2000 Spring - Insurance Newsletter
April 1, 2000

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ATTORNEY RETAINED TO DEFEND BUSINESS CLIENT HAS NO GENERAL DUTY TO ADVISE CLIENT ON INSURANCE COVERAGE

New York's Appellate Division, First Department has recently held that an attorney is neither liable in malpractice, nor for a breach of fiduciary duty for failing to inquire into whether a client has an insurance policy or policies that will cover the action. In Darby & Darby v. VSI International, ___A.D. 2d ___, 701 N.Y.S.2d 50 (1st Dep't 2000), the First Department held that absent factual circumstances to the contrary, an attorney retained to defend a business client is not required to inquire about all possible areas of the client's insurance coverage to properly defend the matter.

In Darby, the plaintiff brought an action for an account stated and legal fees in the New York County Supreme Court against defendant VSI International. VSI counterclaimed alleging malpractice and the breach of a fiduciary duty. VSI argued that it had retained the plaintiff to defend it in an intellectual property infringement suit, and that plaintiff committed malpractice and breached its fiduciary duty, by (1) failing to inquire into the existence of insurance coverage and (2) failing to inform VSI that its comprehensive insurance policy might permit VSI to recover damages it sustained as a result of the infringement action.

Plaintiff moved for summary judgment on its claim and to dismiss VSI's counterclaims. Justice Franklin J. Weissberg denied plaintiff's motion for summary judgment and its motion to dismiss the counterclaims relating to malpractice for failing to inform VSI about its insurance coverage. The Appellate Division, First Department reversed and held that VSI's allegations were "insufficient to support findings of either professional malpractice or breach of fiduciary duty." The First Department also held that, absent factual circumstances indicating that an attorney was retained specifically to inquire about the existence of insurance and/or the extent of the insurance coverage, an attorney retained to defend an action is not required to advise a client about the existence or extent of insurance coverage.

The Appellate Division recognized that there may be cases, such as automobile accidents in which the existence or non-existence of insurance coverage for the claim may be key. However, the court distinguished such cases from the underlying action stating, "we find no support for the proposition that an attorney who was retained to defend a business client in intellectual property action has a duty to inquire into the existence, nature and scope of insurance policies previously procured by the client, and to determine whether any such policy provides the client with any entitlement in relation to the claim being litigated." The court then reviewed the one case cited by Justice Weissberg for support in denying plaintiff's motion, Jordache Enters. v. Brobeck Phleger & Harrison, 56 Cal. Rptr. 2d 661, rev'd, 958 P.2d 1062, and held that Jordache does not impose a duty on an attorney to inquire into the existence of insurance. The court noted that the court in Jordache dismissed the malpractice claim on statute of limitations, grounds and never reached the merits of the malpractice claim.

Finally, the court acknowledged that although recent decisions from jurisdictions around the country have found that most general commercial liability policies provide coverage for certain intellectual property claims, the bulk of those decisions arose subsequent to plaintiff's representation of defendant.

NEW YORK'S REQUIREMENT OF TIMELY NOTICE OF DISCLAIMER HELD APPLICABLE TO OUT-OF-STATE INSURANCE POLICY

Claims handling under an insurance policy countersigned and delivered in Texas is still governed by New York notice requirements when the insured is a New York corporation doing business in New York, seeking coverage for a claim arising in the state. In American Ref-Fuel Co. of Hempstead v. Employers Ins. Co. of Wausau, ___ N.Y.S. 2d ___, 2000 WL 311178, 2000 N.Y. Slip Op. 02787 (2d Dep't, Mar 27, 2000), New York's Appellate Division, Second Department applied New York's notice rule under Insurance Law §3420(d) to a policy issued by an insurance company with a home office in Wisconsin, to a corporation based in Houston, Texas.

The parent company of plaintiff American Ref- Fuel Company of Hempstead, located in Houston, Texas, purchased a commercial general liability policy and a commercial umbrella liability policy from Employers Insurance Company of Wausau, whose home office is located in Wisconsin. Each policy listed plaintiff American Ref-Fuel Company of Hempstead, located in Westbury, New York, as one of several named insureds.

An employee of the Town of Brookhaven working in the Town's landfill commenced the underlying action, alleging that he was caused bodily injury as a result of American Ref-Fuel's negligent treatment of ash which it produced from its operation of the municipal incinerator. According to the employee, American Ref-Fuel failed to add enough moisture to the ash, thereby causing it to become airborne where the employee was required to work.

Employers attempted to disclaim coverage of American Ref-Fuel under the two policies purchased by American Ref-Fuel's parent company, asserting that the employee's personal injuries fell within a "pollution exclusion" in each policy. American Ref-Fuel argued the existence of coverage, asserting that Wausau's disclaimer was untimely pursuant to Insurance Law §3420(d).

Pursuant to Insurance Law §3420(d), an insurer must give written notice of its denial of coverage for death or bodily injury arising out of an accident occurring within the state, based on the applicability of an exclusion, as soon as is reasonably possible when the policy is delivered or issued for delivery in New York and would provide coverage for the occurrence, except when a policy exclusion applies.

In American Ref-Fuel, Employers contended that §3420(d) did not apply since the policies were not "delivered or issued for delivery" in New York, as is required by the statute, but instead were delivered to American Ref-Fuel's parent company in Texas. The Second Department distinguished the cases cited by Employers, finding that "[t]he fact that the policies also covered other corporations operating in other States and the happenstance that the policies were countersigned and actually delivered in another state is not determinative. Rather, the location of the insured and the risk to be insured are determinative." (emphasis added). The court also emphasized that the claim concerned injuries resulting from an accident that occurred within New York.

The court concluded that the claim fell within the purview of §3420(d). Finding Employers' delay of over four months in giving written notice of the denial of coverage to be untimely as a matter of law, the court ruled that Employers must defend and indemnify American Ref-Fuel for any liability incurred during the policy period.

This ruling emphasizes the potentially broad application of §3420(d), and alerts all insurers issuing policies which cover risks of accidents which may result in bodily injury within New York, and/or any insureds located in New York to the requirements of the statute, even where the policy otherwise had no contact with the state.

On the same day, a different Second Department panel cited American Ref-Fuel. In Sphere Drake Ins. Co., PLC v. Block 7206 Corp., d/b/a Hipps, ___ N.Y.S.2d ___, 2000 WL 311440, 2000 N.Y. Slip Op. 02889 (2d Dep't, Mar 27, 2000), the court ruled in favor of an insurer seeking a declaration of non-coverage, but initially ruled that Insurance Law §3420(d) applied to the occurrence at issue, imposing a duty upon Sphere Drake Insurance Company to disclaim coverage based on policy exclusions in a timely manner.

In the underlying action, plaintiff Jonathan Ilchert claimed that he was shot in the parking lot of the defendant nightclub Hipps by a fellow patron who had verbally and physically confronted him inside the nightclub a short time before. Ilchert alleged that his injuries were the result of Hipps' negligent failure to maintain a secure premises, negligent hiring and supervision of its personnel, and violation of New York's Dram Shop Act, which can impose liability upon an entity serving alcohol to an individual who it knows or should know to be intoxicated.

Hipps then sought coverage from Sphere Drake, with whom it maintained general and liquor liability policies. Sphere Drake denied Hipps' claim under both policies pursuant to an assault and battery exclusion, and commenced a declaratory judgment action. The trial court judge denied a cross-motion for summary judgment by Sphere Drake seeking a declaration that it was not obligated to defend or indemnify Hipps for the occurrence, finding issues of fact.

The Second Department reversed, holding initially that Hipps failed to rebut Sphere Drake's prima facie showing of the existence of the exclusion in each policy and that the facts of the underlying case triggered application of the exclusions. As a result, the court found that Sphere Drake properly disclaimed coverage based on the exclusions.

Citing American Ref-Fuel, the court also held that the facts of the case imposed a duty of timely disclaimer pursuant to Insurance Law §3420(d). Concluding that, by denying coverage approximately 45 days after receiving notice of the claim, Sphere Drake timely disclaimed as a matter of law under the §3420(d) standard, the court reversed the trial court's decision, granted plaintiff's cross-motion for summary judgment, and remitted the matter to the trial court for entry of a judgment that Sphere Drake was not obligated to defend or indemnify Hipps in the underlying action

GENERAL LIABILITY INSURER MAY DENY COVERAGE UNDER AUTO EXCLUSION WHERE COMPLAINT DOES NOT ALLEGE NEGLIGENCE IN THE OPERATION OF A VEHICLE

In United States Fire Ins. Co. v. New York Marine and General Ins. Co., ___ N.Y.S.2d ____ 2000 WL 307576, 2000 N.Y. Slip Op. 02748 (1st Dep't 2000), New York's Appellate Division, First Department held that a general liability insurer properly denied coverage based upon an automobile exclusion in its policy where the underlying complaint asserted negligence in the operation of a bridge as opposed to the use of a vehicle.

Plaintiff U.S. Fire commenced a declaratory judgment action alleging that defendant N.Y. Marine had a concurrent duty to indemnify the Nassau County Bridge Authority (NCBA) and its maintenance man for personal injury actions brought against them, stemming from a collision that occurred on a bridge. In 1990, NCBA had problems with its tollgates. In order to curb the flow of traffic to the non-operational tollgates, the bridge operator directed a maintenance man to block the lanes with a pick-up truck. A vehicle collided with the stationary pick up truck, spawning personal injury actions by the driver and two passengers of the vehicle. The complaints alleged negligence on the part of NCBA and the driver of the pick-up truck. The complaints also alleged that NCBA was negligent in managing and operating the bridge, specifically in failing to warn drivers that there was a truck stopped in the middle of the road.

NCBA timely notified both U.S. Fire, its automobile insurer, and N.Y. Marine, its general liability carrier, of the claims. N.Y. Marine denied coverage based on an automobile exclusion which provided that insurance did not apply to injuries and damages arising from the use of motor vehicles.

Subsequently, U.S. Fire settled the claims of the two passengers. In the action brought by the driver, a jury found that NCBA and the driver of the pick-up truck were not negligent. In the declaratory judgment action, U.S. Fire moved for summary judgment against N.Y. Marine, seeking a ruling that N.Y. Marine was obligated to indemnify NCBA and the driver of the pick-up truck. This ruling would obligate N.Y. Marine to share the costs of the settlements. N.Y. Marine moved to dismiss the complaint against them, arguing that the exclusion applied. U.S. Fire's focal argument was that multiple theories of liability were alleged in the underlying action, including the claim that NCBA was negligent in operating the bridge. The court, however, determined the declaratory judgment action in favor of N.Y. Marine and explained that the immediate and efficient cause of the injuries was the NCBA vehicle. The court further noted that the act giving rise to liability is determinative, not the theories of liability alleged. Therefore, the automobile exclusion in the policy issued by N.Y. Marine would protect it from having to share the costs of U.S. Fire's settlements.

INSURER LIABLE IN VERDICT DESPITE URGING SETTLEMENT

In N.Y.C. Housing Auth. v. Housing Authority Risk Retention Group Inc., 203 F.3d 145 (2d Cir., 2000), the U.S. Court of Appeals for the Second Circuit addressed the issue of whether an insured's improper refusal to allow its insurer to convey a settlement offer constituted willful and avowed obstruction, justifying the insurer's failure to seek its cooperation before disclaiming coverage. The court held that the insurer acted prematurely when it disclaimed coverage because N.Y.C. Housing Authority lawyers refused to settle a case one day before the jury returned a $5 million verdict in favor of a tenant.

The Housing Authority appealed a judgment which held that its insurer effectively disclaimed liability in an underlying suit which stemmed from an incident in which unknown attackers shot and paralyzed a tenant in a Housing Authority building. The tenant alleged that the Housing Authority plaintiff negligent in that it failed to maintain the building locks.

The insurer unsuccessfully attempted to settle the case. The first offer made to the tenant was rejected. The Housing Authority objected to settlement of the case since, at the time, New York law did not permit recovery against a property owner unless the identity of the assailant was proven. The insurer disclaimed coverage when the Housing Authority refused to permit the insurer to convey a second settlement offer. Thereafter, a verdict in favor of the tenant was returned for double the proposed settlement. The Housing Authority sued the insurer for indemnification when it declined to rescind its disclaimer.

Pursuant to the policy, the insurer provided coverage only if it was given a wide latitude to settle suits with a reasonable chance of success that the claim would exceed the self-insured retention. The Second Circuit agreed with the insurer that the tenant had a reasonable chance of recovering more that the selfinsured retention fund since circumstantial evidence could be used to infer the identity of the assailant. The Second Circuit reversed the judgment of the District Court, which had held that the insurer had effectively disclaimed liability. The Second Circuit held that, although the insurer was entitled to disclaim, its disclaimer had been ineffective, because it had not acted diligently in procuring the Housing Authority's cooperation. The court noted, for example, that the insurer never attempted to persuade the Housing Authority that there was a reasonable chance of success in the underlying action nor did the insurer give the Housing Authority an opportunity to reconsider its position with regard to a second settlement offer. As such the Housing Authority's failure to cooperate fell short of the "willful and avowed obstruction" required under New York law for an insurer to disclaim liability