Coverage Pointers - Volume IV, No. 7
10/03/02: BROOKE v. ZURICH-AMERICAN INS. CO.
New York State Supreme Court, Appellate Division, First Department
Hoping for Bonus, Even Where None is Allowable, Leads to Denial of Fidelity Claim
In an action to recover under a fidelity bond, it was ascertained that plaintiff's employee forged purchase orders for garments that were never ordered by plaintiff's customers; that plaintiff manufactured the garments called for in the purchase orders; and that plaintiff, after learning that the orders were fake, was able to sell the garments only below cost, sustaining a loss. The policy covered losses caused by dishonest employee acts committed “with the manifest intent to ... obtain financial benefit [for the employee] (other than employee benefits earned in the normal course of employment, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions).” The motion court found that the employee’s dishonesty was motivated by a desire to obtain a bonus, and that there was therefore no coverage. On appeal, plaintiff argued that although the form of benefit that the employee apparently had in mind was some sort of bonus or other reward for delivering an unusually high volume of orders, in point of fact it does not pay its employees bonuses, and that the hoped-for bonus therefore did not fall within the exclusion for “employee benefits earned in the normal course of employment.” The court held that this argument overlooked that application of the exclusion depended not on the employee’s entitlement to or receipt of a bonus or other normal form of employee financial benefit, but on the employee’s “manifest intent” to obtain such a benefit. Since plaintiff acknowledged that the dishonesty was apparently motivated by the hope of obtaining some form of extra compensation, the exclusion applied, and it did not avail plaintiff that its employee was apparently misinformed as to his compensation arrangement.
New York State Supreme Court, Appellate Division, First Department
GC’s Claim for Coverage as Additional Insured Deemed Valid Despite Default-Based Dismissal of GC’s Third-Party Claims for Indemnification in Underlying Action
General contractor commenced this action against its subcontractor and subcontractor’s insurer for reimbursement of defense costs and indemnification following the general contractor’s settlement of an underlying personal injury action. The underlying action was brought by an employee of the subcontractor, who sustained injury when he slipped and fell on the floor of the construction site bathroom. Prior to settlement of that action, Supreme Court had issued an order precluding the GC from submitting evidence on its own behalf at trial as a penalty for discovery defaults. As a result, the general contractor’s third-party complaint against its subcontractor for common-law and contractual indemnification and contribution was dismissed. In this action for coverage, the court held that the subcontractor’s insurer was obligated to provide the GC with a defense and indemnification. The court rejected the insurer’s argument that the GC was not entitled to additional insured status for liability that arose due to its own discovery defaults because the GC’s liability was never adjudicated, and no determination was made that the accident did not arise from the subcontractor’s work. The court concluded that the relevant and unadjudicated issues in determining whether the GC was entitled to coverage were whether the injured employee’s use of bathroom facilities located at the job site was a necessary and unavoidable activity that arose in the course of the construction project and whether the employee’s injury therefore arose in connection with the execution of the subcontractor’s work for the GC. The court also rejected the insurer’s equitable argument that the GC should not be permitted to benefit from “self-inflicted” liability arising from its discovery defaults, since the insurer’s refusal to defend and indemnify the GC, which occurred long before the preclusion order was issued, was unjustified.
New York State Supreme Court, Appellate Division, Fourth Department
Member of Military Stationed Overseas Still Resident of Parent’s Household for Insurance Purposes
Defendant established that, two days before the accident, he had moved back to the United States following a military tour of duty in Guam. Defendant’s active military duty was to end nearly two weeks after the accident, and he planned to leave the military and reside at his mother’s home for an indefinite period of time while he sought employment. Defendant had a key to his mother’s home and his driver’s license listed his mother’s home as his address. Defendant had maintained his voter registration in New York State during his entire military service, and he had returned to his mother’s home for periods of up to 30 days while on military leave. Defendant resided with his mother and stepfather for several months after his active duty ended. Thus, defendant established as a matter of law that he was a resident of his mother’s household on the date of the accident. The fact that defendant may have had other residences during his military service is not dispositive; “[a]n individual can have more than one residence for insurance purposes”.
09/23/02: MATTER OF EAGLE INS. CO. v. BEAUVIL
New York State Supreme Court, Appellate Division, Second Department
In Uninsured Motorist Proceeding, Police Accident Report Designation of Insurer is Prima Facie Evidence of Insurer’s Identity; Letter from Carrier Denying Coverage is Not Sufficient to Overcome Prima Facie Case
The petitioner established a prima facie case as to the existence of insurance coverage for the subject vehicle by producing the police accident report that contained the offending vehicle’s insurance code. The appellant, the offending vehicle’s alleged carrier, submitted a letter stating in conclusory fashion that it did not insure the offending vehicle. This was insufficient to overcome the petitioner’s prima facie case and a permanent stay of uninsured motorist arbitration was therefore proper.
Visit the HOT CASES section of the Federation of Defense and Corporate Counsel website for cases covering a broad range of legal issues from other jurisdictions: www.thefederation.org.
Massachusetts Appeals Court
CGL Policy with Auto Exclusion Need Not Respond to Claim That Employee of Insured Failed to Supervise Driver
Markel was plaintiff’s commercial general liability insurer. The issue here was the scope of Markel’s obligation to defend plaintiff’s employee under the general liability policy, which contained an automobile exclusion. The plaintiff instituted this declaratory judgment action to recover a settlement amount paid by it that exceeded the limit of its commercial auto policy, and to recover attorney’s fees and costs. A Superior Court judge concluded that the severability of interests clause in the Markel policy entitled plaintiff’s employee “to coverage on claims of negligent supervision and negligent failure to follow camp rules and policies.” On appeal, Markel asserted that the judgment in favor of plaintiff’s employee was error because the policy clearly and unambiguously excluded coverage for claims for “’bodily injury’ ... arising out of the ownership, maintenance, use or entrustment to others of any ... ‘auto’ ... owned or operated by ... any insured.” The Appellate Court agreed. Plaintiff was the named insured on the Markel policy whereas plaintiff’s employee was an insured under the policy in her capacity as an employee. She was also an insured as executive officer and director of the corporation. The employee argued that because she did not own or operate the automobile, the severability of interests clause in the Markel policy provided coverage for negligent supervision claims against her. The claims against her involved actions falling within the scope of her employment for which the Society was vicariously liable. Plaintiff purchased a commercial auto policy that insured the employee for the alleged negligent acts. Court held that when the real party in interest seeks coverage or payment, directly or through what amounts to subrogation, under its general liability policy for the consequences of an injury caused by a motor vehicle it owns, the vehicle owner “is not entitled to be defended against[, or reimbursed for payments made to resolve] claims of negligent supervision ... or against analogous claims.”
09/27/02: ERIE INS. EXCH. v. FIDLER
Pennsylvania Superior Court
No Coverage For Intentional Act of Physical Assault
The Fidlers sought a defense and indemnity under their homeowners’ insurance policy for an underlying action for damages sustained by a classmate who alleged he was physically assaulted by the Fidlers’ son at their high school. Erie Insurance denied it owed either a defense or indemnity based on the excluded coverage for bodily injury “expected or intended by anyone we protect.” The court agreed with Erie finding that, although the underlying complaint was phrased in terms of negligent acts, the alleged act of throwing the underlying plaintiff “with such great force that the Plaintiff’s head struck the wall and a desk causing him to fall unconscious to the floor,” was an intentional act excluded by the policy.
Prepared by Bruce Celebrezze and Randall Berdan of Celebrezze & Wesley in Los Angeles
California Court of Appeal
Punitive Damages Award of $3 Million Against Aetna For Malicious Suits Against Insured
A California appellate court found that a building contractor was entitled to punitive damages for his insurance company’s malicious litigation against him after he sought coverage for claims of negligent construction. In upholding the trial court’s verdict, but reducing the punitive damages to $3 million, the Court of Appeal found there was ample evidence that Aetna Insurance Co. sued carpenter George Hillenbrand and his firm for improper purposes, despite its duty to defend him.
Prepared by Bruce Celebrezze and Randall Berdan of Celebrezze & Wesley in Los Angeles
Mississippi Supreme Court
Where Policy Says Coverages Don't Stack, They Don't Stack
Farm Bureau included in its policies certain limiting language stating, “Medical payment limits shall not stack.” Court found this to be a clear and unambiguous contract term effectively prohibiting the stacking of medical payments. Farm Bureau could not have stated such an intention more clearly. Court held that there is an ambiguity in an insurance contract when the policy can be interpreted as having two or more reasonable meanings. Here, the use of “Medical payment limits shall not stack” does not lend itself to any reasonable interpretation other than that medical payment limits under the policies shall not stack. That provision is by no means technical or obscure. Court bound to enforce contract language as written and give it its plain and ordinary meaning if it is clear and unambiguous. Effect should be given to this valid, clear and unambiguous contract term where there is no statutory or public policy prohibition nullifying it.
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In a proceeding pursuant to CPLR 7503 to stay arbitration of a claim for uninsured motorist benefits, Allstate Insurance Company appeals from an order of the Supreme Court, Kings County (Silverman, J.), dated January 10, 2002, which, after a hearing, granted the petitioner's application for a permanent stay of arbitration.
ORDERED that the judgment is affirmed, with costs.
The petitioner established a prima facie case as to the existence of insurance coverage for the subject vehicle by producing the police accident report that contained the offending vehicle's insurance code (see Matter of Centennial Ins. Co. v Capehart, 220 AD2d 499; Matter of Wausau Ins. Co. v Ramos, 151 AD2d 487). The appellant, the offending vehicle's alleged carrier, submitted a letter stating in conclusory fashion that it did not insure the offending vehicle. This was insufficient to overcome the petitioner's prima facie case (see Matter of Eagle Ins. Co. v Sadiq, 237 AD2d 605). The Supreme Court, therefore, properly permanently stayed uninsured motorist arbitration.
ALTMAN, J.P., S. MILLER, McGINITY, SCHMIDT and RIVERA, JJ., concur.
Order and judgment (one paper), Supreme Court, New York County (Franklin Weissberg, J.), entered March 28, 2001, which, inter alia, granted plaintiff Turner Construction Co.'s motion for summary judgment declaring that defendant TIG Insurance Company was obligated to indemnify and hold Turner harmless for expenses and liability which it incurred in the underlying personal injury action brought by an employee of TIG's primary insured, defendant Pace Plumbing Co., unanimously affirmed, with costs.
Plaintiff Turner was a defendant in the underlying personal injury action brought by an employee of plaintiff's subcontractor, Pace. Pace's employee, while employed on a project for which Turner was the general contractor, was allegedly injured when he slipped and fell on the floor of the construction site bathroom. Turner settled the underlying action and brought this declaratory judgment action against Pace and its insurer, TIG Insurance Company, seeking reimbursement of defense costs and indemnity pursuant to the Master Agreement between Pace and Turner and Pace's general liability policy in which Turner was named as an additional insured.
Prior to Turner's settlement of the underlying action, Queens County Supreme Court had issued an order precluding Turner from submitting evidence on its own behalf at trial as a penalty for Turner's discovery defaults. On Turner's appeal, the preclusion order was affirmed (Provenzano v Turner Constr. Co., 275 AD2d 314). In light of the preclusion order and since "there is no evidence on the record of any negligence on the part of [*2]Pace," Queens County Supreme Court also dismissed Turner's third-party complaint against Pace seeking common-law and contractual indemnification and contribution.
These determinations notwithstanding, the IAS court properly held that TIG was obligated to provide Turner with a defense and indemnification in the underlying action. Defendants' argument that Turner is not entitled to additional insured status for liability that arose due to its own discovery defaults is unavailing because Turner's liability was never adjudicated, and, more to the point, no determination was made that the accident did not arise from Pace's work. Contrary to defendants' argument, Turner has not sought to relitigate decided issues. Indeed, the determinations relied on by defendants have no bearing on whether TIG was required to provide Turner a defense and indemnify Turner pursuant to the additional insured endorsement. Rather, the relevant and previously unadjudicated issues in determining whether plaintiff was entitled to a defense and indemnification under the subject policy's additional insured endorsement were whether the injured employee's use of bathroom facilities located at the job site was a necessary and unavoidable activity that arose in the course of the construction project and whether the employee's injury therefore arose in connection with the execution of Pace's work for Turner. These inquiries were properly answered in the affirmative by the IAS court (see Structure Tone, Inc. v Component Assembly Sys., 275 AD2d 603; Tishman Constr. Corp. v CNA Ins. Co., 236 AD2d 211). The dismissal of Turner's third-party complaint and any resulting implication that Turner was negligent have no bearing upon whether Turner may assert the rights of an additional insured under the policy at issue (see Consolidated Edison Co. of New York v United States Fid. & Guar. Co., 266 AD2d 9). In addition, defendants' attempt to escape the broad scope of the insurance endorsement clause as a matter of equity, urging, as they do, that Turner should not be permitted to benefit from "self-inflicted" liability arising from its own discovery defaults, is completely undermined by TIG's unjustifiable refusal of Turner's request for defense and indemnification long before Queens County Supreme Court issued its preclusion order.
Since the underlying action was settled before any judicial determination that Turner was negligent, the issue of whether Pace is required to indemnify Turner is moot. In any event, it bears noting that, in seeking summary judgment and opposing [*3]defendants' cross motions, Turner's counsel has explicitly disavowed Turner's direct claims against Pace for a defense and indemnification and merely seeks to enforce the insurance contract between Pace and TIG wherein Turner is named as an additional insured.
Defendants' additional appellate arguments are unavailing since there is no question that Pace's general liability insurance policy covers the date of the accident and defendants' subrogation claims are beyond the scope of this appeal.
Order, Supreme Court, New York County (Ira Gammerman, J.), entered on or about April 27, 2001, which, in an action to recover on a fidelity insurance policy, denied plaintiff insured's motion for summary judgment, and, upon a search of the record, granted defendant insurer summary judgment dismissing the complaint, unanimously affirmed, with costs.
It appears that plaintiff manufactures clothing; that plaintiff's employee forged purchase orders for garments that were never ordered by plaintiff's customers; that plaintiff manufactured the garments called for in the purchase orders; and that plaintiff, after learning that the orders were fake, was able to sell the garments only below cost, sustaining a loss that it seeks to recover under its fidelity policy with defendant. Insofar as pertinent, the policy covers losses caused by dishonest employee acts committed "with the manifest intent to ... obtain financial benefit [for the employee] (other than employee benefits earned in the normal course of employment, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions)." The motion court found that the employee's dishonesty was motivated by a desire to obtain a bonus, and that there was therefore no coverage. Plaintiff argues that although the form of benefit that the employee apparently had in mind was some sort of a bonus or other extraordinary reward for delivering an unusually high volume of orders, in point of fact it does not pay its employees bonuses, and that the hoped-for bonus therefore does not fall within the exclusion for "employee benefits earned in the normal course of employment." This argument overlooks that the exclusion depends not on the employee's entitlement to or receipt of a bonus or other normal form of employee financial benefit, but on the employee's "manifest intent" to obtain such a benefit. Since [*2]plaintiff acknowledges that its employee's dishonesty was apparently motivated by the hope of obtaining some form of extra compensation for the extra volume, the exclusion applies, and it does not avail plaintiff that its employee was apparently misinformed as to his compensation arrangement (cf. Aetna Cas. & Sur. Co. v Kidder, Peabody & Co., 246 AD2d 202, 209, lv denied 93 NY2d 805).