Coverage Pointers - Volume XXIV, No. 18

Volume XXIV, No. 18 (No. 639)
Friday, February 17, 2023
A Biweekly Electronic Newsletter

As a public service, Hurwitz Fine P.C. is pleased to present its biweekly newsletter, providing summaries of and access to the latest insurance law decisions from the New York and Connecticut appellate courts and Canadian appellate courts. The primary purpose of this newsletter is to provide timely educational information and commentary for our clients and subscribers.

 

In some jurisdictions, newsletters such as this may be considered Attorney Advertising.

If you know of others who may wish to subscribe to this free publication, or if you wish to discontinue your subscription, please advise Dan D. Kohane at [email protected] or call 716-849-8900.

 

You will find back issues of Coverage Pointers on the firm website listed above.
 

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Dear Coverage Pointers Subscribers:

Do you have a situation? We love situations.
 


 

Greetings from Chattanooga, on my way to the FDCC Winter Meeting in Nashville. Photo off the porch on Lookout Mountain.

I don’t usually use this cover note to speak, in length, about pending coverage issues, I usually do that in the attached edition.  However, I have been bothered about some of the risk transfer decisions coming out of New York courts, in recent month.  One that I report on in this week’s issue raised my hackles -- the outcome was right, but the rationale didn’t sit well with me, so I thought I would let off some steam.

In doing so, I want to talk about exhaustion – not the exhaustion I feel just before cocktail hour, but horizontal and vertical exhaustion. Fair warning – if horizontal and vertical exhaustion exhausts you, skip over these next couple of pages.  If you are a coverage purist, wallow in the muck being offered.

 

Let’s talk about exhaustion and risk transfer.

Plaintiff, Mary Hardhat, is an employee of the General Contractor (“GC”) and GC is insured by Contractor Insurance Company (“CIC”) with limits of $1 million per occurrence.  CG has an excess policy with Excess Insurance Company (“EIC”) with limits of $5 million dollars per occurrence.  The CIC policy adds, by additional insured endorsement, the project owner, Ollie Owner, Inc., as an additional insured.  Assume that the EIC policy does not provide coverage to Ollie Owner.  Why?  Because the trade contract between Ollie Owner and GC only requires $1 million in coverage to be provided and the endorsement provides that coverage is limited by that amount required in the trade contract.

Ollie Owner has its own CGL policy with Owners Insurance Company (“OIC”).  It provides Ollie Owner with $1 million per occurrence in coverage, and Ollie has an excess policy with Umbrella Insurance Company (“UIC”) with limits of $4 million.

There is also a trade contract with a hold harmless agreement running in favor of Ollie Owner from GC.

So, we have: 

  • Ollie Owner with a primary policy with OIC ($1 million) and an excess policy with UIC ($1 million);
  • General Contractor with a primary policy with CIC ($1 million) providing AI coverage to Ollie Owner and an excess policy with EIC ($5 million) which does not provide AI to GC.
     

Mary gets hurt when she falls off a scaffold and sues Ollie Owner.  She cannot sue GC because it is her employer.  Owner refers the lawsuit to its carriers, OIC and UIC, and they immediately tender to GC, CIC, and UIC:

  • Assume CIC accepts additional insured tender from Ollie Owner, EIC denies AI tender because it does not extend additional insured coverage to Ollie Owner and its insured, GC denies trade contract indemnity claim as premature.
  • Jury returns a verdict in favor of Mary Hardhat in the amount of $4,000,000 under the New York Labor Law (Section 240) which imposes absolute liability on the part of the owner and then finds that the GC was the only party negligent and thus grants indemnity under the trade contract.

 

My question is simple?  How does the money flow?  To me, it should be clear:

As the only party liable to the plaintiff is Ollie Owner, the money should flow this way:

  • First $1,000,000 paid by CIC, under AI provisions, which generally go first (and exhausts the CIC policy);
  • Second $1,000,000 paid by OIC, Ollie Owner’s primary carrier;
  • Third $1,000,000 paid by UIC, Ollie Owner’s excess carrier;
  • Fourth $1,000,000 remains unpaid unless Ollie Owner has assets;
  • Then the trade contract is enforced, and since GC is responsible for indemnifying Ollie Owner, OIC and UIC recover their $2,000,000 back which is paid by EIC.
     

Courts have recognized two legal theories on assigning priority of insurance coverage: “vertical” and “horizontal” exhaustion. Generally speaking, vertical exhaustion is the theory that primary and excess policies purchased by the downstream parties must pay before any policies purchased by the upstream parties. Typically, vertical exhaustion reflects the intent of the parties seeking to transfer risk to the downstream party. By contrast, horizontal exhaustion is the theory that the downstream party’s excess policy is not triggered unless all applicable primary policies have been exhausted, including the upstream parties’ own primary CGL insurance.

I am a coverage purist. In saying that, I believe that New York has, generally, followed the horizontal exhaustion approach.  Under that approach, the plaintiff may not reach the EIC excess policy, except though the policies issued to, or covering, the GC.


That brings us to Scottsdale Insurance Company v. Mt. Hawley, reviewed in today’s issue.  Right result, but as a purist, imprecise reasoning.

In that case, 175 Broadway (“Owner”) as owner, hired Dome as general contractor (“GC”), for a construction project.  The GC was to indemnify the Owner and provide it with additional insured coverage.

Scottsdale sought reimbursement, from Mt. Hawley and Lloyd's, for a $2 million payment Scottdale contributed to settle an underlying personal injury suit. The court recognized that the horizontal exhaustion rule mandates that all primary policies be exhausted before excess coverage is triggered but found that the rules governing priority of coverage were inapplicable here.  First Mercury (“FM”) provided the GC with primary coverage in the amount of $1 million and Scottsdale provided the GC with $10 million in excess coverage.

Owner had its own coverage, Underwriters in the primary CGL policy with $1 million limits and Mt. Hawley with an excess policy with $3 million.

Eventually the injury case settled with FM paying $1 million and Scottsdale paying the balance of $2.275 million.

Scottsdale then complained in this lawsuit, seeking to recover from Owner’s primary carrier, the $1 million and from the owner’s excess carrier, its limits, arguing that the horizontal exhaustion rule required the exhaustion of the owner’s policies before the downstream policies from the GC.

At the end of the day, the appellate court jumped over the policies issued to the owner and held “since the owner was entitled to contractual indemnification from the general contractor due to a complete pass-through of liability, the excess policy issued to the GC Dome must respond before the primary and excess policies issued to 175 Broadway.  

The GC had waived its right of subrogation and thus the court found that it could not go after the owner’s coverage in any event.

From my perspective, if Scottsdale had not settled the case, and judgment had been entered against the Owner, the owner would have passed that liability down to the GC through the hold harmless agreement and the result would have been the same.  Scottsdale, having decided to settle the case, was stuck with its decision (and it would have been the same result because of the contractual risk transfer).

It is not the “intent” of the parties that should govern, it is policy terms and the contractual risk transfer.  If the plaintiff was Mary Hardhat and Scottsdale did not believe all of its coverage could be reached through risk transfer, because of insufficient coverage for the owner, then it should not settle the case.  That was not the issue here.

Anyway, read the decision and read the case and draw your own conclusions. I commend the victorious attorneys on winning it and one of them, Michael Savett, was kind enough to draw the summary in the attached issue.

 

Speaking of risk transfer ….

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Registration is around the corner for the PLRB Claim Conference and Expo in Orlando where I will be speaking on Risk Transfer, this time with John Hanlon, Director, Complex Claims and Litigation at Kemper.

Already preregistered for our programs are folks from about 30 different insurers.


Need a mediator?

Coverage mediation is a thing!  Subject matter expertise may be useful.

Hey coverage lawyers.  Hey professionals. Have you and a friend, adversary, or lawyer for whom who have respect reached a stalemate on a coverage dispute?  Look, we know each other.  We know that.  We don’t want to litigate every coverage disagreement.  Why?   Because the position we oppose today may be the one we advocate tomorrow.  Face it.  We all understand that.

Let me help mediate your disagreement to see if there is some mutual agreement, we can reach that will not box us into a corner. Reach out to me.  I will be pleased to mediate your dispute.

My partners, Mike Perley and Ann Evanko, are also available to help resolve other challenges.


You don’t want adverse precedent that will bite you next time you might have a slightly different view on coverage issues. You don’t want to spend tens of thousands of dollars to litigate a coverage issue before a motion judge or appellate justice that knows as much about insurance coverage as you do about nuclear physics.  For those in the Western District of New York, I am certified by the Court and on the WDNY Mediation Panel as are Mike and Ann.

Try mediation.
 

Newsletters:      

We have other firm newsletters to which you can subscribe by simply letting the editor (or me) know, including a new publication, which was created to advise on business and employment law questions:

  • Premises Pointers:  This monthly electronic newsletter covers current cases, trends and developments involving premises liability and general litigation. Our attorneys must stay abreast of new cases and trends across New York in both State and Federal Court and will now share their insight and analysis with you. This publication covers a wide range of topics including retail, restaurant and hospitality liability, slip and fall accidents, snow and ice claims, storm in progress, inadequate/negligent security, inadequate maintenance and negligent repair, service contracts, elevator and escalator accidents, swimming pool and recreational accidents, negligent supervision, assumption of risk, tavern owner and dram shop liability, homeowner liability and toxic exposures (just to name a few!).  Please drop a note to Jody Briandi at [email protected] to be added to the mailing list.
     

  • Labor Law Pointers:  Hurwitz Fine P.C.’s Labor Law Pointers offers a monthly review and analysis of every New York State Labor Law case decided during the month by the Court of Appeals and all four Departments. This e-mail direct newsletter is published the first Wednesday of each month on four distinct areas – New York Labor Law Sections 240(1), 241(6), 200 and indemnity/risk transfer. Contact Dave Adams at [email protected] to subscribe.
     

  • Products Liability Pointers:  Whether the claim is based on a defective design, flawed manufacturing process, or inadequate instructions/warnings, product liability litigation is constantly evolving.  Products Liability Pointers examines recent New York State and Federal cases as well as high court decisions from other jurisdictions, keeping our readers up to date with the latest developments and trends, and providing useful practice tips and litigation strategies.  This monthly newsletter covers all areas of product liability litigation, including negligence, strict products liability, breach of warranty claims, medical device litigation, toxic and mass torts, regulatory framework and governmental agencies.  Contact Brian F. Mark at [email protected] to subscribe.

  • Medical & Nursing Home Liability Pointers.  Medical & Nursing Home Liability Pointers provides the latest news, developments, and analysis of recent court decisions impacting the medical and long-term care communities. Contact Chris Potenza at [email protected] to subscribe.

 

Peiper on Property and Potpourri:

We start this week by joining Dan’s call to Orlando for PLRB’s annual conference.  Come for Dan’s risk transfer but stay for the enlightening discussion on navigating the various exclusions and coverage defenses found in construction defect claims.   I’ll be joined by Renee Carnuche who currently serves as the Claims Manager, Erie Branch for Erie Insurance Company.  We promise to keep you entertained, and, perhaps, point out a thing or two that you may not have realized.

Before Orlando, though, I’ll be traveling to IADC’s Mid-Year Meeting in Austin, Texas.  Looking forward to catching up with colleagues from around the country, and likewise learning a few new things along the way.  Before the sunshine of Austin, I have to brave the hard, cold ice of Detroit.  In what appears to be the final hockey trip of the season, we’ll be taking quick run-down Highway 401 (the “401” as our Canadian friends call it) to cross the bridge at Sarnia, Ontario.  My son’s team has had a great season, but as we’re closing in on 70 games since September, we’re all looking forward to a break in the action. 

For those geographically challenged, by the way, did you know that driving to Detroit from Downtown Buffalo is almost identical to driving to Albany?  Given the rapidity of travel down the 401, however, I’ll most likely spend less time in the car.  

That’s it for now.  See you in two weeks.

Steve
Steven E. Peiper

[email protected]

 

Bake Sale! – 100 Years Ago:

Democrat and Chronicle
Rochester, New York
17 Feb 1923

FIELD
BAKED GOODS

 Field electro fried cake will be unusually good today. Take home a dozen or 2—18c dozen.

KUCHEN

FOR

SUNDAY BREAKFAST

FIELD BAKE SHOP

129 CLNTON AVE., S.
 

Wilewicz’ Wide-World of Coverage:    

Dear Readers,    

This edition of the Wide World of Coverage comes to you on the heels of a recent jaunt to The Big Easy. Earlier this month I attended the ABA’s mid-year meeting in New Orleans for sessions with my various committees and a meeting of the Editorial Board of the ABA TIPS’s magazine The Brief. I had never been to the city before, and it was certainly an interesting experience. Between conference and meeting attendance, I had just enough time to visit the World War II museum (very well done), a national historical park right in the French Quarter (very informative), and even caught some live jazz in the evenings (quite fun). The steamboat dinner ride down the Mississippi was memorable as well.

Now, the nerd in me also visited the most important places of any city – the courthouses. The Fifth Circuit Court of Appeals was about five blocks from my hotel, so I could not help but make the pilgrimage. In honor of that, today’s case summary comes from that very court. In PHI Group, Inc. v. Zurich American, the Fifth Circuit just addressed an all-too-common point of law from recent years: Covid business interruption claims. See the attachment for the write-up and a link to the decision itself.

Until next time, cheers!  

Agnes
Agnes A. Wilewicz

[email protected]

 

Flirt Alert – 100 Years Ago:

The Buffalo Times
Buffalo, New York
17 Feb 1923

Lauren Gray’s
Love Gossip

          This is about Flirts. No need to read on if you are a Flirt because you know all about it.

          Ninety-seven per cent of our friends stop here. Detour.

          Flirts are like the hunters who go out to shoot elephants and then feel themselves badly used because the elephant turns on ‘em.

          Flirts excuse themselves with the plea that they seek a thrill. So do parachute leapers.

          Flirtations start like a meeting of the Tuesday Afternoon Sewing Circle and end like the battle of Bull Run.

          Girls who start flirtations allege they are misunderstood. When they are, they are insulted. Either way.

          There are insurance companies willing to write risks against cyclones, typhoons, fire, death, birth, sickness and moonshine poisoning. But no insurance company will write flirtation risks.

(Copyright John F. Dille Co.)

 

Barnas on Bad Faith:

Hello again:

One of my favorite sights every year is baseball players on the field for the first time during spring training.  Now that football is over, the Sabres are struggling, and Syracuse basketball needs a miracle to make the tournament, I am turning my attention to the diamond.  Baseball is my favorite sport, and I would consider myself to be a purist.  However, even I am excited and ready for the rule changes this year.  Better pace, more steals, and more balls in play can only help the game in my humble opinion.  I think it is going to be ugly for the first few weeks while the players get used to the rules, but I am hoping it will be worth it in the end.

I have an interesting case to report on this week involving the inadvertent omission of an HO3 form from a policy issued.  That form contained an exclusion that would bar coverage for the insured’s claim, but it was not included when the policy was issued.  The insured attempted to argue that the reissuance of the policy with the form by the insurer after it realized the mistake was bad faith.  The court rejected this argument, finding that it was not done with any bad intent or reckless indifference.  The court also found that there was no coverage for the claim because the HO3 form was incorporated into the policy.

Brian
Brian D. Barnas

[email protected]

 

Baseball Training – 100 Years Ago:

The News Tribune
Tacoma, Washington
17 Feb 1923

CHICAGO
CUBS OFF
FOR CAMP

First of Major Clubs to
Make Actual Journey
to Spring Training
Grounds

By Associated Press

          CHICAGO, Feb. 17.—Fires began flickering out in the hot stove league today with the departure of the Chicago Nationals for their spring training camp — the first of the major league clubs in the West to start preparation for the 1923 pennant race. The Cubs will establish camp on Catalina Island, 60 miles off Los Angeles.

          The Chicago White Sox have arranged to leave for their spring training camp at Sequin, Texas, a week from Monday, while the St. Louis Browns will get away for Mobile, Ala., on the same day. The Cardinals of St. Lous will entrain for their camp at Bradenton, Fla., February 24.

          Tris Speaker, manager of the Cleveland Indians, has ordered his players to report at Lake Land, Fla., on March 1. Some of the Indians already are in training at Hot Springs, Ark., preliminary to invading Florida for the real practice season.

          Ty Cobb plans to have his Detroit crew in camp at Macon, Ga., by March 1, while the Cincinnati players, under the direction of the veteran Pat Moran, will assemble March 3 for the dash to Orlando, Fla.

 

Kyle's Construction Column:

Dear Readers,

I got to enjoy some time away this weekend camping in Allegany with a few friends. Even though we had a cabin, we did have surprisingly good weather for the middle of February, so we were able to spend quite a bit of time outside. Had a great time hiking, enjoying the scenic views, and relaxing by the fire.

This week’s case involves a suit by an insured against his insurance company and his insurance agent arising out of a loss caused using defective concrete in the foundation of a construction project. The plaintiff asserted claims for breach of contract and breach of the covenant of good faith and fair dealing against the insurer, as well as claims for negligence and malpractice against his agent for the alleged failure to procure coverage.

Until next time…

Kyle
Kyle A. Ruffner

[email protected]

 

Out of Style? – 100 Years Ago:

The Buffalo Courier
Buffalo, New York
17 Feb 1923

WHAT IS SO RARE
AS STRAW HATS
THESE COLD DAYS?

          Washington, Feb. 16.—For the edification of a shivering United States, it was announced today by the census bureau that straw hats were 11.1 per cent less popular in 1921 than they were in 1919.

          If it interests you — The value of products of establishments engaged primarily in the manufacture of straw hats amounted to $28,617,000 in 1921 as compared with $32,187,000 in 1919.

 

Fleming’s Finest:

Dear Coverage Pointers Subscribers:

Love is in the air, but so is COVID. This week’s case from the Maryland Supreme Court considered whether an insurance policy covering all risks of physical loss or damage to insured property was triggered by COVID physically in the indoor air of the property or on the physical items at the property or the loss of the functional use of the property. No surprises here: the court answered that the presence of COVID causes neither tangible, concrete, and material harm to property nor deprivation of possession of said property.

Until next time,

Kate
Katherine A. Fleming

[email protected]

 

Not Very Studious – 100 Years Ago:

Poughkeepsie Eagle-News
Poughkeepsie, New York
17 Feb 1923

Only Four Flunk Out
at Vassar College

          There were only four unfortunates at Vassar this mid-year exam time: two freshman, one sophomore and one junior. The record is about the same as last year’s, and although statistics have not yet been made, the opinion seems to be that it is a better record than the average for the past years. Both the flunking freshman intend returning next year but will have to pass entrance examinations in order to do so.

 

Ryan’s Capital Roundup:

Hello Loyal Coverage Pointers Subscribers:

We have reached critical mass of children’s playthings in our family room and the only option appears expansion (at least for my sanity). I spent last weekend ripping out old wood paneling and insulation from my basement walls in preparation for waterproofing. That drop ceiling had to go, too, and so it did. Estimates to follow today, but I estimate that our main living space will open up to cleaner living within the year. What’s that you say? I am being too optimistic about being penciled in on contractor schedules? We shall see…

This week, I have an interesting write-up on a legislative bill that would amend the Financial Services Law to permit insurers to promote and incentivize participation in safe driving related loss prevention programs, including the use of telematics.

Until next time,

Ryan
Ryan P. Maxwell

[email protected]

 

Bootleggers Get the Boot – 100 Years Ago:

The Brooklyn Daily Eagle
Brooklyn, New York
17 Feb 1923

Life Insurance Companies
Find Bootleggers Bad Risks

          No matter how many healthy, wealthy or wise bootleggers may be, life insurance companies in Brooklyn and elsewhere do not consider them good risks and are daily turning down their applications for big insurance policies, it became known today.

          Men who a few years ago were glad to carry policies covering a few thousands are now making applications for policies ranging from $50,000 to $100,000, and in some instances even greater amounts. Unless the applicants have a high business standing, they are carefully investigated, and if there is any suspicion as to the source of their incomes, they are rejected. It matters not how good physical risks the examining physicians decide they may be.

          Every day applications for large policies and large increases in insurance are turned down on the ground that applicants are not good “moral hazards,” a Brooklyn insurance official stated today.

          “We investigate every applicant,” he said, “and if there is the slightest suspicion that he is a bootlegger, or violator of the law, we sidestep the application.”

 

Dishing Out Serious Injury Threshold:      

Dear Readers,

Hope everyone had a Happy Valentine’s Day and was able to enjoy the Superbowl. The year has been flying by and the nice weather will be here before we know it.

I have a couple cases to talk about in this issue, both out of the Second Department. Both also deal with defendants’ failure to adequately argue plaintiff’s gap in medical treatment as a basis for dismissal.

Enjoy,

Michael
Michael J. Dischley

[email protected]  

 

Interesting – 100 Years Ago:

Buffalo Truth
Brooklyn, New York
17 Feb 1923

Selected Snickers

Way of the World.

“Now, my dear, never let a man touch your lips who has touched liquor.”

         “I’ll promise, mother,” said that dutiful daughter. “But most men seem to prefer the liquor.”

          ***

           His Ambition.

           Dick’s parents are well-meaning but a trifle too strict, believing that “to spare the rod is to spoil the child.”

           When Dick was asked by a friend of the family what he would like to be when he grew up, he replied readily, “An orphan.”—             The Epworth Herald (Chicago.)

          ***

            Auto-Information.

            Our wonderful automobiles will tell future generations much about us; and locking devices on them will tell the rest. —                    Hartford Times.

 

Lee’s Connecticut Chronicles:

Dear Nutmeg Newsies:

It seems to always go this way—a quiet week follows a week of dramatic reporting. No new cases of interest. And it’s just as well, as I have been in trial prep mode recently. It’s an interesting UIM case involving whether a rental car for an undelivered vehicle was a temporary substitute on a commercial auto policy. We’ll let you know how it goes.

Lee
Lee S. Siegel

[email protected]

 

Tricked – 100 Years Ago:

The Buffalo News
Buffalo, New York
17 Feb 1923

Buys $100 Harem,
Can’t Locate It

  New York Bureau,

          Buffalo Evening News.

          NEW YORK, Feb. 17—Frank Menussa of 601 Plain Street, Homestead, N. J., was converted to Mohammedanism yesterday when a regulation Turkish harem consisting of six beautiful charmers was offered for the modest sum of $100.

          A stranger on a Passaic line trolley car sold the harem, which he said was at 45 Hill street, after he had pointed out two girls across the aisles as samples.

          Frank turned over the $100 and got off to look up his seraglio on Hill street.

          No. “45” was not there.

 

Rauh’s Ramblings:

Hello Readers!

I hope you are all having a great week. It has been a busy week of traveling for me for various court appearances. I was in Goshen, New York, yesterday for an appearance in Orange County and am traveling to Jamestown, New York, today for an appearance in Chautauqua County. I'm just glad we have had decent weather, so I wasn't forced to drive in bad conditions. It was a beautiful day in Goshen yesterday - I think the temp reached almost 70!

I don't have an ERISA/life insurance case to report on this week – the courts have been slow lately with these types of cases, but I will remain on the lookout for next time!

Until next time,

Patty
Patricia A. Rauh

[email protected]

 

Cracking Down – 100 Years Ago:

The Ithaca Journal
Ithaca, New York
17 Feb 1923

“Barber Bloc” Blocks
“Hairdressing” Bill
In Oregon Legislature

          Portland, Ore., Feb. 17—A “barber bloc” a new insidious force in legislation, is charged with the defeat of the “hairdressing” bill framed by the lady members of the Hairdressers and Cosmeticians Associations of this state. And so, the aspiration to be “standardized” expressed by many more young women who have found in the beautification of womankind a field for study, artistry and profit, is doomed to wither on the bench of legislative indifference far beyond the refreshing splash of the permanent wave.

          The barbers, it seems, want the beauty experts to call themselves barbers, and the cosmeticians object. There is a decided joker in the existing state barber law which makes it illegal for anyone not a licensed barber to “cut, trim or singe” the hair. Whether this law would punish a homebrew haircut around the edges of the family sugar bowl has not been determined.

          The beauty specialists have been bobbing the flappers and wanted to continue to do so. They also wanted separate licenses for beauty parlors, hoping to rid their craft of some who have brought reproach upon it by unquestionable conduct.

          The barber bloc said, “barbers or nothing.” The ladies are planning a fresh campaign. It will start with monthly style shows at which they will bring out the latest wrinkles and show how to remove them.

 

Storm’s SIU:

Hi Friends:

I’m getting a complex motion for summary judgment drafted and filed.  I will have double of the case reviews for your next edition.

I hope you have a good two weeks!

Scott
Scott D. Storm

[email protected]

 

HELP WANTED – 100 Years Ago:

The Post-Star
Glens Falls, New York
17 Feb 1923

WANTED
LABORERS

          On dam at Glens Falls, N. Y. 40c per hour. Boarding accommodations on job or in town.

          Apply at PARKLAP CONSTRUCTION CO. dam, Glens Falls.

 

Gestwick’s Greatest:

Hello Readers!

On the other side of a Super Bowl in which my beloved Buffalo Bills totally should have played, I have not much else to report.

Okay, that was a lie. I do have a pretty interesting and educational case to report on this week, though it is off my usual beat of State Supreme Court decisions. The New York State Appellate Division, First Department, reversed the lower-level court’s decision to deny an insurer’s motion to consolidate. There, the Court noted that consolidation would do away with the risk of duplicate discovery, inconsistent verdicts, and promote judicial economy. Moreover, the opposing party failed to argue, much less show, that she would be prejudiced by consolidation. Finding a common question of laws across all cases to be consolidated, the First Department granted the motion to consolidate. 

This case serves as a reminder of the basic fundamentals of when and how to consolidate, and what to do if you don’t want to do so.

Until next time,

Evan
Evan D. Gestwick

[email protected]

 

Death by Dentist – 100 Years Ago:

The Buffalo Times
Buffalo, New York
17 Feb 1923

Mrs. Cuedek Dies
In Dentist’s Chair

          Anesthetic administered to Mrs. Helen Cuedek, 38 years old, No. 156 Hickory Street, in the dental office of Dr. Martin Levy, No. 515 Elmwood Avenue, yesterday afternoon, was the cause of her death, according to the certificate of accidental death which was issued by Dr. Charles E. Long.

          Mrs. Cuedek visited the dentist’s office yesterday afternoon suffering with a severe toothache and after an examination Dr. Levy found it necessary to administer anesthetic.

          When the operation was finished it was found that the woman was dead.

 

On the Road with O’Shea:

Hello Readers,

Hope all is well as we make our way through the early part of the year. Unfortunately (or fortunately), the Appellate Divisions have been quiet on the SUM and auto liability front. But I do have a notable case from Kings County on the interpretation of “incorrect as a matter of law” regarding medical necessity. Essentially, the NYS Supreme Court found arbitrators have wide latitude in making evidentiary decisions.

Hopefully, as we stroll into spring, the courts will be more active on these issues.

Until then,

Ryan
Ryan P. O’Shea

[email protected]

 

Amusing – 100 Years Ago:

Yonkers Statesman
Yonkers, New York
17 Feb 1923

A WISE AND WITTY EDITOR

A THOUGHTFUL EDITOR RECENTLY WROTE:

“A Hearse is a Poor Vehicle in Which to Ride to Church,

Why Wait for It?”

          Could you do better than that?

          Was he only writing to editors?

          Try auto or trolley or just walking–tomorrow!

THE FIRST REFORMED—Phillipsburg Hall

“THE FRIENDLY CHURCH IN THE HALL”

Services—9 :45 A. M., 10 A. M., 11 A. M., 7 P. M., 8 P. M.

WELCOME

 

North of the Border:

At the end of this week, I am headed to the FDCC Winter Meeting in Nashville – a place that I have never been. It will be five days of fun, terrific CLE and catching up with friends. Both Dan and I are presenting. How’s that for coincidence?

The moral of the case that is reviewed in my column is “do not lie to your insurer – ever”.  Might be thinking of that as I sit in the Nashville bars listening to 68 songs about cheating and lying.

Take care,

Heather
Heather A. Sanderson
Sanderson Law, Calgary, Alberta

[email protected]

 

Headlines from this week’s issue, attached:

 

KOHANE’S COVERAGE CORNER
Dan D. Kohane

[email protected]

  • First Department Mixes Up Notice Requirements, First and Third-Party Coverage and the Insurer Wins the Day.  Thousands Flee
  • Claim for Breach of Fiduciary Duty Against Carrier that Served as Claim Handler Fails
  • Vertical Exhaustion Trumps Horizontal Exhaustion.  Should it? 

 

PEIPER on PROPERTY (and POTPOURRI)
Steven E. Peiper

[email protected]

  • Broad Waiver of Subrogation Clause is Enforced Just as it is Written
  • Question of Fact on whether Excluded Cause of Loss Resulted in a Covered Cause of Loss
  • COVID-19 Is NOT, Standing Alone, Physical Damage

 

DISHING OUT SERIOUS INJURY THRESHOLD
Michael J. Dischley

[email protected]

  • Defendant Expert Failed to Establish that the Alleged Injuries were not Caused by the Subject Accident, Therefore not Requiring Plaintiff to Explain any Gap in Treatment
  • Defendants Failed to Timely Raise a Gap in Treatment Argument in their Motion Papers and Only Raised it in the First Instance on Reply. As such, the Court Refused to Consider Same

 

WILEWICZ’S WIDE WORLD of COVERAGE:
Agnes A. Wilewicz

[email protected]

  • Fifth Circuit Holds, Consistently with Courts Around the Country, that Direct Physical Loss is Required for Economic Loss Claims due to Business Interruption Caused by the Covid-19 Pandemic

 

BARNAS on BAD FAITH
Brian D. Barnas

[email protected]

  • Good Faith and Fair Dealing Claim Dismissed where Insurer’s Reissuance of Policy with Omitted Form was not the Result of Intentional Wrongdoing or Reckless Indifference

 

LEE’S CONNECTICUT CHRONICLES
Lee S. Siegel

[email protected]

  • No cases of interest to report this fortnight.

 

KYLE'S CONSTRUCTION COLUMN
Kyle A. Ruffner
[email protected]

  • Court Holds the Plaintiff’s Claim arising from the use of Defective Materials is Not Covered under the Policy, Insurer did not Breach the Insurance Contract, and the Agency was not Guilty of Negligence as there was no Specific Request for Coverage not Satisfied and no Special Relationship to Create Heightened Duties

 

RYAN’S CAPITAL ROUNDUP
Ryan P. Maxwell

[email protected]

  • Bill Introduced That Would Clarify That Telematics Rewards Programs Do Not Violate “Anti-Rebate” Provisions of New York Financial Services Law

 

RAUH’S RAMBLINGS
Patricia A. Rauh

[email protected]

  • See you in two weeks.

STORM’S SIU
Scott D. Storm

[email protected]

  • Getting a complex motion for summary judgment drafted and filed.  Double cases next edition

 

FLEMING’S FINEST
Katherine A. Fleming

[email protected]

  • Presence of COVID Causes Neither Tangible, Concrete, and Material Harm to Property nor Deprivation of Possession of Property

 

GESTWICK’S GREATEST
Evan D. Gestwick

[email protected]

  • An Insurer’s Motion to Consolidate Multiple Actions Should be Granted if the Same Coverage Issue Applies to All Cases

 

ON the ROAD with O’SHEA
Ryan P. O’Shea

[email protected]

  • Incorrect As a Matter of Law Is Applies To Substantive Issues, Not Evidentiary Decisions By An Arbitrator

 

NORTH of the BORDER
Heather A. Sanderson
Sanderson Law, Calgary, Alberta

[email protected]

  • If a Single Event Triggers Different Claims Under Different Coverages of the Same Policy, and the Insured Lies About One of Those Claims, then the Insured Forfeits All Claims Under All Coverages of that Policy

 

All my best.
 

Hurwitz Fine P.C. is a full-service law firm providing legal services throughout the State of New York and providing insurance coverage advice and counsel in Connecticut.

In addition, Dan D. Kohane is a Foreign Legal Consultant, Permit No. 000241, issued by the Law Society of Upper Canada, and authorized to provide legal advice in the Province of Ontario on matters of New York State and federal law.


NEWSLETTER EDITOR
Dan D. Kohane

[email protected]

ASSOCIATE EDITOR
Agnes A. Wilewicz

[email protected]

ASSISTANT EDITOR
Patricia A. Rauh

[email protected]

INSURANCE COVERAGE/EXTRA CONTRACTUAL LIABILITY TEAM
Dan D. Kohane, Chair
[email protected]

Steven E. Peiper, Co-Chair
[email protected]

Michael F. Perley
Agnieszka A. Wilewicz
Lee S. Siegel
Brian F. Mark
Scott D. Storm
Thomas Casella
Brian D. Barnas
Eric T. Boron
Robert P. Louttit
Ryan P. Maxwell
Patricia A. Rauh
Diane F. Bosse
Kyle A. Ruffner
Katherine A. Fleming
Evan D. Gestwick
Ryan P. O’Shea

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

Michael F. Perley
Scott D. Storm
Brian D. Barnas

NO-FAULT/UM/SUM TEAM
Dan D. Kohane
[email protected]

Alice A. Trueman

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

Diane F. Bosse

Topical Index

Kohane’s Coverage Corner
Peiper on Property and Potpourri

Dishing Out Serious Injury Threshold
Wilewicz’s Wide World of Coverage

Barnas on Bad Faith

Lee’s Connecticut Chronicles

Kyle’s Construction Column

Ryan’s Capital Roundup

Rauh’s Ramblings

Storm’s SIU

Fleming’s Finest

Gestwick’s
Greatest
On the Road with O’Shea

North of the Border


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

02/14/23       Menlo Energy Florida, LLC v. Certain Underwriters, etc.
Appellate Division, First Department
First Department Mixes Up Notice Requirements, First and Third Party Coverage and the Insurer Wins the Day.  Thousands Flee

The notice provision in an insurance policy "is a condition precedent to coverage and, absent a valid excuse, the failure to satisfy the notice requirement vitiates the policy"  The notice provision at issue states:

"It is a condition precedent to liability that in the event of loss or damage insured under this Policy the insured shall give notice of loss or damage to Underwriters hereon as soon thereafter as practicable, and in any event within sixty (60) days of the date of loss after which any claim shall become forfeit."

The policy therefore required the insured to satisfy two distinct conditions to satisfy its notice obligations: (i) to provide Underwriters with notice of the loss or damage as soon as practicable; and (ii) to provide Underwriters with notice within 60 days of the date of loss.

An insurance policy provision that requires the insured to provide notice "as soon as practicable," like the provision at issue here, "mandates that notice be given within a reasonable time under the circumstances"  The insured knew, by July 25, 2013, that the vacuum blower at its plant was vibrating excessively and leaking oil internally from its seals, and that the loss of the vacuum blower would force the shutdown of all operations at the refinery for a significant period.

Although the date notice was provided is disputed, whether looking at the earliest date (September 14, 2013) or the latest date (September 25, 2013), the insured's notice was not "as soon as practicable" or reasonable. Prejudice is not an issue in this case, as Insurance Law § 3420, which requires liability insurers to demonstrate prejudice, "applies only to claims for death or bodily injury”.

Editor’s Note:  The court completely misread Insurance Law Section 3420(d)(2).  This was a first party claim for property and business interruption coverage, not a liability claim.  Section 3420(d)(2) only applies to liability insurance.  Secondly, notice TO an insurer is not covered by 3420(d)(2),  The court was right that 3420(d)(2) does not apply to third-party property cases, but this was not a third-party property case, it was a first party case

That subdivision applies to disclaimers.  If this were a liability policy, the presence or absence of prejudice with respect to the insured’s notice to the insurer, would be a factor.

 

02/09/23       New York Marine & Gen. Ins. Co. v.  Wesco
Appellate Division, First Department
Claim for Breach of Fiduciary Duty Against Carrier that Served as Claim Handler Fails

The lower court should have granted the motion to dismiss the action as against defendant AmTrust of North America, Inc. To state a claim for breach of fiduciary duty, plaintiff must allege that "(1) defendant owed them a fiduciary duty, (2) defendant committed misconduct, and (3) they suffered damages caused by that misconduct.  Further, "[a] cause of action sounding in breach of fiduciary duty must be pleaded with particularity."

There was a failure to plead sufficient facts to support its claim that AmTrust owed it a fiduciary duty. AmTrust was not a party to the policies at issue in the underlying lawsuits, and indeed had no contractual relationship with plaintiff, the excess insurer.

While plaintiff alleged that AmTrust was the authorized claims administrator for  Wesco Company and Technology Insurance Company at all relevant times, and "exercised direct and exclusive control over the claims and defense handling, the policies underwritten by [defendant insurers], and the coverages provided to the insureds," plaintiff alleges no facts giving rise to an inference of a special or confidential relationship between it and AmTrust.
 

02/27/23       Scottsdale Insurance Company v. Mt. Hawley Ins. Co.
Appellate Division, First Department
Vertical Exhaustion Trumps Horizontal Exhaustion. Should it? 

Summary submitted by Michael Savett, attorney for Lloyds.  Tim Delahunt represented Mt. Hawley.

Scottsdale Insurance Company was not entitled to contribution from two other insurers after settling an underlying Labor Law action for an additional $1.4 million, according to the First Department. Under the “circuity of the action” doctrine, Scottsdale, which insured a general contractor as a named insured on an excess basis, could not recoup money from the owner’s primary and excess insurers, Certain Underwriters at Lloyd’s and Mt. Hawley.

Relying on longstanding law in the First Department (Arch v. Nationwide and IICNA v. St. Paul), the appeals court rejected Scottsdale’s argument that under the principle of “horizontal exhaustion,” all primary insurance available to the owner should be exhausted before the excess layer is reached. According to the court, horizontal exhaustion was inapplicable because the owner was entitled to contractual indemnification from the general contractor due to a complete pass-through of liability. Because the pass-through would result in Scottsdale insuring the contractor’s contractual indemnity - the circuity - Scottsdale was obligated to respond on behalf of the owner before the owner’s own policies.

Editor’s Note:  Thanks to Michael Savett, who represented Certain Underwriters, for his contribution of tis summary.

Your Editor agrees with the result but not the approach taken by the court.  The complete pass through of liability should not change the rules of insurance construction.  The right of contractual indemnification may lead to recovery through the excess policy but should not change the priority of coverage.

Scottsdale sought reimbursement from Mt. Hawley and Lloyds.  Since the owners were entitled to contractual indemnification from the general contractor, Dome, that should not change the order of coverage.  The owners carriers should be responsible and then the contractual indemnity claim should pass liability to Dome and its carriers.  Dome’s excess carrier would end up paying but not because of vertical exhaustion, but because its insured is liability for contractual indemnification, and should then reimburse the owner’s carriers.

In other words, Dome’s umbrella carrier did not insure the owners directly and therefore should not be required to pay the judgment in their capacity as insurers from the owner.

 

PEIPER on PROPERTY (and POTPOURRI)
Steven E. Peiper

[email protected]

02/14/23       Certain Underwriters at Lloyds’ London v. Forty Seventh Fifth Co., Inc.       
Appellate Division, First Department
Broad Waiver of Subrogation Clause is Enforced Just as it is Written

Underwriters commenced this action in subrogation seeking recovery of loss that was it believes was the result of the negligence of defendant.  Defendant moved to dismiss the Complaint by application of a waiver of subrogation clause found both in the lease executed between it and Underwriters’ insured/tenant and in the Underwriters’ policy. 

Underwriters opposed the motion by arguing that the waiver of subrogation clause should be limited only instances involving the wearing or carrying of its insured’s jewelry.  However, a review of the Underwriters’ policy contained no such limitations.  Indeed, the waiver of subrogation extended to certain “persons or companies” of which defendant qualified as one. 

Because the phrase “persons or companies” as used in Underwriters’ policy was unambiguous, the Court rejected attempts to draw in the doctrine of ejusdem generis – which permits the reader to compare the other terms and phrases used around the disputed term to infer a group or category. 

 

02/14/23       SSP Springs, LLC v. First Specialty Insurance Corporation
Appellate Division, First Department
Question of Fact on whether Excluded Cause of Loss Resulted in a Covered Cause of Loss

Here, the policy excludes faulty workmanship, repair, construction, renovation, and remodeling from coverage. There is, however, also a carve-out providing coverage where such faulty work "results in a Covered Cause of Loss."

All ambiguities must be resolved against the insurer, the drafter of the language. "Covered Causes of Loss" is defined in the policy as "direct physical loss unless the loss is excluded or limited in this policy." Thus, the meaning of the carve-out as it relates to the rule is ambiguous and, at the very least, plaintiffs have pleaded their complaint sufficiently to survive a motion to dismiss. Hence, it is premature to dismiss the complaint based upon the "pollutant" exclusion.

The court also properly dismissed plaintiffs' bad faith claim as duplicative of their breach of contract claim, as plaintiffs may seek the same damages through their breach of contract claim, including consequential damages, if they can prove that they were foreseeable.

Peiper’s Point – This is a dangerous decision because the facts are so thin.  As with many first party exclusions, the defective work product exclusion provides coverage if the defective work product’s failure resulted in a Covered Cause of Loss.  The defective work is not, and is never, covered.  The resulting damage, however, may be depending on the circumstances. 

We’re troubled by the inclusion of ambiguity into the analysis.  The language never has been deemed ambiguous, and we’re alarmed that this decision may give rise to scrutiny being directed to language that, heretofore, has been understood and afforded its plain and ordinary meaning.

 

02/09/23       Madison Square Garden Sports Corp. v. Factory Mutual Ins.
Appellate Division, First Department
COVID-19 Is NOT, Standing Alone, Physical Damage

Another COVID claim, another win for sound policy interpretation.  In affirming the trial court’s partial dismissal of plaintiff’s actions, the First Department noted that to trigger coverage for physical damage the insured must, in fact, allege physical damage.  COVID-19 closures are categorically not allegations of physical damage, and accordingly so there is no coverage found under the Factory Mutual policy.   

 

DISHING OUT SERIOUS INJURY THRESHOLD
Michael J. Dischley
[email protected]

02/08/23       Crystal G. Hospedales v. New York City Transit Authority, et al
Appellate Division, Second Department
Defendant Expert Failed to Establish that the Alleged Injuries were not Caused by the Subject Accident, Therefore not Requiring Plaintiff to Explain any Gap in Treatment

In an action to recover damages for personal injuries, the plaintiff appeals from an order of the Supreme Court, Kings County (Rosemarie Montalbano, J.), dated June 25, 2020. The order granted the defendants' motion for summary judgment dismissing the complaint on the ground that the plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102(d) as a result of the subject accident.

The plaintiff commenced this action to recover damages for personal injuries that she allegedly sustained in a motor vehicle accident that occurred on October 14, 2015. The defendants moved for summary judgment dismissing the complaint on the ground that the plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102(d) as a result of the accident. The Supreme Court granted the motion. The plaintiff appeals.

The defendants met their prima facie burden of demonstrating that the plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102(d) as a result of the accident. The defendants demonstrated, prima facie, that the plaintiff did not sustain a serious injury under the permanent consequential limitation of use or significant limitation of use categories of Insurance Law § 5102(d). In opposition, however, the plaintiff raised a triable issue of fact as to whether she sustained serious injuries to the cervical and lumbar regions of her spine under the permanent consequential limitation of use and significant limitation of use categories of Insurance Law § 5102(d).

Since the defendants failed to establish that the alleged injuries to the cervical and lumbar regions of the plaintiff's spine were not caused by the accident, the burden never shifted to the plaintiff to explain any gap in treatment.

In light of our determination, we need not reach the parties' remaining contentions.

Accordingly, the Supreme Court should have denied the defendants' motion for summary judgment dismissing the complaint.

 

02/01/23       Alphonso Carrier v. Vasyl Gleba, et al
Appellate Division, Second Department
Defendants Failed to Timely Raise a Gap in Treatment Argument in their Motion Papers and Only Raised it in the First Instance on Reply. As such, the Court Refused to Consider Same

In an action to recover damages for personal injuries, the defendants appeal from an order of the Supreme Court, Kings County (Wavny Toussaint, J.), dated July 16, 2021. The order denied the defendants' motion for summary judgment dismissing the complaint on the ground that the plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102(d) as a result of the subject accident.

The plaintiff commenced this action to recover damages for personal injuries that he allegedly sustained in a motor vehicle accident. The defendants moved for summary judgment dismissing the complaint on the ground that the plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102(d) as a result of the accident. In an order dated July 16, 2021, the Supreme Court denied the defendants' motion, and the defendants appeal.

The defendants failed to meet their prima facie burden of showing that the plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102(d). The defendants' expert, who examined the plaintiff, set forth range-of-motion findings for the cervical and lumbar regions of the plaintiff's spine, but failed to compare those findings to what is normal. Nevertheless, with respect to causation, the defendants demonstrated, prima facie, that the plaintiff's alleged injuries were not caused by the subject accident.

In opposition, however, the plaintiff raised a triable issue of fact as to whether the alleged injuries to the cervical and lumbar regions of his spine were caused by the accident. We have not considered the defendants' contention regarding a gap in treatment, since it was improperly raised for the first time in their reply papers and not addressed by the Supreme Court in its order.

Accordingly, the Supreme Court properly denied the defendants' motion for summary judgment dismissing the complaint.

 

WILEWICZ’S WIDE WORLD of COVERAGE
Agnes A. Wilewicz

[email protected]

01/30/23       PHI Group, Inc. v. Zurich American Insurance Company
United States Court of Appeals, Fifth Circuit
Fifth Circuit Holds, Consistently with Courts Around the Country, that Direct Physical Loss is Required for Economic Loss Claims due to Business Interruption Caused by the Covid-19 Pandemic

PHI Group offered helicopter services for numerous global customers in the oil and gas, air medical, technical services, and health-care industries. Their insurance carrier Zurich had insured them under an “all-risk” policy from February 1, 2020, to February 1, 2021. Notably, this inception date was just before the start of the global Covid-19 pandemic. Shortly after the pandemic started, PHI started to suffer losses due to the interruption of its business services.

The PHI/Zurich policy had provided for coverage for “direct physical loss of or damage caused by a Covered Cause of Loss to Covered Property, at an Insured Location.” The policy defined “Covered Cause of Loss” as “all risks of direct physical loss of or damage from any cause unless excluded.”

While the policy included a section on time element and business interruption, as well as civil or military authority coverage (and no virus exclusion), the analysis stopped at the coverage grant. Indeed, after the pandemic began to severely affect American life and businesses, many insureds made claims under their insurance policies for the significant interruptions they faced. However, the PHI/Zurich policy, like many liability policies, expressly required a “direct physical loss of or damage” to property. Here, PHI asserted that the damage was caused by coronavirus particles on surfaces and materials within its facilities. Yet, this is neither “physical loss” nor is it “damage”. As such, and consistent with decisions from around the country, there is no coverage for such financial losses.

 

BARNAS on BAD FAITH
Brian D. Barnas

[email protected]

02/13/23       232 Dune Road, LLC v. Scottsdale Insurance Company
United States District Court, Southern District of New York
Good Faith and Fair Dealing Claim Dismissed where Insurer’s Reissuance of Policy with Omitted Form was not the Result of Intentional Wrongdoing or Reckless Indifference

Dune was formed in 2019 to acquire a vacant oceanfront property in Quogue, New York and build a luxury one-family home.  The Gaetanos, the principals of Dune, had used Conklin to procure insurance for two other projects they had performed.  Gaetano emailed Gerard Quinn of Conklin and informed him they were in contract to purchase a vacant lot at 232 Dune Road and requested a policy to cover the vacant land.

An insurance quote was issued that identified an HO3 policy form, which is a standard form of insurance used in the insurance industry generated by the Insurance Services Office, and read “Builders Risk” in the occupancy field.  The homeowners policy application and builders risk supplemental questionnaire were signed on March 3, 2020.  A binder was issued, which indicated the policy form was an HO3 and that the occupancy type was Builders Risk.

However, the Scottsdale policy that was eventually issued did not contain the HO3 form or list it on the Schedule for Forms and Endorsements.  The policy did contain an endorsement for Builders Risk Liability.

After the policy was issued, concrete work was taking place at the project.  Testing revealed that the concrete foundation for the project could not hold the load required to support the structure.  Dune filed a claim with Scottsdale and listed the description of the loss as defective concrete.  Scottsdale informed Dune that the policy did not cover defective concrete, referencing the exclusion for faulty, inadequate, or defective workmanship, construction, or materials used in repair, construction renovation, or remodeling in the HO3 form.

Dune was unable to locate the relevant exclusion in the policy.  Scottsdale determined that the HO3 policy form had been omitted as a result of a printing error.  Scottsdale reissued the policy with the same policy number and effective dates, now including the HO3 form.

According to Conklin, it understood that the exclusion for faulty work and defective materials in the HO3 form would be included in the policy when the request to bind it was made.  Conklin did not specifically advise Dune on what an HO3 policy was.  Dune claimed it did not know what an HO3 policy was, and that it fully expected that a claim resulting from the work of a subcontractor would be covered.

Dune commenced a lawsuit against Scottsdale and Conklin.  Plaintiff asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing against Scottsdale.  The claims against Conklin included breach of contract, negligence, and professional malpractice.

On the breach of contract claim, Scottsdale argued that the HO3 form was incorporated into the policy by reference, and the court agreed.  The court found that the HO3 form was expressly and clearly identified and referred to in the policy, and that the references to the endorsement clearly demonstrated that the purpose of the reference was to incorporate the HO3 form into the policy.  Having concluded that the policy form was incorporated, the court concluded that the exclusion relied upon by Scottsdale applied to bar coverage for the loss.

The court also dismissed the good faith and fair dealing claim.  Dune argued that Scottsdale backdated the policy to include the HO3 form in an act of bad faith.  However, Dune failed to put forth any evidence that the backdating of the policy was the result of any intentional wrongdoing or reckless indifference.  Scottsdale did not backdate the policy; it merely included a form that should have been included in the first place.  There was no intent to deceive or gain an unfair advantage.

Scottsdale also counterclaimed seeking reformation of the policy to include the HO3 form.  The court concluded that it did not need to determine if the policy should be reformed because the HO3 form was incorporated.  However, it did analyze the reformation argument and conclude that reformation would be appropriate if the form had not been incorporated.

The court also granted summary judgment dismissing the claims against the broker.  Conklin had obtained the homeowners, builders risk policy that Dune asked it to obtain.  The court also found that there was no special relationship between Plaintiff and Conklin.  Dune had not made a specific request to Conklin as to whether the policy covered defective materials in applying for coverage, and the principals of plaintiff had only engaged in three transactions with Conklin over eight years.

 

LEE’S CONNECTICUT CHRONICLES
Lee S. Siegel

[email protected]

No cases of interest to report this fortnight.
 

KYLE'S CONSTRUCTION COLUMN
Kyle A. Ruffner

[email protected]

02/13/23       232 Dune Rd., LLC v. Scottsdale Ins. Co.
United States District Court for the Southern District of New York
Court Holds the Plaintiff’s Claim arising from the use of Defective Materials is Not Covered under the Policy, Insurer did not Breach the Insurance Contract, and the Agency was not Guilty of Negligence as there was no Specific Request for Coverage not Satisfied and no Special Relationship to Create Heightened Duties

Michael Gaetano and his father were real estate developer and the sole members of Dune, which is a New York limited liability company. Dune was formed in order to acquire a vacant oceanfront property in New York and to build a luxury one-family home. Prior to the project at issue, Conklin insurance agency and its principal, Quinn, procured insurance for prior projects completed by the Gaetanos. Gaetano emailed Quin to inform him they were purchasing the vacant lot at issue, requesting that Quinn procure a policy to “cover this piece of land”. According to Gaetano, the only request was for the policy to be a homeowner, builder risk policy with the type of structure being built and for the coverages included in a builders risk policy. Quinn emailed Gaetano the proposed policy coverages on February 7, 2020.

Gaetano then informed Quinn that he would need to have a workers’ compensation policy in place to get permits to build and was issued a new business insurance quote by Scottsdale Insurance Company. On March 2, 2020 Gaetano informed Quinn that the Business Risk policy looked good and asked to put it in place. Gaetano testified that Conklin had authority to act on Dune’s behalf in binding the coverage that had been proposed in the Scottsdale quote, which mirrored his homeowner’s policy application. Further, Gaetano signed a builders risk supplemental questionnaire and on March 4, Scottsdale issued an insurance policy that indicated the policy form was an “HO3” and that the occupancy type was “builder’s risk”. Gaetano received a copy of the policy issued by Scottsdale on March 26, 2020. The policy did not contain the HO3 form and, therefore, the policy neither explained its coverage nor set forth any exclusions. According to both Gaetano and Quinn, Quinn did not review or explain the coverages set forth in the Policy.

After the concrete foundation for the project was installed, testing revealed the concrete used could not hold the load required to support the structure. Gaetano notified Quinn of the failure and requested he file a claim for the loss. Therefore, the insurance agency filed a loss notice for the defective concrete, but Scottsdale informed the insured that the policy did not cover the claim due to policy exclusions for faulty, inadequate, or defective workmanship, construction, or materials used in construction. Gaetano claims that he fully expected that a claim resulting form the work of one of his subcontractors would be covered, however, he does not point to anything Quinn or Conklin said to give him that expectation. 

Therefore, Dune brought this action against Scottsdale for breach of contract and violation of the covenant of good faith and fair dealing, seeking a judgment that Scottsdale is obligated to perform its contractual obligations and that the plaintiff is entitled to coverage for the loss. Plaintiff also set forth claims against Conklin for breach of contract, negligence, and malpractice.

Scottsdale moved for summary judgment on the breach of contract claim on the grounds that the HO3 form was incorporated into the policy be reference, that it clearly excluded coverage for the loss, and the plaintiff could not selectively enforce the policy form by claiming to be covered by it but not be subject to its exclusions. The court found that no rational juror could reach any conclusion other than that the reference to HO3 in the policy unambiguously incorporated the HO3 form by reference. The reference was to the policy form itself and was repeatedly referenced through the 44 page policy.  However, the plaintiff argued that the policy provided coverage on its own without the need to rely on the HO3 form and thus argued Scottsdale could not rely on the exclusion. However, the court explained that under New York law, plaintiffs cannot seek the benefit of insurance coverage without being subject to the limitations of that coverage. As such, because the HO3 form was incorporated by reference, because without it there is no coverage, and because with it the damages are excluded, plaintiff’s breach of contract claim against Scottsdale was denied.

Further, the court dismissed the plaintiff's claim against Scottsdale for breach of the implied covenant of good faith and fair dealing. New York law does not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim based on the same facts is also pled. Therefore, in the absence of any evidence of intent to deceive or take unfair advantage, the court held a reasonable jury could not conclude that Scottsdale’s conduct constituted bad faith or unfair dealing. In addition, the court rejected plaintiff’s cause of action for declaratory judgment, as the court already determined that Scottsdale was not obligated to indemnify the policy ff for damages arising from the defective materials. Lastly, with regards to the claims against Scottsdale, the court held it need not reach Scottsdale’s claim for reformation of the policy because the court held the HO3 form was incorporated by reference in the Policy but, even if the HO3 form were not incorporated, reformation would have been appropriate.

The plaintiff also brought claims against the insurance agency, Conklin, for breach of contract, negligence, and professional malpractice. Plaintiff alleged Conklin failed to procure adequate insurance coverage for the construction project and failed to reasonably advice Dune in the purchase of adequate insurance. Conklin asserted that the plaintiff did not make a specific request for coverage and even if it had, the requested coverage was not available.

Insurance agents have a duty to obtain requested coverage for their clients within a reasonable time. To set forth a case for negligence a plaintiff must establish that a specific request was made for coverage that was not provided in the policy. The issue in this case was whether Gaetano’s request for builders risk liability coverage was a specific request for coverage of claims for defective materials. However, while plaintiff claimed that Quinn was aware of plaintiff’s need or desire for defective materials coverage, the court concluded that none of the evidence presented indicated that the plaintiff was seeking coverage for defective materials. Further, for purposes of determining whether plaintiff made a specific request, the court held it was irrelevant whether Gaetano subjectively expected that the policy would cover all work to be performed by the subcontractors.

Lastly, the plaintiff argued that even if Gaetano did not make a specific request for coverage, Conklin had a duty to advise or direct the plaintiff to obtain coverage for defective materials because they had a special relationship. Where a special relationship develops between the broker and client, the broker may be liable for failing to advise or direct the client to obtain additional coverage even in the absence of a specific request. Under New York law, situations that may give rise to a special relationship include (1) the agent receives compensation apart form the payment of premiums, (2) there was an interaction regarding a question of coverage, with the insured relying on the expertise of the agent, or (3) there is a course of dealing over an extended period of time between the agent and the insured. However, here, the court held that Gaetano did not raise the question of whether the policy would cover defective materials claims and the fact that Gaetano believed he was covered, without reliance on specific statements by the agent, was insufficient to constitute a special relationship. Further, the plaintiff alleged nothing further than the existence of an eight year relationship with the agent, which is insufficient to establish the requisite special relationship, as the plaintiff only engaged in three transactions over the eight year period. Therefore, the court held the plaintiff’s claims against Conklin failed.

Accordingly, Scottsdale’s motion for summary judgment, as well as Conklin’s, were granted by the court, and the plaintiff’s cross motion was denied.
 

RYAN’S CAPITAL ROUNDUP
Ryan P. Maxwell
[email protected]

Legislative List

02/02/23       Insurance Incentives For Use Of Telematics Devices
New York State Legislature
Bill Introduced That Would Clarify That Telematics Rewards Programs Do Not Violate “Anti-Rebate” Provisions of New York Financial Services Law

Assembly Bill No. A03056 and its counterpart Senate Bill No. S03553 currently reside in their respective committees on insurance. These bills, if passed, would allow insurance companies to offer incentives to both insureds and prospective insureds for participating in certain risk management programs through the use of “telematics devices”. As outlined in the Sponsor Memorandum:

“‘Telematics’ refers to the technology of sending, receiving, and storing information relating to remote objects, such as vehicles, via telecommunication devices. The term is often used to refer specifically to the use of the technology in connection with the provision of auto insurance, See Insurance Circular Letter No. 4, Insurance Telematics and Usage-Based Auto Insurance (May 27, 2014).”

By the Sponsor’s estimation, “approximately forty-nine states allow for such telematics rewards programs and recognize that these programs do not constitute an improper rebate under their respective anti-rebate statutes.”

Sounds like New York was behind on this one (at least in its black letter law). However, this law would add a provision in New York Financial Services Law §2324 expressly allowing these types of loss prevention programs. Currently, §2324 prohibits insurers broadly from providing “any rebate from the premium which is specified in the policy” or similar incentive while negotiating an insurance policy with an insured or potential insured. The new proposed language would indicate that

“This section shall not prohibit any insurer from offering participation in a loss prevention program that promotes and incentives safe driving behavior with points-based rewards so long as participation in such program is offered both to members of the general public and to the insurer's policyholders.”

I do note that the proposed new language is not limited to the use of telematics devices, despite the Sponsor’s focus on their utility as the purpose of this measure.

Maxwell’s Minute: Programs like this assist insurers in overall risk assessment, improving the availability of data and information that allows for more accurate calculation of the probability of tomorrow’s fortuitous happenings. Nothing is certain, except the inevitability of death, taxes, and the next claim notice (whatever it may be).

 

RAUH’S RAMBLINGS
Patricia A. Rauh

[email protected]

See you in two weeks.
 

STORM’S SIU
Scott D. Storm

[email protected]

Getting a complex motion for summary judgment drafted and filed.  Double cases next edition
 

FLEMING’S FINEST
Katherine A. Fleming

[email protected]

02/01/23       Tapestry, Inc. v. Factory Mut. Ins. Co.
Supreme Court of Maryland
Presence of COVID Causes Neither Tangible, Concrete, and Material Harm to Property nor Deprivation of Possession of Property

Factory Mutual Insurance Company (“FM”), the appellee, issued two first-person, all-risk commercial property insurance policies to Tapestry, Inc. (“Tapestry”) covering policy periods in which Tapestry’s stores were closed in connection with the COVID-19 pandemic. The primary coverages provided under those policies are triggered by “physical loss or damage” to covered property.

Tapestry owns “modern luxury accessory and lifestyle brands” including Coach, kate spade new york, and Stuart Weitzman. Tapestry operates over 1,400 stores in the U.S. and internationally, including 15 stores in Maryland.

Tapestry submitted claims to FM under the policies for losses exceeding $700 million. In responses to notices of claims Tapestry provided under both Policies, FM denied coverage under all coverages except the Communicable Disease Response and Interruption by Communicable Disease coverages, neither of which is predicated on “physical loss or damage” to property. In its denial letters, FM contended that Tapestry could not meet the requirement of other coverages because “the presence of COVID-19 does not cause physical loss or damage.” FM also asserted that coverage was barred by the Contamination Exclusion in the Policies.

After FM denied coverage for the bulk of Tapestry’s claim, Tapestry sued. In the lawsuit, pending in the United States District Court, Tapestry contends that coverage under the policies is triggered because it suffered “physical loss or damage” both by the presence of Coronavirus in its stores and when those stores had to close for business due to the presence of Coronavirus. In response, FM contends that “physical loss or damage” requires structural alteration or permanent dispossession of property, and that Tapestry suffered neither.

Allegedly, the presence of Coronavirus/COVID-19 rendered objects, surfaces, and areas exposed to them dangerous and fatal. Tapestry argued that Coronavirus causes the same physical loss or damage to property as that of ammonia, smoke, soot, radon gas, asbestos and other hazardous substances. As such, Tapestry also argued that the temporary, functional loss of use of covered property constituted physical loss or damage. Further, Tapestry argued that Coronavirus damaged the air in its covered properties (citing no case law stating that air is covered by a property damage policy). Finally, Tapestry argued that Coronavirus rested on and adhered to surfaces of property at its stores, which “alter[ed] these objects to become vectors of disease.”

The United States District Court certified a question of law to the Maryland Supreme Court, which reformulated the question as:

When a first-party, all-risk property insurance policy covers “all risks of physical loss or damage” to insured property from any cause unless excluded, is coverage triggered when a toxic, noxious, or hazardous substance—such as Coronavirus or COVID-19—is physically present in the indoor air of that property; is also present on, adheres to, and can later be dislodged from physical items on the property; and causes a loss, either in whole or in part, of the functional use of the property?

The Court answered: No, provided the substance causes neither tangible, concrete, and material harm to the property nor deprivation of possession of the property.

The Court reasoned that based on its ordinary meaning, physical loss does not include a temporary functional loss of use. “Physical loss or damage” to covered property must involve tangible, concrete, and material harm to the property or a deprivation of possession of the property. Thus, the Court agreed with FM that “physical loss or damage” requires “tangible, physical changes to insured property.” Looking at the phrase in the context of the Policies as a whole confirmed that a reasonable person would understand physical loss or damage to require tangible, concrete, and material harm to the property or a deprivation of possession of the property.

 

GESTWICK’S GREATEST
Evan D. Gestwick

[email protected]

02/09/23       Liberty Mut. Ins. Co. v. Bonilla
New York State Appellate Division, Fourth Department
An Insurer’s Motion to Consolidate Multiple Actions Should be Granted if the Same Coverage Issue Applies to All Cases

The defendant was sitting in a parked vehicle when said vehicle was struck by another car, causing the defendant to suffer injuries. As a result of the collision, the defendant sought no-fault coverage under her auto insurance policy with Liberty Mutual, which contained a provision requiring the insured claimant to appear for an examination under oath (“EUO”).

When the insured failed to appear for her EUO, Liberty Mutual denied coverage due to the insured’s failure to cooperate with this policy condition. Subsequently, two of the medical service providers with which the defendant treated as a result of her injuries brought a total of eight separate lawsuits against Liberty Mutual, each of which sought payment for the medical services provided.

The same coverage issue applied in all eight cases—that is, the fact that the insured defendant failed to appear for her EUO as required of her by the terms of the policy, thereby breaching a policy condition. Liberty Mutual moved to consolidate the eight cases brought by the medical providers, in an effort to avoid duplicative discovery, potentially inconsistent verdicts, and the risk of having to conduct multiple trials. The lower court denied Liberty Mutual’s motion.

The standard for when multiple cases may be consolidated into one is covered by New York Civil Practice Law and Rules (“CPLR”) Section 602(a). That section provides that courts may grant motions to consolidate if it finds that the actions to be consolidated involve a common question of law or fact. A defense to a motion to consolidate, however, is that consolidation would prejudice the non-moving party.

In reversing the lower court’s decision denying the motion to consolidate, and instead granting it, the appellate court reasoned that consolidation was appropriate in this instance because, absent consolidation, Liberty Mutual would risk inconsistent verdicts and multiple trials. Moreover, the court noted that, in its opposition, Bonilla failed to argue that she would be prejudiced.

This case serves as a very important lesson, regardless of which side of the consolidation equation on which one finds itself. The takeaway is this: the party wishing to consolidate must show that there exists a common question of law and fact across all cases to be consolidates, and that the absence of consolidation would risk inconsistent verdicts, multiple trials, and duplicative discovery. Another factor commonly considered with respect to a motion to consolidate is the promotion of judicial efficiency. Meanwhile, the party opposing consolidation may make a showing that its rights would be prejudiced by consolidation. This is especially true in the realm of insurance litigation, where an insurer runs a serious risk of prejudice by having its case tried alongside the underlying matter.

 

ON the ROAD with O’SHEA
Ryan P. O’Shea

[email protected]

 

02/09/23       American Tr. Ins. Co. v Right Choice Supply, Inc.
New York State Supreme Court, Kings County
Incorrect As A Matter Of Law Is Applies To Substantive Issues, Not Evidentiary Decisions By An Arbitrator

American Tire sought to vacate a heating arbitrator’s award under 11 NYCRR 65-4.10 as incorrect as a matter of law. The Kings County Court considered whether an error of law extends to an arbitrator’s finding of medical necessity, specifically, that where an insurer asserts lack of medical necessity does a provider need to submit expert medical evidence that refers to necessity and/or rebuts the insurer’s expert medical opinion.

American Tire rejected the award to Right Choice for services provided to an assignor injured in a motor vehicle accident. The injury focused on the Assignor’s right knee and the recovery devices needed after surgery. In supporting its argument, American Tire submitted was a peer report completed by a Dr. Skolnick. Right Choice then submitted an opposing report by Dr. Sinha. In granting an award in favor of Right Choice, the lower arbitrator found the surgeon’s notes themselves provided the best evidence of the causal connection between the injury and the medical necessity, as well as, letters of medical necessity, medical records, and the lack of an EUO by either party. The lower arbitrator found the lack of an EUO rendered American Tire’s claim verification argument without merit.

The master arbitrator found the lower arbitrator acted within his discretion in making his findings. The master arbitrator concluded that he could not find the lower decision incorrect as a matter of law or arbitrary or capricious, thereby affirming the award. American Tire’s petition to vacate premised its argument that Right Choice failed to refer to, or rebut the conclusions set forth in Dr. Skolnick’s peer review. American Tire framed the issue as a point of well settled law.

In its discussion, the Kings County Court found Dr. Sinha’s report was not in fact rebuttal and that the other supporting evidence of medical necessity was also not rebuttal. However, the Court noted procedural or factual errors are not encompassed in “as a matter of law” language. It also noted that the American Tire’s most supportive case involved a summary judgment. It explained that while American Tire would have surely been victorious on summary judgment, because Dr. Sinha’s report did not rebut or refer to Dr. Skolnick’s report, it did not apply to arbitration awards or an arbitrator’s decision.

In limiting “incorrect as a matter of law” to substantive issues, not evidentiary issues, the court reasoned that 11 NYCRR 65-4.10 (a) (4) provided an exception. Specifically, that “procedural or factual errors committed in the arbitration are not encompassed within this ground” in reference to incorrect as a matter of law. The Court found that arbitrators are given wider latitude to determine what is sufficient evidence. Additionally, the Court found the task of determining medical necessity is a finding of fact and not a conclusion of law. Accordingly, the Court found that the arbitrators were not bound by the well-established law presented by American Tire requiring Right Choice to submit its own expert witness that rebutted or specifically referred to Dr. Skolnick’s peer review.

The Court found the proper way to challenge the award was whether the award was reached in a rational manner, not arbitrary and capricious. Based on the record, the Court found the lower arbitrator acted rationally with evidence supporting his award. The Court also affirmed the master arbitrator’s award as well.

 

NORTH of the BORDER
Heather A. Sanderson
Sanderson Law, Calgary, Alberta

[email protected]

02/06/23       Abbas v. Esurance Insurance Company of Canada, 2023 ABCA 36
Alberta Court of Appeal
If a Single Event Triggers Different Claims Under Different Coverages of the Same Policy, and the Insured Lies About One of Those Claims, then the Insured Forfeits All Claims Under All Coverages of that Policy

All vehicles in Alberta must be registered, licensed, and insured. The minimum third party liability limits are $200,000 but most primary auto policies carry limits well beyond the statutory minimum.

If an Alberta resident is injured because of the use and operation of an uninsured vehicle, then the injured party can:

  1. Claim “no-fault” benefits under his or her own auto policy. These benefits cover the cost of certain forms of medical treatment that is not funded by provincial health care plans and, in the event of accident induced disability, minimal amounts of income loss.

  2. Sue the uninsured registered owner and operator of the at-fault vehicle. In that event, the Administrator of the Motor Vehicle Accident Claims Act will defend the uninsured registered owner of the uninsured vehicle and pay any provable claim up to and including $200,000.

If the injured party has a claim for injuries or damages in excess of $200,000, then that injured party can sue his or her own auto insurer under coverage known as the “SEF 44” for the difference between the assessed claim and the recovery paid by the Administrator of the Motor Vehicle Accident Claims Fund, but only if:

  1. injured party is the named insured under an auto policy with limits in excess of $200,000; and,

  2. according to the Alberta Court of Appeal in a judgment released February 6, 2023, did not lie on any part of any other claim under that auto policy.

In 2014, Ali Abbas was the backseat passenger of an insured vehicle when it was involved in a collision. Abbas was thrown clear of the collision and injured. At the time of that collision, he was the named insured under an Alberta Standard Auto policy issued by Esurance Insurance Company of Canada, a federally incorporated, P&C insurance company, that is a wholly owned subsidiary of Allstate Insurance Company of Canada.

  1. Abbas filed a claim for the no-fault benefits under Section B of his auto policy and a claim under the SEF 44 which is, as stated above, another coverage offered under the same policy. Separate adjusters were appointed for each claim. However, Abbas lied to the Section B adjuster – he said that he was employed when he wasn’t and submitted falsified employment records. Abbas was found out and admitted to the lies and the fraud. The SEF 44 adjuster took the position that in view of s. 554 of the Alberta Insurance Act, Abbas had forfeited all of his rights under the Esurance policy when he lied on his Section B claim.

    Section 554(1) reads:

554(1) If

...

(b) the insured contravenes a term of the contract or commits a fraud, or

(c) the insured wilfully makes a false statement in respect of a claim under the contract,

a claim by the insured is invalid and the right of the insured to recover indemnity is forfeited.

Mr. Abbas argues that a plain reading of “a claim” in section 554 means that two types of coverage under a single policy are not contemplated. Therefore, the invalidation of a claim or forfeiture of the indemnity provided by the policy would be confined to the claim in which the insured perpetrated the fraud.

The Alberta Court of Queen’s Bench (as it was then known) disagreed stating:

In this case, I find the conduct of Mr. Abbas reprehensible. This was not a case of mere inadvertence. He lied on multiple occasions and falsified documents. The fraud was also perpetuated in multiple contexts: in the original application; over the phone; and then through fabricated records. He provided a false certificate of employer and falsified a hiring letter. He also has his uncle participate in the fraud by advising the adjuster that Mr. Abbas had worked for him under the table, when such assertion was false.

Mr. Abbas asserts that the SEF 44 claim is a separate claim and his fraud in the claim for Section B benefits ought not to carry over to impact his claim under the SEF 44 endorsement.

In this case there is a single policy and a single motor vehicle accident. Although there are different elements to the claim or even perhaps different claims, these claims arose out of one accident and the claims were under one policy of insurance.

Mr. Abbas appealed to the Alberta Court of Appeal.

That Court noted that a single event – the auto accident – resulted in the claim for Section B benefits and the SEF 44 claim under one policy of insurance. “The insured’s claims for Section B and SEF No. 44 benefits constitute “a claim” under section 554(1) because they both arise from the same event – the automobile accident caused by the uninsured motorist – and are made under the same insurance contract. “[A]n insurer has no obligation to provide an insured with any benefits if the insured made a willfully false statement in support of a claim under a policy and all other claims arise under the same insurance contract and from the same event... An insured who files a fraudulent proof of loss under that circumstance is not entitled to a single dime from the insurer.”  That court noted that this severe result has been the law for 200 years.

If the Alberta Court of Appeal has its way, it will be the law for another 200 years.

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