1997 Spring/Summer - Insurance Newsletter
April 1, 1997

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APPELLATE COURT HOLDS THAT NEW YORK WORKERS’ COMPENSATION REFORM ACT APPLIES PROSPECTIVELY ONLY

As first reported in the Summer 1996 issue of the Insurance Newsletter, the New York State Legislature enacted the Workers’ Compensation Reform Act (“the Act”), limiting third-party indemnification and contribution actions against a plaintiff’s employer to cases based upon a written contract entered into prior to the accident or where the employee’s injury falls within the Act’s narrow definition of “grave injury”. The Act, which was signed into law by Governor Pataki in September, 1996, severely restricts cases where a defendant can interpose a third-party action against a plaintiff’s employer, even if the employer’s negligence was the proximate cause of the plaintiff’s injury. Prior to the passage of the Act, a defendant sued by the employee of another entity could interpose a third-party action against that entity without restriction.

Since the passage of the Act a topic of significant discussion in the legal and insurance communities has been whether the Act has prospective only or retroactive effect. In the first appellate ruling relating to this question, Morales v. Gross, ____ N.Y.S. 2d ____, 1997 WL 208988 (April 21, 1997), the Appellate Division, Second Department held that the Act is to be applied prospectively only. Noting that the Act was silent as to whether pending third-party actions against employers would be adversely effected, the court reviewed the legislative history and noted that the intent of the framer was that the Act be applied prospectively and that it not serve to extinguish pending thirdparty claims.

Prior to Morales, there had been decision on this issue by trial level courts in each of New York’s four judicial departments, some holding that the statute was retroactive and some holding that it was to be prospective only. See, e.g. Debate Over Retroactivity of Workers’ Compensation Reform Act Begins. OHRENSTEIN & BROWN INS. NEWSLETTER, Fall 1996 at 4.

Although Morales is technically binding only in the Second Department, it should have wide ranging impact. There will, however, continue to be considerable discourse throughout the state and contrary decisions in other judicial departments remain a possibility until the Court of Appeals addresses the issue, which it is expected to do within the next year.

GRADUAL LEAKS DEEMED NOT “SUDDEN”

Ruling in favor of insurers in a case with national ramifications for pollution cleanup projects, the New York Court of Appeals, in Northville Industries Corp. v. National Union Fire Ins. Co. of Pittsburgh, PA.,____ N.Y.S. 2d_____, 1997 WL 135829 (March 25, 1997), held that the standard pollution exclusion, which restricts insurance coverage to “sudden and accidental” toxic discharges, does not apply to gradual leaks that occur over a period of years. The Court affirmed a decision of the Appellate Division, Second Department reported on in a previous issue the Insurance Newsletter. See “Sudden” Defined to Deny Policy Coverage, OHRENSTEIN & BROWN INS. NEWSLETTER, Winter 1996 at 8.

In a unanimous opinion, the Court defined “sudden” in the context of the pollution exclusion for the first time in New York, holding that insurance coverage is triggered only by “an abrupt, environmentally significant discharge of pollutants.” The battle over the scope of the pollution exclusion has resulted in courts throughout the country being almost evenly split on the meaning of a “sudden” discharge. Nearly half have concluded that the term is ambiguous and may, in fact, mean essentially the same thing as “accidental.” Because many insurance policies emanate from New York, the Court’s broader interpretation of the pollution exclusion is likely to impact on cases in jurisdictions where accused polluters and their insurers litigate over the cost of cleanup projects.

Following its insurers’ disclaimer of coverage under the pollution exclusion, Northville sought to establish that the insurers were obligated to defend and indemnify it with regard to claims by owners of neighboring properties who had commenced suit against it based on the release of approximately two million gallons of gasoline into ground water from two of the company’s storage and distribution facilities. The sources of the two discharges were identified as a “pinhole” in an underground pipe caused by corrosion, and a leak from a failed elbow joint. Each leak continued for seven to 10 years before it was discovered.

Relying on its previous construction of the “sudden and accidental” exception to the pollution exclusion, in Technicon Elecs. Corp. v. American Home Assur. Co., 74 N.Y.2d 66, 544 N.Y.S.2d 531 (1989), rearg. denied, 74 N.Y.2d 893, 547 N.Y.S.2d 857, the Court reasoned that both contingencies included in the exception must be satisfied. (In Technicon, the Court held that coverage is triggered only if a discharge is both “sudden and accidental”. The Court also held that no intentional discharge can be accidental, but did not determine the meaning of “sudden”.) The Court rejected Northville’s definition of “sudden” as happening unexpectedly, noting that this would essentially define “sudden” as “accidental”, and that precedent dictates that separate terms must have separate meanings. The Court concluded that a common sense reading of “sudden” brings a temporal aspect (abruptly, precitpitantly or brought about in a short time) to the definition which cannot be ignored.

INDEMNIFICATION AGREEMENT HELD UNENFORCEABLE WHERE CONTRACTOR FOUND PARTIALLY NEGLIGENT

In Itri Brick & Concrete Corp. v. Aetna Cas & Sur. Co., 89 N.Y.2d 786, 1997 WL 255335 (May 13, 1997), the New York Court of Appeals, faced with the question of whether, and to what extent, an indemnification agreement between a general contractor and subcontractor can be enforced where the general contractor is found to be partially negligent, held that where the agreements in question contemplate full, rather than partial indemnification, they are unenforceable under New York General Obligations Law § 5-322.1.

General Obligations Law §5-322.1 renders void and unenforceable indemnification provisions contained in construction contracts which purport to indemnify or hold harmless a promisee against liability for damage arising out of the promisee’s own negligence, whether in whole or in part. The statute was a response to a common practice in the construction industry where subcontractors were forced to assume liability by contract for the negligence of others, most often general contractors.

Itri was a combined appeal of two cases in each of which a subcontractor had contractually agreed to broaden its liability by providing for the indemnification of a general contractor from claims for injuries, in one case, “from any cause while on the project”, and in the other case, “in connection with or resulting from the work.” Each agreement imposed an indemnification obligation on the subcontractor without limitation in terms of the negligence of the general contractor, and in each case there had been a finding that the general contractor was partially negligent.

Noting that General Obligations Law §5-322.1 speaks in broad terms and “makes no attempt to salvage that part of an indemnification contract that would require a subcontractor to indemnify a general for the subcontractor’s negligence only [,]” the court concluded that the statute applies to indemnification agreements in their entirety where, as in this case, there has been a finding that the promisee was negligent.

NEW JERSEY SUPREME COURT TO CONSIDER COVERAGE FOR SEXUAL ASSAULT

Is a sexual assault by a gynecologist a “medical incident” for purposes of malpractice coverage? According to a New Jersey intermediate appellate court, the answer is “yes.” The answer was provided in Princeton Ins. Co. v. Chunmuang, 292 N.J. Super. 349, 678 A.2d 1143 (N.J. Super. Ct. App. Div. 1996), in which a malpractice insurer sought a declaration that it was not liable for compensatory damages for emotional distress suffered by a former patient of an insured physician. The case is now pending before the New Jersey Supreme Court, the state’s highest court.

In finding that the policy afforded coverage for such claims, the appellate court observed that the insurer was obligated to pay for damages resulting from “injury caused by a ‘medical incident’ arising out of [the] supplying of professional services.” A “medical incident” was defined under the policy as “any act in the furnishing of the professional medical services by you.” Relying on decisions outside of New Jersey, the court followed the reasoning of St. Paul Fire & Marine Ins. Co. v. Asbury, 149 Ariz. 565, 720 P.2d 540 (Ariz. Ct. App. 1986), which had held under similar circumstances that because “the tortious conduct [was] committed while providing professional services,” such conduct was “intertwined with and inseparable from the services provided.”

Acknowledging that other courts have held to the contrary in such situations, the court declined to follow the majority of jurisdictions refusing coverage, which includes New York. See, e.g., Snyder. v. Major, 789 F. Supp. 646 (S.D.N.Y. 1992).

The court in Princeton further concluded that neither public policy nor the intentional acts exclusion in the policy precluded a finding of coverage under such circumstances. The court noted that New Jersey “is committed to the principle of protecting injured innocent victims by finding coverage in their favor”, even under circumstances where the conduct may constitute a criminal or intentional act. As such, the court reasoned that the policy’s intentional act exclusion served to distinguish acts which are “intertwined and inseparable from the prohibited conduct” from those in which “criminal conduct is not an inseparable part of providing professional services by the insured physician.” Examples of the latter type of conduct (which would fall within the exclusion), were “rape, serious assault [and] robbery.” Under the court’s analysis, the sexual assault at issue was apparently not a “serious assault”, although no explanation was given of which might qualify as such.

In a long dissent from the court’s decision, one judge wrote that regardless of whether the tortious conduct arose out of the rendering of “professional services”, the injury alleged nevertheless resulted from a “criminal act” which is excluded under the policy. Moreover, because the policy at issue in Asbury apparently did not include an exclusion for criminal acts, the dissent found the Asbury case distinguishable.

The New Jersey Supreme Court heard oral argument on April 28, 1997.