Albert J. Schiff Associates, Inc. v. The Travelers Indemnity Company, 50 N.Y.2d 673 (1980)
An insurer’s disclaimer of liability based on specific policy exclusions does not waive its right to later assert that the claim falls outside the scope of the policy’s insuring clause, because waiver cannot create coverage where none exists under the policy’s terms.
Summary
Albert J. Schiff Associates, Inc., an insurance agency, sued its insurers, Lloyd’s, after Lloyd’s disclaimed coverage for a lawsuit filed against Schiff in Massachusetts. The Massachusetts suit alleged that Schiff misappropriated a competitor’s insurance program. Lloyd’s disclaimed based on policy exclusions related to dishonest acts, failure to pay premiums, and personal profit. Schiff argued that the disclaimer waived Lloyd’s right to deny coverage based on the insuring clause. The New York Court of Appeals held that the initial disclaimer did not prevent the insurer from later arguing that the claim fell outside the scope of the policy’s coverage because waiver cannot create coverage where none exists in the first place. The court emphasized the importance of distinguishing between conditions of coverage (which can be waived) and the scope of coverage itself.
Facts
Albert J. Schiff Associates, Inc. (Schiff), an insurance agency, purchased professional indemnity insurance policies from Lloyd’s insurers. A competitor, Backman, sued Schiff in Massachusetts, alleging Schiff misappropriated Backman’s “Double Dollar Plan” insurance program after it was revealed to Schiff under a non-disclosure agreement. Backman claimed Schiff willfully usurped this trade secret for its own “Executive Salary Protection Plan.” Lloyd’s disclaimed coverage, citing policy exclusions related to dishonest acts, failure to pay premiums, and personal profit.
Procedural History
Schiff sued Lloyd’s in New York after Lloyd’s disclaimed coverage. Special Term initially ordered Lloyd’s to defend Schiff in the Massachusetts action, finding the disclaimer and the complaint didn’t align. The Appellate Division reversed, holding the Massachusetts claim was not within the policy coverage because it did not allege a negligent act, error, or omission in the performance of professional services. Schiff appealed to the New York Court of Appeals.
Issue(s)
Whether an insurer’s disclaimer of liability, based on specified exclusions in an insurance policy, waives the insurer’s right to assert that the claim is outside the scope of the insuring clause of the policy.
Holding
No, because waiver cannot create insurance coverage where none exists under the policy’s terms. The insurer can still argue the claim falls outside the policy’s scope despite initially disclaiming based on specific exclusions.
Court’s Reasoning
The court reasoned that the scope of insurance coverage is determined by both the insuring agreement and the exclusions. These two components define the limits of the insurer’s obligation. Waiver, defined as the voluntary relinquishment of a known right, applies to conditions of the policy, such as timely notice of a loss. It does not, however, extend coverage beyond what was originally bargained for. The court distinguished waiver from equitable estoppel, which may apply if an insurer undertakes the defense of a case without reserving its rights, thereby prejudicing the insured. The court held that the Massachusetts lawsuit, alleging willful misappropriation of a trade secret, fell outside the scope of the professional indemnity policies, which covered liability arising from errors, omissions, or negligent acts in the performance of professional services. The court stated: “An errors and omissions policy is intended to insure a member of a designated calling against liability arising out of the mistakes inherent in the practice of that particular profession or business.” The court rejected the argument that because the allegedly misappropriated plan related to insurance activities, the lawsuit was covered. The court emphasized that coverage requires a direct connection to the performance of professional services and not merely an indirect connection to the insured’s business. The court stated that because the insurers at all times denied liability to indemnify and refused to undertake to defend, the defense of noncoverage remained intact. The court cited Gerka v. Fidelity & Cas. Co., 251 N.Y. 51, 56, clarifying that “where the issue is the existence or nonexistence of coverage (e.g., the insuring clause and exclusions), the doctrine of waiver is simply inapplicable”.