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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And the plaintiff considered himself lucky when all this transpired, because, after all, he had purchased Allstate’s Deluxe Plus Homeowner’s policy, and figured that his losses would be covered. How wrong he was.

Allstate didn’t even have the decency to formally deny his claim; and, since his insurance policy (like all other Deluxe Plus policy holders) required him to protect Allstate’s interests in recovering compensation for the property damage that may have been caused through the fault of a third party (in this case the Village), he independently hired an attorney, and paid him out of his own pocket, to prosecute the claim in order to assure that the statute of limitations against the Village did not expire.

Reading between the lines of this decision, it is fairly clear to me that the Appellate court, like the trial court before it, found Allstate’s conduct rather troubling, as they both ruled that a jury should be free to consider whether Allstate deliberately withheld its determination on this claim so that the plaintiff (rather than Allstate) would have to bear the cost of hiring an attorney (which otherwise would and/or should have been Allstate’s obligation). If a jury sides with plaintiff on this issue, and finds that Allstate engaged in deceptive business practices (this law is codified at sections 349 and 350 of the General Business Law), Allstate faces the specter of not only compensatory damages for their alleged breach of contract, but also treble and punitive damages as well.

This should prove interesting.

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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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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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