In June 2017, the New York Court of Appeals issued its decision in Burlington Ins. Co. v. NYC Tr. Auth., 29 N.Y.3d 313 (2017), which significantly impacted the insurance industry and forever changed the way in which insurers must assess their duties to provide coverage to purported additional insureds. The core holding of Burlington is that an additional insured provision in an insurance policy—which provides coverage to additional insureds for claims “caused in whole or in part” by the “acts or omissions” of the named insured—are more limited than those which provide additional insured coverage for claims “arising out of” the acts or operations of the named insured. In this regard, the Court of Appeals held that to qualify as an additional insured under the “caused by” trigger, the purported additional insured must establish a proximate link between the acts or omissions of the named insured and the alleged accident or occurrence. This differs substantially from the older “arising out of” standard, which only required a causative link. While much paper and ink has been dedicated to this core differentiation between “caused by” and “arising out of,” less attention has been paid to that aspect of the Burlington decision which provides for an insurer’s ability to recoup defense costs upon a determination that the purported additional insured does not, in fact, qualify as an additional insured.
Generally, New York law provides that where coverage is disputed, and a liability policy includes the payment of defense costs, “insurers are required to make contemporaneous interim advances of defense expenses …, subject to recoupment in the event it is ultimately determined no coverage was afforded.” Axis Reinsurance Co. v. Bennett, No. 07-CV-10302 (GEL), 2008 U.S. Dist. LEXIS 53921 (S.D.N.Y. June 27, 2008) (quoting Nat’l Union Fire Ins. Co. of Pittsburgh, PA. v. Ambassador Grp., 157 A.D.2d 293, 299 (1st Dep’t 1990)). Maxum Index. Co. v. VLK Constr., No. 14-CV-1616 (RRM) (LB), 2016 U.S. Dist. LEXIS 121476, at *16-17 (E.D.N.Y. Sept. 8, 2016); Century Sr. Co. v. Franchise Const., 14-CV 277, 2016 U.S. Dist. LEXIS 31271 (S.D.N.Y. 2016).
In the above-cited cases, the insurers were found to be entitled to recoup defense costs where the insurer’s disclaimer was upheld based upon a policy condition or exclusion, which was available at the outset of the underlying lawsuit. For example, in Maxum Indem. Co., the insurer successfully denied coverage relying on an “Employer’s Liability” exclusion contained in the subject policy. Consistent with other decisions relying upon applicable exclusions, it was determined that the insurer never owed a defense to the underlying lawsuit and, accordingly, was thereby able to recoup defense costs.
The above-rationale allowing for the recoupment of defense costs may vary, however, when applied in an additional insured context. To wit, it is axiomatic under New York law that an insurer owes an additional insured a duty to defend when the allegations set forth within the four-corners of the underlying complaint potentially fall within the coverage grants of the policy. As such, once a complaint asserts that a named insured under a policy of insurance is the proximate cause of an accident, a duty to defend would be triggered for the additional insured under the “caused by” policy language, assuming the other terms and conditions of the policy are satisfied, and that no exclusion applies as a bar to coverage.
Furthermore, the duty to defend the additional insured is triggered regardless of whether facts regarding causation that could allow for a complete defense to coverage may ultimately be established. Indeed, causation issues require a highly fact-intensive analysis, often presenting questions of fact for a jury, and may take years of litigation before it is established that a named insured did not cause the alleged underlying injury. Thus, an insurer can be “on the hook” for years of attorneys’ fees and defense costs for a purported additional insured, before being able to establish facts to support a declaration of non-coverage based on the absence of the requisite causation to trigger additional insured coverage.
It begs the question, then, whether an insurer may recoup defense costs, properly paid based upon the allegations of the complaint, once it is established that the purported additional insured does not qualify as an additional insured.
Based on the facts and ruling in Burlington, it appears that an insurer can recoup defense costs expended on behalf of a purported additional insured upon establishing that the named insured was not the cause of the underlying bodily injury or property damage. Specifically, the insurer in Burlington was seeking a declaration that it did not owe coverage to the purported additional insured and also sought a declaration that it was entitled to recoup the amounts (both defense costs and settlement) incurred on behalf of the NYCTA as subrogee of the City. The Appellate Division held that Burlington could not stand in the shoes of the City to seek recoupment from the NYCTA due to the anti-subrogation rule, because, according to the Appellate Division, both the City and the NYCTA qualified as additional insureds on the subject policy.
The Court of Appeals reversed the Appellate Division, holding that neither the City nor the NYCTA qualified as additional insureds on the policy. On remand, based upon the Court of Appeals’ ruling, the Appellate Division held that Burlington could recoup the defense and indemnity payments. According to the Appellate Division, rejecting the claim for recoupment would allow the NYCTA to obtain a windfall benefit of the coverage from Burlington to which it was now-determined to not be entitled. Specifically, the Appellate Division awarded “costs and fees” but noted that the motion court had properly found that it was “premature to determine the amount of defense costs at this juncture.” Burlington Ins. Co. v. NYC Transit Auth., 2017 NY Slip Op 06233, ¶ 1, 153 A.D.3d 438, 439 (1st Dept. 2017).
Based on the Burlington holding and the cited cases wherein insurers were allowed to recoup defense costs upon successfully establishing the validity of their disclaimers, insurers should also be able to recoup past defense costs once it is established that a purported additional insured does not qualify as an additional insured under the policy.
Applying this to practice, under circumstances where a purported additional insured may ultimately be determined not to qualify as an additional insured, insurers would be wise to provide a defense to that tendering party under a reservation of rights, specifically reserving rights to recoup any costs incurred in connection with defending that purported additional insured, along with all other appropriate reservations, to protect the insurer in the event that facts develop which would allow for a complete defense to coverage. By issuing such a reservation of rights letter, an insurer preserves its right to seek recoupment of defense costs from the additional insured and the additional insured’s own insurers.
Further, the tendering purported additional insured may want to rethink issuing a knee-jerk, pro-forma tender if it has knowledge of facts which could lead to the ultimate determination that it would not qualify as an additional insured due to causation issues. Even absent such knowledge, the tendering purported additional insured should monitor the underlying lawsuit, as information could be developed regarding causation during the litigation that could ultimately defeat a claim for coverage. In such a situation, the purported additional insured would be well-advised to seize upon opportunities for resolution with the defending insurer that could benefit all parties.
Eric B. Stern is a partner at Kaufman Dolowich & Voluck in Woodbury, N.Y., where he concentrates his practice in insurance coverage litigation. Jonathan B. Isaacson, a partner at the firm, concentrates his practice in the areas of professional liability, property and casualty defense and complex coverage matters.