After reading decisions that seemingly disregard late notice that is furnished to an insurer (see, e.g., “Late Notice to Insurer Not Fatal to Claim Under New York Law, Federal Court Holds“) you might be lulled into thinking that failing to furnish timely and proper notice of a claim to your insurer may not really be that big of a deal.

But it’s just not true.

As New York’s Appellate Division, First Department recently held in its June 2 decision in Continental Casualty Company v. Employers Insurance Company of Wausau, since plaintiff CNA “fail[ed] to prove that it gave [defendant] OneBeacon timely notice of any underlying asbestos action, the … judgment must be reversed.”

Here’s why this is a big deal: the legal costs that CNA sought to recover under this policy, which were incurred in defending numerous asbestos-related claims, totaled roughly $31 million.

And now CNA is stuck holding (nearly) the entire bag (OneBeacon had to foot part of the bill for some of the other claims).

Nothing sends this message as effectively as the Court’s decision, does it?

(For more on this topic, readers are directed to an old 2008 article of mine, whose central points are still valid, “5 Rules to Succeed in Filing an Insurance Claim“).

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A while back, I wrote about Estee Lauder, Inc. v. OneBeacon Insurance, an important case that helps define the issues in deciding whether to fight against an insurance company’s wrongful disclaimer of coverage (see “Why it May Pay to Fight a Disclaimer of Coverage Under NY Law“). Having won the initial battle, and secured an Order requiring the insurance company to defend their interests in the underlying lawsuit, Lauder now sought an Order mandating that the insurer pay their legal fees incurred in forcing the insurer to honor the insurance policy, which in legalese is called a “declaratory judgment action.”

This time they weren’t as lucky.

In a decision that was handed down on January 21, the New York County trial court held that Lauder couldn’t recover its legal fees for the declaratory judgment action because Lauder – rather than OneBeacon – started the lawsuit, and therefore, was “never cast in a defensive position by the insurer.”

Frankly, I think this result is absurd; an insured is penalized because they actively pursued their rights rather than sitting on their hands? Fortunately, I’m not alone in this assessment.

In fact, the trial court acknowledged the absurdity of this result, but felt that its hands were tied by precedent:

“The Court is mindful of the “strong policy reasons against adopting a rule of law that would reduce the incentives for insurance companies to defend in the underlying tort actions and that would likely shift the burden of obtaining a declaratory judgment from the insurance company to the insured” (Nationwide Mut. Ins. Co. v. Welch, 988 F Supp 629 [SDNY 1997]).

“Insurers could simply deny defense as a matter of course, and wait for impending actions by their insureds, without risk of incurring any liability for the insureds’ defense costs in resulting litigation (Folksamerica Reinsurance Co. v. Republic Ins. Co., 2004 WL 2423539 [SDNY 2004] (the Mighty Midgets doctrine seems to provide “a perverse incentive” for the insurer “to refuse to defend in the underlying suit, thereby leaving it up to the insured to bring a declaratory action seeking coverage’”)). There is the potential that insurers might shrink from their defense obligations under their policies and categorically deny their insureds’ tenders of defense in an effort to reduce their financial exposure, without risk of incurring any additional liabilities or expenses associated with issuing and maintaining policies. However, until the legislature determines otherwise, this Court is constrained to interpret the law as it currently stands.”

I imagine this isn’t over yet. I expect that Lauder is going to appeal.

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Having been down a similar road with respect to my own house several years ago, I found myself cheering when I read this decision, which was handed down on December 10.

In Carden v. Allstate, the plaintiffs were forced to rent another place to live when their home sustained serious fire damage. When they put in a claim under their homeowner’s policy, however, Allstate engaged in a modified version of the standard 3 “D”‘s – deny, delay and defend. (For an interesting expose on this topic, see Anderson Cooper’s report on insurance companies’ tactics, click on the link under the 3 “D”‘s.)

As the Court noted in its opinion, after first offering a low-ball offer that clearly did not cover the plaintiff’s losses that were required to be covered under the homeowner’s policy, they increased their offer – but it was still woefully inadequate, and forced plaintiffs to seek an independent evaluation, and for the appointment of an umpire to properly determine the appropriate payment they were entitled to under the policy. This umpire found that Allstate’s last offer was nearly $300,000 too low (and roughly $200,000 less than Allstate’s own independent adjuster’s estimate). And, despite an express provision in the policy entitling the plaintiffs to Additional Living Expense (“ALE”) for a maximum of 12 months during the reconstruction, Allstate refused to do so.

Left with no choice, the plaintiffs sued for breach of their insurance agreement. And won.

In finding Allstate guilty of bad faith, the Court stated as follows:

“As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims (Bi-County Market, Inc. v. Harleysville Ins. Co. of New York, 10 NY3d 187, 193 [2008]). While New York does not recognize an independent tort cause of action for an insurer’s failure to perform its contractual obligations under an insurance policy (New York Univ. v. Continental Ins. Co., 87 NY2d 308 [1995]; Roconova v. Equitable Life Assur. Socy., 83 NY2d 603 [1994]), where an insurer breaches its duty to investigate, bargain and settle claims in good faith, consequential damages for breach of contract may be recovered not limited by the amount specified in the insurance policy (Acquista v. New York Life Ins. Co., 285 AD2d 73, 77 [1st Dept 2001]; see Bi-County Market, Inc. v. Harlysville Ins. Co. of New York, 10 NY3d 187, 192-93 [2008]) …

“[D]ue to the delay in the settlement process and consequent delay in reconstruction, Plaintiffs were forced to remain out of the dwelling for 18 months. Under the Policy, Plaintiffs were entitled to Additional Living Expense (“ALE”) for a maximum of 12 months which Defendant refused to extend .. Here, the Plaintiffs have submitted evidence in admissible form that Defendant offered Plaintiffs $265,000 and then $575,000 on a claim ultimately determined to be, and paid, in the amount of $832,982, and that Plaintiffs suffered damage due to the delay in reconstruction of their Dwelling due to Defendant’s bad faith delay in settling the claim. This makes out a prima facie claim for breach of the covenant of good faith.”

Make no mistake; an award of bad faith against an insurer in New York is extremely rare. In fact, New York’s appellate courts usually dismiss bad faith claims against insurers. That’s why an appeal of this decision is a near-certainty.

That said, I hope these plaintiff’s enjoy the moment.

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Although I’m certainly no fan of the insurance industry, I can’t blame them for fighting this claim. And I don’t blame the Court for siding with them either.

Recently, in Rampersant v. Nationwide Mutual Fire Ins. Co., a Brooklyn  judge dismissed the lawsuit brought by a Kings County man against his auto insurer, which sought money to replace his stolen SUV. And, from all appearances, it was in fact stolen.

But the insured was penny-wise and pound foolish. In an effort to save a few dollars off of his insurance premium, he indicated that he resided in North Carolina rather than New York, where he actually lived. When the insurance company investigated his claim that his SUV was stolen from New York and found that he in fact lived, and kept his vehicle, in New York, they found that he made a material misrepresentation (i.e., “lied”) in his application for insurance, which led them to underwrite his policy at a lower premium than had he indicated his true residence in New York.  Therefore, in concluding that his policy was issued on fraudulent grounds, (in legalese, “misrepresentation“), the company voided his insurance contract retroactively and denied the claim.

Leaving aside the moral component to lying on an insurance application, this insured did something that was patently foolish: the entire purpose of having insurance is to cover you in the event of a loss; but by lying on the application in order to save a few dollars in the short run, he guaranteed that the policy would never cover him. In other words, he just threw money out the window.

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In a recent decision, New York’s Appellate Division, Second Department showed once again just how powerful New York’s insurance lobby is, and how, under the current structure of the law in New York, an insurer has almost no incentive to protect its clients – the insureds – by negotiating claims in good faith. Quite the contrary, in New York, insurers have every incentive to ignore their insureds’ interests, and to put their own economic self-interest first. (For more on this topic, please see “Bad Faith Claims in New York“.)

In CBL Path, Inc. v. Lexington Insurance Co., the plaintiff was confronted with an obvious negligence situation – their laboratory mixed up test results, causing a woman to undergo what was otherwise an unnecessary double mastectomy. Although their malpractice policy carried limits of $1 million, the defendant, a subsidiary of AIG, apparently never contacted the claimant to conduct any pre-litigation settlement negotiations, and as a result, the claimant ultimately filed suit, which brought a great deal of negative publicity to CBL.

CBL then sued its insurer for damage to its business reputation, lost profits, as well as the lost business opportunities that were directly caused by the negative publicity that it suffered due to the filing of the underlying negligence action.

Ultimately, and predictably, the Court was constrained to dismiss the action, following New York’s legal precedent, which the Court summarized as follows:

“Since an award of damages exceeding the policy limits is punitive in nature, it “is not applied routinely for breach of contract; and bad faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract …

“Since courts are understandably reluctant to expose insurers to liability exceeding the policy limits, the bad faith must be for conduct that is clearly more than ordinary negligence, i.e., more than merely poor judgment.”

The Court then articulated the rare circumstance under which an insurer can be held liable in bad faith in New York:

“Naturally, proof that a demand for settlement was made is a prerequisite to a bad-faith action for failure to settle. [Additionally,] the plaintiff in a bad-faith action must show that the insured lost an actual opportunity to settle the . . . claim at a time when all serious doubts about the insured’s liability were removed.

“Bad faith is established only where the liability is clear and the potential recovery far exceeds the insurance coverage” (id. at 454 [internal quotations marks and citations omitted]; see also Smith v General Acc. Ins. Co., 91 NY2d 648, 653; Soto v State Farm Ins. Co., 83 NY2d 718, 723; Vecchione v Amica Mut. Ins. Co., 274 AD2d 576, 578; cf. United States Fid. & Guar. Co. v Copfer, 48 NY2d 871, 873).”

Needless to say, I find this rule disturbing, because it tacitly allows insurers to ignore their fiduciary duties to their insureds – without any fear of adverse consequence. To borrow an old phrase, “There ought to be a law …”

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In Cooper Square Associates LP v.  Atlantic Mut. Ins. Co., a decision that was handed down by a New York County trial court on February 9 (and reported in tomorrow’s edition of the New York Law Journal), the plaintiff-landlord contended that since they were named on their tenant’s insurance policy as an additional insured, Atlantic Mutual was obligated to defend them against a personal injury lawsuit that was brought. Atlantic refused to do so on the grounds that there was evidence that the plaintiff in the underlying personal injury lawsuit was not injured at Cooper Square’s premises.

Citing New York’s long-established precedent that an insurer’s obligation to defend an insured (or, as in this case, an additional insured) is broader than its obligation to indemnify them, the Court stated as follows:

“If the claims asserted, though frivolous, are within the policy coverage, the insurer must defend irrespective of the ultimate liability …  A declaration that an insurer is without obligation to defend a pending action could be made ‘only if it could be concluded as a matter of law that there is no possible factual or legal basis on which [the insurer] might eventually be held to be obligated to indemnify [the insured] under any provision of the insurance policy.’  Servidone Const Corp. v. Security Ins Co of Hartford, 64 NY2d 419, 423-424 (1985).”

Under the circumstances, Atlantic’s refusal to defend Cooper Square was clearly improper, and the plaintiff was entitled to recover from Atlantic the costs it incurred in defending the underlying personal injury action from the date that it tendered its defense of that case to Atlantic.

This case is further proof of why it may pay to fight an insurer’s disclaimer of coverage.

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In an opinion that was published in today’s New York Law Journal, a Federal judge refused to hold as a matter of law that an insurance company’s disclaimer of coverage was proper – even though the insured did not report the underlying incident giving rise to the claim until over a year had passed.

In this particular case, the jacuzzi maintenance company, Northway Pool Service, Inc., did not notify their insurance company about an incident wherein one of their customers died while in the hot tub because based upon the police’s questioning regarding the incident, they did not believe that they had any liability for the accident. More specifically, they didn’t notify the insurance company until more than one year later, when they were served with a summons and complaint seeking damages for wrongful death.

Atlantic disclaimed coverage for the loss, citing Northway’s failure to timely notify them about the occurrence, and then  brought this lawsuit seeking a Court Order to confirm the propriety of their disclaimer. In denying the insurance company’s motion, however, the Court acknowledged that while an insured’s failure to timely notify its insurer of an occurrence will generally vitiate coverage, there is also an important exception to this rule: where a reasonable person standing in the insured’s shoes would believe that they had no liability; stated differently, where the insured is justified in believing that he would not be sued for this occurrence.

At the risk of redundancy (see, “Why It May Pay to Fight an Insurer’s Disclaimer of Coverage“), you should never assume that an insurer’s disclaimer of coverage, or refusal to honor your insurance contract is valid.

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In a decision that was handed down on June 25, New York’s Court of Appeals was confronted with an unusual question: under what circumstances can someone (or, as in this case, a small business in New York) be deemed an additional insured on an insurance contract (such that the insurance company is obligated to defend and indemnify them against a personal injury claim under the policy), even if they are not actually named as additional insureds on the insurance policy?

Although you would think that the answer to this question is probably “never,” you’d be mistaken; in Cassis v. Ohio Cas. Ins. Co.,  the Court of Appeals (New York’s highest court) held that since the landlord’s underlying contract with its tenant (the insured) obligated the tenant to procure proper insurance that named the landlord as an additional insured on its own commercial liability insurance policy, and the tenant’s policy expressly stated that coverage would be provided to anyone that the tenant was obligated to name as an additional insured on this policy pursuant to a written contract or agreement, the insurer must be held on the hook to cover the landlord.

At first blush, this decision would perhaps present a significant area of concern for insurers. However, a more careful reading of this decision suggests that the Court deemed the facts of this case somewhat unique (I, for one, do not recall ever seeing such language with regard to additional named insureds being employed in an insurance policy), and that this case is of limited precedential value. Time will tell.

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In a big victory for a property owner who brought a breach of insurance contract lawsuit against their insurance company (State Farm), New York’s highest court held invalid State Farm’s disclaimer of coverage for the building owner’s claims that they sustained damage to the foundation when improper excavation work that was done on the immediately adjacent lot caused the earth beneath the plaintiff’s building to slide away.  In its disclaimer, State Farm argued that they were not required to pay on the claim because the insurance policy contained a provision that excluded coverage for any claim arising out of ”earth movement,” such as the shifting, contracting or sinking of earth, including from earthquake or erosion.

Conversely, the plaintiff apartment building asserted that this exclusion was at best vague, and in any event inapplicable to these facts, because unlike the examples in the policy describing “earth movement,” this case involved a contractor’s purposeful excavation of property. In affirming the trial and appellate courts’ finding for the plaintiff, the Court of Appeals adhered to the general rule that “all ambiguties in a contract must be construed against the drafter,” which in this context, is the insurer. Thus, since the specific type of claim in this case was not clearly and unambiguously excluded from coverage, State Farm was obligated to pay the claim. A copy of the Court’s opinion can be read by clicking on this link.

This story is yet another example (see our other blog) of why you should never accept an insurer’s disclaimer or denial of coverage at face value; it may pay to fight them.

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