Coverage Pointers - Volume XV, No. 18

Dear Coverage Pointers Subscribers:

Do you have a situation?  We’ll help you unravel it, because we love “situations”.

This issue comes to you from Naples, Florida, a location providing some escape to your editor from a very harsh Buffalo winter.  The Federation of Defense & Corporate Counsel Winter Meeting will be held here next week, and it is necessary to acclimate to temperatures above 10 degrees so the body doesn’t go into full body shock.

PLRB Claims Conference – Indianapolis – March 16-19:

Over the years, we have had the good fortune of meeting many Coverage Pointers subscribers at PLRB Claims Conferences.  We hope and trust that this year is no exception.  I am delighted to partner with Kipper Burke, Div. VP & Sr. Claims Counsel
Great American P&C Group, for a second year, for an expanded presentation entitled and described as follows:

Contractual Indemnity Provisions & Additional Insured Liability Coverage
Session Code:  1055    Session Level:  Intermediate
Monday 1:30 - 5:00 -- Grand 2 & 3
Wednesday 8:30 - 12:00 -- Grand 2 & 3

• Distinguish between an insurer's obligations to those who qualify as additional insureds and those who benefit from contractual indemnity obligations
• Evaluate how tenders of defense and indemnity should be made under both policy and trade agreement
• Describe the protocols to be considered when tenders are received under both insurance policy and contract
• Identify the relevant factors when sending or receiving tenders

 

This will be a hands-on workshop, using real-life examples, and those who attend will leave with a practical and useful approach to the interrelationship between contractual indemnity and additional insured obligations.  We will be discussing tenders of defense and indemnity under both trade contracts and policies and strategic responses to tenders received.

The pre-registration for these two programs exceeds 100 already.  Please stop by and say “hello”.  Let me know ahead of time if you plan on attending so we can say “hello”.

Coverage Decisions Galore:

The Court of Appeals was chock-full of situations this month.  In our January 31 edition we previewed them for you and all have come home to roost.  This issue contains some of the most important coverage decisions rendered by the New York courts in several years, each one with a lesson to be learned in proper claims handling.

We previewed:

K2 Investment Group, LLC v American Guarantee & Liability Insurance Co.

You have all received our Special Edition discussing that one, a few days back, and you know that precedent has been reestablished.

QBE Insurance Corporation v. Jinx-Proof, Inc.

As we said in the previous edition, the Appellate Division underscored the NY rule which provides that reservation of rights (ROR) letters are relatively worthless in New York.  The Court of Appeals decision came down on February 18, affirming that ruling, one which is consistent with New York precedent and reminds insurers of the importance of the proper wording required in denial letters.  Use of ROR letters as substitutes for disclaimer letters are very problematic and should, in most cases, be avoided.

Country-Wide Ins. Co. v. Preferred Trucking Services Corp.

The Court of Appeals sided with the insurer on one, finding that a properly documented file, demonstrating an ongoing effort to secure the cooperation of an insured who only responded sporadically to requests for help, was critical to a later and timely denial for a breach of the cooperation clause.

Voss v. Netherlands Insurance Company

See Kathie Fijal’s column for this summary.  In a 4-3 decision, the high Court refused to dismiss a claim against an insurance agent based on the lack of a “special relationship”.

Beth’s Bits:

Dear Subscribers:

Ahh, the world has returned to normalcy following the reversal by the Court of Appeals of the K2 decision with the issuance of K2-II and the return to the law as we knew it.  The decision was addressed in a Special Edition of Coverage Pointers and we trust you are all familiar with the court’s February 18, 2014 decision in which the court chose to adhere to rule of law set forth in Servidone Const. Corp. v Security Ins. Co. of Hartford. As our faithful editor often initiates the discussion of a decision that seems contrary to existing law with the phrases “thousands flee,” on this one, we believe, thousands cheer.

Today I bring you several decisions on Coverage B, Personal and Advertising Injury, including a trial court decision right here in New York County, where the court found the Coverage B portion of Zurich’s CGL policy did not afford coverage for claims against Sony for security breaches by third-party hackers, the court evidently focusing on the fact that the conduct complained of was not by the insured, but rather by a third party.

I hope to see some of you at next week’s FDCC meeting, where I am delighted to be part of a panel discussing noteworthy insurance coverage cases form across the country.

Til next time,

Beth
Elizabeth A. Fitzpatrick
[email protected]

 

One Hundred Years Ago Today, “Murder, She Wrote”:

Wellsville (NY) Daily Reporter
February 28, 1914

MRS. BUFFUM IS FOUND GUILTY

Jury Convicts Woman of Murder
in the First Degree

WENT TO AUBURN THIS MORNING

Justice Brown Sentenced Mrs. Buffum to Die During
Week of April 6 at Auburn Prison—Jury Remained Out Five Hours
and Half—Woman Stood Strain Well

Salamanca, N.Y., Feb. 28.—Mrs. Cynthia Buffum was last night found guilty of murder in the first degree in the poisoning of her husband by means of arsenic administered over a period of two months.

Justice Brown sentenced her to be electrocuted at Auburn during the week of April 6.  She left on the 7:15 train this morning for the death house at Auburn under the guard of Sheriff Dempsey. 

She is the first woman to be sentenced to death from this county and the jury was out five hours and a half.  During this time Mrs. Buffum sat in the court room with her aged mother and two brothers and one small son.

When the jury announced the verdict Mrs. Buffum never turned a hair.  She stood up and answered the questions of District attorney Laidlaw regarding her age and the ordinary questions put to the condemned without a tremor of the voice.

Over in the corner her mother dabbed her eyes with a handkerchief.  The little 10-year-old son, Francis, kept his head resting against his mother’s shoulder. 

Editor’s Note:  In 1914, Laura Buffum, 12-year-old daughter of Mrs. Cynthia Buffum, died the previous afternoon after an operation. Mrs. Buffum was in the county jail at Little Valley on a charge of murdering her husband, Willis Buffum, by giving him poison. The death of Laura was the third in the family since the past spring. Norris, four years old, died on August 27th. Four other boys became ill at the time Laura was stricken in August but all of them recovered. All showed symptoms of arsenical poisoning, according to the attending physicians. Mrs. Buffum was alleged to have confessed that she mixed poison with food prepared for the family. Her motive, as alleged, was to get rid of her husband and children so that she might be free to marry Ernest Frahm, a young farm hand.

Mrs. Buffum’s conviction was overturned by the Court of Appeals but facing retrial, she plead guilty to second degree murder and spent 20 years in prison.

Peiper’s Position:

I join this issue of CP Roadshow from lovely downtown Atlanta where I am attending the CLM Bad Faith and Fraud Seminar.  Looking forward to an excellent program, and to being a spectator rather than a participant.  Unless you've been under a rock since our last issue, the Court of Appeals has issued four insurance law decisions within the past two weeks.  When one counts the decision that we reviewed last issue on the two year suit limitation clause, the unmistakable outcome is that the output over the last 15 days has been unprecedented.  The Court has offered its opinion and direction on agent/broker issues, first party issues, the duty to cooperate, the duty to defend, the right to independent counsel, and the requirements of Insurance law 3420(d)(2).  If you read this issue alone, it a pretty good primer on the state of Insurance Law in New York. 

Despite all that the Court of Appeals has written on, we highlight an issue that continues to gain steam in the Appellate Divisions.  Again this week, we review two decisions that continue to erode insurer's protections against vexatious discovery practices.  The Fireman's Fund case reviewed in my column required the insurer to provide all of its excess claims files for an entire one year time period.  This task was required not because the carrier mistakenly denied coverage, but, in fact, because the insured failed to provide timely notice and is seeking to disprove that its unmitigated failure to comply with said notice provisions  was not prejudicial.  In other words, although the insured made the mistake...the carrier will still bear the costs.  Dan also reviews another decision that furthers the argument that carrier/coverage communications are not exempt from disclosure.  This battle will continue, but for now it appears that insureds are winning.   Not a good development.

While there is much more to discuss about protecting files from overreaching discovery demands, we think you've got more than enough to digest this week.  With that, we bid you a hearty welcome to March with warmer weather on the horizon.
  
Steve
Steven E. Peiper
[email protected]

A Century Ago:  Activist Women Scorned:

The New York Times
February 28, 1914

THE FEMALE OF THE SPECIES.

The lady rioters in the Chicago strike rebel against the savage manner in which their amenities are repressed by the women policemen in that progressive town.  “I thought they would give us a square deal,” said one of those dragged to a dungeon, “but they are worse than the men.”   It is cruel enough to refuse “free speech” to those who use clubs and cannon, but surely the like refusal is unconstitutional torture in the cases of that sex whose tongues are its natural weapons.  When the minion of the law is something in petticoats the denial of free speech is surely not by due process of law.

T’was ever thus with the female of every species.  Too often they carry a good thing to excess.  Take for instance the ciphering done by the “swatters” in yesterday’s newspapers.  They tell us that a single female fly between June and September becomes—or may become—mother to a progeny expressed in twenty-two figures. That is a sum in septillions which only the ordinary schoolboy can grasp, his father certainly cannot.  That number of flies is calculated to require for lodgings 900,000 cubic miles.

Far be it from us to criticize the arithmetic, or to excuse the flies.  The point is that deadliness of the females of all species.  Whenever the lady suffragists show that they are really in earnest, and divert their energies from arson and processions to something worthwhile in the above manner, more or less, the day of their enfranchisement will be near at hand.  In a very few generations, votes for women could be bred, and the protest of the men would be unavailing as the vain regrets of the ladies cast into the Chicago cells by the treachery of their own heartless sex.  Here is the remedy for race suicide, and the promise of potential patriots in millions without end.  When this is once realized the last jest will have been cracked about votes for women, and the terrified men will recoil from the fate their obduracy has brought upon themselves. 

Exposition Construction Begins – One Hundred Years Ago:

On February 28, 1914, construction began on the Tower of Jewels, also known as the Tower of the Sun, was the central building at the Panama-Pacific International Exposition, the 1915 world's fair held in San Francisco, California.

Designed by architect Thomas Hastings, of the firm of Carrère and Hastings the combination triumphal arch-and-tower was 435 feet tall. It was covered with more than 100,000 Novagems, cut glass "jewels" that sparkled in the sunlight, and were illuminated at night by more than fifty spotlights. Originally named just The Tower, the "appellation 'of Jewels'  became an addition to the original title, after the tower was thus gorgeously arrayed.

The Tower was a temporary building, constructed of staff, a combination of plaster and burlap-like fiber applied over a skeleton structure. It was demolished following the Exposition.

The Exposition, originally designed to commemorate the construction of the Panama Canal, became a celebration of San Francisco’s rebirth and revival following the 1906 earthquake.

Hunter’s Hints on Serious Injury

Hello again, Coverage Pointers subscribers:

As we march through the final weeks of the blustery and wicked Winter of 2014, I am here to provide you with the warmth and comfort that only comes from New York State Serious Injury case law updates. 

This week we analyze two (2) cases out of the Second Department, both of which deal with meeting burdens in summary judgment motions.  As you will see in the summaries below, a Defendant's motion for summary judgment was deemed properly denied where the Plaintiff submitted evidence raising a triable issue of fact regarding the seriousness of her injuries.  In the other Second Department case, Defendants' motion for summary judgment was deemed properly granted as Plaintiff failed to raise a triable issue of fact in opposition after Defendants' met their initial burden by submitting competent medical evidence establishing that Plaintiff's alleged injuries do not qualify as "serious injuries" under Insurance Law §5102(d).

The days are getting longer, the sun is shining brighter and Spring is on its way.  Stay warm and stay positive.  As always, if any of our beloved readers have questions regarding any and all things Serious Injury, please feel free to contact me at your convenience.  Hope to talk to you soon.

Dan
Daniel T. Hunter
[email protected]

A Century Ago, A Convict Returns:

The New York Times
February 28, 1914

WOMAN CONVICT’S PATHETIC RETURN

Believed Innocent of Husband’s
Murder, Is Freed for Retrial
After Six Years

DAZED BY TOWN’S WELCOME

Met by Son, Shy and Frightened,
Whom She Had Not Seen Since
He Was an Infant

 

BERLIN, Germany Feb. 27.—A frail and tottering woman in black stepped from a train in the village of Flandersbach, in Rhineland, yesterday afternoon, and, half carried, half led, passed down the garlanded high street to a house on which hung a wreath inscribed, “Welcome Home.” 

She was Frau Hamm, the middle-aged widow of a farmer and she had just been released after serving five and one-half years’ penal servitude in Siegburg Prison, where she was undergoing a sentence of fourteen years for alleged complicity in the murder of her husband.

The courts, in response to Parliamentary pressure, decided that the prisoner was entitled to a retrial, on the strength of evidence that she was wrongly convicted.

Although Flandersbach was en fête in her honor, Frau Hamm, unable to comprehend the meaning of her triumphal homecoming, could neither laugh nor cry.  A nervous twitching was the only expression of her emotions.  Her brother, who went to the station to fetch her, hardly recognized her, and his greeting was a hysterical outburst of tears.

Frau Hamm gave no sign of realizing her surroundings until a curly haired boy of 6 advanced reluctantly with a bouquet.  He had to be pushed toward the woman, whose appearance frightened him.  The boy was her second child.  He was only a fortnight old when she was arrested, and she had not seen him since.  When friends made her understand he was her son she drew the boy passionately to her breast and smothered him with kisses.

The conviction of Frau Hamm is now attributed to the zeal of a detective who is said to have set himself the task of convicting her at all costs.  His methods will be thoroughly investigated at the retrial.  Two farmhands now in custody are believed to be the real authors of the murder. 

Audrey’s Angles:

A thank you to Michael McMyne for sending us material for my column this edition.  He was a blessing but I have to say that I issued a silent curse.  The blessing is that he fed us an eyebrow raising decision from the Supreme Court of Hawaii.  Why the silent curse?  It’s end of February in Buffalo where it hasn’t been above 20 degrees Fahrenheit all week.  He sent me a decision from Hawaii.  I think you get my point.  Let’s move on.  I am still grateful to you Mr. McMyne and hope that you continue to send cases of interest our way.  I note that this is a decision worth pulling and reading in full when you have time.

Also, a reminder to register for the DRI Insurance Law Committee's Insurance Coverage and Claims Institute that is being held from April 2-4 in Chicago.  If you need a brochure or more information on the program then send me an email at [email protected].

Hope you are staying warm!

Audrey
Audrey A. Seeley

Jen’s Gems:

This has certainly been an exciting few weeks for those with a keen interest in New York insurance coverage.  If you have not heard yet, the New York Court of Appeals changed course in K2, and reaffirmed its prior holding in Servidone that a breach of the duty to defend does not result in a loss of the right to later assert coverage defenses.  I recall a few months ago I presented at a CPCU Chapter Seminar, and the question was posed to the panel, whether New York is still a favorable venue for insurance companies.  The panel, almost by majority, responded “it depends on the outcome of the K2 reargument.”   Now that we have the decision, I can think we can safely say that New York continues to be a fairly insurer-friendly state. 

Now, jumping to bad faith, another area that tends to dictate a state’s “friendless,” this issue I report on an Eastern District of New York decision.  The matter involves an excess verdict rendered against GEICO’s insured.  Presumably, to take a proactive approach, and to have a better chance of selecting venue, GEICO preemptively filed a declaratory judgment action seeking a declaration that GEICO is not obligated to pay sums in excess of the policy limits, and that GEICO satisfied its obligations under the policies in good faith and no potential bad faith claims exist.  As a spoiler, the District Court refused to grant the insured and injured party’s motions to dismiss.  This will be a case we will definitely monitor going forward.   

Lastly, because I always like to give a little update on my 21 month old daughter, Ella, she recently learned the concept of the number “2.”  Now, anytime you give her one pacifier, she responds “two mama.”  The problem is that after she has two, she says again “two mama.”  Next milestone: an understanding of the number “3.”  

Until next issue…

Jen
Jennifer A. Ehman
[email protected]

In This Week’s Issue, Attached:

KOHANE’S COVERAGE CORNER
Dan D. Kohane
[email protected]

New York Court of Appeals

• Major Case Alert – Court Reverses Course; Holds Breach of Duty to Defend DOES NOT Result in the Loss of the Right to Assert Coverage Defenses in Opposition to Indemnity Obligations
• Disclaimers Good, Reservation of Rights Bad
• The Duty to Cooperate – When Does an Insurer Know That an Insured is Not?

 

Appellate Departments

• Without Physical Contact Between Vehicles, Uninsured Motorists Claim Cannot Proceed in “Hit and Run” Case
• Stay of Tort Action because of Pending Coverage Lawsuit Inappropriate Where Parties Not Sufficiently Overlapping
• Danger, Danger:  Courts Continue to Invade Attorney Client Privilege.  Thousands Flee
• Appellate Division Holds that Insurer is Entitled to Rely on Statements Given by Insured When Investigating Coverage and is Not Later Estopped from Denying Coverage When the Information Changes
• Subduing a Man with a Lead Pipe is Not an Occurrence

 

HUNTER’S HINTS ON SERIOUS INJURY UNDER NO-FAULT LAW
Daniel T. Hunter
[email protected]

• Order Upheld where Plaintiff Fails to Raise a Triable Issue of Fact in Opposition
• Summary Judgment Motion Properly Denied

 

MARGO’S MUSINGS ON NO-FAULT
Margo M. Lagueras
[email protected]

Arbitration:

• Shipping Request Form Is Not Proof of Mailing
• Rate of Reimbursement for Acupuncture Treatment Is Dictated by Chiropractic Fee Schedule
• Appointment Scheduled Solely for Purpose of Referral Script Does Not Meet Requirement of Being Curative or Palliative

 

Litigation:

• Defendant Not Required to Set Forth Medical Rationale in Its Denial of Claim Form
• Affirmation of Attorney Who Was to Conduct EUO Is Sufficient to Establish Non-Appearance

                                 

PEIPER ON PROPERTY (and POTPOURRI)
Steven E. Peiper
[email protected]
Property

• Sixty Day Deadline for Proof of Loss Upheld Again

 

Potpourri

• Negligence of Subcontractor Triggers Contractual Indemnity Obligations
• Stay of Tort Action for Related DJ Action Not Appropriate Where Parties in Both Were Not Identical
• Voluntary Discontinuance Should Be Unfettered, and Without Prejudice
• Another Brick in the Wall -- Court Requires Carrier to Turn Over All Excess Claims Files Maintained During the Term of Plaintiff's Policy in Question

 

BETH’S BANTER OF COVERAGE “B” AND FITZ’ BITS
Elizabeth A. Fitzpatrick
[email protected]

• Knowing Violation Exclusion Applies
• Knowing Violation Exclusion Applies (Again)
• No Coverage For Cyber-Hacking

 

AUDREY’S ANGLES ON THE NATIONALLY NOTEWORTHY
Audrey A. Seeley
[email protected]

• Insurer Cannot Look To Another Insurance Policy To Avoid Defense Obligation.

 

CASSIE’S CAPITAL CONNECTION
Cassandra A. Kazukenus
[email protected]

• DFS Is Seeking Comments Regarding The Concept Of Private Flood Insurance
• Assembly Bill 90 – Prohibiting Discrimination In The Issuance Of Homeowners’ Policies.
• A571 Proposes To Repeal Provisions of Insurance Law §3216 Pertaining To Accident And Health Insurance Policy Provisions.

 

FIJAL’S FEDERAL FOCUS
Katherine A. Fijal
[email protected]

• Agent’s Errors and Omissions:
• Did a Special Relationship Exist between Insured and Broker?
• Policy Language Controls

 

KEEPING THE FAITH WITH JEN’S GEMS
Jennifer A. Ehman
[email protected]

• Court Refuses to Grant Default Judgment Where Insurer Failed to Establish that Loss Did Not Arise out of a Covered Classification

 

Bad Faith:

• Court Permits Insurer to Move Forward with Preemptive Action Relating to Excess Verdict Rendered in Underlying Action

 

EARL’S PEARLS
Earl K. Cantwell
[email protected]

• Hapless Condo Owner’s Water Damage Claim Not Deemed “Accidental” Because He Removed the

 

Bones are slowly defrosting.  Keep the faith and keep those cards and letters coming in.  Kudos to my son, Jacob, who, on his 29th birthday, is being transferred to GEICO’s home office for a new and exciting career opportunity.  We live for our children, don’t we?
Dan
Dan D. Kohane
Hurwitz & Fine, P.C.
1300 Liberty Building
Buffalo, NY 14202    

Office:      716.849.8942
Mobile:     716.445.2258
Fax:          716.855.0874
E-Mail:     [email protected]
Website:   www.hurwitzfine.com
LinkedIn: www.linkedin.com/in/kohane

Hurwitz & Fine, P.C. is a full-service law firm
providing legal services throughout the State of New York

NEWSLETTER EDITOR
Dan D. Kohane
[email protected]

ASSOCIATE EDITOR
Audrey A. Seeley
[email protected]

ASSISTANT EDITOR
Jennifer A. Ehman
[email protected]

INSURANCE COVERAGE TEAM
Dan D. Kohane, Team Leader
[email protected]

Michael F. Perley
Elizabeth A. Fitzpatrick
Katherine A. Fijal
Audrey A. Seeley
Steven E. Peiper
Margo M. Lagueras
Cassandra Kazukenus
Jennifer A. Ehman
Diane F. Bosse

FIRE, FIRST-PARTY AND SUBROGATION TEAM
Steven E. Peiper, Team Leader
[email protected]

Elizabeth A. Fitzpatrick
Cassandra Kazukenus

NO-FAULT/UM/SUM TEAM
Audrey A. Seeley, Team Leader
[email protected]

Margo M. Lagueras
Cassandra Kazukenus
Jennifer A. Ehman

APPELLATE TEAM
Jody E. Briandi, Team Leader
[email protected]

 Elizabeth A. Fitzpatrick
Diane F. Bosse

Index to Special Columns

Kohane’s Coverage Corner
Hunter’s Hints on Serious Injury
Margo’s Musings on No Fault
Steve on Sandy, Peiper on Property and Potpourri
Beth’s Banter on Coverage B and Fitz’ Bits
Audrey’s Angles on the Nationally Noteworthy
Cassie’s Capital Connection
Fijal’s Federal Focus
Keeping the Faith with Jen’s Gems
Earl’s Pearls

KOHANE’S COVERAGE CORNER
Dan D. Kohane
[email protected]

New York Court of Appeals

02/18/14       K2 Investment Group, LLC v. American Guar. & Liab. Ins. Co.
New York Court of Appeals
Major Case Alert – Court Reverses Course; Holds Breach of Duty to Defend DOES NOT Result in the Loss of the Right to Assert Coverage Defenses in Opposition to Indemnity Obligations
Last June, the Court of Appeals handed down a decision that sent shock waves throughout the Insurance Industry.  Its decision in what is now known as K2-I, the Court of Appeals created, for the first time, a rule that would preclude a carrier from raising policy defenses if it breached its duty to defend.  On that same day, your faithful reporters at Coverage Pointers argued that the Court had unceremoniously undone nearly thirty years of clear precedent which held to the contrary.  In our overview of the K2-I decision, we openly recited our confusion and dismay over what, seemingly, eviscerated the Court’s 1985 decision in Servidone Constr. Corp. 

We, of course, were not alone.  The few voices calling for reconsideration in the beginning reached a cacophony by the end of summer, and the Court granted re-argument in September of 2013.  The arguments against K2-I were, principally, that it destroyed the Servidone standard that, prior to June of 2013, had been working quite nicely. 

The Decision

In its February 18, 2014 decision (now called K2-II), Judge Smith wasted little time in describing the motivations for granting re-argument.  Indeed, in the first paragraph of his decision, Judge Smith stated:
American Guarantee & Liability Insurance Company contends, on re-argument, that our prior decision in this case, K2 Inv. Group, LLC v Am. Guar. & Liab. Ins. Co. (21 NY3d 384)(K2-I), erred by failing to take account of a controlling precedent, Servidone Const. Corp. v Security Ins. Co. of Hartford (64 NY2d 419 [1985]). We hold that American Guarantee is correct

Judge Smith then, very briefly, recited the underlying facts of this claim which involved Jeffrey Daniel’s activities in real estate activities with Goldan.  The Court directed its audience to review K2-I for a more in-depth review of the facts of this case, and following Judge Smith’s lead, we will do the same.  If you have any questions on the basic facts of the claim, or just want a quick refresher, take a look at our June 11, 2013 Special Edition of Coverage Pointers. 

The Court, as it had in K2-I, ruled that American Guarantee breached its duty to defend Mr. Daniels in the underlying action.  Notably, this was not a finding that American Guarantee had previously acknowledged at oral argument before the Court. 

Despite its breach of the duty to defend, American Guarantee contended that Servidone protected and secured its ultimate right to rely upon policy defenses (e.g., exclusions) in a later coverage action.  Unlike K2-I, Judge Smith’s decision in K2-II addressed Servidone head on.  To remove all doubt as to the Court’s direction this issue, Judge Smith noted:

In short, to decide this case we must either overrule Servidone or follow it. We choose to follow it.

In reaching this decision, the Court rejected plaintiff’s argument that Servidone and K2-I were distinguishable.  According to plaintiff’s argument, the decisions could, and should, be reconciled because one involved a settlement (Servidone) and one involved a default judgment (K2).  Because American Guarantee’s failure to defend resulted in a default being entered against its insured, plaintiff argued that coverage defenses were likewise lost. 

The Court, however, was not convinced, stating unequivocally that the duty of a carrier to indemnity “does not depend on whether the insurer settles or loses the case.”  While the default judgment may result in the company being precluded from re-litigating issues that were decided in the underlying action, it has no impact on the insurer’s ability to assert policy defenses that were preserved by their incorporation into the insuring contract by way of exclusions. 

The Court also rejected plaintiff’s argument that its decision Lang v Hanover Ins. Co. provided a basis for overturning Servidone.  Plaintiff’s supported their argument by referencing the famous line in Lang wherein the Court advised:

An insurance company that disclaims in a situation where coverage may be arguable is well advised to seek a declaratory judgment concerning the duty to defend or indemnify the purported insured

That passage, plaintiff’s surmised, tacit overturned the Court’s previous ruling in Servidone.  While the Court again advised that its holding in Lang was “sound advice,” its decision in Lang did not inhibit an insurer from asserting coverage defenses based upon policy exclusions. 

Justice Smith then addressed the dissent’s position that the Court should adopt a hybrid rule which would treat coverage positions based upon issues of “non-coverage” differently than those positions focused on exclusions.  In contrast with the dissent’s view, Judge Smith noted that Servidone, and now K2-II, stand for the proposition that a failure to defend will not result in the carrier losing the right to assert non-coverage defenses and exclusions, alike. 

The Court also noted that plaintiff had failed to present compelling evidence that the standard created by Servidone had become “unworkable or caused significant injustices or hardship.”  On the other hand, the Court noted that over the past thirty (30) years, a majority of other states, as well as a majority of federal courts, have adopted by the standard enunciated in Servidone.  As such, Judge Smith opined:

When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise. In other words, the rule of stare decisis, while it is not inexorable, is strong enough to govern this case.  

Having reinvigorated American Guarantee’s coverage defenses, the Court then addressed the actual sufficiency of their denial.  Recall, that American Guarantee’s disclaimer was premised on two exclusions; the so-called “insured status” exclusion and the “business enterprises” exclusion.  On the Record before it, the Court could not discern whether the exclusions were applicable.  Accordingly, the Court agreed with the dissenting opinion of the Second Department, and remanded the matter to trial court on a question of fact. Our January 6, 2012 issue of Coverage Pointers reviewed that decision. 

The Dissent

In dissent, Judge Graffeo, joined by Judge Pigott, argued that the Court’s holding in K2-I was an appropriate restriction on the Servidone standard discussed above.  Judge Graffeo noted, initially, that a carrier who breaches its fundamental duty to defend ought to be forced to suffer some legal consequences.  That, she opined, should be the loss of the ability to rely on exclusions as coverage defenses.

Judge Graffeo also argued that adopting the rule enunciated in K2-II would properly incentivize insurers to honor their duties to defend.  The dissent referenced the Court’s previous position that liability policies are, at a most basic level, “litigation insurance,” and as such, the duty to defend must be protected to ensure insureds are provided with timely representation. 

The dissent also noted that the K2-Iholding also created a system that would resolve coverage issues more expeditiously.  The commencement of a declaratory judgment early in the litigation would, in her words:

contributes to the efficient resolution of factual issues for the benefit of litigants without unduly burdening the ability of injured parties to obtain recovery for covered losses

Despite the arguments in support of the dissent’s position, Judge Graffeo also spends considerable amount of time seeking to reconcile the holding of K2-I with previous decision from the High Court.  To reconcile K2-I with Servidone, the dissent notes that Servidone addressed the fundamental issue of whether the claim at issue triggered the insuring agreement.  Thus, in contrast to K2, which was premised upon the application of two exclusions, the threshold question of Servidone was whether the loss actually fell within the scope of coverage anticipated by the policy.

The dissent then referenced the Court’s traditional rule in applying Insurance Law § 3420(d)(2) as further support for its position.  To that end, it has long been established that Insurance Law § 3420(d)(2) does not apply coverage defenses that are based upon the carrier arguing that the policy does not anticipate coverage for the claimed loss.  On the contrary, Insurance Law 3420(d)(2) would preclude a carrier from relying upon exclusions if the denial letter was in violation of the Insurance Law.  

Judge Graffeo argues that the rule for breach of the duty to defend should mirror the long accepted rule for violations of the Insurance Law.  That is to say where, as here, the decision to deny coverage is premised upon the application of an exclusion, a carrier’s breach of the duty to defend will destroy the coverage defense as a matter of law.  On the other hand, where the carrier is challenging its indemnity obligations on the basis of “non-coverage,” the carrier’s failure to defend should not apply. 

In reaching this conclusion, it is noted that the dissent acknowledges that Servidone, by its plain language, applied to both policy defenses based upon both non-coverage and exclusions.  However, the dissent argues that it was Servidone, and not K2, that was not in congruence with New York precedent.  As such, the dissent would have affirmed K2-I as an appropriate restriction to Servidone.

The Fallout

The result of all of this puts carriers back in the position they were post-Lang v. Hanover Ins. Co.  That is to say that if a carrier elects not defend its insured, it will not have the opportunity to re-litigate issues of fact and damages decided in the underlying action.  However, in line with the Court's ruling in Lang and Servidone, respectively, the Court again reaffirms the long standing principle that a carrier will not lose its right to assert coverage defenses when challenging its indemnity obligations. 

Three cheers for the Court for recognizing its departure from Servidone, for crafting a workable, right decision, and for everyone involved in bringing this decision to fruition.

Editor’s Note:  Along with Beth Fitzpatrick, Diane Bosse and Steve Peiper, we were honored to be author the amici brief on behalf of the New York Insurance Association, the Property Casualty Insurance Association of America, the National Association of Mutual Insurance Companies and the Federation of Defense & Corporate Counsel.  We were delighted to be a small part of the solution.

02/18/14       QBE Insurance Corporation v. Jinx-Proof Inc.
New York Court of Appeals
Disclaimers Good, Reservation of Rights Bad
Summary from the January 31, 2014 Edition of Coverage Pointers:

Here is a link to our summary of the First Department’s decision, from the January 18, 2013 issue of Coverage Pointers. The decision was very instructive and deals, quite well, with the NY rule that provides that reservation of rights letters are relatively worthless in New York. A carrier that wants to deny coverage, even when it has to defend other causes of action, must do so in unequivocal language. Here, the carrier did just what it had to do, it denied coverage (rather than reserved its rights) but defended.

This one resulted in three opinions, a 2 – 2 – 1 opinion, very rare in the world of coverage. Four votes in the two opinions declared that the carrier had no duty to defend. The App Div decision focused on the language of the coverage position letter in an assault and battery claim at a bar. The policy included an “assault and battery” exclusion in its policy (ala Mount Vernon v. Creative Housing).

I watched, with interest, the January 15, oral argument at the Court of Appeals. Frankly, if I did not know any better, I would have believed that the lawyers were arguing a completely different decision. The battle between the lawyers focused on whether the insurer’s motion for summary judgment should have been denied because it did not include a liquor liability endorsement in the motion papers, which, the insured argued, provided liquor coverage without being reduced by the assault and battery exclusion. This was not an issue that was discussed in any detail by the court below. The endorsement was not in the record and nobody seemed to really care about it until the case reached the high court.

My biggest angst about the oral argument was an expression by Judge Pigott questioning whether an insurance carrier that partially disclaims or reserves it rights, even had a right to assign defense counsel, suggesting that perhaps the insurer must tell the insured that it must (rather than has the option to) designate “independent” (Cumis or Goldfarb) counsel . That issue was not before the Court and why the questioning went in that direction, I do not know.

In an unsigned decision, the Court of Appeals determined that QBE effectively disclaimed coverage for the assault and battery claims asserted in the underlying action. The first letter sent to Jinx-Proof stated that QBE would not defend or indemnify Jinx-Proof "under the General Liability portion of the policy for assault and battery allegations" and that Jinx-Proof did not have liquor liability coverage. The second letter stated that Jinx-Proof did have liquor liability coverage but that the policy excludes coverage for assault and battery claims.

Lest you think we jest about “reservation of rights” letters being unloved in New York, note this language:

The letters specifically and consistently stated that Jinx-Proof's insurance policy excludes coverage for assault and battery claims. These statements were sufficient to apprise Jinx-Proof that QBE was disclaiming coverage on the ground of the exclusion for assault and battery, and this disclaimer was effective even though the letters also contained "reservation of rights" language …

Although the letters contained some contradictory and confusing language, the confusion was not relevant to the issue in this case.

Jinx-Proof's claim that the liquor liability portion of the policy may have included coverage for assault and battery was not raised below and referred to matters outside the record
Editor’s Note:  The right decision, we think.

However, very troubling was Judge Pigott’s dissent (joined by the Chief Judge).  We understand the argument, in the first point of his dissent, that there was some lack of clarity in the insurer’s position and thus, perhaps, this was not an outright disclaimer.  Fair comment.

However, his second ground for dissent is troubling.  Again, it was a two-judge dissent, but may signal where the Court is going on this issue.

Judge Pigott opined that QBE was required to advise Jinx-Proof that, under the Goldfarb rule, it was entitled to defense by an attorney of its own choosing, whose fees were to be paid by QBE (citing to the Third Department’s decisions in Elacqua.  QBE did not advise of the right to select independent counsel.

Then the dissent argued:

Here, by failing to communicate to Jinx-Proof that it was entitled to an attorney of its own choosing paid for by the insurer, QBE breached its duty to its insured in such a way as to estop it from disclaiming. An insurer that arranges matters so that it exclusively controls its insured's defense, preventing the defense from retaining its own counsel at insurer's expense, and possibly acting directly against the interests of the insured, cannot now assert that the policy does not cover the claim.

Huh?  There has NEVER been a case that has held that an insurer that does not advise of the insured’s right to “independent counsel” would estop it from disclaiming. Never, never, never.  No citation was offered for that rather radical (rather?) statement of the law.

Again, it’s a two-judge dissent, but be wary…
Editor’s Note:  New York courts do not like Reservation of Rights letters.  We stand alone, among the state courts, but be careful!

02/18/14       Country-Wide Ins. Co. v. Preferred Trucking Services Corp.
New York Court of Appeals
The Duty to Cooperate – When Does an Insurer Know That an Insured is Not?
Summary from the January 31, 2014 Edition of Coverage Pointers:

In October 2012, the First Department held that the insurer’s disclaimer of coverage was untimely, since it came approximately four months after it learned of the ground for the disclaimer, that being the insured’s lack of cooperation. The carrier argued that the disclaimer was timely; it had no basis for disclaiming coverage until it became apparent that the operator of the subject truck would not cooperate with the defense of the underlying personal injury action.

Jen Ehman had earlier reported on the motion court decision, with an extensive review of the facts, in our August 19, 2011 edition.

The Court of Appeals heard oral argument on January 15. The focus of the argument was on the question of how an insurance carrier knows that there has been a breach of the cooperation clause. The high court has previously ruled that a carrier must do all it can to secure the cooperation of an insured and only willful and avowed obstruction will justify a cooperation disclaimer. When does an insurer know that its insured has crossed the line? The policyholder argued that the insurer should have known earlier and the failure to disclaim promptly was a waiver. The insurer argued that it did not want to disclaim precipitously and tried its hardest to secure the insured’s cooperation and shouldn’t be penalized for continuing in its efforts to secure cooperation.

The high court noted that Insurance Law Section 3420(d)(2) requires an insurer to disclaim as soon as is reasonably possible “once the insurer has sufficient knowledge of facts entitling it to disclaim, or knows that it will disclaim coverage”.

Timeliness of an insurer's disclaimer is measured from the point in time when the insurer first learns of the grounds for disclaimer of liability or denial of coverage.

The court held that the question whether an insurer disclaimed as soon as reasonably possible is necessarily case-specific. In some cases, very different from this one, the justification for disclaimer is "readily ascertainable from the face of the complaint in the underlying action or all relevant facts supporting
a disclaimer are immediately apparent upon receipt of notice of the accident".

Country-Wide did not dispute that it knew or should have known in July 2008 that Markos, the president of Preferred Trucking, would not cooperate. Instead, Country-Wide contends that it was not in a position to know that Arias, the driver of the vehicle, would not cooperate until later when he said he did not "care about the EBT date."

In these circumstances, in which Arias "punctuated periods of noncompliance with sporadic cooperation or promises to cooperate” the Court held that Country-Wide established as a matter of law that its delay was reasonable.
Editor’s Note: 
Document the file to demonstrate the attempts made at securing cooperation.  Document the file to demonstrate the attempts made at securing cooperation.  Document the file to demonstrate the attempts made at securing cooperation.  Have I said that enough?

Appellate Departments

02/27/14       National Continental Ins. v Brojaj
Appellate Division, First Department
Without Physical Contact Between Vehicles, Uninsured Motorists Claim Cannot Proceed in “Hit and Run” Case

Supreme Court, based on the evidence presented at a framed issue hearing, concluded that there was no contact between the truck driven by respondent and an unidentified car. The insured’s testimony was not credited by Supreme Court and there was no basis to upset such finding.

02/26/14       Ingram v. Miller
Appellate Division, Second Department
Stay of Tort Action because of Pending Coverage Lawsuit Inappropriate Where Parties Not Sufficiently Overlapping
A party sought a stay of a coverage lawsuit until the pending personal injury action was resolved.  The Second Department agreed with the lower court that a stay of the Declaratory Judgment Action was not appropriate where parties in the declaratory judgment action were not sufficiently identical to, or overlapping with, the parties in the underlying action.
Editor’s Note:  Absolutely the right decision.  Often parties want to stay coverage suits when there is a related declaratory judgment action pending.  Those actions should not be stayed where the parties are sufficiently different or where the issues cannot be decided in action binding on all parties including the insurers.

For example, consider the typical bar fight lawsuit, where the underlying plaintiff claims both negligence and assault (or just negligence) trying to trigger coverage.  The bar’s insurer is not a party to that personal injury action and is not present to present proof of assault (nor will any other party present that proof).  Accordingly, a DJ action on coverage should proceed independently of the tort action and not be stayed pending the completion of the underlying lawsuit.

02/25/14       National Union Fire Ins. Co. v. TransCanada Energy USA, Inc.
Appellate Division, First Department
Danger, Danger:  Courts Continue to Invade Attorney Client Privilege.  Thousands Flee
This is yet another of a series of recent decisions where the courts have been opening up insurance company files to discovery, this one allowing disclosure of communications between insurer and coverage counsel.

The insurance companies retained counsel to provide a coverage opinion, i.e. an opinion as to whether the insurance companies should pay or deny the claims. The lower court found that the majority of the documents sought to be withheld are not protected by the attorney-client privilege or the work product doctrine or as materials prepared in anticipation of litigation.
The court found that documents prepared in the ordinary course of an insurer's investigation of whether to pay or deny a claim are not privileged, and do not become so " merely because [the] investigation was conducted by an attorney'" citing to a 2005 decision of the First Department, Brooklyn Union Gas Co. v American Home Assur. Co., 23 AD3d 190.

The common interest exception to waiver of the attorney-client privilege by disclosure is not applicable, since there was no pending or reasonably anticipated litigation in which the insurance companies had a common legal

The insurers' argument that they actually denied TransCanada's claims before the date identified in the motion court's order had not been raised below so they were not considered by the appellate court,

Nine years, in Volume VII, No. 9 of Coverage Pointers, we reported on that Brooklyn Union Gas decision with an ominous warning:

11/03/05          Brooklyn Union Gas Company v. American Home Assurance Company
Appellate Division, First Department
Coverage Counsel Beware – Your Files – and Your Client’s -- May Be Discovered
Documents prepared in the ordinary course of an insurance company's investigation to determine whether to accept or reject coverage and to evaluate the extent of a claimant's loss are not privileged, and, therefore, discoverable. In addition, such documents do not become privileged "merely because an investigation was conducted by an attorney." A review of the documents in question reveals that carrier’s attorneys were acting as claims investigators, not attorneys, and were investigating the issue of whether coverage should be provided and the costs of such coverage.

Contrary to appellants' conclusory assertions, there is no legal advice, no legal recommendations or attorney thought processes revealed in these documents, nor do they appear to have been "solely" prepared for settlement purposes, as insurer assert, inasmuch as no litigation had been commenced. Nor can insurer rely on their anticipation of litigation, since they had not yet made a coverage decision. Thus, these documents were prepared in the ordinary course of the insurance companies' business of evaluating claims, and the fact that the investigation was performed by attorneys will not shield them from discovery.
Editor’s Note: See Steve Peiper’s recent discussion of more recent cases in the December 20, 2013 issue.

02/18/14       Tarry Realty LLC v. Utica First Insurance Company
Appellate Division, First Department
Appellate Division Holds that Insurer is Entitled to Rely on Statements Given by Insured When Investigating Coverage and is Not Later Estopped from Denying Coverage When the Information Changes
Guest columnist:  Sherri N. Pavloff of Farber, Brocks & Zane, L.L.P, who successfully handled this matter for Utica First.

The Appellate Division, First Department recently issued a decision clarifying that an insurer is entitled to rely on a statement given to it by its insured in determining that an exclusion contained within its policy does not apply, even where such statement contradicts the pleadings served by the plaintiff; and that the insurer is not later estopped from disclaiming after Its insured provides different information that supports a disclaimer. 

Tarry arose out of an accident that occurred on July 2, 2007 when Jose Vidals fell from a scaffold while working at a construction site owned by Tarry Realty.  Vidals sued Tarry, alleging that Tarry owned the site; and Sinis Contracting, alleging that Sinis was the general contractor.  When Sinis’ insurer spoke to Sinis, Sinis advised that it was not the general contractor.  Based upon that information, Sinis’ insurer agreed to provide coverage.

During the course of defending Sinis, the insurer learned that Sinis may have been the general contractor, which, if true, would have triggered an exclusion within Sinis’ insurance policy.  At that point, the insurer reserved its rights.  When Sinis then challenged the insurer’s reservation of rights, Sinis provided information which completely contradicted its initial statement provided to its insurer. At that point, Sinis’ insurer issued a disclaimer to Sinis.

In upholding first the insurer’s agreement to provide coverage and the insurer’s later decision to deny coverage, the First Department explained that the insurer was entitled to rely upon the statement its insured provided and that once it learned the truth, it was not equitably estopped from disclaiming merely because the insurer first agreed to defend without issuing a reservation of rights.  Rather, in order to equitably estop the insurer from disclaiming, proof of prejudice was required and since none was provided, the insurer’s denial was upheld.

This decision is significant since it firmly establishes two important concepts.  First, an insurer is entitled to rely upon information provided to it by its insured; and second, that estoppel is not automatically presumed merely because an insurer defends its insured, but rather, must be established by proof of prejudice.
Editor’s Note: We thank and congratulate Sherri N. Pavloff of Farber, Brocks & Zane, L.L.P. who successfully handled the matter before the First Department.

02/18/14       Empire Insurance Company v. San Miguel
Appellate Division, First Department
Subduing a Man with a Lead Pipe is Not an Occurrence
The Empire policy states, in relevant part: "[o]ur obligation to defend any claim or suit ends when the amount we pay for damages resulting from the occurrence equals our limit of liability." The term "occurrence" is not ambiguous, as it refers to a "fortuitous event," as opposed to an intended act. An “occurrence” would not include an intentional assault with a metal pipe.

The injured party argued that, contrary to his pleadings and testimony before the trial court, that the injuries he received from Empire's insured were the unexpected result of an intended act.  The court didn’t buy that.  The harm to the victim was inherent in the nature of the act; courts have determined that there is no coverage, despite the fact that the intention of the insured, allegedly, was not to cause the harm.  The insured testified in the underlying action that he intended to hit McHenry with a metal pipe in order to "subdue" him. The fact that the injuries may have been more extensive than San Miguel intended does not negate the fact that this was an intentional assault.

The jury in the personal injury action rejected the insured’s claim of “self defense”

 

HUNTER’S HINTS ON SERIOUS INJURY UNDER NO-FAULT LAW
Daniel T. Hunter
[email protected]

02/13/14       Jackson v. Aghwana
Appellate Division, Second Department
Order Upheld where Plaintiff Fails to Raise a Triable Issue of Fact in Opposition
The lower court granted Defendants' motion for summary judgment dismissing Plaintiff's complaint on the ground that Plaintiff did not sustain a serious injury within the meaning of Insurance Law §5102(d).

The Defendants met their prima facie burden of demonstrating that Plaintiff did not sustain a serious injury as a result of the subject matter accident by submitting competent medical evidence establishing that Plaintiff's alleged injuries to the cervical and lumbar regions of her spine, to her left shoulder, and to her left knee did not constitute serious injuries under either the permanent consequential limitation of use or significant limitation of use categories of Insurance Law §5102(d).  Defendants also submitted evidence which established that Plaintiff did not sustain a serious injury under the 90/180 day category of §5102(d). 

Therefore, since Defendants met their initial burden by presenting competent medical evidence calling into question Plaintiff's "serious injuries", the burden then shifted to Plaintiff to raise a triable issue of fact in opposition to Defendants' evidence.  As Plaintiff failed to do so, the Second Department upheld the lower court's order granting the Defendants' motion for summary judgment dismissing the complaint.

02/19/14       Burgett v. Schaffhauser
Appellate Division, Second Department
Summary Judgment Motion Properly Denied
Defendant brought a summary judgment motion to dismiss Plaintiff's complaint stating that Plaintiff's injuries did not meet the "serious injury" threshold within the meaning of Insurance Law §5102(d).  In support of the motion, Defendant submitted competent medical evidence that the alleged injuries to Plaintiff's cervical and lumbar regions did not constitute a serious injury under either the permanent consequential limitation of use or significant limitation of use categories of §5102(d).  In doing so, the Defendant met his initial prima facie burden.

With the burden shifted to Plaintiff, Plaintiff submitted evidence raising a triable issue of fact regarding the injuries to her cervical and lumbar spine and whether or not these injuries could be considered "serious injuries" under New York State Insurance Law.  As such, the Second Department upheld the lower court's order in denying Defendant's motion for summary judgment.

 

MARGO’S MUSINGS ON NO-FAULT
Margo M. Lagueras
[email protected]

Arbitration

01/29/14       John Bialecki DC v Geico Insurance Co.
Erie County, Arbitrator Kent L. Benziger
Shipping Request Form Is Not Proof of Mailing
At issue was whether or not Respondent properly mailed IME scheduling orders to Applicant’s Assignor given that the Assignor denied receiving them which resulted in her failure to attend the IMEs.  Respondent asserted it mailed two scheduling letters to the address listed on the Assignor’s No-fault application.  Following her failure to appear, Respondent then issued a general denial based upon non-compliance.  The Assignor first called and then wrote to Respondent requesting the claim be reinstated claiming she missed the IMEs because she did not receive the scheduling letters.  The Arbitrator determined that Respondent failed to document that the scheduling letters were sent as it only submitted a shipping request form to the Shipping Department.  The Arbitrator noted that such a form is merely an inter-office request while proof of mailing should include such documents as proof of certified mail or a mailing log made in the regular course of business.  The Arbitrator therefore awarded reimbursement for the sessions denied based upon the failure to attend the IME after reducing the billed amount to the proper fee schedule.

01/29/14       Frank S Tang v Allstate Insurance Co.
Erie County, Arbitrator Michelle Murphy-Louden
Rate of Reimbursement for Acupuncture Treatment Is Dictated by Chiropractic Fee Schedule
Applicant, a licensed acupuncturist, billed for treatment under CPT codes 97813 and 97814 at $65.00 per each code.  Respondent reimbursed $18.09 for CPT 97813, and $15.72 for CPY 97814.  The Arbitrator noted that there currently is no fee schedule for acupuncture but the CPT codes under which treatment is billed are contained in the Medical and Chiropractic Fee Schedules.  If a physician practices acupuncture, he/she need only obtain certification, while a chiropractor practicing acupuncture must be licensed under the Education Law (section 8214).  Therefore, a licensed acupuncturist’s billing must conform to the Chiropractic Fee Schedule, not the Medical Fee Schedule, and Respondent properly reimbursed Applicant for CPT codes 97813 and 97814.  In addition, Applicant’s billing under CPT 99213 for an office visit was properly denied as this is not a code billable under the Chiropractic Fee Schedule.

01/28/14       Cameron B. Huckell, MD v Geico Insurance Co.
Erie County, Arbitrator Michelle Murphy-Louden
Appointment Scheduled Solely for Purpose of Referral Script Does Not Meet Requirement of Being Curative or Palliative
Applicant sought reimbursement for an office visit and x-rays and was denied based upon an orthopedic IME.  The IME physician opined that Applicant’s Assignor had reached an end result with respect to orthopedic treatment as she had been treating with no improvement.  The Arbitrator denied the claim finding that the IME report was persuasive and that Applicant did not document that the disputed treatment was providing any curative or palliative benefits.  Furthermore, as to the visit in question, it had been a year and a half since the Assignor had last seen Applicant and she scheduled the appointment only because she wanted a referral for cervical and lumbar MRIs for “documentation purposes.”  Applicant acquiesced and the second appointment’s only purpose was to review those MRIs.  Applicant had no treatment to offer and the only recommendation was for the Assignor to follow up six months later.

Litigation

02/19/14       Wyckoff Heights Medical Center v Geico Insurance Co.
Appellate Term, Second Department
Defendant Not Required to Set Forth Medical Rationale in Its Denial of Claim Form
On appeal, the trial court is reversed and court holds that plaintiff’s motion for summary judgment on its first cause of action should have been denied as defendant raised a triable issue of fact.  The court found that defendant established that it timely denied plaintiff’s claim even though the denial of claim form incorrectly stated the amount of the claim and the amount in dispute.  Such minor errors do not render the denial a nullity.  In addition, and contrary to plaintiff’s contentions, the fact that defendant annexed an unaffirmed and unsworn peer review which only contained a stamped physician signature did not invalidate the denial.  The no-fault regulations do not require that a peer review or IME report accompany a denial and, in fact, a defendant is not required to set forth a medical rationale in its denial. 

01/28/14       Natural Therapy Acupuncture PC v State Farm Mut. Auto. Ins. Co.
Appellate Term, Second Department
Affirmation of Attorney Who Was to Conduct EUO Is Sufficient to Establish Non-Appearance
Defendant was granted summary judgment dismissing the complaint based on plaintiff’s failure to appear for duly scheduled EUOs.  On appeal, plaintiffs argued that defendant failed to prove it mailed the EUO scheduling letters and denials, that defendant lacked justification for its EUO requests and that plaintiff did not receive discovery regarding the reasonableness of the EUO requests.  On appeal, the court affirmed finding that defendant’s affidavits established that the scheduling letters and denials were properly and timely sent.  Moreover, as plaintiff did not respond to the EUO requests, it could not raise any objections to them and discovery as to the reasonableness of the requests was therefore not necessary to oppose defendant’s motion.  In addition, the affirmation of the attorney who was to conduct the EUO was sufficient to establish that plaintiff failed to appear.

 

PEIPER ON PROPERTY (and POTPOURRI)
Steven E. Peiper
[email protected]

Property:

02/20/14       Hunter v. Seneca Ins. Co., Inc.
Appellate Division, First Department
Sixty Day Deadline for Proof of Loss Upheld Again
Very simple facts in this case.  Plaintiff sustained water damage in January of 2010.  Seneca, through its counsel, sent a request for Proof of Loss on July 16, 2010.  When it had not been received as of November of 2010, Seneca denied the claim.

Failure to provide a Proof of Loss within 60 days of its request by the carrier is an absolute defense to coverage.  Accordingly, plaintiff's complaint was dismissed on summary judgment.  In so holding, the Court noted that the request for Proof of Loss from counsel was just as good as if the request had come from Seneca directly.

Potpourri:

02/26/14       Ramales v Pecker Iron Works of Westchester, Inc.
Appellate Division, Second Department
Negligence of Subcontractor Triggers Contractual Indemnity Obligations
Plaintiff was employed by Pecker's subcontractor when he was injured on a jobsite owned by Christ Fellowship.  Thereafter, plaintiff commenced the above action against Christ Fellowship and Pecker.  Christ Fellowship asserted a cross-claim for contractual indemnification against Pecker pursuant to a contract the two parties had executed prior to the loss. 

The provision at issue provided indemnity for liability caused "in whole, or in part, by Pecker's negligent acts or omissions or that of a [Pecker] subcontractor."  In affirming Christ Fellowship's contractual indemnification claim, the Court noted that Pecker had failed to meets its burden that the loss did not arise, in whole or in part, from the negligence of its subcontractor (plaintiff's employer).

Peiper's Point -- Still not a definitive answer, but it appears that the Court is leaning toward holding that some percentage of negligence triggers a 100% indemnity obligation.  Something to keep an eye on. 

02/26/14       Ingram v Miller
Appellate Division, Second Department
Stay of Tort Action for Related DJ Action Not Appropriate Where Parties in Both Were Not Identical
Defendant Miller sought a stay of the instant proceedings until a related declaratory judgment action concerning the insurance available to the co-defendant could be resolved.  While the Court noted that a stay, in certain circumstances was appropriate, the discretion on whether to grant such an application rested with the Trial Court.  Here, the Trial Court's decision to deny the request for a stay was not an abuse of discretion where there were not identical parties in both actions. 

 

02/19/14       American Transit Ins. Co. v Roberson
Appellate Division, Second Department
Voluntary Discontinuance Should Be Unfettered, and Without Prejudice
Plaintiff sought to voluntarily discontinue the instant action without prejudice.  Defendant, however, objected therein seeking the discontinuance with prejudice to bar any future actions.  The Trial Court sided with the defendant, and ruled that the matter was voluntarily discontinued with prejudice.

In the instant appeal, the Second Department disagreed.  In support of its ruling, the Court noted that absent special circumstances a voluntary discontinuance should be granted without prejudice.  The Court went on to explain that it would not be prejudice to the defendants if American Transit were to commence the same action in a different (presumably more appropriate) venue.  This is particularly true where, as here, American Transit reimbursed defendant for any fees incurred in the instant proceeding. 

 

02/18/14       FC Bruckner Assoc., LP v. Fireman's Fund Ins. Co.
Appellate Division, First Department
Another Brick in the Wall -- Court Requires Carrier to Turn Over All Excess Claims Files Maintained During the Term of Plaintiff's Policy in Question
Defendant issued an excess policy to plaintiff that was governed under Ohio law.  Under Ohio law, where, as here, the carrier establishes that notice from its assured was late, the insured then bears the burden of establishing that such late notice did not result in prejudice.  As part of the litigation, plaintiff sought the production of all claims files defendant maintained on excess files during the policy period in question.  In support of its argument, plaintiff asserted that the documentation was necessary to discern whether the carrier reacted differently, and what actions were undertaken by the carrier, when notice was provided timely. 

When the Trial Court refused to permit these in discovery, plaintiff made the instant motion and subsequent appeal.  In reversing the Trial Court, the First Department noted that the requests were not "palpably improper" as had been urged by Fireman's Fund.  The Court also noted that because Fireman's Fund acknowledged that it did not have many files that would fall within the range sought by plaintiff, the request was not overly burdensome.  Regardless, the Court noted that the necessity for plaintiff to uncover this information outweighed any burden that Fireman's Fund may have suffered.  

BETH’S BANTER OF COVERAGE “B” AND FITZ’ BITS
Elizabeth A. Fitzpatrick
[email protected]

02/18/14       Travelers Property Casualty Company of America v. Kansas City Landsmen, LLC
2014  WL632282 Northern District of Georgia
Knowing Violation Exclusion Applies
In Travelers Property Casualty Company of America v. Kansas City Landsmen, LLC,Travelers issued four primary Commercial Liability Insurance Policies and St. Paul issued four excess Commercial General Liability policies to the Kansas City Landsmen d/b/a Budget Rent-A-Car and A Better Way Rent-A-Car, Inc.  A class action lawsuit was brought against the insureds and they tendered their defense to Travelers, who disclaimed based upon an exclusion in the policy entitled “Knowing Violation of Rights of Another.”  This exclusion precluded coverage for personal injury caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict “personal injury”…  The St. Paul policies insured against liability for injury or damages in excess of a retained limit and likewise included a Knowing Violation Exclusion, which provided that personal injury or advertising injury caused by or committed at the direction of the insured, or by an offense committed at the direction of the insured with knowledge that the rights of another would be violated and that personal injury or advertising injury which resulted was excluded.

In the underlying lawsuit, from which the coverage action derived, John Galloway, on behalf of himself and a class of similarly situated individuals, alleged that the defendants, owners and operators of several rental car facilities, willfully violated the Fair and Accurate Credit Transaction Act (FACTA) to the Fair Credit Reporting Act by failing to truncate the credit card numbers and expiration dates on receipts issued to rental car customers in violation of the referenced act.  A cause of action under 15 USC §1681N was asserted.  That section imposes liability on any person who willfully (emphasis added) fails to comply with any requirement of FACTA.

The Court, in considering motions for summary judgment, noted that the only allegations in the underlying lawsuit were that the defendants knowingly violated FACTA.  They also noted that willfulness is an element of §1681N liability and that negligent violations of FACTA are not actionable under the statute.  The Court thus concluded that Travelers was not obligated to defend or indemnify the insureds and thus granted their motion for summary judgment.

 

02/17/14       North Coast Medical, Inc. v. Hartford Fire Insurance Co.
2014  WL 605672 Northern District of California
Knowing Violation Exclusion Applies
In North Coast Medical, Inc. v. Hartford Fire Insurance Co., North Coast commenced a declaratory judgment action against Hartford seeking a declaratory judgment and alleging breach of the insurance contract.  North Coast alleged that Hartford had a duty to indemnify and defend them in underlying litigation pending in the United States District Court for the Southern District of New York.  North Coast had purchased an insurance policy from Hartford, which was renewed for two subsequent years and was effective until November 1, 2013.  The policy included an obligation on the part of Hartford to indemnify and defend North Coast for personal and advertising injury which was defined to include injury arising out of, among other things, infringement of copyright, slogan, or title of any literary or artistic work in your “advertisement.” 

The policy included three exclusions, which were cited by Hartford in its denial of a duty to defend or indemnify.  The intellectual property exclusion, which precluded coverage for personal and advertising injury arising out of any actual or alleged infringement or violation of any intellectual property right, such as copyright, patent, trademark, trade name, trade secret, service mark or other designation of origin or authenticity; or any injury or damage alleged in any claim or suit that also alleges an infringement or violation of any intellectual property right, whether such allegation of infringement or violation is made by you or by other party involved in the claim or suit regardless of whether this insurance would otherwise apply.  However, this exclusion does not apply if the only allegation of the claim or suit involving any intellectual property right is limited to:  (1) infringement in your “advertisement” of; (a) copyrights; (b) slogan; (c) title of any literary or artistic work; (2) copyright, in your “advertisement”, a person’s or organization’s “advertising idea” or style of “advertisement.”

The second exclusion cited by Hartford was the prior publication exclusion, which precluded coverage for personal and advertising injury arising out of oral, written or electronic publication of material whose first publication took place before the beginning of the policy period, while the third was the knowing violation exclusion, which precluded coverage for personal and advertising injury arising out of an offense committed by, at the direction or with the consent or acquiescence of the insured, with the expectation of inflicting “personal and advertising injury.” 

The underlying litigation involved a claim that North Coast cease using “THERA-PUTTY” because such use infringed Fabrication’s registered trademark and created confusion.  North Coast refused to stop using “THERA-PUTTY.”  Litigation was thus commenced by Fabrication seeking injunctive relief and damages for North Coast’s use of Fabrication’s trademark “THERA-PUTTY.”  In an amended complaint filed in May 2013 by Fabrication, they alleged substantially the same facts, but added a cause of action for common law trademark infringement, unfair competition and consumer fraud.

North Coast tendered defense of the underlying litigation to Hartford, who initially requested additional information and thereafter disclaimed coverage, contending that the allegations in the underlying litigation did not meet the definition of “personal and advertising injury” and cited the three above referenced exclusions.  In seeking reconsideration from Hartford, North Coast’s counsel stated that “THERA-PUTTY” had been used by North Coast since several years before Fabrication’s federal registration. 

Slogan is a brief attention-getting phrase used in advertising or promotion or a phrase used repeatedly as in promotion, according to prior California law and applying this definition of slogan, the Court found that “THERA-PUTTY’ was not a slogan that was exempted from the intellectual property exclusion.  “THERA-PUTTY” is a single word, not a brief attention getting phrase or a phrase utilized repeatedly.  Thus, the Court found, as a matter of law, the intellectual property exclusion applied and Hartford was not required to defend or indemnify North Coast with respect to the underlying litigation.  They, thus, did not consider the applicability of the other cited exclusions.

2/21/14         Zurich American Insurance v. Sony Corporation of America
Supreme Court, New York County
No Coverage for Cyber Hacking
In a decision issued following argument on February 21, 2014, Judge Jeffrey Oing in the Supreme Court, New York County in an action captioned Zurich American Insurance v. Sony Corporation of America found that a policy issued by Zurich did not afford coverage for liabilities of  Sony as a result of the acts of hackers breaking into a computer system as such did not qualify as oral or written publication in any manner of material that violates a person’s right of privacy as set forth in the personal and advertising injury coverage of the CGL policy issued by Zurich.  The Court focused on the fact that the acts were those of a third-party and not an act or conduct by the policyholder. 

The claim for which coverage was sought involved the theft by hackers of personally identifiable information of some 77 million users of Sony’s Play Station network.  The decision was brought to our attention by our good friend, Laura Foggan, at Wiley Rain.  No written decision is yet available, but rather the February 21, 2014 disposition by the Court incorporates the record of argument held on February 21, 2014 and directs Zurich to order the transcript and submit it to the court to be so ordered.

          AUDREY’S ANGLES ON THE NATIONALLY NOTEWORTHY

Audrey A. Seeley
[email protected]

02/13/14       Nautilus Ins. Co. v. Lexington Ins. Co.
Supreme Court, Hawai’i
Insurer Cannot Look To Another Insurance Policy To Avoid Defense Obligation.
The Hawaii Supreme Court was asked to answer a number of certified questions by the United States Court of Appeals, Ninth Circuit, regarding an insurer’s defense obligation where a primary policy is rendered excess by virtue of the other insurance provision.  The certified questions presented were:

1. When the underlying action’s complaint alleges facts within coverage, can an insurer look to another policy to disclaimer a defense obligation?

 

1. Whether the “other insurance” provision that purports to release an otherwise primary insurer of a defense obligation if the insurer because excess as to liability is enforceable?

1. Whether the irreconcilability of the “other insurance” provisions in primary policies should be determined before or after the operation of the “other insurance” provisions is determined? and

 

1. Whether, and when, an excess insurer or a primary insurer rendered excess by virtue of the “other insurance” provision has a defense obligation?

In the underlying action, VP & PK was the owner and developer of real property in the Maui Lani Project District.  VP & PC contracted with Kila Kila Construction (Kila Kila) for the development of this project.  Ms. Goo and others commenced an action against VP & PK and Kila Kila for property damage arising out of the development.  A jury found VP & PC liable for $232,700.00 in damages on some of the causes of action and found no liability for any of the causes of action against Kila Kila.

VP & PK had a commercial general liability policy with Lexington Insurance Company (Lexington Policy).  Kila Kila had a commercial general liability policy with Nautilus Insurance Company (Nautilus Policy).  VP & PK was an additional insured under the Nautilus Policy only for liability arising out of Kila Kila’s negligence.

Further, the Lexington Policy’s “other insurance” provision rendered the normally primary policy excess when other primary insurance is available for which the insured is added as an additional insured.  The Nautilus Policy’s “other insurance” provision was essentially the same as the Lexington Policy’s “other insurance” provision.

Nautilus undertook the defense of VP & PK and Kila Kila in the underlying action.  After the jury verdict it appears that Lexington did not dispute that its policy would indemnity VP & PK.  The dispute arose when Nautilus wanted Lexington to contribute toward the defense costs of VP & PK in the underlying action.

Turning to the certified questions, the Court held that a primary insurer cannot disclaim its defense obligation by looking at another insurance policy.  If the primary insurer receives a defense tender and believes it is an excess insurer or that its “other insurance” provision renders it an excess insurer then it still must defend the insured.  A caveat to this rule was if another insurer’s policy is specifically named in the first insurer’s policy.  So what are the insurer’s options if it must defend?  Keep reading.

The Court in response to the second question answered that the “other insurance” clauses are not rendered completely unenforceable.  Rather, the primary insurer has a defense obligation with the ability to enforce the “other insurance” provision in obtaining equitable contribution or defense cost recoupment from the other insurer.

As to the third question, the Court responded that the issue really did not apply to this case as the “other insurance” provisions were not mutually repugnant.  Then, the Court held that it must first be determined if the “other insurance” provisions are relevant and then whether the provisions are irreconcilable with the complete operation of the provisions resolved thereafter.

Finally, the Court held with regard to the last question that a primary insurer who becomes an excess insurer by virtue of the “other insurance” provisions has a defense obligation upon tender and the mere possibility of insurance coverage under the policy.

CASSIE’S CAPITAL CONNECTION
Cassandra A. Kazukenus
[email protected]

DFS Is Seeking Comments Regarding the Concept of Private Flood Insurance
The Department of Financial Services is investigating the feasibility of a private flood insurance market in New York as an alternative option to the Federal flood insurance program currently in place.  Recognizing this would be a significant change the Department has asked the following questions:

1. Whether it is feasible to write flood policies that provide coverage where the National flood Insurance Program does not?  (i.e., basement endorsements, discounts for mitigation measures and earth movement caused by flood waters).

 

1. The Department is concerned about how to develop a large and diversified risk pool of insureds to ensure the premiums are affordable and mitigate adverse selection.

1. Are there any New York regulatory challenges that must be addressed before private insurers can offer flood insurance?

 

1. Are there any federal regulatory challenges that must be addressed or solved before private insurers can offer flood insurance?

1. Are there any legislative challenges that must be addressed or solved before private carriers can offer flood insurance?

 

Assembly Bill 90 – Prohibiting Discrimination in the Issuance of Homeowners’ Policies

This legislation was referred from the Insurance Committee to Codes this week, and it seeks to amend Insurance Law §3429.  This new Legislation seeks to prohibit an insurer from rejecting any application, refusing to issue or renew, or limit the amount of coverage under a homeowners’, fire or automobile insurance policy based solely upon geographic location, age or market value of the risk or property.  However, this will not preclude an insurer from rejecting an application for property that is located an unreasonable distance from the insurer’s ordinary service area or refusing to issue, renew, limiting the coverage, or cancelling the policy if the action is supported by actuarially sound statistical data related to actual or anticipated loss experience as long as the action is consistent with its treatment of risks of substantially similar hazard in all geographical locations it serves in this state.

A571 Proposes To Repeal Provisions of Insurance Law §3216 Pertaining To Accident And Health Insurance Policy Provisions.

This Legislation which was reported out of the Insurance Committee seeks to repeal Insurance Law §3216’s provisions holding an insurer liable for any loss sustained or contracted as a consequence of the insured’s being intoxicated or under the influence of any narcotic unless it was administered on the advice of their physician.

FIJAL’S FEDERAL FOCUS
Katherine A. Fijal
[email protected]

AGENT’S ERRORS AND OMISSIONS – New York:

02/25/14       Voss v. CH Insurance Brokerage Services
New York Court of Appeals
Did a Special Relationship Exist between Insured and Broker?
This case was originally reported in the June 22, 2012 edition of Coverage Pointers. At that time the Appellate Division, Fourth Department, found a question of fact on the issue of whether a special relationship existed between the insured the CH Insurance Brokerage Services [“CHI”].  However, the court also found that even if a special relationship did exist there was still no viable claim because the plaintiff failed to read her policy; and, because even if CHI was negligent, its negligence was not the proximate cause of the loss.

By way of background this action arises out of property damage and the consequential business interruption sustained by plaintiff as a result of water damage that occurred following three separate roof breaches in 2007 and 2008.  The plaintiff, Deborah Voss, began her relationship with CHI in 2004, prior to the purchase of the property at issue here.  At the initial meeting Voss discussed insurance coverage for the premises and her two companies in existence at the time.  Coverages discussed were property insurance, professional liability coverage and business interruption insurance.  The broker/agent, Joe Convertino, asked Voss to disclose sales figures and other pertinent information to enable him to calculate an appropriate level of business interruption coverage for her companies.  Voss also testified that Convertino also represented that CHI would reassess and revisit the coverage needs as her business grew. At that time CHI procured $75,000 of business interruption coverage.

In April 2006, plaintiff purchased a new building which had twice as much square footage as the previous location.  With the additional space, plaintiff planned to open two new businesses.  After Voss discussed the move and the new business arrangements with Convertino, CHI renewed the policy issued by Netherlands Insurance with the same business interruption limit of $75,000 for the new location.

The first loss occurred in March, 2007 when Voss discovered multiple leaks in the roof and dripping water.  At that time Voss hired a contractor to replace the roof.  The following month the new roof failed resulting in additional damage to both floors of the premises.  Ultimately plaintiff recovered $3,000 for the first loss and $30,000 for the second loss.

While dealing with the loss, Voss met with another CHI representative, Carrie Allen, to discuss the renewal of the Netherlands policy.  Shortly thereafter, Voss received a proposal which indicated that the business interruption coverage would be reduced from $75,000 to $30,000.  Voss testified that she questioned this reduction and that Allen advised that she “would take a look at it”.  Voss did not follow up and the April 2007 policy renewed with the reduced limits on the business interruption coverage.

In February 2008, the roof failed for the third time causing significant damage to the premises and further disrupting Voss’s businesses.  While the claims were still pending, Voss filed suit in May, 2008 against, among others, CHI.

The primary question before the court was whether a “special relationship” existed between Voss and CHI.  Voss alleged that CHI had negligently secured inadequate levels of business interruption insurance for all three losses.

Following discovery CHI moved for summary judgment making three arguments:  (1) no special relationship existed and in the absence of a specific request for higher limits, CHI could not be held liable; (2) Voss failed to read her policies; and (3) even if a special relationship existed, negligence on the part of CHI was not the proximate cause of Voss’s loss – instead, plaintiff’s damages occurred because Netherlands failed to timely pay the policy limits.

The Supreme Court granted CHI’s motion, agreeing with CHI’s contentions, the Appellate Division affirmed with one justice dissenting. For the following reasons the Court of Appeals [“Court”] reversed.

As a general principle, in New York, insurance brokers have a common law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage.  Consequently, in an ordinary broker-client relationship, the client may prevail in a negligence action only where it can establish that it made a particular request to the broker and the requested coverage was not procured.

On the other hand, where a special relationship develops between the broker and the client, the Court indicated that a broker may be liable, even in the absence of a specific request for failing to advise or direct the client to obtain additional coverage. The Court pointed to prior precedent, Murphy v. Kuhn, 90 NY2d 266 (1971), where it recognized that “particularized situations may arise  in which insurance agents, through their conduct or by express or implied contract with customers and clients, may assume or acquire duties in addition to those fixed at common law”.

The Court determined that in this particular case CHI did not satisfy its initial burden of establishing the absence of a material issue of fact as to the existence of a special relationship. Indeed, the Court found that the evidence suggested that there was “some interaction regarding a question of coverage with the insured relying on the expertise of the agent.”  Based on the evidence before it, the Court concluded that the complaint against CHI could not be dismissed on the basis that no special relationship arose between the parties.  However, the Court also reiterated that special relationships in the insurance brokerage context are the exception, not the norm, and emphasized that it remained to be determined whether a special relationship existed here.  To prevail on her claim the plaintiff had the ultimate burden of proving that a special relationship did in fact arise and that they relied on CHI’s expertise in calculating the proper level of business interruption coverage during the relevant time frames.

On the remaining issues the Court determined that Voss’s awareness of the business interruption limits of $75,000 and $30,000 during the relevant policy years does not defeat her cause of action as a matter of law.  The Court noted that plaintiff’s claim was predicated on the alleged special relationship with CHI, i.e., that CHI was negligent in failing to recommend higher limits and that plaintiff relied on CHI in setting the allegedly deficient coverage amounts.  The Court found that under the circumstances it was wholly irrelevant whether plaintiff was aware of the limits that were actually procured.

As to the Appellate Division’s second ground for dismissing the complaint that it was the insurer’s failure to timely pay the claims and not CHI’s negligence, the Court determined that questions of proximate cause should generally be resolved by the factfinder.

Accordingly, the order of the Appellate Division was reversed.

A dissenting opinion was written by Justice Smith, joined by two other judges in this 4-3 decision

In his dissent Justice Smith correctly pointed out that based on Voss’s own testimony she was not relying on advice at the time at the time that Voss now complained of was acquired.  Although she may have relied on the expertise of the first agent, Convertino, by the time of the third loss, the business had changed and there was a new agent, Allen.  In addition, Voss knew that the coverage acquired by Allen might not be enough for the new situation, requested advice and did not get that advice.

Justice Smith also pointed out that CHI had no duty to follow through on Convertino’s promise made in 2004 to keep looking at and advising them about their insurance coverage. It simply could not be claimed that Convertino’s promise was legally binding.  Justice Smith noted that it would be different if Voss had hired CHI to give advice and paid it for doing so.  As stated by the Court in Murphy a “duty of advisement” may exist where the agent receives compensation for consultation apart from payment of the premiums”; however, there is no authority for finding a special relationship based on a gratuitous promise to consult, where no consultation takes place. 

Although as Justice Smith stated, CHI would not get high marks for customer service, its fault was simply in failing to do what the Court held in Murphy that agents were not required to do:  “to advise, guide or direct a client” in acquiring insurance coverage”. Agents are not insurance companies and do not earn premium income. Justice Smith stated that if lawsuits by clients against their agents are welcomed by the courts, the consequence may be to make the agent into a kind of back up insurer, a result which is neither sensible nor fair.

02/24/14       Scottsdale Ins. Co. v. Logansport Gaming
United States Court of Appeals Fifth Circuit – Louisiana Law
Policy Language Controls
Scottsdale issued a commercial general liability and property insurance [“Policy”] to Logansport Gaming, LLC, Logansport Truckstop, LLC and Sabine River Restaurant [collectively “Logansport”], insuring property in Logansport, Louisiana.  The property included a truckstop, convenience store, video poker machines and a restaurant. The Policy contained a Protective Safeguards Endorsement.

Logansport purchased and installed a fire suppression system in the vent hood above the stove in the restaurant kitchen.  Logansport hired Ark-La-Tex Fire Systems to service the fire suppression system and inspect it semi-annually.  Ark-La-Tex inspected the fire protection system in August, 2010; and, on January 31, 2011, a fire occurred in Logansport’s restaurant kitchen causing damage to the property. On the same day Logansport filed a claim.

Scottsdale investigated the claim, particularly whether the fire suppression system had been maintained “in such a condition that it should have operated”.  Its investigation concluded that the system did not activate on the day of the fire and that, even if it had activated, missing parts would have rendered the system ineffective in suppressing the fire.

Scottsdale filed its declaratory judgment action on September 15, 2011.  Scottsdale moved for summary judgment claiming that the Policy barred coverage because it required Logansport to maintain its fire suppression system “in complete working order”.  Logansport argued that it complied with the Policy by acting with due diligence and in a reasonably prudent manner in maintaining the fire suppression system.

The district court granted summary judgment to Scottsdale finding that the Policy’s requirement that Logansport not only “maintain” the system, but “maintain it in complete working order” meant that the system had to be working at the time of the fire for Logansport to receive coverage.  The district court concluded that because Logansport conceded that the system did not work on the date of the fire and because Logansport did not provide any alternative interpretation of the Policy’s language, summary judgment for Scottsdale was appropriate. For the following reasons, the United States Court of Appeals for the Fifth Circuit [“Court”] agreed.

On appeal Logansport challenged the district court’s interpretation of the Policy arguing that (1) the Policy’s language – ‘to maintain . . . in complete working order” – is ambiguous; (2) the district court’s interpretation of the Policy leads to absurd results; and (3) due diligence is the proper standard for determining compliance with the Policy’s requirements.

Scottsdale argued that Logansport’s ambiguity and absurdity arguments were not raised before the district court and should be deemed waived.  The Court agreed.

As to the remaining due diligence argument raised by Logansport, the Court disagreed.  In reviewing the Policy the Court found nothing in the plain language of the Policy to suggest that to maintain the protective safeguards in complete working order means only to exercise due diligence in maintaining the safeguards listed.  As emphasized by the district court, the phrase “in complete working order” is crucial.  The Court concluded that the Policy’s use of the phrase “in complete working order” to modify “maintain” left no doubt that due diligence alone is not enough to satisfy the plain terms of the policy. By conceding that the fire suppression system did not work on the date of the fire Logansport necessarily admitted that its system was “not in complete working order,” and thus did not comply with the plain language of the Policy.

 

KEEPING THE FAITH WITH JEN’S GEMS
Jennifer A. Ehman
                                            [email protected] 

02/10/14       Hermitage Ins. Co. v. Bronx Steel Fabricators Inc.
Supreme Court, New York County
Court Refuses to Grant Default Judgment Where Insurer Failed to Establish that Loss Did Not Arise out of a Covered Classification
Bronx Steel was retained by the project’s general contractor to perform shoring work.  Bronx Steel installed horizontal walers to hold back the soil and support the sidewalks along two sides of the project.  It also installed a racker system; however, before it could complete its work, the Department of Buildings issued a stop work order.  While the work was stopped, the building next to the project partially collapsed.

The adjacent building owner brought an action against Bronx Steel, the general contractor and the project owner.  Hermitage Ins. Co. issued a CGL policy to Bronx Steel.  The policy contained a Classification Limitation Endorsement, which provided that coverage under the policy only applied to “Metal Works-Shop-Structural-Loading Bearing” and “Metal Erection-Structural.”  The policy also contained an additional insured endorsement, but coverage was only available if ‘the company gives express written consent to add coverage”.

Hermitage was notified of the property loss, and the property owner and general contractor tendered their defense.  In response, Hermitage denied coverage to its named insured based on the Classification Limitation endorsement, submitting that the claims involved operations outside of the scope of coverage.  It also denied coverage to the owner and GC because Hermitage never gave express written consent to add them to the policy (even though the insured agreed to provide such coverage and a certificate of insurance was issued by a broker).

Following the disclaimer, Hermitage agreed to provide Bronx Steel a courtesy defense, and brought this action.  In this motion, Hermitage moved for a default against Bronx Steel as they had not yet appeared in the action.  The court declined to grant the default finding that Hermitage had not met its burden of establishing that the activity performed by Bronx Steel was an “excluded” activity under the policy.  While the classification codes included structural load bearing and metal erection work, there was no specific exclusion for “shoring” activity – the activity allegedly performed by Bronx Steel. 

The court did however grant summary judgment to Hermitage on the other claims, agreeing that the additional insured limitation endorsement required written consent to add coverage. 

Bad Faith

02/18/14       Government Employees Ins. Co. v. Saco
United States District Court, Eastern District, New York
Court Permits Insurer to Move Forward with Preemptive Action Relating to Excess Verdict Rendered in Underlying Action
GEICO issued an automobile liability and umbrella policy to Diane Saco.  On February 23, 2006, Saco was involved in a motor vehicle accident.  Saco’s passenger Suzanne Kusulas was severely injured. 

Kusulas brought a personal injury action against Saco.  Acting on behalf of its insured, GEICO assigned counsel.  Counsel advised that a reasonable settlement value was $250,000, and signaled that Kusulas would have difficulty attributing the second surgery to the accident. 

Thereafter, summary judgment on liability was entered against Saco.  From that time, through the damages trial, GEICO continually increased its offer eventually offering the entire $1.3 million of available coverage.  Kusulas’ counsel indicated a willingness to accept the offer, but demanded prejudgment interest since the date of summary judgment.  GEICO declined the counteroffer on the grounds that it exceeded the policy limit.  A jury then awarded over $3 million to Kusulas.

Presumably, to be proactive and to select venue, GEICO commenced this action seeking a declaration that it is not obligated to pay sums in excess of the policy limits, that is not required to pay the insured’s personal counsel expenses, and that it satisfied its obligations under the policies in good faith and no potential bad faith claims exist. 

Saco and Kusulas moved to dismiss the Complaint.  Kusulas argued first that she has no contractual relationship with GEICO.  In dismissing this argument, the court cited the line of cases holding that an “actual controversy” under the Declaratory Judgment Act existed between insurer and the insured party. The court also found that Kusulas did not have to file the 3420(b)(1) direct action in order to make this action ripe.  The dispute over the excess judgment is neither hypothetical or conjectural, but rather well-defined and suitable for resolution in the current action.

With regard to the requested good faith declaration, the court found it was also ripe for judicial resolution as one element of the larger case or controversy.  Saco accused GEICO of acting in bad faith for not tendering its policy earlier, and GEICO need not wait for her to file a bad faith action to settle its ultimate liability for the outstanding judgment.  The court also found that the circumstances did not present the type of “exceptional circumstances” warranting abstention in favor of a now-concluded state court action.  For these reasons, the court denied both motions to dismiss. 

Of note, in the last section of the decision, the Court responds to a request in Saco’s motion for sanctions.  In addition to denying the request as procedurally defective, since it was not made separately, it also strongly advised against such motions.  Counsel for Saco was cautioned that if it brought another facially deficient demand for sanctions under Rule 11 the Court would entertain a cross-motion and entertain a request for the same relief. 

EARL’S PEARLS
Earl K. Cantwell
[email protected]

HAPLESS CONDO OWNER’S WATER DAMAGE CLAIM NOT DEEMED
“ACCIDENTAL” BECAUSE HE REMOVED THE FIXTURES

Sigelman v. State Farm General Insurance Co., 2013 WL 5827707 (Cal. Ct. App. 2d Dist., October 30, 2013).

Mr. Sigelman’s neighbor in the condo had signs of mold allegedly caused by a leak in Mr. Sigelman’s bathroom.  A contractor stated that the mold in the neighboring unit was caused by water leaking through grout in Mr. Sigelman’s bathroom.  As a dutiful policyholder, Mr. Sigelman notified State Farm that the contractor said that he would need to remove a lower bathtub wall, a bathtub, and some tile to make the repairs. 

Mr. Sigelman’s contractor commenced the repairs; however water now appeared in the wall and corner of his own bathroom.  To make matters worse, further investigation indicated that the original leak problem experienced by his neighbor was coming from a unit on a higher floor, and not from Mr. Sigelman’s bathroom.

State Farm denied coverage for the water damage in Mr. Sigelman’s unit on the basis that there was no “accidental loss” to his property.  In later litigation, State Farm successfully moved for summary judgment, and on appeal State Farm’s denial was affirmed.

Mr. Sigelman argued that his loss was “accidental” because it was caused by “unforeseen” circumstances, including the alleged mold hazard, the supposed requirement for him to make repairs, and the ultimate mis-diagnosis of the entire problem.  The appellate court disagreed, concluding that, while the various mistakes started the process which caused the loss, he intentionally chose to remove his bathroom’s fixtures, which removal was not accidental, and the policy did not cover his water damage.  Making for a really bad day, the appellate court also required Mr. Sigelman to pay State Farm’s appeal costs.

The lesson of this case is to determine the root proximate cause of a claim, and if it is not accidental or unexpected, but rather the result of intentional or conscious acts or decisions, there may not be a covered accidental and unforeseen occurrence.