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COVERAGE ADJUDICATION
What to Consider After the Insurance Coverage Analysis
by
Catherine Habermehl
Altreuter & Habermehl
Buffalo, New York
New York, New York
Presented at the New York State Bar Association Seminar on
Insurance Coverage Matters
11/1997
Insurance companies are paying more attention to whether a particular claim is covered. There is a reason. They charge a premium only for a particular type of loss, and they are under constant accountability for their company's bottom line. Insureds are becoming less likely to accept disclaimer letters without a fight. There is an equally good reason. They have been paying those premiums for years, and they are under constant accountability for their company's bottom line. Add to this the interest that other parties or entities have in whether or not and how much there is available coverage for a particular claim. The result is that more counsel are being asked to sit down, review a policy, and evaluate not only coverage, but also whether they should recommend legal action on the policy, when to bring it, and who must be involved. There is no sense in even thinking about the prosecution or defense of, or intervention in a claim until these preliminary issues have been straightened out.
Because (1) it is critical to consider these issues when a claim first arises, (2) you are certain at that time not to have all the information needed, (3) alignments on either side of the "versus" line can change, and (4) time is always "of the essence", we have drafted the following non-exhaustive outline for the practitioner to use as a mental checklist.
I Generally
Declaratory judgments actions afford judicial assistance in interpreting words and phrases and further determining the scope of insurance coverage or validity of a policy provision. The two applicable CPLR provisions relating specifically to these actions is Sections 3001 and 3017(b). The rest is decisional law. Examples of reviewable issues are:
Effective dates of policy
Whether insurance broker is "employed" by the insurance company
Discriminatory impact of a policy provision, premium setting, etc.
See People by Vacco v. Alamo Rent A Car, Inc., 89 N.Y.2d 560, (1997) (where Attorney-General commenced suit, successfully seeking a declaratory judgment, permanent injunctive relief prohibiting rental car agencies from refusing to rent cars to persons between the ages of 18 and 25 solely on the basis of age, and penalties. We now answer that question in the affirmative).
Sufficiency of cancellation notices, sufficiency of cooperation by insured
Risk within coverage territory, risks covered at all
Additional insured status, and corporate affiliations
See Garcia v. Great Atlantic and Pacific Tea Co., Inc 647 N.Y.S.2d 2, 231 A.D.2d 401,., (1 Dept. 1996). There the contract between a supplier and purchaser obliged the supplier to procure liability insurance for the buyer. The supplier obtaining a policy with an automatic additional insured's endorsement. The insurer, however disclaimed and the buyer sued the supplier for defense costs. Court held that to the extent buyer might have been aggrieved by insurer's action or inaction on its behalf, its proper remedy was to bring a declaratory judgment action against the insurer directly based upon its rights as an additional insured.
Covered premises or property, and insurable interests
Covered risks, such as intentional torts, products liability, environmental costs
"While certain injuries arising from intentional acts may be deemed unintentional such as to trigger coverage ... the relevant inquiry is whether the harm was inherent in the nature of the acts alleged such as to be intentionally caused within the meaning of the policy exclusion". Tomain v. Allstate Ins. Co 656 N.Y.S.2d 470, (3 Dept. 1997), or "In our view, liquid manure is properly classified as a "waste material", "pollutant" or "contaminant" when, as is alleged in the underlying action, the substance has leached into the groundwater and contaminated a well on adjoining property". Space v. Farm Family Mut. Ins. Co., 652 N.Y.S.2d 357, (3 Dept. 1997).
Duty to defend, and sometimes the duty to indemnify
Timely notice of claim, timely notice of disclaimer
In Nalea Realty Corp. v. Public Service Mut. Ins. Co., 656 N.Y.S.2d 613, (1st Dept. 1997), insurer not allowed to disclaim coverage for untimely notice of the occurrence where plaintiff insured, the owner of an apartment building, upon learning that a tenant had been shot in the building, did not report the incident to the insurer at that time, based upon its belief that it was not responsible for the intentional criminal acts of third parties, but promptly forwarded the summons and complaint to the insurer when it was sued by the tenant for negligence. This belief of nonliability was reasonably and properly based on language in the policy defining an "occurrence" as an accident.
Order of coverage in multiple insurer situations
II The Mechanics
A. Jurisdiction and Venue - As a rule, consider the underlying claim
1. Generally, Supreme Court, or federal court (sometimes Court of Claims).
2. In the court where the underlying claim exists or is most likely to be venued.
3. Exceptions. Pay attention to the type of underlying claim for which coverage is being sought, and assess it against the particular venue and jurisdictional prerequisites. For example, pursuant to New York Civil Court Act 212, the Civil Court shall have the jurisdiction to issue a declaratory judgment "with respect to any controversy involving the obligation of an insurer to indemnify or defend a defendant in an action in which the amount sought to be recovered does not exceed $25,000." In Appollon Waterproofing & Restoration Corp. v. Arthur Brandt, M.D. 1997 WL 277185 the court answered no, it did not have jurisdiction to issue a declaratory judgment with regard to the obligation of an insurer to defend and indemnify a plaintiff for a counterclaim asserted against it which exceeds $25,000.
But you are not always so limited. Eg., federal court can have jurisdiction over certain policies, such as ocean marine. Therefore, if a claim arises where the underlying litigation between insured and injured party may be in a state court, or even in another state's court, an action on the policy could be had in a federal court having jurisdiction over the insurers - which often includes federal courts situate in New York.
B. Statute of Limitations
1. Read the policy.
2. Read the policy again.
3. If there is no limit on time to sue or be sued, 6 years, but research anyway (CPLR 213[1])
4. If there is a government, tax, or real property aspect, drop everything and research. Those limitations period can be very short.
5. Accrual periods - sometimes stated in the policy
6. Tolling - sometimes available if insurer does not readily respond to a claim
C. The Complaint
Follow the CPLR for commencement of actions in general in Supreme Court.
Other civil procedure laws and rules for other courts.
Do not be intimidated.
Plead:
bona fide controversy and result to ordinary action is inadequate
facts which justify asking the court to grant relief
status of plaintiff
prayer for declaratory relief, (which may be joined by prayer for more traditional relief such as injunctive relief or money damages
Attach insurance contracts
Attach underlying claim summons and complaint if applicable
On sufficiency, we note that upon a motion to dismiss a complaint for legal insufficiency in a declaratory judgment action, the test is not whether a party will succeed in getting a declaration of rights in accordance with a theory or contention advanced, but whether the allegations of the complaint when considered as true, demonstrate the existence of a bona fide justiciable controversy which should be settled. Robert L. Schulz v. New York State Legislature, In Matter of, 1997 WL 368681, (3 Dept. 1997).
One of the biggest risks will be that the action is premature because there are factual issues that must be resolved by a jury before a finding on coverage can be made. Better to error on the side of moving too fast. The issues have been raised, everyone is on notice, and the claim can be either held in abeyance or dismissed without prejudice.
D. The Answer
Same as in ordinary actions, especially with respect to requirements on affirmative defenses such as statute of limitations - first responsive pleading or motion to dismiss.
Failure to name necessary party defense
E. The Parties, or Who Gets to Play?
1. All persons interested. Even nonparties. If you are going to disclaim, put everyone potentially affected by this decision on notice. If you are going to challenge the disclaimer, put everyone potentially affected by this action on notice.
"Declaratory judgments are an effective device to determine whether an insurer is obligated to defend or indemnify an insured for liability arising from a particular incident (see, Siegel, NY Prac § 437, at 665 [2d ed]; 3 Weinstein-Korn-Miller, NY Civil Prac § 3001.22; see also, > DiGregorio v.Alix, 230 N.Y.S.2d 301; Curreri v. Allstate Ins. Co., 37 Misc.2d 557, 236 N.Y.S.2d 719). '[R]ecognizing that the person most interested in this dispute is the injured person, [a declaratory judgment action] may be brought by the injured person against both [the insured and the insurer]' (Siegel, NY Prac § 437, at 665 [2d ed]).
As we have stated, '[a] declaratory judgment serves a legitimate purpose only when all interested persons who might be affected by the enforcement of rights and legal relations are parties' (Matter of J-T Assocs. v. Hudson Riv.--Black Riv. Regulating Dist., 175 A.D.2d 438, 440, 572 N.Y.S.2d 122). Since this declaratory judgment action seeks to determine whether defendant has a duty to defend and indemnify [the insured ] and since [the insured's] rights are inextricably tied to the resolution of this dispute, here both the insured and the insurer are necessary parties (see, CPLR 1001[a]; Newsom v. Republic Fin. Servs., 130 Misc.2d 780, 497 N.Y.S.2d 830; Siegel, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR 3001:10, at 439). Accordingly, this action should be dismissed on the ground raised by defendant both before Supreme Court and on appeal: '[a] court may and ordinarily must refuse to render a declaratory judgment in the absence of necessary parties' (Matter of J-T Assocs., supra, at 440, 572 N.Y.S.2d.). White v. Nationwide Mut. Ins. Co., 644 N.Y.S.2d 590, 228 A.D.2d 940, (3 Dept. 1996)
Consider compulsory joinder and motions to dismiss. CPLR Sections 1001 and 1003 Eg., as a defendant, do not automatically third-party in an unnamed but necessary party. Consider moving to dismiss, which should prompt the plaintiff to amend the pleadings and do the lifting.
2. Plaintiffs
Matured legally protected interest in the outcome of the case, such as insureds, insurers, parties to a lawsuit, potential claimants. This is why those not insured by a particular insurer should also receive copies of disclaimers and reservation of rights letters.
3. Defendants
Potentially, everyone on the above list not a plaintiff.
4. Third-party defendants
Third-party defendants may be impleded if claim is based on a theory of liability different than in primary claim and the third-party defendant could be found liable to the plaintiff.
Declaratory judgment actions can also be first raised in a third or fourth party action, with some limitation. A recent example of this procedural posture is found in ITRI Brick & Concrete Corp. v. Aetna Cas. & Sur. Co.,89 N.Y.2d 786, (1997). There, two carriers were impleaded in fourth party actions, trailing behind the usual Plaintiff/Defendant/Third-party defendant scenario in a Labor Law case.
Often, however, this time of impleading is put in the "Don't Bother" File - Plaintiff sues defendant. Defendant notifies insurer. Insurer disclaims. Can the Defendant bring a third party action against the insurer? Yes. Should it? Not generally if it is liability coverage case unless the court is willing to bifurcate. Under those circumstances the insurer can request a severance on the basis of prejudice at the hands of a jury that is not supposed to know that coverage exists. Again, consider the basis for the underlying claim.
Another aspect relates to the settlement of the primary action. If the defendant settles with the plaintiff, the indemnification action against the insurer can continue. However, the defendant then "assumes the risk of being able to prove the actionable facts upon which his liability depends as well as the reasonableness of the amount which he pays." Dunn v. Uvalde Asphalt Paving Co., 175 N.Y. 214, 67 N.E. 439 (1903); Codling v. Paglia, 38 A.D.2d 154, 327 N.Y.S.2d 978 (3d Dep't 1972), aff'd, > 32 N.Y.2d 330, 345 N.Y.S.2d 461, 298 N.E.2d 622 (1973); Trans World Maintenance Services, Inc. v. Accident Prevention Brokerage Corp., 560 N.Y.S.2d 914, 148 Misc.2d 518, (1989). This includes establishing liability in the primary action, as well as actionable facts which impose liability upon the third-party defendant.
5. Intervenors -
Petition to intervene. Or if you are already in the case and want some back-up, get someone else to petition to intervene. Do this by considering the nature of the relief sought by the declaratory action, then notify trade associations, businesses, governmental agencies, or legal associations of the policy you are about to challenge or about which you are being challenged.
F. Stays, Injunctive Relief, and Severance
1. Evaluate which action should be heard first - the action on the policy or the underlying claim, and request a stay of the other pending claim.
2. Injunctive relief to prevent irreparable injury and preserve status quo pending trial or resolution of the declaratory judgment action.
G. Additional Considerations
Wrap up coverage
Antisubrogation
Attorneys' Fees
The traditional rule against loser paying attorneys' fees does not always apply in declaratory judgment actions.
When an insured is "cast in defensive posture by the legal steps [the] insurer [has taken] in an effort to free itself from its policy obligations" (Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 21), it is entitled to recover the reasonable costs and attorneys' fees incurred in the defense of that action. Sphere Drake Ins. Co. v. Block 7206 Corp 655 N.Y.S.2d 86, (2 Dept. 1997).
But the lines might be blurring more, and fees may be available even if the insured commences the action. Although the case does not explain the rationale behind the award, in Michael Levy, Anne Levy v. Aetna Casualty and SuretyCompany, Victor B. Siegel 1997 WL 307860, (N.Y.Sup. 1997), the insureds brought an action against their insurers insisting the insurers had an obligation to defend and indemnify on an underlying claim. The court granted the plaintiff's their attorneys' fees associated with the declaratory judgment action. It may have had a contract clause that afforded this relief. However, because the insurers moved for summary judgment, the court may have viewed this as casting the insureds in a defensive posture and allowed the award. In any event, be prepared to ask and be asked for fees.
Still, the rule is attorneys' fees when insured in a defensive posture, only, making another factor to consider in whether an insurer should commence an action, or wait for an interested party to bring the action.
IV Direct Action by Judgment Creditors
Sometimes, carriers choose to disclaim coverage for one of their insured's - be it because of a policy exclusion, a failure to timely notify or some other breach of the insurance contract. Unless the insured uses its own money to pay for a defense, it is likely that a default judgment will eventually be entered against it. In that instance, Insurance Law §3420(a)(2) enables the judgment creditor to bring an action directly against the carrier in an effort to collect the amount of the judgment up to the policy limits.
The carrier has 30 days from service of notice of judgment upon it to pay. After that time, the judgment creditor, or an assignee of the judgment, may commence the suit. The action will be governed by the six-year statue of limitations for the enforcement of contractual obligations found in CPLR 213(2), Roldan v. Allstate Ins. Co., 149 A.D.2d 20, 31, 544 N.Y.S.2d 359 (N.Y.A.D. 2 Dept. 1989), and accrues upon the entry of the judgment against the insured. Id.
The judgment creditor will have no greater rights to coverage than was possessed by the insured, however, if the creditor is successful in showing that the carrier's disclaimer was improper, the carrier will be obligated to pay. It is important to note that where the carrier argues it had the right to disclaim on the basis of the insured's failure or refusal to cooperate, the burden of proof will be upon the carrier to prove the alleged failure or refusal. Insurance Law §3420(c).