New York Law Review

Tag: Insurance Law

  • QBE Insurance Corp. v. Jinx-Proof, Inc., 23 N.Y.3d 1106 (2014): Effective Disclaimer of Coverage Despite Confusing Language

    QBE Insurance Corp. v. Jinx-Proof, Inc., 23 N.Y.3d 1106 (2014)

    An insurance company’s disclaimer of coverage is effective if it sufficiently apprises the insured of the grounds for disclaimer, even if the disclaimer contains some contradictory or confusing language.

    Summary

    QBE Insurance Corp. issued a liability policy to Jinx-Proof, Inc. that contained an assault and battery exclusion. After a patron sued Jinx-Proof for injuries sustained from an employee’s intentional act, Jinx-Proof notified QBE. QBE sent two letters disclaiming coverage for the assault and battery claims but also mentioned defending the matter under the liquor liability portion of the policy, reserving rights for assault and battery allegations. QBE then sought a declaratory judgment that it had no duty to defend or indemnify Jinx-Proof. The New York Court of Appeals held that QBE’s disclaimer was effective because the letters specifically and consistently stated the policy excluded assault and battery coverage, sufficiently apprising Jinx-Proof of the basis for the disclaimer despite some confusing language.

    Facts

    • QBE Insurance Corp. issued a liability policy to Jinx-Proof, Inc. with an assault and battery exclusion.
    • In December 2007, a patron of Jinx-Proof’s bar sued for injuries allegedly caused by an employee throwing a glass at her face.
    • Jinx-Proof notified QBE of the lawsuit in January 2008, which included claims of negligence and intentional acts.
    • QBE sent two letters to Jinx-Proof disclaiming coverage for the assault and battery claims but also mentioning defending under the liquor liability portion, reserving rights.

    Procedural History

    • QBE commenced a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify Jinx-Proof.
    • The Supreme Court granted QBE’s motion for summary judgment.
    • The Appellate Division modified the order, declaring that QBE was not obligated to defend Jinx-Proof, and otherwise affirmed.
    • Jinx-Proof appealed to the New York Court of Appeals.

    Issue(s)

    Whether an insurance company’s disclaimer of coverage is effective when the disclaimer letters contain some contradictory or confusing language but specifically state that the policy excludes coverage for the relevant claims.

    Holding

    Yes, because the letters specifically and consistently stated that Jinx-Proof’s insurance policy excludes coverage for assault and battery claims, which was sufficient to apprise Jinx-Proof that QBE was disclaiming coverage on that ground, regardless of any contradictory or confusing language.

    Court’s Reasoning

    The Court of Appeals focused on the clarity of the disclaimer regarding the assault and battery exclusion. The court stated, “Although the letters contained some contradictory and confusing language, the confusion was not relevant to the issue in this case. The letters specifically and consistently stated that Jinx-Proofs insurance policy excludes coverage for assault and battery claims.” This specific disclaimer was sufficient to inform Jinx-Proof that QBE was disclaiming coverage based on the exclusion. The court cited Blue Ridge Ins. Co. v Jiminez, 7 AD3d 652, 653 (2d Dept 2004), to support the principle that a disclaimer can be effective even with a reservation of rights. The court also declined to consider Jinx-Proof’s argument about potential coverage under the liquor liability portion of the policy, as this argument was not raised in the lower courts and was based on information outside the record. The court emphasized that neither party submitted the liquor liability portion of the policy to the motion court, making the argument “unreviewable” and “based on pure speculation.” This case clarifies that the key requirement for an effective disclaimer is clear communication of the grounds for denial, even if other parts of the communication are less clear.

  • K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co., 23 N.Y.3d 584 (2014): Insurer’s Right to Assert Policy Exclusions After Breaching Duty to Defend

    K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co., 23 N.Y.3d 584 (2014)

    An insurer that breaches its duty to defend its insured may still rely on policy exclusions to deny indemnification, provided the exclusions do not depend on facts established in the underlying litigation.

    Summary

    This case addresses whether an insurer that wrongly refuses to defend its insured can later rely on policy exclusions to avoid indemnifying the insured for a resulting judgment. The New York Court of Appeals, on reargument, reversed its prior decision and held that an insurer is not barred from asserting policy exclusions, even after breaching its duty to defend, as long as the exclusions do not require relitigating issues from the underlying case. The Court emphasized the importance of stare decisis and declined to overrule its prior precedent in Servidone Constr. Corp. v Security Ins. Co. of Hartford, which allowed insurers to invoke policy exclusions even after breaching the duty to defend.

    Facts

    Jeffrey Daniels, insured by American Guarantee, faced legal malpractice claims. American Guarantee refused to defend Daniels, who then suffered a default judgment. Daniels assigned his rights against American Guarantee to the plaintiffs from the malpractice suit, who then sued American Guarantee to enforce the duty to indemnify. American Guarantee argued that policy exclusions barred coverage.

    Procedural History

    The plaintiffs were initially granted summary judgment, which was affirmed by the Appellate Division. The Court of Appeals initially affirmed in K2 Investment Group, LLC v American Guar. & Liab. Ins. Co., but later granted reargument. On reargument, the Court of Appeals reversed the Appellate Division’s order and denied the plaintiffs’ motion for summary judgment.

    Issue(s)

    Whether an insurer that breaches its contractual duty to defend its insured is barred from later relying on policy exclusions to deny indemnification for a judgment against the insured.

    Holding

    No, because the insurer is not barred from relying on policy exclusions to deny indemnification, provided the exclusions do not depend on facts established in the underlying litigation.

    Court’s Reasoning

    The Court relied heavily on its prior decision in Servidone, which held that an insurer could still assert policy exclusions even after breaching its duty to defend. The Court rejected the argument that Servidone was distinguishable because it involved a settlement rather than a judgment. The Court stated that the duty to indemnify does not depend on whether the case is settled or results in a judgment. The Court distinguished Lang v Hanover Ins. Co., stating that while Lang held that an insurer may litigate only the validity of its disclaimer, it did not involve a defense based on policy exclusions. The Court emphasized the importance of stare decisis, finding no reason to overrule Servidone, which had been followed for nearly three decades. The Court also found that the applicability of the “insured’s status” and “business enterprise” exclusions presented an issue of fact sufficient to defeat summary judgment, as the malpractice claims could have arisen partly out of Daniels’s status as a manager of Goldan. The court reasoned that the alleged malpractice may have occurred because Daniels was serving two masters (plaintiffs, his clients, and Goldan, the company of which he was a principal), thus possibly triggering the policy exclusions. As the court in Servidone stated: “Security responded that, pursuant to an exclusion in the policy, a loss based upon any obligation the insured had assumed by contract was outside coverage”.

  • Country-Wide Ins. Co. v. Preferred Trucking Services Corp., 22 N.Y.3d 571 (2014): Timeliness of Disclaimer for Non-Cooperation

    Country-Wide Ins. Co. v. Preferred Trucking Services Corp., 22 N.Y.3d 571 (2014)

    An insurer’s disclaimer of coverage based on an insured’s non-cooperation must be made within a reasonable time after it is clear that further attempts to elicit the insured’s cooperation would be futile, and the reasonableness of the delay is evaluated on a case-by-case basis.

    Summary

    Country-Wide Insurance sought a declaratory judgment that it had no duty to defend or indemnify Preferred Trucking and its driver, Arias, in a personal injury lawsuit due to their failure to cooperate. The New York Court of Appeals held that Country-Wide’s disclaimer was timely because, despite diligent efforts, Arias’s lack of cooperation wasn’t clear until shortly before the disclaimer. The court emphasized that insurers must be given reasonable latitude to secure cooperation before disclaiming coverage, especially when initial non-compliance is followed by sporadic promises of cooperation. This case underscores the insurer’s heavy burden to demonstrate diligent efforts to secure the insured’s cooperation before issuing a disclaimer.

    Facts

    Gallina sued Preferred Trucking and its driver, Arias, for personal injuries. Country-Wide, Preferred Trucking’s insurer, repeatedly tried to contact the company’s president, Markos, and Arias, without success. Plaintiffs sought a default judgment, prompting Country-Wide’s initial notice of potential disclaimer. Markos briefly expressed willingness to cooperate but remained unreachable. Despite ongoing efforts, Arias only became reachable several months later. After initially promising cooperation, Arias later stated he did not care about the deposition date. Country-Wide then disclaimed coverage based on non-cooperation.

    Procedural History

    The Supreme Court struck the defendant’s answer, awarded judgment to the Gallinas, and directed an assessment of damages. Country-Wide then sued for a declaration that it had no duty to defend or indemnify. The Supreme Court declared Country-Wide obligated to indemnify Preferred Trucking but not Arias. The Appellate Division affirmed, finding the disclaimer untimely. The Court of Appeals reversed, holding the disclaimer was timely.

    Issue(s)

    Whether Country-Wide’s disclaimer of coverage, issued approximately four months after its initial awareness of potential non-cooperation, was timely under New York Insurance Law § 3420(d)(2), given its ongoing efforts to secure the insured’s cooperation.

    Holding

    No, because Country-Wide acted reasonably in continuing its efforts to secure Arias’s cooperation, and the insured’s lack of cooperation only became definitively clear shortly before the disclaimer was issued.

    Court’s Reasoning

    The Court of Appeals emphasized that Insurance Law § 3420(d)(2) requires insurers to disclaim coverage “as soon as is reasonably possible.” However, timeliness is case-specific, especially when disclaiming for non-cooperation, which “is often not readily apparent” (Continental Cas. Co. v Stradford, 11 NY3d 443, 449 [2008]). The Court reiterated that insurers should disclaim only after it’s clear that further attempts to elicit cooperation will be futile. The court highlighted the insurer’s “heavy” burden to show it acted diligently in seeking cooperation and that the insured’s attitude was one of “willful and avowed obstruction” (Thrasher v United States Liab. Ins. Co., 19 NY2d 159, 168 [1967]). Here, the delay was justified because Arias, the driver, initially promised cooperation after prior unresponsiveness. His ultimate unwillingness to cooperate became clear only shortly before the disclaimer. The Court reasoned that as long as Country-Wide was seeking Arias’s cooperation in good faith, it could not disclaim.

  • Executive Plaza, LLC v. Peerless Ins. Co., 22 N.Y.3d 511 (2014): Enforceability of Contractual Limitation Periods in Insurance Policies

    Executive Plaza, LLC v. Peerless Ins. Co., 22 N.Y.3d 511 (2014)

    A contractual limitation period in an insurance policy is unenforceable if it requires suit to be brought within a certain time from the date of loss, while also imposing a condition precedent (like completion of property replacement) that cannot reasonably be met within that same period.

    Summary

    Executive Plaza, LLC sued Peerless Insurance Company to recover replacement costs under a fire insurance policy. The policy required the insured to complete repairs before claiming replacement costs and to bring suit within two years of the fire. After a fire damaged Executive Plaza’s building, the replacement took longer than two years. The court held that the two-year limitation period was unreasonable and unenforceable because the insured could not both complete the repairs and file suit within that timeframe. This case highlights that contractual limitation periods must be fair and allow a reasonable opportunity to bring suit.

    Facts

    Executive Plaza, LLC owned an office building insured by Peerless Insurance Company. A fire on February 23, 2007, significantly damaged the building. The insurance policy allowed for payment of either “actual cash value” or “replacement cost,” but required the property to be actually repaired or replaced before any replacement cost would be paid and to be done as soon as reasonably possible. The policy also had a clause requiring any legal action to be brought within two years of the loss. Peerless paid the actual cash value, but Executive Plaza sought additional payment for the replacement cost. The building replacement wasn’t completed within the two-year period.

    Procedural History

    Executive Plaza initially sued Peerless in state court seeking a declaratory judgment, which Peerless removed to federal court. The District Court dismissed the case as premature because the building hadn’t been replaced yet. After the building was replaced, Executive Plaza sued again in state court, and Peerless again removed to federal court. The District Court dismissed the second suit, finding the two-year limitation period barred the action. Executive Plaza appealed to the Second Circuit, which certified the question of whether the two-year limitation was enforceable to the New York Court of Appeals.

    Issue(s)

    Whether an insured is covered for replacement costs under a fire insurance policy that (1) allows reimbursement of replacement costs only after the property is replaced and requires replacement “as soon as reasonably possible,” and (2) requires suit within two years of the loss, if the property cannot reasonably be replaced within two years.

    Holding

    Yes, because a contractual limitation period is unreasonable and unenforceable if the policy requires certain actions that cannot be completed within the limitation period, effectively nullifying the claim.

    Court’s Reasoning

    The Court of Appeals held that while a shorter contractual limitations period is generally enforceable if reasonable, the two-year limitation in this case was unreasonable because it was impossible to comply with the policy’s requirement to complete the replacement before bringing suit within that period. The court emphasized that the issue was not the duration of the limitation period itself, but rather the accrual date, which effectively prevented the insured from bringing suit. The court quoted Judge Crane’s dissent in Continental Leather Co., stating that the limitation period should be fair and reasonable based on the circumstances of the particular case. The court distinguished Blitman Constr. Corp. v. Insurance Co. of N. Am., where a 12-month limitation was upheld because the insured could have brought suit before the limitation period expired. Here, the insured *did* bring suit within the period, but the insurer successfully argued it was premature. The court found that Peerless could not claim the suit was both premature and time-barred, thus making the limitation period unenforceable. The court reasoned that Peerless chose to insure the plaintiff for replacement costs, and therefore could not impose a limitation that rendered the coverage valueless. As the court stated, a “limitation period” that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim.

  • Bentoria Holdings, Inc. v. Travelers Indemnity Co., 19 N.Y.3d 60 (2012): Interpreting ‘Earth Movement’ Exclusions in Insurance Policies

    19 N.Y.3d 60 (2012)

    When an insurance policy explicitly excludes earth movement caused by both natural and man-made events, damage caused by excavation on an adjacent property is not covered.

    Summary

    Bentoria Holdings sued Travelers Indemnity after its building suffered damage from excavation on a neighboring property, claiming the damage was covered under its insurance policy. Travelers denied the claim, citing an “earth movement” exclusion. The New York Court of Appeals reversed the Appellate Division’s decision, holding that the policy’s explicit exclusion of earth movement caused by “man made” events unambiguously applied to excavation, thus precluding coverage. The court distinguished this case from a prior ruling, emphasizing the significance of the ‘man-made’ clause in clarifying the exclusion’s scope.

    Facts

    Bentoria Holdings owned a building in Brooklyn insured by Travelers Indemnity Company. A neighboring property underwent excavation. The excavation caused cracks and damage to Bentoria’s building. Bentoria filed an insurance claim with Travelers. Travelers denied the claim based on the “Earth Movement” exclusion in the policy.

    Procedural History

    Bentoria Holdings sued Travelers in the Supreme Court for breach of the insurance policy. The Supreme Court denied Travelers’ motion for summary judgment. The Appellate Division affirmed the Supreme Court’s decision. The Appellate Division granted Travelers leave to appeal to the New York Court of Appeals.

    Issue(s)

    Whether an “earth movement” exclusion in an insurance policy, which expressly applies to man-made causes, unambiguously excludes coverage for damage caused by excavation on an adjacent property.

    Holding

    No, because the policy explicitly excludes earth movement caused by “man made or other artificial causes,” the damage resulting from excavation is not covered.

    Court’s Reasoning

    The court distinguished this case from Pioneer Tower Owners Assn. v State Farm Fire & Cas. Co., where a similar earth movement exclusion was deemed ambiguous because it lacked the “man made” clause. In Pioneer, the court found that it was reasonable to argue that “the intentional removal of earth by humans” was not clearly excluded. However, in this case, the policy’s explicit exclusion of earth movement “due to man made or other artificial causes” directly contradicts the argument that excavation is not an excluded event. The court emphasized that insurance policies should be interpreted based on the plain meaning of their language. Since the policy clearly excluded man-made earth movement, it unambiguously excluded damage caused by excavation. The court stated that, “By expressly excluding earth movement ‘due to man made or other artificial causes,’ the policy contradicts the idea that ‘the intentional removal of earth by humans’ is not an excluded event.” Therefore, the court concluded that no reasonable interpretation of the policy would provide coverage for the damage in question. The court’s decision underscores the importance of clear and unambiguous language in insurance policies to accurately reflect the intended scope of coverage and exclusions.

  • Admiral Ins. Co. v. Joy Contractors, Inc., 19 N.Y.3d 448 (2012): Rescission Based on Insured’s Misrepresentation Affects Additional Insureds

    Admiral Ins. Co. v. Joy Contractors, Inc., 19 N.Y.3d 448 (2012)

    An insurer’s claim for rescission of an insurance policy based on the named insured’s material misrepresentations in the underwriting process can affect the coverage of additional insureds under the same policy.

    Summary

    This case concerns an insurance coverage dispute arising from a crane collapse during the construction of a high-rise condominium. Admiral Insurance sought a declaration of no coverage based on alleged misrepresentations by the named insured, Joy Contractors, in its underwriting submission and a residential construction exclusion. The New York Court of Appeals held that if the policy is rescinded due to the named insured’s misrepresentations, additional insureds also lose coverage. The court also found that a factual dispute existed as to whether the building was “mixed-use” or purely residential, requiring further investigation.

    Facts

    Joy Contractors, Inc., was the structural concrete contractor for a high-rise condominium. A tower crane collapsed during construction, causing multiple deaths, injuries, and property damage. Joy carried a CGL policy with Lincoln General and an excess policy with Admiral. Admiral received notice of the accident and sent reservation-of-rights letters, raising concerns about coverage based on a residential construction activities exclusion and alleged inaccuracies in Joy’s underwriting submission. Joy had represented it specialized in drywall and did not perform exterior work or work above two stories, which Admiral claimed was false.

    Procedural History

    Admiral filed suit seeking a declaration of no coverage. The Supreme Court denied Admiral’s motion for summary judgment on the residential construction exclusion and dismissed causes of action against Reliance and the owners/developers related to Joy’s alleged misrepresentations. The Appellate Division modified, declaring the residential construction activities exclusion inapplicable, and otherwise affirmed. The Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the residential construction activities exclusion in the excess policy applies to preclude coverage.

    2. Whether Admiral’s causes of action seeking relief based on Joy’s alleged false statements in its underwriting submission are precluded against additional insureds.

    3. Whether the LLC exclusion in the CGL policy precludes coverage of those owners/developers that are limited liability companies.

    Holding

    1. No, because there is a material issue of fact as to whether the building was residential or “mixed-use.”

    2. No, because if the excess policy is rescinded due to Joy’s misrepresentations, the additional insureds cannot enforce a policy that is deemed never to have existed.

    3. No, because the language of the LLC exclusion is ambiguous and should be construed in favor of the owners/developers.

    Court’s Reasoning

    Regarding the residential construction activities exclusion, the Court of Appeals found that the Appellate Division erred in disregarding the affidavit of Admiral’s engineering expert based on a lack of personal knowledge. The court also noted that conflicting evidence regarding the nature of the building’s construction required factual findings, making summary judgment inappropriate. The court emphasized that the key question was what the defendants were actually building, as evidenced by contracts and other documentation. (See e.g. Bovis Lend Lease LMB, Inc. v Royal Surplus Lines Ins. Co., 27 AD3d 84, 94 [2005]).

    Concerning Joy’s alleged misrepresentations, the Court distinguished prior cases such as Morgan v Greater N.Y. Taxpayers Mut. Ins. Assn., 305 NY 243 (1953), and Greaves v Public Serv. Mut. Ins. Co., 5 NY2d 120 (1959), where the insurers did not seek rescission. The court emphasized that if Admiral’s allegations are true, it evaluated and priced the risk based on interior drywall installation, not the risk of exterior construction with a tower crane. The court reasoned that additional insureds must exist in addition to something – namely, named insureds in a valid existing policy. The court stated, “[A]dditional’ insureds, by definition, must exist in addition, to something’, namely, the named insureds in a valid existing policy.” Thus, the causes of action for rescission, reformation, and declarations based on fraud/misrepresentation are properly interposed against Reliance and the owners/developers.

    Finally, the Court agreed with the Supreme Court that the LLC exclusion was ambiguous and should be construed against the insurer. The court reviewed and dismissed other arguments raised by the defendants.

  • Cragg v. Allstate Indemnity Corp., 16 N.Y.3d 118 (2011): Interpreting “Benefit” in Homeowner’s Insurance Exclusions

    Cragg v. Allstate Indemnity Corp., 16 N.Y.3d 118 (2011)

    When interpreting exclusionary clauses in insurance contracts, courts must narrowly construe them in favor of the insured, and the insurer bears the burden of proving the exclusion applies unambiguously.

    Summary

    Eric Cragg, father of the deceased Kayla, sued Allstate after Kayla drowned in her grandparents’ pool. Allstate denied coverage based on a policy exclusion for bodily injury to an insured where any policy benefit would accrue to an insured. Cragg, as administrator of Kayla’s estate, sought to recover for wrongful death. The New York Court of Appeals reversed the lower court’s decision, holding that Allstate’s policy exclusion was ambiguous and did not clearly bar coverage for the non-insured father’s wrongful death claim. The court emphasized that insurance contracts should be interpreted according to common speech and the reasonable expectations of the average insured, construing ambiguities against the insurer.

    Facts

    Kayla, a three-year-old, lived with her mother, Marina Ward, at her grandparents’, Gregory and Katherine Klein, home. The Kleins had a homeowner’s insurance policy with Allstate. Kayla drowned in the Kleins’ swimming pool. Eric Cragg, Kayla’s father, maintained a separate residence and was not an insured under the policy. Allstate denied coverage based on a policy exclusion that disallows coverage for bodily injury to an insured person whenever any benefit of the coverage would accrue directly or indirectly to an insured person.

    Procedural History

    Cragg, as administrator of Kayla’s estate, sued Ward and the Kleins for wrongful death and conscious pain and suffering. Ward defaulted. Cragg then filed a declaratory judgment action against Allstate, seeking a declaration that Allstate was required to defend and indemnify its insureds. The Supreme Court granted Allstate’s summary judgment motion. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether Allstate’s homeowner’s insurance policy exclusion for bodily injury to an insured, where any benefit of the coverage would accrue to an insured, unambiguously bars coverage for a wrongful death claim brought by a non-insured parent for the death of their insured child.

    Holding

    No, because the language of the exclusion is ambiguous and can be reasonably interpreted to mean that “benefit” refers to proceeds paid under the policy, not merely the provision of defense and indemnification, and thus does not clearly bar payment to a noninsured plaintiff on a wrongful death claim.

    Court’s Reasoning

    The court found the policy exclusion ambiguous, stating, “The language of the policy exclusion — excluding coverage ‘whenever any benefit of this coverage would accrue directly or indirectly to an insured’ — is ambiguous.” Allstate argued that ‘benefit’ included coverage itself. However, the court reasoned that this interpretation would render the second part of the exclusion meaningless, as the right to defense and indemnification universally accrues to an insured. The court stated, “However, the second part of the exclusion must somehow modify the first part of the clause in order to have any meaning. In this context, a benefit must mean something other than coverage itself and is more naturally read to mean proceeds paid under the policy.”

    The court noted that insurance contracts should be interpreted according to common speech and the reasonable expectations of the average insured. Ambiguities in exclusionary clauses must be construed in favor of the insured. The court quoted, ” ‘exclusions or exceptions from policy coverage . . . are not to be extended by interpretation or implication, but are to be accorded a strict and narrow construction…’ “

    The court acknowledged policy reasons for excluding coverage in similar cases, such as avoiding collusion, but emphasized that Allstate failed to meet its burden of proving the exclusion applied unambiguously. Referencing Day v Allstate Indem. Co., the court agreed that Allstate failed to demonstrate that ‘benefit’ unambiguously includes the contractual right to receive a defense or indemnification. Thus, the exclusion did not bar coverage for the noninsured plaintiff’s wrongful death claim.

  • Union Carbide Corp. v. Affiliated FM Ins. Co., 16 N.Y.3d 420 (2011): Interpreting “Follow-the-Form” Clauses in Excess Insurance Policies

    16 N.Y.3d 420 (2011)

    When an excess insurance policy incorporates an underlying policy’s terms through a “follow-the-form” clause, those terms, including annual aggregate limits, apply unless the excess policy’s declarations explicitly and unambiguously state otherwise.

    Summary

    Union Carbide (UCC) sought coverage for asbestos claims under a layered insurance program. The dispute centered on a fifth-layer excess policy and whether its aggregate limit of $30 million was renewed annually or applied to the entire three-year policy period. The policy contained a “follow-the-form” clause incorporating the terms of an underlying policy with an annual aggregate limit. UCC argued for annual renewal, while the insurers claimed a single aggregate limit. The court held that the “follow-the-form” clause meant the limit was renewed annually. The court also considered whether a two-month policy extension triggered a new limit but determined UCC hadn’t proven it was entitled to summary judgement on this issue. The court emphasized the importance of uniform coverage in complex insurance programs.

    Facts

    UCC purchased multiple layers of liability insurance, including a fifth excess layer covering losses between $70 million and $100 million. This layer was subscribed to by several insurers, including Continental Casualty Company and Argonaut Insurance Company. The fifth-layer policy incorporated the terms of an underlying Appalachian Insurance Company policy through a “follow-the-form” clause. The Appalachian policy had an “annual aggregate” limit. UCC faced substantial asbestos claims and sought coverage under the excess policies, arguing that the $30 million limit should be applied annually. Continental extended its policy for two months and UCC argued that this created an additional year of coverage.

    Procedural History

    UCC moved for partial summary judgment, arguing that the aggregate limit in the fifth-layer excess policy was renewed annually and that the Continental extension triggered a new limit. The Supreme Court granted UCC’s motions. The Appellate Division reversed. The Court of Appeals modified the Appellate Division’s order, granting UCC’s motion on the annualization issue but affirming the denial on the extension issue.

    Issue(s)

    1. Whether the aggregate limit in the fifth-layer excess insurance policy was renewed annually, given the “follow-the-form” clause incorporating the underlying policy’s annual aggregate limit.
    2. Whether the two-month extension of the Continental policy created a new “year” for policy limit purposes, entitling UCC to an additional $5 million in coverage.

    Holding

    1. Yes, because the “follow-the-form” clause incorporated the underlying Appalachian policy’s annual aggregate limit, and the excess policy’s declarations did not unambiguously negate this annualization.
    2. No, because UCC failed to meet its burden on summary judgment to demonstrate that the policy extension created a new “year” with a new policy limit. The record was unclear on whether the parties intended the extension to provide a fresh set of policy limits.

    Court’s Reasoning

    Regarding the annualization issue, the court reasoned that “follow-the-form” clauses are intended to provide insureds with uniform coverage across multiple layers of insurance. It would be illogical for a sophisticated insured like UCC to bargain for differing coverage periods between its primary and excess layers. The court noted that the policy language included both a per occurrence and aggregate limit of the same amount ($30 million), suggesting that there was an intent for the limit to be applied for each occurrence, annually. While the court acknowledged the general principle that extrinsic evidence is unnecessary when a writing is clear, it noted that even considering UCC’s extrinsic evidence showing the universal custom of annualization, UCC’s position was overwhelmingly supported. Regarding the policy extension, the court noted the conflicting arguments and the lack of clear evidence showing a mutual intent to create a new policy limit. The court stated, “We conclude, as the Appellate Division majority did, that UCC has not met its burden on summary judgment of establishing coverage for an additional year’s policy limits”.

  • Regal Construction Corp. v. National Union Fire Insurance, 15 N.Y.3d 34 (2010): Scope of “Arising Out Of” in Additional Insured Clauses

    15 N.Y.3d 34 (2010)

    An additional insured clause in a commercial general liability (CGL) policy, covering liability “arising out of” the named insured’s operations, applies when there is a causal relationship between the injury and the named insured’s work, regardless of whether the additional insured’s negligence contributed to the injury.

    Summary

    Regal Construction Corporation’s employee was injured at a renovation project managed by URS Corporation. Regal’s insurance policy with INSCORP named URS as an additional insured for liability “arising out of” Regal’s operations. The employee sued URS, who sought coverage from INSCORP. INSCORP initially accepted the defense but then filed a declaratory judgment action arguing URS wasn’t covered. The Court of Appeals held that URS was entitled to coverage because the injury was causally connected to Regal’s ongoing operations, despite URS’s alleged negligence. The focus is on the general nature of the operation, not the precise cause of the accident.

    Facts

    URS Corporation was the construction manager for a renovation at Rikers Island. URS hired Regal Construction Corporation as a prime contractor. The contract required Regal to obtain a CGL policy naming URS as an additional insured. Regal obtained a policy from INSCORP. Regal’s project manager, LeClair, was injured when he slipped on a painted floor joist while supervising demolition work. LeClair claimed a URS employee painted the joist.

    Procedural History

    LeClair sued URS in 2003. URS tendered its defense to Regal and INSCORP based on the additional insured clause. INSCORP initially accepted the defense but later filed a declaratory judgment action against URS and its insurer, National Union Fire Insurance Company, seeking a declaration that URS was not entitled to coverage. Supreme Court ruled in favor of URS. The Appellate Division affirmed. The New York Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether URS is entitled to coverage as an additional insured under Regal’s CGL policy with INSCORP, given that the injury to Regal’s employee occurred at a project managed by URS, and the policy covered liability “arising out of” Regal’s operations.

    Holding

    Yes, because the injury arose out of Regal’s operations notwithstanding URS’s alleged negligence, and fell within the scope of the additional insured clause of the insurance policy.

    Court’s Reasoning

    The Court emphasized the broad duty to defend. An insurer must defend if the complaint suggests a reasonable possibility of coverage. The phrase “arising out of” means originating from, incident to, or having a connection with. It requires only some causal relationship between the injury and the risk for which coverage is provided. Here, LeClair was injured while supervising demolition work. The court stated, “the focus of the inquiry is not on the precise cause of the accident but the general nature of the operation in the course of which the injury was sustained.” The Court distinguished this case from Worth Constr. Co., Inc. v Admiral Ins. Co., 10 NY3d 411 (2008), where the subcontractor had completed its work and was not on site when the injury occurred. In Worth, the staircase was merely the situs of the accident, lacking a connection to the subcontractor’s work. Here, there was a direct connection because the injury was sustained by Regal’s employee while supervising Regal’s subcontractor. The court stated, “That the underlying complaint alleges negligence on the part of URS and not Regal is of no consequence, as URS’s potential liability for LeClair’s injury ‘ar[ose] out of’ Regal’s operation”.

  • Executive Risk Indemnity Inc. v. Pepper Hamilton LLP, 2010 NY Slip Op 00310 (2010): Prior Knowledge Exclusion in Insurance Policies

    Executive Risk Indemnity Inc. v. Pepper Hamilton LLP, 2010 NY Slip Op 00310 (2010)

    An insurance policy’s prior knowledge exclusion bars coverage when the insured knew of acts, errors, or omissions prior to the policy’s effective date that could reasonably be foreseen as the basis of a claim.

    Summary

    This case concerns whether excess insurers must indemnify the law firm Pepper Hamilton for malpractice claims. The New York Court of Appeals held that Executive Risk and Twin City were entitled to summary judgment based on the policies’ prior knowledge exclusions, as the firm knew of potential claims before the policies’ effective dates. The court also held that Continental Casualty was not entitled to summary judgment on its rescission claim because it failed to prove materiality and bad faith. The law firm’s knowledge of its client’s fraudulent activities triggered the prior knowledge exclusion, negating the insurers’ obligation to indemnify.

    Facts

    Pepper Hamilton represented Student Finance Corporation (SFC). In March 2002, the firm learned that SFC was involved in securities fraud by misrepresenting its default rate. Despite this knowledge, Pepper Hamilton prepared private placement memoranda for SFC and did not disclose this information when applying for insurance coverage with Executive Risk and Twin City in October 2002. SFC later faced bankruptcy, leading to lawsuits against Pepper Hamilton for, among other claims, professional malpractice. The insurers denied coverage, citing prior knowledge exclusions.

    Procedural History

    Executive Risk sued Pepper Hamilton, seeking a declaration that it had no duty to indemnify. Pepper Hamilton counterclaimed and brought third-party claims against Twin City and Continental Casualty. The Supreme Court granted summary judgment to the excess insurers, finding no obligation to indemnify based on the prior knowledge exclusion and rescinding the Continental Casualty policies. The Appellate Division reversed. The Court of Appeals modified the Appellate Division order, granting summary judgment to Executive Risk and Twin City but denying it to Continental Casualty, answering the certified question in the negative.

    Issue(s)

    1. Whether the prior knowledge exclusion in the insurance policies of Executive Risk and Twin City bars coverage for Pepper Hamilton’s potential liability, given their knowledge of SFC’s fraudulent activities prior to the policy’s effective date.

    2. Whether Continental Casualty is entitled to rescind its insurance policies based on Pepper Hamilton’s failure to disclose the SFC incident during the policy renewal period.

    Holding

    1. Yes, because Pepper Hamilton knew of acts, errors, or omissions prior to the policies’ effective date that could reasonably be foreseen as the basis of a claim.

    2. No, because Continental Casualty failed to establish, as a matter of law, that Pepper Hamilton’s omission was material to the reinsurance determination and made in bad faith.

    Court’s Reasoning

    Regarding the prior knowledge exclusions, the court applied Pennsylvania law, which places the burden on the insurer to prove the applicability of any exclusions. The court cited the two-pronged test from Coregis Ins. Co. v. Baratta & Fenerty, Ltd., requiring consideration of both the insured’s subjective knowledge and the objective understanding of a reasonable attorney with that knowledge. The court found that Pepper Hamilton knew of SFC’s securities fraud before the policies’ effective dates and that a reasonable attorney would have foreseen the possibility of a lawsuit, triggering the exclusion. The court emphasized that the exclusion applied to “any act, error, omission [or] circumstance,” not just wrongful conduct by the insured.

    Regarding rescission, the court again applied Pennsylvania law, stating that rescission requires proving a false statement, materiality to the risk, knowledge of falsity, and bad faith by clear and convincing evidence. The court agreed with the Appellate Division that Continental Casualty failed to prove materiality and bad faith, finding the underwriter’s self-serving affidavit insufficient to meet the heightened burden of proof. The court stated: “Here, the self-serving affidavit of Continental Casualty’s underwriter—that Pepper Hamilton’s renewal application would have been treated differently had it disclosed the underlying circumstances which led to the denial of coverage—is insufficient to meet the insurer’s heightened burden of proof.”