Decisions Reflect Significance Of Insurance Law Across New York

The New York Court of Appeals’ nine significant insurance law rulings last term displayed no discernible theme, evidenced no apparent trend, and reflected no obvious insurance law philosophy. Policyholders were victorious in some of the cases and insurance companies in others – and creditors in another.

The principal cases involved statutory construction, [1] policy construction, [2] and common law issues, [3] as well as procedural matters such as collateral estoppel [4] and choice of law. [5] The majority opinions were written by four different members of the Court: Chief Judge Jonathan Lippman (3), [6] Judge Carmen Beauchamp Ciparick (3), [7] Judge Robert S. Smith (2), [8] and Judge Theodore T. Jones (1). [9] Five cases were unanimous. [10] Judge Smith wrote two dissenting opinions, [11] and Judge Susan Phillips Read [12] and Judge Eugene F. Pigott, Jr., wrote one each. [13]

The diversity of the underlying facts, legal issues, and insurance policies in these cases may be the one feature that unifies them. In essence, the very breadth and scope of the Court’s insurance law cases illustrate the importance of insurance and insurance law to a growing swath of businesses and individuals across New York.

Life Insurance

Following certification from the U.S. Court of Appeals for the Second Circuit, the Court held in Kramer v. Phoenix Life Ins. Co. that New York law permits a person to obtain an insurance policy on his or her own life and immediately transfer it to one without an insurable interest in that life, even where the policy was obtained for just such a purpose.

The Court found “no support” in Insurance Law § 3205(b) for the proposition that a policy obtained by an insured with the intent of immediate assignment to a stranger was invalid, explaining that the statute contained no intent requirement and did not attempt to prescribe the insured’s motivations. Indeed, the Court pointed out, § 3205(b)(1) explicitly allowed for “immediate transfer or assignment” – at least where the insured’s decision was free of what the Court characterized as “nefarious influence or coercion.”

The Court’s ruling gave a boost to the so-called “stranger-owned life insurance” market, although it should be noted that provisions added to the Insurance Law by the Legislature in 2009, which were not applicable to this case because they went into effect on May 18, 2010 – prohibit anyone from entering a valid life settlement contract[14] for two years following the issuance of a policy, with some exceptions,[15] and prohibit stranger-originated life insurance.[16]
Broker Incentives

When Governor Andrew Cuomo was still Attorney General Andrew Cuomo, he brought an action against an insurance brokerage firm now known as Wells Fargo Insurance Services, Inc., alleging that the firm had engaged in “repeated fraudulent or illegal acts” in violation of Executive Law § 63(12), was unjustly enriched, committed common law fraud, and breached its fiduciary duties. The complaint alleged that Wells Fargo acted as an agent for organizations and individuals seeking to purchase insurance, dealt with insurance companies on those customers’ behalf, obtained quotes from insurers and presented them to customers, and offered customers recommendations about what coverage would best suit their needs.

The complaint also alleged that Wells Fargo entered into a number of “incentive” arrangements with insurance companies in which the companies financially rewarded Wells Fargo for bringing them business. It alleged that, as a result of the incentive programs, Wells Fargo “steered” its customers to particular insurance companies and away from others that did not participate in the programs, and that the incentive payments were not disclosed to Wells Fargo customers.

In its decision, the Court pointed out that there were no allegations that Wells Fargo had made any affirmative misrepresentations, that any customer had suffered demonstrable harm from the incentive arrangements, or that that any customer had been persuaded to buy inferior or overpriced insurance to help Wells Fargo earn its incentives. The Court explained that a broker had a “dual agency status” as an agent of the insured who customarily looked for compensation to the insurer. The Court then held that an insurance broker did not have a common law fiduciary duty to disclose to its customers “incentive” arrangements that the broker had entered into with insurance companies, and it affirmed dismissal of the complaint.[17]

“Other Insurance”

In Fieldston Property Owners Assoc. Inc. v. Hermitage Ins. Co. Inc., Hermitage Insurance Company issued a commercial general liability (CGL) policy to Fieldston Property Owners Association Inc., for the period July 5, 2000 to July 5, 2001. Federal Insurance Company issued an “Association Directors and Officers Liability” (D&O) policy covering the period from Feb. 13, 1999 to Feb. 13, 2002. Two lawsuits asserting a variety of claims, including “injurious falsehood,” were filed against Fieldston and the Court had to decide which insurance carrier had the primary duty to defend given that both had “other insurance” provisions.

The Court pointed out that the parties had conceded at least the possibility that both Hermitage’s CGL and Federal’s D&O policies covered the injurious falsehood claims in the two underlying actions. Then, based on the policies’ “other insurance” clauses, the Court found that Hermitage’s CGL policy was primary to Federal’s D&O policy as they related to defense costs. The Court held that the Hermitage policy’s primacy on the injurious falsehood claim triggered a primary duty to defend against the remaining causes of action in the two complaints, thus preempting any defense obligation by Federal. The Court reached the conclusion that Hermitage had the full obligation to defend its insured notwithstanding that Federal apparently had an obligation to indemnify Fieldston for a greater proportion of the causes of action, if successfully prosecuted.

Interestingly, the Court acknowledged that the result reached by the Appellate Division, which permitted Hermitage to recover from Federal its equitable share of defense, except to the extent that those costs related to the injurious falsehood claims, had “much equitable appeal.” It added, however, given the policies’ provisions, that it could “not judicially rewrite the language of the policies” to reach that result.

What is an Accident?

State Farm Mut. Auto Ins. Co. v. Langan reached the Court after a driver intentionally drove his vehicle into pedestrians in Manhattan, injurying many of them, including Neil Spicehandler, who required surgery and died from complications after the operation. The driver later pleaded guilty to second degree murder and admitted that he had intended to cause the decedent’s death.

The decedent was an insured under an automobile liability policy purchased by Robert Langan. As the administrator of the decedent’s estate, Mr. Langan made a claim seeking to recover benefits under the policy’s uninsured/underinsured motorist endorsement (UM endorsement), mandatory personal injury protection endorsement (PIP endorsement) and death, dismemberment and loss of sight endorsement (Coverage S).

The insurer commenced a declaratory judgment action seeking a declaration that it was not obligated to provide benefits in connection with the decedent’s death on the ground that the decedent was not injured as the result of an accident. The summary judgment motion by the insurer, which at this point was represented by the author and his firm, was granted by Supreme Court, Nassau County; a divided Appellate Division, Second Department, modified, and the case reached the Court of Appeals.

The Court found that, viewed from the insured decedent’s perspective, the occurrence was an unexpected or unintended event – and therefore an “accident” – even though the driver admittedly had intended to strike the decedent with the vehicle. According to the Court, consistent with what it stated was the purpose of the UM endorsement (to provide coverage against damage caused by uninsured motorists) and the national trend toward allowing innocent insureds to recover uninsured motorist benefits when injured through the intentional conduct of another, the intentional assault of an innocent insured was an accident from the insured’s point of view. Accordingly, Mr. Langan was entitled to benefits under the UM endorsement.

Moreover, the Court ruled that Mr. Langan also was entitled to coverage under the PIP endorsement and Coverage S. It reasoned that the average insured’s understanding of the term “accident” was unlikely to vary from endorsement to endorsement within the same policy. The occurrence, from the insured’s perspective, “was certainly unexpected and unforeseen and should be considered an accident subject to coverage,” the Court concluded. The Court further noted that it did not perceive any danger that this result will frustrate efforts to fight fraud, as there was no allegation of fraud in this case.

Creditor Rights

The dispute in ABN AMRO Bank, N.V. v. MBIA Inc. between MBIA Insurance Corporation, a monoline insurer that exclusively wrote financial guarantee insurance, and certain of its policyholders arose following the 2009 restructuring of MBIA Insurance and its related subsidiaries and affiliates that had been authorized by the New York State Insurance Superintendent. The restructuring segregated MBIA Insurance’s municipal bond policy portfolio from its structured-finance policy portfolio.

The plaintiff policyholders alleged that the restructuring had fraudulently stripped approximately $5 billion in cash and securities out of MBIA Insurance and that MBIA Insurance had received no consideration for the assets it transferred. They further alleged that the transaction exposed them to potentially billions of dollars in losses because MBIA Insurance was undercapitalized and insolvent.

The Court decided that the superintendent’s approval of the restructuring pursuant to its authority under the Insurance Law did not bar policyholders from asserting claims against MBIA Insurance under the New York Debtor and Creditor Law and the common law. In reaching that result, the Court rejected arguments that the plaintiffs’ claims under the Debtor and Creditor Law and the common law constituted “impermissible collateral attacks” on the superintendent’s approval of the transaction, or that the Insurance Law vested the superintendent with “exclusive original jurisdiction” to adjudicate the plaintiffs’ claims, subject only to potential Article 78 relief. In the Court’s view, the superintendent’s exclusive original jurisdiction to approve the transaction under the Insurance Law did not mean that he also was the exclusive arbiter of all private claims that might arise in connection with the transaction, including claims that the restructuring rendered MBIA Insurance insolvent and was unfair to its policyholders. Simply put, the Court found no indication from the statutory language and structure of the Insurance Law or its legislative history that the Legislature intended to give the superintendent the power to extinguish the rights of policyholders to attack fraudulent transactions under the Debtor and Creditor Law or the common law.

Other Rulings

The Court’s other insurance law decisions included rulings on a homeowner’s insurance policy exclusion (Cragg v. Allstate Indemn. Corp.), a choice-of-law dispute between policyholders and the New York State Liquidation Bureau stemming from an insurance company’s insolvency (Matter of the Liquidation of Midland Ins. Co.), an excess liability insurance policy covering asbestos claims (Union Carbide Corp. v. Affiliated FM Ins. Co.), and a dispute over arbitration of an uninsured motorist benefits award (Matter of Arbitration Between Falzone and New York Central Mut. Fire Ins. Co.). In addition, the Court already has agreed to hear four insurance law cases next term, involving alleged bad faith failure to settle,[18] no-fault medical benefits,[19] a fiduciary liability policy,[20] and a professional liability insurance policy,[21] that further demonstrate the broad range of insurance law disputes facing the courts today.

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[1] Kramer v. Phoenix Life Ins. Co., 15 N.Y.3d 539 (November 17, 2010); ABN AMRO Bank, N.V. v. MBIA Inc., 2011 N.Y. Slip Op. 5542 (June 28, 2011).

[2] Union Carbide Corp. v. Affiliated FM Ins. Co., 16 N.Y.3d 419 (February 22, 2011); Fieldston Property Owners Assoc., Inc. v. Hermitage Ins. Co., Inc., 16 N.Y.3d 257 (February 24, 2011); State Farm Mutual Automobile Ins. Co. v. Langan, 16 N.Y.3d 349 (March 29, 2011) (the author and his firm represented the insurance carrier in this case); Cragg v. Allstate Indemnity Corp., 2011 N.Y. Slip Op. 4767 (June 9, 2011).

[3] State v. Wells Fargo Ins. Services, Inc., 16 N.Y.3d 166 (February 17, 2011).

[4] Matter of Arbitration between Falzone and New York Central Mutual Fire Ins. Co., 15 N.Y.3d 530 (October 21, 2010).

[5] Matter of the Liquidation of Midland Ins. Co., 16 N.Y.3d 536 (April 5, 2011).

[6] Kramer, Langan, Cragg.

[7] Fieldston, Midland, ABN AMRO.

[8] Wells Fargo, Union Carbide.

[9] Falzone.

[10] Wells Fargo (with Judge Victoria A. Graffeo taking no part), Union Carbide, Fieldston, Midland, Cragg.

[11] Kramer (in which Judge Pigott concurred), Langan (in which Judge Reed concurred).

[12] ABN AMRO, in which Judge Graffeo concurred.

[13] Falzone.

[14] Insurance Law § 7802(k) defines life settlement contracts as agreements by which compensation is paid for “the assignment, transfer, sale, release, devise or bequest of any portion of: (A) the death benefit; (B) the ownership of the policy; or (C) any beneficial interest in the policy, or in a trust . . . that owns the policy.”

[15] See Insurance Law § 7813(j)(1).

[16] Insurance Law § 7815 defines stranger-originated life insurance as “any act, practice or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the life of the insured under the laws of this state.”

[17] The Court acknowledged, without going into detail, that there may be exceptions where disclosure would be required, but pointed out that the complaint did not allege that anything Wells Fargo did was contrary to industry custom. It should be noted that a regulation, 11 NYCRR § 30.3(a)(2), effective January 1, 2011, and thus not applicable to this case, requires disclosure to a purchaser of insurance if a broker “will receive compensation from the selling insurer . . . based in whole or in part on the insurance contract” that the broker sells.

[18] Doherty v. Merchants Mut. Ins. Co., 74 A.D.3d 1870 (4th Dep’t 2010).

[19] Wyckoff Heights Medical Center v. Country-Wide Ins. Co., 71 A.D.3d 1009 (2d Dep’t), appeal granted, 15 N.Y.3d 709 (2010).

[20] Federal Ins. Co. v. International Business Machines Corp., 78 A.D.3d 763 (2d Dep’t 2010), appeal granted, 16 N.Y.3d 706 (2011).

[21] McCabe v. St. Paul Fire and Marine Ins. Co., 79 A.D.3d 1612 (4th Dep’t 2010), appeal granted, 16 N.Y.3d 711 (2011).

This article is reprinted with permission from the August 22, 2011 issue of the New York Law Journal. Copyright ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.