Coverage Pointers - Volume I, No. 21
Visit the HOT CASES section of the Federation of Insurance and Corporate Counsel website for cases covering a broad range of legal issues from other jurisdictions: www.thefederation.org.
MUTUAL INS. CO. v. GREATER NEW YORK INS. CO.
Tenants of a cooperative apartment brought suit against the cooperative corporation for water damage sustained to the apartments. Atlantic disclaimed coverage, while Greater New York assumed the defense of the action. The cooperative corporation retained counsel to defend it and incurred engineering consultant fees in connection with its defense. The cooperative then filed an action against Atlantic for the costs it incurred in the defense of the action and recovered a judgment in excess of $500,000. In that action, the court directed a new trial unless the cooperative corporation agreed to a reduced damage award of $325,000. Atlantic then settled the action by paying to the corporation the full amount of the judgment it had obtained. Atlantic commenced this action against Greater New York seeking contribution toward the amount it paid to settle the corporation’s suit. In a prior decision, the court held that both insurers were liable as co-insurers for the cost of defending the corporation in the action brought by tenants. In this subsequent decision, the court allowed Greater New York to amend its answer to include as an affirmative defense that its liability is limited to "reasonable costs" of defense – which was determined by the court’s previous finding that costs exceeding $325,000 were unreasonable. Moreover, Greater New York’s costs in defending and settling the tenant’s action would be included in the calculation of defense costs and the determination of Greater’s pro rata share.
666 5th AVENUE LIMITED PARTNERSHIP
Tenant was required to obtain insurance coverage for the landlord, but did not. However, landlord obtained its own. Court distinguishes between cases where landlord is uninsured as a result and cases where landlord has thereafter purchased insurance because of tenant’s breach. In cases where landlord in uninsured, the landlord would be able to recover, against the tenant, any ultimate liability judgment against the landlord, as well as any litigation expenses. However, if the landlord itself purchased insurance equivalent to that which the tenant was contractually obligated to procure, regardless of whether or not its purchase was motivated by the knowledge that the tenant had breached the insurance procurement provision of the lease, the landlord's only damages arising from the tenant's breach of the lease are contract damages, equivalent to the costs of procuring the insurance policy.
ASSOCIATES INC. v. AMODIO
The underlying incident occurred in 1991 and it was sued in 1993. In November 1996, plaintiffs made a claim under an insurance policy issued and administered by defendants, who disclaimed coverage after conducting an investigation. The insured denied knowledge or receipt of the pleadings and maintained that it learned of the lawsuit in the course of refinancing the property in 1996. Three days after receipt of the claim, the insurer requested that its investigator determine when the insured became aware of the injury at its premises. The investigator interviewed plaintiffs four days later and, approximately 30 days later, spoke with the building superintendent, who stated that he had learned about the accident the day after it happened. The insurer disclaimed coverage a week later. The court held that, while a two-month delay in issuing a notice of disclaimer is unreasonable, the moment from which the timeliness of an insurer's disclaimer is measured is the date on which it first receives information that would disqualify the claim, not the date on which it receives the insured's notice of claim.
OF AMERICAN CASUALTY INS. CO. v. SILVERMAN
Policy provision requiring that the insured give notice of a claim "as soon as practicable" was breached where the insured provided notice of a possible underinsurance (UIM) claim more than 18 months after the accident and failed to demonstrate he acted with due diligence in ascertaining the insurance status of the offending vehicles. Absent valid excuse, failure to satisfy the notice requirement of the insurance policy vitiates the coverage.
LIBERY MUTUAL INS. CO. v. SARAVIA
Claimant was a passenger in a vehicle driven by Romero, who was operating the vehicle without the owner’s permission. As a result of Romero’s non-permissive use, there was no liability coverage for the vehicle and claimant sought uninsured motorist coverage. The uninsured motorist endorsement did not afford coverage to any person using a vehicle without "a reasonable belief" that the person is entitled to do so. In this action to stay arbitration of the claim, the court granted a temporary stay pending a determination of whether claimant had a reasonable belief that Romero was operating the vehicle with the owner’s permission, as that issue must be resolved before arbitration or a permanent stay is granted. The court also rejected claimant’s argument that the insurer’s disclaimer was untimely. The policy language expresses a lack of coverage for which prompt disclaimer is not required.
04/10/00: MATTER OF
NATIONWIDE INS. CO. v. SMALLER
Plaintiff was properly denied supplementary uninsured motorist benefits under her former husband’s policy because the policy provides the coverage only for the named-insured and, while residents of the same household, the insured’s spouse. Although she stored some belongings in her then-estranged husband’s home and had a key, she was admittedly not a resident of the household. Moreover, since plaintiff was not a covered person under the policy, the insurer had no statutory obligation to provide her with prompt notice of disclaimer under Insurance Law § 3420(d).
v. NEW YORK CENTRAL MUT. FIRE INS. CO.
The insurer’s disclaimer of coverage, issued four months after receiving notification of plaintiff’s claim for uninsured motorist benefits, was deemed untimely as a matter of law. The insurer did not offer an explanation for the delay and its primary reason for disclaimer (plaintiff’s untimely filing of notice of claim for UM benefits) was readily apparent upon receipt of the notice claim. The court held that an insurer’s failure to give notice of disclaimer as soon as reasonably possible after it first learns of the accident or grounds for disclaimer or denial of coverage precludes disclaimer, even where the insured failed to provide the carrier with timely notice of the claim in the first instance.
04/03/00: MATTER OF
STATE FARM MUTUAL AUTO. INS. CO. v. TREMAINE
The insured was involved in an accident while a passenger in a motor vehicle owned by the State of New York. She served notice of an underinsurance (UIM) claim on her insurer 2 ½ years later, and then filed an uninsured (UM) claim under the State’s policy. The insured settled her claim with the State for its policy limit, and served a demand for arbitration of the UIM claim on her carrier. The insured’s policy required notice of an UIM claim "as soon as practicable", which is defined in the UIM context as "with reasonable promptness after the insured knew or should have known that the tortfeasor was underinsured." The court held the insured’s unexcused 2 ½ -year delay in providing notice was unreasonable as a matter of law. Arbitration of the claim was permanently stayed accordingly.
INS. CO. v. STATE INSURANCE FUND
An underlying action was commenced against the owner of a construction site, who in turn impleaded the contractor seeking contractual indemnification. Transcontinental insured the contractor under a commercial general liability policy and assumed the defense of the underlying action in accordance with the contractor’s contractual obligation to indemnify the owner. After the case was settled, Transcontinental commenced this action against State Insurance Fund, who insured the contractor for liability under the "1B" coverage of a workers’ compensation policy. Transcontinental sought a declaration that State Insurance Fund must contribute to the defense and settlement of the underlying action as a co-insurer. The court held that the action was barred by the antisubrogation rule. Transcontinental essentially sought to recoup from its own insured for the very risk for which its insured purchased the CGL policy.
04/03/00: TWIN TIERS
EYE CARE ASSOC., P.C. v. FIRST UNUM LIFE INS. CO.
Plaintiff/professional corporation commenced this action against its insurer under two policies of professional business overhead expense/disability insurance, alleging the insurer breached the contract by failing to pay benefits on account of the disability of plaintiff employee and former shareholder. Plaintiff also sued its insurance agents, alleging they were negligent in failing to advise plaintiff to obtain proper coverage and in their breach of contract to render insurance agency services. The court held that the claims were properly dismissed. The policy, issued while its employee was still a shareholder, insured against the risk that the employee would become disabled and would incur expenses in the operation of the office. However, at the time the claim was made, the employee was no longer a shareholder and was not regularly liable for and could not actually incur monthly overhead expenses. An insured’s non-ownership of a business or professional practice, or an insured’s sale of an ownership interest prior to the period of disability, will defeat a claim under a business overhead/disability policy. Claims against the agents were also dismissed. An insurance agent’s duty is to obtain requested coverage within a reasonable time or to inform the client of its inability to do so. An insurance agent has no continuing duty to advise, guide or direct a client to obtain additional or different coverage.
MOHAWK POWER CORP. v. SKIBECK PIPELINE CO., INC.
Two employees of Skiebeck Pipeline Co. were injured while working on a construction project for Niagara Mohawk. Niagara Mohawk was to have been named an additional insured on Skiebeck’s CGL policy. The carrier defended both Niagara Mohawk and Skiebeck in the underlying action on two policies. The first policy was an Owner’s Protective Liability (OPL) policy issued to Niagara Mohawk and the second was Skiebeck’s CGL policy. The issue in this case was whether Niagara Mohawk was an additional insured under the CGL policy. The contract required Skiebeck to name Niagara Mohawk as an additional insured on its CGL policy. Skiebeck contacted the carrier’s agent and requested the coverage. The agent then issued a certificate of insurance listing Niagara Mohawk as an additional insured. Prior to the accident, however, the agent issued another certificate that omitted that designation. The court held that Niagara Mohawk was an additional insured under the policy. The record demonstrated that neither Skiebeck nor the agent intended to delete Niagara Mohawk as an additional insured; rather, the omission on the second certificate was a clerical error. Further, given the uncontroverted proof that the agent acted within the scope of its actual or apparent authority by adding Niagara Mohawk as an additional insured, the carrier was bound by the agent’s actions in issuing the certificate of insurance designating Niagara Mohawk as an additional insured.
Also at issue was the allocation of the policies toward the settlement. The OCP policy had limits of $1.5 million per occurrence and in the aggregate. The CGL policy had a limit of $1 million per occurrence and $2 million in the aggregate. The carrier settled the underlying litigation by agreeing to pay one injured employee $2.2 million and the other $1.1 million. The carrier then the determined that $1.5 million of the settlement would be allocated against the OPL policy, thereby exhausting its aggregate limit. The remaining $1.6 million was allocated against the CGL policy. Niagara Mohawk objected because exhaustion of the OPL policy left it without defense or indemnification with regard to other adverse claims during the policy period. Niagara Mohawk sought "replenishment" of the policy and to have the entire settlement charged against the CGL policy. While the lower court had directed that the OPL policy be replenished, and that the settlement be charged against the CGL policy, the Appellate Court reversed. The record was inadequate on whether the carrier properly allocated liability between the policies.
From time to time we highlight significant cases of interest from other jurisdictions. This week we offer decisions from Texas and California:
v. SOUTHERN FARM BUREAU CASUALTY INS. CO.
The question was whether an insurer, obligated to pay uninsured/underinsured (UM/UIM) benefits, owes prejudgment interest accruing 180 days after a demand for those benefits was made or from the day suit for benefits was filed. Because UM/UIM insurers do not breach their contractual obligation to pay until tort liability is established, the court conclude that prejudgment interest begins running from the date liability of the uninsured/underinsured motorist is established. Consequently, Texas Farm Bureau Mutual Insurance Company and Southern Farm Bureau Casualty Insurance Company did not owe prejudgment interest on top of the uninsured/underinsured benefits.
INS. EXCHANGE v. UNIGARD INS. CO.
Faced with multiple lawsuits, a company tendered the defense of the actions to one of its insurers. After paying defense costs and indemnity, the insurer looked to an alleged co-insurer for contribution. The co-insurer refused to contribute on the ground that it had not been asked to participate in the litigation, by tender of defense or otherwise. This lawsuit followed. The trial court found that the co-insurer was obligated to contribute. The Court of Appeal disagrees and reverses -- having not been asked to participate in the defense by the carrier that assumed the defense, it is too late to ask when the litigation is concluded. Court focuses on the "notice", "cooperation", and "voluntary payment" clauses.
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In an action, inter alia, for a judgment declaring the rights of the parties in an uninsured motorist insurance claim, the defendant New York Central Mutual Fire Insurance Company appeals from so much of an order of the Supreme Court, Richmond County (Mastro, J.), entered October 5, 1998, as denied its cross motion to dismiss the complaint and determined that its disclaimer of liability was invalid.
ORDERED that the order is affirmed insofar as appealed from, with one bill of costs to the respondents appearing separately and filing separate briefs.
It is well settled that "[a] failure by the insurer to give [notice of disclaimer] as soon as is reasonably possible after it first learns of the accident or of grounds for disclaimer of liability or denial of coverage, precludes effective disclaimer or denial" ( Hartford Ins. Co. v County of Nassau, 46 NY2d 1028, 1029; see, Matter of State Farm Mut. Auto. Ins. Co. v Cote, 200 AD2d 622, 623; New York Cent. Mut. Fire Ins. Co. v Markowitz, 147 AD2d 461, 462). This rule applies even where, as here, the insured failed to provide the carrier with timely notice of the claim in the first instance (see, Matter of State Farm Mut. Auto. Ins. Co. v Cote, supra, at 623; Kramer v Interboro Mut. Indem. Ins. Co., 176 AD2d 308). Where the ground for disclaiming coverage should have been readily apparent to the carrier when it first received notice of the claim, the requirement for timely notice is particularly applicable (see, Matter of Nationwide Mut. Ins. Co. v Steiner, 199 AD2d 507; Kramer v Interboro Mut. Indem. Ins. Co ., supra). It is the responsibility of the insurer to explain the delay (see, Hartford Ins. Co. v County of Nassau, supra, at 1029-1030).
In the instant case, four months after receiving notification of the plaintiffs' claim for uninsured motorist benefits, New York Central Mutual Fire Insurance Company (hereinafter New York Central) notified the plaintiffs that it was disclaiming coverage on the ground that the notice of claim was untimely filed. No explanation was offered by New York Central to justify its four-month delay in notifying the plaintiffs of its disclaimer. Under these circumstances , and given that the primary reason for disclaiming coverage was readily apparent upon receipt of notice of the claim, New York Central's unexplained delay in disclaiming coverage was unreasonable.
BRACKEN, J.P., JOY, GOLDSTEIN, and FLORIO, JJ., concur.
In a proceeding pursuant to CPLR article 75 to stay arbitration of a claim for underinsured motorist benefits, the appeal is from an order of the Supreme Court, Suffolk County (Doyle, J.), dated May 18, 1999, which granted the application.
ORDERED that the order is affirmed, with costs.
The relevant provision of the insurance policy required that the appellant give notice of the claim to the petitioner "as soon as practicable". Therefore, the appellant was required to give notice "within a reasonable time under all the circumstances" ( Security Mut. Ins. Co. of New York v Acker-Fitzsimons Corp., 31 NY2d 436, 441; see, Matter of Nationwide Mut. Ins. Co. [Oglesby], 219 AD2d 771). "Absent a valid excuse, failure to satisfy the notice requirement of an insurance policy vitiates insurance coverage" ( Matter of Travelers Ins. Co. v Littleton, 218 AD2d 661, 662). The appellant provided notice of a possible underinsurance claim more than 18 months after the accident and failed to demonstrate that he acted with due diligence in ascertaining the insurance status of the offending vehicles (see, Matter of State Farm Mut. Auto. Ins. Co. v Adams, 259 AD2d 551; cf., Matter of Nationwide Mut. Ins. Co. v Edgerson, 195 AD2d 560, 561).
The timeliness of an insurer's disclaimer is measured from the point in time when it first learns of the ground for denial of coverage (see, Matter of Allcity Ins. Co. [Jimenez], 78 NY2d 1054; Hartford Ins. Co. v County of Nassau, 46 NY2d 1028). Under the circumstances of this case, the petition to stay arbitration was a timely notice of disclaimer under Insurance Law § 3420 (see, State Farm Ins. Co. v Velasquez, 211 AD2d 636).
THOMPSON, J.P., KRAUSMAN, FLORIO, and SCHMIDT, JJ., concur.
In a proceeding pursuant to CPLR article 75 to stay arbitration of an uninsured motorist claim, Milagro Saravia appeals (1) from an order of the Supreme Court, Nassau County (McCaffrey, J.), entered April 7, 1999, which granted the petition and permanently stayed arbitration, and (2), as limited by her brief, from so much of an order of the same court, entered June 29, 1999, as, upon reargument, granted the petition only to the extent that it temporarily stayed the arbitration pending a determination of the issue of whether she had a reasonable belief that the vehicle in which she was injured was being operated with the permission of the owner, and granted the petitioner discovery on that issue, and the petitioner Liberty Mutual Insurance Company cross-appeals, as limited by its brief, from so much of the order entered June 29, 1999, as granted reargument and denied a permanent stay of arbitraion.
ORDERED that the appeal from the order entered April 7, 1999, is dismissed, without costs or disbursements, as that order was superseded by the order entered June 29, 1999, made upon reargument; and it is further,
ORDERED that the order entered June 29, 1999, is affirmed insofar as appealed and cross-appealed from , without costs or disbursements.
Milagro Saravia, a passenger in a car driven by Jose Romero, was injured when the car ran a red light and struck another vehicle. Romero was driving the car without the permission of the owner, Rodolfo Salamanca. The petitioner, Liberty Mutual Insurance Company (hereinafter Liberty), insured the Salamanca vehicle. Because there was no liability coverage for the vehicle as a result of Romero's nonpermissive use, Saravia served on Liberty a notice of intention to arbitrate and a demand for arbitration of an uninsured motorist claim. After the arbitration was scheduled, Liberty commenced this proceeding to permanently stay arbitration. The Supreme Court granted the petition, but, upon reargument, granted only a temporary stay of arbitration pending a determination as to whether Saravia had a reasonable belief that Romero was operating the vehicle with the permission of the owner. The court also determined that Liberty was entitled to discovery on that issue.
Once it was determined that Romero was driving the vehicle without Salamanca's permission , the car became an uninsured vehicle pursuant to the terms of the Liberty policy (see, Rowell v Utica Mut. Ins. Co., 77 NY2d 636, 640; see also, Matter of Liberty Mut. Ins. Co. [Hogan], 82 NY2d 57). Although the supplementary uninsured motorist endorsement of the policy states that an uninsured vehicle does not include a vehicle that is "[i]nsured under the liability coverage of this policy", that provision cannot be invoked to deprive Saravia of the mandatory uninsured motorist benefits required by Insurance Law § 3420(f)(1) (see, Rowell v Utica Mut. Ins. Co., supra, at 640).
The uninsured motorist endorsement of the policy does, however, state in relevant part, as follows:
"We do not provide Uninsured Motorists Coverage for 'bodily injury ' sustained by any person:
* * *
"Using a vehicle without a reasonable belief that that person is entitled to do so".
Consequently, the Supreme Court properly determined that the issue of whether Saravia had a reasonable belief that Romero was operating the vehicle with permission must first be resolved. The court also correctly determined that Liberty was entitled to discovery on that issue (see, Matter of Graphic Arts Mut. Ins. Co. [Leno], 214 AD2d 976). Contrary to Saravia's contentions, Liberty was not obligated to timely disclaim coverage based on that policy provision, and its petition to stay arbitration was timely. Because the policy language expresses a lack of coverage, a prompt disclaimer is not required and the 20-day limitations period of CPLR 7503(c) does not apply (see, Matter of Worcester Ins. Co. v Bettenhauser, 260 AD2d 488; Matter of Graphic Arts Mut. Ins. Co. [ Leno], supra).
JOY, J.P., ALTMAN, GOLDSTEIN, and H. MILLER, JJ., concur.
In a proceeding pursuant to CPLR article 75 to permanently stay arbitration of a claim for supplementary uninsured motorist benefits , Lisa Smaller appeals from an order of the Supreme Court, Nassau County (O'Shaughnessy, J.H.O.), dated December 7, 1998, which granted the petition.
ORDERED that the order is affirmed , without costs or disbursements.
The appellant is not a covered person entitled to supplementary uninsured motorist benefits under her former husband's insurance policy. The policy provides such coverage only for the "named insured and, while residents of the same household, [the insured 's] spouse and the relatives of either of [the named insured or spouse]". Although the appellant stored some belongings in her then-estranged husband's home, had a key, and would visit to obtain clothing, she was not a resident of the household (see, Matter of Aetna Cas. & Sur. Co. v Gutstein, 80 NY2d 773; cf., Pellegrino v State Farm Ins., Co., 167 Misc 2d 617). The appellant admitted in sworn documents and in a police accident report that she had been living separate and apart from her husband at the time of the accident and that her resident address was not the marital address.
Since the appellant was not a covered person under the subject policy, the petitioner had no statutory obligation to provide her with prompt notification of disclaimer (see, Insurance Law § 3420[d]; Zappone v Home Ins. Co., 55 NY2d 131; Fireman's Fund Ins. Co. v Freda, 156 AD2d 364).
JOY, J.P., THOMPSON, KRAUSMAN, and GOLDSTEIN, JJ., concur.
Order unanimously reversed on the law without costs and application granted. Memorandum: Respondent, a passenger in a motor vehicle owned by the State of New York (State), was involved in an accident on July 11, 1994. She served notice of an underinsurance claim on petitioner, her insurer, 2½ years later, in December 1996. Respondent thereafter filed an uninsured claim under the State insurance policy and, after settling with the State for its policy limit, served a demand for arbitration of her underinsurance claim on petitioner. Supreme Court erred in denying the application to stay arbitration. Respondent’s insurance policy required that she provide notice of an underinsurance claim "[a]s soon as practicable", which the Court of Appeals has defined in the underinsurance context as "with reasonable promptness after the insured knew or should reasonably have known that the tortfeasor was underinsured" ( Matter of Metropolitan Prop. & Cas. Ins. Co. v Mancuso, 93 NY2d 487, 495). Delay in giving notice may be excused, but "the burden of establishing a reasonable excuse for the delay is upon the insured" ( Matter of Travelers Ins. Co. [DeLosh], 249 AD2d 924, 925). Here, respondent offered no excuse for the 2½-year delay after the accident, and we conclude that the unexplained delay of 2½ years was unreasonable as a matter of law (see, Matter of Travelers Ins. Co. [DeLosh], supra; see also, Unwin v New York Cent. Mut. Fire Ins. Co., ___ AD2d ___ [decided Jan. 6, 2000]). (Appeal from Order of Supreme Court, Onondaga County, Major, J. - Arbitration.) PRESENT: PINE, J. P., WISNER, HURLBUTT, KEHOE AND LAWTON, JJ. (Filed Mar. 29, 2000.)
Judgment unanimously modified on the law and as modified affirmed with costs to defendant and judgment granted in accordance with the following Memorandum: This is a dispute between two insurers concerning whether both must contribute to the defense and settlement of an underlying personal injury action. The underlying action was commenced against the owner of a construction site, the New York Power Authority (NYPA), which in turn impleaded the contractor, Master Painting and Sheeting Company, Inc. (Master), seeking indemnification . Plaintiff, Transcontinental Insurance Company, insured Master under a Commercial General Liability (CGL) policy. Pursuant to Master's contractual obligation to indemnify NYPA, plaintiff assumed the defense of the underlying action, incurring expenses of $23,000 and eventually settling it on behalf of NYPA for approximately $700,000. Plaintiff then commenced this action against defendant, State Insurance Fund, which insured Master for liability via the "1B" coverage of a workers' compensation insurance policy. Plaintiff seeks a declaration that defendant must contribute to the defense and settlement of the underlying action as the "coinsurer" of Master.
Plaintiff appeals from a judgment denying its motion for summary judgment on the complaint and instead dismissing the complaint . Supreme Court determined that plaintiff is estopped from denying that NYPA is an additional insured under the CGL policy, that NYPA and Master thus are coinsureds under that policy, and that plaintiff' s claim against defendant therefore is barred by the antisubrogation rule.
We need not address whether NYPA is an additional insured under the CGL policy issued by plaintiff to Master. Because plaintiff essentially seeks to recoup from its own insured, Master, for the very risk for which Master purchased the CGL policy, this claim is barred by the antisubrogation rule (see, North Star Reins. Corp. v Continental Ins. Co., 82 NY2d 281, 294; Pennsylvania Gen. Ins. Co. v Austin Powder Co., 68 NY2d 465, 471-472), irrespective of whether NYPA is itself an additional insured under the policy (see, Antonitti v City of Glen Cove, ___ AD2d ___ [decided Nov. 29, 1999]; Maksymowicz v New York City Bd. of Educ., 232 AD2d 223, appeal withdrawn 234 AD2d 1017).
Because plaintiff seeks a declaratory judgment, the court should not have dismissed the complaint and should have declared the rights of the parties (see, Matter of Boyd v Allstate Life Ins. Co. of N. Y., ___ AD2d ___ [decided Dec. 30, 1999]). We modify the judgment, therefore , by vacating the provision dismissing the complaint and by granting judgment in favor of defendant declaring that defendant is not obligated to reimburse plaintiff for monies expended in the defense and settlement of the underlying action. (Appeal from Judgment of Supreme Court, Onondaga County, Tormey, III, J. - Declaratory Judgment.) PRESENT: PIGOTT, JR., P. J., WISNER, SCUDDER AND LAWTON, JJ. (Filed Mar. 29 , 2000.)
Order unanimously affirmed with costs. Memorandum: Plaintiff, a professional corporation engaged in the practice of ophthalmology , commenced this action against defendant First Unum Life Insurance Company (First Unum), the issuer of two policies of professional business overhead expense/disability insurance, alleging First Unum's breach of contract in failing to pay benefits under the policy on account of the disability of plaintiff 's employee (and former shareholder), Dr. Steven D. Salsburg. Plaintiff also sued defendants Sedgwick James of New York, Inc. (Sedgwick James) and Charles J. Sellers & Co., Inc. (Sellers), two insurance agents, alleging their negligence in failing to advise plaintiff to obtain proper coverage, and their breach of their contractual obligation to render insurance agency services. Plaintiff appeals from an order granting defendants’ motions for summary judgment dismissing the complaint and denying plaintiff 's cross motion for partial summary judgment on liability.
Supreme Court properly dismissed the complaint as against First Unum. The policy, issued when Dr. Salsburg was a shareholder, unambiguously insured against the risk that Dr. Salsburg would become totally disabled and would, during his total disability, "incur" certain expenses in the operation of his ("Your") office. At the time a claim was made, however, Dr. Salsburg, a nonshareholder in the practice, was not "regularly liable" for, and could not "actual[ly] incur," any monthly overhead expense during the period of his disability. It is well established that an insured's nonownership of a business or professional practice, or an insured’s sale of an ownership interest prior to the period of total disability, will defeat a claim under a business overhead/disability policy (see, Richardson v Guardian Life Ins. Co., 161 Or App 615, 619-622, 984 P2d 917, 921-922, review denied 329 Or 553, ___ P2d ___ ; Wilson v Monarch Life Ins. Co., 971 F2d 312, 313; Paul Revere Life Ins. Co. v Klock, 169 So 2d 493, 495, cert denied 173 So 2d 148).
The court also properly dismissed the complaint as against the agents. The record establishes that Sellers did not procure the disability policies that are the subject of this action, was not asked to procure them, and had no dealings with plaintiff or Dr. Salsburg at or near the time that the policies were issued. Absent a request by the insured, an insurance agent cannot be held liable for failure to procure coverage (see, M & E Mfg. Co. v Frank H. Reis, Inc., 258 AD2d 9, 11-12; Madhvani v Sheehan, 234 AD2d 652, 654).
Similarly, there is no basis for imposition of liability against Sedgwick James, which did procure the issuance of the policies that are the subject of this suit. Plaintiff alleges that Sedgwick James "failed to advise, guide and direct [plaintiff ] to obtain the proper coverage for business overhead expense insurance for [plaintiff's] physician employees ." It is well established that the duty of an insurance agent is to obtain requested insurance coverage for its client within a reasonable time or to inform the client of its inability to do so ( see, Murphy v Kuhn, 90 NY2d 266, 270). Here, Sedgwick James obtained the requested insurance coverage , thereby discharging its duty. An insurance agent has no continuing duty to advise, guide or direct a client to obtain additional or different coverage (see, Murphy v Kuhn, supra, at 270).
In view of our determination, there is no need to consider the parties' contentions with regard to the Statute of Limitations. (Appeal from Order of Supreme Court, Erie County, Michalek, J. - Summary Judgment.) PRESENT: GREEN, J. P., PINE, HAYES AND KEHOE, JJ. (Filed Mar. 29, 2000.)
Judgment unanimously modified on the law and as modified affirmed without costs in accordance with the following Memorandum: This insurance coverage dispute is secondary to litigation arising out of an accident in which two employees of defendant Skibeck Pipeline Co., Inc. (Skibeck) were injured while working on a construction project for plaintiff, Niagara Mohawk Power Corporation (Niagara Mohawk). Defendants Aetna Casualty & Surety Company of America, Farmington Casualty Company and Aetna Casualty & Surety Company (collectively Aetna) defended both in the underlying litigation under separate policies of liability insurance. The first was an Owner's Protective Liability (OPL) policy issued to Niagara Mohawk and containing a limit of liability of $1,500,000 per occurrence and in the aggregate. The second was a Commercial General Liability (CGL) policy issued to Skibeck and containing a limit of liability of $1,000,000 per occurrence and $2,000,000 in the aggregate, and excess coverage of $5,000,000 in "umbrella form". This dispute centers on whether Niagara Mohawk was an "additional insured" under the CGL policy.
Aetna settled the underlying litigation by agreeing to pay one injured employee $2,000,0 00 and the other $1,100,000. Of the total settlement, Aetna determined that $1,500,000 would be allocated against the OPL policy, thereby exhausting its aggregate limit. The remainder, $1,600,000, was allocated against the CGL policy.
Niagara Mohawk commenced this action against Skibeck and Aetna. As against Aetna, Niagara Mohawk alleges that the exhaustion or depletion of coverage under its OPL policy leaves it without defense or indemnification with regard to various other adverse claims arising during the policy period. Niagara Mohawk contends that it is entitled to have the OPL policy "replenished " and to have the settlement charged in its entirety against the CGL policy, under which Niagara Mohawk claims to be an additional insured. Conversely, as against Skibeck, it alleges that, if Niagara Mohawk is not determined to be an additional insured under the CGL policy, then Skibeck breached its contract to procure insurance coverage for Niagara Mohawk. Skibeck commenced a third-party action against The Whittingham Agency, Inc. (Whittingham), the agent of Aetna, to which Skibeck had directed its request that Niagara Mohawk be named as an additional insured under the CGL policy. Whittingham had issued a certificate of insurance designating Niagara Mohawk as an additional insured under the CGL policy for the policy period during which the accident occurred, but just prior to the accident had issued another certificate of insurance that mistakenly omitted that designation. Whittingham commenced a fourth-party action against Aetna asserting the same theory as alleged by Niagara Mohawk against Aetna, i.e., that Niagara Mohawk is an additional insured under the CGL policy.
Aetna, as defendant and fourth -party defendant, and Skibeck, as defendant, appeal from a judgment granting the motion of Niagara Mohawk and the cross motion of Whittingham for summary judgment and denying Aetna's cross motion for summary judgment dismissing the amended complaint. Supreme Court declared that Niagara Mohawk is an additional insured under the CGL policy and is entitled to indemnification from Aetna under the CGL policy for all costs of defense and liability (settlement) incurred in the underlying personal injury action; directed Aetna to "reimburse and replenish" Niagara Mohawk's OPL policy to the extent of its aggregate limit of $1,500,000; and determined that the "$1.5 million expended by Aetna on behalf of Niagara Mohawk under its owner's protective liability policy is attributed to the Skibeck Commercial General Liability policy, to which plaintiff Niagara Mohawk was an additional insured at the time of the [underlying plaintiffs'] accidents in December of 1993." On appeal, Aetna contends that Niagara Mohawk is not an additional insured under the CGL policy. Additionally, Aetna and Skibeck each contend that the court erred in attributing all of Niagara Mohawk's liability (settlement) to the CGL policy and none to the OPL policy.
We conclude that the court properly declared that Niagara Mohawk is an additional insured under the CGL policy. The undisputed proof on this record is that neither Whittingham nor Skibeck intended that Niagara Mohawk be deleted as an additional insured under the CGL policy; rather, the designation of Niagara Mohawk as an additional insured under that policy was omitted through Whittingham's clerical error. Further, given the uncontroverted proof that Whittingham acted within the scope of its actual or apparent authority in adding Niagara Mohawk as an additional insured, we conclude that Aetna was bound by Whittingham's actions in issuing the certificate of insurance designating Niagara Mohawk as an additional insured (see, Lenox Realty v Excelsior Ins. Co., 255 AD2d 644, 646, lv denied 93 NY2d 807; Matter of Tavano v Tavano Enters., 227 AD2d 836, 837, lv dismissed 88 NY2d 1018; Gleason v Temple Hill Assocs., 159 AD2d 682, 683-684; cf., Tomala v Peerless Ins. Co., 20 AD2d 206, 209, affd 14 NY2d 862; Bucon, Inc. v Pennsylvania Mfg. Assn. Ins. Co., 151 AD2d 207, 210-211; Nojaim Bros. v CNA Ins. Cos., 113 AD2d 109, 112-114).
The record, however, is inadequate to determine whether Aetna correctly allocated Niagara Mohawk's liability in the underlying action entirely against the CGL policy rather than ratably or equally between the CGL policy and the OPL policy. Thus, we modify the judgment by deleting the word "all" from the penultimate decretal paragraph and by vacating the last decretal paragraph. (Appeals from Judgment of Supreme Court, Onondaga County, McCarthy, J. - Declaratory Judgment.) PRESENT: PIGOTT, JR., P. J., WISNER, SCUDDER AND LAWTON, JJ. (Filed Mar. 29, 2000.)
Order, Supreme Court, New York County (Herman Cahn, J.), entered on or about November 16, 1998, which granted, in part , the motion of defendants Greater New York Mutual Insurance Company and Insurance Company of Greater New York to amend their answer to add four affirmative defenses, unanimously modified, on the law, by striking the fifth affirmative defense, except to the extent it seeks to limit plaintiff's reasonable costs to $325,000, and striking the sixth affirmative defense, in its entirety and, except as so modified , affirmed, without costs.
This dispute arises out of coverage provided, respectively, by plaintiff Atlantic Mutual Insurance Company and parties defendant Greater New York Mutual Insurance Company and Insurance Company of Greater New York (collectively, "Greater") to 1010 Tenants Corporation. When the tenants of a cooperative apartment brought suit against the corporation for water damage sustained in their apartment, Atlantic Mutual disclaimed coverage, and Greater assumed the defense of the action. 1010 Tenants Corporation engaged the services of a law firm and an engineering consultant in connection with their defense. The cooperative corporation then instituted an action against Atlantic Mutual for the legal and engineering fees incurred, recovering a judgment of $544,607.25. This Court directed a new trial unless the cooperative corporation stipulated to a reduced damage award in the total amount of $325,000 (1010 Tenants Corp. v Atlantic Mut. Ins. Co., 146 AD2d 471). Prior to the new trial, Atlantic Mutual settled the action by paying the corporate plaintiff the full amount of the judgment it had obtained.
Atlantic Mutual then commenced this action against Greater seeking contribution towards the amount it paid to settle the suit brought by the cooperative. On appeal from an order granting summary judgment dismissing the complaint, this Court reversed on the ground that the parties are liable, as coinsurers, for the cost of defending the action against 1010 Tenants Corporation (241 AD2d 427, lv dismissed 91 NY2d 956). Greater then moved for leave to serve an amended answer asserting four additional affirmative defenses in which it contends that: a) if it is liable for any portion of the fees, it is liable only for the "reasonable costs" of defense costs (fifth affirmative defense); b) it is not liable for any fees that resulted from Atlantic 's breach of its insurance contract (sixth affirmative defense); c) it is entitled to a set off for $ 83,000 it paid to settle the action brought by the tenants (seventh affirmative defense); and d) it is entitled to a set off for the amount expended in defending the cooperative corporation in that action (eighth affirmative defense).
We agree with defendants' contention that collateral estoppel is inapplicable to bar the affirmative defenses. Greater was neither a party to the insured's action against Atlantic Mutual (Allied Chem. v Niagra Mohawk Power Corp., 72 NY2d 271, 276, cert denied 488 US 1005), nor in privity with a party to that action (cf., D'Arata v New York Cent. Mut. Fire Ins. Co., 76 NY2d 659, 664-665). However, under the doctrine of law of the case, the respective parties are bound by our prior decision in this matter, holding that Atlantic is "entitled to recover * * * its pro rata share of the defense costs" ( 241 AD2d 427, 428). The sixth affirmative defense seeks to avoid liability on the ground that Greater should not be held liable for any costs attributable to Atlantic's refusal to defend the cooperative corporation. This was the ground upon which this action was originally dismissed and was expressly rejected by this Court on appeal ( 241 AD2d 427, supra). Likewise, the fifth affirmative defense is barred to the extent that it seeks to avoid liability for such costs. However, Greater's liability is limited by this Court's previous finding that costs exceeding $325,000 are unreasonable (1010 Tenants Corp. v Atlantic Mut . Ins. Co., supra). As a party to that action, Atlantic Mutual is estopped to relitigate this issue.
The seventh and eighth affirmative defenses assert, respectively, set offs and counterclaims for $83,000, which Greater paid to settle the tenant action against the cooperative corporation, and for the cost of defending the insured in that action. These amounts are properly included in the calculation of the defense costs and the determination of Greater's pro rata share.
We find no merit to Atlantic 's assertion that it has been prejudiced by Greater's motion to assert additional affirmative defenses . CPLR 3025 allows liberal amendment of pleadings absent demonstrable prejudice. Aside from the mere passage of time, no prejudice is discernible here. Virtually no discovery has been conducted, and Atlantic does not profess surprise at the nature
of the counterclaims. Assertion of these defenses was necessitated by the reversal of summary judgment to Greater and amendment was proposed within days of this Court's decision.
Third-Party Plaintiffs appeal from an order of the Supreme Court, New York County (Alice Schlesinger, J.), entered February 19, 1999, which, to the extent appealed from, limited their recoverable damages to the cost of purchasing the insurance that the third-party defendant had failed to purchase on their behalf.
This appeal asks us to consider what relief is available to a landlord when its tenant breaches a lease provision requiring the procurement of liability insurance covering the landlord for claims related to injuries occurring on the premises, and the landlord itself obtains its own insurance policy covering the contemplated risks. We conclude that in one respect, the settled law too narrowly circumscribes the available relief, so we identify additional forms of possible damages.
This matter arises out of an underlying incident that occurred on December 7, 1995, when plaintiff Rosario Inchaustegui sustained personal injuries after being struck in the head by a dislodged ceiling tile while on premises subleased and occupied by respondent Petrofin Corporation, on the 21st floor of the office building located at 666 5th Avenue, New York. For purposes of the following discussion, Petrofin stands in the position of a tenant.
Paragraph 14 of the sublease agreement expressly requires that:
[The] subtenant [Petrofin] shall maintain comprehensive general public liability insurance in respect to the subleased premises and the conduct and operation of business therein, with sublessor and the landlord as additional insureds as set forth in the underlying lease.
In amendments to the original lease, defendant 666 5th Avenue Limited Partnership is identified as the landlord; defendant Sumitomo Realty and Development is its general partner. Together, they are referred to jointly herein as the "landlord".
Petrofin obtained comprehensive general liability insurance for the subleased space, but failed to comply with the insurance procurement provisions of the sublease agreement by naming the landlord as the additional insured under the purchased policy.
When plaintiff sued the landlord for his injuries, the landlord in turn brought a third-party claim against Petrofin, alleging a violation of the lease's insurance procurement provision. In the motion for summary judgment that followed, the landlord contended that Petrofin's failure to procure the requisite insurance coverage constituted a breach of the sublease agreement, entitling them to indemnity as well as money damages, including the costs incurred in the defense of the action. The IAS court granted the motion, but limited the extent of their recoverable damages to the cost of maintaining and securing an independent policy of insurance.
For the reasons that follow, we modify, to a limited extent, the order appealed from, and otherwise affirm.
Generally, when a tenant breaches a contract with a landlord with respect to the procurement of insurance to cover the risk of liability to third parties, "[t]he usual penalty . . . is to be liable for all the resulting damages" ( Wallen v Polo Grounds Bar & Grill N.Y., 198 AD2d 19, 20, citing Morel v City of New York, 192 AD2d 428, 429; see, Kinney v Lisk Co., 76 NY2d 215, 219). However, case law limits the extent of damages available to a landlord when it procures its own insurance upon learning that the tenant has violated the lease by failing to procure insurance. These cases hold that under such circumstances the landlord's damages "are limited to the cost of such insurance" (see, Wallen, supra, citing Rodriguez v Nachamie, 57 AD2d 920; Wilson v Haagen Dazs Co., 201 AD2d 361; Noah v 270 Lafayette Assocs., 233 AD2d 108).
The landlord contends that (1) these cases are contrary to settled law, as enunciated in Kinney v Lisk (76 NY2d 215, supra) and Roblee v Corning Community College (134 AD2d 803, lv denied 72 NY2d 803), and (2) that they are not controlling because they apply only where the contract requires or gives the landlord the option to procure its own insurance should the tenant fail to do so.
Initially, we note that the rule enunciated in Kinney v Lisk Co., supra, does not require that where a party to a contract has breached an insurance procurement provision, the damages awarded must include the costs of indemnification and defense. Rather, it merely authorizes such an award where appropriate under the circumstances.
It is true that in Wallen v Polo Grounds Bar & Grill (198 AD2d 19, 20, supra) and the first few cases relying upon Wallen to limit the landlord's damages to the cost of the substitute policy, the courts specifically cited the lease provision giving the landlord the option of procuring substitute coverage (see, e.g., Wilson v Haagen Dazs Co., 201 AD2d 361, supra). However, more recent cases have limited the landlord's damages in this manner even where the lease, while requiring the tenant to procure insurance, contained no provision authorizing the landlord to recoup the cost of substitute insurance from the tenant as additional rent (see, e.g., Noah v 270 Lafayette Assocs., 233 AD2d 108).
Furthermore, in Rodriguez v Nachamie (57 AD2d 920), the case upon which the current line of cases, beginning with Wallen, was founded, the court held that since the landlord was aware that the tenant had failed to procure insurance, its damages were limited to the cost of such insurance. As in Noah v 270 Lafayette Assocs., supra, the holding in Rodriguez was not based upon a lease provision authorizing the landlord to purchase substitute insurance. Moreover, the Rodriguez case itself relied on an older line of appellate authority, in which it had been held that "when the party whose interest is to be insured has knowledge or notice of the fact that the party agreeing to secure the insurance has failed to insure it", the measure of damages is "the amount of premiums which would have been charged for [the] insurance" (see, Marconi Wireless Tel. Co. of Am. v Universal Transp. Co., 194 App Div 272, affd 233 NY 581, citing National Mahaiwe Bank v Hand, 80 Hun 584).
Thus, application of the reasoning of these earlier cases also supports the limitation of damages to the cost of premiums, regardless of whether or not the landlord's purchase of insurance was pursuant to a contractual provision; in those cases, the critical factor is simply whether the landlord knew of the tenant's failure to procure insurance.
Finally, this limitation of the landlord's damages upon purchasing substitute insurance is consistent with the nature of the remedy to which the landlord is entitled. The landlord's cause of action against the tenant is based upon a breach of contract. Damages for breach of contract are intended to put the aggrieved party in the same economic position he would have been in if the contract had been performed (5 Corbin § 992; 11 Williston § 1338; McCormick, Damages, 561; 3 Farnsworth on Contracts § 12.8, at 188-189). This includes all actual economic injury that the breaching party had reason to know would arise from the breach, both direct or general damages, such as lost profits, and consequential damages, consisting of other economic injury the breaching party would have had reason to foresee as a probable result of the breach (see, Hadley v Baxendale, 9 Exch 341, 156 Eng Rep 145).
However, the law does not permit the injured party to recover damages for losses that could have been avoided by taking reasonable and appropriate steps (3 Farnsworth on Contracts § 12.8, at 191-192; see, Restatement [Second] of Contracts § 350). Of course, the injured party is entitled to recoup from the breaching party the costs of such mitigation.
Applying these fundamental contract law principles to a tenant's breach of the insurance procurement provision of a lease reflects two possible categories of damages. First, if the tenant fails to obtain the contemplated insurance coverage on behalf of the landlord (whether because it procured no coverage at all, or because it neglected to have the landlord included as a named insured) in the absence of the contemplated insurance coverage, any ultimate liability judgment against the landlord would fall within the category of consequential damages, and the landlord would be entitled to recoup that amount, as well as any litigation expenses, from the tenant, since the tenant's failure to purchase insurance on behalf of the landlord could reasonably be expected to result in such economic injury to the landlord.
However, if the landlord itself purchased insurance equivalent to that which the tenant was contractually obligated to procure, regardless of whether or not its purchase was motivated by the knowledge that the tenant had breached the insurance procurement provision of the lease, the landlord's only damages arising from the tenant's breach of the lease are contract damages, equivalent to the costs of procuring the insurance policy.
The dissent takes the position that our conclusion contravenes the collateral source rule. We disagree. The purpose of that rule, which evolved in the context of tort law, is to ensure that the wrongdoer is required to pay for all damages his conduct caused to the injured party, without setoff from payments the injured party receives from other, collateral sources (see, Rutzen v Monroe County Long Term Care Program, 104 Misc 2d 1000, 1001). While the collateral source rule has been applied in some contract cases, as the dissent notes (see, Rutzen v Monroe County, supra; Gusikoff v Republic Storage Co., 241 App Div 889), we should keep in mind that the nature of contract damages is quite distinct from that of tort damages (see generally, Fleming, the Collateral Source Rule and Contract Damages, 71 Calif L Rev 56, 60). While tort damages are expansive, focusing on the full spectrum of the harm caused by the tortfeasor, damages for a breach of contract are restrictive, limited to the economic injury actually caused to the claimant as a consequence of the other party's breach (id.).
An analysis of the application of the collateral source rule begins by determining the total extent of the damages to the injured party (here, the landlord) caused by the wrongdoer (here, the tenant). It then determines if the defendant is entitled to claim that this sum must be reduced by the amount available to the injured party from another source. Because the claim at issue here arises out of a breach of contract, the first step requires determination of the consequential economic damage caused to the landlord by the tenant's breach of the insurance procurement provision. As we discussed previously, because of the landlord's procurement of substitute insurance, the extent of damages to which it is entitled for this breach of contract is limited to the cost of its purchase of substitute coverage, and potentially, any other expenses not covered by the policy it procured. The collateral source rule is inapplicable. We are not setting off the damages to which the landlord is entitled from the tenant by the amount covered by the insurance; any insurance company's payment to the injured plaintiff is simply irrelevant to the analysis.
If this holding leaves the landlord's insurer without the right to recoup its expenses from the tenant by means of a subrogation claim, we perceive no prejudice. The premium was paid for the risk to be underwritten. Had it been the tenant, rather than the landlord, who applied to the same insurer for the coverage, the same premium would presumably have been paid and the same risk underwritten, and no subrogation claim would have been available to the insurer against the tenant.
Moreover, as the dissent recognizes, the concept of subrogation focuses on permitting the insurer to recoup its payment from "the party who has caused the damage" (see, Winkelmann v Excelsior Ins. Co., 85 NY2d 577, 581). A tenant who failed to procure insurance has breached a lease provision, but did not cause the damage underlying the liability determination. This situation is distinguishable from one where a right of subrogation is clearly appropriate, for instance, where a tenant negligently causes a fire that ultimately destroys other tenants' property. In such circumstances there is a wrongdoer against whom the landlord's insurer must have a subrogation right to seek to recoup payments it made to others, such as other building occupants.
Lastly, because we recognize that despite the coverage it obtained, there is a possibility the landlord may ultimately suffer certain other economic consequential damages as a result of the tenant's breach, besides the cost of the premiums, we modify the order of the IAS court in one relatively minor respect. Although the Wallen line of cases seems to strictly limit the landlord's damages to the cost of the premiums, we believe the proper extent of damage recovery is slightly broader. In the cases limiting the landlord's damages to the cost of the premiums, the courts have drawn a distinction between two categories of damages. On one hand, there is the "cost of insurance", generally thought of as the premiums paid, which falls under the category of expenses the landlord has had to pay as a direct result of the breach, and for which it has no source of reimbursement; these costs are therefore recoverable by the landlord in an action against the tenant. On the other hand, the amount of any eventual liability determination against the landlord, and the costs of the defense, are not recoverable damages, inasmuch as both would be covered by the insurance procured by the landlord (see, e.g., Wallen, supra; Wilson v Haagen Dazs Co., 201 AD2d 361; Noah v 270 Lafayette Assocs., 233 AD2d 108).
The same reasoning that authorizes a damages award for premiums paid by the landlord in these circumstances would also permit recovery for certain other out-of-pocket costs suffered by the landlord and not covered by the procured insurance. For instance, if the policy procured by the landlord required some sort of co-payment, deductible, or other out-of-pocket payment by the landlord, such payments should, like the premiums, be recoverable as against the tenant who breached the procurement provision. Similarly, should the landlord's insurance rate be increased as a result of the liability claim, the increase in its future insurance premiums would be recoverable as breach of contract damages.
Accordingly, the order of the Supreme Court, New York County (Alice Schlesinger, J.), entered February 19, 1999, which, to the extent appealed from, limited the damages recoverable by third-party plaintiffs to the cost of purchasing the insurance that third-party defendant had failed to purchase for them, should be modified, on the law, to the extent of adding the right of third-party plaintiffs to seek damages for any other expense arising out of the liability claim and not covered by the substitute insurance procured by the landlord, and as so modified, affirmed, without costs, and the matter remanded for determination of third-party plaintiffs' damages.
All concur except Sullivan, P.J. and Buckley, J. who dissent in an Opinion by Sullivan, P.J.
SULLIVAN, P.J. (dissenting)
In my view, the majority improperly limits the damages recoverable by the landlord to the amounts paid for insurance premiums and certain "out-of-pocket costs suffered by the landlord and not covered by the procured insurance." I would modify the order to award the landlord all its damages resulting from the tenant’s failure to procure insurance. Accordingly, I dissent.
The measure of damages for breaching a contractual provision to procure liability insurance naming the other party to the contract as an additional insured is all damages resulting from the breach, including the amount paid to dispose of the third party's claim, and defense expenses. ( Kinney v Lisk, 76 NY2d 215, 219; Roblee v Corning Community College, 134 AD2d 803, 805, lv denied 72 NY2d 803; Morel v City of New York, 192 AD2d 428, 429; Marconi Wireless T. Co. of America v Universal Transp. Co., 194 App Div 272, affd 233 NY 581.) Even if the injured party "has been wholly or partly indemnified for his loss by insurance effected by him and to the procurement of which the wrongdoer did not contribute," his damages are not diminished. ( Kish v Bd. Of Educ., 76 NY2d 379, 384, quoting Healy v Rennert, 9 NY2d 202, 206.) This principle is based on the collateral source doctrine, which "holds that as a general rule damages cannot be mitigated or reduced because of payments received by an injured party from a source wholly independent of and collateral to the wrongdoer." ( Rutzen v Monroe County Long Term Care Program, 104 Misc2d 1000, 1001; Silinsky v State-Wide Ins. Co., 30 AD2d 1, 4.) The collateral source doctrine, which originated in tort, is applicable to cases sounding in contract as well. (Rutzen v Monroe County Long Term Care Program, supra, at 1001; Gusikoff v Republic Storage Co., 241 App Div 889.)
The reason for the rule is clear. The collateral payment by the insurer does not mitigate the wrongdoer’s damages. "[P]roof of the insurance actually paid would not tend to show that the damage claimed was not actually occasioned by the wrong-doer. . . .[I]t would simply show that compensation had been received by the injured party in whole or in part from some other person - not that the wrong-doer had made satisfaction[,] which alone could give him a defense." ( Drinkwater v Dinsmore, 80 NY 390, 392; 36 NY Jur 2d Damages 129, p 222-223.)
The majority’s reliance on Wallen v Polo Grounds Bar & Grill N.Y. (198 AD2d 19) and Wilson v Haagen Dazs Co. (201 AD2d 361) is misplaced. (See, also, Rodriguez v Nachamie, 57 AD2d 920, 921.) In Wallen and Wilson, this court held that a landlord which has exercised its contractual right to procure its own insurance covering the claims was not entitled to recover from the tenant for the amount of any eventual liability but only for the cost of its insurance premiums. In both cases, however, the lease’s insurance procurement provisions afforded the landlord the right to procure its own insurance and collect, as additional rent, the amount of the premium from the tenant. The fact that the parties thus agreed to a remedy for the tenant’s failure to comply with the procurement provision arguably affords a rationale for limiting the landlord’s damages if it fails to utilize that remedy. No such provision is contained in the lease in this case.
In any event, this recent line of cases can be traced to the 1977 decision in Rodriguez v Nachamie (supra, 57 AD2d 920). In light of Kinney v Lisk, supra (76 NY2d 215), decided in 1990, which explicitly states that "because [the subcontractor] breached its agreement to procure liability insurance covering [the contractor], it is liable for the resulting damages, including [the contractor’s] liability to plaintiff" (id., at 219), Rodriguez v Nachamie's limitation on damages for breach of an agreement to procure insurance is no longer valid. Thus, these recent cases, to the extent that they disagree with the principle that the proper measure of damages in claims for breach of an agreement to procure insurance is the resulting loss sustained, including the expense of defending the underlying third-party claim, misconstrue prevailing law.
To accept the result reached by the majority would remove the incentive for the tenant to comply with the procurement provision and would reward the tenant for its failure to comply, thus rendering the procurement provision meaningless. (See, Santamaria v 1125 Park Ave. Corp., 238 AD2d 259, 260.) In addition, the majority’s holding ignores the fact that, by including this provision in their agreement, the parties, sophisticated business entities, did not merely allocate the cost of insurance premiums, but rather, allocated the risk of loss through the employment of insurance.(1)
Nor can it be said that the landlord will receive a windfall by virtue of any recovery against the tenant.(1) The landlord's insurer, upon payment of the indemnity to the injured third party and after providing a defense of the underlying action, would be automatically entitled, as a subrogee, to the landlord's rights against the tenant for its breach of its obligation to provide the landlord with liability coverage. (See, Winkelmann v Excelsior Ins. Co., 85 NY2d 577, 581.) One of the objectives of subrogation is "to require the party who has caused the damage to reimburse the insurer for the payment the insurer has made." (Id.) Thus, any recovery from the assertion of such right would - quite properly - be for the benefit of the insurer, not the landlord. The overriding principle here, which hardly needs to be stated, is that the parties to a transaction such as this are free to allocate the risk of loss as they see fit through insurance. (Interested Underwriters at Lloyds v Ducor's, Inc., 65 NY2d 647.)
(1)There is not the slightest hint in this record that the landlord purchased liability insurance just for the demised premises in question, knowing that the tenant had failed to provide such coverage for the landlord's benefit. The notion that the landlord of a large office building in midtown Manhattan would not have building-wide liability coverage and would thereby expose itself to the consequences of allowing any part of its premises to remain uninsured is unrealistic. In any event, the landlord's knowledge of the tenant's default in procuring insurance for the landlord's account is of no legal consequence under the procurement provision here.
(1)To the extent that whichever way this case turns out, one of the parties will be viewed as receiving a windfall, the tenant should not be allowed to reap an undeserved benefit at the landlord’s expense in the face of its failure to comply with its clear contractual obligations. (Id.)
Order, Supreme Court, Bronx County ( Bertram Katz, J.), entered on or about April 1, 1999, which, to the extent appealed from, as limited by the briefs, denied defendants-appellants-respondents' motion for summary judgment and granted the cross-motion of plaintiffs 2540 Associates, Inc. and Manhattan Management Associates, Inc. for summary judgment on the complaint seeking a declaration that the liability policy issued by defendant Assicurazioni Generali, S.P.A. was in effect, unanimously reversed, on the law, without costs, the motion granted, the cross motion denied, and a declaration issued that the disclaimer of liability is valid and the complaint otherwise dismissed. The Clerk is directed to enter judgment accordingly.
This action arose out of a lawsuit for injuries sustained in a fall at premises owned by plaintiff 2540 Associates, Inc . and managed by plaintiff Manhattan Management Associates, Inc. (collectively, Associates). A summons and complaint was filed by the injured party by serving the Secretary of State on or about May 17, 19 93. In 1996, plaintiffs made a claim under a policy of insurance issued by defendant Assicurazioni Generali , S.P.A. and administered by defendant Leone Claims Management, Inc. (collectively, Generali). After conducting an investigation, Generali disclaimed coverage. At issue is whether the disclaimer was timely and, if so, whether Associates is entitled to recover attorney's fees in connection with the denial of coverage. Supreme Court's finding that Associates is estopped to contest the untimeliness of its notice of claim based upon this Court's decision in Zapater v 2540 Assocs. (250 AD2d 508) is not contested.
The material facts are not in dispute. The insured disavowed either knowledge or receipt of the pleadings filed with the Secretary of State, maintaining that it learned of the lawsuit in the course of refinancing the property in 199 6. Associates's claim was received by Generali on approximately November 12, 1996. On November 15, Generali sent a request to its investigator to determine when the insured became aware of the 1991 injury at its premises. On November 20, the investigator interviewed Associates's principal, who denied knowledge of the incident until June or July of 1996 and identified a person who might have been the building superintendent in September 1991. On December 18, 1996, the investigator spoke with the superintendent, who stated that he had learned about the accident the day after it happened. The investigator's report, which was received by Generali on December 30, 1996, resulted in a notice dated January 6, 1997, in which Generali disclaimed coverage on the ground that Associates failed to give notice of the claim as soon as practicable , as required by the contract of insurance.
On appeal, Generali contends that it issued a disclaimer promptly following receipt of the report by its investigator. Associates argues that a disclaimer issued two months after receipt of notice of claim is untimely as a matter of law.
While plaintiff is correct that a two-month delay in issuing a notice of disclaimer is unreasonable ( Hartford Ins. Co. v County of Nassau, 46 NY2d 1028, 1029), the moment from which the timeliness of an insurer's disclaimer is measured is the date on which it first receives information that would disqualify the claim, not the date on which it receives the insured's notice of claim ( Allcity Ins. Co. v Jimenez, 78 NY2d 1054, 1056). Delay in providing notice to the insurer is a sufficient basis for disclaimer (supra, at 1055; Jenkins v Burgos, 99 AD2d 217, 219-220).
Associates suggests that the information provided by its principal, reported to Generali on December 6, 1996, rendered further investigation superfluous and contends that the disclaimer, issued one month later, "is unreasonable and thus foreclosed the insurer from disclaiming its liability" (citing Wright v Wright, 35 AD2d 895, lv denied 28 NY2d 483; Appell v Liberty Mut. Ins. Co., 22 AD2d 906, affd 17 NY2d 519). However, Associates originally sent the notice of claim to its insurance broker in or about June 1996, and the broker sent the notice of claim to the New York State Liquidation Bureau.
It is settled that an insurance broker is the agent of the insured ( Brown v Poritzky, 30 NY2d 289, 292-294). Knowledge that the insured had notice of the incident at the time the papers were misrouted by its agent, whether imputed to the insurer on the date such knowledge was acquired by its investigator or on the date the insurer first received the notice of claim, cannot be regarded, variously, as an excuse for late receipt of notice by the insurer and as grounds for its immediate denial of coverage. Notable is that the investigator did not learn of the superintendent's contemporaneous knowledge of the accident until December 18, 1996. Even measured from that date and not the date the investigator's report was submitted to the insurer, the reasonableness of the delay in issuing the disclaimer on January 6, 1997 would present merely a question of fact whether it was timely in light of the insurer's "prompt, diligent and good faith investigation of the claim" ( Structure Tone v Burgess Steel, 249 AD2d 144, 145; see also, Allstate Ins. Co. v Aetna Cas. & Sur. Co., 191 AD2d 665, 666, lv denied and dismissed 82 NY2d 744). Moreover, the notice of disclaimer was issued one week after receipt of the investigator 's final report, and Associates has offered no authority suggesting that the passage of one week presents any issue of timeliness to require submission of the issue to a trier of fact. An insurer's justification for denying coverage is strictly limited to those grounds stated in the notice of disclaimer ( General Acc. Ins. Group v Cirucci, 46 NY2d 862; Appell v Liberty Mut. Ins. Co., supra) and, as a matter of policy, reasonable investigation is preferable to piecemeal
disclaimers ( Wilczak v Ruda & Capozzi, 203 AD2d 944, 945; see also, U.S. Underwriters Ins. Co. v Congregation B’nai Israel, 900 F Supp 641, 649 [EDNY 1995], affd 101 F 3d 685 [2d Cir 1 996]).