• Occurrence / Advertising injury / Designated premises endorsement

        Accessories Biz, Inc. v. Linda and Jay Keane, Inc., __ F.Supp.2d __, 2008 WL 282269 (U.S.D.C., S.D.N.Y., January 31, 2008), involved a dispute over costume jewelry. Accessories Biz designs, produces, and wholesales costume jewelry. L&J Keane is (or, more accurately, was) a customer of Accessories Biz. In April, 2005, Accessories Biz provided L&J with samples of its designs, allegedly worth about $250,000. L&J refused to return the samples. Instead, L&J allegedly contracted with other producers to manufacture competing costume jewelry based on Accessories Biz's samples. Accessories therefore sued L&J.

        L&J sought coverage under a CGL policy issued by Maryland Casualty. When Maryland refused to defend or indemnify, L&J impleaded it into Accessories Biz's pre-existing action as a third-party defendant. Long story short, Maryland won for the following reasons:

• Although Accessories Biz's complaint alleged "property damage" -- i.e., its "loss of use" of its valuable samples -- that "property damage" was not alleged to have been caused by an "occurrence." Although liability policies usually cover the accidental consequences of intentional acts, there are some kinds of intentional conduct for which that is not true; i.e., intentional conduct that necessarily and inherently results in readily foreseen harm. A knowing refusal to return another's property is exactly that kind of conduct, and the owner's resulting "loss of use" of that property cannot be viewed as the result of an accident or "occurrence."
• Even if the property damage could be viewed as the result of an "occurrence," it would still be excluded by the "expected or intended" exclusion.
• Accessories Biz's complaint did not allege anything that fit within the policy's definition of "personal and advertising injury." L&J's misappropriation of Accessories Biz's samples and designs was not "misappropriation of advertising ideas or style of doing business."
• The policy contained a Designated Premises Endorsement, limiting coverage to a specific premises in Florida and "operations necessary or incidental to those premises," but all the conduct alleged in the complaint had occurred at L&J's premises in New York. The phrase "operations necessary or incidental to those premises" was not broad enough to encompass L&J's business-related activity at other locations.

That's all for now, folks. See you next month.

February, 2008

        Thought we'd heard the last of 9/11 coverage litigation? Think again. In Cosmetics Plus Group, Ltd. v. American International Group, Inc., __ B.R. __ 2007 WL 3197417 (Bkrtcy.S.D.N.Y., 2007), yet another policyholder with a retail store in the World Trade Center argued that the "period of restoration" for its business interruption coverage should be deemed to last until the World Trade Center is rebuilt. Courts hearing "September 11th cases" have been unreceptive to that argument; regardless of differences in policy language, courts have generally limited an insured's period of restoration to the time reasonably required to replace its operations at a reasonably equivalent location. The court in this case saw no reason to give the insured a period of restoration any longer than that. Indeed, in this case the facts required the period of restoration to be shorter: the insured had already declared bankruptcy and was in the process of winding up its operations before the Twin Towers fell on 9/11. The final act in that winding-up was to have been a court-approved "going out of business" sale, scheduled to have ended on 12/24/01. Therefore, the period of restoration was held to end no later than that date.

        In City of Kingston v. Harco Nat'l. Ins. Co., 848 N.Y.S.2d 455 (3rd Dep't, 2007), a municipal sewer line broke, discharging a large volume of water and raw sewage that flooded a number of properties. Numerous claims (for both bodily injury and property damage) were made against the City. Harco, the City's liability insurer, disclaimed coverage on the sole basis of the policy's pollution exclusion. The City then sued Harco, seeking a declaration that Harco was obligated to defend the claims. In the coverage action, Harco asserted an additional exclusion (a "fungi" or "bacterial" exclusion) as an additional basis for disclaiming. Sorry, Harco: by disclaiming on the sole basis of the pollution exclusion, you implicitly waived any other ground for disclaiming of which you knew or should have known at the time. The court therefore disregarded the fungi/bacterial exclusion. As to the pollution exclusion, the court noted some of the claims, and some of the alleged damage, had nothing to do with any pollutant or contaminant: they were based only on the discharge of water (variously described as having been like a "flood," a "river," or "Niagara Falls") on the claimants' properties. Although the pollution exclusion might exclude a duty to indemnify some of the claimed damages, it did not exclude a duty to indemnify all of them. Therefore, Harco had a duty to defend.

        The New York State Attorney General's "contingent commissions" suit against Wells Fargo has suffered a setback: in People ex rel. Cuomo v. Wells Fargo Ins. Services, 2008 WL 162147 (Sup.Ct., N.Y.Co., January 14, 2008), a trial court dismissed the AG's complaint. The complaint alleged four legal theories:

• violations of N.Y. Executive Law § 63(12) (which permits the Attorney General to sue any "person...engag[ing] in repeated fraudulent or illegal acts or otherwise demonstrat[ing] persistent fraud or illegality in the carrying on, conducting or transaction of business");
• unjust enrichment;
• common law fraud; and
• breach of fiduciary duty.

The problem with the AG's complaint was that, although it purported to describe and characterize Wells Fargo's contingent compensation arrangements in a general sort of way, it alleged very few specifics. Fraud, for example, is supposed to be pleaded with particularity, but the complaint alleged no specific instance of fraud and provided no particulars of any fraud that might have occurred. Similarly, the claim for breach of fiduciary duty failed to allege facts indicating the existence of a fiduciary relationship between Wells Fargo and any of its customers. (Under NY law, a broker is not ordinarily a fiduciary for its customers, but may become one as to a specific customer if there is a "special relationship" with that customer.) The unjust enrichment claim failed to allege any particulars concerning any specific instance of unjust enrichment. Because of that kind of broad-brush, "impressionistic" pleading -- i.e., lots of general accusations, characterizations, and pejoratives, but no specifics -- the court dismissed the AG's complaint. The AG's Office asked for leave to replead, which the court granted, so this dismissal is not necessarily the end of the case.

January, 2008

        Happy new year to all of you. You may have noticed that this site was down for part of December. Some malicious moron apparently decided it would be fun to bombard the site with huge amounts of data (about 100 megabytes a pop!) until my monthly data transfer quota was exceeded and my Web host shut me down. My apologies for the disruption. Now, on to the recent decisions.

        In White v. Continental Cas. Co., __ N.Y.2d __, __ N.Y.S.2d __, __ N.E.2d __, 2007 WL 4165127, N.Y. Slip Op. 09310 (November 27, 2007), the Court of Appeals had to decide whether a disability policy's definition of "total disability" was clear and unambiguous. The policy's definition of "total disability" included a requirement that the insured be unable to "[perform] the duties of any gainful occupation for which [he is] reasonably fitted by education, training, or experience." The insured argued that requirement was unclear and ambiguous, and rendered coverage illusory. The insured, an orthopedic surgeon, was disabled by a hip condition and could no longer perform surgery. However, he continued to render second opinions, perform independent medical examinations, and serve as an expert witness. The Court held the policy's definition was clear and unambiguous. Because the insured was able to -- and actually did -- perform the duties of a gainful occupation for which he was reasonably fitted by education, training, and experience, he was not "totally disabled" within the meaning of the policy. The decision notes that, once a policy provision is determined to be clear and unambiguous (and, of course, assuming it is not unenforceable for some other reason), "a court is not free to alter the contract to reflect its personal notions of fairness and equity."

        In Romano v. Whitehall Properties, LLC, __ N.Y.S.2d __, 2007 WL 4105723, 2007 N.Y. Slip Op. 27477 (Sup.Ct., Kings County, November 19, 2007), the plaintiff was a construction worker who was injured at a job site. He sued the owner and general contractor, each of whom was insured under an Owner-Controlled Insurance Program ("OCIP") or "wrap-up" program -- i.e., the owner had procured GL, employer's liability, XS, and WC coverages to protect itself and all the contractors and subcontractors working on the project. Under the OCIP, Travelers provided the GL, employer's liability, and WC coverages, and Westchester Fire Insurance Company provided excess coverage. The case was eventually settled for a total of $4 million ($2 million from Travelers' GL policy and $2 million from Westchester's XS policy). In the meanwhile, the plaintiff had been collecting WC payments under the Travelers WC policy, so Travelers asserted -- and collected -- a $71,500 lien against the settlement proceeds. The owner and general contractor then argued that Travelers' recovery of its WC lien was prohibited by New York's antisubrogation rule. The court rejected that argument, for a couple of reasons. First, Travelers' WC lien was a creation of statute (Workers Compensation Law § 29); it did not stem from an insurance contract or from the common law doctrine of subrogation. Second, the antisubrogation rule applies where a carrier attempts to subrogate against its own insured for the very risk for which it covered that insured. It does not apply where, as here, the same carrier covers two distinct risks under separate policies. That is, Travelers -- in its role as a WC carrier -- could assert its statutory lien against the recovery to which it had contributed in its separate and distinct role as a GL insurer.

        The defendants also argued that Travelers should be required to contribute "fresh money" to the settlement. The court's opinion does not explain exactly what it means by the phrase fresh money, but the context suggests the defendants argued that, because the settlement relieved Travelers of the obligation to pay future benefits under its WC policy, Travelers ought to reimburse Westchester (the XS carrier) for some portion of its $2 million contribution to the settlement. Under Workers Compensation Law § 29, the plaintiff would have had a statutory right to demand an apportionment of part of his attorneys' fees to Travelers, and it was this right that the defendants were trying to assert for themselves. Again, the court rejected that argument: under the statute, the right to such an apportionment belonged to the plaintiff, not to the defendants and not to Westchester. Nothing in the settlement agreement indicated the plaintiff had intended or agreed to assign that right to anyone. Therefore, the defendants had no standing to seek such relief.

        Some recent New York decisions have treated "earth movement" exclusions pretty harshly, but Labate v. Liberty Mut. Ins. Co., __ A.D.2d __, __ N.Y.S.2d __, N.Y. Slip Op. 09366, 2007 WL 4183024 (2nd Dep't. November 27, 2007), shows such exclusions are still alive and kicking when the facts are right. In this case, the insureds' house suffered substantial damage when the basement slab settled: the slab itself cracked and so did some walls. The owners'  homeowner's policy excluded coverage due to "Earth Movement... earth sinking, rising or shifting," or due to the "[s]ettling, shrinking, bulging or expansion, including resultant cracking, of pavements, foundations, walls, floors, roofs or ceilings." Liberty Mutual denied coverage on the basis of that exclusion, so the insureds sued. Both the carrier's expert and the insureds' own engineers, hired to fix the conditions, testified the damage had been caused directly or indirectly by earth movement or settlement. Liberty Mutual moved for summary judgment, but the trial court denied that motion (for reasons not stated in the cited decision). Liberty Mutual then appealed. In the decision cited above, the Appellate Division held there was no material question of fact, the exclusion applied, and Liberty Mutual's motion for summary judgment should have been granted. It sure does tend to undercut an insured's case when its own engineers testify that  property damage was caused by an excluded cause of loss.

        MCI LLC v. Rutgers Cas. Ins. Co., 2007 WL 4258190 (U.S.D.C., S.D.N.Y., December 4, 2007), follows a twisting factual path to reach some interesting conclusions. The saga begins in July, 2003, when an excavation contractor (Pelcrete) severed two underground fiber-optic telecommunications cables. MCI and Sprint (the owner and lessee of the cables, respectively) contacted Pelcrete the next day and asked for the name of its liability carrier, but Pelcrete refused to disclose it. Over a year later, in September, 2004, MCI and Sprint sued Pelcrete. In January, 2005, MCI and Sprint learned that Pelcrete's insurer was Rutgers Casualty. Sprint and MCI promptly gave Rutgers notice of the occurrence and of the pending suit. In response, Rutgers promptly disclaimed coverage because Pelcrete had never notified it of either the occurrence or the suit. Rutgers never defended Pelcrete and Pelcrete ultimately defaulted in the suit. In May, 2006, the plaintiffs were awarded a default judgment against Pelcrete totaling in excess of $2 million, plus pre- and post-judgment interest. The plaintiffs then sued Rutgers to recover on the default judgment against Rutgers' insured. In August, 2007, the District Court awarded the plaintiffs summary judgment against Rutgers (for reasons not immediately relevant and which need not detain us here) and a judgment for $1 million (Rutgers' per-occurrence limit) was entered the next day. So far, so good. Now comes the interesting part.

        Ten days after entry of the judgment against Rutgers, plaintiffs moved to amend that judgment by adding about $500,000 in pre- and post-judgment interest. Rutgers opposed that motion by pointing to its policy's supplementary payments provision, which provided for the payment of pre- and post-judgment interest only "[w]ith respect to any claim that we investigate or settle, or any 'suit' against an insured we defend." The court characterized that language as creating a condition precedent: Rutgers could be required to cover interest only if it had investigated or settled the claim, or defended a suit. Everyone agreed Rutgers had neither settled the underlying claim nor defended the underlying suit. The plaintiffs argued, however, that Rutgers had "investigated" the underlying claim, so it should be on the hook for interest. The court held Rutgers had not "investigated" the claim, because the word investigate refers to making a detailed, close, systematic, thorough, careful, official, or methodical inquiry or examination. Rutgers had done nothing of the sort here: it had merely reacted to the initial notice it received and issued a quick disclaimer. It never contacted its insured or inquired into the merits before issuing the disclaimer, and had done nothing thereafter that could reasonably be construed as an "investigation."

        Plaintiffs then fell back on secondary arguments: even if Rutgers had not investigated the claim, its failure to have done so was a breach of the covenant of good faith and fair dealing, so Rutgers should not be able to rely on the failure of a condition precedent where only its own conduct frustrated or prevented the fulfillment of that condition. The court rejected those arguments, too. The court framed the issue as being whether an insurer, when it receives notice of a claim it believes to be clearly not covered -- whether because of late notice or some other reason -- can make a good-faith business judgment not to expend resources conducting an investigation of it. Here, Rutgers had assumed the truth of all the facts alleged in plaintiffs' complaint against Pelcrete, but concluded there was no coverage because of late notice, so there was no reason for Rutgers to have conducted any further "investigation." Rutgers' disclaimer letter had  invited the submission of further information if anyone thought it had overlooked something, but no further information had been sent to it. Although Rutgers had been mistaken about the effectiveness of its disclaimer vis-à-vis the plaintiffs, it had been mistaken in good faith, and the court found no New York authority for the proposition that an insurer must always make an investigation of a claim where it believes that claim to be clearly not covered.

        Sexual misconduct claims against physicians are, alas, not as uncommon as they ought to be. Usually, such claims are made by patients. In Elashker v. Medical Liability Mutual Ins. Co., __ A.D.2d __, __ N.Y.S.2d __, 2007 N.Y. Slip Op. 09638, 2007 WL 4258843 (3rd Dep't, December 6, 2007), however, such a claim was made by a nurse who worked for the nursing home where the doctor was an attending physician. (No carrier likes defending such claims, regardless of who makes them.) In Elashker, the nurse claimed she and the doctor had been working on patient files in a conference room. Somehow (the opinion is short on graphic detail) the doctor allegedly engaged in intentional (and unwelcome) sexual contact while purporting to palpate the nurse's thyroid. The nurse sued the nursing home and the doctor, and the doctor turned the claim over to his medical malpractice carrier, Medical Liability Mutual. MLM denied a duty to defend or indemnify, so the doctor sued for a declaration of coverage. The med mal policy's insuring agreement encompassed claims "brought against [the insured] because of Professional Services which [he] provided (or should have provided)." The nurse's claim alleged only an intentional sexual assault  perpetrated by the doctor as a co-worker while she was performing her duties in her place of employment. She made no claim regarding his having provided, or failed to provide, any kind of professional service, or that his alleged misconduct had constituted medical malpractice. Under the circumstances, both the trial court and the Appellate Division held the doctor's purported thyroid examination had merely provided the occasion for the alleged assault, and did not convert the doctor's acts into medical malpractice within the scope of the insuring agreement.

        Transportation Ins. Co. v. AARK Construction Group, Ltd., __ F.Supp.2d __, 2007 WL 4284161 (U.S.D.C., E.D.N.Y., December 7, 2007), dealt with a construction defect claim. AARK was the general contractor for the construction of a parking structure for Dollar Rent-A-Car. A few months after the garage had been completed, the pre-cast concrete floor collapsed, precipitating a fuel delivery truck from the first floor into the basement. The president of AARK visited the site and concluded the floor had collapsed because the fuel truck was too heavy and should not have been allowed into the garage. He then  wrote to the subcontractor that had designed and manufactured the floor, advising that contractor to "notify all appropriate parties." Unfortunately, he never followed his own advice: AARK's CGL carrier (Transportation) remained blissfully unaware of the above events.

        Nearly two years later, Dollar's property insurer notified AARK that it had paid for Dollar's property loss and intended to pursue subrogation against AARK. AARK then -- at last! -- notified Transportation of the above events and of the threatened subrogation claim. In response, Transportation reserved all its rights, but began an investigation of the claim. About a year later, Dollar's property insurer sued AARK. Transportation defended AARK in that suit, subject to its earlier reservation of rights. After defending AARK for more than two and a half years, Transportation started a declaratory judgment action, seeking a declaration that it was not required to defend or indemnify AARK because (1) the damage to the garage had not been the result of an "occurrence" and (2) even if it had been the result of an "occurrence," AARK had not given prompt notice of that "occurrence." In response, AARK argued that it had had a reasonable belief in its own non-liability, which ought to excuse its late notice. AARK also argued it would be unreasonably prejudiced if Transportation were permitted to drop its defense after two and a half years. AARK also impleaded its insurance broker into the declaratory judgment action, alleging that, if Transportation had no duty to defend or indemnify, it would only be because of broker malpractice: AARK claimed it had sought "full coverage," and that is what the broker had agreed to procure. The court disposed of this welter of arguments as follows:

• The property damage to Dollar's garage was not the result of an "occurrence" within the meaning of Transportation's CGL coverage. A CGL policy is not a performance bond. Although it covers the insured's liability for damage to property other than the insured's own product or work, it does not cover the insured's liability for damage to its own product or work.
• Even if the damage to the garage had been the result of an "occurrence," AARK would have forfeited any coverage it might otherwise have had when it failed to notify Transportation of that "occurrence" for more than two years. Although AARK's president claimed to have concluded to his own satisfaction that AARK should not be liable for the floor's collapse, that is not at all what courts mean when they talk about a "reasonable belief in non-liability" in this context. [Note: the court did not address whether Transportation might have waived its late notice defense by taking so long to assert it. I assume AARK never raised that argument, but a lot of judges would have raised it on their own. This one did not.]
• There was no reason to suppose AARK's defense would be prejudiced if it had to take it over from the carrier. Although AARK made a bland, pro forma claim of general, unspecified prejudice, it offered no evidence or argument to suggest how or why its defense might be prejudiced if Transportation withdrew.
• There was no evidence to support an E&O claim against the broker. Vague descriptions like "full coverage," "good coverage," or "gold-plated coverage" are merely aspirational; they are not specific or meaningful enough to create a duty above or beyond a broker's normal common law duty to procure a policy of the type the insured has asked for or notify the insured that it cannot do so. The fact that AARK's president received the policy, read it, retained it, and never asked for any different or additional coverage amounted to a ratification of the coverage and was fatal to AARK's claim against the broker.

        In Catholic Health Services of Long Island, Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa., __ N.Y.S.2d __, 2007 WL 4328737, N.Y. Slip Op. 09715 (2nd Dep't, December 11, 2007), the parties disputed whether an investigative subpoena constituted a "claim" within the meaning of a policy. That topic interests me (see here). I wish I could say this decision actually addresses it, but it does not. Here's why.

December, 2007  

        Although not about insurance coverage per se (it's actually about the rule against hearsay), the decision in Hochhauser v. Electric Ins. Co., __ N.Y.S.2d __, 2007 WL 3105684, N.Y. Slip Op. 08037 (2nd Dep't, October 23, 2007), is a cautionary tale for claim-handlers. It shows how an apparently careful claim investigation can nevertheless sometimes lead to a bad result when it runs into the law of evidence. In this case, a Mrs. Hochhauser was hit by a car and was injured as a result. The driver had no insurance, so Mrs. Hochhauser submitted a claim for uninsured motorist benefits under her son's personal auto policy. That policy required that, to be entitled to such benefits, Mrs. Hochhauser had to have been a resident in her son's household at the time of the accident. The carrier's claim-handler interviewed the son (the Named Insured) concerning Mrs. Hochhauser's status as a resident of the household and, based on what the son told him, concluded she had not been a resident of the household at the time of the accident. The claim-handler made a contemporaneous written memorandum of the conversation for his claim file, but never spoke with Mrs. Hochhauser herself. The company then denied coverage, and Mrs. Hochhauser sued.

        At the trial, the claim-handler's report was admitted into evidence and the claim-handler was permitted to testify about his conversation with the son.  Mrs. Hochhauser lost. She then appealed, and the decision cited above is the result of that appeal. The Appellate Division held that neither the claim-handler's memo nor his testimony about the conversation should have been admitted: each of them was inadmissible hearsay and neither of them was subject to an exception from the hearsay rule. The file memo was not admissible as a business record, because the initial declarant (the son) was not a part of the same business enterprise as the claim-handler and, in any event, was not operating under a "business duty" to report accurate and truthful information when he spoke with the claim-handler. The son's statements to the claim-handler were not admissible against Mrs. Hochhauser as declarations against interest, because they were not her statements and the son had not been authorized to speak for her. The result: without either the memo or the claim-handler's testimony about what the son had told him, the only evidence in the case was Mrs. Hochhauser's own trial testimony that she had so been a resident of the household, so she won. To try to avoid that result, it would have been necessary to pin down Mrs. Hochhauser herself, in her own words, either by interviewing her in the claim investigation or by deposing her in the action. After all, she was the insured and it was her claim, not the son's. Apparently, neither of those things was done.

        In Axelrod v. Magna Carta Companies, 2007 WL 3378346, Slip Copy, 2007 WL 3378346 (Table), 2007 N.Y. Slip Op. 52165(U) (N.Y.Sup., November 7, 2007), an insured apparently got hoist on its own petard. The insured (Axelrod) manufactured and sold charms (i.e., the jewelry kind, not the magic kind). It was sued for copyright infringement by Quest (another charm manufacturer), which alleged Axelrod had copied Quest's charm designs. Axelrod tendered the suit to its CGL insurer, Public Service Mutual. Under the Public Service policy, copyright infringement was one of the predicate offenses for "advertising injury," but only if the infringement was "committed in the course of advertising your goods, products or services." The complaint neither alleged nor implied that Axelrod had committed any copyright infringement in the course of advertising, so Public Service denied a duty to defend. When Axelrod notified Quest of the disclaimer, Quest promptly amended its complaint to try to allege a covered advertising injury. Axelrod received Quest's amended complaint, but never asked Public Service to defend against the amended complaint and, in fact, never notified Public Service the complaint had been amended. Instead, Axelrod continued to defend the claim through its own privately-retained counsel and, eventually, settled for $100,000. Axelrod then brought a declaratory judgment action against Public Service Mutual, demanding that Public Service reimburse Axelrod's defense costs in the underlying action, the $100,000 Axelrod had paid to settle that action, and Axelrod's attorneys' fees in the declaratory judgment action. In the cited decision, a trial court rejected all of Axelrod's claims: Public Service's disclaimer of a duty to defend had been correct under the allegations of the original complaint. Whether Public Service might have had a duty to defend under the allegations of the amended complaint was essentially irrelevant: Axelrod had itself elected not to tell the carrier about that amended complaint until after it had settled the underlying action and started the declaratory judgment action. The decision does not say so, but the circumstances lead me to suspect Axelrod may have been trying to have the best of both worlds: it wanted to be able to plead a lack of insurance coverage so it could try to settle at a lower number with Quest, but then demand that the carrier pay for the settlement anyway. [My thanks to Mike Savett of Weber Gallagher Simpson Stapleton Fires & Newby LLP, for bringing this decision to my attention. Mike represented Public Service Mutual in the case.]

        Federal Ins. Co. v. North American Specialty Ins. Co., __ N.Y.S.2d __, 2007 WL 3306577, N.Y. Slip Op. 08391 (1st Dep't, November 8, 2007), delves into the often-murky area of the "tripartite relationship" -- the mix of sometimes conflicting duties of loyalty and independence that a defense counsel owes to its client (i.e., an insured) and that client's insurers. The facts of the case are too complex to describe in detail here. Suffice it to say that Federal was an excess insurer that was required to pay $2 million (in excess of an underlying $1 million primary CGL policy) to settle a construction accident claim. Federal believed the underlying claim had been badly defended, in that the defense counsel (Rivkin Radler) selected by the underlying CGL carrier had failed to allege the applicability of New York's antisubrogation rule. In Federal's view, had Rivkin Radler alleged that rule in a timely fashion, Federal's policy would have ended up attaching excess of $2 million, rather than excess of $1 million, and Federal would have had to pay $1 million less to settle the construction accident claim. Federal therefore sued Rivkin Radler. In the decision cited above, the Appellate Division, First Department, dismissed all of Federal's claims:

• Federal's claim for legal malpractice failed because it was not Rivkin Radler's client. NY law imposes a strict privity requirement on legal malpractice claims; an attorney normally can not be liable to a third party for negligence in performing legal services on behalf of a client.
• Federal's complaint also failed to allege facts describing a relationship of "near privity." In limited circumstances, a relationship of "near privity" may be enough to support a legal malpractice claim or a negligent misrepresentation claim. No such relationship was alleged here.
• Federal's claim as a subrogee of the insured failed because the insured had suffered no damages. It had been liable for the underlying plaintiff's injuries and everyone agreed the amount of the underlying settlement had been reasonable. Federal's only real gripe was that a second $1 million primary policy limit ought to have applied before Federal's own excess policy attached.

        On the regulatory front:

• The NYS Insurance Department is reportedly drafting a new "producer transparency" regulation that would require every retail broker in New York to disclose to its clients the value of all its compensation deals with insurers.
• The NYS Insurance Department has released a draft regulation intended to establish "principles-based regulation." Is this a tacit admission that NY's regulation of the industry has been unprincipled up 'til now? (Just asking.)

        That's it for December, folks. That's also it for 2007. Thanks to all of you for reading these monthly Updates. Please accept my sincere best wishes to you and yours for a very merry Christmas, happy holidays, and a great 2008.
 

November, 2007

        The New York State Court of Appeals issued two insurance-related decisions in October. The first, Certain Underwriters at Lloyd's, London v. Foster Wheeler Corp., __ N.Y.3d __, __ N.Y.S.2d __, __ N.E.2d __, 2007 WL 2947419, N.Y. Slip Op. 07501 (October 11, 2007), deals with how a court should choose the applicable law of decision in complex coverage disputes involving multiple years of coverage, policies issued by multiple carriers from multiple states, policies covering events throughout the United States (and most of the rest of the world), an insured conducting operations and selling products in numerous states, and liabilities arising in numerous states. This kind of scenario frequently arises in coverage disputes involving mass torts or class actions. Trying to decide which state's law should apply to coverage issues in that kind of scenario can be a real mind-bender. Because the Court of Appeals' decision is just a one-sentence affirmance of the Appellate Division's earlier decision in the case (which I wrote-up here last November), it is necessary to revisit the Appellate Division's decision. The Appellate Division announced a sort of bright-line rule by which courts should pick the applicable law in this kind of situation:

• the overriding factor should be "the principal location of the insured risk,"
• where the insured's operations are all over the place, its "domicile" will be used as a proxy for the principal location of the insured risk, and
• where the insured is organized in one state, but its principal place of business is in another, the principal place of business will be deemed the "domicile" for purposes of a choice-of-law determination.

Now that the Court of Appeals has endorsed that holding, it should be followed by (a) all New York State courts and (b) all federal courts sitting in New York State in diversity cases.

        The second Court of Appeals decision deals with the status of the New York Liquidation Bureau. Dinallo v. DiNapoli, __ N.Y.3d __, __ N.Y.S.2d __, __ N.E.2d __, 2007 WL 2947397, 2007 N.Y. Slip Op. 07497 (October 11, 2007).  The specific question the Court had to decide was "whether the New York State Comptroller has the constitutional and/or statutory authority to audit the New York State Insurance Department Liquidation Bureau." The Court held the Comptroller has no such authority. To reach that answer, however, the Court also held that, in his capacity as a liquidator or rehabilitator of distressed companies, the Superintendent of Insurance is not a "state officer," the Liquidation Bureau is not a "state agency," and the assets of distressed insurers that the Bureau controls are neither "money[s] of the state" nor "money[s] under state control." Although the Court thus immunizes the Liquidation Bureau from much of the oversight and control under which state officers and agencies must operate, it also makes clear that the Legislature can do something about that if it wants to: "Although the Legislature does not have the authority...to assign to the Comptroller the task of auditing the Bureau, it does have the authority to require the Bureau to retain independent auditors." The Superintendent is reportedly going to urge the Legislature to do so, as part of his recently announced program to reform the Bureau. Whether the Legislature will do so remains to be seen.

        United States Liability Ins. Co. v. Trance Nite Club, Inc., 2007 WL 2782714 (U.S.D.C., E.D.N.Y., September 24, 2007), shows how to build a good case for rescission of an insurance policy, based on a misrepresentation in the application. Here, the insured (Trance) was a bar/nightclub that had liquor liability coverage from U.S. Liability. When Trance was sued for a wrongful death under New York's Dram Shop Law, U.S. Liability agreed to defend. During the litigation, the owner of the club testified at a deposition. Some of his testimony contradicted information he had put on the application for U.S. Liability's insurance. After investigating, the carrier determined the information on the application was a material misrepresentation. The carrier then decided to rescind the policy, tendered the premium back to the insured, and commenced a d.j. action to get a judicial declaration that the policy was rescinded ab initio. In the decision cited above, the carrier won summary judgment in its favor and the court declared the policy rescinded. To achieve this result, U.S. Liability did a number of things right -- things some carriers fail to do:

• The particular question on the application to which the insured gave a false answer was clear, specific, and unambiguous. (The insured argued the question was ambiguous, and that his answer to it would have been truthful under an alternative reading of the question, but that argument was very weak and the court rejected it.) Many applications ask questions that are so loose, unclear, or ambiguous that, even if the applicant answers them dishonestly, there's often nothing the carrier can do about it later.
• When the carrier became aware of possible grounds to rescind, it acted promptly. It investigated promptly. Based on that investigation, it made a decision (i.e., to rescind) promptly. It announced that decision to the insured promptly. Ignoring grounds for rescission, or delaying unreasonably in acting on those grounds, can be fatal to any later effort to rescind.
• When it rescinded the policy, U.S. Liability tendered the premium back to the insured. In most states, doing so is an essential step in making a claim for rescission and should be done before starting a d.j. action, but carriers sometimes forget this.
• Once it rescinded, U.S. Liability brought a d.j. action to enforce that decision. Some carriers announce they have decided to rescind, but then sit back, do nothing, and wait for the insured to do something about it; that often turns out to be a bad idea.
• U.S. Liability was able to prove materiality by pointing to the specific written underwriting guidelines it followed when Trance applied for coverage. Under those written underwriting guidelines, Trance's application would have been declined had it answered the application truthfully. Carriers who cannot point to written underwriting guidelines, but who rely only on self-serving or subjective testimony to establish materiality, will usually not be able to get summary judgment in their favor; instead, the carrier will have to prove materiality at a trial.

        Penna v. Peerless Ins. Co., __ F.Supp.2d __, 2007 WL 2769668 (W.D.N.Y., September 24, 2007), is another reminder to insureds and their lawyers that contractual limitations periods in insurance policies are enforceable -- and enforced -- under New York law. Here, the policy contained a two-year contractual limitations period (often called a "time for suit" or "suit limitations" clause). The insured's property claim was investigated and adjusted for longer than two years; the insured made some small partial payments during the two years, and conducted an EUO shortly after the two years had run. The adjustment then came to a dead stop. After hearing nothing further from the carrier, the insured brought suit some nine months after the two-year period had expired. The carrier moved for summary judgment on the basis of its "time for suit" clause, and won. The carrier had repeatedly reserved all its rights and had done nothing to suggest it intended to waive the two-year suit limitations clause. Such waivers are not lightly presumed: merely continuing to investigate or negotiate, or making partial payments, is not enough to show waiver. Although such waivers have been found in a small number of cases, those cases are few and far between. If an insured fears its claim will not be fully and finally resolved before the end of a limitations period, it should either (a) get a written waiver from the carrier, (b) get a written extension of time from the carrier, or (c) start a lawsuit. If it does none of those things, it's taking a big risk.

        International Business Machines v. United States Fire Ins. Co., 17 Misc.3d 1108(A), 2007 WL 2891408 (Sup.Ct., N.Y. County, September 24, 2007), illustrates that "additional insured" endorsements are not fungible: their precise wording matters, and can matter a lot. The dispute dealt with a bodily injury claim by a subcontractor's employee after he twisted his knee at a work site. There were multiple parties, multiple policies, and multiple versions of multiple construction contracts, so the facts and issues of the case are too complicated to set out here in detail. The one thing I want to focus on is the wording of one additional insured endorsement that was at issue. It was an endorsement on a CGL policy issued to a subcontractor (the injured worker's employer). It designated as an additional insured "any person or organization whom you are required to add as an additional insured to this policy by a written contract...."  For such an additional insured, the endorsement afforded coverage "with respect to liability caused by your [i.e., the Named Insured subcontractor's] negligent acts or omissions at" the job site. Under that language, there would be coverage for the additional insured only if the liability were alleged to have been "caused by" the Named Insured subcontractor's "negligent acts or omissions." In this case, no one alleged that any act or omission by the subcontractor had contributed in any way to the accident, so there was no additional insured coverage. The outcome would probably have been different if the endorsement had afforded coverage "with respect to liability arising from your work for that additional insured."

        Another additional insured provision was the subject of N.Y.C. Housing Auth. v. Merchants Mut. Ins. Co., 2007 Slip Op. 07996 (1st Dep't, October 25, 2007). In this case, Merchants Mutual issued a policy to Stonewall, which installed an electromagnetic locking system on a Housing Authority building. The additional insured endorsement afforded coverage to the Housing Authority, "but only with respect to liability arising out of [Stonewall's] ongoing operations performed for" the Housing Authority. Stonewall installed a locking system on the Housing Authority building in 1995, and contracted to maintain and guarantee that system (except for malfunctions caused by vandalism) for two years after the date of installation. During the two-year guarantee period, a man was shot at the building, allegedly as a result of the locking system's failure to keep out an intruder. The shooting victim sued the Housing Authority, and the Housing Authority sought coverage from Merchants Mutual. The court decided, without extended analysis, that Stonewall's "ongoing operations" for the Housing Authority included both installation of the system and Stonewall's two-year maintenance and guarantee obligation. Although the shooting had occurred during that two-year period, the court held there was no additional insured coverage for the Housing Authority: there was no evidence of any failure of the system as a result of faulty installation or poor maintenance. The only evidence of system failure was as a result of vandalism, which had been specifically excluded from Stonewall's contract and was therefore not part of its "ongoing operations."

        Alex & Alex Diamonds, Inc. v. Certain Underwriters at Lloyd's, London, 2007 WL 2844912 (U.S.D.C., S.D.N.Y., September 27, 2007), is a cautionary tale for (a) policy drafters and (b) lawyers who make unsupported motions for summary judgment. The case involves a theft claim under a jeweler's block policy. The policy listed different limits of liability that might apply, depending on where the property was, or by whom it was held, at the time of loss. For example, one limit would apply if the property was lost while in transit by Registered Mail, another if the property was held at the insured's own premises, another if it was in a bank or safe depository, etc. The schedule of limits indicated there would be "No liability" if the property was in the hands of "commission salesmen or selling agents." Lloyd's decided this particular theft had occurred while the merchandise was in the hands of a commission salesman, and therefore refused to pay anything. The insured sued, arguing that the person from whom the jewelry had been stolen was not a commission salesman, but a salaried employee (albeit one who also received commissions in addition to a salary). Even though the insured testified the person was a salaried employee, and even though there was little or no documentation to suggest otherwise, Lloyd's moved for summary judgment. Of course, the court said there was an obvious question of fact and denied Lloyd's motion. So, the first moral (the one for litigators) is: unless you are trying to secure some indirect tactical benefit (and I don't see one here), don't waste your time and your client's money moving for summary judgment when there are obvious disputed factual issues.

        The second moral (the one for policy drafters) comes from the court's holding that the undefined term "commission salesman" in the Lloyd's policy was ambiguous. In fact, the policy and its attachments used the terms selling agents, salesmen, commission salesmen, and independent commission salesmen, without defining them or explaining how to distinguish any of them from the others, and without saying whether any of them could also be a salaried employee. None of those terms has a single, precise, well-understood meaning. Rather, each of them is reasonably susceptible of being understood and applied in multiple ways in different contexts. Since deciding which of those labels to stick on a particular individual could determine who would get (or get to keep) a lot of money, it should have been worth someone's time to define or explain -- right in the policy -- what they were actually intended to mean. Now, a jury will get to decide that. Swell.

        State Ins. Dept. Liquidation Bureau v. Generali Ins. Co., __ A.D.2d __, __ N.Y.S.2d __, 2007 WL 2993807 (1st Dep't, October 16, 2007), deals with how to allocate loss and defense costs among multiple coverage periods. The insured, Rosan Realty Corp., owned a premises from March, 1988, to July, 1992. Rosan was then evicted and, in 1994, the corporation was dissolved. While it owned the premises, Rosan had two different liability insurers, at different times: Generali (for 5.5 months) and Transtate (for 10.2 months). During the remaining 35 months, Rosan had had no liability insurance on the premises. In 1993, shortly before Rosan Realty was dissolved, it was sued for bodily injuries allegedly sustained by a tenant's child as a result of exposure to lead paint at the premises. Generali disclaimed any duty to defend or indemnify the suit. Transtate was by then in liquidation, but the Liquidation Bureau defended the suit on Transtate's behalf and ultimately settled it. The Liquidation Bureau paid 100% of (a) Rosan's defense costs and (b) Rosan's share of the settlement.

        Then, the Liquidation Bureau went after Generali for contribution. A trial court held that Generali had owed a duty to defend and indemnify Rosan with respect to the lead paint suit. It therefore allocated to Generali responsibility for 50% of the defense costs the Liquidation Bureau had paid. It also allocated to Generali responsibility for a share of the settlement paid by the Liquidation Bureau. Generali's share of the settlement was based on a "time on the risk" ratio: Generali's 5.5 months was the numerator and the sum of Transtate's 10.2 months and Generali's 5.5 months (a total of 15.7 months) was the denominator, yielding a 35% share for Generali.

        Generali appealed, arguing that (a) its share of defense costs should also have been based on a "time on the risk" ratio, not on a per capita division based on the number of carriers, and (b) a correct "time on the risk" ratio should include the insured's bare period of 35 months in the denominator. According to its argument, Generali should have been responsible for only 10.8% of both defense costs and indemnity. In the cited decision, the Appellate Division rejected Generali's argument and affirmed the trial court's decision. First, nothing about the 50:50 split of defense costs seemed unfair to the Appellate Division: each carrier had had a duty to defend the entire claim. Transtate (the Liquidation Bureau) had done so, but Generali had unjustifiably defaulted on its duty to defend. Requiring Generali to reimburse half of the defense costs was not unfair or unreasonable.

        With respect to allocating indemnity, although there have been some cases in which loss has been allocated by a pure "time on the risk" method that included uninsured periods, no New York court has ever held that is the only way, or even the default way, to allocate loss among multiple coverage periods. In this case, the insured no longer existed and the estate of Transtate had already actually paid the entire settlement. Under the circumstances, there was nothing unfair about the trial court's allocation based on the ratio of Generali's coverage period to the total of insured periods, with no account taken of bare periods. (Two of the five justices dissented. The minority, like the majority, rejected Generali's position on defense costs, but would have accepted Generali's position on allocating loss.)

        In International Flavors & Fragrances, Inc. v. Royal Ins. Co. of America, __ A.D.2d __, __ N.Y.S.2d __, N.Y. Slip Op. 08122, 2007 WL 3146945 (1st Dep't, October 30, 2007), the Appellate Division, First Department, had to decide how to apply a per-"occurrence" deductible where multiple claimants alleged they had been injured by prolonged exposure to a chemical used in their workplace. The claimants worked at a factory that packaged microwave popcorn. Thirty of them brought a class action, alleging they had developed a collection of respiratory ailments (sometimes referred to as "popcorn lung") as a result of prolonged workplace exposure to diacetyl and other chemicals used to impart a buttery flavor to microwave popcorn. The defendant (the manufacturer of the chemical) was insured under a series of AIG CGL policies. The first two policies provided for per-claim SIRs; the remainder provided for per-"occurrence" deductibles. The court assumed the per-claim SIRs "would require application of the [SIRs] to each of the...injured workers' claims." (That is by no means self-evident in the context of a class action, in my opinion, but the court apparently thought it was.) As regards the per-"occurrence" deductibles, the court held each claimant's exposure to the chemicals constituted a separate "occurrence," requiring a separate application of the deductible to each claimant. That was because each claimant's exposure had been independent of the others', and their exposures had occurred at different times and for different lengths of time. The parties to the insurance contract were both sophisticated commercial entities and, had they intended the deductible to apply on any other basis -- such as an aggregate basis -- they could have said so in the policy.

October, 2007

        I recently got a nice e-mail from the folks at LexisNexis. It says:

So, I gather this page is deemed a blog, which makes me a blogger. Who knew? One post a month does not seem like much of a blog to me; a slow-motion blog, maybe. In any event, it's gratifying to get such compliments. Now, on to the news.

        The Court of Appeals recently weighed in on the meaning of a CGL policy's "auto" exclusion in Guishard v. General Security Ins. Co., __ N.Y.3d __, __ N.Y.S.2d __, __ N.E.2d __, 2007 WL 2592414 (September 11, 2007). The insured owned a van, which it was in the process of converting into a "Mr. Softee" ice cream truck. In the course of that conversion, a worker severely injured his eye while riveting metal to the van. The worker sued the owner. The owner sought a defense from his CGL carrier (General Security). General Security denied a duty to defend, because the policy excluded coverage for BI "arising out of the ownership, maintenance, use or entrustment to others of any...'auto'...owned or operated by or rented or loaned to any insured." The owner then sued General Security, seeking a declaration that there was a duty to defend and indemnify. General Security's position was that the van conversion constituted maintenance, so any BI arising from it was excluded. The trial court disagreed, and held there was a duty to defend and indemnify. The appellate Division affirmed, because General Security had failed to submit the definitions section of its policy, and so had failed to show that the van was an "auto" within the meaning of the policy. The Court of Appeals also affirmed, but for a different reason. The Court of Appeals held the word maintenance refers to work on "an intrinsic part of the mechanism of the car and its overall function." In the Court's view, riveting metal to the van in furtherance of its conversion to an ice cream truck was not maintenance, as that word is used in the policy. About all this, a few observations:

• General Accident surely ought to have submitted a complete copy of its policy. It is unreasonable for an insurer to ask for summary judgment in its favor when the court does not have a complete copy of the policy to look at. I understand why the absence of the policy definitions should have precluded summary judgment in favor of General Security, but why did it require summary judgment in favor of the insured? Shouldn't the definitions' absence have generated a question of fact, precluding summary judgment in favor of either party?
• The Court of Appeals' observation -- that maintenance does not include this sort of van conversion -- is not unreasonable. At best, the word maintenance was ambiguous in this context, and could reasonably be understood not to refer to this kind of conversion.
• However, what about ownership and use? Didn't the BI arise out of the insured's ownership of the van? Wasn't the conversion of the van into an ice cream truck a use of the van? Unfortunately, the Court's opinion does not mention either of those possibilities. Don't ask me why not, because I don't know; I presume either General Security never made those arguments, or all three courts chose to ignore them.

        When is a representation not a misrepresentation? When it's true, of course! That is the tautological moral of First Unum Life Ins. Co. v. Gravante, __ A.D.2d __, __ N.Y.S.2d __, 2007 WL 2389672 (1st Dep't, August 23, 2007). Mr. Gravante applied to First Unum for a disability policy. In his application, he stated that he already had a disability policy from Provident, but intended to cancel it if First Unum issued one to him. First Unum issued its policy. Gravante then wrote to Provident, asking for cancellation of the Provident policy. For some reason, Provident did not cancel its policy. Sometime thereafter, Gravante presumably made a claim to First Unum. When First Unum investigated and learned the Provident policy had not been cancelled, it brought an action for rescission of its own policy. First Unum's argument for rescission was that Gravante had made a material misrepresentation in his application. Both the trial court and the Appellate Division rejected that argument: Gravante had made no misrepresentation -- material or otherwise -- in his application. He had disclosed the existence of the Provident policy and stated his intention to request its cancellation if First Unum issued a policy. His subsequent letter requesting such a cancellation was conclusive proof that he had not misrepresented his intentions on the application. Provident's failure to have cancelled its own policy did not make anything Gravante had said a misrepresentation. (I have a nagging suspicion there must be more to this story than is revealed by the court's decision. If that's all there really was to it, surely First Unum could have figured this out for itself, without the time and expense of a lawsuit.)

        Liberty Mut. v. Ins. Co. of the State of Pa., 2007 N.Y.Slip Op. 06576 (1st Dep't, September 6, 2007), dealt with the allocation of a settlement between primary and excess insurers, in the context of a construction accident. A subcontractor's employee was injured on the job and sued the project owner and construction manager. Those defendants then impleaded the injured plaintiff's employer ("General," the subcontractor). The injury claim was eventually settled for $2.5 million, of which Diamond (General's primary GL carrier) paid $1 million and Liberty Mutual (General's excess liability carrier) paid $1.5 million. General also had primary employer's liability coverage through AIG. Although AIG's policy afforded General unlimited primary coverage for common law liability for BI to an employee in the course of employment, AIG refused to participate in defending or settling the underlying claim.

        After the settlement, Liberty Mutual sued AIG. Liberty Mutual's position was simple: AIG was primary and Liberty Mutual was excess, AIG's refusal to defend or indemnify had been wrongful, and AIG's applicable limit of liability was unlimited, so AIG had to reimburse Liberty Mutual for Liberty's $1.5 million contribution to the settlement. AIG threw up a number of roadblocks in Liberty Mutual's path to recovery, some of which worked and some of which did not:

• AIG argued it owed no coverage to General under New York's antisubrogation rule. The court summarily rejected that contention, for reasons which the opinion leaves obscure.
• AIG argued that, under Workers Compensation Law § 11, General could have had no common law liability (the only kind AIG's policy covered) unless that employee had suffered a "grave injury," and Liberty had not proved such an injury occurred. On the record before it, the court was unable to determine whether the employee's injury had been "grave" within the meaning of that statute, so it left that determination for another day.
• AIG argued that, even though its primary policy limit was unlimited, its maximum potential liability to Liberty Mutual could nevertheless be for no more than $1 million, rather than the full $1.5 million Liberty had spent. The insured's "Retained Limit" under Liberty's excess policy included only $1 million from AIG, because that was the amount of underlying coverage from AIG shown on Liberty's Schedule of Underlying Insurance. The court agreed that, in light of Liberty's Schedule of Underlying Insurance, Liberty's excess policy should attach at $1 million, rather than when AIG's underlying policy limit was actually  "exhausted" (which it never could be, because it was unlimited).
• Finally, AIG argued its potential liability should be only half of that $1 million, because there needed to be a 50:50 apportionment of the $1 million between General's common law liability (which AIG covered) and General's contractual liability (which AIG did not cover). The court rejected that argument: General would have been liable for the full $2.5 million under either theory, and "...AIG is the only primary insurer whose coverage has not been exhausted, and it is not entitled to an apportionment of liability between itself and Liberty, whose excess coverage is implicated only upon the exhaustion of primary insurance."

        Here's a dangerous little case about arbitration clauses. In Sozzi v. Moishe's Moving Systems, Inc., 16 Misc3d 1121(A), 2007 WL 2295401, 2007 N.Y. Slip Op. 51530(U), (Sup.Ct., N.Y.Co., August 7, 2007), Mr. Sozzi contracted with a moving company to move his household goods from New York to Italy. As part of the transaction, the movers arranged, on Sozzi's behalf, for insurance on the goods. When the goods were delivered in Italy, some items were found to be damaged. Sozzi submitted a claim for $59,500, but the insurer (Fortis Corporate Insurance N.V.) offered to pay only $7,275.19. Sozzi then sued everybody: the mover, the insurance broker, and Fortis. When Fortis answered Sozzi's complaint, it asserted as an affirmative defense the existence of a mandatory arbitration clause in its policy. It then moved to compel arbitration of the dispute between Fortis and Sozzi. Sozzi's position was simple: he had never seen, signed, or agreed to any arbitration clause, either expressly or by implication; the mover and the broker had arranged for placing the insurance on his behalf, and he had had nothing to do with it; indeed, he had never even seen a copy of the policy until after he had taken delivery of the damaged goods in Italy, and could not have known it contained an arbitration clause. The court held that, simply by suing on the policy and relying on some of its terms, Sozzi had necessarily assented to the arbitration clause and evinced an intent to be bound by it. The court therefore ordered the dispute to be resolved by arbitration under AAA rules. This reasoning seems dangerous to me: is it really true that suing under a contract one had never seen necessarily proves assent and an intent to be bound by each and every provision in it?

        An earth movement exclusion was the focus of Cali v. Merrimack Mut. Fire Ins. Co., __ A.D.2d __, __ N.Y.S.2d __, 2007 WL 2317457, 2007 N.Y. Slip Op. 06415 (2nd Dep't, August 14, 2007). Cali bought HO coverage from Merrimack. During the coverage period, the house's slab foundation settled, causing substantial damage to the structure. Merrimack denied coverage on the basis of an earth movement exclusion, excluding coverage caused by "earth movement...earth sinking, rising or shifting" and due to "settling, shrinking, bulging or expansion, including resultant cracking, of pavements, patios, foundations, walls, floors, roofs or ceilings." The policy excluded coverage for such loss "regardless of any other cause or event contributing concurrently or in any sequence to the loss." Cali sued. Her argument was that the loss was not a result of earth movement at all, but had been caused by "hidden decay" -- a peril specifically covered under the policy. Her theory (supported by the testimony of an engineer) was that decayed wood buried in the earth under the foundation had created a void in the soil and a resultant "collapse" of the foundation. The Second Department agreed [reluctantly, it seems] with the carrier: "[W]e are...constrained to conclude that this policy's language specifically excluded coverage for damages resulting from earth movement 'even though the cause of the earth movement is a covered peril.'"

        An insurer is usually required to comply strictly (very strictly) with all applicable cancellation requirements, or its attempted cancellation of a policy will be deemed ineffective. Allstate Ins. Co. v. Ochoa, __ Misc.2d __, 2007 WL 2416192, 2007 N.Y. Slip Op. 27349 (Sup.Ct., NassauCo., August 27, 2007), is one of the few reported decisions relieving an insurer of the consequences of failing to make strict compliance. Bernetha Jeffrey was the insured under a Liberty Mutual personal auto policy. In April, 2003, her nephew called Liberty Mutual to advise that Ms. Jeffrey had died and that he (the nephew) was her executor. He also told Liberty the car would henceforth be driven by a cousin, and that the cousin would contact Liberty to be added to the policy as an additional driver until the estate was settled. Liberty Mutual told the executor and the new driver that the old policy would have to be cancelled and a new policy issued. Liberty asked the new driver to send a cancellation request and turn in the car's license plates. The original policy was supposed to expire on 6/11/03. Before then, Liberty issued a "renewal" policy to "The Estate of Bernetha Jeffrey," at the same address, with an inception date of 6/11/03. Liberty also mailed two premium statements for the "renewal" policy, but never received any payment. Finally, on 7/7/03, Liberty Mutual mailed a notice of cancellation for non-payment, effective 7/27/03. Although Vehicle & Traffic Law § 313(1)(a) required the cancellation notice to be mailed to the Named Insured at the address shown on the policy, this cancellation notice was mailed to the attention of "Bernetha Jeffrey," rather than "The Estate of Bernetha Jeffrey." No premium was paid, and no further contact was had from the family. Neither the executor nor the cousin (the new driver) ever changed the car's registration, turned in the car's plates, paid the premium, or applied for a new policy. A couple of weeks after the effective cancellation date, the car was involved in an accident while the cousin was driving it. The only question before the court was whether Liberty's attempt to cancel the policy should be deemed ineffective because it had mailed the cancellation notice to "Bernetha Jeffrey," instead of to "The Estate of Bernetha Jeffrey." Under these unusual facts, the court held the notice of cancellation had been sufficient, and the cancellation had been effective as of 7/27/03.

        On the regulatory front:

• Governor Spitzer has reportedly created a task force to crack down on employers who misclassify employers to avoid providing workers comp and other benefits, by labeling them as private contractors or paying them off the books.
• The top leadership of the New York Liquidation Bureau is being shaken up, to improve the Bureau's performance and cure problems that have reportedly been unaddressed for years.
• Along with that shake-up is the creation of a new program intended to make the Bureau more aggressive about collecting balances claimed to be due from reinsurers.
• The Insurance Department has formed an Elder Protection Unit, intended to support the elderly in their dealings with insurers.
• The Legislature has enacted legislation adding a new § 1324 to the Insurance Law, which became effective 8/28/07. This new law sets forth numerous detailed risk-based capital requirements for P&C companies.
• Governor Spitzer has announced a plan to provide NYS drivers' licenses for the roughly 500,000 to 1,000,000 illegal aliens in the state.

September, 2007

        I guess a lot of New York judges must have been away in August, because interesting coverage decisions have been thin on the ground during the past month. There was one, though; plus some regulatory/political developments.

        US Pack Network Corp. v. Travelers Property Cas., __ N.Y.S.2d __, 2007 WL 2003411 (1st Dep't, July 12, 2007), is a sequel to a case I discussed over a year ago: US Pack Network Corp. v. Travelers Property Cas., 23 A.D.3d 299, 808 N.Y.S.2d 153 (1st Dep't, 2005). In the earlier decision, a carrier disclaimed coverage for late notice of two losses. The insured then sued both the carrier and the broker, claiming it