Injured Party/Judgment Creditor Who Obtains Assignment of Insureds' Bad Faith Claim After Conclusion of Direct Action May Bring Second Action Against Liability Insurer

HOMEOWNERS – LIABILITY – EXCESS JUDGMENT – STANDING – BAD FAITH – INSURANCE LAW 3420(A)(2) & (B)(1) 

Corle v. Allstate Ins. Co.
(4th Dept., 6/8/2018)

Sometimes called New York's direct action statute, New York Insurance Law § 3420(b)(1) states:

(b) Subject to the limitations and conditions of paragraph two of subsection (a) of this section, an action may be maintained by the following persons against the insurer upon any policy or contract of liability insurance that is governed by such paragraph, to recover the amount of a judgment against the insured or his personal representative: 

    (1) any person who, or the personal representative of any person who, has obtained a judgment against the insured or the insured's personal representative, for damages for injury sustained or loss or damage occasioned during the life of the policy or contract[.]

Teeter accidentally shoots Corle, and Corle sues Teeter.  Allstate disclaims coverage to Teeter, asserting that the accidental shooting was not a covered loss under the policy.  Corle proceeds with his personal injury action against Teeter and obtains a judgment of over $350,000 against him.

Corle then sues Allstate as a judgment creditor under Insurance Law § 3420 (a) (2) and (b) (1), and Supreme Court grants Corle's motion for summary judgment, holding that the shooting was a covered loss under Teeter's parents' homeowners insurance policy with Allstate, awarding Corle the policy's $50,000 limit.

This is not that action, however.  This is Corle's second action against Allstate, commenced after the Teeters assigned their rights and claims against Allstate to Corle, who then sued Allstate for disclaiming coverage in bad faith.

Allstate moved to dismiss this action, arguing primarily that Corle should have taken the assignment and included his bad faith claim in his first action under Insurance Law § 3420(b)(1) against Allstate -- that Corle's judgment in that action for $50,000 was res judicata, barring any additional recovery against Allstate.

The Appellate Division, Fourth Department, disagreed:

Contrary to defendant's contention, we conclude that the failure of James [Corle] to litigate the bad faith claim in the earlier Insurance Law § 3420 (a) (2) action does not bar litigation of that claim in the instant action. "Under the doctrine of res judicata, a party may not litigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter. The rule applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation . . . Additionally, under New York's transactional analysis approach to res judicata, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy' " (Matter of Hunter, 4 NY3d 260, 269 [2005]; see O'Brien v City of Syracuse, 54 NY2d 353, 357 [1981]).  

Insurance Law § 3420 (b) (1) provides that, "[s]ubject to the limitations and conditions of paragraph two of subsection (a) of this section, . . . any person who . . . has obtained a judgment against the insured or the insured's personal representative[] for damages for injury sustained . . . during the life of the policy or contract" may maintain an action against the insurer "to recover the amount of a judgment against the insured or his personal representative." Such an action may be "maintained against the insurer under the terms of the policy or contract for the amount of such judgment not exceeding the amount of the applicable limit of coverage under such policy or contract" (§ 3420 [a] [2]).  

We conclude that, under Insurance Law § 3420 (a) (2) and (b) (1), an injured party's standing to bring an action against an insurer is limited to recovering only the policy limits of the insured's insurance policy. Contrary to defendant's contention, we conclude that, if an injured party/judgment creditor seeks to recover from the insurer an amount above the insured's policy limits on a theory of liability beyond that created by Insurance Law § 3420 (a) (2), the statute does not confer standing to do so. However, if the insured assigns his or her rights under the insurance contract to the injured party/judgment creditor, then the injured party/judgment creditor may simultaneously bring a direct action against the insurer pursuant to Insurance Law § 3420 (a) (2) along with any other appropriate claim, including a bad faith claim, seeking a judgment in a total amount beyond the insured's policy limits.  

Here, when James [Corle] commenced the prior action pursuant to Insurance Law § 3420 (a) (2) individually and on behalf of [his injured son,] Colin, the Teeters had not yet assigned their rights under the insurance contract to James and Colin. As a result, James did not have standing to bring a bad faith claim against defendant (cf. Bennion v Allstate Ins. Co., 284 AD2d 924, 924-926 [4th Dept 2001]). Thus, because James lacked standing to bring a bad faith claim against defendant at the time he brought the Insurance Law § 3420 (a) (2) action, we conclude that the doctrine of res judicata does not bar this action (see generally Hunter, 4 NY3d at 269; Summer v Marine Midland Bank, 227 AD2d 932, 934 [4th Dept 1996]), and defendant's motion insofar as it sought to dismiss the complaint pursuant to CPLR 3211 (a) (5) was properly denied. 

In so holding, the Fourth Department declined to follow the holding on similar facts of the First Department in a 2010 case:

We recognize that the First Department held otherwise on similar facts in Cirone v Tower Ins. Co. of N.Y. (76 AD3d 883 [1st Dept 2010], lv denied 16 NY3d 708 [2011]).  To the extent that the First Department in Cirone concluded that an injured person/judgment creditor who commenced an action against the insurer pursuant to Insurance Law § 3420 (a) (2) had standing to assert a bad faith settlement practices claim in that action in the absence of an assignment from the insured, we disagree with that conclusion and decline to follow Cirone. 

The Fourth Department also concluded that. contrary to Allstate's argument, Corle's complaint in this action sufficiently stated a cause of action for insurer bad faith:

We reject defendant's further contention that the court erred in denying its motion insofar as it sought to dismiss the complaint under CPLR 3211 (a) (7), for failure to state a cause of action. Viewing the facts as alleged by plaintiffs in the light most favorable to them and affording plaintiffs all favorable inferences (see generally Whitebox Concentrated Convertible Arbitrage Partners, L.P. v Superior Well Servs., Inc., 20 NY3d 59, 63 [2012]), we conclude that plaintiffs sufficiently stated a cause of action for bad faith against defendant.

With the apparent split in appellate authority on res judicata issue, it remains to be seen whether Allstate will seek leave to appeal this decision to the New York Court of Appeals.

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

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

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

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

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

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

Res Judicata and Collateral Estoppel Not Applicable to Bar Relitigation of Rate Evasion-Based Voiding of Pennsylvania Auto Policy

AUTO – UM/SUM – RATE EVASION – RES JUDISCATA – COLLATERAL ESTOPPEL
Matter of AutoOne Ins. Co. v. Valentine
(2nd Dept., decided 4/20/2010)

On January 3, 2004, Valentine was involved in an automobile accident in Queens with a motor vehicle operated by Rodriguez. The petitioner, AutoOne Insurance Company, insured the Valentine vehicle.  Rutgers Casualty Insurance Company insured the Rodriguez vehicle.

In 2005, Rutgers commenced an action in Pennsylvania state court against, among others, Rodriguez and Valentine.  AutoOne was not a party to the Pennsylvania action. Rutgers' complaint alleged that Rodriguez had fraudulently represented on his application for insurance that he resided in Pennsylvania and that his vehicle was garaged there.  Rutgers sought to have Rodriguez's policy declared void ab initio.  The complaint also stated that "[a]ll other defendants named herein are so named FOR THE PURPOSE OF NOTICE ONLY," referring to Valentine and all of the defendants other than Rodriguez.

In 2006, the Pennsylvania state court declared Rodriguez's policy void ab initio upon the default of Rodriguez and granted Rutgers' request to discontinue the Pennsylvania action against all other defendants, including Valentine.

Valentine thereafter amended his supplementary uninsured motorists (SUM) coverage claim to AutoOne and demanded arbitration.  In 2008, AutoOne commenced this special proceeding and sought leave to join Rutgers and Rodriguez as proposed additional respondents and temporarily to stay arbitration of Valentine's claim for SUM benefits pending a hearing on the determination of coverage under Rodriguez's policy with Rutgers.

Queens Supreme Court (Rios, J.) granted AutoOne's petition and Rutgers appealed.  In AFFIRMING the order appealed from, the Second Department ruled:

• the doctrine of res judicata did not apply to bar relitigation in this proceeding of the issue of insurance coverage for the Rodriguez vehicle under the Rutgers policy because the Pennsylvania court order was not a final judgment on the merits which would be entitled to res judicata effect in this proceeding;
  
  
• because the discontinuance of Rutgers' Pennsylvania state court action as to Valentine did not state that it was granted with prejudice, it did not operate as an adjudication on the merits for purposes of res judicata application; and
  
  
• the doctrine of collateral estoppel did not apply to bar relitigation in this proceeding of the insured status of the Rodriguez vehicle because that issue was not actually litigated and decided in the Pennsylvania action, since Rodriguez defaulted and the Pennsylvania court's order voiding his policy ab initio was issued on that basis.

A Spate of No-Fault Decisions from the Appellate Term, Second Department

NO-FAULT – NOTARY PUBLIC'S JURAT – TECHNICAL DEFECT – PEER REVIEW – MEDICAL NECESSITY
Complete Orthopedic Supplies, Inc. a/a/o Ana Valencia v. State Farm Mut. Auto. Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Appeal from a Queens Civil judgment for plaintiff DME provider on its motion for summary judgment.

REVERSED and State Farm's cross motion for summary judgment was granted. The notary public's jurat was missing the year State Farm's affidavits of mailing were signed. The Appellate Term held that this was a "technical defect" that the Civil Court should have disregarded since it did not prejudice a substantial right of a party, and plaintiff had raised no objection to it. State Farm's affirmed peer review report established prima facie that there was no medical necessity for the supplies provided by plaintiff, which proof plaintiff did not rebut. As a result, State Farm's cross motion for summary judgment dismissing the complaint should have been granted.


NO-FAULT – UNTIMELY SUBMISSION OF CLAIMS
Long Is. Multi-Medicine Group, P.C. a/a/o Sumira Lund v. Travelers Ins. Co.
(App. Term, 2nd Dept., decided 1/8/2009)

Appeal from a Queens Civil judgment for plaintiff on its motion for summary judgment.

AFFIRMED. Civil Court had granted plaintiff's motion based on its finding that Travelers waived its defense of claim submission untimeliness, since it failed to advise plaintiff that the claim would be reconsidered upon a showing of impossibility to timely submit the claims. The Appellate Term affirmed the judgment, not on that ground, but because Travelers' opposition motion papers annexed denial of claim forms that did not correspond to the claim forms upon which plaintiff sought summary judgment. As such, the court held that Travelers had failed to establish that it timely denied the subject claims and, as such, failed to raise a triable issue of fact with respect to the claims at issue.


NO-FAULT – ADMISSIBILITY OF BUSINESS RECORDS
Union Physician Healthcare, P.C. a/a/o Christopher Kelly v. Utica Mut. Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Appeal from a Kings Civil judgment for plaintiff on its motion for summary judgment.

REVERSED and plaintiff's motion denied. The affidavit by plaintiff's officer submitted in support of plaintiff's motion for summary judgment failed to lay a proper foundation for the admission of the documents annexed to plaintiff's moving papers and, as a result, plaintiff failed to establish a prima facie case. The affidavit submitted by plaintiff's officer was insufficient to demonstrate that he possessed personal knowledge of plaintiff's practices and procedures so as to lay a foundation for the admission, as business records, of the documents annexed to plaintiff's moving papers. Accordingly, plaintiff failed to make a prima facie showing of its entitlement to summary judgment (see Art of Healing Medicine, P.C. v Travelers Home & Mar. Ins. Co., 15 Misc 3d 144[A], 2007 NY Slip Op 51161[U] [App Term, 2d & 11th Jud Dists 2007], affd 55 AD3d 644 [2008]; Bath Med. Supply, Inc. v Deerbrook Ins. Co., 14 Misc 3d 135[A], 2007 NY Slip Op 50179[U] [App Term, 2d & 11th Jud Dists 2007]; Dan Med., P.C. v New York Cent. Mut. Fire Ins. Co., 14 Misc 3d 44 [App Term, 2d & 11th Jud Dists 2006]).


NO-FAULT – MVAIC – NOTICE OF CLAIM – INSURANCE LAW § 5208(A)
M.N.M. Med. Health Care, P.C. a/a/o Erick Papillion v. MVAIC
(App. Term, 2nd Dept., decided 1/9/2009)

Appeal from a Queens Civil order denying defendant MVAIC's motion for summary judgment.

REVERSED and MVAIC's motion granted, dismissing the complaint. The filing of a timely affidavit providing MVAIC with notice of intention to file a claim is a condition precedent to the right to apply for payment from MVAIC pursuant to New York Insurance Law § 5208(a). Compliance with the statutory requirement of timely filing a notice of claim must be established in order to demonstrate that the claimant is a "covered person" who is entitled to recover no-fault benefits from MVAIC. MVAIC's submissions in support of its motion for summary judgment made a prima facie showing that plaintiff's assignor failed to timely file a notice of claim. By defaulting on the motion, plaintiff did not demonstrate that its assignor timely filed a notice of claim or sought leave to file a late notice of claim. Thus, MVAIC's motion for summary judgment should have been granted.


NO-FAULT – NOTICE TO ADMIT – PRIMA FACIE CASE SHOWING
All Mental Care Medicine, P.C. a/a/o Augustin Martes v. State Farm Mut. Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Vista Surgical Supplies, Inc. a/a/o Tyrone Pearson v. State Farm Mut. Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Judgments for State Farm dismissing the complaints AFFIRMED. An admission that defendant received plaintiff's claim form is not a concession of the facts set forth in said claim form (Bajaj v General Assur. Co., 18 Misc 3d 25, 28 [App Term, 2d & 11th Jud Dists 2007]; Midborough Acupuncture, P.C. v New York Cent. Mut. Fire Ins. Co., 13 Misc 3d 132[A], 2006 NY Slip Op 51879[U] [App Term, 2d & 11th Jud Dists 2006]). By only submitting the notices to admit and producing no witnesses at trial, plaintiffs failed to make a prima facie case for recovery of no-fault benefits.


NO-FAULT – MOTION TO AMEND ANSWER TO ADD AFFIRMATIVE DEFENSES – RES JUDICATA – COLLATERAL ESTOPPEL BASED ON PRIOR ARBITRATION DECISION – FRAUDULENTLY INCORPORATED PC
Uptodate Med. Serv., P.C. a/a/o Jean Alberic v. State Farm Mut. Auto. Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Appeal from a Queens Civil judgment for plaintiff on its motion for summary judgment.

REVERSED, granting State Farm's motion to amend its answer and, upon such amendment, summary judgment dismissing the complaint. The Civil Court improperly denied State Farm's motion to amend its answer to add the affirmative defenses of res judicata and collateral estoppel. Generally, leave to amend a pleading pursuant to CPLR 3025 (b) should be granted where there is no significant prejudice or surprise to the opposing party and where the proof submitted in support of the motion indicates that the amendment may have merit. State Farm sought to add those affirmative defenses because there was a prior arbitration proceeding between the parties in which plaintiff had sought to recover assigned first-party no-fault benefits for services rendered from August 2003 through January 14, 2004, in which proceeding the arbitrator had determined that plaintiff was ineligible to receive reimbursement of no-fault benefits because it was a fraudulently incorporated professional service corporation. Plaintiff did not demonstrate prejudice or surprise from the proposed amendment.

State Farm established that the issue of whether plaintiff was ineligible to receive reimbursement of no-fault benefits because it was a fraudulently incorporated professional service corporation was identical to the issue previously decided by the arbitrator. In opposition to State Farm's cross motion, plaintiff failed to address the branch of the cross motion which sought summary judgment dismissing the complaint on the ground of collateral estoppel. Therefore, plaintiff failed to establish that it did not receive a full and fair opportunity to litigate in the arbitration proceeding. Thus, the branch of defendant's cross motion seeking summary judgment should have been granted.


NO-FAULT – ADMISSIBILITY OF BUSINESS RECORDS
V.S. Med. Servs., P.C. a/a/o Mohamad Nazir v. Travelers Ins. Co.
(App. Term, 2nd Dept., decided 1/9/2009)

Appeal from a Queens Civil judgment after non jury trial for Travelers dismissing plaintiff's complaint.

AFFIRMED. While plaintiff produced a witness to testify regarding the claim forms plaintiff sought to have admitted into evidence, because said witness did not testify at all as to the generation of such claim forms, they were not admissible as business records (see CPLR 4518). Accordingly, plaintiff failed to establish a prima facie case (see Bajaj v General Assur., 18 Misc 3d 25 [App Term, 2d & 11th Jud Dists 2007]).

De Novo Action Following Master Arbitration Award of No-Fault Benefits Upheld

NO-FAULT – DE NOVO ACTION – RES JUDICATA
Progressive Ins. Co. v. Strough
(4th Dept., decided 10/3/2008)

Is it possible for a no-fault insurer to challenge a master arbitration award? Yes. 11 NYCRR § 65-4.10(h) provides:

(h) Appeal from master arbitrators award.

(1) A decision of a master arbitrator is final and binding, except for:

(i) court review pursuant to an article 75 proceeding; or

(ii) if the award of the master arbitrator is $5,000 or greater, exclusive of interest and attorney’s fees, either party may, in lieu of an article 75 proceeding, institute a court action to adjudicate the dispute de novo.

(2) A party who intends to commence an article 75 proceeding or an action to adjudicate a dispute de novo shall follow the applicable procedures as set forth in CPLR article 75. If the party initiating such action is an insurer, payment of all amounts set forth in the master arbitration award which will not be the subject of judicial action or review shall be made prior to the commencement of such action.

In this case Progressive commenced a de novo action following a master arbitration award, seeking a declaration not only that it should not have to pay the master arbitration award, but that it was not obligated to indemnify the insured for any claims arising from her accident based on her alleged lack of cooperation.

In AFFIRMING the denial of both parties' summary judgment motions, the Fourth Department held:

We conclude that Supreme Court properly denied defendant's motion seeking summary judgment dismissing the complaint and confirming the award of the master arbitrator and properly granted that part of the cross motion of plaintiff seeking a de novo determination of its claim that it has no duty to indemnify defendant for claims arising from the motor vehicle accident, including claims for no-fault benefits. Contrary to the contention of defendant, the action is not barred by the doctrine of res judicata. Although the doctrine of res judicata generally applies with respect to a final arbitration award (see Rembrandt Indus. v Hodges Intl., 46 AD2d 623, 623-624, affd 38 NY2d 502), Insurance Law § 5106 (c) and 11 NYCRR 65-4.10 (h) (1) (ii) expressly provide that either party to a matter submitted to arbitration has the right to a de novo determination of the dispute in the event that the master arbitrator's award is $5,000 or greater, exclusive of interest and attorney's fees, and that is the case here (see Matter of Greenberg [Ryder Truck Rental], 70 NY2d 573, 576-577; Matter of Capuano v Allstate Ins. Co., 122 AD2d 138, 139).

We further conclude that the court properly denied that part of plaintiff's cross motion for summary judgment declaring that plaintiff has no duty to indemnify defendant for claims arising from the motor vehicle accident in question, including claims for no-fault benefits. Plaintiff failed to support its motion with evidence provided by an individual with personal knowledge of the facts (see Chiarini v County of Ulster, 9 AD3d 769, 769-770), and the documents provided by plaintiff in support of the cross motion do not establish that defendant failed to cooperate with plaintiff, as alleged in the complaint. Thus, plaintiff failed to meet its burden of establishing its entitlement to judgment as a matter of law (see generally Zuckerman v City of New York, 49 NY2d 557, 562; New York Cas. Ins. Co. v Kushner, 309 AD2d 1235).

With the abundance of reported cases denying summary judgment motions based on the lack of supporting affidavits from individuals with personal knowledge -- especially in the no-fault arena -- one would think that this procedural deficit could and would easily be avoided. A summary judgment motion without a party's affidavit is like an omelette without eggs.

SUM Claim Arbitration Not Barred By Res Judicata or Collateral Estoppel

SUM – COLLATERAL ESTOPPEL – DISCOVERY IN SUM CLAIM – RIGHT TO EUO, IME & MEDICAL RECORDS PRIOR TO ARBITRATION
Matter of Interboro Ins. Co. v. Rienzo
(2nd Dept., decided 9/2/2008)

In Matter of State Farm Ins. Co. v Smith, 277 AD2d 390 (2nd Dept. 2000), the Second Department ruled that the claimant was not barred by the doctrine of collateral estoppel from pursuing her SUM claim against State Farm even though she had previously been awarded only $25,000 in an arbitration concluding her personal injury claim against the tortfeasor. While acknowledging that collateral estoppel effect can be given to arbitration awards, the court noted that the claimant and tortfeasor had limited the scope of their arbitration by stipulating in their written arbitration agreement that the decision rendered by the arbitrator was to be conclusive "only as to the matters being adjudicated in said arbitration, pertaining to the parties present," and was to have no "collateral estoppel effect as to the same or similar issues in companion claims or actions arising out of the incident which is the subject of said arbitration."

In this case, the Second Department's citation to and reliance on Matter of State Farm Ins. Co. v Smith implies that Interboro Insurance Company made the same argument -- that collateral estoppel from a prior arbitration award or result collaterally estopped its insured from pursuing coverage under her policy with Interboro. The Second Department affirmed that part of Suffolk County Supreme Court's order which denial of Interboro's petition to permanently stay arbitration of the SUM claim:

The Supreme Court correctly concluded that the respondent was not barred by the doctrines of res judicata or collateral estoppel from pursuing arbitration against the petitioner with respect to her claim for supplementary uninsured/underinsured motorist benefits; accordingly, that branch of the petition which was for a stay of the arbitration on that basis was properly denied (see Matter of State Farm Ins. Co. v Smith, 277 AD2d 390; Kerins v Prudential Prop. & Cas., 185 AD2d 403).

The court reversed that part of the lower court's order denying Interboro discovery of the insured's SUM claim prior to arbitration:

However, the Supreme Court should have granted the alternative branch of the petition, which the respondent, Theresa Rienzo, did not oppose, which was to direct Rienzo to submit to an examination under oath and a physical examination, and to furnish pertinent medical documentation or authorizations for the petitioner to obtain that documentation, prior to arbitration (see 11 NYCRR 60-2.3[f][2], [3]; Matter of Interboro Mut. Indem. Ins. Co. v Wiener, 267 AD2d 310).

APIP Subrogation Suit Not Barred by Settlement of Subrogor's Personal Injury Action

NO-FAULT – APIP SUBROGATION – RES JUDICATA – RELEASE
Farm Family Cas. Ins. Co. a/s/o Raymon Morgan v. Kieper
(Sup. Ct., Wayne Co., decided 6/30/2008)

Question: Since a subrogee "stands in the shoes" of the subrogor, does the subrogor's settlement of his separate personal injury action cut off or extinguish the subrogee's related claim? Answer: It depends.

Raymon Morgan was injured in a motor vehicle accident and brought a personal injury action against the estate of the driver of the motor vehicle. Just before that action settled, Farm Family commenced this subrogation action (presumably for additional personal injury protection benefits paid to or on behalf of Morgan) against Kieper, as well, seeking recovery of approximately $22,000 in medical expenses Farm Family had paid. The Morgan personal injury settled shortly thereafter, with an unconditional general release and stipulation of discontinuance.

Kieper then moved to dismiss Farm Family's complaint based on the doctrine of res judicata and/or collateral estoppel and other defenses.

In denying Kieper's motion, Wayne County Supreme Court Justice Dennis Kehoe ruled:

[A] closer inspection of [Morgan's Supplemental Bill of Particulars, general release and stipulation of discontinuance] reveals certain weakness in the Defendant's contentions. First of all, while Morgan does set forth a claim for medical expenses in the approximate amount of $25,000.00, he makes it clear in his Supplemental Bill that such expenses were paid by Farm Family, and that Morgan himself makes no claim for such expenses in his own right, as they were paid under the no-fault coverage, provided by Farm Family.

Further, while the Release and Stipulation of Discontinuance executed by Morgan appear to be general in nature, at the bottom of the Release, Morgan clearly states that the total settlement amount is allocated to pain and suffering, and that "(n)o portion of the settlement amount is for medical expenses, all of which were paid for by no-fault insurance."

In Progressive Insurance Company v. Sheri Torah, Inc., 44 AD3d 837 (2007), the Fourth Department held that "(w)hen an insured executes a general release in favor of a tortfeasor without reserving the rights of his or her insurer (emphasis added), the insured impairs the rights of his insurer." However, in the instant matter this Court finds that the language at the foot of Morgan's release, while not couched in express terms of a reservation of rights, is sufficient to preserve Farm Family's rights of subrogation.

Further, this Court finds that the doctrines of res judicata/collateral estoppel do not constitute a bar to the instant action. In Ocean Accident & Guarantee Corp v. Hooker Electochemical Co., 240 NY 37(1925), the Court of Appeals held that "an insured cannot extinguish the subrogation rights of its carrier when the defendants are on notice of the carrier's claims prior to the settlement." In this instance, Farm Family instituted the instant action, albeit at the eleventh hour, against Kieper, thus substantiating its claim that the Defendant was on notice of the carrier's claim, prior to the execution of the release and stipulation of discontinuance.

The best practice, of course, is for subrogation counsel to remain in touch with and coordinate the settlement of the subrogor's personal injury action with either the settlement of the APIP subrogation action or its legal survival and continuation.

No Do-Over for Non-Compliance with So-Ordered Discovery Stipulation

NO-FAULT – RES JUDICATA – SO-ORDERED DISCOVERY STIPULATION
First Help Acupuncture, P.C. a/a/o Simone Brin v. State Farm Mut. Auto. Ins. Co.
(App. Term, 2nd Dept., decided 4/3/2008)

After plaintiff medical provider's first action was dismissed for its non-compliance with a so-ordered discovery stipulation, it commenced this second, identical action, and State Farm moved to dismiss the complaint based on doctrine of res judicata.

In AFFIRMING Kings Civil's grant of summary judgment to State Farm, the Appellate Term held:

Although the court's order dismissing the prior action did not specifically state that the dismissal of the action was with prejudice or on the merits, since the so-ordered discovery stipulation provided for preclusion, the dismissal was with prejudice and, as a result, plaintiff was barred from commencing a second action (citations omitted). Accordingly, the court below properly granted defendant's motion for summary judgment dismissing the complaint based on the doctrine of res judicata.

No Do-Overs in Intercompany Arbitration

NO-FAULT – LOSS TRANSFER – INTERCOMPANY ARBITRATION – INSURANCE LAW § 5105 – RES JUDICATA
Matter of Progressive N. Ins. Co. v. Sentry Ins. A Mut. Co.
(2nd Dept., decided 5/13/2008)

Progressive paid no-fault benefits to its insured for injuries she sustained in a motor vehicle accident with Sentry's insured, and then commenced an intercompany arbitration proceeding against Sentry, seeking reimbursement under the priority-of-payment section of Regulation 68 (11 NYCRR § 65-3.12[b]; 65-4.11). In that first arbitration proceeding, the arbitrator ruled against Progressive and denied reimbursement.

Progressive commenced a second intercompany arbitration proceeding against Sentry, this time asserting a loss-transfer claim under Insurance Law § 5105. Sentry argued that Progressive was barred by res judicata from re-arbitrating its reimbursement claim, and the arbitrator agreed, denying Progressive's loss-transfer claim on that basis.

Progressive then commenced this CPLR article 75 special proceeding to vacate the second arbitration decision. In AFFIRMING the lower court's denial of Progressive's petition, the Second Department held that the arbitrator did not exceed its authority by rendering an award in favor of Sentry:

[I]t is clear that the instant claim made by Progressive arose out of the same transaction as the prior claim that was denied in the prior arbitration (citations omitted). While Progressive now alleges different facts regarding how the accident occurred, and a different theory upon which reimbursement is sought, the instant arbitration and the instant claim involve the same accident and the same parties, while Progressive seeks reimbursement of the same payments, albeit on a different legal theory (citations omitted).

Based on res judicata, the denial of Progressive's petition to vacate the second arbitration decision was upheld.

If At First You Don't Succeed, Sue Again

COMMERCIAL PROPERTY – REPLACEMENT COST COVERAGE – RES JUDICATA – 2-YEAR CONTRACTUAL SUIT LIMITATIONS PERIOD
O & E Growers, Inc. v. Selective Ins. Co. of Amer.
(WDNY, decided 5/5/2008)

To the occasional surprise of judges, juries and many of my neighbors, most replacement cost property insurance policies pay actual cash value (ACV) first and require the insured to repair or replace the damaged or destroyed property before the withheld depreciation or "RC holdback" is paid. Most property insurance policies also require insureds to sue for policy proceeds within two years of the loss date - making the 2-year loss anniversary the effective deadline for the insured to repair or replace and claim for RC holdback benefits (see, Finley v. Security Mut. Ins. Co., Index No. 02-0594 [Sup.Ct., Jefferson Co., decided 6/21/2005]). But what if the insurer's denial of coverage, and non-payment of ACV, makes it economically impossible for the insured to repair or replace the damaged/destroyed property?

On March 8, 2001, a fire destroyed a large building and contents insured by Selective. Following its investigation of the fire, Selective denied coverage. In February 2003, the insureds sued Selective for policy benefits. In their original complaint in the first action, the insureds sought damages for breach of the insurance contract based on the ACV of the building and its contents. Selective asserted an "arson" defense, claiming that the fire was intentionally caused.

Shortly before trial in the first action, the plaintiffs obtained leave to amend the complaint to include an alternative claim for the full "replacement cost" (RC) of the building and its contents, relying on the policy's replacement cost provision. The RC claim, as set forth in the amended complaint in the first action, was based on the allegation that Selective's wrongful denial of coverage and its refusal to pay the ACV rendered it impossible for the plaintiffs to repair or replace their destroyed property, thereby preventing them from fulfilling the condition precedent of actual repair or replacement under the policy. The court granted the insureds leave to amend their complaint based on the rarely cited 1982 decision of the Southern District NY in Zaitchick v. American Motorists Ins. Co., 554 F. Supp. 209, 216-17 (SDNY 1982), aff'd, 742 F.2d 1441 (2d Cir.), cert. denied, 464 U.S. 851, 104 S. Ct. 162 (1983), in which the district court held that plaintiffs sustained their burden of proving that their insurer's refusal to pay ACV based on arson defense made it impossible for them to fulfill the policy's RC condition precedent, excusing their performance of that condition.

With their complaint so amended, the insureds proceeded to a jury trial in July 2006. After closing arguments, the court instructed the jury on the law pertaining to Selective's arson defense, as well as the insureds' right to recover damages based on either ACV or RC. The jury rendered its verdict by answering the four jury questions as follows:

1) Selective had not met its burden of proving by clear and convincing evidence that the fire was intentionally caused or procured by the plaintiffs;

2) the total cost of replacing the building was $1,077,705;

3) the ACV of the building immediately prior to the fire was $300,000, and the ACV of the contents of the building immediately prior to the fire was $1,054,492; and,

4) the plaintiffs had not met their burden of proving by a preponderance of the evidence that, under the circumstances of that case, they were excused from meeting the conditions precedent set forth in the policy and were therefore not entitled to recover the cost of replacement of the building.

Judgment was entered for the insureds, with prejudgment interest in the amount of $591,100.30, and taxable costs in the amount of $ 7,940.86, resulting in final judgment in favor of plaintiffs in the amount of $1,953,533.16. The insureds did not appeal from the judgment, and Selective paid the entire judgment in September 2006.

One month later, counsel for the plaintiffs sent a letter to Selective advising:

. . . O & E intends to purchase a replacement commercial building located at 795 Wurlitzer Drive, North Tonawanda, New York 14120. O & E anticipates that the purchase price will exceed the sum of $ 1.1 million. You will recall that at trial, the jury awarded the sum of $300,000 as the actual cash value of the O & E building in Elba. Based upon this award and the further jury award of the actual cash value of the contents (business personal property) to the other two plaintiffs in the case . . . , we calculate that the "holdback" under the above-referenced Selective policy is equal to the sum of $ 777,706. O & E is prepared to close on the purchase of the Wurlitzer building and thereafter submit a claim under the policy for replacement cost benefits in the full amount of the holdback.

Not surprisingly, Selective said "nuts to that" (or words to that effect), and O & E then brought this action, seeking a declaration from the court that the policy remained in full force and effect and that, upon actual replacement of the building, O & E could recover up to $777,705 (representing the difference between the amount the jury determined as the building's RCV, $1,077,705, and the amount the jury awarded as its ACV, $300,000). O & E moved for summary judgment in its favor on this claim, and Selective cross-moved for summary judgment on the ground that this action was barred by the doctrine of res judicata, as well as by the policy's applicable 2-year contractual suit limitations period.

In granting summary judgment to Selective based on its finding that plaintiffs' second action was barred by the doctrine of res judicata the court held:

Clearly, the facts underlying O & E's claim for replacement costs in this action are directly related in time, space, origin and motivation to the same transaction that formed the basis of the claims which were fully litigated to judgment upon jury verdict in the previous insurance coverage action. Indeed, this declaratory judgment action seeks precisely the same relief that the plaintiffs sought in the prior action-declaring the rights and obligations of the parties to the same insurance policy. The facts essential to the claim made in this action regarding whether the policy provides the right to recover replacement cost were also present in the first action, and were fully addressed during the trial. However, the plaintiffs proceeded on the theory that those facts made it impossible to fulfill the replacement condition, a theory which the jury rejected. Based upon the jury's finding, the court entered an order containing specific language dismissing the plaintiffs' cause of action for recovery of replacement costs.

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Based on these undisputable facts, the court has little difficulty concluding that O & E's replacement cost claim in this action is "sufficiently related to the claims that were asserted in the first proceeding that it should have been asserted in that proceeding." (citation omitted). Accordingly, O & E is precluded by the doctrine of res judicata from bringing this second coverage action against Selective.

The court also found that this second action - brought more than six years after the fire loss - was time-barred by the policy's 2-year contractual suit limitations period. The jury's determination that O & E's obligation to fulfill the condition precedent of repair or replacement had not been frustrated by Selective's refusal to provide coverage refuted O & E's contention that it should not be bound by the 2-year period because it could not have brought this action seeking recovery of replacement costs until the jury made its determination, in July 2006, that Selective was obligated to provide coverage. "The clear implication of [the jury's] finding is that Selective's conduct had no bearing on the ability of the plaintiffs (including O & E) to seek recovery of replacement costs upon fulfilling the condition precedent. Beyond this, O & E has made no showing that it was somehow otherwise misled by Selective into believing that the limitations provision in the policy would not be invoked."

Summary judgment for Selective, dismissing this second action for RC holdback benefits.