Tom Bower News Page

This is where we'll announce recent developments of interest to those in the insurance and reinsurance community. For news about the firm, go here. For older coverage news, go here. I send e-mail announcements whenever I update this page. Instead of checking back here unnecessarily, just to see whether there's been a change, let me add you to that mailing list. To be added, please send me an e-mail at tombower@thomasbower.com. (Please don't make it a blank e-mail: tell me briefly what you'd like me to do.)

In Liberty Ins. Underwriters, Inc. v. Arch Ins. Co., 2009 NY Slip Op 02837 (1st Dep't, April 14, 2009), two insurers disputed which of them was obligated to defend their mutual additional insured, the owner of a construction project. One of the insurers ─ Arch, which had issued a policy to the general contractor ─ defended the owner for a week, but then tendered the owner's defense to Liberty ─ which had issued a policy to a subcontractor. In response to Arch's tender, Liberty accepted the owner's defense without asserting or reserving any rights under its policy. Liberty then defended the owner for the next two years.

After those two years, and while the claim was still being litigated, Liberty sent a letter to the owner, purporting to reserve Liberty's rights under its policy. In that letter, Liberty for the first time took the positions that: (a) Liberty would have no duty to indemnify the owner if there was no liability on the part of Liberty's named insured (the subcontractor) and (b) if Liberty had any duty to indemnify the owner, its policy would apply only as excess insurance over Arch's policy limit. Liberty also tendered the owner's defense back to Arch, but Arch refused to re-assume it. Liberty then sued Arch, seeking declarations that Arch was obligated to defend and indemnify the owner, and that, as respected any duty to indemnify the owner, Liberty's policy would apply only in excess of Arch's. Arch's principal defense was that, whatever rights Liberty might once have had under its policy, it was now equitably estopped from asserting them. When both sides sought summary judgment, the motion court agreed with Arch and held that Liberty was equitably estopped from asserting its coverage position. Moreover, the motion court ordered Liberty to reimburse Arch for the costs Arch had incurred in its week-long defense of the owner.

In the decision cited above, the Appellate Division, First Department, affirmed the motion court on the main issue of equitable estoppel. The doctrine of estoppel precludes an insurer from denying or disclaiming coverage where the insured ─ or, as here, another carrier ─ has relied to its detriment on the insurer's unreserved acceptance of a defense. Here, Liberty's unreserved acceptance of the owner's defense, plus its silence for the next two years, meant it was now estopped from changing its position to Arch's prejudice. Arch, in reasonable reliance on Liberty's unreserved acceptance of the owner's defense, had surrendered any opportunity to control or direct that defense and would presumptively be prejudiced if it now had to reassume that defense. The appellate court expressly rejected Liberty's argument that the doctrine of equitable estoppel should be available only to insureds, but not to other insurers. The Appellate Division did, however, modify the lower court's decision by holding that Liberty was not required to reimburse Arch's pre-tender defense costs.

The New York Court of Appeals ─ the state's highest court ─ holds that many "earth movement" and "settling-cracking" exclusions are ambiguous in the context of excavation and other man-made movements of soil. In Pioneer Tower Owners Ass'n. v. State Farm Fire & Cas. Co., 2009 NY Slip Op 03409 (Ct.App., April 30, 2009), a condominium apartment building suffered damage in the form of cracks, separations, and open joints. An engineer concluded ─ and the parties apparently did not dispute ─ that the damage was caused by excavation work on an adjoining lot. State Farm, which insured the apartment building, took the position that coverage was precluded by its policy's exclusions for:

The Court held those exclusions were susceptible of being understood in two different ways. One way ─ which supported State Farm's position ─ was to read the words of the exclusions in their exact and literal sense. The other way ─ which supported the insured's argument for coverage ─ was to give those exclusions the practical meaning that an ordinary reader might assign to them. Under that second view, said the Court, the exclusions could be reasonably understood to encompass only natural forces, not man-made ones like excavation. Under New York law, exclusions are construed narrowly and strictly against the carrier. An exclusion will be enforced only where it unambiguously excludes coverage, and any ambiguity is to be resolved in favor of coverage. Here, the exclusions were subject to more than one meaning, each of which the Court viewed as objectively reasonable. The Court was therefore unable to say these exclusions unambiguously excluded the loss from the policy's coverage. Instead, the Court gave the exclusions the meaning that most favored the insured.

If it's any consolation to State Farm (which I doubt it is), the Court acknowledged the case was "a close one." From the standpoint of drafting (leaving aside the hassle and expense of filing new forms), this should not be a hard problem to fix.

Some of you may remember that, on May 12, 2005, a large section of a bluff in Manhattan collapsed onto the Henry Hudson Parkway. (You can see a photo of the immediate aftermath here.) That part of the bluff had been supported for many years by a large retaining wall, owned by a residential co-op complex on top of the bluff. The City incurred substantial expense in cleaning-up the mess and making emergency repairs to stabilize the remainder of the hillside, then billed the co-op complex for that work. The complex's primary and umbrella liability insurers (GNYMIC and AISLIC, respectively) agreed to pay for that. However, the co-op was also ordered to make substantial long-term, non-emergency repairs and upgrades to its retaining wall, and the umbrella carrier balked at paying for those. Naturally, a lawsuit ensued. (Is this a great country, or what?) A motion court granted summary judgment to the umbrella carrier, holding it had no duty to pay for those non-emergency repairs. The insured co-op appealed.

In Castle Village Owners Corp. v. Greater New York Mut. Ins. Co., __ N.Y.S.2d __, 2009 WL 1186692 (1st Dep't, May 5, 2009), the First Department affirmed. The appellate court described the "threshold issue" as being "whether an exclusion in a commercial umbrella liability policy from coverage for the insured's own property can be circumvented by a claim that ameliorative measures had to be effected to the insured's property so as to prevent or cure damage to adjoining property." More precisely, the policy excluded coverage for:

To support its claim for coverage, the co-op relied on a line of cases (mostly involving oil spills) in which NY courts had refused to enforce similar exclusions and had required insurers to pay for emergency repairs to an insured's own property, when such emergency repairs were necessary to prevent harm to others. The First Department refused to follow those cases in this context, distinguishing them as follows:

So, in this case the exclusion was held to apply to the long-term, non-emergency repairs and upgrades to the insured's retaining wall, but with the caveat that such exclusions do not apply where the work to be done "on the insured's property ... is necessary to cure (as opposed to prevent) imminent and recurring damage to adjoining property." A cynic might suspect this will give some insureds an incentive to delay maintaining and repairing their own property until it starts causing harm to a third party, at which point they may be able to get a carrier to pay for fixing it.

In Janart 55 West 8th L.L.C. v. Greenwich Ins. Co., 2009 WL 1270223 (U.S.D.C., S.D.N.Y., May 6, 2009), a U.S. District Court analyzed whether a property policy's pollution exclusion should apply to mercury pollution in an apartment building. In January, 2006, a tenant in an apartment building noticed liquid mercury dripping from her ceiling. The Fire Department was called and, eventually, recovered a total of about fifteen pounds of liquid mercury from the space between the tenant's ceiling and the floor of the apartment above hers. Investigation suggested that, decades earlier, a dentist had maintained an office in the apartment above the tenant's and may have stored or lost ampoules of liquid mercury in a space under his floor. (At the time, mercury was used as an ingredient in dental fillings.) However, no specific source for the mercury was conclusively established. Needless to say, the City ordered the apartment building to be vacated until all mercury was removed. Eventually, the property was cleaned-up and the tenants moved back in.

Janart, the owner of the building, submitted a claim to its property insurer, Greenwich. Greenwich denied the claim, so Janart sued. Eventually, both sides sought summary judgment. In connection with the motions for summary judgment, Greenwich based its argument on a pollution exclusion endorsed onto its all-risk policy. The court held that, in the context of this loss, the policy's pollution exclusion was ambiguous because it could reasonably be read to exclude only environmental pollution, rather than mercury contamination that had been contained completely within the insured building. Because the pollution exclusion was ambiguous, the court denied Greenwich's motion for summary judgment. However, the court also denied the insured's request for summary judgment because, in the court's view, it was still unclear whether the pollution exclusion applied to the loss. I.e., it was not clear whether the mercury contamination in this case was, or was not, the kind of environmental pollution to which the pollution exclusion applied.

Regular readers of this page know that, under N.Y.Ins.Law §3420(d), an insurer wishing to disclaim liability or deny coverage for death or bodily injury must usually "give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage." Failure to do so usually results in a finding that the insurer has waived whatever grounds it knew or should have known of at the time. However, the carrier's duty to disclaim "as soon as is reasonably possible" does not arise unless and until the carrier first receives notice of the occurrence, claim, or suit from its insured.

In JT Magen v. Hartford Fire Ins. Co., __ N.Y.S.2d __, 2009 WL 1326359 (1st Dep't, May 14, 2009), the insured's carrier (Hartford) did not receive notice of the suit from its insured. Rather, it received its first notice of the suit from another carrier (Travelers) that also covered the same insured. Hartford then waited 45-50 days before issuing a written disclaimer, basing that disclaimer on the insured's failure to have given Hartford prompt notice of the claim. The insured and Travelers argued that Hartford's obligation to disclaim promptly was triggered as soon as Hartford received Travelers' letter, so Hartford's 45-50-day delay in disclaiming amounted to a waiver of Hartford's late notice argument. Hartford, on the other hand, argued that its duty to disclaim promptly could not be triggered by notice from another carrier, but only by notice from the insured.

As framed by the First Department, the issue in the case was "whether the prompt disclaimer requirement of the Insurance Law is triggered when an insurance carrier receives the notice of claim from another insurance carrier on behalf of a mutual insured asking that the insured be provided a defense and indemnity." The court answered that question in the affirmative and held that Hartford's unexplained delay made its disclaimer untimely as a matter of law. Note that, under First Department case law, N.Y.Ins.Law §3420(d) does not apply to one insurer's demand for contribution or indemnification by another insurer. Here, however, Travelers' letter was not just a claim for contribution or indemnification on its own behalf. Rather, Travelers' letter was framed as a request for defense and indemnification, made on behalf of the two carriers' mutual insured.

Last month I wrote about the decision in Fieldston Property Owners Assoc., Inc. v. Hermitage Ins. Co., Inc., 873 N.Y.S.2d 607 2009 WL 466121, 2009 NY Slip Op 01429 (1st Dep't, February 26, 2009), a case about dueling "other insurance" clauses. Now, in Sport Rock Internat'l. v. Am Cas. Co. of Reading, __ N.Y.S.2d __, 2009 WL 1290266, 2009 NY Slip Op 03794 (1st Dep't, May 12, 2009), another panel of the same court writes at length to criticize the analysis, precedents, and result in Fieldston. Their disagreements are too numerous, complicated, and subtle to discuss here; suffice it to say the Sport Rock panel seems to think badly of the mental acuity of the Fieldston panel. If you are thinking of relying on Fieldston as the law of New York, please think again: you're going to need to study both opinions very closely and do your best to try to reconcile them or distinguish one or the other.

If two panels of the same court, writing less than three months apart, cannot agree on this "other insurance" stuff, how are we poor mortals supposed to get it right? Personally, I'd rather try to learn something simple, like string theory, stellar cartography, or Attic Greek.

It seems like yesterday, but it was actually January, 2007, that Eric Dinallo was appointed NYS Superintendent of Insurance. Now he's resigning, effective July 3. Dinallo will reportedly move to an academic position at NYU's business school. The press has reported Dinallo may be planning to run for NYS Attorney General. That would be a plausible scenario in NY's permanent political soap opera, but seems mere speculation at this point. As of this writing, I've heard nothing about whom Governor Patterson may select as the new Superintendent.

Now that Aprille with his shoures soote the droghte of March hath perced to the roote, it's time to turn our thoughts to ─ what else? ─ recent New York coverage decisions. There was no April Update, so there's a lot to summarize this month.

In Zawatzky v. Barker Materials, Ltd., 2009 NY Slip Op 50401(U) (Sup.Ct., Suffolk Co., January 29, 2009), a motion court held that the Graves Amendment, 49 U.S.C. § 30106, applies to a leased trailer. One of the vehicles involved in a multi-vehicle collision was a truck pulling a leased trailer. The truck and trailer had different registered owners. The owner of the trailer did not own, maintain, repair, operate, lease, rent, or control the truck, and did not employ its driver. Under the trailer lease, the owner of the trailer was not responsible for the maintenance, operation, repair, or control of the trailer. The executrix of a person killed in the collision sued the trailer owner (among others). Her theory against the trailer owner was based on a theory of vicarious liability; i.e., that, under N.Y. Vehicle & Traffic Law § 388, the trailer was a "motor vehicle" and, therefore, its owner/lessor was vicariously liable for the negligence of the driver hauling it. The trailer's owner/lessor, citing the Graves Amendment, moved to dismiss the plaintiff's action as to it. In the decision cited above, the court granted that motion.

Here's another case for you Graves Amendment junkies (yes, I know you're out there). Yet another court in New York State has held the Graves Amendment to be a valid exercise of Congressional power under the Commerce Clause of Article I, § 8, of the U.S. Constitution. This time it's a federal court: Green v. Toyota Motor Credit Corp., 2009 U.S.Dist. LEXIS 26278 (U.S.D.C., E.D.N.Y., March 25, 2009).

The coverage dispute in Neff v. Automobile Ins. Co. of Hartford, 2009 WL 435297 (U.S.D.C., S.D.N.Y., February 20, 2009), grew out of an underlying action alleging Mr. Neff had, either deliberately or negligently, filed a false criminal complaint, thereby causing the underlying plaintiff's false arrest and false imprisonment. Neff tendered the complaint to his homeowners carrier and a CGL carrier, each of which disclaimed coverage on various grounds. Neff then sued each of the disclaiming carriers, seeking (a) a declaration of coverage, (b) consequential damages, and (c) punitive damages.

The carriers moved to dismiss the complaint's prayer for punitive damages. Under NY law, punitive damages are usually not available for garden-variety coverage disputes, which are breach of contract claims. Instead, punitive damages are available only where the defendant carrier's alleged conduct is: (a) actionable as an independent tort, separate and apart from the breach of contract claim, and (b) so egregious that it qualifies for punitive damages, and (c) directed at the plaintiff, and (d) part of a larger pattern of similar conduct directed at the public generally. In this case, Neff alleged only that the defendants' disclaimers had been made with no reasonable basis and that they had breached their respective insurance contracts in bad faith; he did not allege any other conduct that would be actionable as an independent tort. Accordingly, in the decision cited above, the District Court dismissed his claims for punitive damages.

In United National Ins. Co. v. Granoff, Walker & Forlenza, P.C., __ F.Supp.2d __, 2009 WL 429243 (U.S.D.C., S.D.N.Y., February 23, 2009), a professional liability carrier argued it had no duty to defend or indemnify its insured ─ a law firm ─ because of a policy exclusion and a related misrepresentation in the insured's application for insurance. The underlying malpractice claim against the firm arose from an aborted real estate transaction. The firm's client was an experienced real estate investor and long-time client of the firm. With the firm's assistance, the client entered into a contract to buy certain parcels of property, subject to a clause requiring him to have a firm mortgage commitment within thirty days. He then by-passed his lawyers and personally negotiated an oral modification, changing the deal to an all-cash transaction. Unfortunately, he came up with neither a mortgage commitment nor the requisite cash within the time required under the contract, so the seller cancelled the deal. The client then retained the firm to sue the seller. When the client lost at the trial court level, he retained the same firm to handle an appeal from the judgment. After he lost the appeal, he sued the firm for malpractice.

The firm tendered the malpractice suit to its carrier, UNIC. After investigating the matter, UNIC disclaimed because, in its view, the claim arose out of a wrongful act that was (a) committed before the effective date of the policy and (b) concealed by the insured in its application for insurance. The firm submitted its application for the policy to UNIC after the client had lost his suit at the trial court level, but before the appeal had been decided. The application included the following question: "After inquiry, are attorneys in your firm aware: ... of any legal work or incidents that might reasonably be expected to lead to a claim or suit against them?" The firm's answer to that question was "no." A few weeks later, the firm again informed UNIC that, "after inquiry, [the firm was] not aware of any claims and/or circumstances, acts, errors or omissions that could result in a professional liability claim since completion of [the] application." When the policy was issued, it included an exclusion for:

The policy defined WRONGFUL ACT as any actual or alleged "act, error, omission, misstatement, misleading statement, neglect or breach of duty, or personal injury." Citing the firm's statements in the application and pre-binding letter, and the exclusion quoted above, UNIC contended there was no coverage for the client's malpractice claim against the firm. UNIC sued for a declaration of non-coverage or, alternatively, for rescission. Both sides moved for summary judgment. In the decision cited above, the District Court resolved those motions in the firm's favor, for the following reasons:

Fieldston Property Owners Assoc., Inc. v. Hermitage Ins. Co., Inc., 873 N.Y.S.2d 607 2009 WL 466121, 2009 NY Slip Op 01429 (1st Dep't, February 26, 2009), is an interesting "other insurance" decision. Fieldston and some of its officers and directors were sued in two separate actions alleging various wrongful acts and statements by Fieldston's officers and directors. Fieldston had two policies that applied to the actions: a Hermitage CGL policy and a Federal D&O policy. Those two policies had different policy periods: 7/5/00-01 for the CGL, and 2/13/99-02 for the D&O.

The plaintiffs in Action #1 pleaded eight causes of action. The plaintiffs in Action #2 pleaded twenty-one causes of action. Hermitage acknowledged that one of the eight causes of action in Action #1 (alleging a claim for "injurious falsehood"), and one of the twenty-one causes of action in Action #2 (also alleging "injurious falsehood") triggered a duty to defend under its CGL policy, although none of the other numerous causes of action in either action was even arguably covered under the CGL policy. Hermitage therefore agreed to defend both actions, subject to reservations of its rights. Federal did not dispute that its D&O policy would normally cover some of the claims alleged in each of the two actions, and that it would therefore have a duty to defend each action. However, Federal took the position that, in this case, its D&O policy applied only in excess of Hermitage's CGL policy. Federal based that position on its policy's "other insurance" clause, providing:

Federal therefore refused to defend, or to contribute to the defense of, either action. Later, when the "injurious falsehood" claim was dropped from Action #2, Hermitage demanded that Federal assume the defense of that action and Federal complied.

Hermitage sued Federal, seeking to compel Federal to (a) contribute to the defense of Action #1 and (2) reimburse Hermitage for some of the defense costs it had paid in Action #2. A trial court held in favor of Federal, finding that Federal's D&O policy applied only in excess of the limits of Hermitage's CGL policy. In the decision cited above, the Appellate Division, First Department, reversed that result. The First Department reasoned as follows:

... [W]ith the possible exception of the injurious falsehood claim asserted in both underlying actions, it is undisputed that the Hermitage CGL policy and the Federal D & O policy do not provide coverage for the same risks. Indeed, Federal expressly so conceded in one of its submissions to Supreme Court. Finally, it also is undisputed that certain of the causes of action are based on alleged wrongful acts by the Fieldston parties that occurred after the policy period of the Hermitage CGL policy but during the period in which the Federal D&O policy was in effect....

Accordingly, Federal's position entails the proposition that regardless of the number of claims asserted against one of its insureds that are covered under a policy providing primary coverage but containing such an 'other insurance' clause, it is absolved of any obligation to defend its insured as long as the complaint in the underlying action includes even a single cause of action that falls within the coverage of another primary insurer's policy, regardless of whether it also falls within the Federal policy, and even though all the other causes of action fall outside the coverage of the other insurer's policy. Only if the single cause of action within the scope of the other insurer's policy is dismissed before the dismissal of all the other causes of action would Federal then be obligated to defend its insured.

Moreover, Federal thus would be absolved of its duty to defend regardless not only of the number of causes of action that fall within its policy but also of both the extent of the financial burden imposed on the other insurer in also defending these causes of action and of how unrelated the sole cause of action within the other insurer's policy is to all the other causes of action that are covered by Federal's policy. Federal defends this position in part on the basis of the obligation of the other insurer to provide a defense even when some of the causes of action asserted against its insured 'fall outside the policy's general coverage or within its exclusionary provisions.' Of course, the other insurer might well contend that because the law imposes the same obligation on Federal, at the very least Federal also must defend the insured and that requiring Federal to do so is particularly appropriate when the bulk of the claims against the insured fall within only the Federal policy. Federal, however, seeks to avoid the force of this contention by arguing that the 'other insurance' clause of its policy requires the conclusion that the obligation to defend uncovered claims is not a reciprocal one that it shares....

Contrary to Federal's contention, it is irrelevant that Hermitage's CGL policy is not 'written only as specific excess insurance over the limits provided in the [D & O] policy.' As Hermitage correctly argues, by its plain terms the 'other insurance' clause applies only where a loss is insured under both the D&O policy and another 'valid policy.' With the possible exception of the injurious falsehood claims, all the other losses (including defense costs) that could result from the other causes of action are not insured under the CGL policy but at least some of them are insured under the D & O policy. Accordingly, the 'other insurance' clause is inapplicable to the risks of all other such losses, and the D&O policy thus provides primary coverage with respect to some of those risks. In other words, putting aside that possible exception, the CGL and D&O policies do not provide concurrent coverage as they do not insure against the same risks....

Although the lack of support for Federal's position in the terms of the 'other insurance' clause is a sufficient basis for rejecting its position, other of its flaws should be noted. Acceptance of Federal's position would create an incentive for coinsurers like Hermitage in similar disputes to act inconsistently with their broad duty to defend the insured. After all, if Hermitage had refused to provide a defense rather than respect its obligation to provide a defense even though certain of the claims asserted against Fieldston fell outside the scope of its CGL policy, it is at least conceivable that Fieldston may have brought a declaratory judgment against Federal alone, especially given that so many of the claims against it fall squarely within the scope of its D & O policy. In that event, Federal would have to seek contribution from Hermitage, rather than the other way around, and Hermitage would not in the meantime have incurred the costs of defending the underlying action. Moreover, to permit Federal to be a free rider here is particularly inappropriate given that it issued the D&O policy before the CGL policy was issued. Because Federal had no assurance that Fieldston would secure additional insurance that might overlap in coverage with the D & O policy, the premium Federal charged and accepted presumably reflected in part the potential costs of the broad duty to defend it had assumed under the policy.

Ironically, Federal seeks to use the broad duty to defend as a sword, wielding it not only against Hermitage but also using it to cut that same duty out of its policy, arguing that by defending the underlying actions Hermitage conceded that its CGL policy provided coverage. In undertaking to defend the actions, Hermitage conceded at most only a reasonable possibility of coverage for at least one cause of action in each of the underlying complaints. Actually, Hermitage conceded nothing, for it provided a defense in each underlying action under full reservations of its rights.

In Potoff v. Chubb Indem. Ins. Co., 2009 NY Slip Op 01833 (1st Dep't, March 12, 2009), the insured's property was damaged when her apartment building's roof drain became clogged by a plastic bag. Because the drain was clogged, rainwater filled the drain pipe and overflowed onto the roof, from which it leaked into her apartment. Chubb's policy covered both "accidental discharge or overflow from within a plumbing ... system" and "damage caused by water ... which backs up from within ... drains." Chubb denied coverage, arguing that the damage was not caused by water "from within" the drain, but rather by rainwater that collected on the roof. A trial court held for the insured and, in the decision cited above, the Appellate Division affirmed.

But wait... Is a roof drain part of a "plumbing system"? Gutters and downspouts on a house aren't normally thought of as part of a "plumbing system," so why is the roof drain of an apartment building? Since a roof drain is not connected to any water supply, why is it part of a "plumbing system" (as opposed to a "drainage system" or some other kind of system)? Also, when water "overflows," is that the same thing as water that "backs up"? Does the phrase "backs up" refer to some kind of reverse flow, as opposed to rainwater that just accumulates because there's no outlet for it? I don't know the answers to those questions and don't have time to look them up (maybe a reader who knows the answers could help out here), but the decision just ignores them.

Courts are often confronted with coverage disputes in which it is unclear which state's law ought to govern. For example: an insured is headquartered in State A, its insurer is in State B, and the insured's underlying liabilities arose and are being adjudicated in States C through Z. Which state's law governs the policy's coverage? Every state has a variety of laws, doctrines, and rules to guide its own courts in selecting the state law that ought to govern the coverage in such a case. In New York, one of those rules is that a contract of liability insurance is normally to be governed by the law of the state which the parties understood was to be the "principal location of the insured risk." Where the insured's covered operations occur in numerous states ─ and it is therefore difficult to identify any particular state as the "principal location of the insured risk" ─ then the insured's "principal place of business" (i.e., its executive headquarters) is used as a proxy for the "principal location of the insured risk."

Appalachian Ins. Co. v. Riunione Adriatic Di Sicurata, 2009 NY Slip Op 01857 (1st Dep't, March 17, 2009), involved a coverage dispute between General Electric and a number of its insurers, involving risks spread through multiple states. The insurers argued New York law governed GE's policies, because New York is GE's principal place of business. GE, however, argued its principal place of business is not in New York, but in some other state (which the decision does not identify), and that New York law should therefore not apply to the coverage dispute. Sorry, GE: you lose. In other cases, GE has argued (successfully) that its principal place of business is in New York. Having previously obtained rulings in its favor on that point, GE is now judicially estopped from arguing that its principal place of business is anywhere else.

Dock's Clam Bar was a saloon that leased space at Tottenville Commons, a shopping center. In 2004, 19-year-old Christopher Constantino was a patron at Dock's when he was assaulted by Luigi Esposito. Esposito was subsequently convicted of the assault and sentenced to three years in prison. Constantino sued Docks Clam Bar and Tottenville Commons, alleging that Esposito was employed by Dock's as a bouncer when he assaulted Constantino. Dock's owner denied Esposito was employed by Dock's, but admitted he was present at Dock's on the night of the assault. Eyewitnesses disagree as to whether the assault took place inside Dock's, just outside Dock's entrance, or in a parking area about 200 feet away from Dock's and controlled by Tottenville.

Dock's was insured by Alea North America Ins. Co.; Tottenville by Travelers. Tottenville was also an additional insured under Dock's Alea policy. Each of those policies had an "other insurance" provision to the effect that it was primary insurance and would share ultimate liability with other applicable primary insurance. However, the Travelers (Tottenville) policy was endorsed to provide that it would be "excess over any... other insurance, whether primary, excess, contingent or on any other basis... that is valid and collectible insurance available to you if you are added as an additional insured under any policy." The endorsement went on to say that, in that case, Travelers would have no duty to defend if the other insurance provided for a defense, and that Travelers would pay only its share of the amount of any liability that exceeded the amount paid by the other insurance.

Alea acknowledged that, because Tottenville was an additional insured under its policy, Alea was obligated to defend both Dock's and Tottenville. Alea also believed that, because Travelers had its own duty to defend Tottenville, the two insurers were obligated to share Tottenville's defense as co-insurers. In Alea's view, the two policies' "other insurance" clauses simply cancelled each other out, leaving them both as primary insurers. Travelers disagreed: on the basis of its "other insurance" endorsement, Travelers took the position that only Alea had a duty to defend Tottenville, and that Travelers had no such duty because its policy applied only in excess of Alea's.

Tottenville and Travelers sued Alea and Dock's for a declaration that the Alea policy had the sole duty to defend both Dock's and Tottenville. In Tottenville Commons, LLC v. Alea North America Ins. Co., 2009 WL 975789, 2009 NY Slip Op 50625(U) (Supreme Court, NY Co., March 19, 2009), a trial court agreed that the Travelers "other insurance" endorsement rendered its policy excess over Alea's policy in this case, and that Alea was obligated to defend both Dock's and Tottenville, with no contribution from Travelers.

A client accused its law firm of misappropriating the client's confidential business information and trade secrets, then using the information to try to lure away the client's current and prospective members and customers to a newly-formed competitor backed by the law firm. The client sued the lawyers, characterizing their conduct as a "wanton, willful and malicious" breach of fiduciary duty, tortious interference with contract, and misappropriation of trade secrets.

The law firm sought coverage from its professional liability carrier, which declined to defend or indemnify. The lawyers then sued the carrier for a declaration of coverage. The trial court held for the carrier. In Burkhart, Wexler & Hirschberg, LLP v. Liberty Ins. Underwriters, Inc., 2009 NY Slip Op 02313 (2nd Dep't, March 24, 2009), the Appellate Division, Second Department, affirmed the trial court. The insuring agreement of Liberty's policy clearly limited coverage to claims caused by "any actual or alleged act, error, omission or personal injury which arises out of the rendering or failure to render professional legal services." In the courts' view, the client's complaint alleged no error or omission, no malpractice or negligence, arising out of the firm's performance of, or failure to perform, legal services. The claim was therefore outside the insuring agreement.

Back in March, 2008, I wrote about the Court of Appeals' then-recent decision in Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (2008), which permits insureds to sue carriers for "consequential" damages resulting from bad-faith breach of an insurance contract. The Court's decision purported to draw a distinction between such consequential damages and punitive damages: consequential damages were to be awarded ─ not to punish the carrier ─ but only to compensate the insured in cases where the payment of such damages could be said to have been contemplated by the parties to the insurance contract. In Bi-Economy, the specific nature and purpose of the disputed coverage (i.e., business interruption) led the Court to conclude that the specific kind of damage allegedly caused by the bad-faith breach of contract (i.e., financial failure of the insured's business) was, or should have been, within the contemplation of the parties to the insurance contract and, therefore, should be compensable through "consequential damages." At the time, I predicted we would see claims for such consequential damages alleged promiscuously "in nearly every garden-variety coverage dispute, involving either property or liability coverage." Several decisions issued during the ensuing year have borne out that prediction.

The latest to do so is Savino v. The Hartford, 2009 NY Slip Op 30823(U) (Supreme Ct., Suffolk Co., March 25, 2009), in which a trial court refused to dismiss a plaintiff's claim for such "consequential" damages in a dispute over statutory no-fault coverage. The specific dispute concerned a carrier's refusal to pay for an insured's shoulder surgery, after two medical reviews had concluded there was no need for the surgery. No-fault coverage ─ the terms of which are mandated by statute and which insureds are compelled by law to buy ─ seems particularly inappropriate for these kinds of "consequential" damages. In the context of this specific dispute one also has to ask, what particular kind(s) of harm might the insured have suffered ─ as a result of the carriers' alleged bad-faith breach of a duty to defend ─ that should be compensated by such "consequential" damages? What is there about the purpose and nature of no-fault coverage that would bring harm of that kind within the contemplation of the parties to the insurance policy? The trial court's decision does not even ask those questions ─ let alone try to answer them. Let's face it: the Court of Appeals' Bi-Economy Market decision was simply a botched job (the dissent, on the other hand, got it right). It's going to take lawyers and judges a decade or more to figure out what it means, what its limits are, and how to deal with it.

Raymond and Kelly Brooks owned a home, and bought homeowners coverage from State Farm. A detached pole barn* was located on the same property as the home. The Brooks stored some of their personal property, as well as some business property, in the pole barn. When the pole barn was destroyed by fire, State Farm paid for the personal property, but refused to pay for the pole barn itself. State Farm based its position on (a) the policy's exclusion for "other structures ... used in whole or in part for business purposes...," and (b) its not-unreasonable view that storing business property is a "business purpose."

In R.B. Woodcraft, Inc. v. Acadia Ins. Co., __ N.Y.S.2d __, 2009 WL 793017 (4th Dep't, March 27, 2009), the Appellate Division, Fourth Department, rejected State Farm's position. The court held the phrase "used in whole or in part for business purposes" is ambiguous in the absence of any qualifying language, and therefore had to be construed in favor of the insureds. The decision does not say what alternative meaning the insureds had ascribed to the phrase, or what kind of qualifying language the court would deem sufficient.

* I had to look up what a pole barn is, so I thought I'd share the information with you. A pole barn is a barn that is essentially a roof extended over a series of poles. It is usually rectangular and lacks exterior walls. The roof is supported by the poles, which make up the exterior perimeter of the barn. The roof can be gabled or hooped. Pole barns are most often used for hay storage or livestock shelter. The advantages of pole barns include their low cost and their ability to store large quantities of hay in areas easily accessible by vehicles, machines, and people.

Specialty National Ins. Co. v. English Brothers Funeral Home, __ F.Supp.2d __, 2009 WL 884568 (S.D.N.Y., March 30, 2009), deals with coverage for a gruesome scheme to unlawfully harvest body parts from dead bodies entrusted to a funeral home, without the knowledge or consent of the deceased or next of kin. The scheme has apparently resulted in a series of lawsuits against the funeral home; some brought by next of kin of the deceased, others by recipients of unlawfully harvested parts.

Specialty National insured the funeral home under a policy with two separate coverage parts: Business Owners Liability (apparently a BOP-like form) and Death Care Services Professional Liability (a professional liability form). Specialty National denied it had a duty to defend or indemnify any of the claims, for a number of reasons:

Kiss Constr. NY, Inc. v. Rutgers Cas. Ins. Co., 2009 NY Slip Op 02540 (1st Dep't, April 2, 2009), is a textbook case for rescission because of an insured's misrepresentation in its application for insurance. When it applied for insurance, Kiss Construction represented its business as "PAINTING - 100% - 100% INTERIOR... PAINTING INTERIOR BUILDINGS - NO TANKS." In 2004, Kiss gave notice of a bodily injury claim that allegedly occurred during construction of a three-family residential building for which Kiss was the general contractor in work involving excavation and paving. Rutgers denied coverage because of the misrepresentation in the application for insurance. Kiss sued for a declaration of coverage, and Rutgers pleaded rescission as an "affirmative defense." When Rutgers moved for summary judgment rescinding the policy ab initio, the trial court denied its motion.

On Rutgers' appeal, the Appellate Division, First Department, reversed the trial court and declared the policy void ab initio. In support of its rescission claim, Rutgers had offered the affidavits of two of its vice presidents (one of whom was the Vice President of Commercial Underwriting) who each averred that the company does not write policies for such construction work, or for general contractors. That argument was further supported by Rutgers' underwriting guidelines and copies of e-mails in which Rutgers had declined to write insurance for similarly situated applicants. That was enough to satisfy Rutgers' burden of demonstrating the materiality of the misrepresentation, and Kiss was unable to rebut that showing.

Travis Schmidt had a summer job delivering pizzas for Nick's Brick Oven Pizza. When delivering pizzas, he used his own car. Nick's had hired Schmidt only temporarily, to meet seasonal, short-term workload during the busy summer months. His job was to last only until the end of the summer, when Schmidt was either going to enroll in college or enlist in the military. On one of his delivery runs, Schmidt collided with another car, an occupant of which sued Nick's. Nick's GL carrier denied any duty to defend or indemnify the claim against Nick's, citing the "auto" exclusion in its policy. Nick's sued the carrier, and won. On the carrier's appeal, the Appellate Division, Second Department, affirmed and held the "auto" exclusion did not apply. Nick's Brick Oven Pizza, Inc. v. Excelsior Ins., 2009 NY Slip Op 02763 (2nd Dep't, April 7, 2009).

The "auto" exclusion in Nick's policy said it applied only to liability arising from an "auto" that was owned, operated, etc., by an insured. Under the policy, however, Schmidt was a "temporary worker"; i.e., Schmidt was neither an "employee" nor an insured. The "auto" exclusion therefore did not apply to a claim against Nick's, arising from Schmidt's use of Schmidt's car, even if Schmidt was using that car in the course of Nick's business.

An insured under a jeweler's block policy put over $150,000 of jewelry in the locked trunk of his car. At all times while the jewelry was in the trunk, the insured stayed either inside the car or immediately next to it. He kept the car keys in his possession at all times. He never saw anyone open ─ or even approach ─ the locked trunk. And yet, at the end of the day, the jewelry was... gone! There was no damage to the trunk and no sign its latch had been forced. The insured had no idea how anyone could possibly have got into the trunk or removed the jewelry from it without his knowledge. He could only hypothesize that one or more incredibly skilled thieves must have somehow divined the jewelry's presence in the locked trunk and stolen it ─ in some eerily clever and undetectable way ─ without having left any trace of their crime.

The insurer refused to pay for the jewelry, citing the policy's exclusion for "unexplained loss, mysterious disappearance or loss or shortage disclosed on taking inventory." The insured therefore sued, seeking a declaration of coverage. In E. Chabot, Ltd. v. Lead Underwriters of Great Lakes Reinsurance (U.k.) Plc., 2009 NY Slip Op 30906(U) (Supreme Ct., NY Co., April 15, 2009), the trial court rejected the insured's position and granted summary judgment to the carrier. The carrier offered evidence that put the loss smack-dab within the exclusion: by the insured's own account, the loss had clearly been both an "unexplained loss" and a "mysterious disappearance." In response, the insured failed to raise a genuine issue of material fact that would suggest otherwise. My favorite line from the decision: "...[T]he mere fact that the insured property is no longer where the insured placed it does not warrant the inference that the property was lost, much less that it was stolen."

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Send mail to webmaster@thomasbower.com with questions or comments about this web site. Please help by reporting any broken or dead links on this site.
Copyright © 2004 Law Office of Thomas M. Bower
Last modified: 01/03/08