"Personal Injury" (Defamation) Coverage under a PULP -- Depp v. Heard Defense Costs

From my LinkedIn post today (Sat., June 4, 2022):

I rarely learn anything useful from the New York Post, but this article reports that Amber Heard "had to switch legal representation and is relying on her homeowner’s #insurance policy to cover the cost of her attorneys in the case. The bill for Heard’s attorney has mostly been footed by The Travelers Companies, Inc under terms of the actress’s insurance policy, sources said." "Mostly" likely because Travelers would not be responsible for paying attorneys' fees and costs associated with the prosecution of Heard's $100 million counterclaim against Depp.

Most homeowners policies don't provide coverage for "personal injury", defined to include "injury arising out of one or more of the following offenses, but only if the offense was committed during the policy period: *** 4. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services[.]" Personal umbrella policies typically provide "personal injury" coverage. I'm guessing that the Travelers policy that provided defense costs is a PULP (personal umbrella liability policy) sitting above Heard's homeowners policy.

The article is probably correct, however, in pointing out that Heard's policy with Travelers will likely NOT provide indemnification coverage for Johnny Depp's $10 million compensatory damages verdict against Heard. PULPs typically exclude personal injury coverage for:

"Personal injury":

a.  Caused by or at the direction of an "insured" with the knowledge that the act would violate the rights of another and would inflict "personal injury";

b.  Arising out of oral or written publication of material, if done by or at the direction of the "insured" with knowledge of its falsity;

c.  Arising out of oral or written publication of material whose first publication took place before the beginning of the policy period;

d.   Arising out of a criminal act committed by or at the direction of an "insureds"; or

e.  Sustained by any person as a result of an offense directly or indirectly related to the employment of this person by the "insured"[.]

The jury's positive finding on each of the prima facie elements of defamation on the three statements in Heard's op ed piece likely triggers at least one of these exclusionary provisions--"b."--and possibly two of them--"a." and "b."

I'm no bankruptcy lawyer but I do know that judgments based on intentional torts, like libel with malice aforethought, are NOT dischargeable in bankruptcy.

#personalinjury #defamation #insurancecoverageinthenews

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.    

Passing References Do Not a Covered Claim Make

"WRONGFUL ACT" – ANTITRUST LAWSUIT – DUTY TO DEFEND 

Carfax, Inc. v. Illinois National Ins. Co.
(1st Dept., 3/1/2018)

Carfax's policy with Illinois National covered loss "resulting from a Claim alleging a Wrongful Act."  The policy defined "Wrongful Act" as "any act, error, omission, ... misstatement or misleading statement by an Insured ... that results solely in ... defamation, libel, slander, product disparagement or trade libel or other tort related to disparagement or harm to character or reputation; including, without limitation, unfair competition" (emphasis added). The policy contained an exclusion from coverage for claims alleging antitrust violations.

Carfax sought coverage for an underlying antitrust lawsuit, contending that Illinois National owed it a defense because the suit alleged disparagement: 

"By contractually committing these two websites to include hyperlinks to Carfax VHRs (vehicle history reports) and to exclude VHRs of any other provider, Carfax has stigmatized any listing without such a link in the eyes of consumers who infer that the absence means that the car has a blemished history."  "Carfax also utilizes its inflated revenues to disparage and falsely malign dealers in order to mislead consumers into believing its VHRs are necessary and accurate."

The Appellate Division, First Department, rejected Carfax's claim that the underlying complaint, by mentioning disparagement, alleged a "wrongful act", triggering coverage:

These passing references to disparagement do not allege a "Wrongful Act." They were made "only in the context of the anti-trust claims, i.e. , as legal jargon pertinent to anti-trust and not as a means of even arguably alleging a separate claim for libel, slander or product disparagement" (see National Union Fire Ins. Co. of Pittsburgh, Pa. v Alticor, Inc. , 2005 WL 2206461, *3, 2005 US Dist LEXIS 29833, *9 [WD Mich 2005], affd 2007 WL 273339, 2007 US App LEXIS 22585 [6th Cir 2007]). In any event, coverage under the policy is barred by the antitrust exclusion, and the exceptions thereto are inapplicable. 

Passing references do not a covered claim or cause of action make. 

Can You Find The The Mistake?

HOMEOWNERS – INTENTIONAL ACT – CRIMINAL ASSAULT – DUTY TO DEFEND – DUTY TO INDEMNIFY
State Farm Fire & Cas. Co. v. Gloria
(Sup. Ct., Suffolk Co., decided 3/14/2016)

When I was blogging regularly I rarely blogged about decisions from trial-level courts.  Trial-level decisions are rarely significant enough to merit your time and my effort on these pages.  But I came across this decision today and decided to throw it on here as a sort of can-you-find-the-mistake exercise.

We all know that for liability insurers the duty to defend is broader than the duty to indemnify and is determined, in the first instance, by the allegations of the complaint.  You may also know that once that the liability insurer can establish that it will have no duty to indemnify, its duty to defend terminates.  And that collateral estoppel, when applicable, precludes the re-litigation in a subsequent action of an issue raised and decided against an insured in a prior action.

I think the court made a mistake in deciding State Farm's motion for summary judgment.  Can you find it?  Comment below if you can.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Passenger Who Grabbed Steering Wheel from Driver Not Entitled to Defense and Indemnification Coverage as an "Insured Person"

AUTO – PERMISSIVE USE OR OPERATION – NEGLIGENT ENTRUSTMENT – DUTY TO DEFEND
Progressive Halcyon Ins. Co. v. Giacometti
(4th Dept., decided 4/30/2010)

If a front seat passenger grabs the steering wheel from the driver and causes an accident, is that passenger an "insured person" entitled to defense and indemnification coverage from the vehicle's liability insurer?  In the opinion of four out of five justices of the Appellate Division, Fourth Department, no, she is not. 

While driving her leased vehicle down an interstate highway in North Carolina, for reasons that were in dispute, Shannon Doyle suddenly steered her vehicle to the left.  Her front seat passenger, Amy Giacometti, grabbed the steering wheel and pulled it to the right, causing the vehicle to go off the road, become airborne, and crash among trees, injuring Doyle, Giacometti and backseat passenger, Marle Fiocco.

Giacometti sued Doyle, Fiocco sued Doyle, Giacometti and the vehicle's leasing companies (the GMAC defendants), and Doyle sued Giacometti.  Progressive insured Doyle and her vehicle, but declined to defend or indemnify Giacometti.  Progressive then brought this declaratory judgment action against all parties to determine its coverage responsibilities vis-à-vis Giacometti and the GMAC defendants.  Meanwhile, the GMAC defendants obtained summary judgment in the Fiocco action, dismissing her complaint against them, which had alleged that the GMAC defendants were liable under New York Vehicle & Traffic Law § 388 and for having negligently entrusted the leased vehicle to Doyle.

Progressive's policy for Doyle and her vehicle defined an "insured person" in part as  

any person with respect to an accident arising out of that person's use of a covered vehicle with the express or implied permission of you or a relative. 

Progressive argued that Giacometti did not qualify as an "insured person" entitled to coverage under Doyle's auto policy because Giacometti had neither the express or implied permission of Doyle to use the vehicle when she grabbed its steering wheel and pulled it to the right. State Farm, Giacometti's auto insurer, argued that any use of a vehicle is with permission of the owner pursuant to the presumption in Vehicle and Traffic Law § 388(1) and that, at a minimum, Giacometti's claim that she grabbed the steering wheel to prevent an accident created a question of fact, precluding summary judgment in Progressive's favor.  

On the issue of coverage for Giacometti, the four justice majority agreed with Progressive, holding:

We agree with Progressive that it met its burden of establishing that Giacometti had neither the express nor the implied permission of Doyle to use the vehicle. The evidence in the record, including the deposition testimony of Giacometti, establishes that she did not have express permission to take control of the steering wheel, and we further conclude on the record before us that Doyle did not impliedly consent to Giacometti's use of the vehicle in that manner (see Allstate Ins. Co. v Gill, 192 AD2d 1123; Electric Ins. Co. v Boutelle, 122 AD2d 332). The deposition testimony of Giacometti "that [s]he grabbed the wheel to prevent an accident does not create a question of fact on the issue of permissive use" (Allstate Ins. Co., 192 AD2d at 1123-1124). It is well settled that, "[w]here the provisions of [an insurance] policy are clear and unambiguous, they must be given their plain and ordinary meaning, and courts should refrain from rewriting the agreement' " (United States Fid. & Guar. Co. v Annunziata, 67 NY2d 229, 232; see Fulmont Mut. Ins. Co. v New York Cent. Mut. Fire Ins. Co., 4 AD3d 724, 725). 

We reject the further contention of Giacometti and State Farm Insurance Company, a defendant in appeal No. 1 (State Farm), that any use of a vehicle is with permission of the owner pursuant to the presumption in Vehicle and Traffic Law § 388 (1). Initially, we agree with Giacometti and State Farm that Doyle, as the lessee of the vehicle for a period of more than 30 days, was an owner within the meaning of that statute (see §§ 128, 388 [3]). Furthermore, it is well settled that "proof of ownership of a motor vehicle creates a rebuttable presumption that the driver was using the vehicle with the owner's permission, express or implied ... Once the plaintiff meets its initial burden of establishing ownership, a logical inference of lawful operation with the owner's consent may be drawn from the possession of the operator . . . This presumption may be rebutted, however, by substantial evidence sufficient to show that a vehicle was not operated with the owner's consent" (Murdza v Zimmerman, 99 NY2d 375, 380 [internal quotation marks omitted]). Here, that presumption is inapplicable because it was overcome by substantial evidence that the use was without the permission of Doyle, and we therefore conclude that the court erred in denying that part of Progressive's motion. 

The GMAC defendants argued that Progressive owed defense and indemnification coverage to them in regard to the Fiocco's complaint's assertion of a negligent entrustment cause of action, and the Fourth Department agreed:

"It is well established that a liability insurer has a duty to defend its insured in a pending lawsuit if the pleadings allege a covered occurrence, even though facts outside the four corners of those pleadings indicate that the claim may be meritless or not covered" (Fitzpatrick v American Honda Motor Co., 78 NY2d 61, 63; see Petr-All Petroleum Corp. v Fireman's Ins. Co. of Newark, 188 AD2d 139, 142). Contrary to Progressive's contention, the fact "[t]hat the claimed negligence here is based upon the entrustment of the motor vehicle rather than, for example, its condition, in no way alters the unarguable fact that the claim arises out of the ownership and use of the vehicle" (Progressive Cas. Ins. Co. v Jackson, 151 Misc 2d 479, 483, affd 181 AD2d 1035). Thus, the GMAC defendants are entitled to indemnification from Progressive for their defense of Fiocco's negligent entrustment cause of action against them. 

Although Progressive apparently had afforded defense counsel to the GMAC defendants in the Fiocca action, because it had commenced this declaratory judgment and lost, at least with respect to the GMAC defendants, the majority remitted the matter back to Supreme Court "to determine the amount of reasonable attorneys' fees to which the GMAC defendants are entitled in the declaratory judgment action following a hearing, if necessary[.]"

Justice Eugene Fahey dissented on the issue of coverage for Giacometti under the Progressive policy, pointing out that "use" and "operation" of a motor vehicle are not synonymous or interchangeable, and opining that, in his view, the injuries to Fiocco and Doyle arose out of Giacometti's "use" of the Doyle vehicle as a permissive passenger of it:

In any event, in my view the issue of Giacometti's control of the steering wheel is not dispositive of the coverage issue in this case. Most importantly, the language determining whether Giacometti is an insured under the policy is prefaced by the broad "arising out of" phrase, which is absent from the policies at issue in the Allstate Ins. Co. and Electric Ins. Co. cases on which the majority relies. Moreover, on these facts, the accident, which occurred after Giacometti grabbed the steering wheel from her seat on the passenger's side of the vehicle, was arguably connected with her traveling in the vehicle, which was undeniably a use of that vehicle and a permissive one at that.

The Third Department's Bad Penny -- Not Waiver. Not Insurance Law § 3420(D)(2) Preclusion

CGL – ADDITIONAL INSURED – DUTY TO DEFEND – WAIVER – PRIORITY OF COVERAGE
Village of Brewster v. Virginia Sur. Co., Inc.
(3rd Dept., decided 2/18/2010)

Here's the promised follow-up to my February 19, 2010 post on this case.  On February 23rd, commenter Tom E. wrote:

I'll hazard a guess - #3. [Virginia Surety waived or is precluded from asserting any policy exclusions not raised or invoked in its original disclaimer.] Section 3420(d) of New York's Insurance Law does not apply to property damage claims. Therefore, the 3d Dept. erred in precluding the carrier's previously uninvoked exclusions. However, the insurer could be equitably estopped from relying on coverage defenses if the insured/claimant could prove it was prejudiced by the insurer's actions and/or it relied to its detriment on the insurer's conduct.

Correct!  For some reason, the Third Department insists on muddling together and misusing the concepts of common law waiver and statutory preclusion under New York Insurance Law § 3420(d)(2).

In June 2004, the Village of Brewster contracted with Laws Construction Corporation to construct new potable water distribution and wastewater collection systems within the Village.  The contract provided that Laws would indemnify the Village for all claims for injury to property arising out of Laws' work and required Laws to maintain comprehensive general liability insurance naming the Village an additional insured. Laws obtained a CGL insurance policy from Virginia Surety Company, which included an additional insured endorsement naming the Village as an additional insured, but "only with respect to liability arising out of [Laws'] work for [the Village]."

On August 5, 2005, during the course of the work, a water main broke in the vicinity of Main Street in the Village, causing flooding to properties. Two of the affected residents sued the Village and Laws for property damage. The Village, in turn, tendered to Virginia Surety the claims against it and Laws, and demanded that Virginia Surety defend and indemnify it pursuant to the terms of Law's CGL insurance policy.  Virginia Surety denied coverage on the basis that Laws' operations did not cause or contribute to the property damages claimed in the underlying complaints and, therefore, any alleged loss did not arise out of Laws' work.

The Village and its CGL insurer commenced this declaratory judgment action seeking, among other things, a declaration that Virginia Surety was required to defend and indemnify the Village for any liability arising out of the underlying actions and that Virginia Surety must reimburse the Village's own CGL insurer for legal fees and costs it had incurred to date in defending the Village in the underlying actions.  Plaintiffs unsuccessfully moved for summary judgment and then appealed. 

In MODIFYING the order appealed from to grant summary judgment to the plaintiffs, the Third Department held:

1. Regardless of whether it must ultimately indemnify the additional insured Village in the underlying property damage actions, Virginia Surety was obligated to defend the Village because the allegations of the underlying complaints were what triggered Virginia Surety's exceedingly broad duty to defend.
2. Having failed to establish as a matter of law that there was no possible factual or legal basis on which it might eventually be obligated to indemnify the Village under any policy provision, Virginia Surety was obligated to defend the Village in the underlying actions, with the issue of indemnification to await the proof at trial in those actions.
3. Virginia Surety waived any policy exclusions not raised or invoked in its original disclaimer.
4. Coverage for the Village under Virginia Surety's policy was primary and needed to be exhausted before the Village's own insurer was required to contribute under its policy.
5. Virginia Surety was obligated to reimburse the Village's insurer for costs incurred to date in defending the underlying actions. 

For the most part, I take no issue with the Third Department's rulings on issues 1, 2, 4 and 5, and you can read the decision yourself for the court's discussion of those.  I do, however, believe the Third Department missed the mark, again, with its ruling on the third issue:

To the extent that defendant argues that certain exclusions contained in the policy provide an alternate basis for denying coverage, it failed to invoke these grounds in its notice of disclaimer, instead raising them for the first time in opposition to plaintiffs' motion for summary judgment. Since "'an insurer's disclaimer is strictly limited to those grounds stated in the notice of disclaimer, which disclaimer must clearly apprise the insured of the grounds on which the disclaimer is based'" (City of Kingston v Harco Natl. Ins. Co., 46 AD3d 1320, 1321 [2007], lv dismissed 10 NY3d 822 [2008], quoting Maroney v New York Cent. Mut. Fire Ins. Co., 10 AD3d 778, 780-781 [2004], affd 5 NY3d 467 [2005] [internal quotation marks and citation omitted]; see Clayburn v Nationwide Mut. Fire Ins. Co., 58 AD3d 990, 991 [2009]; Kokonis v Hanover Ins. Co., 279 AD2d 868, 870 [2001]), defendant cannot now rely on uninvoked exclusions as a basis for denying coverage.^[FN1]

Footnote 1: Even were we to find no waiver on the part of defendant, we would nevertheless find that its attempt to disclaim based on these exclusions was untimely as a matter of law. Defendant failed to advance any justification or explanation for the three-year delay in raising these exclusions (see Kokonis v Hanover Ins. Co., 279 AD2d 868, 870 [2001]; Dependible Janitorial Servs. v Transcontinental Ins. Co., 212 AD2d 946, 947 [1995], lv denied 85 NY2d 811 [1995]).

As Tom E. recognized, the coverage defense preclusive impact of violating the timely disclaimer and denial requirement of Insurance Law § 3420(d)(2) only applies to death or bodily injury claims;  it does not apply to property damage claims.   The Village brought this DJ action for defense and indemnification coverage in relation to two underlying property damage actions.  All of the cases cited by the Third Department on this issue involved wrongful death or bodily injury claims, not property damage.  It is simply incorrect for the court to have utilized the defense preclusive impact of 3420(d)(2) to rule that Virginia Surety could not raise and rely on initially uninvoked exclusions to deny coverage to the Village.  Moreover, waiver is defined as the intentional relinquishment of a known right, something Virginia Surety likely did not do with respect to the initially uninvoked exclusions.  As Tom E. points out, the doctrine of equitable estoppel could apply, however, if the Village justifiably relied to its detriment on something Virginia Surety initially did or said.  With a denial of coverage having already been issued to the Village, it's unlikely that Virginia Surety could have subsequently done or said anything that the Village would have been justified in relying on to its detriment.  Thus, in the absence of 3420(d)(2) preclusion, waiver, or estoppel, the Third Department should have permitted Virginia Surety to raise even initially uninvoked exclusion-based coverage defenses.  
 
Send me an email, Tom, and I'll contact you to make arrangements to get you what you won.

A Bad Penny Turns Up Again in the Third Department

CGL – ADDITIONAL INSURED – DUTY TO DEFEND – WAIVER – PRIORITY OF COVERAGE
Village of Brewster v. Virginia Sur. Co., Inc.
(3rd Dept., decided 2/18/2010)

Readers:  this is an interactive post.  Can you spot the bad penny in this decision?  The ruling that diverges from established tenets of New York insurance coverage law?  The part that raises one or both of your eyebrows and evokes an audible "huh?" when you read it?  One of the components of this decision stands alone as the Third Department's own rule of law.  I'll give you a hint.  It's the issue for which the Third Department cites only its own cases, perpetuating what I believe is a relatively longstanding error of insurance coverage law, at least in the Third Department.  It's like a bad penny that keeps showing up.  You know what they say about repeating something often enough. 

If you think you've spotted the peculiar rule, leave a comment on this post.  First correct answer wins something.  I don't know what yet, but it'll be something.  Let me make this a multiple choice quiz.  The component issues/rulings from this decision, and thus your answer choices, are:

1. Regardless of whether it must ultimately indemnify the additional insured Village of Brewster in the underlying property damage actions, Virginia Surety Company must defend the Village because the allegations of the underlying complaints are what trigger Virginia Surety's exceedingly broad duty to defend.
2. Having failed to establish as a matter of law that there is no possible factual or legal basis on which it might eventually be obligated to indemnify the Village under any policy provision, Virginia Surety must defend the Village in the underlying actions, with the issue of indemnification to await the proof at trial in those actions.
3. Virginia Surety waived or is precluded from asserting any policy exclusions not raised or invoked in its original disclaimer.
4. Coverage for the Village under Virginia Surety's policy is primary and must be exhausted before the Village's own insurer is required to contribute under its policy.
5. Virginia Surety must reimburse the Village's insurer for costs incurred to date in defending the underlying actions.  

See?  You already have a 20% chance of picking the right issue.  Answers without explanations, however, won't count.  I'll re-post this case one week from today, on Friday, February 26th, with my identification and explanation of the bad penny.  Until then, have a look at the decision by clicking on its link above and let us know what you think.

The Dam Project and Its Dam Additional Insured Coverage for the Dam Failure

CGL – ADDITIONAL INSURED – "ONGOING OPERATIONS" – REQUIRED BY WRITTEN CONTRACT – DUTY TO DEFEND
Town of Fort Ann v. Liberty Mut. Ins. Co.
(3rd Dept., decided 1/28/2010)

Juvenile title, I know.  Sorry, just couldn't resist. 

Plaintiff Town of Fort Ann retained engineering firm Heynan Teale Engineers and construction company Kubricky Construction Corporation to reconstruct its Hadlock Pond dam in 2004 and 2005.  On July 2, 2005, the reconstructed dam catastrophically failed, releasing a billion-gallon torrent of water that destroyed homes, cars and roadways for hundreds of yards downstream from the spillway. Upstream and downstream property owners brought multiple property damage lawsuits against the Town, which sought liability coverage an an additional insured from Heynan's CGL insurer, Steadfast Insurance Company, and Kubricky's CGL insurer, Liberty Mutual Insurance Company.  Steadfast and Liberty both denied any obligation to the Town asserting, among other things, that the Town did not qualify as an "additional insured" under the terms of their respective policies.

The Town and its CGL insurer commenced this declaratory judgment action for defense and indemnification coverage from Steadfast and Liberty, and breach of contract damages against Kubricky, and, following the completion of discovery, moved for summary judgment.  All defendants cross-moved for summary judgment.  Albany County Supreme Court granted plaintiffs' motion to the extent of finding that Steadfast was obligated to defend the Town in the underlying property damage actions and denied all other motions and cross motions.  All parties appealed.

In MODIFYING the order appealed from to declare that Liberty also had a duty to defend the Town in the underlying property damage actions, the Third Department found that additional insured coverage was triggered under both Kubricky's (Liberty's) and Heynan's (Steadfast's) policies.

Kubricky's policy with Liberty extended additional insured status to an entity when Kubricky's written contract to provide work for the entity required such coverage.  The written contract between Kubricky and the Town required Kubricky to maintain such insurance until the Town accepted the completed project. Liberty argued that the Town's additional insured coverage had ceased since the policy provided that such coverage remained in effect only so long as Kubricky had ongoing operations at the project.

In rejecting Liberty's argument that Kubricky's operations had ended before the dam breached, the Third Department noted that there had yet to be a final inspection of Kubricky's work and held:

The term "ongoing operations" is interpreted broadly in New York (see generally Wausau Underwriters Ins. Co. v Cincinnati Ins. Co., 198 Fed Appx 148, 150 [2d Cir 2006]; Liberty Mut. Fire Ins. Co. v E.E. Cruz & Co., 475 F Supp 2d 400, 411 [SD NY 2007]). Work may be considered as ongoing during a short lapse of time necessary to conduct tests designed to assure proper performance where such testing is an essential element of the work by the insured (see Perez v New York City Hous. Auth., 302 AD2d 222, 222 [2003]; cf. 9A Couch on Insurance 3d § 129:24). While major construction by Kubricky had ended one to two months before the dam's failure, inspection of the project by the engineer, which was required before Kubricky's work was considered completed under the contract, had not yet occurred. In light of the nature of the project, such inspection was not merely a minor after-the-fact detail. We find that the Town adequately established that it was an additional insured for purposes of the broad duty to defend. The exclusions in the policy urged as applicable by Liberty Mutual, which must be construed narrowly, do not vitiate Liberty Mutual's expansive obligation to provide a defense (see generally Automobile Ins. Co. of Hartford v Cook, 7 NY3d 131, 137 [2006]). 

Steadfast's policy with Heynan provided that a client of Heynan would be an additional insured when "required by written contract executed and effective before the performance of 'your work' or 'covered operations.'"  The written contract between Heynan and the Town, which was executed before Heynan's work on the project commenced, stated that "[c]ertificates of insurance will be furnished upon request naming the Town of Fort Ann . . . as additional insured."  The Town did not request the certificate of insurance until well after the dam had failed.  Because the Town had not requested certificates of insurance from Heynan before its work or the dam breach, Steadfast argued that Heynan's written contract with the Town did not require that the Town be named as an additional insured on Heynan's policy.

In rejecting that argument, the Third Department reasoned that an agreement prospectively to provide certificates of additional insured insurance reflected or constituted an agreement to provide AI insurance:

So long as a clear written intent to include an entity as an additional insured is manifested prior to the loss, the fact that certificates of insurance are not issued until after the loss does not compel the conclusion that such entity is not an additional insured (see United States Fid. & Guar. Co. v Shorenstein Realty Servs., LP, 591 F Supp 2d 966, 968-969 [ND Ill 2008]; Atofina Petrochemicals, Inc. v Continental Cas. Co., 49 Tex Sup Ct J 225 185 SW3d 440, 443-444 [2005]; 3 Couch on Insurance 3d § 40:29). Applying rules for construing contracts (see National Abatement Corp. v National Union Fire Ins. Co. of Pittsburgh, Pa., 33 AD3d at 571), we observe that the underlying contract, which had been drafted by Heynan, addresses the full extent of insurance coverage in just one paragraph, three sentences in length. The fact that Heynan agreed in the contract that it was prepared to supply certificates of insurance upon request reflects a clear intent to include the Town as an additional insured in Heynan's work on the dam project. The status of the Town as an additional insured is not made contingent upon the request for a certificate of insurance. We agree with Supreme Court that, under these circumstances, Steadfast Insurance has a duty to defend the Town. 

Credit to the Bay Ridge Volunteer Fire Department for use of its Hadlock Pond dam and damage photos.

Homeowners Insurer Ordered to Defend Teenager Who Allegedly Injured Another Teenager at a Party

HOMEOWNERS – EXPECTED OR INTENDED INJURY EXCLUSION – DUTY TO DEFEND
Rhodes v. Liberty Mut. Ins. Co.
(2d Dept., decided 11/17/2009)

The standard homeowners policy excludes liability coverage for bodily injury or property damage which is expected or intended by an insured.  With a liability insurer's duty to defend being broader that its duty to indemnify, the allegations of a complaint are what, in most cases, dictate whether the insurer must defend its insured notwithstanding facts that may indicate an intentionally caused harm.  It is only in cases where the insurer can establish that there is no possible factual or legal basis on which it might eventually be obligated to indemnify its insured under any policy provision that it can disregard complaint allegations and deny both the duty to defend and the duty to indemnify.

Although the facts underlying this decision are scant, it appears Devon Rhodes and Alava David were at a teenage party at which alcohol was being served.  Rhodes reportedly caused injury to David, and David brought a personal injury action against her.  Although the personal injury complaint alleged that Rhodes' "recklessness, carelessness, and negligence" caused serious personal injuries to David, Liberty Mutual Insurance Company apparently declined to defend or indemnify Rhodes under her parents' homeowners policy with Liberty, citing the policy's intended or expected harm exclusion.  Rhodes then commenced this declaratory judgment action for liability coverage in relation to the underlying personal injury action.

Suffolk Supreme denied Liberty's motion and granted plaintiff's cross motion for summary judgment on the issue of defense coverage owed with respect to the underlying personal injury action.  In AFFIRMING that order, the Second Department agreed that the underlying complaint's allegations triggered defense coverage and held:

Generally, it is the insured's burden to establish coverage and the insurer's burden to prove the applicability of an exclusion (see Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d 208, 218-220; Barkan v New York Schools Ins. Reciprocal, 65 AD3d 1061). Moreover, an insurer's duty to defend is broader than its duty to indemnify, and arises whenever the allegations in the complaint in the underlying action, construed liberally, suggest a reasonable possibility of coverage, or where the insurer has actual knowledge of facts establishing such a reasonable possibility (see Frontier Insulation Contrs., v Merchants Mut. Ins. Co., 91 NY2d 169, 175; Burlington Ins. Corp. v Guma Constr. Corp.,AD3d, 2009 NY Slip Op. 07216 [2d Dept 2009]; City of New York v Insurance Corp. of N.Y., 305 AD2d 443). As such, the duty to defend arises if the claims against the insured arguably arise from a covered event, even if the claims may be meritless or not covered, either because the insured is not liable or because the event is later determined outside the policy's scope of coverage (see Automobile Ins. Co. of Hartford v Cook, 7 NY3d 131, 137; Fitzpatrick v American Honda Motor Co., 78 NY2d 61, 65-66; Physicians' Reciprocal Insurers v Loeb, 291 AD2d 541, 542). An insurer can be relieved of its duty to defend only "if it establishes as a matter of law that there is no possible factual or legal basis on which it might eventually be obligated to indemnify its insured under any policy provision" (Allstate Ins. Co. v Zuk, 78 NY2d 41, 45; see Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640, 652; Physicians' Reciprocal Insurers v Giugliano, 37 AD3d 442, 444).

Here, the plaintiffs established that Devon Rhodes (hereinafter Rhodes) was entitled to coverage under the homeowner's insurance policy issued to her parents (see Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d at 218, 220; Barkan v New York Schools Ins. Reciprocal, 65 AD3d 1061). In contrast, the defendant Liberty Mutual Insurance Co. (hereinafter Liberty) failed to establish that "there is no possible factual or legal basis on which it might eventually be obligated to indemnify its insured under any policy provision" (Allstate Ins. Co. v Zuk, 78 NY2d at 45). The complaint in the underlying action alleges, inter alia, that while attending a teenage party at which alcohol was served, Rhodes' "recklessness, carelessness, and negligence" caused serious personal injuries to Alava David, the plaintiff in the underlying action. Construing the complaint liberally, a possible legal or factual basis exists by which Rhodes's conduct may be deemed accidental and, therefore, a covered "occurrence" under the subject Liberty policy, and not excluded from coverage on the ground that the personal injuries allegedly sustained by David were expected or intended by Rhodes (see Frontier Insulation Contrs., v Merchants Mut. Ins. Co., 91 NY2d 169, 175; City of New York v Insurance Corp. of N.Y., 305 AD2d 443; see also Automobile Ins. Co. of Hartford v Cook, 7 NY3d 131, 137-138; Merchants Ins. of N.H., Inc. v Weaver, 31 AD3d 945).

In New York and other jurisdictions there are a number of a "harm inherent in the nature of the act" cases in which liability insurers have successfully argued that the nature of the intentional act itself is such that the insured must have expected or intended the harm, negating liability coverage.  See, e.g., Allstate Ins. Co. v. Mugavero, 79 NY2d 153 (1992).  This apparently was not such a case.

Bronx Supreme Reluctantly Declines to Invalidate the Coverage-Negating Employee Injury, Roofing Work and Contractual Liability Exclusions

CGL – ADDITIONAL INSURED – EMPLOYEE INJURY EXCLUSION – ROOFING WORK EXCLUSION – CONTRACTUAL LIABILITY EXCLUSION – DUTY TO DEFEND
720-730 Fort Wash. Ave. Owners Corp. v. Utica First Ins. Co.
(Sup. Ct., Bronx Co., decided 11/4/2009)

Plaintiff owned a property on which a subcontractor's employee was injured during construction.  Plaintiff had contracted with DNA Contracting, which had hired the injured party's employer, subcontractor Rauman Construction Company, to do the masonry and roof replacement work. DNA's contract with Rauman required that Rauman purchase CGL and name DNA and plaintiff as additional named insureds. Rauman purchased insurance from Utica First which named those entities as additional insureds, but the policy contained three exclusions at issue:  (1) an "employee" exclusion, (2) an exclusion for "roofing work", and (3) an exclusion for any liabilities assumed under contract or agreement.

The "employee exclusion" provided:

This insurance does not apply to:

(i) bodily injury to any employee of any insured, to any contractor hired or retained by or for any insured or to any employee of such contractor, if such claim for bodily injury arises out of and in the course of his/her employment or retention of such contractor by or for any insured, for which any insured may, liable in any capacity;

(ii) any obligation of any insured to indemnify or contribute with another because of damage arising out of the bodily injury; or

(iii) bodily injury sustained by the spouse, child, parent, brother or sister of an employee of any insured, or of a contractor, or of an employee of a contractor of any insured as a consequence of the bodily injury to such employee, contractor or employee of such contractor, arising out of and in the course of such employment or retention by or for any insured.

The "roofing work" exclusion stated:

It is hereby understood and agreed that such insurance as is afforded by coverage L-bodily injury, property damage coverage and coverage N-products/completed work coverage does not apply to bodily injury, property damage, products or completed work arising out of any roofing operations, which involve any replacement roof or recovering of the existing roof.

The exclusion for liabilities assumed under contract or agreement read:

1. "We" do not pay for "bodily injury", "property damage", "personal injury", or "advertising injury" liability which is assumed by the "insured" under a contract or an agreement.

This exclusion does not apply to:

a. Liability that an "insured" would have had in the absence of the contract or agreement; or

b. "Bodily injury or property damage" covered under the contractual liability coverage, provided that the "bodily injury" or "property damage" occurs after the effective date of the contract or agreement.

The injured employee commenced a personal injury action against plaintiff, alleging causes of action for violations of §§ 200, 240 and 241 of New York's Labor Law, as well as a cause of action for common law negligence.  Plaintiff tendered that action to Utica First for defense and indemnification, and Utica First disclaimed coverage based on the employee injury, roofing work and contractual liability exclusions.  DNA's CGL insurer, Liberty International Underwriters, assumed plaintiff's defense and commenced this declaratory judgment action, in plaintiff's name, against Utica First for coverage under Rauman's policy.

Prior to the completion of discovery, Utica First moved for summary judgment based on the employee and roofing work exclusions.  Plaintiff opposed the motion based on its arguments that: (1) the Utica First policy was illusory and should be held to be against public policy since it does not provide any of the insureds with the usual construction site coverage required under plaintiff's agreement with DNA and Rauman;  (2) discovery has not yet been completed;  (3) questions of fact remained as to whether or not Rauman's employee was, in fact, working in the course of his roofing duties with Rauman at the time of the accident that caused his injuries; and (4) Utica First must defend under the policy even if it need not indemnify, since the duty to defend is greater than the duty to indemnify.

In response to plaintiff's opposition, Utica First argued that since plaintiff had admitted that Rauman's employee was working in the course of his employment with Rauman, and performing roofing operations, no further discovery was necessary since both the "employee" and "roofing" exclusions applied.   As to plaintiff's argument that the Utica First policy was violative of public policy, Utica First argued that exclusions are necessary to precisely define the scope of coverage.  Lastly, Utica contended that, although the duty to defend is broader than the duty to indemnify, it does not attach, when, as here the complaint and claims are so totally baseless.

Noting that plaintiff was not contending that the three exclusions at issue were vague, ambiguous or inapplicable, Bronx County Supreme Court Justice Paul Victor identified the sole issues for determination to be whether those three exclusions are violative of public policy, and whether, despite the language of those exclusions, Utica First might still be obligated to defend the plaintiff.  The court answered those questions with a no, and a no. 

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.

Court Again Rules that Graves Amendment Creates Conflict in Joint Defense Representation of Driver & Rental Car Company

AUTO – RENTAL VEHICLE – GRAVES AMENDMENT – RETAINED DEFENSE COUNSEL – CONFLICT OF INTEREST
Meigel v. Schulman
(Sup. Ct., Kings Co., decided 8/12/2009)

Kings County Supreme Court Justice Wayne Saitta has done it again.  As he did in Graca v. Krasnik, Justice Saitta not only denied the car lessor's motion for summary judgment, but ordered that separate defense counsel be provided for the renter who was driving the rental car at the time of the accident.

For all actions commenced on or after August 10, 2005, the "Graves Amendment" has provided vehicle lessors with a statutory basis for dismissing vicarious liability claims in motor vehicle accident lawsuits.  This amendment to the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users ("SAFETEA") provides in relevant part that:

[a]n owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle (or an affiliate of the owner), for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if-

(1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and

(2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner).  49 U.S.C. § 30106(a). 

Micki Schulman rented a vehicle from ELRAC, Inc., d/b/a Enterprise Rent-A-Car and was involved in an accident with the plaintiff.  Plaintiff commenced a personal injury action against Schulman and ELRAC.  Prior to discovery, both defendants moved to dismiss plaintiff's complaint against ELRAC based on the Graves Amendment.   On the motion, Justice Saitta sua sponte (of its own accord) raised the issue of whether defendants' counsel had a conflict in representing both defendants while seeking to dismiss the complaint against only one of them.

Defense counsel argued that there was no conflict in one attorney representing both defendants because: (1) the Graves Amendment applied to preclude ELRAC from being held vicariously liable for Schulman's allegedly negligent driving; (2) Schulman submitted an affidavit asserting that that were no problems with the rental vehicle; (3) because the leasing agreement between the defendants required Schulman to indemnify ELRAC for any loss over $25,000, including attorneys' fees, it was in Schulman's best interest to have the case dismissed against ELRAC; and (4) there had been full disclosure of the potential for conflicts and the defendants both consented to the joint representation.  Plaintiff opposed defendants' motion based on the fact that he had not had an opportunity to conduct discovery as to whether ELRAC properly maintained and serviced the vehicle (direct negligence of the vehicle's owner being an exception to the Graves Amendment's liability exemption).

In rejecting defense counsel's argument that there was no conflict in representing both defendants and denying their motion with leave to renew after the appointment of separate defense counsel and completion of discovery, Justice Saitta held:

There is an inherent conflict of interest in representing two named defendants where, if the case against one defendant (owner/lessor) is dismissed pursuant to the Graves Amendment, the other defendant (driver) is left bearing full liability for the claims alleged in Plaintiff's complaint. The driver has no independent advocate to oppose the motion which would result in the driver shouldering full liability.

The conflict remains despite the provision in the lease that requires the driver, SCHULMAN, to reimburse ELRAC for any loss they suffer arising from her use of the vehicle.  Such a lease provision is enforceable, but not as to losses resulting from ELRAC's own negligence. This means that if ELRAC's motion to dismiss pursuant to the Graves Amendment was denied on the grounds that they were negligent in maintaining the vehicle, and ELRAC was found liable to the Plaintiff because of that negligence, ELRAC could not seek indemnification from Schulman for that percentage of the damages caused by its negligence. 

Further, such an indemnification provision is enforceable only to the extent that the losses that exceed the minimum primary coverage ELRAC was required to provide pursuant to VTL §370. Elrac v Ward, 96 NY2d 58, 724 NYS2d 692 (Ct of Ap 2001); Haight v Estate of DePamphilis, 5 AD3d 547, 772 NYS2d 833 (2nd Dept. 2004). Thus ELRAC may only seek reimbursement for any losses that exceeded the $25,000 in coverage they were required to provide Schulman. 

There is an inherent conflict in an attorney representing both the driver and the leasing company where there is a possibility that the leasing company may have been negligent. If ELRAC was negligent then the driver would be entitled to contribution from ELRAC and ELRAC could not seek indemnification for such contribution based on its own negligence. 

In this case, counsel has produced an affidavit from SCHULMAN stating that there was nothing wrong with the vehicle, which counsel argues shows that there is no question as to negligence by ELRAC, and thus no conflict.  However, this line of reasoning conflates the issue of whether ELRAC was negligent with whether an attorney representing both ELRAC and the driver can vigorously investigate, on the driver's behalf, whether ELRAC was negligent. 

It is difficult to imagine an attorney, who represented only the driver, agreeing that ELRAC was not negligent based on the fact that the driver, who is not an expert, thought there was nothing from with the car. It is even more difficult to imagine an attorney who represented only the driver, procuring such an affidavit from their client. An independent counsel would almost certainly at a minimum insist on conducting discovery of ELRAC's maintenance and service records before conceding that ELRAC was not negligent. 

There is also a need for separate counsel to evaluate whether there is a basis to argue that the Graves Amendment is not applicable in a given case, either on constitutional grounds or because the company is not a leasing company within the meaning of the act. While it is true that if ELRAC was held vicariously liable, the driver may be liable to reimburse ELRAC for its losses and attorneys fees that exceeded $25,000. However there many be situations in which counsel would conclude that having the leasing company remain in the case, if there is a legal basis for doing so, may increase the chances of a favorable settlement that outweigh the risk of having to reimburse the leasing company and pay additional legal fees. A client is entitled to the undivided loyalty of counsel, even for such strategic decisions. 

Lastly, Plaintiff is entitled to conduct discovery as to the maintenance of the vehicle, before having to answer the summary judgment motion, as such information is both material and within ELRAC's sole control. Therefore summary judgment would be premature at this time.

To read most posts about New York cases involving the Graves Amendment, click here.  

Additional Insured Not Collaterally Estopped From Relitigating Factual Issue Affecting Coverage

COMMERCIAL GENERAL LIABILITY – ADDITIONAL INSURED – LEASED PREMISES – COLLATERAL ESTOPPEL
Franklin Dev. Co., Inc. v. Atlantic Mut. Ins. Co.
(2nd Dept., decided 3/24/2009)

The "Additional Insured—Manager or Lessors of Premises" endorsement (CG 20 11 01 96) adds the lessor or manager as an insured "but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to [the named insured]."  Cases involving this endorsement often raise questions regarding the scope of the leasehold; in other words, what is "that part of the premises" that was actually leased to the named insured tenant?

Plaintiff Franklin Development Company leased space in a building it owned to Hertlein Special Tool Company. Pursuant to the lease terms, Hertlein obtained a CGL insurance policy for the leased premises from Atlantic Mutual, naming Franklin as an additional insured. An employee of Hertlein allegedly fell in a stairwell in the building and sustained injuries. He commenced a personal injury action against Franklin and two related entities, which in turned impleaded Hertlein.

In a previous appeal in the underlying personal injury action, the Second Department modified the motion court to grant plaintiffs' motion for summary judgment, dismissing the primary complaint and all cross claims against them.  Although plaintiffs had raised the issue of whether the stairwell where the injured party had fallen was an area covered by the additional insured clause of Hertlein's insurance policy with Atlantic Mutual, the Second Department stated that that issue "need not be reached" in light of its decision granting summary judgment to plaintiffs.

Plaintiffs moved and Atlantic Mutual cross-moved for summary in this declaratory judgment action.  The motion court not only granted Atlantic Mutual's cross motion, declaring that it was not obligated to defend or indemnify plaintiffs in relation to the underlying action, but also found, sua sponte, that this action was frivolous within the meaning of 22 NYCRR 130-1.1, and ordered that a hearing be conducted to determined an award of attorneys' fee to the defendant and the imposition of a sanction upon the plaintiffs.

In REVERSING the motion court's decision and remitting the matter back to Supreme Court for a determination on the merits of plaintiffs' motion, the Second Department ruled that the doctrine of collateral estoppel did not apply to preclude plaintiffs' from relitigating in this action the question of whether the stairwell was an area covered by the additional insured endorsement:  

Since Franklin appealed from the Supreme Court's denial of its motion for summary judgment on the third-party complaint, which was based on the issue presented here, Franklin addressed the issue before this Court, but, for the reasons discussed, this Court did not reach the issue. Thus, the issue was not necessarily decided and Franklin did not have "a full and fair chance to overturn the earlier decision" (Tydings v Greenfield, Stein & Senior, LLP, 11 NY3d 195, 200). Accordingly, the Supreme Court's determination thereof is not entitled to preclusive effect (see generally Tydings v Greenfield, Stein & Senior, LLP, 11 NY3d 195). 

On the issue of Atlantic Mutual's duty to defend, the Second Department also ruled that Atlantic Mutual "failed to establish, as a matter of law, that the allegations of the complaint in the underlying action did not suggest a reasonable possibility of coverage, that there was no possible factual or legal basis upon which the defendant might eventually be held to be obligated to indemnify Franklin, or that the only interpretation of the allegations against the insured was that the factual predicate for the claim fell wholly within a policy exclusion[.]"

Law Firm Not Entitled to Defense of Complaint Alleging "Wanton, Willful and Malicious" Conduct

PROFESSIONAL LIABILITY – DUTY TO DEFEND – ALLEGATIONS OF "WANTON, WILLFUL AND MALICIOUS" CONDUCT
Burkhart, Wexler & Hirschberg, LLP v. Liberty Ins. Underwriters, Inc.
(2nd Dept., decided 3/24/2009)

Sometimes plaintiffs deliberately plead into coverage; sometimes they do just the opposite, so the defendant does not enjoy liability coverage.

There's no indication whether the plaintiff in the underlying action did either, but its complaint against the insured law firm asserted claims for relief for "wanton, willful and malicious" breach of fiduciary duty for misappropriating the underlying plaintiff's confidential information and trade secrets; tortious interference with contract for using this information to attempt to convert the underlying plaintiff's members and prospective members to a newly- formed competing business entity; and for "wanton, willful and malicious" misappropriation of trade secrets.

Plaintiff law firm tendered the action to its professional liability insurer, Liberty Insurance Underwriters, which denied coverage, prompting this declaratory judgment action for defense and indemnification coverage.

In AFFIRMING the motion court's order granting summary judgment to Liberty, the Second Department ruled:

In determining whether an insurance carrier has a duty to defend under a professional liability policy, the point of departure is a comparison between the complaint against the insured and the language of the policy (see Cohen v Employers Reinsurance Corp., 117 AD2d 435, 438). If the underlying action falls within the scope of risk covered by the policy, the insurer is obligated to defend (see American Home Assur. Co. v Port of Auth. of N.Y. & N.J., 66 AD2d 269, 277). On the other hand, if the allegations, on their face, do not bring the case within the coverage of the policy, there is no duty to defend or indemnify (see Lionel Freedman, Inc. v Glens Falls Ins. Co., 27 NY2d 364, 368). 

Here, Liberty established its prima facie entitlement to judgment as a matter of law declaring that it was not obligated to defend and indemnify the Burkhart Firm in the underlying action, and the Burkhart Firm failed to raise a triable issue of fact in opposition. The basic coverage provision of the Liberty policy clearly limits coverage to claims which are caused by "any actual or alleged act, error, omission or personal injury which arises out of the rendering or failure to render professional legal services." Inasmuch as there is no allegation of negligence or malpractice arising out of the Burkhart Firm's performance, or failure to perform, legal services, the claim in the underlying action does not fall within the ambit of the policy (see Tartaglia v Home Ins. Co., 240 AD2d 396; Cohen v Employers Reinsurance Corp., 117 AD2d 435; George Muhlstock & Co. v American Home Assur. Co., 117 AD2d 117). For the same reason, the Supreme Court properly denied that branch of the Burkhart Firm's cross motion which was for summary judgment.