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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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 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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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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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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