Lack of Standing Defense Waived If Not Raised in Pre-Answer Motion or Answer

NO-FAULT – LACK OF STANDING DEFENSE – WAIVER
Kruger v. State Farm Mut. Auto. Ins. Co.
(3rd Dept., decided 12/23/2010)

State Farm denied no-fault coverage benefits to plaintiff for further chiropractic treatment after an IME found no further treatment to be necessary.  The claimant sued and after conducting discovery, State Farm moved to dismiss the complaint, asserting for the first time that plaintiff had assigned her right to payment for no-fault benefits to her chiropractor and did not have standing to bring this action.  Ulster County Supreme Court (O'Connor, J.) granted State Farm's motion and plaintiff appealed.

In REVERSING the order appealed from and reinstating the complaint, the Appellate Division, Third Department, held that lack of standing is a waivable affirmative defense that must be raised either in a pre-answer motion or the insurer's answer: 

Defendant asserted that plaintiff lacked standing to maintain this action but, as that defense was not raised in a pre-answer motion to dismiss or in defendant's answer, it was waived and cannot now be advanced (see CPLR 3211 [a] [3], [e]; McHale v Anthony, 70 AD3d 466, 467 [2010]; Todaro v GEICO Gen. Ins. Co., 46 AD3d 1086, 1087 [2007]). Contrary to defendant's contention, the standing issue does not implicate the jurisdiction of Supreme Court such as to render it nonwaivable. Supreme Court is empowered to determine whether defendant is liable to pay no-fault benefits (see Marangiello v Kamak, 64 AD2d 624, 625 [1978]), and whether plaintiff is a proper person to pursue that claim "is an issue separate from the subject matter of the action or proceeding, and does not affect the court's power to entertain the case before it" (Wells Fargo Bank Minn., N.A. v Mastropaolo, 42 AD3d 239, 243 [2007]; see Matter of Renee XX. v John ZZ., 51 AD3d 1090, 1092-1093 [2008]). Accordingly, defendant waived its right to assert lack of standing as an affirmative defense.

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.

A Bad Penny Turns Up Again in the Third Department

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

Readers:  this is an interactive post.  Can you spot the bad penny in this decision?  The ruling that diverges from established tenets of New York insurance coverage law?  The part that raises one or both of your eyebrows and evokes an audible "huh?" when you read it?  One of the components of this decision stands alone as the Third Department's own rule of law.  I'll give you a hint.  It's the issue for which the Third Department cites only its own cases, perpetuating what I believe is a relatively longstanding error of insurance coverage law, at least in the Third Department.  It's like a bad penny that keeps showing up.  You know what they say about repeating something often enough. 

If you think you've spotted the peculiar rule, leave a comment on this post.  First correct answer wins something.  I don't know what yet, but it'll be something.  Let me make this a multiple choice quiz.  The component issues/rulings from this decision, and thus your answer choices, are:

1. Regardless of whether it must ultimately indemnify the additional insured Village of Brewster in the underlying property damage actions, Virginia Surety Company must defend the Village because the allegations of the underlying complaints are what trigger Virginia Surety's exceedingly broad duty to defend.
2. Having failed to establish as a matter of law that there is no possible factual or legal basis on which it might eventually be obligated to indemnify the Village under any policy provision, Virginia Surety must 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 or is precluded from asserting any policy exclusions not raised or invoked in its original disclaimer.
4. Coverage for the Village under Virginia Surety's policy is primary and must be exhausted before the Village's own insurer is required to contribute under its policy.
5. Virginia Surety must reimburse the Village's insurer for costs incurred to date in defending the underlying actions.  

See?  You already have a 20% chance of picking the right issue.  Answers without explanations, however, won't count.  I'll re-post this case one week from today, on Friday, February 26th, with my identification and explanation of the bad penny.  Until then, have a look at the decision by clicking on its link above and let us know what you think.

Extension Is Not Waiver of 2-Year Suit Limitations Period in Homeowners Policy

HOMEOWNERS – FIRE LOSS – 2-YEAR CONTRACTUAL SUIT LIMITATIONS PERIOD – WAIVER – ESTOPPEL – BAD FAITH
Van Acker v. Unitrin Preferred Ins. Co.
(Sup. Ct., Wayne Co., decided 6/30/2008)

Most if not all property insurance policies contain some sort of contractual suit limitations period. In New York, policies must allow up to two years from the loss date for the insured to bring suit for losses caused by fire and lightning. The New York courts have repeatedly upheld contractual suit limitations periods, as parties are free to contract and may always provide for a suit limitations period shorter than the otherwise applicable statute of limitations.

It sometimes happens that the adjustment and settlement of a large loss takes upwards of two years. In such cases, insureds or their representatives will often request an "extension" of the policy's two-year suit limitations period, since suing before there has been any breach of the insurer's obligation to pay would be premature and potentially subject to dismissal.

The Van Ackers' home sustained a major fire loss on December 10, 2003. On October 25, 2004, Unitrin made an offer of $243,258.98. The Van Ackers then retained their own adjuster, who estimated damages to be $299,492.28. On December 15, 2004 (one year and 5 days after the loss date), the parties signed an agreement to submit their damage appraisals to an umpire. The dwelling RCV was resolved in April 2005, but the Van Ackers' contents RCV and ALE remained in dispute. The Van Ackers moved back into their residence in November 2005, with their contents loss claim still unresolved.

On December 7, 2005 (three days before the two-year loss anniversary date), the Van Ackers emailed Unitrin's general adjuster, to confirm their earlier oral request for an extension of the policy's two-year suit limitations period. That condition provided:

Suit Against Us. No action can be brought unless the policy provisions have been complied with and the action is started within two years of the date of loss.

In a reply email on December 13, 2005 (three days after the two-year suit deadline), Unitrin's general adjuster agreed to a "one-time extension to March 1, 2006." The e-mail further stated in part that "we do not intend to waive or prejudice any rights under the policy[.]" Nevertheless, there were subsequent emails between the parties during the month of March, including one from Unitrin's general adjuster to the Van Ackers, dated March 10, 2006 (after the date of the expiration of the extension), which indicated that he had had a "health issue" arise, and that he been unable to finish looking over some paperwork. On April 11, 2006, Unitrin's general adjuster sent another email to the Van Ackers in which he re-affirmed the March 1, 2006 extension. The Van Ackers commenced this action on August 21, 2007. (Note: The decision gives a 2007 commencement date but later states that the insureds commenced this action four months after the April 2006 email. Either that email was sent in April 2007 or the action was commenced in August 2006.)

Unitrin moved to dismiss the action as barred by the policy's suit limitations period. In opposition, the Van Ackers argued that the March 10, 2006 email Unitrin's general adjuster sent to them, in which he admitted he had not been available to review certain documents, created a fact question as to whether Unitrin waived the policy's suit limitations requirement.

Wayne County Supreme Court Justice Dennis Kehoe disagreed, finding that the insureds had not established the existence of any material triable issue of fact as to the doctrines of waiver or estoppel:

Based on the evidence presented by the Plaintiffs, this Court must find that the circumstances do not rise to the level of a waiver of the statute of limitations by the insurer. While there is evidence of ongoing negotiations between the parties, such negotiations, without more, do not meet the burden imposed by the Court of Appeals on the insured of demonstrating the existence of any "material triable issue of fact."

Although it was not necessary to reach the issue of plaintiffs' bad faith cause of action, Justice Kehoe also ruled that "[w]ere the Court to consider the issue, it would conclude that an action for punitive damages for failing to negotiate in good faith does not lie against Unitrin, in that the Plaintiffs have failed to allege the elements necessary to support a cognizable cause of action in tort which is 'independent of the contract'".

Couple of observations: It's not a "statute of limitations" we're talking about, it's a contractual limitations period. Although the decision does not say so, one can surmise that Unitrin fully paid and settled the dwelling and ALE claims prior to the two-year loss anniversary. Chances are that Unitrin also paid what it thought it owed on the Van Ackers' contents claim, so this suit may have been over what they insureds believed they were still owed on their contents loss. Negotiations extending beyond the suit deadline, in and of themselves, do not constitute a waiver or create an estoppel, although clarity in intention and reservations of rights are always best in those situations.

Policy Rescission Granted for Material Misrepresentations in Application

COMMERCIAL PROPERTY – FIRE LOSS – MATERIAL MISREPRESENTATION IN APPLICATION – RESCISSION – WAIVER – ESTOPPEL – TIMELINESS OF DENIAL
Precision Auto Accessories, Inc. v. Utica First Ins. Co.
(4th Dept., decided 6/6/2008)

Plaintiff's business was destroyed by fire. After an investigation, Utica First notified plaintiff that it was denying coverage and rescinding the policy based on material misrepresentations made in plaintiff's insurance application with respect to plaintiff's prior loss and claims history. Plaintiff sued for coverage, and the parties moved and cross-moved for summary judgment. Supreme Court denied both motions.

The Fourth Department MODIFIED and granted summary judgment to Utica First, holding that it was entitled to rescind the policy because it established as a matter of law that plaintiff had made material misrepresentations such that Utica First would not have issued the policy had it known the true facts. "To establish materiality of misrepresentations as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins or rules pertaining to similar risks, to establish that it would not have issued the same policy if the correct information had been disclosed in the application[.]"

In support of its motion, Utica First submitted the affidavit of its president, who set forth Utica First's minimum underwriting guidelines for prior losses for a risk such as plaintiff's business. Attached to the affidavit was a copy of defendant's underwriting guidelines "for the relevant period," which corroborated the applicable minimum underwriting requirements set forth by Utica First's president concerning prior losses for risks such as plaintiff's business. Utica First's president further stated in his affidavit that, "if [defendant] had been aware of plaintiff's true loss history . . . [defendant] would not have issued a policy of insurance to plaintiff."

The Fourth Department agreed with Utica First that the misrepresentations did not need to be willful in order to rescind the contract.

Insurance Law § 3105 (b) does not specify that a misrepresentation must be willful, and '[w]hether or not plaintiff intended to provide inaccurate statements or misrepresentations at the time [it] filled out the application is irrelevant" (Curanovic, 307 AD2d at 437). Rather, a "material misrepresentation, even if innocent or unintentional, is sufficient to warrant a rescission of the policy" (citations omitted). Although plaintiff contends that, pursuant to the terms of the policy, defendant is required to establish that plaintiff's misrepresentations were willful, when an insurance policy is void ab initio based on material misrepresentations in the application, it is as if the policy never came into existence, and an insured cannot create coverage by relying on the terms of a policy that never existed[.]

Plaintiff argued that Utica First could not rely on any misrepresentations in the application because they were the result of the negligence of Utica First's alleged agents. In rejecting that argument, the appellate court noted:

Plaintiff is bound by the misrepresentations in the application, inasmuch as "[t]he signer of a contract is conclusively bound by it regardless of whether he or she actually read it" (citation omitted). Further, an insured "ha[s] a duty to review the entire application and to correct any incorrect or incomplete answers". Additionally, "an insurance broker is generally considered to be an agent of the insured" (citation omitted). "To establish that the broker was acting as the insurer's agent, [t]here must be evidence of some action on the insurer's part, or facts from which a general authority to represent the insurer may be inferred" (citation omitted). Although the insurance agency that bound the coverage may have been an agent of defendant, the broker who completed the application was hired by plaintiff as its agent and was an independent contractor with no connection to defendant.

Plaintiff next argued that Utica First waived its right to rescind the policy because it knew of plaintiff's misrepresentations concerning plaintiff's loss history before the fire. The court rejected that argument, finding deposition testimony of the plaintiff's insurance broker that she heard within two hours of the fire that Utica First was going to rescind the policy based on the plaintiff's prior losses to be both speculative and inadmissible hearsay. "Moreover, even assuming that defendant acquired knowledge of plaintiff's actual loss history before the fire, we conclude that such knowledge, by itself, is insufficient to constitute a waiver because plaintiff has failed to establish that it paid a premium to defendant after defendant allegedly acquired that knowledge."

Plaintiff's final argument was that Utica First was estopped from disclaiming coverage because it took eight months to do so. In opposition to that argument, Utica First contended that its investigation into plaintiff's loss history was ongoing and was delayed based on the lack of cooperation by plaintiff in providing an adequate authorization for its previous insurer's records. In rejecting the plaintiff's untimely disclaimer argument, the Fourth Department held:

Here, even assuming, arguendo, that defendant's notice of disclaimer was untimely, we conclude that defendant is not estopped from rescinding the policy as void ab initio inasmuch as, contrary to plaintiff's contention, plaintiff failed to demonstrate any prejudice based on defendant's alleged delay in disclaiming coverage (citations omitted). Although plaintiff contends that it was prejudiced because, without the insurance proceeds, it was unable to pay its suppliers and otherwise to re-start its business, it failed to identify any triable issue of fact whether it was prejudiced by the delay with respect to the asserted ground for rescission, i.e., the purported misrepresentations made in the insurance application.

With respect to the plaintiff's untimely disclaimer argument, it is important to bear in mind that Insurance Law § 3420(d) applies only to liability coverage disclaimers and denials for bodily injury or death claims arising from accidents that occur in New York. It does not apply to first-party property coverage denials. Only the equitable doctrines of waiver or estoppel can apply to preclude an insurer from denying first-party property coverage.