2003 Spring - Insurance Newsletter
April 1, 2003

CLICK TO READ FULL TEXT

COURT OF APPEALS ANNOUNCES SIGNIFICANT SHIFT IN NEW YORK'S CO-INSURANCE RULES; ADDITIONAL INSUREDS ENTITLED TO SAME COVERAGE AS NAMED INSUREDS

The New York Court of Appeals recently made a significant change to the rules of co-insurance when it concluded that insurance companies providing primary coverage to named insureds also must provide primary coverage to any additional insureds under the same policy. Pecker Iron Works of New York, Inc. v. Travelers Ins. Co., 2003 N.Y. LEXIS 116 (Feb. 13). Prior to this decision, which was surprisingly short given the tremendous impact it is likely to have on insurers of construction general contractors and subcontractors, an additional insured that had procured its own insurance coverage would often be entitled only to co-insurance (meaning that its own insurer would still be required to cover claims on a 50/50 basis).

The facts of the case were typical of those found in many construction site general liability claims: Pecker Iron Works hired a subcontractor, Upfront Enterprises, to provide labor and materials at a construction job site. The contract between Pecker Iron Works and Upfront required Upfront to buy insurance naming Pecker Iron Works as an additional insured. The policy that Upfront bought from Travelers provided Upfront with primary insurance coverage, and contained a provision saying that "additional insureds" would be provided with excess coverage only, unless the subcontractor "had agreed in a written contract for this insurance to apply on a primary or contributory basis."

One of Upfront's employees was injured at the job site, and sued the property owner and general contractor for his alleged personal injuries. The defendants filed a third-party complaint against Pecker Iron Works, who in turn filed a declaratory judgment action seeking insurance coverage for the claim under the Travelers policy.

Travelers filed a motion to dismiss the declaratory judgment action, arguing that since the contract between Upfront and Pecker Iron Works did not specifically say that the Travelers policy was to provide primary coverage, it was excess to the insurance coverage that Pecker Iron Works had purchased on its own. Although Judge James Gowan of the Suffolk County Supreme Court agreed with Travelers and granted its motion, the Appellate Division, Second Department reversed, explaining that there was no provision in the contract between Pecker Iron Works and Upfront stating that Pecker Iron Works would receive only excess insurance coverage from the Travelers policy.

In a decision written by Judge Albert M. Rosenblatt, the Court of Appeals agreed. According to the Court of Appeals, "additional insureds" are entitled to "enjoy the same protection as the named insured." Therefore, if Upfront was provided with primary insurance coverage, Pecker Iron Works was also entitled to primary insurance coverage. Judge Rosenblatt explained that "when Pecker engaged Upfront as a subcontractor and in writing provided that Upfront would name Pecker as an additional insured, Pecker signified, and Upfront agreed, that Upfront's carrier—not Pecker's—would provide Pecker with primary coverage on the risk."

The Court of Appeal's decision may have an impact on future underwriting decisions, since the potential obligations of insurers for subcontractors will likely be increased, depending on the terms of their contract with general contractors and property owners. Given the large volume of cases in which one party provides insurance coverage for another party, the court's ruling also is expected to have a dramatic impact on existing defense and indemnity allocations. Insurers will likely need to consider whether existing co-insurance arrangements should be modified, or whether the Pecker Iron Works decision should only be applied prospectively.

COURT OF APPEALS TO DECIDE WHETHER INSURER'S DISCLAIMER LETTER, SENT 48 DAYS AFTER RECEIVING NOTICE OF AN OCCURRENCE, WAS UNTIMELY

New York Insurance Law § 3420(d) requires liability insurance carriers to issue written disclaimer letters to insureds and claimants "as soon as is reasonably possible." If an insurer's disclaimer letter is found by a court to be untimely, the insurer may be prevented from disclaiming coverage for the claim. Section 3420 does not specify how long is too long to wait, and decisions from the Appellate Division vary tremendously. (In the 1979 case of Hartford Ins. Co. v. County of Nassau, 46 N.Y. 2d 1028, 416 N.Y.S.2d 539, the Court of Appeals ruled that a 60-day unexcused delay renders a disclaimer letter untimely. However, since then, the court has left open whether delays of less than 60-days render a disclaimer letter untimely. In a January 2002 decision, West 16th St. Tenants Corp. v. Public Service Mut. Ins. Co., 290 A.D.2d 278, 736 N.Y.S.2d 34, the First Department ruled that a disclaimer letter issued only 30 days after the insurance carrier received notice of the claim was untimely as a matter of law.)

The Court of Appeals has agreed to shed some light on the issue, perhaps indicating its intention to establish a uniform rule, by accepting two questions that were certified by the Court of Appeals, Second Circuit: (1) whether an insurance company can wait to issue its disclaimer letter in order to investigate if the insured has other insurance that would provide coverage for the claim, and (2) if not, whether an otherwise unexcused 48-day delay in issuing a disclaimer letter violates § 3420(d) and is untimely. First Financial Ins. Co. v. Jetco Contracting Corp., 2003 N.Y. LEXIS 435 (April 8). The Second Circuit's decision is reported at 322 F.3d 750.

Jetco, a general contractor, was sued by the employee of one of its subcontractors, in connection with personal injuries the employee allegedly sustained at a construction job site. Jetco waited over seven months after learning about the accident to put its insurance carrier on notice, even though Jetco's insurance policy required that it give notice "as soon as practicable." First Financial issued a reservation of rights letter, and hired an investigator in connection with the accident. The investigator learned that Jetco had waited seven months to put the carrier on notice, yet First Financial did not issue its "late notice of occurrence" disclaimer letter until 48 days later.

After a bench trial, United States District Court Judge Naomi Reice Buchwald (S.D.N.Y.) ruled that Jetco's seven month delay violated the insurance policy, and that First Financial's own 48-day delay was reasonable and did not violate § 3420(d), since First Financial used that time to investigate whether Jetco had other insurance that also would provide coverage for the claim. According to Judge Buchwald, this investigation "was clearly for Jetco's benefit" and therefore "should be encouraged" as a matter of public policy.

On appeal, the Second Circuit noted that it would be reasonable for an insurance company to perform an investigation prior to issuing a disclaimer letter if the investigation directly relates to the potential grounds for disclaiming insurance coverage. Here, however, First Financial acknowledged that its investigation of Jetco's other insurance was not germane to the disclaimer letter that it eventually issued to Jetco. Writing for the two-judge panel, Circuit Judge Chester J. Straub decided that it would be more prudent to ask the Court of Appeals for its opinion: "Rather than decide for ourselves in the first instance the significance and novel public policy question of additional source investigations in the context of notification under [section 3420(d)], we respectfully defer to the New York Court of Appeals."

Justice Straub went on to note that if First Financial should not have waited to issue its disclaimer letter in order to investigate if Jetco had other insurance, another outstanding question would have to be answered: whether a 48-day delay is untimely as a matter of law. Here too, the panel deferred to the Court of Appeals, noting that it has "insufficient guidance from the courts of New York confidently to decide" the issue.

SURVEILLANCE TAPES MUST BE TURNED OVER PRIOR TO PLAINTIFFS' DEPOSITION, COURT OF APPEALS RULES

In the 1992 decision of DiMichel v. South Buffalo Railway Co., 80 N.Y.2d 184, 590 N.Y.S.2d 1, the Court of Appeals ruled that surveillance videotapes did not have to be turned over to a plaintiff's attorney until after the plaintiff was deposed. Since then, the New York legislature enacted CPLR 3101(i), which mandates "full disclosure of any films, photographs, video tapes or audio tapes." In light of this statute, the Court of Appeals recently concluded that surveillance video tapes must now be provided to opposing counsel before the plaintiff's deposition is conducted. Tai Tran v. New Rochelle Hospital Medical Center, 2003 N.Y. LEXIS 183 (Feb. 20).

Plaintiff Tran was a hibachi chef who hurt his left palm when he fell while working at a restaurant. Two years after receiving treatment at the New Rochelle Hospital Medical Center and returning to work, Tran sustained another on-the-job injury to his left hand. He claimed that the second injury was caused by weakness arising from the first injury, and that the hospital and treating physicians did not diagnose and treat his first injury properly. Tran learned that the defendants had secretly videotaped him (in an effort to disprove Tran's claim that he had not returned to work since the second accident), and demanded production of the videotape. The defendants refused to turn over the tapes until the plaintiff's deposition was completed. Although the Supreme Court ordered production of the videotape, the Appellate Division reversed, ruling that CPLR 3101(i) did not contain any provision concerning the timing of a videotape's disclosure.

The Court of Appeals reversed, concluding that the plaintiff was entitled to the vieotape before his deposition. Writing for a unanimous court, Judge Albert M. Rosenblatt explained that by enacting CPLR 3101(i) without explicitly adopting the rules concerning the timing of disclosure set forth in the DiMichel descision, the New York legislature had in effect rejected the DiMichel rule entirely. Judge Rosenblatt acknowledged that court's ruling has implicit dangers: "We recognize, as have all of the Appellate Divisions, that requiring full disclosure of surveillance tapes before a plaintiff is deposed reintroduces the prospect of tailored testimony... While we articulated our solution to the tailored-testimony problem in DiMichel we are not now free to impose a timing requirement under section 3101(i) given the Legislature's pointed recasting of the relevant discover provisions and its mandate for 'full disclosure.'"

The court's decision does not prohibit defendants from recording surveillance videotapes after a plaintiff's deposition is conducted. It nonetheless has the practical impact of eliminating the "surprise" element of videotapes that are recorded before a plaintiff's deposition has begun.

U.S. SUPREME COURT RULES THAT EXCESSIVE PUNITIVE DAMAGES AWARD VIOLATES DUE PROCESS CLAUSE OF 14TH AMENDMENT

In a 6-3 decision, the United States Supreme Court has ruled that a $145 million punitive damages award in favor of an insured (who sued his insurer for bad faith, fraud and intentional infliction of emotion distress in connection with the insurer's refusal to settle an underlying claim) was excessive, and violated the Due Process Clause of the Fourteenth Amendment of the United States Constitution. According to the majority, the punitive damages award could not be sustained because it was grossly out of proportion to the jury's compensatory damages award of $1 million. State Farm Mut. Auto. Ins. Co. v. Campbell, 2003 U.S. LEXIS 2713 (Apr. 7).

Writing for the majority, Justice Kennedy explained that "while States possess discretion over the imposition of punitive damages, it is well established that there are procedural and substantive constitutional limitations on these awards." In particular, the court noted that the Due Process Clause of the Fourteenth Amendment prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor, and that excessive punitive damages awards would constitute an "arbitrary deprivation of property." Reiterating considerations that the court discussed in its 1996 ruling in BMW of North America, Inc. v. Gore, 517 U.S. 559, 134 L.Ed 2d 809, 116 S. Ct. 1589, Justice Kennedy stressed three "guideposts" for courts to consider when reviewing punitive damages awards: (1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual and potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

Applying the three "guideposts" to the specific facts before them, the court concluded that "this case is neither close nor difficult," and ruled that the punitive damages award could not be sustained. First, the court noted that the punitive damages award here was not based, as it should have been, on State Farm's conduct towards Campbell alone, but on State Farm's alleged conduct towards other insureds nationwide. Thus, the scope of the conduct considered by the jury when making its punitive damages award was improper. Second, while the Court refused to offer a bright-line rule concerning an appropriate ratio between compensatory and punitive damages, as a general matter the majority took the position that "few awards exceeding a single- digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." Here, the ratio was 145:1, grossly out of proportion to what the constitution allows. Finally, the court noted that "the most relevant civil sanction under state law for the wrong done to the Campbells appears to be a $10,000 fine for an act of fraud, an amount dwarfed by the $145 million punitive damages award."

The court vacated the judgment and remanded the case to the Utah courts to determine anew an appropriate punitive damages award.

Justices Scalia and Thomas filed separate, one-paragraph dissenting opinions, in which they explained that they do not believe the Constitution imposes any limits of punitive damages awards. Justice Ginsburg also filed a dissenting opinion, expressing her opinion that "this Court has no warrant to reform state law governing awards of punitive damages."

COURT GRANTS SUMMARY JUDGMENT TO MANUFACTURER AND RETAILER OF BED SHEETS; DEFENDANT HAD NO DUTY TO WARN OF MINUSCULE LEVELS OF FORMALDEHYDE USED IN THE MANUFACTURING PROCESS

Signaling a possible pro-defendant shift in New York "failure to warn" cases, Queens County Supreme Court Justice Joan Durante has dismissed the complaint of a woman who alleged that she was injured due to excessive formaldahyde levels in bed sheets that she purchased at a local department store. Pai v. Springs Industries, Inc., N.Y. Law J., January 16, 2003, p. 24. The plaintiff, Rose Pai, who suffered from severe allergies and had multiple chemical sensitivities, sought damages based on the alleged failure of the defendants to warn, strict products liability, negligence and breach of warranty. She claimed to have developed rashes, sores, itching and other afflictions due to the formaldehyde in cotton sheets manufactured by Springs Industries, one of the world's leading textile producers. Springs sought dismissal, contending that its sheets and pillow cases passed the only test recognized in the textile industry for measuring formaldehyde levels, and that there had been no consumer safety complaints regarding the sheets.

The court dismissed plaintiff's claims, ruling that the cause of action for failure to warn was preempted by the Federal Hazardous Substance Act, and that there was no evidence supporting any of Pai's other legal claims. Justice Durante concluded that Pai failed to present evidence suggesting that a substantial number of people suffered any allergic reactions to Springs' bed sheets. Absent evidence showing that the sheets caused an allergic reaction in more than a "microscopic fraction" of consumers, the court ruled that Springs had no duty to warn purchasers of the low levels of formaldehyde. The court went even one step further, noting that since "Pai was unaware that she was allergic to formaldehyde prior to her purchase of the sheets, any warning placed on the product would have been meaningless to her, as she was unaware of her preexisting condition." The court also granted summary judgment to Macy's, the co-defendant department store, on the ground that it had no duty to inspect a product which is sold in a sealed package.

The defendants' victory in this case is particularly welcome for manufacturers and their insurers, since New York courts have been known in the past to hold manufacturers to a high standard of care in failure to warn cases, even where a product was unlikely to cause any harm to the overwhelming majority of consumers.

Springs Industries was represented by Ohrenstein & Brown.

MANUFACTURER OF CUSTOM-DESIGNED PRODUCTS IS NOT A "CASUAL MANUFACTURER" AND CAN BE LIABLE FOR STRICT PRODUCT LIABILITY

The Court of Appeals has provided additional guidance on the issue of who qualifies as a "casual manufacturer" for purposes of being immune from strict liability lawsuits. The court ruled unanimously that the definition does not apply to manufacturers who, in the regular course of their business, design and fabricate custom products for their customers. Sprung v. MTR Ravensburg, Inc., 2003 N.Y. LEXIS 387 (Apr. 3).

The plaintiff, Ronald Spring, was injured when panels from a custom designed and manufactured retractable floor accidentally came out of their safety enclosures and fell on him. The retractable floor, which was used to allow employees of the General Electric Turbine Plant to work on equipment in a pit ten feet below the main factory floor, was the only one of its kind ever produced by defendant VF Conner, Inc. Plaintiff's complaint against Connor included claims for strict products liability, negligence, failure to warn, misrepresentation and breach of warranty.

Conner moved to dismiss the complaint, alleging that since it was not in the business of designing and manufacturing retractable floors like the one at issue in this case, it was only a casual manufacturer, and could not be liable for strict liability. The Supreme Court denied Conner's motion, but the Appellate Division adopted Conner's argument and reversed. In addition to ruling that Conner was a casual manufacturer, the Appellate Division concluded that the floor fell on the plaintiff in the first place not because of the way it was designed or manufactured, but because it was installed and maintained improperly by General Electric.

Writing for the Court of Appeals, Chief Judge Judith S. Kaye reinstated the plaintiff's complaint, ruling as a matter of law that Conner was not a casual manufacturer, and that questions of fact existed as to whether Conner participated in the design and installation of the floor.

The court explained that the casual manufacturer doctrine applied only "casual" or "occasional" sales that are not part of the seller's regular business. This includes, for example, where a product is manufactured by the defendant for its own use, or where the manufacturing of the product is incidental to the defendant's business. However, even though the specifications of a product may differ from one customer to the next, as long as the defendant is in the business of producing custom products, it cannot be deemed a "casual manufacturer."

Chief Judge Kaye explained: "True, when a custom fabricator builds a product to suit a customer's specific needs, there may well be less informational disparity between the producer and the user than in the mass production setting. Such disparity is, however, only one of the several policy reasons underpinning strict liability. Like other manufacturers, custom fabricators engaged in the regular course of their business hold themselves out as having expertise in manufacturing their custom products, have the opportunity and incentive to ensure safety in the process of making those products, and are better able to shoulder the costs of injuries caused by defective products than injured customers or users."

The court explicitly left open whether a manufacturer can be liable if it simply executes the design specifications of its client but is not itself involved in the design process. The court noted that other jurisdictions are split on this more narrow issue.

(The plaintiff also sued MTR Ravensburg, the manufacturer of the lathe that the plaintiff was going to work with on the retractable floor. The Court of Appeals affirmed that portion of the Appellate Division's decision that dismissed the complaint against this defendant. The high court agreed that there was no evidence showing that the lathe contributed to the plaintiff's injuries, or that MTR Ravensburg was involved in the design, sale or installation of the retractable floor.)

COURT RULES THAT LAND SURVEYOR IS A "PROFESSIONAL" FOR PURPOSES OF 3-YEAR STATUTE OF LIMITATIONS; BUT DEFENDANT'S UNREASONABLE DELAY BARS IT FROM RAISING LIMITATIONS DEFENSE

The New York Supreme Court, Suffolk County has ruled that legal claims against land surveyors are subject to the three-year statute of limitations under CPLR 214(6) for professional liability claims, but that the defendant could not invoke the limitations defense because it waited three-years to raise the matter with the court. L.A. Wenger Contracting Co, Inc. v. Lovell, N.Y. Law J., Dec. 26, 2002, p. 29.

CPLR 214(6) originally applied only to professional malpractice actions against doctors, but was amended in 1996 to apply a three-year limitations period to claims against all other "professionals," whether the claims are for negligence or breach of contract. The term "professional" is not defined in the statute, and courts have been wrestling ever since with the question of whom the legislature intended to cover under the statute. The New York Court of Appeals offered guidance in 2001 in Chase Scientific Research, Inc. v. NIA Group, Inc., 96 N.Y.2d 20, 725 N.Y.S.2d 592, when it explained that "professional" includes those within a group whose qualities "include extensive formal learning and training, licensure and regulation indicating a qualification to practice, a code of conduct imposing standards beyond those accepted in the marketplace and a system of discipline for violation of those standards."

Applying these factors to licensed land surveyors, Justice Robert W. Doyle cited numerous statutory provisions imposing the requirement of formal training, licensure and codes of conduct upon licensed land surveyors. Additionally, the court noted that land surveying is a branch of engineering, a group that has been routinely recognized as "professionals" within the meaning of the limitations statute. Based on these considerations, the court concluded that the three year statute of limitations set forth in CPLR 214(6) applies to professional malpractice claims against licensed land surveyors.

Notwithstanding the applicability of CPLR 214(6), and the fact that the plaintiff's claims were filed more than three years after they arguably had accrued, the court denied defendant's motion to amend its answer to include a statute of limitations affirmative defense. Judge Doyle explained that in deciding a motion to amend a pleading, the court possesses broad discretion, and considers factors such as whether there has been a "gross delay" in the moving party's assertion of the amendment, how long the amending party was aware of the facts upon which the motion is predicated, whether the amending party offers a reasonable excuse for its lengthy delay, and prejudice to the opposing party if amendment is permitted.

In the case before it, the court stressed the lapse of three years between the filing of the action and the defendant's motion, the defendant's failure to offer any explanation or reasonable justification for its failure to raise the affirmative defense when the answer was served, and the defendant's failure to move to amend the answer earlier. The court also concluded that the plaintiff would be prejudiced if the defendant's motion were granted. According to the court, during the three years in which the action was pending, the defendant obtained extensive discovery from the plaintiff, but the plaintiff did not obtain any discovery from the defendant. The discovery sought by the plaintiff may have included evidence showing that his claims were in fact timely.

One of the practical lessons to be learned from the Lovell decision is that when in doubt, it is easier to include a statute of limitations defense in one's answer (if one has a good faith basis to do so), and to then withdraw the defense if it appears after discovery to be factually or legally unfounded, than to seek to amend one's answer to include a new affirmative defense after obtaining significant discovery.