by the named insured on buildings owned and operated by the named insured.

This insurance does not apply to “bodily injury” or “property damage” arising out of the ongoing operations described in the Schedule of this endorsement, regardless of whether such operations are conducted by you or on your behalf or wliether the operations are conducted for yourself or for others.

S&W was also insured under a $50 million purchasing group commercial umbrella liability policy issued by American Guarantee & Liability Insurance Company. 

On March 30, 2004, a contractor's employee fell from a scaffold and was injured while doing pointing work on an apartment building owned by S&W.  Within days of the accident, both State and American were notified of the employee's fall and injuries.  Weeks later, the employee commenced a personal injury action against S&W, alleging causes of action sounding in common law negligence and violations of New York Law Law §§ 200, 240(1) and 241(6).

Presumably based on the possibility that the employee's injuries had arisen from incidental repair and maintenance of the insured's building, defendant Tower Risk Management Company, acting as State's general managing agent, issued a reservation of rights letter and retained defense counsel to defend S&W in early May.  On May 21, 2004, Tower received a letter from S&W's managing agent which indicated that S&W and the injured party's employer did not have a written contract for the job “as it was a minor building repair, a leak into two apartments[.]"

In a November 2004 bill of particulars report letter, S&W's retained defense counsel advised Tower that it appeared "likely" that the injured employee would be able to sustain a Labor Law § 240(1) cause of action.  By letter dated November 6, 2006, defense counsel advised Tower that the court had granted partial summary judgment to the underlying plaintiff on his Labor Law § 240(1) claim, and that it had been determined "that the job was much larger and [they] did 'pointing work' on the entire front facade of the building."

By letter dated January 30, 2007, Tower disclaimed coverage on State’s behalf to S&W based on the policy's construction exclusion.  American subsequently sent a letter to Tower on behalf of S&W, requesting that State withdraw its coverage disclaimer based on what American asserted was the inapplicability of the construction exclusion and untimeliness of State's coverage denial in violation of Insurance Law § 3420(d).

In May 2007, the matter went to mediation and settled, without State's participation,  for $2.1 million.  American funded the entire settlement and commenced this action to recover State's $1 million in primary coverage, plus interest.

On the parties' motion and cross motion, New York County Supreme Court Justice Michael Stallman granted summary judgment to State and Tower, dismissing the complaint.  Justice Stallman rejected American's arguments that the construction exclusion was ambiguous, and that State had failed to issue a disclaimer in a timely fashion, in violation of Insurance Law § 3420(d).  American appealed.

In AFFIRMING the award of summary judgment to State and Tower, the First Department  held:

Plaintiff, the excess insurance carrier, sought a declaration that the coverage disclaimer by defendant State National, the primary insurer, for reimbursement of funds advanced by the excess insurer on the insured's behalf to settle the underlying personal injury action, was untimely as a matter of law, and that the primary insurer's policy exclusion was inapplicable and ambiguous. The court properly found that the primary insurer's "construction" exclusion was unambiguous and applied to the activities being performed by the injured party at the time of his accident. The exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case (see Continental Cas. Co. v Rapid-Am. Corp., 80 NY2d 640, 652 [1993]). The court also properly found that the protections of Insurance Law § 3420[d] were inapplicable to one insurer's claim for reimbursement from another insurer (see Bovis Lend Lease LMB, Inc. v Royal Surplus Lines Ins. Co., 27 AD3d 84, 91-92 [2005]).

It apparently did not matter to either the motion court or the First Department that, unlike in Bovis Lend Lease LMB, the mutual insured was a nominal party in this coinsurance recovery action, settlement monies had already been paid on behalf of the mutual insured, and American was proceeding against State, in part, as the mutual insured's subrogee.  Thus, the Insurance Law § 3420(d) argument of untimeliness American was making against State was being made as much on behalf of S&W as for itself.

Contrast this decision with the First Department's ruling in JT Magen v. Hartford Fire Ins. Co., 64 AD3d 266 (1st Dept., 5/14/2009), in which the court clarified its holding in Bovis Lend Lease LMB and held that a tender letter which one insurer sends to another insurer — asking that their mutual insureds be provided with a defense and indemnity as additional insureds under the latter insurer's policy — fulfills that policy's notice-of-claim requirements so as to trigger that insurer's obligation to issue a timely disclaimer pursuant to Insurance Law § 3420(d).  The First Department made no mention of its JT Magen decision in this case presumably because both State and American became aware of the underlying accident and injuries at the same time, there was no tender from American to State (American being the excess/umbrella rather than a co-primary insurer), and State assumed S&W's defense in the underlying personal injury action.