Excess to Infinity

EMPLOYERS LIABILITY – COMMERCIAL UMBRELLA – UNLIMITED COVERAGE – EXHAUSTION OF PRIMARY POLICY LIMIT – SCHEDULE OF UNDERLYING INSURANCE  
Tully Construction Co., Inc. v. Illinois National Ins. Co.
(2nd Dept., decided 8/19/2015)

At what point is excess to unlimited coverage triggered?  

Tully Construction Company obtained a New York workers compensation/employers liability (WCEL) from Zurich American Insurance Company and a commercial umbrella liability insurance policy from Illinois National Insurance Company.  The umbrella policy required Tully to exhaust all insurance available before the excess coverage provided by the umbrella policy would be triggered. The umbrella policy also explicitly stated that, despite the listing of any limits of underlying insurance in the Schedule of Underlying Insurance, if the actual insurance available to Tully exceeded the amounts listed in the schedule, the umbrella policy would not be triggered until those greater amounts were met and exceeded. In underlying personal injury actions, the parties settled for $9,000,000, with Zurich paying $6,500,000 and Illinois paying $2,500,000.  This declaratory judgment action ensued, with Illinois seeking reimbursement from Zurich of Illinois' $2,500,000 settlement payment.

In AFFIRMING the Supreme Court's order granting summary judgment to Illinois and ordering Zurich to reimburse Illinois, the Appellate Division, Second Department, held:

The WCEL policy contained a New York Limit of Liability Endorsement which provided that in cases of bodily injury to an employee arising out of and in the course of employment that is subject to and is compensable under the Workers' Compensation Law, Zurich could not limit its liability and, as such, the policy was unlimited in those cases (see generally Oneida Ltd. v Utica Mut. Ins. Co., 263 AD2d 825 [New York recognizes no liability limits in Workers' Compensation and Employer's Liability policies]). 

In light of the unlimited nature of the WCEL policy, the Supreme Court properly concluded that the limits of the underlying insurance policies were never met and, as such, the excess coverage provided by the umbrella policy was never triggered (see Merchants Mut. Ins. Co. v New York State Ins. Fund, 85 AD3d 1686). 

Contrary to the plaintiffs' contention, under the circumstances of this case, the Supreme Court properly concluded that apportionment of liability pursuant to Hawthorne v South Bronx Community Corp. (78 NY2d 433) was not applicable, since this case involves a coverage dispute between a primary insurer and an excess insurer (see Liberty Mut. Ins. Co. v Insurance Co. of State of Pa., 43 AD3d 666; see also National Union Fire Ins. Co. of Pittsburgh, Pa. v State Ins. Fund, 222 AD2d 369; B.K. Gen. Contrs. v Michigan Mut. Ins. Co., 204 AD2d 584; Aetna Cas. & Sur. Co. v Lumbermens Mut. Cas. Co., 136 AD2d 246).

Sorry Buzz.  No excess umbrella liability coverage for you.  

On an Issue of First Impression, Third Department Holds that an Underinsurance Claim is Ripe Only if the Exhaustion of Limits Is of the Adverse Driver's Bodily Injury Insurance

SUM – TRIGGER – EXHAUSTION OF OTHER DRIVER'S POLICY LIMITS
Matter of Kemper Mut. Ins. Co. v. Russell
(3rd Dept., decided 7/1/2010)

If instead of collecting the other driver's full $50,000 in auto liability insurance coverage limits, you collect that amount from the legal malpractice insurer of the law firm that failed to sue your personal injury claim in a timely manner, do you have a supplementary uninsured motorists (SUM) coverage or underinsured claim against your own auto insurer?  In a 4-1 decision, the Third Department, Appellate Division, says no, you do not.

Patricia Russell was injured in a 2000 accident in which the automobile she was driving was rear-ended by another car.  She retained a law firm to bring a personal injury suit and, when the firm failed to timely do so, her ensuing legal malpractice action against the firm settled for $50,000, an amount equal to the full limit of the other driver's automotive liability insurance.  Russell then advised Kemper, her personal auto insurer, that she intended to file a supplementary uninsured/underinsured motorist (SUM) insurance coverage claim.  After she demanded arbitration of that claim, Kemper commenced this proceeding seeking a stay of arbitration.  Supreme Court granted the petition to the extent of temporarily staying arbitration pending a hearing on various issues, and Kemper appealed.

In REVERSING the order appealed from and granting Kemper's petition for a permanent stay of the SUM arbitration, the four-justice majority held:

An insurer is obligated to pay under SUM coverage if the bodily injury liability insurance limits of its insured's policy exceed those of the other policy, subject to the condition that "the limits of liability of all bodily injury liability bonds or insurance policies applicable at the time of the accident shall be exhausted by payment of judgments or settlements" (Insurance Law § 3420 [f] [2] [A]; see Matter of Federal Ins. Co. v Watnick, 80 NY2d 539, 546 [1992]).  The statute, in short, "requires primary insurers to pay every last dollar, and requires [respondent] to accept no less, prior to the initiation of an underinsurance claim" (Matter of Federal Ins. Co. v Watnick, 80 NY2d at 546).  The primary insurer here, however, has paid nothing, as respondent was forced to recover damages in a separate legal malpractice claim.  As the other driver's policy limit was not exhausted by payment, respondent's own SUM coverage does not come into play, and Supreme Court should have granted petitioners' application for a permanent stay. 

In her lone dissent, Justice Garry opined that the majority had misread and misinterpreted this language of New York Insurance Law § 3420(f)(2)(A):

As a condition precedent to the obligation of the insurer to pay under the supplementary uninsured/underinsured motorists insurance coverage, the limits of liability of all bodily injury liability bonds or insurance policies applicable at the time of the accident shall be exhausted by payment of judgments or settlements.  (Emphasis added.)

Justice Garry thought the majority had placed undue emphasis on the modifying phrase "all bodily injury . . . insurance policies" in holding that Russell must obtain the pertinent funds directly from the automobile carrier as a condition precedent to enforcing her contract with her own carrier:

Had the Legislature intended to require exhaustion of the applicable policies as opposed to exhaustion of the limits, this purpose would be met by simply stating that "all bodily injury insurance policies . . . shall be exhausted." This is not what the statute requires; the modifying phrase instead defines the measure of benefits, nothing more, and neither precedent nor public policy supports construing the statutory language as the majority suggests.

* * * * *

Upon this appeal, it is undisputed that respondent obtained the full amount of the "limits of liability" of the tortfeasor's bodily injury policy applicable at the time of the accident, albeit from another carrier. This unusual circumstance apparently presents a matter of first impression and, as Supreme Court correctly noted, no legal precedent establishes that the source of payment, as opposed to the amount of the payment, is a critical factor in the analysis. Instead, as respondent has obtained the full amount of the "limits of liability" of the applicable underlying bodily injury policy, the requisite statutory condition has been met, and the insurer's interests have been fully protected ^[FN2]. Accordingly, I would affirm the determination in full and allow the parties to proceed for determination of the remaining issues.

Although this was a reversal of the Supreme Court's order, with only one rather than two dissents, Russell will need leave of either the Third Department or the Court of Appeals to place what appears to be this issue of first impression before the Court of Appeals for determination.

Court of Appeals Affirms: Unconsented Settlement with Second Tortfeasor Forfeits SUM Coverage

AUTO – SUM – CONSENT TO SETTLE – EXHAUSTION OF MULTIPLE TORTFEASORS' POLICY LIMITS
Matter of Central Mut. Ins. Co. v. Bemiss
(Ct. Apps., decided 6/25/2009)

Three car accident.  Injured plaintiff in Car 1 sues drivers/owners of Cars 2 and 3.  Plaintiff settles with Car 2 for its full, per person BI liability policy limit after properly notifying her SUM insurer.  Then settles with Car 3 for less than its BI limit without notice to or consent from her SUM insurer.  Has plaintiff breached the consent-to-settle and subrogation-protection conditions of her policy's SUM endorsement, voiding coverage for her SUM claim vis-à-vis Car 2?

Yes, said the Third Department, and yes, now says the Court of Appeals.  By choosing to proceed with and settle her claim against the second tortfeasor without obtaining her SUM insurer's consent, the plaintiff-insured forfeited her SUM coverage.

At issue in this case was "whether consent-to-settle and subrogation-protection provisions in the supplementary uninsured/underinsured (SUM) endorsement in an automobile liability insurance policy fall by the wayside once an insured has exhausted the available policy limits of a single tortfeasor in a multi-tortfeasor accident."  In a unanimous decision holding that these provisions remain in force and govern any settlements that the insured may subsequently make with other tortfeasors, Judge Read reasoned:

As already noted, an insured generally may not settle with a tortfeasor without the SUM insurer's written consent, and may not prejudice the SUM insurer's subrogation rights. As to the latter point, Condition 13 of the SUM endorsement specifically states as follows:

"13. Subrogation: If we make a payment under this SUM coverage, we have the right to recover the amount of this payment from any person legally responsible for the bodily injury or loss of the person to whom, or for whose benefit, such payment was made to the extent of the payment. The insured or any person acting on behalf of the insured must do whatever is necessary to transfer this right of recovery to us. Except as permitted by Condition 10, such person shall do nothing to prejudice this right" (11 NYCRR 60-2.3 [f]) (emphasis added).

The final sentence of Condition 10 — the crux of Bemiss's argument — specifies that the insured "shall not otherwise settle with any negligent party, without [the SUM carrier's] written consent, such that [the SUM carrier's] rights would be impaired" (emphasis added). Looking at both this language and the structure of Condition 10, "otherwise" refers back to the settlement scenario delineated in the first sentence — i.e., an insured's 30 days' written notice to the insurer of a tortfeasor's offer to settle for the maximum available policy limits. And while Bemiss contends that "any negligent party" refers only to the first tortfeasor whose policy is exhausted so as to make SUM benefits payable, this is not readily apparent from the words used or the regulatory history. In the original version of Condition 10 (former Condition 8), "any negligent party" clearly referred to all the tortfeasors in a multiple-tortfeasor accident. When the Department revised the SUM endorsement to make the exhaustion requirement applicable to any single tortfeasor rather than the aggregate limits of the liability coverage of all tortfeasors, it retained in new Condition 10 the stipulation that the insured could not "otherwise settle with any negligent party" (emphasis added). Bemiss, in effect, asks us to read this provision to mean "otherwise settle with the first party to tender the available limit of his/her motor vehicle bodily injury liability coverage." Even if Bemiss's interpretation of "any negligent party" were correct, there is nothing in the SUM endorsement to suggest that the subrogation-protection provisions in Condition 13 become inoperative once an insured has exhausted a single tortfeasor's policy limits in a multiple-tortfeasor accident.

In short, Condition 10 delineates the sole situation in which an insured may settle with any tortfeasor in exchange for a general release, thus prejudicing the insurer's subrogation rights, without the carrier's written consent. Here, Bemiss violated Condition 10 when she settled with Genski for less than the maximum available policy limits without Central's written consent, such that its subrogation rights were impaired. Moreover, this result is not inconsistent with our decision in S'Dao or Condition 9 of the SUM endorsement. In this case, Bemiss settled with Kowalczyk in compliance with Condition 10, thereby also fulfilling the exhaustion requirement in Condition 9. At that point, she was entitled to make a claim for $75,000 under her SUM coverage and, if Central disagreed, to proceed to arbitration. That is, she did not have to pursue a claim against Genski in order to become eligible to collect up to the remaining limits of her SUM policy. But once having chosen to resolve her claim against Genski, she was not free under the SUM endorsement to compromise Central's subrogation rights unilaterally.

Counsel for persons injured in multiple vehicle accidents with multiple tortfeasors take note:  at the risk of forfeiting your client's SUM coverage, do not settle any claims against multiple tortfeasors without complying with the SUM endorsement's consent-to-settle conditon(s) as to each settling tortfeasor.

Second Department Affirms Vacatur of Default Judgment Against No-Fault Insurer

NO-FAULT – VACATING DEFAULT JUDGMENT – REASONABLE EXCUSE
Westchester Med. Ctr. a/a/o Diedre Walsh v. Hartford Cas. Ins. Co.
(2nd Dept., decided 1/27/2009)

Under New York CPLR Rule 5015(a)(1), a party seeking to vacate a default judgment taken against it must demonstrate (1) a reasonable excuse for its delay in appearing and answering, and (2) a meritorious defense to the action.

Plaintiff medical provider sued Hartford for unpaid no-fault billing(s).  Hartford did not timely appear and answer, and plaintiff obtained a default judgment in the principal sum of $16,571.91 against it.  Hartford successfully moved to vacate the default judgment, and plaintiff appealed.

In AFFIRMING Nassau Supreme's vacatur of the default judgment, the Second Department held:

Here, the defendants established that their employee reasonably believed that the action had been discontinued after she advised the plaintiff's counsel's office that no-fault benefits had been exhausted, thereby demonstrating a reasonable excuse for the short period of time in which they failed either to appear or to answer the complaint (see New York Univ. Hosp. Tisch Inst. v Merchants Mut. Ins. Co., 15 AD3d 554, 554-555). In addition, the defendants established that the policy limits had been partially exhausted through the payment of claims for prior services (see 11 NYCRR 65-3.15; Nyack Hosp. v General Motors Acceptance Corp., 8 NY3d 294, 301; Montefiore Med. Ctr. v Government Empls. Ins. Co., 34 AD3d 771, 772; New York & Presbyt. Hosp. v Allstate Ins. Co., 28 AD3d 528, 528-529), thereby demonstrating the existence of a potentially meritorious defense to the action. Finally, the plaintiff did not demonstrate prejudice from the defendants' relatively short delay in appearing and answering, and public policy favors the resolution of cases on the merits (see Verde Elec. Corp. v Federal Ins. Co., 50 AD3d at 673).

The motion court's decision is not available online, and this appellate decision does not explain why it was reasonable for Hartford's representative to believe that this action would be discontinued after advising plaintiff's counsel's office that the assignor's no-fault benefits had been exhausted.  And I'm not sure what "partially exhausted" means exactly, or why it represents a potentially meritorious defense to a provider's no-fault claim, but my uncertainty doesn't matter.  Both the motion and appellate court found that Hartford had established a reasonable excuse (we thought the action would be discontinued) and meritorious defense (no-fault limits were partially exhausted), and plaintiff suffered no prejudice from the short delay in appearing and answering.  Vacatur of the default judgment was, therefore, warranted.

Unconsented Settlement with Second Tortfeasor for Less Than Full Policy Voids SUM Coverage

AUTO – SUM – CONSENT TO SETTLE – EXHAUSTION OF MULTIPLE TORTFEASORS' POLICY LIMITS
Matter of Central Mut. Ins. Co. v. Bemiss
(3rd Dept., decided 8/14/2008)

After Bemiss was injured in a multicar accident, she negotiated a settlement with one of the tortfeasors for the full amount of that tortfeasor's liability insurance policy. She then gave written notice of her intent to enter into this settlement to Central Mutual, which had issued her an insurance policy with supplementary uninsured/underinsured motorist (SUM) coverage, but Central Mutual did not respond. Later, she agreed to settle with a second tortfeasor for less than that tortfeasor's policy limits without first giving any notice to, or obtaining written consent from, Central Mutual. Bemiss ultimately signed releases for both tortfeasors that made no provision for preserving Central Mutual's subrogation rights. When she then made a claim for SUM benefits, Central Mutual disclaimed coverage based upon her failure to either obtain its consent to the settlements or take steps to preserve its subrogation rights. Bemiss then demanded arbitration of her SUM claim, and Central Mutual commenced this CPLR article 75 proceeding to permanently stay arbitration. Supreme Court granted Central Mutual's application and Bemiss appealed.

In a 4-1 decision, the Third Department, Appellate Division, AFFIRMED the motion court's order granting a permanent stay of SUM arbitration. With respect to Bemiss' settlement with the first tortfeasor, the majority ruled that since Bemiss gave timely notice of her intention to settle with that tortfeasor and Central Mutual did not advance the settlement amount, the policy permitted Bemiss to settle with that tortfeasor without Central Mutual's consent (the "30-day okay or pay rule").

With respect to the Bemiss' settlement with the second tortfeasor, however, the majority found that Bemiss did not comply with policy conditions, thereby voiding her entire claim for SUM benefits:

We reach a different conclusion as to respondent's argument that her settlement with the first tortfeasor for that party's policy limits relieved her of the obligation to either obtain petitioner's written consent to her settlement with the second tortfeasor or preserve petitioner's subrogation rights in the release given to that tortfeasor. While paragraph 9 of the policy makes clear that respondent was obligated to fully exhaust the policy of only one of the tortfeasors involved in her accident (see S'Dao v National Grange Mut. Ins. Co., 87 NY2d 853, 854-855 [1995]), that same provision does not excuse a failure to comply with paragraph 10 upon settling with another tortfeasor. Unlike the settlement with the first tortfeasor, paragraph 10's first sentence is not applicable to respondent's settlement with the second tortfeasor because the latter was not for the full policy amount. As a result, only the last sentence of paragraph 10 applies here. That sentence provides: "An insured shall not otherwise settle with any negligent party, without our written consent, such that our [subrogation] rights would be impaired." We do not view this sentence to be limited to where a party seeks in the first instance to settle for the full available policy limits of one tortfeasor. Rather, its function is to make clear that the method described in the first sentence of paragraph 10 is the one and only way to enter a settlement with "any negligent party" which impairs petitioner's rights without its consent. There is no dispute that respondent failed to obtain petitioner's consent or reserve petitioner's subrogation rights against the second tortfeasor here.

Our reading of paragraph 10 will not have the effect of discouraging settlements by, as respondent contends, holding her hostage to petitioner's subrogation rights and forcing her to fully litigate any claims that she might have against any and all tortfeasors. That effect would occur only if the insured were required to exhaust the policies of all tortfeasors either before or after receiving SUM benefits. However, since the amendment of the applicable regulation (see 11 NYCRR 60-2.3 [f]) in 1993 and the Court of Appeals holding in S'Dao v National Grange Mut. Ins. Co. (supra) in 1995, it has become clear that insureds need only exhaust the policy or policies of a single tortfeasor (see Dachs and Dachs, Insurance Law, NYLJ, Sept. 13, 2005, at 3, col 1). Thus, there is no longer any requirement in the regulations or the policy language that the insured pursue litigation or settle the claims that it might have against additional tortfeasors in order to qualify for or retain SUM benefits. While it is true that our reading of paragraph 10 precludes the insured from entering a second settlement that impairs subrogation rights without the insurer's consent, it nonetheless encourages an initial settlement with one tortfeasor and expedites the receipt of SUM benefits while protecting the insurer's subrogation rights to recoup the benefits paid from other tortfeasors. There can be little doubt that such was the intent of the applicable regulations (see Dachs and Dachs, Insurance Law, NYLJ, Sept. 13, 2005).

The dissenting justice asserted that the effect of the majority's ruling "is to discourage settlements in this type of litigation and to invite indeed command a plaintiff's counsel to fully litigate any and all personal injury claims that it might have against any and all tortfeasors. Clearly, this is not the result that was intended by the Legislature when it enacted these provisions and, in my view, it constitutes a waste of precious judicial resources. * * * Finally, respondent should not, in my view, be penalized because she had the misfortune to be involved in an accident that involved more than one wrongdoer. Had she only brought suit against the primary tortfeasor and settled against him under precisely the same circumstances while forgoing her right to sue others that were involved in this accident, respondent would clearly have been entitled to make this claim under her SUM policy. As a result, I would reverse and deny petitioner's application to stay arbitration. "

Post Script (July 7, 2009) ~~ The Court of Appeals AFFIRMED this decision on June 25, 2009. Read about it here.