Coverage Pointers - Volume XIX, No. 21 SE
Volume XIX, No. 21 (No. 505)
Tuesday, March 27, 2018
A Biweekly Electronic Newsletter
Hurwitz & Fine, P.C.
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Buffalo, NY 14202
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Dear Coverage Pointers Subscribers:
Long tail coverage, Additional Insured privity requirements and Burlington’s impact on the duty to defend. A trilogy of cases decided today by New York appellate courts.
It is rare, indeed, when your editors send out a special edition of Coverage Pointers, but today, with two Court of Appeals decisions and one very significant First Department opinion released, we are compelled to do so. It is attached. It’s a “three-fer”.
In the first case reported, Keyspan Gas, New York’s highest court, the Court of Appeals, considered long tail coverage. The Court determined that where the time-on-the-risk approach to long tail coverage was at hand, insurers were NOT liable to provide the insured with protection for years where coverage was not available on the market. The insured retained that liability.
The second case from that same court is Gilbane Building involved additional insured (“AI”) coverage. In that case, the AI endorsement read:
"WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you." (Emphasis added)
The Court held that the term “with whom” required privity of contract between the named insured and the purported additional insured. The dissent posited, unsuccessfully, that the term was ambiguous, and so long as the named insured agreed in ANY contract to provide AI coverage to a purported additional insured, that party had the coverage. The word “with”, held the majority, had meaning.
The third and final case is from the Appellate Division, First Department and is really an interesting one. In Hanover Insurance Company v. Philadelphia Indemnity Ins. Co., the court seems to expand the Burlington decision to defense obligations. In that case, a security company, Protection Plus, provided a CGL policy with AI coverage to the building owner, Manhattan School. It was a “caused by” endorsement:
The Manhattan School is an additional named insured "only with respect to liability for bodily injury'. . . caused, in whole or in part, by" the acts or omissions of Protection Plus in the performance of its operations for the Manhattan School.
An on-duty security guard, employed by Protection Plus, fell in on a floor freshly mopped by a Manhattan School employee. The First Department, relying on Burlington Ins. Co. v. NYC Transit Authority, 29 NY3rd 313 (2017) reminded the parties that the terms “caused by” means something different than “arising out of”. It requires that the accident was “proximately caused by” the named insured, not merely that there was a “causal link” between the named insured and the accident.
In reviewing the underlying decision, we note that Manhattan School had alleged, in a third party action, that Protection Plus was negligent in hiring the plaintiff but the lower court had dismissed that claim. The lower court had cited to the traditional cases involving defense, including Regal Construction.
The court held that Philadelphia, Protection Plus’ carrier, had no obligation to either DEFEND or INDEMNIFY Manhattan School. This is the first case that has applied the Burlington decision to an obligation to defend. Perhaps the result would have been different if the claims of negligence in the third party action had not been previously dismissed.
A huge decision, indeed.
KOHANE’S COVERAGE CORNER
Dan D. Kohane
03/18/18 Keyspan Gas East Corp. v. Munich Reinsurance America, Inc. New York State Court of Appeals
Long Tail Coverage – Under Pro Rata, Time-on the Risk Method of Allocation, an Insurer is Not Liable for Years Outside of its Policy Period Where there was Not Applicable Insurance Coverage on the Market
The question before New York’s highest court is whether, under the "pro rata time-on-the-risk" method of allocation, an insurer is liable to its insured for years outside of its policy periods when there was no applicable insurance coverage on the market. The Court holds “no” – the insured in liable for years where the coverage was not available.
For the reasons explained herein, we hold that KeySpan, not Century, bears the risk for those years during which such coverage was unavailable. We, therefore, affirm the order of the Appellate Division.
This was an environmental claim arising out of gas plants owned and operated by KeySpan’s predecessor, Long Island Lighting Company (“LILCO”). Gas production at the sites began in the late 1880s and early 1900s. After operations ceased, and decades later, the New York Department of Environmental Conservation (“DEC”) determined that there had been long-term, gradual environmental damage at both sites due to contaminants, such as tar, seeping into the ground and leeching into groundwater. The DEC required KeySpan to undertake costly remediation efforts.
Between 1953 and 1969, Century issued eight excess liability insurance policies to LILCO covering property damage. The environmental contamination at the sites occurred gradually and continuously before, during, and after the Century policy periods. It was also uncontroverted that the environmental contamination that occurred in any given year was unidentifiable and indivisible from the total resulting damages.
KeySpan did not dispute that pro rata time-on-the-risk allocation controlled under the relevant policies, but argued that Century's pro rata share should not be reduced by factoring in the years in which pollution property damage liability insurance was unavailable. According to KeySpan, Century's expert had opined that such coverage was not available to utilities until approximately 1925, and that a "sudden and accidental pollution exclusion" was later generally adopted by the insurance industry sometime in or after October 1970. Thus, KeySpan argued the allocation should not take into account any years prior to the availability, or after the unavailability, of the applicable coverage.
In general, two primary methods of allocation are used by the courts to apportion liability across multiple policy periods: all sums and proration. All sums allocation "permits the insured to collect its total liability under any policy in effect during the periods that the damage occurred, up to the policy limits" (Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d 208, 222 ) [“ConEd” ]. By contrast, under pro rata allocation, assuming complete coverage, "an insurer's liability is limited to sums incurred by the insured during the policy period; in other words, each insurance policy is allocated a pro rata' share of the total loss representing the portion of the loss that occurred during the policy period" (Matter of Viking Pump, 27 NY3d at 256) [“Viking Pump”]. Pro rata shares are often, although not exclusively, calculated based on an insurer's "time on the risk," a fractional amount corresponding to the duration of the coverage provided by each insurer in relation to the total loss.
In New York, the courts have not adopted a strict pro rata or all sums allocation rule. Rather, the method of allocation is governed foremost by the particular language of the relevant insurance policy. In the ConEd case, that policy language restricted an insurer's liability to all sums incurred and occurrences happening "during the policy period" which the court held generally supports a pro rata allocation. As we explained, the policies at issue there contained such language providing "for liability incurred as a result of an accident or occurrence during the policy period, not outside that period," and we concluded that "[p]roration of liability acknowledges the fact that there is uncertainty as to what actually transpired during any particular policy period".
We subsequently distinguished the policy language in ConEd from that presented in Viking Pump. In Viking Pump, the presence of noncumulation and prior insurance provisions "plainly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence" and, therefore, require all sums allocation. Such provisions are inconsistent with pro rata allocation because "the very essence of pro rata allocation is that the insurance policy language limits indemnification to losses and occurrences during the policy period," such that no two insurance policies indemnify the same loss or occurrence absent overlapping or concurrent policy periods
KeySpan does not dispute that it bears the risk for those years in which property damage insurance was available to, but not purchased by, LILCO and it was, therefore, voluntarily self-insured. KeySpan argues, however, that it should be responsible only for those years in which insurance was available in the marketplace.
The unavailability rule is inconsistent with the contract language that provides the foundation for the pro rata approach — namely, the "during the policy period" limitation — and that to allocate risk to the insurer for years outside the policy period would be to ignore the very premise underlying pro rata allocation. Such an approach could, once a policy is triggered, impose liability in perpetuity (or retroactively to periods prior to coverage) on an insurer who issued insurance coverage for only a limited number of years, thereby eviscerating much of the distinction between pro rata and all sums allocation.
In the context of continuous harms, where the contamination attributable to each policy period cannot be proven and we draw from the contract language to distribute the harm pro rata across the policy periods, it would be incongruous to include harm attributable to years of non-coverage within the policy periods.
The very essence of pro rata allocation is that the insurance policy language limits indemnification to losses and occurrences during the policy period. The Court rejects application of the unavailability rule for time-on-the-risk pro rata allocation.
New York State Court of Appeals
The Term “With Whom” in an Additional Insured Endorsement Means What it Says – a Direct Contract is Necessary
In January 2002, the Dormitory Authority of the State of New York (“DASNY”) contracted with Samson Construction Company (“Samson”), a general contractor, for construction of a new forensic laboratory for New York City, to be built next to Bellevue Hospital. Although the lab was constructed for use by New York City's Office of the Chief Medical Examiner, the construction documents identified DASNY as the owner.
DASNY also contracted with a joint venture between Gilbane and TDX (“Gilbane JV") for Gilbane JV to be the construction manager for the project.
DASNY's contract with Samson provided that Samson would obtain general liability insurance for the job, with an endorsement naming as additional insureds: "DASNY, the State of NY, the Construction Manager [Gilbane JV] and other entities specified on the Sample Certificate of Insurance provided by DASNY."
Samson obtained general liability insurance coverage from Liberty Insurance Underwriters (Liberty). The Sample Certificate of Insurance listed as "Additional Insureds under General Liability as respects this project: . . . Gilbane/TDX Construction Joint Venture."
In 2006, DASNY sued Samson and Perkins Eastman, Architects, P.C., the project architect, alleging that Samson damaged the excavation support system in August of 2003 by negligently removing a section of steel plating which caused the foundation of the neighboring building to settle several inches. Perkins then commenced a third-party action against Gilbane JV in 2010. Gilbane JV provided notice to Liberty by letter in April of 2011, seeking defense and indemnity under the Liberty policy for Perkins' suit against it, which Liberty denied in July of that year.
Gilbane JV commenced this lawsuit arguing that it qualified for coverage under the Liberty policy as an additional insured.
The relevant portion of the Liberty policy is the "Additional Insured-By Written Contract" provision, which reads:
"WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you."
Gilbane JV has no written contract with Samson denominating it as an additional insured, but argues no such contract is necessary, because that requirement would conflict with the plain meaning of the Liberty endorsement; with "well-settled rules of policy interpretation"; and with the parties' reasonable expectations.
Alternatively, Gilbane JV argues that the Liberty endorsement is, at most, ambiguous on that point, and therefore must be construed against Liberty and in favor of coverage. Gilbane JV is incorrect; the endorsement is facially clear and does not provide for coverage unless Gilbane JV is an organization "with whom" Samson has a written contract.
Here, the endorsement would have the meaning Gilbane JV desires if the word "with" had been omitted. Omitting "with," the phrase would read: ". . . any person or organization whom you have agreed by written contract to add . . .", and Gilbane JV's position would have merit. But Samson and Liberty included that preposition in the contract between them, and we must give it its ordinary meaning. Here, the "with" can only mean that the written contract must be "with" the additional insured.
Gilbane JV cited extrinsic materials, including the sample certificate of insurance in support of its argument that it reasonably expected to be covered by the policy, and relied heavily on the contract between DASNY and Gilbane JV, which required Samson, as the prime contractor, to name Gilbane JV as an additional insured on all liability policies obtained by Samson. However, "[e]xtrinsic evidence of the parties' intent may be considered only if the agreement is ambiguous, which is an issue of law for the courts to decide" Gilbane JV might have a claim against Samson for failing to obtain additional insured status for Gilbane JV, but that breach would not permit us to rewrite Samson's contract with Liberty.
A vigorous dissent would have held that the contract between DASNY and Samson — under which Samson agreed in writing to procure a general liability insurance policy for the construction project and to name Gilbane JV as an additional insured — was sufficient to confer additional insured status upon Gilbane JV.
The dissent argued that placing the phrase "by written contract" at the end of the sentence, a placement the majority choose to ignore — it is reasonable for the average insured to expect that the phrase "by written contract" modifies only the immediately preceding infinitive "to add," such that the phrase prescribes only that the agreement by which the named insured commits to extend coverage to the purported additional insured must be evidenced in a contract reduced to writing. In any event, because each party's reading of this language is reasonable, the endorsement is "ambiguous and thus [should be] interpreted in favor of" coverage.
Editor’s Note: when we reported on the Appellate Division decision in this case, which was affirmed by the Court of Appeals in this opinion, we added a two word comment, which we affirm here: Words Matter.
03/27/18 Hanover Insurance Co. v. Philadelphia Indemnity Insurance Co., Appellate Division, First Department
Burlington Expanded – to Defense? Hold onto Your Hats!
Manhattan School was an additional named insured under a policy issued by Philadelphia to Protection Plus Security [“Protection”]. In the additional insured endorsement, the policy provided that the Manhattan School is an additional named insured "only with respect to liability for bodily injury'. . . caused, in whole or in part, by" the acts or omissions of Protection Plus in the performance of its operations for the Manhattan School.
A security guard employed by Protection Plus alleges that he slipped and fell on a recently mopped floor while working at the Manhattan School.
When "an insurance policy is restricted to liability for any bodily injury caused, in whole or in part,' by the acts or omissions' of the named insured, the coverage applies to injury proximately caused by the named insured" (Burlington Ins. Co. v NYC Tr. Auth., 29 NY3d 313, 317 ). Such language in a policy does not equate to "but for" causation and is not the same as policies containing the phrase, "arising out of”. It is not enough to merely establish a causal link to the injury.
Notably, the language in the endorsement was "intended to provide coverage for an additional insured's vicarious or contributory negligence, and to prevent coverage for the additional insured's sole negligence".
Accordingly, when a policy limits coverage to an injury "caused, in whole or part" by the "acts or omissions" of the named insured, coverage is extended to an additional insured only when the damages are the result of the named insured's negligence or some other act or omission (id. at 323).
Here, the acts or omissions of Protection Plus were not a proximate cause of the security guard's injury. Rather, the sole proximate cause of the injury was the additional insured, and thus coverage was not available to the Manhattan School under defendant's policy.
The court declared that defendant is not required to defend and indemnify Manhattan School in the underlying action.
Editor’s Note: This is the first case that held that an insurer, that provides AI protection, is not required to defend a purported additional insured employee of the additional insured. This clearly appears to be an expansion of Burlington to defense obligations by the First Department, the appellate court most likely to provide coverage in employee cases. We do note that the lower court had dismissed the negligence claims against the named insured but the broad language in the decision may open the doors to other arguments.