2000 Fall - Insurance Newsletter
October 1, 2000

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APPELLATE DIVISIONS SPLIT ON LIMITATIONS PERIOD FOR SUITS AGAINST INSURANCE BROKERS

According to a recent ruling by New York's Appellate Division, Second Department, lawsuits alleging that an insurance broker procured an improper insurance policy or inadequate coverage are governed by the state's three-year statute of limitations. In Chase Scientific Research, Inc. v. NIA Group, Inc., 708 N.Y.S.2d 128, 2000 N.Y. Slip Op. 04853 (2nd Dep't 2000) the court pointedly disagreed with the Appellate Division, First Department, which declared last year that a six-year statute of limitations applied. See Insurance Brokering Does Not Qualify as a Learned Profession for Statute of Limitations Purposes, OHRENSTEIN & BROWN INS. NEWSLETTER, Winter 2000 at 3, discussing Santiago v. 1370 Broadway Associates, L.P., 264 A.D.2d 624, 695 N.Y.S.2d 326 (1st Dep't 1999). The court also concluded that the three-year limitations period begins to run on the date that the questionable policy is procured, and not on the date the insured suffered the loss giving rise to the malpractice claim.

In May of 1995, Chase Scientific Research, Inc. retained NIA Group, Inc. to obtain commercial property insurance for its business. When Chase suffered a loss in excess of $1,000,000 in January of 1996 due to a storm, it demanded the $550,000 policy limits from its insurance carriers, but was offered only $50,000. After settling an action that it brought against the insurance carriers for $275,000, Chase sued NIA in January of 1999 for negligence and breach of contract. Chase claimed that NIA had failed to adequately appraise its property, and that the policy procured by NIA was inappropriate for Chase's particular business.

Section 214(6) of New York's Civil Procedure Law and Rules was amended in 1996 to establish a three-year statute of limitations for malpractice actions against 'professionals' other than doctors and dentists. The unanimous five-judge Second Department panel held that brokers are professionals covered under the three-year limitations period, and affirmed the judgment of the Westchester County Supreme Court dismissing Chase's complaint. In support of its conclusion, the court quoted relevant portions of New York's Insurance Law which requires brokers to be licensed in order to "protect the public by requiring and maintaining professional standards." The court also noted that it had recently applied the three-year limitations period to real estate appraisers. "There is no reason why the three-year Statute of Limitations should apply to a malpractice action against a real estate appraiser, but not to an action against and insurance broker," the court explained.

The Second Department's decision—which is binding in Kings (Brooklyn), Queens, Richmond (Staten Island), Nassau, Suffolk, Westchester, Putnam, Dutchess, Orange and Rockland counties— creates a rift in New York State, since the Appellate Division, First Department ruled last September that insurance brokers are not 'professionals' under section 214(6), and that a six-year statute of limitations applies to claims against brokers. Until the issue is decided by the Court of Appeals, plaintiffs whose claims are more than three years old have an incentive to forum shop and seek venue in New York and Bronx Counties.

TRIAL COURT HOLDS INSURANCE BROKERS NOT SUBJECT TO THE "CO
NTINUOUS TREATMENT" DOCTRINE

In a ruling that would have undoubtedly been different in New York's Appellate Division, Second Department, a New York County (which, as noted above, is located in the First Department) Supreme Court judge has denied the protection of the "continuous treatment" doctrine to the Eastman Kodak Company in a case against its former insurance broker.

In Eastman Kodak Co. v. Prometheus Funding Corp., 121191/99 (NYLJ, August 31, 2000), Kodak was barred from suing Prometheus, the successorin- interest to Frank B. Hall and Co. over its alleged failure to transmit claims to Kodak's excess insurer between 1988 and 1990, because the six year statute of limitations had run long before the suit was commenced in 1999. Thus, the court rejected Kodak's argument that the limitations period should not begin until the day the relationship between Kodak and the broker was severed.

Relying on the First Department's holding in Santiago v. 1370 Broadway Associates, L.P. 264 A.D. 624, 695 N.Y.S. 2d 326 (1st Dep't 1999), Justice Herman Cahn stated that because insurance brokering was not considered a learned profession, Prometheus could not be sued for professional malpractice. As such, the professional malpractice statute of limitations, which allows for a plaintiff to file a complaint within three years of the termination of "continuous treatment" has no application .

Kodak alleged that it placed Frank B. Hall on notice of claims made against it in 1988 and that the broker failed to place its excess insurers on notice of the claims for up to two years. The last claim at issue was reported to the excess insurers in September 1990. In response to the complaint which was filed in 1999, Prometheus alleged that any cause of action against it was required to have been filed by September 1995. Kodak argued that the matter was one of professional malpractice because it had relied on its broker's "expertise in providing notice to the proper parties in a timely fashion." As such, the broker's negligence and malpractice was a continuing tort up to the end of the business relationship, when Kodak replaced Prometheus as its broker in 1999. In rejecting Kodak's argument Justice Cahn (citing Santiago) wrote that "malpractice is the negligence of a professional toward a client, and ...a professional is an occupation that is generally associated with long-term educational training, licensure, standards of conduct, ethics and malpractice liability."

Certainly, the final word on this issue has yet to be spoken. It is likely to be decided by the Court of Appeals in conjunction with or at a point following a final decision on the applicable limitations period for actions against insurance brokers.

"SINGLE TRIGGER" APPROACH USED TO DETERMINE COVERAGE OF ASBESTOS-RELATED CLAIMS

In a case of first impression, New York's Appellate Division, First Department has held that insurance coverage of asbestos-related risks is triggered by the initial and continued inhalation of the substance, rather than a broader view that the diagnosis of an asbestos-related illness would act as a separate trigger for coverage. In re Liquidation of Midland Insurance Co., 709 N.Y.S.2d 24, 2000 N.Y. Slip Op. 05417 (1st Dep't 2000).

At issue was the scope of coverage for the liabilities of Lac d'Amiante du Quebec ("LAQ"), a Delaware corporation which was engaged in the mining, milling and selling of asbestos fiber in Quebec, Canada before it ceased operations in 1986. LAQ had purchased a $20 million excess coverage policy from Midland Insurance Company for the period of April 29, 1975 through March 15, 1976. The policy provided personal injury coverage for an occurrence, defined as "an event, including continuous or repeated exposure to conditions, which result in personal injury . . . neither expected nor intended from the standpoint of the insured. All such exposure to substantially the same general conditions shall be deemed one occurrence."

The liquidators of Midland argued that the policy provides coverage for asbestos claims only if the initial injurious inhalation occurred during the policy period, and that coverage could not also be triggered at the time the person is diagnosed with an asbestos-related disease from an earlier exposure, having carried the fibers "in residence." LAQ argued that the U.S. District Court in New Jersey had found that coverage in a policy issued by American Home Assurance Co. was triggered by exposure in residence and subsequent manifestation, and that this interpretation was binding upon Midland due to Midland's undisputed agreement to follow the American Home policy form.

LAQ's argument that the New Jersey federal court's decision was binding on Midland was rejected on conflicts of law principles, since Midland's principal place of business was New York and its policy was written in New York. Accordingly, New York law would apply.

The First Department, acknowledging that the trigger point for coverage in asbestos cases had not been settled in New York, decided to interpret the underlying American Home policy (which Midland was contractually obligated to follow) in accordance with the reasonable expectations of the parties doctrine. Under this analysis, the court reasoned that the purpose of defining all exposure as one occurrence is to make clear that only one deductible would apply, and that the limit of liability, even if the insurer issues several renewal policies, would be the policy limits for one policy. Further, the court stressed that the American Home policy did not recite that the trigger point for coverage was the time of the injury, but rather the time of the occurrence. Therefore, the only reasonable interpretation was that the insurer was obligated to indemnify at the time of inhalation, and not when the disease developed.

In so holding, the appellate panel unanimously agreed with the trial court to which the matter was remanded for a hearing to determine whether specific claims paid by LAQ to individuals who contracted asbestos-related diseases from its products should be covered by the Midland policy.

"SERIOUS INJURY" WITHIN THE MEANING OF INSURANCE LAW 5102(D) REQUIRES EXPERT OPINION SUPPORTED BY OBJECTIVE PROOF

In Grossman v. Wright, 268 A.D.2d 79, 707 N.Y.S.2d 233 (2nd Dep't 2000), New York's Appellate Division, Second Department clarified the type and quality of evidence which a plaintiff must submit in order to establish that he or she sustained a "serious injury" as defined by Insurance Law § 5102(d).

In 1994, plaintiff sustained injuries when his vehicle was struck in the rear as a result of a chain collision. The collision spawned three actions, one of which was the subject of an appeal of a trial court's decision denying defendant's motion for summary judgment.

In his bill of particulars, plaintiff claimed to have suffered various spinal injuries, including herniated and bulging discs. Plaintiff specifically alleged that as a result of the accident he sustained a "significant limitation of use of a body function or system," which fits the statutory definition of a "serious injury." The defendant moved for summary judgment dismissing the claim based on plaintiff's failure to establish a "serious injury." In support of her motion, defendant submitted affirmed medical reports prepared by an orthopedic surgeon and a radiologist who performed independent examinations of the plaintiff. The 1998 orthopedic report specified observations of plaintiff getting on and off the examination table unassisted and walking with a normal gait. It also described the tests that were conducted and the conclusion that there was no evidence of orthopedic injury. The 1995 radiology report noted that plaintiff's injuries were unrelated to the accident based on the review of an MRI of plaintiff's spine.

In opposition to defendant's motion, plaintiff submitted his own affidavit, his chiropractor's unsworn affirmation, and other medical records which were inadmissible in form. The chiropractor's affirmation noted plaintiff's complaints, the degrees of limitation in range of motion tests, and the conclusion that plaintiff's injuries were causally related to the accident. Defendant argued that this response was insufficient to defeat the motion for summary judgment since it consisted of an unsworn affirmation and there was no objective basis upon which the chiropractor determined the degrees of limitation in plaintiff's spine.

In reversing the trial court's decision, and in granting defendant's motion for summary judgement, the Appellate Division explained that the defendant established that the injuries were not "serious" by submitting affirmations of medical experts who examined plaintiff and concluded that no objective medical findings supported plaintiff's claim. The burden then shifted to plaintiff, who failed to establish a triable issue of fact that a "serious injury" was sustained within the meaning of the statute. The medical evidence submitted by plaintiff was inadmissible in form. Even if the chiropractor's report was considered, it failed to set forth any objective tests which may have been performed to support the conclusion that plaintiff's range of motion was restricted.

The court noted that in order to withstand an attack under section 5102(d), a plaintiff must present objective proof to support an expert opinion, which in this case would have been X-rays, MRIs, straight-leg or Lasque tests or other similarly-recognized tests or quantitative results based a neurological examination. As it found in this case, simply tailoring language to fit the statutory definition of "serious injury" will not suffice.

LOSS OF VISION IN ONE EYE INSUFFICIENT TO ESTABLISH "GRAVE INJURY" UNDER WORKERS' COMPENSATION LAW 11

Loss of vision in one eye does not constitute "grave injury" as that term is defined by Workers' Compensation Law § 11. New York's Appellate Division, Second Department, recognizing that, pursuant to the statute, a party seeking contribution and indemnification from a plaintiff's employer bears the burden of proving a "grave injury," so held in Ibarra v. Equipment Control, Inc., 268 A.D.2d 13, 707 N.Y.S.2d 208 (2nd Dep't 2000).

On July 5, 1996, plaintiff, Roman Ibarra, was injured by a bailing machine during the course of his employment at Atlantic Waste Disposal, Inc. As a result of the incident, plaintiff lost sight in one eye. He interposed a workers' compensation claim and commenced a products liability suit against Equipment Control, Inc., the manufacturer of the bailing machine. Equipment commenced a thirdparty action against Atlantic, seeking common law contribution and indemnification.

Atlantic moved for summary judgment, arguing that it could not be held liable for contribution and indemnification because Workers' Compensation Law § 11, as amended in 1996, restricted such liability to cases which involve a "grave injury," as narrowly defined under the statute. Atlantic argued that since plaintiff had not suffered "total and permanent blindness" (which is included in the statute among the injuries defined as "grave"), his injuries were not "grave," and it was only responsible for providing workers' compensation benefits. In opposing Atlantic's motion, Equipment initially contended that the amended statute was inapplicable because plaintiff's accident predated the statute's enactment on September 10, 1996. Equipment further argued that even if the amended statute applied, issues of fact as to whether plaintiff sustained a "grave injury" precluded the granting of summary judgment.

The trial court denied Atlantic's motion without reaching the question of whether Workers' Compensation Law § 11, as amended, was applicable, simply concluding that since the plaintiff had suffered a "grave injury," Atlantic remained liable for contribution even if the statute applied. The Appellate Division reversed, initially noting that the operative date was that of the filing of the main action and not that of the accident. As such, since the main action against Equipment was filed after the statute was enacted, the statute applied.

The Appellate Division also held that under the statute, a third party seeking contribution and indemnification against a plaintiff's employer ultimately bears the burden of proving a "grave injury" with competent medical evidence. At the very least, the third party, in such instances, must show the existence of a question of fact. In this case, Equipment failed to meet its burden because the loss of vision in one eye did not fit the statutory definition of a "grave injury." The court explained that while the statute includes "total and permanent blindness" among those injuries defined as "grave," the phrase must be construed to mean blindness in both eyes. The court noted that its conclusion was supported by the statute's inclusion within the definition of "grave injury" of "total loss of use or amputation of an arm, leg, hand or foot." Thus, had the Legislature intended to include loss of vision in only one eye, it would have done so.

SECOND CIRCUIT HOLDS THAT PRIMARY ASSUMPTION OF RISK BARS CLAIM FOR WRONGFUL DEATH EVEN WHERE INCIDENT OCCURRED AFTER COMPLETION OF SPORTING EVENT

In Goodlet v. Kalishek,—F.3d—, 2000 WL 1056066 (2nd Cir. 2000), the United States Court of Appeals for the Second Circuit, applying New York law, held that the doctrine of primary assumption of the risk barred recovery by the widow of a participant in an airplane race involved in a midair collision, even though the collision occurred after the completion of the race.

The plaintiff's decedent was killed following the completion of a Formula V air race, a sport that involves racing single-seat home built airplanes powered by a Volkswagen engine throughout a twomile oval race course. The risks inherent in Formula V air racing were disclosed by the Air Racing Association in pamphlets and prospective pilots were also cautioned about its inherent dangers when they applied for certification prior to each race. The plaintiff's decedent was the President of the Association. The collision, which was between planes piloted by the plaintiff's decedent and the defendant, occurred 14 seconds after the ill-fated planes crossed the finish line.

At the trial of the wrongful death action, the District Court denied the defendant's motion for judgment based upon the doctrine of primary assumption of the risk. The court held that although the doctrine would have barred plaintiff's action had the collision occurred after the finish of the race, because the collision occurred after the finish of the race, the doctrine was inapplicable and that plaintiff's assumption of the risk, if any, went to the issue of comparative fault, which was a question for the jury. The jury returned a verdict against the defendant, finding him partially liable for the death of the plaintiff's decedent.

In reversing the Second Circuit noted that in general, assumption of the risk is neither an absolute defense to a negligence action, nor an issue of law for the court. However, the court noted that the New York Court of Appeals has carved out an exception to this rule for injuries that are incurred during participation in a sport or recreational activities. See Turcotte v. Fell, 68 N.Y.2d 432, 510 N.Y.S. 2d 49 (1986). The rule set forth in Turcotte is that absent evidence of reckless or intentionally harmful conduct, an individual consents to those injury-causing events which are known, apparent, or reasonably foreseeable consequences of the activity. Accordingly, the participant's consent relieves the other participants of the duty to use reasonable care. Id. at 437-438. For the purposes of determining whether the doctrine of primary assumption of the risk negates a defendant's duty of care and bars a plaintiff's action, a court must consider the participant's knowledge of and experience with the activity and whether the injury derived from an inherent risk in the activity. See Morgan v. State, 90 N.Y.2d 471, 484, 662 N.Y.S. 421 (1997).

Here, according to the Second Circuit, the risk of fatal crash was both inherent in Formula V air racing and "fully comprehended and perfectly obvious" to the plaintiff's decedent. The fact that the crash occurred after the race ended was not significant. Relying upon the New York Court of Appeal's holdings in Turcotte and Morgan, the Second Circuit held that a participant consents to the risks that flow from participation in such activities. In this case, since the plaintiff neither alleged nor demonstrated reckless or intentionally harmful conduct by the defendant, the wrongful death action was barred as a matter of law.

FAILURE TO STRICTLY COMPLY WITH STATUTORY REQUIREMENTS RENDERS PURPORTED CANCELLATION OF AUTO POLICY INEFFECTIVE

An ineffective cancellation, coupled with the failure to provide the required notice of intent not to renew, resulted in an auto policy being extended beyond the original term. In American Home Assur. Co. v. Chin, 708 N.Y.S.2d 453, 2000 N.Y. Slip Op. 05299 (2nd Dep't 2000), Kenneth Chin was a passenger in a vehicle insured by American Home, which was involved in a four car collision on August 7, 1995. Another involved vehicle was owned by Roxy Auto Sales, Inc., which had previously been insured by John Deere Insurance Company. John Deere issued a policy for a period of one year, commencing on April 12, 1994. On June 13, 1994, John Deere mailed a notice of cancellation of the policy, to be effective July 5, 1994, alleging non-payment of premium.

After the collision, Chin filed a claim for uninsured motorist benefits with American Home. American Home denied the claim and Chin filed a demand for arbitration. In response, American Home commenced the proceeding pursuant to CPLR Article 75 to permanently stay arbitration of Chin's claim, asserting because Roxy's vehicle was insured by John Deere at the time of the accident, Chin had no right to proceed to arbitration. American Home argued that John Deere's alleged cancellation of the Roxy policy had been ineffective because it had incorrectly stated that the civil penalty for a lapse of insurance was $4.00 per day, rather than $6.00 per day.

John Deere moved to dismiss the proceedings asserting that: (1) the policy it had issued to Roxy was not a "covered policy" as defined by Insurance Law § 3425, because it had not been issued to a "natural person" for "non-business" purposes; and (2) since the policy was not a "covered policy," the ineffective cancellation could not extend the life of the policy beyond its stated or natural expiration date, i.e., April 12, 1995, nearly four months before the accident occurred. In opposition to John Deere's motion, American Home asserted that until John Deere issued a proper notice of cancellation, the policy issued to Roxy remained in effect.

The trial court denied John Deere's motion and granted American Home's petition to permanently stay arbitration of Chin's claim. Although the court agreed that the policy issued to Roxy was not a "covered policy" within the meaning of the Insurance Law § 3425, it determined that John Deere was nevertheless required to cancel Roxy's policy in accordance with Vehicle and Traffic Law § 313 and that its failure to do caused the policy to remain in effect until it was canceled in the manner prescribed by the statute.

New York's Appellate Division, Second Department affirmed the trial court's ruling stating that "[i]t is well established that a notice of cancellation is ineffective unless in strict compliance with the requirements of Vehicle and Traffic Law § 313(1)(a) . . . and of regulations of the commissioner properly filed not inconsistent with specific statutory provisions." Thus, the seemingly innocuous mistatement of the civil penalty for being uninsured as $4.00 per day, rather than $6.00 per day, rendered the purported cancellation ineffective. Because the notice of cancellation was ineffective, the policy remained in effect at least until its stated expiration date. Additionally, since John Deere had failed to comply with the Vehicle and Traffic Law § 313(1)(a) requirement that it provide notice of its intent not to renew the policy, the policy remained in effect on the date of the accident, and until it was canceled in the manner prescribed by statute. Although the court recognized that its holding might be inequitable as it extends a policy beyond its stated expiration date, "this matter," it noted, was "more properly left to the Legislature to remedy."

INSURER'S IMPROPER DENIAL OF DISABILITY CLAIM DOES NOT AUTOMATICALLY AMOUNT TO DECEPTIVE BUSINESS PRACTICE UNDER NEW YORK GENERAL BUSINESS LAW 349(a)

In Shapiro v. Berkshire Life Insurance Co., 212 F.3d 121 (2nd Cir. 2000), the United States Court of Appeals for the Second Circuit ruled on a claim by a dentist that the denial of his claim for disability benefits, which denial was ruled to have been improper, constituted deceptive business conduct under New York General Business Law § 349.

Plaintiff, a licensed dentist, challenged the denial of his claim for total disability benefits and contemporaneously brought a claim against his disability insurer, Berkshire Life Insurance Co., under New York General Business Law § 349 for deceptive business conduct. The Second Circuit affirmed the District Court's grant of summary judgment in plaintiff's favor on the disability claim and grant of summary judgment in Berkshire's favor on the deceptive business conduct claim.

Plaintiff was issued a disability policy which defined "total disability" as "the inability to perform the material and substantial duties of your occupation" and limited the scope of "your occupation" to "the occupation you are engaged in immediately preceding the onset of disability." Plaintiff testified that just prior to the onset of his disability he worked 4-5 days a week for a total of 40 to 45 hours, seeing 9-11 patients per day and performing an average of 275 procedures per month. He also had non-dentistry responsibilities, which including making personnel decisions, performing billing functions and attending staff meetings. By December of 1995, plaintiff concluded that his osteoarthritis and spondylosis of the elbow, neck and other joints left him medically unable to perform. He filed a claim for total disability benefits in March, 1996.

Berkshire, upon investigating the claim, determined that plaintiff was not prevented from performing his administrative or managerial duties and therefore did not satisfy the policy's definition of "total disability." It undertook to pay plaintiff total disability benefits for a limited time only and then, only under the "residual disability" provisions of the policy.

In holding that the District Court properly granted plaintiff's motion for summary judgment on his breach of contract claim, the Second Circuit noted that the vast majority of plaintiff's time was spent performing chair dentistry. The administrative work was merely incidental to his duties as a dentist. The court stressed that to rule otherwise, it would have had to find that plaintiff had a separate occupation as a medical administrator. Berkshire's argument that the onset of Shapiro's disability did not affect gross revenue of his businesses was rejected by the court on the ground that disability policies are designed to indemnify against loss of capacity to work, and not loss of earnings.

The Second Circuit, similarly affirming the District Court, refused to accept plaintiff's claim of deceptive business conduct under General Business Law § 349. The threshold requirement under such a claim is that a plaintiff demonstrate that a deceptive act is "consumer oriented"—having an impact on consumers at large as distinguished from just the individual claimant. Even if a plaintiff shows that the conduct is "consumer-oriented" within the meaning of the statute, the defendant's conduct must be shown to be deceptive or misleading in a material way and the cause of the plaintiff's injury.

Plaintiff raised two different theories of deceptive conduct. The first was a claim that a Berkshire salesman told him that a surgeon disabled from performing surgery would receive total disability benefits even if he was still able to practice general medicine, because the occupation would be considered "surgeon" rather than "doctor." This theory was rejected because Berkshire's denial of coverage was premised on its conclusion that plaintiff was a medical entrepreneur before the onset of his disability, and therefore he worked at the same occupation before and after the date of onset.

The second theory advanced by plaintiff was that Berkshire failed to adequately investigate his total disability claim before denying it. This too was rejected, since the record indicated that Berkshire provided plaintiff with the standard claim forms and had an investigator meet with him, with the conversation summarized in a memorandum. Although acknowledging that more investigation could have been done, the court concluded that the conduct fell short of being deceptive or misleading and added that an insurer's denial of a claim does not amount to deceptive conduct simply because it was mistaken.