The Third Department's Bad Penny -- Not Waiver. Not Insurance Law § 3420(D)(2) Preclusion

CGL – ADDITIONAL INSURED – DUTY TO DEFEND – WAIVER – PRIORITY OF COVERAGE
Village of Brewster v. Virginia Sur. Co., Inc.
(3rd Dept., decided 2/18/2010)

Here's the promised follow-up to my February 19, 2010 post on this case.  On February 23rd, commenter Tom E. wrote:

I'll hazard a guess - #3. [Virginia Surety waived or is precluded from asserting any policy exclusions not raised or invoked in its original disclaimer.] Section 3420(d) of New York's Insurance Law does not apply to property damage claims. Therefore, the 3d Dept. erred in precluding the carrier's previously uninvoked exclusions. However, the insurer could be equitably estopped from relying on coverage defenses if the insured/claimant could prove it was prejudiced by the insurer's actions and/or it relied to its detriment on the insurer's conduct.

Correct!  For some reason, the Third Department insists on muddling together and misusing the concepts of common law waiver and statutory preclusion under New York Insurance Law § 3420(d)(2).

In June 2004, the Village of Brewster contracted with Laws Construction Corporation to construct new potable water distribution and wastewater collection systems within the Village.  The contract provided that Laws would indemnify the Village for all claims for injury to property arising out of Laws' work and required Laws to maintain comprehensive general liability insurance naming the Village an additional insured. Laws obtained a CGL insurance policy from Virginia Surety Company, which included an additional insured endorsement naming the Village as an additional insured, but "only with respect to liability arising out of [Laws'] work for [the Village]."

On August 5, 2005, during the course of the work, a water main broke in the vicinity of Main Street in the Village, causing flooding to properties. Two of the affected residents sued the Village and Laws for property damage. The Village, in turn, tendered to Virginia Surety the claims against it and Laws, and demanded that Virginia Surety defend and indemnify it pursuant to the terms of Law's CGL insurance policy.  Virginia Surety denied coverage on the basis that Laws' operations did not cause or contribute to the property damages claimed in the underlying complaints and, therefore, any alleged loss did not arise out of Laws' work.

The Village and its CGL insurer commenced this declaratory judgment action seeking, among other things, a declaration that Virginia Surety was required to defend and indemnify the Village for any liability arising out of the underlying actions and that Virginia Surety must reimburse the Village's own CGL insurer for legal fees and costs it had incurred to date in defending the Village in the underlying actions.  Plaintiffs unsuccessfully moved for summary judgment and then appealed. 

In MODIFYING the order appealed from to grant summary judgment to the plaintiffs, the Third Department held:

1. Regardless of whether it must ultimately indemnify the additional insured Village in the underlying property damage actions, Virginia Surety was obligated to defend the Village because the allegations of the underlying complaints were what triggered Virginia Surety's exceedingly broad duty to defend.
2. Having failed to establish as a matter of law that there was no possible factual or legal basis on which it might eventually be obligated to indemnify the Village under any policy provision, Virginia Surety was obligated to defend the Village in the underlying actions, with the issue of indemnification to await the proof at trial in those actions.
3. Virginia Surety waived any policy exclusions not raised or invoked in its original disclaimer.
4. Coverage for the Village under Virginia Surety's policy was primary and needed to be exhausted before the Village's own insurer was required to contribute under its policy.
5. Virginia Surety was obligated to reimburse the Village's insurer for costs incurred to date in defending the underlying actions. 

For the most part, I take no issue with the Third Department's rulings on issues 1, 2, 4 and 5, and you can read the decision yourself for the court's discussion of those.  I do, however, believe the Third Department missed the mark, again, with its ruling on the third issue:

To the extent that defendant argues that certain exclusions contained in the policy provide an alternate basis for denying coverage, it failed to invoke these grounds in its notice of disclaimer, instead raising them for the first time in opposition to plaintiffs' motion for summary judgment. Since "'an insurer's disclaimer is strictly limited to those grounds stated in the notice of disclaimer, which disclaimer must clearly apprise the insured of the grounds on which the disclaimer is based'" (City of Kingston v Harco Natl. Ins. Co., 46 AD3d 1320, 1321 [2007], lv dismissed 10 NY3d 822 [2008], quoting Maroney v New York Cent. Mut. Fire Ins. Co., 10 AD3d 778, 780-781 [2004], affd 5 NY3d 467 [2005] [internal quotation marks and citation omitted]; see Clayburn v Nationwide Mut. Fire Ins. Co., 58 AD3d 990, 991 [2009]; Kokonis v Hanover Ins. Co., 279 AD2d 868, 870 [2001]), defendant cannot now rely on uninvoked exclusions as a basis for denying coverage.^[FN1]

Footnote 1: Even were we to find no waiver on the part of defendant, we would nevertheless find that its attempt to disclaim based on these exclusions was untimely as a matter of law. Defendant failed to advance any justification or explanation for the three-year delay in raising these exclusions (see Kokonis v Hanover Ins. Co., 279 AD2d 868, 870 [2001]; Dependible Janitorial Servs. v Transcontinental Ins. Co., 212 AD2d 946, 947 [1995], lv denied 85 NY2d 811 [1995]).

As Tom E. recognized, the coverage defense preclusive impact of violating the timely disclaimer and denial requirement of Insurance Law § 3420(d)(2) only applies to death or bodily injury claims;  it does not apply to property damage claims.   The Village brought this DJ action for defense and indemnification coverage in relation to two underlying property damage actions.  All of the cases cited by the Third Department on this issue involved wrongful death or bodily injury claims, not property damage.  It is simply incorrect for the court to have utilized the defense preclusive impact of 3420(d)(2) to rule that Virginia Surety could not raise and rely on initially uninvoked exclusions to deny coverage to the Village.  Moreover, waiver is defined as the intentional relinquishment of a known right, something Virginia Surety likely did not do with respect to the initially uninvoked exclusions.  As Tom E. points out, the doctrine of equitable estoppel could apply, however, if the Village justifiably relied to its detriment on something Virginia Surety initially did or said.  With a denial of coverage having already been issued to the Village, it's unlikely that Virginia Surety could have subsequently done or said anything that the Village would have been justified in relying on to its detriment.  Thus, in the absence of 3420(d)(2) preclusion, waiver, or estoppel, the Third Department should have permitted Virginia Surety to raise even initially uninvoked exclusion-based coverage defenses.  
 
Send me an email, Tom, and I'll contact you to make arrangements to get you what you won.