1995 Fall - Insurance Newsletter
October 1, 1995

DEBATE OVER MEANING OF "ASSAULT AND BATTERY" EXCLUSION CONTINUES

The U.S. Court of Appeals for the Second Circuit, stating its belief that New York law is unsettled on the application of the standard "assault and battery" exclusion, has, through a process known as certification, sought an interpretation of the clause under New York law from the New York Court of Appeals. Through certification, a federal appeals court may request that the highest court in a state respond to specific questions regarding that state's law.

Declaring that the New York Court of Appeals' February 1995 decision in U.S. Underwriters Ins. Co. v. Val-Blue Corp., 85 N.Y.2d, 821, 623 N.Y.S.2d 834 (1995), failed to resolve the outstanding issues regarding the exclusion, despite its holding that the clause was unambiguous, the Second Circuit refused to resolve an appeal before it, which had been filed by an insurer seeking to avoid coverage based on the Val-Blue opinion.

Our readers may remember that we have highlighted the ongoing debate between New York's state and federal courts in three earlier issues, stating that if the "based on" language of the exclusion were to have any effect, insurers should be able to properly disclaim coverage for all suits arising out of an assault or battery. Duty to Defend Assault and Battery Claim, OHRENSTEIN & BROWN INS. NEWSLETTER, February 1994 at 11. Subsequently, the Second Circuit reversed a decision which had followed several other New York federal court rulings, and held that the "assault and battery" exclusion did not excuse insurers from defending claims based on negligent hiring. See Second Circuit Resolves State/ Federal Split Over Application of "Assault and Battery" Exclusion, OHRENSTEIN & BROWN INS. NEWSLETTER, Fall 1994 at 1. The insurance community was finally provided with what appeared to be a degree of certainty by the New York Court of Appeals' decision in Val-Blue, which held that the "assault and battery" exclusion extends to claims for negligent hiring or supervision where such claims are "based on" acts which constitute assault or battery. See New York Court of Appeals Holds "Assault and Battery" Exclusion Forecloses Coverage For Claims Based on Negligent Hiring, OHRENSTEIN & BROWN INS. NEWSLETTER, Spring 1995 at 1.

Nevertheless, in Mount Vernon Fire Ins. Co. v. Creative Housing, Ltd.,__F.3d__, 1995 WL 678780 (2d Cir. November 15, 1995), the Second Circuit noted that "the parameters of assault and battery exclusions are likely to be frequent subjects of litigation," and asked that the New York Court of Appeals answer questions regarding the import of the language in the exclusion and whether it applies to third-party torts. The court continued, "we believe that the New York Court of Appeals should resolve these questions because the use of exclusion clauses to preclude coverage of assaults committed by a third-party to which the insured contributed through negligence is an issue of importance to the state, to insurers and to the insured."

We will continue to monitor this important question and provide a full report in a future issue.

NEW YORK APPELLATE COURT ALLOWS INSURERS TO CONTROL JURISDICTION IN COVERAGE DISPUTES

In Columbia Casualty Co. v. Bristol-Myers Squibb, __A.D.2d__,__N.Y.S.2d__,1995 WL 634043 (1st Dep't October 26, 1995), New York's Appellate Division, First Department has reversed its own ten-year old precedent, and held that an insurer, not an insured, has control over selecting the jurisdiction for resolving disputes when insurers refuse to provide coverage.

In Rokeby-Johnson v. Kentucky Agr. Energy Corp., 108 A.D.2d 336, 489 N.Y.S.2d 69 (1st Dep't 1985), the court had held that an insured's choice of forum was binding on the insurer pursuant to a commonly used "forum selection clause" contained in the policy at issue therein. Relying on a series of federal and state decisions issued since then that have reached a similar conclusion in their interpretation of the clause, the court held that New York, rather than Texas was the proper jurisdiction in a declaratory judgment action commenced by insurers seeking to disclaim coverage for manufacturers being sued over silicone breast implants. The policy language at issue was as follows:

It is agreed that in the event of the failure of the Underwriters hereon to pay any amount claimed to be due hereunder, the Underwriters hereon, at the request of the Assured, will submit to the jurisdiction of any Court of competent jurisdiction within the United States and will comply with all the requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court. It is further agreed that service of process in such suit may be made as stated in item of the Declarations, and that in any suit instituted against any one of them upon this policy, the Company will abide by the final decision of such Court or of any Appellate Court in the event of an appeal.

Bristol-Myers, a manufacturer of silicone breast implants, commenced a declaratory judgment action in Texas to determine its rights to coverage for claims arising from the manufacture of the silicone breast implants. Subsequently, ten of the insurers from whom Bristol-Myers sought coverage filed a declaratory judgment action in New York seeking a declaration that they were not required to defend and indemnify Bristol-Myers for the claims at issue. Bristol-Myers moved to dismiss the New York action or, alternatively, stay the New York action pending the outcome of the Texas action. The trial court granted the motion and ordered the action stayed pending the outcome of the Texas action.

On appeal, the Appellate Division reversed, abrogating its holding in Rokeby-Johnson, finding that the clause at issue merely guaranteed the insured that the insurer would submit to the jurisdiction of a court within the United States, but not necessarily to the insured's chosen venue. In sum, the clause should be construed as a permissive "service of suit clause," and not a mandatory and exclusive "forum selection clause." Among the reasons cited for this outcome was that under the Rokeby-Johnson rule, the insured could effectively block an insurer's otherwise valid action in federal court by filing a separate action in state court. Also, under Rokeby-Johnson, the insured could bring suit in any forum, no matter how unrelated to the events, even if the insurer had previously brought an action in a more appropriate forum.

This holding by the First Department resolves a conflict with the Appellate Division, Fourth Department which, in Price v. Brown Group, Inc., 206 A.D.2d 195, 619 N.Y.S.2d 414 (4th Dep't 1994), expressly refused to follow Rokeby-Johnson. See New York Conflict Over Lloyd's Forum Selection Clause, OHRENSTEIN & BROWN INS. NEWSLETTER, Spring 1995 at 3.

NEW YORK STATE AND FEDERAL COURTS PROVIDE GUIDANCE ON REASONABLENESS REQUIREMENT IN NOTICE PROVISIONS

It is well settled under New York law that an insurer's compliance with a notice of occurrence provision is a condition precedent to an insurer's liability under a policy. Commercial Union Ins. Co. v. Int'l Flavors and Fragrances, Inc., 822 F.2d 267 (2d Cir. 1987); Security Mutual Ins. Co. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 340 N.Y.S.2d 902 (1972). Many policies contain language which provide that notice be provided "as soon as practicable," a phrase interpreted to mean that notice be given within a "reasonable" time under the circumstances. Jenkins v. Burgos, 99 A.D.2d 217, 472 N.Y.S.2d 373 (1st Dep't 1984).

Under this rule, insurers benefit from a complete defense, because they need not demonstrate that they were prejudiced by an insured's failure to provide them with timely notice. State of N.Y. v. Blank, 27 F.3d 783 (2d Cir. 1994). Nevertheless, while New York's law has been recognized as being favorable for insurers in this regard, the question remains how long of a delay is "reasonable." Four recent cases decided under New York law shed some light on the factors considered by the courts in resolving this question.

In Mount Vernon Fire Ins. Co. v. East Side Renaissance Assoc., 893 F.Supp. 242 (S.D.N.Y. 1995), a New York federal court held that an eight year delay in providing notice was reasonable under the circumstances. A comprehensive general liability policy had been issued by Mount Vernon to the owner of an apartment building. In 1984, the owner received an order from the New York City Department of Health advising that it had been discovered that a resident of one of the building's apartments had "a blood-lead level of thirty (30) micrograms per deciliter or higher," and that the City's inspection of the apartment revealed that paint samples taken from the interior surfaces of the apartment contained high levels of lead in violation of the New York City Health Code. The owner never notified Mount Vernon of the City's order.

Following receipt of the order, the owner effected certain repairs to the apartment, and following several further inspections by the City, it was determined by April 8, 1985, that all of the violations had been removed. Thereafter, on April 29, 1992, approximately eight years after the City's order, the tenants of the subject apartment brought a personal injury action against the owner and others for damages resulting from the residents' (which included a child) prolonged exposure to lead dust particles and lead-based paint. Upon receipt of the summons and complaint, the owner forwarded them to Mount Vernon, which disclaimed coverage on the basis that notice of the occurrence was not provided "as soon as practicable."

In concluding that the owner provided its insurer with "reasonable" notice, the court found that the insured had acted in good faith in its belief that liability would not result from the order. See D'Aloia v. Travelers Ins. Co., 85 N.Y.2d 825, 623 N.Y.S.2d 837 (1995). It noted that the order had used "technical language in describing both the tenant's blood-lead level and lead level of the paint," and that it failed to identify the apartment as the source of the tenant's elevated blood-lead levels. Under such circumstances, the court reasoned that while "it may have been reasonable for [the owner] to conclude that . . . it might have been obligated to repair the apartment," it was not reasonable for it to further conclude that it was "responsible for causing injury to the person with elevated blood levels." Interestingly, in reaching its conclusion, the court observed that the owner had no further duty to investigate the facts contained in the order. Utica Mut. Ins. Co. v. C.L. Haines Mfg. Co., Inc., 55 A.D.2d 834, 390 N.Y.S.2d 320 (4th Dep't 1976). On this point, the court wrote:

[R]eceipt of the Order would not have caused a reasonable and prudent owner to further investigate. Indeed, if receipt of [the order] to remove lead from an apartment, without more, was sufficient notice of a personal injury claim, then thousands of landlords in New York have likely failed to provide timely notice of claims to their insurers, thereby effectively depriving owners of coverage and plaintiffs of a reliable deep pocket.

A similar result was reached by the New York Court of Appeals in Argentina v. Otsego Mutual Fire Ins. Co., 86 N.Y.2d 748, 631 N.Y.S.2d 125 (1995), which affirmed a 3-2 decision by the Appellate Division. See New York Appellate Court Sides with Homeowners in Dispute Over Notice to Insurers, OHRENSTEIN & BROWN INS. NEWSLETTER, Fall 1994 at 3. In Argentina, the plaintiff, who was also the insured's brother, alleged personal injuries arising out of a slip and fall. Notice provided 171 days after the occurrence was deemed to be reasonable by the court, because there was "no evidence that the insureds knew or had reason to believe that permanent ongoing injury had occurred."

Moreover, the court found that the insureds' inquiry into the plaintiff's post-injury condition "did not reveal the existence of the kind of harm that would naturally lead to a lawsuit," and that given the insured's familial relationship with the plaintiff, it would be reasonable to assume that the insureds "would have been apprised if the injured party was contemplating a lawsuit."

Unlike the Mount Vernon and Argentina courts, a New York federal court held in Axa Marine & Aviation Ins. (UK) Ltd. v. Seajet Indus., Inc., 891 F.Supp. 978 (S.D.N.Y. 1995), that a 10 month delay in notice was unreasonable as a matter of law. In that case, the insureds owned and operated a warehouse facility which was robbed on December 5, 1990. In November, 1991 and February, 1992, two civil actions against the insured were commenced arising out of the robbery. The insurers were notified of the two actions, and counsel was appointed to represent the insured in connection with them.

Sometime after December, 1991, however, a third action was also commenced against the insureds arising out of the robbery. The insureds failed to notify its insurer of this lawsuit, and by September 16, 1992, a default judgment had been entered against the insured. It was only at this point that the insured notified its insurer, which appointed counsel, subject to a reservation of rights, to vacate the default judgment. During the pendency of counsel's motion to vacate, the insurer decided to decline coverage on the basis of the insured's late notice, and later commenced a separate action to determine the parties' rights under the policy.

In holding that the insureds' delay was unreasonable, the court noted that the insureds had admitted that they did not comply with the policy requirements, and had further acknowledged that there was "no valid excuse" for the delay. Thus, the court observed that the only issue for decision was whether the insurer was "prejudiced" by the delay.

Addressing the insured's prejudice argument, the court wrote that timely satisfaction of the notice provision of an insurer's policy is a condition precedent to the insurer's liability under New York law, "regardless of whether the insurer was prejudiced by the delay." Elaborating on this point, the court remarked that the fact that the insurer had notice of the two other actions did not excuse the insureds' failure to notify the insurers of the third action in a timely matter. Such notice is important, the court wrote, because it permits an insurer "to conduct an early investigation . . . , to set appropriate reserves, to prevent fraudulent claims, to exercise early control of litigation, and to effect settlements." These goals, the court found, could not be accomplished by notice of the robbery. Rather, they could only be achieved by notice of the particular claim.

Finally, in Hartford Fire Ins. Co. v. Baseball Office of the Commissioner, No. 125586/94 (N.Y.Sup., September 1, 1995), a New York state trial court held that a 19 month delay in notice was unreasonable. An action was commenced against the Commissioner's Office in Pennsylvania federal court in connection with the proposed purchase of a major league baseball team. The Commissioner's Office contended that upon commencement of the action on December 15, 1992, it "immediately orally advised [its] broker," and in consultation with the broker determined that the policies at issue did not cover the claims made. The Commissioner's Office did not notify its insurers of the pendency of the action at that time, but rather appointed its own counsel to defend the action, which was eventually settled in mid-1994, prior to trial. Thereafter, in July, 1994, the Commissioner's Office placed its insurers on notice of the lawsuit and demanded coverage. In response, the insurers disclaimed coverage on the basis that claims made were not covered and that, in any event, the Commissioner's Office had failed to comply with the notice provisions of the policies.

In considering whether notice was timely, the court noted that the policies required that notice be given "as soon as practicable." Finding that the Commissioner's Office had admitted that it did not provide the insurers with written notice until 19 months after the litigation had commenced, the only issue before the court was whether the delay was reasonable in light of the Commissioner's Office's contention that the personal injury and advertising exemption endorsement was ambiguously worded and improperly annexed to the primary policy after commencement of coverage, leading the Commissioner's Office and its broker to believe that coverage was not available.

Although the court recognized that a "justifiable lack of knowledge of the availability of insurance" may excuse an insured's delay in providing notice, it held that the Commissioner's Office's "professed ignorance was not justifiable and did not constitute due diligence." In support of its conclusion, the court noted that the Commissioner's Office had admitted that its broker had advised it that it appeared that the exemption endorsement had been unilaterally annexed to the policy after inception of coverage.

Moreover, the court held that regardless of the accuracy of this claim, the existence of the endorsement should have alerted the Commissioner's Office, which was comprised of "sophisticated businessmen," and put it on notice of the necessity of challenging its enforcement.

NEW YORK COURTS DISAGREE ON APPLICATION OF ANTI-SUBROGATION RULE

In reading North Star Reinsurance Corp. v. Continental Ins. Co., 604 N.Y.S.2d 510 (1993), the New York Court of Appeals' most recent attempt at clarifying the breadth of the anti-subrogation rule (which provides that an insurer may not be subrogated to a claim against its own insured, which arises out of a risk covered by the policy, even where the insured is also insured under a separate policy), one would have reason to believe the issue to be beyond further discussion. Nevertheless, two New York intermediate appellate courts have revisited the rule in the wake of North Star, and their opinions arguably exemplify a split of authority with respect to the application of the rule, at least in situations involving two policies issued by two different insurers.

In Aetna Casualty & Sur. Co. v. Greater N.Y. Mut. Ins. Co., 205 A.D.2d 433, 613 N.Y.S.2d 904 (1st Dep't 1994), an employee injured on the job sued the lessor of the premises. In the ubiquitous anti-subrogation scenario, the defendant-lessor commenced a thirdparty action against the employer-lessee.

Aetna, which insured and provided a defense to the employer, had previously undertaken by separate counsel, representation of the lessor as an additional insured under the employer's policy. After settling the case, Aetna brought suit against the employer's workers' compensation insurer. Rejecting the notion that the action was merely one between insurers, the Appellate Division, First Department held that the only action to which Aetna was subrogated was one commenced by the additional insured-lessor against the insured-employer. This, the court held, amounted to an impermissible action by the insurer against the insured-employer for common law indemnity in direct contravention of the anti-subrogation rule.

The Aetna opinion was literally reiterated by the court in Avalanche Wrecking Corp. v. N.Y. State Ins. Fund, 211 A.D.2d 551, 621 N.Y.S.2d 74 (1st Dep't 1995). Two employees of a contractor [the "employer"] sustained injuries and separately sued the owner and another contractor working on the job site. Not unexpectedly, in accordance with an agreement between the owner and the employer, the owner was named as an additional insured under the employer's liability policy. The insurer's defense of the owner included the institution in both cases of third-party actions against the employer in an attempt to obtain contribution and/or indemnification from the employer's workers' compensation insurer.

Quoting the entirety of its opinion in Aetna, the court held that the insurer was subrogated only to the owner's claim against the insured employer and was precluded from such action by the anti-subrogation rule.

These facts faced the court yet again in National Union Fire Ins. Co. of Pittsburgh, Pa. v. State Ins. Fund, 213 A.D. 2d 164, 623 N.Y.S.2d 558 (1st Dep't 1995). Using identical reasoning, the court found that an insurer, which had undertaken the defense and indemnification of an additional insured, could not maintain a declaratory judgment action against a workers' compensation insurer where it was, in effect, only subrogated to an action against its own insured.

Despite the First Department's consistent treatment of this issue, a different result was obtained in U.S. Fidelity & Guar. Co. v. CNA Ins. Co., 208 A.D.2d 1163, 618 N.Y.S.2d 465 (3d Dep't 1994), where the same scenario was presented to the Appellate Division, Third Department. An injured employee of a sub-contractor brought an action against a general contractor, which had purchased general liability insurance from CNA. In a sub-contract, the employersub- contractor [the "employer"] agreed to indemnify the general contractor against all claims and to name it as an additional insured in a policy issued by U.S. Fidelity. After undertaking the defense of the contractor as its additional insured, U.S. Fidelity commenced a declaratory judgement action against CNA on the theory that the owner was a mutual insured.

In apparent conflict with the trio of First Department cases, as well as with North Star, the court, relying on the policies' "other insurance" clauses, held that the insurers were required to provide equal contribution toward the defense and indemnification of the contractor, but that CNA was subrogated to the contractor's indemnification claim against the employer- presumably because the employer was not an additional insured under the contractor's policy.

Although it is unclear why the court did not bar U.S. Fidelity from reaching the CNA policy, the practical result of the court's decision was consistent with that in the First Department cases. CNA was required to bear an equal portion of the defense and indemnification of its insured, the contractor, but was ultimately subrogated to the contractor's claims for indemnification against the employer, leaving the employer's insurer, U.S. Fidelity to bear the loss.

INSURER WHICH PAID FULL AMOUNT DUE UNDER POLICY, BUT LESS THAN TOTAL LOSS, MAY SETTLE SUBROGATION CLAIM BEFORE INSURED IS MADE WHOLE

The New York Court of Appeals held recently that an insurer which has satisfied its obligations to its insured under a fire policy may proceed against a third-party tortfeasor on a subrogation claim before the insured has been made whole by the tortfeasor.

In Winkelmann v. Excelsior Ins. Co., 85 N.Y.2d 577, 626 N.Y.S.2d 994 (1995), the plaintiffs were insured under a fire policy issued by Excelsior. After a third-party negligently started a fire on the insured premises, Excelsior paid to the insureds the total amount due under the policy, leaving the insureds with unreimbursed losses. Subsequently, the insurer settled with the negligent tortfeasor (and the tortfeasor's insurance company) and released its subrogation claims against them. The insureds, unable to reach a settlement with the tortfeasor for their remaining loss, sued Excelsior claiming that the settlement with the tortfeasor and his insurer diminished the insureds' ability to obtain payment from them.

The plaintiffs claimed that because an insured is prejudiced when its insurer settles with the tortfeasor before the insured is made whole, insurers should be precluded as a matter of law from settling with tortfeasors prior to the insured's being made whole. The lower courts dismissed the action against the insurer, and the Court of Appeals affirmed. The Court rejected the plaintiffs' argument that this scenario is analogous to that in which the insurer exercises its subrogation rights against the insured when the insured has not been made whole. In that case, the insurer, which has been paid a premium by the insured to assume the risk, may not share in the insured's proceeds unless and until the insured has been made whole.

The Court also rejected the plaintiffs' argument that the insurer's rights as a subrogee, like those of sureties, do not arise until the creditor (the insured) has been made whole. While the surety's obligation runs to the creditor, the insurer's obligation runs to its insured, and then only to the extent of the policy limits. The surety therefore acquires no rights of subrogation against the debtor until the creditor has been paid in full. The insurer, on the other hand, need not delay its subrogation claim against the third-party because, unlike the surety, the insurer's subrogation action will not necessarily interfere with the insured's right to be made whole.

Finally, with regard to public policy and possible prejudice to the insured, the Court found the insured's arguments unavailing. Requiring the insurer to forgo its rights while the insured, perhaps belatedly, asserts its claim, may in fact result in prejudice to the insurer.