Thursday, April 16, 2009

Unqualified Assumption of Additional Insureds' Defense for Two Years Estops Insurer from Seeking Contribution from Co-Insurer

Liberty Ins. Underwriters, Inc. v. Arch Ins. Co.

(1st Dept., decided 4/14/2009)

The City of New York and its Department of Environmental Protection were involved in a construction project with Crescent Contracting Corp.  The DEP entered into a general contract with Yonkers Contracting Company in relation to that project.  As required by that contract, Yonkers purchased CGL coverage from Arch Insurance Company, and the Arch policy contained an additional insured endorsement affording AI coverage to any parties Yonkers was contractually obligated to name as AIs.  The AI coverage endorsement stated that "[c]overage afforded to these additional parties will be primary to, and noncontributory with, any other insurance available to that person or organization."

Crescent had CGL insurance with Liberty, presumably also insuring the City and DEP as AIs in some capacitiy.  The Liberty policy's "Other Insurance" clause provided that "if other valid and collectible insurance [was] available to any insured for a loss [Liberty] cover[ed] * * *, then this insurance [wa]s excess of such insurance and [Liberty would] have no duty to defend any claim or 'suit' that any other insurer ha[d] a duty to defend."

An employee of Yonkers was injured while working on the construction project and brought a personal injury action against the City, DEP and Crescent.  Through its attorneys, Arch initially agreed in April 2006 to defend and indemnify the City and DEP in the personal injury action.  A week later, Arch tendered the City's and DEP's defense and indemnification to Liberty, which Liberty accepted in a May 2006 letter containing no reservation of rights. 

Liberty defended the City and DEP in the personal injury action for two years.  On March 1, 2008, three days after a pre-trial conference was held in that action, Liberty sent a letter to the City's Law Department purporting to reserve Liberty's rights, stating that Liberty would not indemnify the City or DEP in the personal injury action "if there is no liability on the part of Crescent[.]"  Liberty also noted in that letter that its coverage was excess to coverage available to the City and DEP under Yonkers' policy with Arch.

When Arch refused to re-assume the City's and DEP's defense, Liberty commenced this declaratory judgment action seeking declarations that Arch was obligated to defend and indemnify the City and DEP and that Arch's coverage was primary to Liberty's excess coverage.  Finding that Liberty was "estopped from requesting contribution" because it had "unqualifiably" taken over the defense and indemnification of the underlying personal injury action and failed to reserve any rights as against Arch, New York Supreme granted Arch's cross motion for summary judgment and declared that Liberty was obligated to defend and indemnify the City and DEP in the underlying action and reimburse Arch for the costs it incurred in defending the underlying action prior to Liberty's acceptance of Arch's tender.

In MODIFYING the motion court's order, the First Department agreed that Liberty was equitably estopped from seeking coverage contribution from Arch, but held that Arch was not entitled to recover its pre-tender defense costs.  Relying on established Second Department case law, the First Department rejected Liberty's argument that the doctrine of equitable estoppel should only apply to coverage disputes between insureds and their insurers:
"The doctrine of estoppel precludes an insurance company from denying or disclaiming coverage where the proper defending party relied to its detriment on that coverage and was prejudiced by the delay of the insurance company in denying or disclaiming coverage based on the loss of the right to control its own defense" (Merchants Mut. Ins. Group v Travelers Ins. Co., 24 AD3d 1179, 1182 [2005] [internal quotation marks and brackets omitted]). We reject plaintiff's argument that this doctrine should be limited to coverage disputes between insurers and insureds, and not applied to coverage allocation disputes between insurers (see e.g. Fireman's Fund Ins. Co. v Zurich Am. Ins. Co., 37 AD3d 521 [2d Dept 2007]; Donato v City of New York, 156 AD2d 505, 507-508 [2d Dept 1989]). Lumbermens Mut. Ins. Co. v Lumber Mut. Ins. Co. (148 AD2d 328 [1st Dept 1989]), cited by plaintiff, is not to the contrary. Lumbermens merely held that failure by an insurer to reserve its rights under the circumstances of that case did not constitute an intentional relinquishment, or waiver, of the right to seek contribution from another insurer (id. at 330). It did not address the issue of whether an insurer may be estopped, by its unqualified assumption of the defense of an action, from seeking contribution from another insurer. No issues of fact exist as to whether defendants, in tendering the defense to plaintiff, lacked knowledge that plaintiff would ultimately claim to be only an excess insurer, or whether defendants lost control of the underlying defense and were otherwise prejudiced by plaintiff's assumption thereof for two years without reserving a right to disclaim coverage (see Federated Dept. Stores v Twin City Fire Ins. Co., 28 AD3d 32, 39 [2006]). Defendants, however, are not entitled to reimbursement of defense costs incurred before tendering the defense to plaintiff (see Bovis Lend Lease LMB, Inc. v Royal Surplus Lines Ins. Co., 27 AD2d 84, 94 [2005]), and we modify the declaration accordingly. 
 Had there been either a pre-tender discussion between Arch and Liberty about the priority of their respective coverage obligations or a reservation of rights in Liberty's tender acceptance letter, the result may have been different.  Three takeaway points from this case are:
  1. when accepting a tender of defense and indemnification from another insurer, be sure to address and expressly reserve one's rights vis-à-vis coverage priority and defenses;
  2. pre-tender defense costs are not recoverable; and 
  3. equitable estoppel can apply between coinsurers.

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