Opinions by Graffeo and Smith Highlight Insurance Law Developments

It is not often that two judges on the New York Court of Appeals leave the  court at the same time, as is occurring now with Judge Victoria A. Graffeo  (whose 14-year term is coming to a close) and Judge Robert S. Smith (who has  reached the retirement age of 70). Both judges have made invaluable  contributions to insurance law, with each writing approximately 20 separate  opinions (majority or dissent) involving various aspects of insurance law.

Judges Graffeo and Smith voted in favor of insurance companies in some  instances and in favor of policyholders in others. Both wrote majority decisions  and both dissented. They voted together in most instances, but they also found  themselves on opposite sides of a number of questions of insurance law.

This article does not discuss all of their decisions. Rather, it reviews some  of their most significant insurance law opinions, with the goal of highlighting  some of the key developments in New York insurance law since they joined the  court.

Insurance Brokers

The ability of policyholders to sue their insurance brokers for failing to  obtain sufficient insurance coverage has come before the court a number of  times, with Graffeo and Smith disagreeing in the most recent cases.

In 2011, the court decided People of the State of N.Y. v. Wells Fargo  Insurance Services.¹ This was an action by the New York  Attorney General against a large insurance brokerage firm. The complaint alleged  that the firm entered into a number of “incentive” arrangements with insurance  companies, in which the insurance companies rewarded the firm for bringing them  business and that, as a result, the firm “steered” its customers to particular  insurance companies and away from others that did not participate in the  programs. The complaint alleged that the firm did not disclose the incentive  payments to its customers, but it did not allege that the firm made any  affirmative misrepresentations or that any customer suffered demonstrable harm  from the incentive arrangements.

The court, with Smith writing the opinion for a unanimous court (with Graffeo  taking no part), rejected the Attorney General’s action, expressing an  unwillingness to retroactively impose a new obligation on insurance brokers.  Thus, it 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.

The next year, in American Building Supply v. Petrocelli  Group,² the court permitted an action for negligence and  breach of contract to be brought against an insurance broker for allegedly  failing to procure adequate insurance coverage even though the insured had  received the policy but had not reviewed it. Smith concurred in the majority  decision, written by Judge Carmen Beauchamp Ciparick, while Graffeo joined in  the dissent written by Judge Eugene F. Pigott Jr.

Most recently, the court decided Voss v. The Netherlands Ins.  Co.,³ with Graffeo writing the opinion for the court and  Smith writing the dissent.

The case arose out of property damage and the consequent business  interruption the insured allegedly sustained as a result of water damage that  occurred following three separate roof breaches to its building. The insureds  contended that they had a “special relationship” with their broker that was  sufficient to permit them to assert a claim against their broker alleging that  the broker had negligently secured inadequate levels of business interruption  insurance for all three losses.

Graffeo reiterated that special relationships in the insurance brokerage  context—which are necessary for insureds to sue brokers for negligence—were the  exception, not the norm. Graffeo also pointed out that the insureds had the  burden of proving that a special relationship existed and that they had relied  on the broker’s expertise in calculating the proper level of business  interruption coverage during the relevant time frames. The court, however,  determined that this particular complaint nevertheless could not be dismissed on  the ground that no special relationship had existed between the parties.

Smith—the author of the decision in Wells Fargo Insurance Services in favor of insurance brokers discussed above—disagreed. Smith was concerned  that the effect of the majority’s decision “may be to make the agent into a kind  of back-up insurer.” In an effort to avoid that result, he determined that the  record “conclusively” established that any special relationship that might have  existed between the insureds and their broker had “ceased to exist by the time  of the events in question.”

Bad Faith

Bad faith actions by policyholders against insurance companies seeking  extra-contractual damages are a staple of insurance practice outside New York.  In Bi-Economy Market v. Harleysville Ins. Co. of New  York,⁴ the court (with Graffeo concurring in the majority  decision) opened the door for more such claims when it held that an insured  could assert a claim for consequential damages against an insurer in a suit for  breach of a commercial property insurance contract. Smith dissented, contending  that the “consequential” damages authorized by the majority were disguised  punitive damages, which are unavailable under controlling New York law.  According to Smith, the real “consequential damage” flowing from the court’s  opinion will be jury verdicts against insurers and an increase in insurance  premiums.

No-Fault

A notable portion of the insurance docket in the lower courts involves the  state’s no-fault law. The Court of Appeals has issued several decisions in this  area in recent years.

Graffeo wrote the decision for the court (in which Smith concurred) in Hospital for Joint Diseases v. Travelers Property Cas. Ins.  Co.⁵

In this action, a hospital sought to recover no-fault insurance benefits for  services rendered to a patient injured in a motor vehicle accident. The court  concluded that the insurance company’s failure to timely request verification of  the patient’s assignment of benefits to the hospital precluded the carrier from  contesting the validity of the assignment. Graffeo reasoned that, upon receipt  of a no-fault claim, the burden shifted to the insurance company to obtain  further verification or deny or pay the claim. When an insurer did not act, but  waited to be sued for nonpayment, “the carrier should bear the consequences of  its nonaction,” Graffeo wrote.

The next year, Graffeo was in the majority in Fair Price Medical Supply v. Travelers  Indemnity,⁶ where the court found that an insurance company  that had failed to meet no-fault deadlines imposed by New York’s insurance  regulations was barred from challenging a claim for payment of medical supplies.  Smith, however, wrote a dissent in which he pointed out that the insurance  company asserted that it was being asked to pay for medical supplies that had  never been delivered to the patient it insured. Smith said that he would hold  that, if indeed the basis for the claims was non-existent, those claims were  outside the coverage of the policy, and the insurance company’s defense should  not be barred by its failure to meet no-fault deadlines.

Accidents and Occurrences

A decade ago, Smith wrote the opinion for a unanimous court (including  Graffeo) in RJC Realty Holding v. Republic Franklin  Ins.,⁷ a case that explored the meaning of the word  “accident” in liability insurance policies. In particular, the issue was whether  an insurance company was obligated to defend and indemnify its policyholder, a  “beauty salon/health spa,” in an action based on an alleged sexual assault by a  masseur who worked for the policyholder.

The court ruled that the alleged assault was an “accident” within the meaning  of the policy. The court reasoned that because the masseur’s alleged actions  were not the insured’s actions for purposes of the respondeat superior doctrine,  they were “unexpected, unusual and unforeseen” from the insured’s point of view,  and were not “expected or intended” by the insured. Accordingly, Smith wrote,  they were an “accident,” within the coverage of the policy.

Several years later, Graffeo wrote the opinion for the court (with Smith  concurring) in Appalachian Ins. v. General  Electric,⁸ an important case involving insurance coverage  for asbestos claims.

In this case, General Electric sought to obtain excess insurance coverage for  asbestos-related personal injury claims brought by individuals who, between 1966  and 1986, allegedly had been exposed to asbestos-containing insulation used in  steam turbines manufactured by GE and installed at more than 22,000 sites  throughout the United States.

The excess insurers argued that GE’s primary insurance policies had not been  exhausted by the payment of these individuals’ asbestos claims because each  claim by an injured plaintiff represented a separate occurrence and none of the  claims came close to reaching the $5 million per-occurrence limit of those  policies.

The court agreed with the excess insurance companies, finding that, under the  terms of GE’s primary insurance policies, the claims presented multiple  occurrences. Graffeo explained that there were numerous exposure incidents, and  found that the incidents shared “few, if any commonalities, differing in terms  of when and where exposure occurred, whether the exposure was prolonged and for  how long, and whether one or more GE turbine sites was involved.” Under the  circumstances, Graffeo wrote, there were “unquestionably multiple occurrences”  and the excess insurers were entitled to a declaration to that effect.

More recently, a divided court decided Roman Catholic Diocese of Brooklyn v. National  Union Fire Ins. Co. of Pittsburgh, Pa.⁹ Here, a plurality of  the court found that incidents of alleged sexual abuse constituted multiple  occurrences, and that any potential liability should be apportioned among the  several insurance policies, pro rata. Graffeo dissented in part. Graffeo agreed  with the plurality’s conclusion that pro rata allocation of the loss across all  implicated policies was appropriate, but disagreed that there were multiple  occurrences. Smith concurred in the result in a separate opinion, agreeing about  pro rata allocation but also agreeing with Graffeo that there was only one  occurrence, not several.

‘K2 Investment’

The court’s two decisions in K2 Investment Group v. American Guarantee &  Liability Ins.¹⁰ both were written by Smith. Graffeo  concurred in the 2013 decision, but dissented in the 2014 ruling.

In the first decision, the court held that, when a liability insurer had  breached its duty to defend its insured, the insurer could not later rely on  policy exclusions to escape its duty to indemnify the insured for a judgment  against the insured.

Following unprecedented adverse reaction from the insurance bar, the court  granted reargument, vacated the first decision, acknowledged that it had erred  by failing to take account of a controlling precedent, Servidone Constr. v. Security Ins. Co. of  Hartford,¹¹ and found no reason to overrule that precedent.  It then held, contrary to its decision in the first K2 case, that the  insurer was not barred from relying on policy exclusions even if it had breached  its duty to defend its insured.

Dissenting, Graffeo (joined by Pigott) sought to distinguish  Servidone and continued to advocate for the principle that a breach of  a liability insurer’s duty to defend prohibited it from subsequently invoking  policy exclusions to escape its duty to satisfy a judgment entered against the  insured by a third party.

Conclusion

Graffeo and Smith have each made substantial contributions to insurance law  during their tenures as associate judges on the Court of Appeals. Of course, the  measure of their ultimate impact on the development of the law will be  determined by the Court of Appeals in the years and decades to come. As new  cases arise concerning the scope of insurance agent liability, bad faith, fraud  in the no-fault arena, occurrences and allocation, among many other insurance  law issues, advocates and those future courts will look to the opinions of  Graffeo and Smith for guidance and persuasion. It is their written words, as set  forth in their many opinions, that is their enduring legacy.

Endnotes:

1. 16 N.Y.3d 166 (2011).

2. 19 N.Y.3d 730 (2012).

3. 22 N.Y.3d 728 (2014).

4. 10 N.Y.3d 187 (2008). In this case, the author and his firm  represented the New York Insurance Association and others as amici curiae.

5. 9 N.Y.3d 312 (2007). The author and his firm represented the  New York Insurance Association as amicus curiae in this case.

6. 10 N.Y.3d 556 (2008). The author and his firm represented the  New York Insurance Association as amicus curiae in this case.

7. 2 N.Y.3d 158 (2004).

8. 8 N.Y.3d 162 (2007). The author and his firm represented the  plaintiff and certain respondents in this case.

9. 21 N.Y.3d 139 (2013).

10. 21 N.Y.3d 384 (2013); reargument granted by K2 Investment Group v. American Guarantee & Liability Ins., 21 N.Y.3d 1049 (2013); vacated by, recalled by,  summary judgment denied by K2 Investment Group v. American Guarantee & Liability Ins., 22 N.Y.3d 578 (2014).

11. 64 N.Y.2d 419 (1985).

Reprinted with permission from the December 1, 2014 issue of the New York Law Journal.  All rights reserved.