CGL and Garage Insurers Found to Owe Policy Limit Coinsurance to Employers' Liability Insurer

CGL – GARAGE POLICY – EMPLOYER'S LIABILITY POLICY – COINSURANCE CONTRIBUTION – UNTIMELY DISCLAIMER
State Ins. Fund v. American Hardware Mut. Ins. Co.
(2nd Dept., decided 7/7/2009)

Question:  In New York, when does a CGL or a garage policy apply to cover a garage employee's injuries sustained during employment?  Answer:  When  the insurers wait more than four months to disclaim coverage based on those policies' employee injury exclusions, that's when. 

The parties in this coinsurance contribution action insured World of Hitches N Rentals in North Bellmore, New York -- the State Fund (SIF) under a WC/EL policy; and American Hardware under a $300K CGL policy and a $300K garage policy.  An employee of the insured was burned when a container he was filling with kerosene exploded.  He sued various defendants, three of which impleaded the insured, World of Hitches, in a third-party action.  Although both insurers initially assumed World of Hitches' defense, SIF took over that defense after American Hardware disclaimed coverage under both policies more than four months after receiving notice of the third-party action, based on the policies' employee injury exclusion.

Then underlying action eventually settled for $1,475,000, with SIF contributing $750,000 and agreeing to waive its $225,000 WC lien in the amount of $225,000. SIF then brought this action for a proportionate coinsurance contribution towards its defense and indemnification costs relative to the underlying action and successfully moved for summary judgment, the trial court awarding SIF $650,000 in principal, representing approximately two-thirds of its combined indemnity contribution of $975,000, and two-thirds of its defense costs in the underlying personal injury action.

On appeal, the Second Department agreed with the trial court's determinations that "[s]ince the disclaimer was based on policy exclusions, the defendants were required to provide World of Hitches with timely notice of its disclaimer under Insurance Law § 3420(d)", and American Hardware's disclaimer,  issued more than four months after receiving notification of the third-party action, was untimely as a matter of law.  The Second Department rejected the defendants' contention that SIF was obligated to demonstrate prejudice from their delay in disclaiming.

The Second Department also rejected the defendants' argument that that even if the disclaimer was untimely, no coverage was provided under the garage policy because the employee was not injured while engaged in garage operations:

The record establishes that the employee's actions were taken in furtherance of the garage business (compare Lancer Ins. Co. v Whitfield,AD3d, 2009 NY Slip Op 02975 [2d Dept 2009]; Singh v Allcity Ins. Co., 1 AD3d 501; Minerva v Merchants Mut. Ins. Co., 117 AD2d 720).

The Second Department did, however, MODIFY the trial court's ruling to reduce the indemnification coinsurance award from $650,000 down to $300,000, holding:

Although the defendants were obligated to defend and indemnify World of Hitches in the underlying action (see Moore v Ewing, 9 AD3d 484), and thus must pay their proportionate share of the settlement (see Hawthorne v. South Bronx Community Corp., 78 NY2d 433) and defense costs incurred in the underlying action, their contribution may not exceed the limits of the policies. Here, both policy limits were $300,000 per accident. Moreover, the garage policy provided that all of the defendants' policies were mutually exclusive in that if more than one policy applied to the same accident, the maximum limit of liability under all the policies would not exceed the highest applicable limit under one policy. Thus, the maximum amount the defendants were required to contribute to the settlement was $300,000, and the judgment must be modified accordingly. 

This aspect of the Second Department's decision is noteworthy in standing for two propositions:  that an untimely disclaimer under Insurance Law § 3420(d) does not: (1) increase the disclaiming insurer's coinsurance obligation above policy limits; or (2) preclude the disclaiming insurer from later relying on policy conditions that limit such coinsurance contributions.

Fourth Department Coverage Decisions -- April 25, 2008

UM COVERAGE – VENUE OF ARBITRATION HEARING
Matter of the Arbitration Between Erie Ins. Co. and Malcolm
(4th Dept. decided 4/25/2008)
The venue of an uninsured motorists coverage arbitration may not be held more than 100 miles from the insured's residence.
In Matter of the Arbitration Between Erie Ins. Co. and Malcolm, the court granted the insurer's CPLR article 75 petition to change the venue of the insured UM arbitration from Kings County to Erie County. In originally granting the insured's request to change the venue from Erie County to Kings County, the AAA arbitrator violated that AAA's own rule that an arbitration hearing may not be held more than 100 miles from an insured's residence. The insured's listed residence was in West Seneca, Erie County.

SUBROGATION – WAIVER OF SUBROGATION
American Motorists Ins. Co. v. Louis Ciminelli Construction Co.
(4th Dept. decided 4/25/2008)
In American Motorists Ins. Co. v. Louis Ciminelli Construction Co., the court affirmed the lower court's granting of summary judgment to the general contractor and sprinkler system subcontractor based on the waiver of subrogation provision of the general contract. The court also rejected the subrogating insurer's contention that the waiver of subrogation provision does not apply to postconstruction losses.

CGL – COINSURANCE – ADDITIONAL INSURED – PRIORITY OF COVERAGE
B.F. Yenny Construction Co. v. OneBeacon Ins. Grp.
(4th Dept. decided 4/25/2008)
In B.F. Yenny Construction Co. v. OneBeacon Ins. Grp., the court ruled that the lower court erred in relying on construction subcontract language rather than the language of the two insurance policies to determine the priority of coverage between those policies. Pursuant to the "other insurance" and "method of sharing" provisions of those policies, both One Beacon (which insured the GC as an additional insured) and Selective (which insured the GC as a named insured) were found obligated to provide primary coverage and to share equally in the costs of the GC's defense and indemnification in the underlying action.

CGL – GARAGE LIABILITY POLICY – "YOUR CUSTOMERS" – WHO IS AN "INSURED"
Graphic Arts Mutual Ins. Co. v. Russell
(4th Dept. decided 4/25/2008)
In Graphic Arts Mutual Ins. Co. v. Russell, the court affirmed the lower court's ruling that Graphic Arts Mutual was obligated to defend and indemnify defendant who was test driving a vehicle owned by the plaintiff's car dealership insured. The Graphic Arts garage liability policy excluded by definition from coverage customers of the dealership who had liability insurance of at least mandatory minimum limits. The court rejected Graphic Arts Mutual's argument that the defendant was its named insured dealership's "customer", holding that the defendant, who had had no contact with the dealership and transacted no business with the dealership, could not be construed to fall within the "[y]our customers" language of the garage liability policy.