Insurance law is surely an area of the civil law that occupies more than its fair share of the docket of the New York Court of Appeals. This past term, the court issued nine significant insurance law decisions, including one for which it heard reargument and vacated a unanimous—and highly controversial—ruling that it had issued near the end of its 2012-2013 term. In these rulings, almost every judge wrote either a majority or dissenting opinion and the nine cases generated 14 separate opinions, including an unusual number of dissenting opinions. Certain of the decisions were clear victories for insurance companies, while others favored policyholders.
Unlike the divisions among the U.S. Supreme Court justices on so very many issues, there does not appear to be any predictable division among the New York Court of Appeals judges as to the likelihood of a particular judge ruling in favor of policyholders or insurance carriers. In fact, examination of the five insurance law cases that divided the court this term revealed that each judge on the court voted in favor of the policyholder and the carrier in at least one instance. Rather than relying on philosophical underpinnings, the court seems to address each insurance law issue individually based on precedent and public policy. With New York’s longstanding and continuing role as a leader in insurance jurisprudence, the court is likely to continue facing difficult insurance law issues for quite some time to come.
On June 11, 2013, the court issued its first decision in K2 Investment Group v. American Guarantee & Liability Ins. This case arose when a lawyer was sued for malpractice but his insurance carrier disclaimed coverage and refused to provide a defense. The plaintiffs obtained a default judgment against the lawyer, which they sought to recover from his insurance company pursuant to Insurance Law §3420. The insurer claimed that two policy exclusions established that it had no obligation to provide indemnity to its insured.
In its June 11, 2013 decision, the court held that the insurer had wrongly breached its duty to defend the lawyer and concluded that, as a consequence, it had “lost its right” to rely on the policy’s exclusions in litigation over its indemnity obligation to the insured.
Early in this current term, the court granted reargument. On February 18, it vacated its June 11 decision and issued a new one.1 The court decided that it had erred in its earlier ruling by failing to take account of a controlling precedent, Servidone Const. v. Security Ins. of Hartford,2 in which the court held that when an insurer breached a contractual duty to defend its insured in a personal injury action, and the insured thereafter concluded a reasonable settlement with the injured party, the insurer was not liable to indemnify the insured even if coverage was disputed. The court recognized that Servidone and its June 11 holding in K2 could not be reconciled, and it specifically refused to overrule Servidone. In language certainly comforting to carriers and policyholders alike, the court stated: “When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged… .” Thus, in its decision in K2 on reargument, it held that the insurer was not barred from relying on policy exclusions as a defense to the lawsuit against it.
The issue in KeySpan Gas East v. Munich Reinsurance America,3 was whether Insurance Law §3420(d)(2), which requires that insurance carriers disclaim coverage based on late notice “as soon as reasonably possible after first learning of the … grounds for disclaimer,” applied in this case, and the court ruled that it did not.
The court said that §3420(d)(2) applies only in a particular context: insurance cases involving death and bodily injury claims arising out of a New York accident and brought under a New York liability policy. Because the underlying claim in this case did not arise out of an accident involving bodily injury or death, the notice of disclaimer provisions set forth in §3420(d)(2) were “inapplicable.” Rather, the court concluded, in this case the insurance carrier could not be barred from disclaiming coverage “simply as a result of the passage of time,” and its delay in giving notice of disclaimer had to be considered under “common-law waiver and/or estoppel principles.”
Country-Wide Ins. v. Preferred Trucking Services also involved a question of notice.4 In this case, §3420(d)(2) did apply, and the issue was whether the insurance company had issued a timely disclaimer based on the insured’s failure to cooperate in the defense of the action.
The court ruled that it had done so, even though the personal injury lawsuit against the insured company had been filed in March 2007 and the insurer had not disclaimed until Nov. 6, 2008—about 20 months later.
The court explained that the policyholder in this case had not cooperated with the insurer in the defense of the suit. The court acknowledged that the insurer knew or should have known in July 2008 that the president of the insured would not cooperate, but it also found that the insurer was not in a position to know that the driver of the vehicle involved in the alleged accident underlying the personal injury lawsuit would not cooperate until Oct. 13, 2008, when he told the insurance company’s investigator that he did not care about attending a deposition and, thereafter, gave no further response.
Given that the driver “punctuated periods of noncompliance with sporadic cooperation or promises to cooperate,” the court concluded that the insurance carrier had established as a matter of law that its disclaimer had been made in a reasonable time. The court distinguished other bases for disclaimer where the facts supporting the disclaimer were immediately apparent.
Under well-established New York law, insurance brokers have a common law duty to obtain requested coverage for their clients within a reasonable time or inform their clients of their inability to do so. Brokers, however, typically have no continuing duty to advise, guide, or direct a client to obtain additional coverage. Thus, in the ordinary broker-client situation, a client may prevail in a negligence action only where it can establish that it made a particular request to the broker and the requested coverage was not procured.
The situation is somewhat different where a “special relationship” exists between a broker and client. In that case, a broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage.
In Voss v. Netherlands Ins.5 the client argued that the broker should have advised about a higher level of business interruption coverage. A divided court determined that the client’s complaint should not have been dismissed on the basis that no special relationship arose between the parties, concluding that the broker had not satisfied its burden of establishing the absence of a material issue of fact as to the existence of a special relationship.
It should be noted that the majority opinion specifically reiterated that special relationships in the insurance brokerage context “are the exception, not the norm.” Still, as the dissent observed, a consequence of the majority decision may result in brokers becoming “a kind of back-up insurer.”
Indeed, when this decision is considered with the court’s 2012 ruling in American Building Supply v. Petrocelli Group,6 holding that an insured’s failure to read did not bar its lawsuit against its broker, it appears that the court may be cutting back on protections for brokers. This certainly bears watching.
In February, the court issued an important memorandum decision in QBE Ins. v. Jinx-Proof.7
The case arose when a patron of a bar owned by Jinx-Proof sued Jinx-Proof, alleging that she had been injured when one of its employees threw a glass at her face. The bar’s insurance carrier wrote it two letters that stated, among other things, that Jinx-Proof had no coverage for the assault and battery claims. Jinx-Proof argued that the disclaimers were ineffective. A divided court ruled otherwise.
Over the dissent of two judges, the majority said that although the letters contained some “contradictory and confusing language” and although the letters also contained “reservation of rights” language, the letters “specifically and consistently stated” that Jinx-Proof’s insurance policy excluded coverage for assault and battery claims. According to the court, these statements “were sufficient to apprise Jinx-Proof that [its insurer] was disclaiming coverage on the ground of the exclusion for assault and battery.”
As the court has done a number of times in recent years, this past term it answered questions of insurance law certified to it by the U.S. Court of Appeals for the Second Circuit. In Georgitsi Realty v. Penn-Star Ins.,8 the Second Circuit first asked the court if, for purposes of construing a property insurance policy covering acts of vandalism, malicious damage could be found to result from an act not directed specifically at the covered property. Then, the circuit court asked, if so, what state of mind was required?
In its first decision ever to address the meaning of the term “vandalism” in an insurance policy, the court ruled that malicious damage within the coverage of a property insurance policy “may be found to result from acts not directed specifically at the covered property.” The court reasoned that there was “no reason” that the term “vandalism” should be limited to acts “directed specifically at the covered property,” or that an act of vandalism had to bring the vandals in direct contact with the covered property. “Where damage naturally and foreseeably results from an act of vandalism, a vandalism clause in an insurance policy should cover it.”
In response to the second certified question, the court ruled that, to obtain coverage under a property insurance policy, the insured must show “malice,” which it defined as “such a conscious and deliberate disregard of the interests of others that the conduct in question may be called willful or wanton.” In the court’s view, this test would “serve to distinguish between acts that may fairly be called vandalism and ordinary tortious conduct.”
Of the last three cases, two were unanimous. In Executive Plaza v. Peerless Ins.,9 Judge Robert S. Smith wrote the opinion for the court (also in answer to a question certified by the Second Circuit).
Here, a fire insurance policy limited the time in which the insured could bring suit against its insurer under the policy to two years. The policy also provided that the insured could recover the cost of replacing destroyed property—but only after the property already had been replaced. The court decided that the two year contractual limitations period was unreasonable and unenforceable where the property could not reasonably be replaced in two years.
The issue in Ragins v. Hospitals Ins.,10 was whether excess insurers had to pay interest on a $1,100,000 medical malpractice judgment against the insured where the liquidator of the insured’s insolvent primary professional liability insurer had paid the $1,000,000 per occurrence liability limit of that policy.
The court, in a unanimous memorandum decision, concluded that, given the policies’ language, the liquidator’s payment of the primary policy’s $1,000,000 liability limit triggered the excess insurers’ duty to pay all remaining amounts in connection with the judgment, including interest. It reached this conclusion, it said, in the absence of a provision in the primary policy expressly covering interest above the policy’s liability limit, regulations mandating that the primary insurer cover additional damages or interest beyond the primary policy’s limit, or regulations exempting the excess carriers from the responsibility to pay all amounts in excess of the primary policy’s limit.
Finally, in Matter of Beth V. v. New York State Office of Children & Family Services,11 the court found that a workers’ compensation carrier could take a credit under §29(4) of the Workers’ Compensation Law against the settlement proceeds of a civil rights lawsuit brought by a recipient of worker’s compensation benefits against her employer and co-employees for injuries arising from the same incident for which she was receiving benefits. The court disregarded the form of the settlement (which, it said, may have been structured to afford the claimant a presumed tax advantage), and concluded that the settlement agreement indicated that the settlement proceeds were intended to compensate the workers’ compensation claimant for the same personal physical and mental injuries for which she had been awarded compensation benefits.
1. K2 Investment Group v. American Guarantee & Liability Ins., 22 N.Y.3d 578 (2014), reargument denied, Motion No.: 2014-315 (N.Y. May 6, 2014). Judge Robert S. Smith wrote the majority opinion, in which Chief Judge Jonathan Lippman and Judges Susan P. Read and Jenny Rivera concurred. Judge Victoria A. Graffeo dissented in an opinion in which Judge Eugene F. Pigott concurred. Judge Sheila Abdus-Salaam took no part in the case.
2. 64 N.Y.2d 419 (1985). See Evan H. Krinick, “Breach of Duty to Defend Stands Out Among Noteworthy Issues,” NYLJ, Aug. 26, 2013.
3. 2014 N.Y. Slip Op. 4113 (June 10, 2014). Judge Abdus-Salaam wrote the opinion for a unanimous court; Chief Judge Lippman and Judge Rivera took no part in the case.
4. 22 N.Y.3d 571 (2014). Judge Pigott wrote the opinion for a unanimous court; Judge Abdus-Salaam took no part in the case.
5. 22 N.Y.3d 728 (2014). Judge Graffeo wrote the decision for the court, in which Chief Judge Lippman and Judges Rivera and Abdus-Salaam concurred. Judge Smith dissented in an opinion in which Judges Read and Pigott concurred.
6. 19 N.Y.3d 730 (2012).
7. 22 N.Y.3d 1105 (2014). Judges Graffeo, Read, Smith, Rivera, and Abdus-Salaam concurred. Judge Pigott dissented in an opinion in which Chief Judge Lippman concurred.
8. 21 N.Y.3d 606 (2013). Judge Smith wrote the majority opinion, in which Chief Judge Lippman and Judges Graffeo, Read, Pigott, and Rivera concurred. Judge Abdus-Salaam dissented in part in an opinion.
9. 22 N.Y.3d 511 (2014).
10. 22 N.Y.3d 1019 (2013).
11. 22 N.Y.3d 80 (2013). Judge Read wrote the majority decision, with Judge Rivera dissenting.