Opinions by Graffeo and Smith Highlight Insurance Law DevelopmentsNovember 30, 2014 |
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.
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 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.
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.
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.
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.
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.