New York Law Review

Tag: Direct Action Statute

  • 175 East 74th Corp. v. Hartford Accident and Indemnity Co., 51 N.Y.2d 585 (1980): Direct Action Against Insurer Requires Liability Policy

    175 East 74th Corp. v. Hartford Accident and Indemnity Co., 51 N.Y.2d 585 (1980)

    A fidelity bond, which insures against loss of property due to employee dishonesty, is not a “contract or policy insuring against liability” under New York Insurance Law § 167, and therefore does not permit a direct action against the insurer by a third party upon the insolvency of the insured.

    Summary

    A cooperative apartment corporation (plaintiff) sought to recover directly from an insurer (Hartford) under a fidelity bond issued to its managing agent (RBW), after RBW misappropriated the plaintiff’s funds and became insolvent. The plaintiff argued that Insurance Law § 167 allowed a direct action against Hartford. The New York Court of Appeals held that the fidelity bond was not a liability insurance policy within the meaning of § 167, because it insured against the insured’s direct loss of property, not the insured’s liability to a third party. Therefore, the plaintiff could not sue Hartford directly.

    Facts

    Plaintiff hired RBW to manage its building, collect rents, and pay expenses. RBW agreed to obtain a fidelity bond covering employees responsible for plaintiff’s funds. Hartford issued a fidelity bond to RBW, covering losses sustained by RBW due to fraudulent or dishonest acts of its employees. Plaintiff discovered RBW had misappropriated its funds. Plaintiff sued RBW, its officers, and Hartford. The complaint against Hartford was dismissed due to the plaintiff’s default. A judgment was later entered against RBW for $50,000. RBW became insolvent, and the judgment remained unsatisfied.

    Procedural History

    The Supreme Court, Special Term, granted Hartford’s motion to dismiss the second action based on res judicata and the inapplicability of Insurance Law § 167. The Appellate Division reversed, finding the prior dismissal not a bar and § 167 applicable. The Appellate Division certified the question of whether its order was properly made to the Court of Appeals.

    Issue(s)

    Whether a fidelity bond, insuring against loss due to employee dishonesty, constitutes a “contract or policy insuring against liability” within the meaning of Insurance Law § 167, thus permitting a direct action against the insurer upon the insured’s insolvency.

    Holding

    No, because the fidelity bond insures against direct loss of property sustained by the insured, not against the insured’s liability to a third party.

    Court’s Reasoning

    Insurance Law § 167 allows a direct action against an insurer only when the policy insures against liability. The statute’s purpose is to prevent an insurer from escaping liability when the insured becomes insolvent. The court distinguished between liability policies, which cover the insured’s obligations to third parties, and indemnity policies, which cover the insured’s own losses. The fidelity bond issued by Hartford insured RBW against direct loss of property due to employee dishonesty. The court emphasized that “[n]othing applicable to the employee dishonesty coverage indicates that the agreement insures against liability asserted by a third person. Indeed, by its terms, the coverage attaches to a loss of property irrespective of the insured’s liability therefor.” The fact that RBW might be liable to the plaintiff for the misappropriated funds does not transform the fidelity bond into a liability policy. The court rejected the plaintiff’s reliance on Coleman v. New Amsterdam Cas. Co., 247 N.Y. 271, noting that in Coleman, the policy expressly provided coverage against liability imposed by law. The Court stated, “It is only where the insured’s liability for injury to a third party forms the basis of coverage… that section 167… ensures that the benefits of that coverage will run to the injured party. Absent that predicate, however, there is no basis for invoking section 167.”

  • Oltarsh v. Aetna Ins. Co., 15 N.Y.2d 110 (1965): Enforceability of Foreign Direct Action Statutes

    Oltarsh v. Aetna Ins. Co., 15 N.Y.2d 110 (1965)

    A direct action statute of a foreign jurisdiction, which allows an injured party to sue an insurer directly, is substantive law and may be enforced in New York courts unless it violates a fundamental principle of justice, prevalent moral conception, or deep-rooted tradition of the common weal.

    Summary

    A New York resident was injured in Puerto Rico due to the alleged negligence of a Puerto Rican corporation insured by Aetna. The plaintiff sued Aetna directly in New York, relying on a Puerto Rican statute permitting direct actions against insurers. The New York Court of Appeals reversed the lower court’s dismissal, holding that the Puerto Rican statute created a substantive right and did not violate New York’s public policy. The court reasoned that Puerto Rico had the most significant contacts with the case, and New York’s policy against disclosing insurance coverage to juries was not a sufficient basis to refuse enforcement.

    Facts

    The plaintiff, a New York resident, was injured in Puerto Rico after slipping and falling in a building owned by a Puerto Rican corporation. The defendant, Aetna Insurance Company, had issued a public liability insurance policy in Puerto Rico covering the premises where the accident occurred. The plaintiff then sued Aetna directly in New York based on a Puerto Rican statute allowing such direct actions.

    Procedural History

    The Supreme Court, Special Term, dismissed the complaint, holding that the direct action was against New York’s public policy based on Morton v. Maryland Cas. Co. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the Puerto Rican direct action statute is procedural or substantive for conflict of laws purposes?
    2. Whether enforcing the Puerto Rican direct action statute in New York would violate New York’s public policy?
    3. Whether the Puerto Rican statute restricts direct actions to be brought only in the courts of Puerto Rico?

    Holding

    1. Yes, because the statute creates a separate and distinct right of action against the insurer, going beyond merely redefining parties or providing a procedural shortcut.
    2. No, because New York’s rule against disclosing insurance is not absolute and is only meant to prevent improper influence on the jury where the fact of insurance is irrelevant.
    3. No, because the statute contains no built-in venue provision or language restricting direct actions to Puerto Rican courts. The provision cited by the defendant is solely for the protection of the insured.

    Court’s Reasoning

    The court determined that the Puerto Rican statute created a substantive right by making insurers immediately liable and negating “no action” clauses. This went beyond mere procedure. The court noted that New York undertakes its own characterization of a foreign statute, but considered it relevant that the federal appeals court for Puerto Rico treated the statute as substantive under Erie. Puerto Rico had a legitimate interest in safeguarding the rights of those injured within its borders and ensuring compensation. Applying the law of Puerto Rico was appropriate because it had the most significant relationship with the matter in dispute.

    The court rejected the argument that enforcing the statute violated New York public policy. The rule precluding disclosure of insurance aims to prevent improper influence on juries. Here, the insurance company was a direct defendant, making the existence of insurance relevant and proper. “Public policy is not determinable by mere reference to the laws of the forum alone.” The court quoted Loucks v. Standard Oil Co. stating, “We are not so provincial as to say that every solution of a problem is wrong because we deal with it otherwise at home.”

    Finally, the court found no indication that Puerto Rico intended its statute to be enforced solely in its own courts. The statute lacked a built-in venue provision, unlike the Louisiana statute in Morton. The provision cited by the defendant aimed only to protect insured parties, not restrict venue for direct actions.