Coverage Pointers - Volume II, No. 4

08/14/00: PORT AUTHORITY OF NEW YORK AND NEW JERSEY v. EVERGREEN INTERNATIONAL AVIATION, INC.
New York State Supreme Court, Appellate Division, Second Department
Insurance Procurement Clause in Commercial Lease Deemed Unenforceable
In commercial lease, landlord required tenant to indemnify it and provide liability coverage naming landlord as insured. A sprinkler valve in the leased premises ruptured, causing flood damage to tenant's property and its property insurer paid tenant to compensate it for its loss. Insurer then commenced a subrogation action in Federal court against the landlord alleging that its negligence led to the rupture of the sprinkler valve. Thereafter, the landlord commenced an action seeking, inter alia, a declaration that tenant had a duty to insure, defend, indemnify, and hold it harmless in the underlying Federal action. The tenant moved for summary judgment on the ground that the plaintiff is not entitled to indemnification in the underlying action. Pursuant to General Obligations Law § 5-321, a lease provision that purports to exempt a lessor from liability for its own acts of negligence is void and unenforceable. Although lease provisions in which the parties allocate the risk of liability to third parties between themselves through the use of insurance are generally enforceable, a landlord may not circumvent General Obligations Law § 5-321 "simply by placing the burden to procure insurance on the tenant." In this case, the lease placed the sole obligation to obtain insurance upon the tenant, but it lacked any language demonstrating a mutuality of intent to directly exculpate the landlord from negligence towards its tenant-indemnitor. Accordingly, the court found that the insurance procurement clause contained in the lease was unenforceable since it attempted to relieve the landlord of its responsibility for damages caused to tenant as a result of its own negligence.

08/14/00 PRUDENTIAL PROPERTY & CASUALTY INS. CO. v. SINGH
New York State, Appellate Division, Second Department
Rental Endorsement Supersedes Business Pursuits/Rental Exclusion Contained in Policy
In an action by insurer for declaration that it was not obligated to defend or indemnify its insureds in an underlying action, the court dismissed the insurer’s cause of action premised upon the policy’s rental exclusion. The Court determined that a rental endorsement added to the policy superseded the business pursuits/rental exclusion provision contained in the policy.

08/10/00: AMERICAN HOME ASSURANCE CO. v. McDONALD
New York State Supreme Court, Appellate Division, First Department
Professional Liability Policy Cap on Damages for Sexual Misconduct Upheld -- Public Policy Does Not Prohibit Limit on Indemnity
Reversing a lower court judge, the court determined that a cap of $25,000 for sexual misconduct in a professional liability policy does not violate public policy. The sexual misconduct limitation in the policies was clear and unambiguous, and gave the policyholder clear notice of the restrictions. It is not contrary to the public interest to allow insurers to offer varying amounts of coverage depending on the nature of the claim asserted against the insured, especially where, as here, there is no requirement by New York State that social workers and psychotherapists carry malpractice insurance.

08/15/00: EMPIRE FIRE & MARINE INS. CO. v. BANTLEY TRUCKING, INC.
Fifth Circuit (applying Texas law)
Bobtail Coverage Examined -- Vehicle Being Taken for Maintenance is Being Used For Business Purposes
This dispute arose between owner’s and lessee’s policies for accident that occurred when a tractor, being driven "bobtail" for maintenance operation, was involved in an accident. The Owner's policy had a "business use" exclusion, which the court found unambiguous. The policy at issue was a lease agreement entitled "Insurance for Non-Trucking Use", commonly referred to as a bobtail policy. The fact that the lessee was leasing the truck was evidence that it was being used in pursuit of its business interests.

08/11/00: VILLAS v. UNITED PACIFIC INS.
Ninth Circuit (applying California law)
Insurer Which Wrongfully Fails to Defend is Responsible for Entire Judgment, Even if Taken by Default
A homeowner’s association of a 12-unit condominium filed a construction defect suit against the developers of the project. The developers tendered the action to its insurer, which defended them under a reservation of rights. Four months prior to trial, it withdrew from the defense on the grounds, based on a legal opinion from outside counsel, that the damages sought were not covered under its policy. The insured did not retain new counsel and the homeowners obtained a default judgment against the insured. The homeowners and the insured brought suit against the insurer for breach of contract and bad faith arising out of their withdrawal from the defense and refusal to pay the judgment. The trial court granted plaintiffs’ motion for summary judgment, finding that the withdrawal from the defense was wrongful as a matter of law and holding them liable for the entire judgment. The appellate court affirmed the judgment as to the developers-insureds. It held that under California law, an insurer that wrongfully refuses to defend is liable for the entire judgment, even if the judgment is obtained by default, and that the insured does not have the burden of proving that its damages were caused by the failure to defend. Thus, an insurer that wrongfully and in bad faith refuses to defend is liable for the entire judgment and all other damages consequential to it. However, the court held that the same result does not automatically apply to judgment creditors, such as the homeowners in this case. Because the homeowners were not insureds under the policy, there was no covenant of good faith and fair dealing as between them and the insurer and damages based on "bad faith" should not have been awarded. The appellate court also affirmed the emotional distress award, holding that an insured may recover damages for all emotional distress incident to an insurer’s bad faith denial of coverage, so long as the insurer’s conduct also resulted in substantial financial loss. It rejected the insurer’s argument that there must be an additional showing that the emotional distress was severe, substantial and enduring. Further, the damages awarded for the emotional distress were found not to be excessive as they amounted to a small fraction of the damages awarded for financial injury.

Submitted by Bryan Weiss, an attorney with the Los Angeles firm of Murchison & Cumming.

08/11/00: POWERS v. UNITED SERVICES AUTOMOBILE ASSOC.
Alaska Supreme Court
Excess Carrier May Relitigate Uninsured Motorist Case Lost by Primary
May an injured plaintiff who has successfully arbitrated an uninsured motorist claim against a primary carrier preclude a secondary carrier from further arbitration where the secondary carrier had neither adequate notice of the first arbitration nor any opportunity to participate in it? The trial court answered this question in the negative. The Alaska Supreme Court agrees and affirms. The evidence indicates that the excess carrier had no involvement in the arbitration, and had no contractual relationship with the underlying carrier. In addition, while the carriers had similar interests, they were not identical. The excess carrier had no liability until the primary policy limit was exceeded. The primary would have considerably less interest in appealing the final award than the excess insurer, as even a substantial reduction would still result in the primary paying its full limit.

08/10/00: ROYAL INS. CO. v. PINETTE
Maine Supreme Judicial Court
An Assault and Battery Committed in Self Defense is Still an Intended Event and Thus Excluded Under Liability Policy
The Parties stipulated that the insured was defending himself when he assaulted the plaintiff. The insured argued that he did not intend to cause injury, only to defend himself from an attack by the tort plaintiff. The fact that self-defense motivates the battery does not change the reality of the event: the batterer actively intends to harm another in a way that a trespasser who enters land under a mistaken claim of right does not. The claim of self-defense is a plea to justify what the batterer knows would otherwise be an improper action, rather than an indication that the batterer was unaware that he or she was harming the victim. However, it is still intentional and still excluded.

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Sheldon Hurwitz
Carolyn M. Henry
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James D. Gauthier, Team Leader
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Donna L. Burden
Andrea Schillaci
Jody E. Briandi

In an action for a judgment declaring, inter alia, that the plaintiff is not obligated to defend and indemnify the defendants Esther Singh, Arjune Singh, and Allan Ramlochan in an action entitled DeJesus v Singh, pending in the Supreme Court, Kings County, under Docket No. 2 847/97, the plaintiff appeals from so much of an order of the Supreme Court, Nassau County (Levitt, J .), dated September 15, 1999, as granted that branch of the defendants' cross motion which was for summary judgment dismissing the second cause of action for a declaration that the plaintiff is not obligated to defend and indemnify the defendants based on the rental exclusion provision of the policy.

ORDERED that the order is affirmed insofar as appealed from, with costs.

Contrary to the plaintiff's contention, the Supreme Court properly determined, as a matter of law, that the defendants were entitled to summary judgment dismissing the second cause of action for a declaration that the plaintiff was not obligated to defend and indemnify the defendants based on a rental exclusion in the subject policy . The Supreme Court properly determined that a rental endorsement added to the policy superseded the business pursuits/rental exclusion provision contained in the subject policy of insurance (cf., United States Fid. & Guar. Co. v Annunziata, 67 NY2d 229, 232; Neuwirth v Blue Cross & Blue Shield of Greater New York, Blue Cross Assn., 62 NY2d 718, 719).

SANTUCCI, J.P., S. MILLER, FLORIO and McGINITY , JJ., concur.