The Bane of Being the Butt of Jokes

Who doesn't like a well-written judicial decision?  Especially when the case is about insurance coverage?

In ECB USA, Inc. v. Chubb Ins. Co. of New Jersey (S.D. Fla. Dec. 17, 2021), US District Court Judge Robert N. Scola, Jr. opened with this beauty:

As a general matter, insurance policies and insurance salesmen have long been the butt of jokes. The former are not known for beautiful prose nor the latter for exciting conversation. But insurance contracts can provide fodder for scores of attorneys, grammarians, and logophiles, where, as here, the meaning of one phrase and the placement (or omission) of one comma can make the difference between coverage and nothing.

The policy in question covered “Management consulting services,” which were defined as “services directed toward expertise in banking finance, accounting, risk and systems analysis, design and implementation, asset recovery and strategy planning for financial institutions.” 

Chubb argued that "for financial institutions" modified the entire series--banking finance, accounting, risk and systems analysis, design and implementation, asset recovery, and strategy planning. The policyholder argued that the lack of a comma meant that "for financial institutions" applied only to "asset recovery and strategy planning", the last term in the series. 

The court agree with Chubb, citing a 1971 SCOTUS decision which noted that while “commas at the end of series can avoid ambiguity...[the] use of such commas is discretionary”.

#iamalogophile

#punctuationmatters

#thediscretionarycomma

#theseriesqualifiercanonrocks

Estoppel by Delay

PROFESSIONAL LIABILITY  – LATE NOTICE – UNTIMELY DISCLAIMER – ESTOPPEL
B&R Consol., LLC v Zurich Am. Ins. Co.
(2nd Dept., decided 9/24/2014)

At my firm's biennial coverage seminar last September I spent a good deal of time talking about Insurance Law § 3420(d)(2) untimely disclaimer/denial case law.  But 3420(d)(2) applies only to coverage declinations regarding accidentally caused death or bodily injury.

No accident?  No death or bodily injury?  No risk of a disclaimer or denial being invalidated as untimely, right?  No, not right.  Liability insurers' coverage disclaimers and denial can be found to be untimely and therefore unenforceable even if 3420(d)(2) does not apply.  How?  Estoppel.

As applied to liability insurers as in this case, estoppel is an equitable doctrine deriving from common law rather than statute.  It essentially provides that an insurer may not take or change its position on coverage if either its delay in doing so or previous words or conduct caused prejudice to its insured's legal position.  I advise my firm's insurer clients that reservation of rights (ROR) letters protect against the application of estoppel.  Or, I should say, are supposed to protect against invalidation of disclaimers and denials by estoppel.

Zurich insured a then lawyer, Frederick Powell, who misappropriated funds intended for his client, B&R Consolidated, LLC.  An amended complaint filed and served on Powell alleged that he had breached his fiduciary duty and duty of loyalty to B&R.  Powell notified Zurich of the lawsuit 51 days after receiving the summons and complaint.  Zurich assigned defense counsel and issued a reservation of rights letter to Powell 18 days after it first received notice of the claim and underlying lawsuit.  The reservation of rights letter reserved Zurich's right to disclaim coverage based upon certain policy exclusions and Powell's failure to give timely notice of the commencement of the action against him.

Approximately five months later, Zurich issued a full disclaimer of coverage based on Powell's asserted failure to give timely notice of the commencement of the underlying action. Zurich also advised Powell that it reserved the right to deny coverage on all other grounds set forth in its earlier ROR letter, and that it would no longer provide a defense or indemnify him in the underlying action. After obtaining on motion a judgment against Powell in the principal amount of $585,056.18, B&R commenced this Insurance Law § 3420(b) action against Zurich.

Supreme Court denied Zurich's and granted B&R's cross motion for summary judgment.  In AFFIRMING that order, the Appellate Division, Second Department, held first that Zurich could be held liable to B&R under Insurance Law § 3420(b) even though it did not issue the professional liability policy in question because there was an apparent agency relationship between Zurich and defendant American Guarantee and Liability Insurance Company given that: (1) Zurich's logo was on documents created and distributed by American Guarantee; (2) Zurich's claims counsel was assigned to handle Powell's case; (3) assigned counsel was required to follow Zurich's guidelines and to submit bills to Zurich; and (4) Powell was contacted by Zurich's Customer Care Center regarding the claim and was directed to file his claim on Zurich's website.

In upholding Supreme Court's finding that American Guarantee was estopped from relying upon its late notice defense because its disclaimer to Powell was untimely, the Appellate Division reasoned:

Where, as here, the matter does not involve death or bodily injury, the untimely disclaimer by an insurer does not automatically estop the insurer from disclaiming on the basis of late notice unless there has been a showing of prejudice to the insured due to the delay (see Only Natural, Inc. v Realm Natl. Ins. Co., 37 AD3d 436 [2007]; United States Fid. & Guar. Co. v Weiri, 265 AD2d 321 [1999]; Esseks, Hefter & Angel v Government Empls. Ins. Co., 215 AD2d 430 [1995]). Although the court did not make a determination that Powell was prejudiced by the defendants' approximate five-month delay in disclaiming coverage, based upon this record, B&R made a sufficient showing of prejudice to Powell due to the defendants' late disclaimer such that the defendants are estopped from disclaiming coverage (cf. Legum v Allstate Ins. Co., 33 AD3d 670 [2006]). Moreover, the purported reason for the disclaimer of coverage was evident on the face of the original complaint, and did not require any additional investigation by the insurer (see Uptown Whole Foods v Liberty Mut. Fire Ins. Co., 302 AD2d 592, 593 [2003]). The defendants failed to rebut this showing.

The appellate court did not explain or indicate what B&R's "sufficient showing of prejudice to Powell" consisted of, and neither had the lower court's decision.  In fact, the lower court did not even rule on B&R's argument of estoppel by delay.  Was the prejudice American Guarantee's sudden withdrawal of defense counsel?  

So what to do about the advice that ROR letters protect against estoppel?

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.

Trial Court Did Not Abuse Its Discretion in Excluding Reference to Defendant's Expert's Stock Ownership in Defendant's Liability Insurer

EVIDENCE OF DEFENDANT'S LIABILITY INSURANCE – PROBATIVE VS. PREJUDICIAL VALUE
Salm v. Moses
(Ct. Apps., decided 10/22/2009)

Hat tip to Gregory McGoldrick over at McGoldrick's New York State Civil Evidence for spotting and blogging this decision. 

This is not an insurance coverage decision, but one about insurance coverage.  It has long been the rule in New York that evidence that a civil defendant carries liability insurance is generally inadmissible at trial.  In this dental malpractice action, moved in limine to preclude plaintiff from cross-examining defendant's expert regarding the fact that he and defendant were both shareholders of and insured by the same dental malpractice insurance company.  Plaintiff opposed the motion, but did not request a voir dire of the expert to inquire into his connection to the insurer.  After a colloquy with counsel, Supreme Court granted the motion, finding that the probative value of the inquiry would be outweighed by the prejudicial effect of having defendant's insurance coverage revealed to the jury. Upon plaintiff's appeal following a jury verdict in favor of defendant, the Appellate Division affirmed (57 AD3d 370 [1st Dept 2008]). The Court of Appeals granted plaintiff leave to appeal.

In AFFRIMING the Appellate Division's decision, the Court of Appeals held that the trial court did not abuse its discretion in granting the defendant's motion in limine:   

Evidence that a defendant carries liability insurance is generally inadmissible (see Leotta v Plessinger, 8 NY2d 449, 461 [1960], rearg denied 9 NY2d 688 [1961]; Simpson v Foundation Co., 201 NY 479, 490 [1911]). The rationale underlying this rule is twofold. First, "it might make it much easier to find an adverse verdict if the jury understood that an insurance company would be compelled to pay the verdict" (Loughlin v Brassil, 187 NY 128, 135 [1907]). Second, evidence of liability insurance injects a collateral issue into the trial that is not relevant as to whether the insured acted negligently. Although we have acknowledged that liability insurance has increasingly become more prevalent and that, consequently, jurors are now more likely to be aware of the possibility of insurance coverage, we have continued to recognize the potential for prejudice (see Oltarsh v Aetna Ins. Co., 15 NY2d 111, 118-119 [1965]; see also Barker and Alexander, Evidence in New York State and Federal Courts § 4:63, at 260-261 [5 West's NY Prac Series 2001] ["Because the prejudice quotient is obvious, the rule barring such evidence is one of the least controversial in the law of evidence"]).

The rule, however, is not absolute. If the evidence is relevant to a material issue in the trial, it may be admissible notwithstanding the resulting prejudice of divulging the existence of insurance to the jury. For example, we have held that evidence that a defendant insured a premises is relevant to demonstrate ownership or control over it (see Leotta, 8 NY2d at 462). Likewise, it was proper to allow cross-examination of a physician regarding the fact that the defendant's insurance company retained him to examine the plaintiff in order to show bias or interest on the part of the witness (see Di Tommaso v Syracuse Univ., 172 App Div 34, 37 [4th Dept 1916], affd without opn 218 NY 640 [1916]).

Here, we perceive no abuse of discretion in Supreme Court's evidentiary ruling. Such evidence may be excluded if the trial court finds that the risk of confusion or prejudice outweighs the advantage in receiving it (see Kish v Board of Educ. of City of N.Y., 76 NY2d 379, 384-385 [1990]). In this case, plaintiff speculated during the colloquy that a verdict in defendant's favor could result in a $100 benefit — at the time of the expert's death, disability or retirement — based on the expert's shareholder status in OMSNIC. The trial court's finding that any such financial interest was likely "illusory" and that the possibility of bias was attenuated was reasonable on this record. Absent a more substantial connection to the insurance company — or at least something greater than a de minimis monetary interest in the carrier's exposure — the court did not engage in an abuse of discretion in precluding the testimony. We note that a voir dire of an expert outside the presence of the jury can better aid the court in exploring the potential for bias.

Judge Piggott concurred in the majority's conclusion but wrote separately because, in his view, "courts should no longer treat insurance coverage as the third rail of trial practice such that it can neither be mentioned, even incidentally, nor be the basis of appropriate inquiry as to possible bias, as in the ruling here."

Legal Malpractice Policy Found to Constitute Insurance Against Liability for "Injury to Person(s)" Under New York Insurance Law § 3420(A)

PROFESSIONAL LIABILITY – NOTICE OF CLAIM – INSURANCE LAW § 3420(A) – INSURANCE AGAINST "LIABILITY FOR INJURY TO PERSON"
McCabe v. St. Paul Fire & Mar. Ins. Co.
(Sup. Ct., Erie Co., decided 8/19/2009)

New York Insurance Law § 3420(a) mandates that certain provisions be included in all policies issued or delivered in New York State that insure against liability for "injury to person . . . or . . . injury to, or destruction of, property[.]"  One such required provision allows injured persons to satisfy an insured's contractual obligation to give timely notice of an occurrence (accident) and/or claim:

§ 3420. Liability insurance; standard provisions; right of injured person

(a) No policy or contract insuring against liability for injury to person, except as provided in subsection (g) of this section, or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions or provisions that are equally or more favorable to the insured and to judgment creditors so far as such provisions relate to judgment creditors:

*  *  *  *  *

(3) A provision that notice given by or on behalf of the insured, or written notice by or on behalf of the injured person or any other claimant, to any licensed agent of the insurer in this state, with particulars sufficient to identify the insured, shall be deemed notice to the insurer.

(4) A provision that failure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, an injured person or any other claimant if it shall be shown not to have been reasonably possible to give such notice within the prescribed time and that notice was given as soon as was reasonably possible thereafter.

There's no question that  § 3420(a) applies to auto, homeowners and commercial general liability policies, but does it apply to a legal malpractice policy issued or delivered in New York?  Yes it does, says this court. 

St. Paul Fire and Marine Insurance Company insured attorney David Fretz under a $1 million claims-made professional liability policy effective from January 14, 2006 and January 14, 2007.  Coverage under that policy depended on two preconditions:  (1) that a claim for legal malpractice was made against Fretz during the policy period; and (2) that such claim was reported to St. Paul within the policy's period or 60-day extended reporting period of January 14, 2006 through March 14, 2007.

Fretz represented the plaintiffs on their insurance claim for the December 2003 fire loss of their home.  As a consequence of Fretz' neglect of their insurance claim, plaintiffs lost their ability to recover on that claim.  After sending several letters to Fretz, including one dated January 2, 2007, plaintiffs commenced an action for malpractice against Fretz in late March 2007.  Fretz failed to notify St. Paul of plaintiffs' malpractice claim against him in time for St. Paul to submit an answer on his behalf in the action, and Fretz eventually was determined to be in default.  In December 2007, following an inquest on damages, plaintiffs were awarded compensatory damages of $226,000, and those damages were ordered trebled pursuant to Judiciary Law § 487. Accordingly, by judgment entered January 2, 2008, Fretz was directed to pay plaintiffs just over $700,000, inclusive of costs, disbursements, and interest to the date of entry of the judgment.

By letter to plaintiffs' attorney dated July 17, 2007, St. Paul disclaimed coverage under Fretz' legal malpractice policy on the ground that, although plaintiffs' claim against Fretz may have been made (as claimed in their attorneys' letter) within the policy period, such claim had not been reported to St. Paul within the policy period or the 60-day Extended Reported Period, as required by the policy.

After obtaining a money judgment against Fretz, plaintiffs commenced this action against St. Paul in June 2008 pursuant to Insurance Law §§ 3420(a)(2) and (b)(1). St. Paul interposed an answer and counterclaim, asserting only that the plaintiffs' malpractice claim had not been timely reported.  Subsequently, by letter dated October 7, 2008 letter, St. Paul attempted to add a new and additional basis for disclaiming coverage, i.e., that plaintiffs' letter to Fretz of January 2, 2008 did not in fact constitute the making of a claim by plaintiffs against Fretz within the policy period, as required in order to give rise to coverage under the policy.  Plaintiffs moved and St. Paul cross-moved for summary judgment.

In granting plaintiffs' motion for summary judgment, Erie County Supreme Court Justice Patrick Nemoyer held that St. Paul's professional liability policy fell constituted a policy insuring against liability for "injury to person" within the meaning of Insurance Law § 3420(a).  Thus, in the opinion of the court, "plaintiffs acted diligently in an attempt to garner the relevant insurance information from Fretz [and], as a matter of law, plaintiffs did not unduly or unreasonably delay in reporting the claim to St. Paul":

Plaintiffs reported the making of the claim to St. Paul on June 22, 2007, the very day on which they were informed of St. Paul's identity as Fretz's malpractice insurer. The period of delay to be examined with reference to plaintiffs' asserted diligent efforts is the period from March 14, 2007, the end of the 60-day extension period, until June 22, 2007, when notice was given to St. Paul. During that period alone, more particularly on March 26, April 9, April 24, and May 8, 2007, plaintiffs' then attorney Doyle sent four certified letters to Fretz, repeatedly emphasizing the importance of notice being given immediately to his malpractice insurance carrier and pleading with Fretz to reveal the name of such carrier so that plaintiffs could exercise their independent right to give such notice. Those letters were in addition to an unspecified number of telephone calls made for the same purpose. In each instance, the mentally incapacitated Fretz failed to respond to the letter or telephone call. Doyle was reduced to asking this Court for an order compelling Fretz to disclose the identity of his carrier, and only then were plaintiffs made aware of that identity. Those various attempts by Doyle were a follow up to his earliest certified letter of March 2, 2007, in which Doyle likewise sought to have Fretz provide him with the identity of his carrier and place that carrier on notice of the malpractice claim. That plaintiff first undertook and were thwarted in those efforts to discover the identity of the insurer before March 14, 2007, at a time when it would have been possible for them to comply with the requirements of the policy, demonstrates their due diligence as a matter of law. 

 Justice Neymoyer also rejected as untimely St. Paul's second ground for disclaiming coverage -- that no malpractice claim had actually been made against Fretz within the policy period:

Having determined the applicability of Insurance Law § 3420(a)(2), it remains for this Court to determine the validity of St. Paul's disclaimer under the policy. St. Paul now contends that it validly disclaimed coverage under the policy on two grounds: first, that no claim was made during the policy period; and second, that no claim was reported to St. Paul during the policy period or the 60-day extension period. The problem for St. Paul is that only the second of those disclaimer grounds was articulated in St. Paul's July 17, 2007 disclaimer letter to Fretz. The pertinent paragraph of the letter stated that St. Paul was denying Fretz any defense and indemnity in the malpractice action on the ground that "this Claim' was neither reported to St. Paul during the Policy Period,' nor was the Claim' or your disability reported within the 60 days following the date of the St. Paul Policy's" lapse. It is of course a fundamental principle of the law in this realm that an insurer's attempt at disclaimer is strictly limited to those grounds articulated in the notice of disclaimer, and that a ground not raised in a disclaimer letter may not be later asserted by the insurer (see General Accident Ins. Co v Cirucci, 46 NY2d 862, 864 [1979]; City of Kingston v Harco Nat. Ins. Co., 46 AD3d 1320, 1321 [3d Dept 2007]; Benjamin Shapiro Realty Co. v Agric. Ins. Co., 287 AD2d 389 [1st Dept 2001]; see also Wraight v Exchange Ins. Co., 234 AD2d 916, 917-918 [4th Dept 1996] [held: where insurer disclaimed coverage based solely upon its insured's failure to provide timely notice, insurer is subsequently estopped from raising the injured party's allegedly untimely notice as a defense in the declaratory judgment action]). Indeed, St. Paul's July 17, 2007 letter explicitly assumed, based on Doyle's representations, that the claim was first made against the insured on January 2, 2007, within the policy period. The Court understands that St. Paul entertained that assumption without having seen the January 2, 2000 letter, but St. Paul's own lack of reasonable investigation into the circumstances is not a ground for departing from the aforementioned principle that the insurer is strictly limited to those disclaimer grounds articulated in the letter of disclaimer (see 2540 Associates, Inc. v Assicurazioni Generali, S.p.A., 271 AD2d 282, 284 [1st Dept 2000] [held: "as a matter of policy, reasonable investigation is preferable to piecemeal disclaimers"]; see also DiGuglielmo v Travelers Property Cas., 6 AD3d 344, 346 [1st Dept 2004], lv denied 3 NY3d 608 [2004]). Contrary to St. Paul's contention, enforcement of the rule that an insurer's attempt at disclaimer is strictly limited to those grounds articulated in the notice of disclaimer does not involve the creation of coverage where none would otherwise exist. St. Paul's belated attempt to supplement its disclaimer letter to Fretz by adding or resurrecting the "claim not timely made" disclaimer ground — an attempt not made until October 7, 2008, after the commencement of this declaratory judgment action by plaintiffs and indeed following the interposition of St. Paul's answer and counterclaim asserting only that the malpractice claim had not been timely reported — cannot avail for obvious reasons, both procedural and substantive. 

It remains to be seen, on what undoubtedly will be St. Paul's appeal to the Fourth Department, whether the court's preclusion of St. Paul's no-claim-within-policy-period defense will withstand appellate scrutiny.  New York case law is legion that coverage may not be created by either waiver or estoppel.  Three of the four cases cited by the court -- Cirucci, City of Kingston and Wraigth -- involved bodily injury claims and, as such, implicated then Insurance Law § 3420(d) (now [d][1]), which explains those courts' preclusion of coverage defenses not initially raised in a timely disclaimer or denial.  Although this court concluded that the Fretz malpractice policy insured against liability for "injury to person", the plaintiffs' claims clearly did not fall within the purview of § 3420(d)(1) because they were not ones for "bodily injury" or death.

If the Fourth Department decides that St. Paul was not precluded from asserting its no-claim-within-policy-period defense, either it or the motion court will need to address whether the plaintiffs' January 2, 2007 letter constituted a "claim" against Fretz within the meaning of his malpractice policy with St. Paul:

"We [have] attempted to contact you for over six months, we also had another attorney attempt to contact you. We don't understand what is happening with our case. Upon our own research, we understand that our insurance lawsuit with Erie Insurance has been closed, due to negligence, on your part.

Please contact us immediately to rectify this. If we do not he[ar] from you, this letter, a letter explaining our hardships, and letter explaining the irresponsibility of our lawyer, will be sent to The Attorney Grievance Committee. With or without you we are going forward."

Compare that letter with what the First Department said about what constitutes a "claim" under a legal malpractice policy in it September 2008 decision in Yale Club of New York City, Inc. v. Reliance Ins. Co. in Liquidation:

In the context of ongoing attempts by the union representing the insured's employees to resolve the parties' dispute, the letter, which neither makes any demand for payment nor advises that legal action will be forthcoming, is insufficient to state a claim.

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.