In Term of Transition, Court Sides With InsurersAugust 21, 2017 | Evan H. Krinick |
The one thing that can be said about the most significant insurance law cases decided by the Court this past term: They all were decided in favor of the insurance carriers.
It was a term of transition for the New York Court of Appeals, with Associate Judge Eugene Pigott Jr., retiring at the end of 2016, Associate Judge Rowan Wilson joining the Court in February 2017, Associate Judge Sheila Abdus-Salaam’s death in April 2017, and Associate Judge Paul Feinman joining the Court at the end of June 2017. The recent changes in the composition of the Court and the fact that the most tenured judge (Associate Judge Jenny Rivera) has been on the Court for only four years make it difficult to predict how insurance law cases will be decided in the future. The one thing that can be said about the most significant insurance law cases decided by the Court this past term: They all were decided in favor of the insurance carriers.
The decision with the most important practical implications for insurance companies and policyholders, Burlington Ins. Co. v. New York City Transit Authority, 2017 N.Y. Slip Op. 04384, came down on June 6, 2017. Judge Rivera wrote the majority decision, in which Chief Judge Janet DiFiore and Judges Michael Garcia and Wilson concurred. Judge Eugene Fahey dissented, in an opinion in which Judge Leslie Stein concurred.
The city tendered its defense in the federal action to The Burlington Insurance Company, which had issued an insurance policy to BSI with an endorsement listing the NYCTA and MTA New York City Transit as “additional insureds.”
The city impleaded the NYCTA and MTA and asserted third-party claims for indemnification and contribution, based on a lease between the NYCTA and the city as a property owner of certain transit facilities. Under the lease, the NYCTA had agreed to indemnify the city for liability “arising out of or in connection with the operation, management[,] and control by the [NYCTA]” of the leased property.
The NYCTA tendered its defense of these claims to Burlington, also as an additional insured under the BSI policy. Burlington accepted the defense, subject to the reservation that the NYCTA qualify as an additional insured under the additional insured endorsement to the policy.
Discovery in the employee’s federal lawsuit revealed that the NYCTA had failed to identify, mark, or protect the electric cable, and that it also had failed to turn off the cable power. Documents further established that the BSI machine operator could not have known about the location of the cable or the fact that it was electrified. Based on these revelations, Burlington disclaimed coverage of the NYCTA and MTA, asserting that BSI had not been at fault for the injuries and, therefore, that NYCTA and MTA were not additional insureds under the policy.
The district court dismissed the employee’s claims against BSI with prejudice and the city’s third-party claims against NYCTA without prejudice. Burlington subsequently settled the lawsuit for $950,000 and paid the city’s defense costs.
Then, Burlington filed its own action, in a state court in New York, seeking a declaratory judgment that it did not owe NYCTA and MTA coverage as additional insureds under the additional insured endorsement to BSI’s insurance policy.
The Supreme Court, New York County, granted summary judgment in favor of Burlington, concluding that the NYCTA and MTA were not additional insureds because the endorsement limited liability to instances where BSI, as the named insured, was negligent.
The Appellate Division, First Department, reversed. It ruled that the NYCTA and MTA were entitled to coverage as additional insureds under the Burlington policy. The First Department concluded that although BSI had not been negligent, the “act of triggering the explosion … was a cause of [the employee’s] injury” within the meaning of the policy sufficient to afford additional insured coverage to the NYCTA and MTA.
The Court of Appeals granted Burlington leave to appeal. Burlington argued that under the plain meaning of the additional insured endorsement, the NYCTA and MTA were not additional insureds because the acts or omissions of the named insured, BSI, were not a proximate cause of the injury.
For their part, the NYCTA and MTA claimed that by its express terms the endorsement applied to any act or omission by BSI that resulted in injury, regardless of negligence on the part of an additional insured. They further argued that the First Department had properly concluded that BSI’s operation of its excavation machine had provided the requisite causal nexus between injury and act to trigger coverage under the policy.
The Court reversed the First Department, concluding that there was no coverage because, by its terms, the policy endorsement was limited to those injuries proximately caused by BSI.
In its decision, the Court explained that the endorsement stated that an entity was an additional insured “only with respect to liability for ‘bodily injury’ caused, in whole or in part, by [BSI’s] acts or omissions.” The Court then rejected the argument put forth by the NYCTA and MTA that the endorsement did not limit liability to cases in which an insured’s acts or omissions were negligent or otherwise legally actionable but, rather, that the phrase “caused, in whole or in part” meant “but for” causation. According to the Court, the NYCTA and MTA were “incorrect” when they argued that all that was necessary for an additional insured to be covered was that the insured’s conduct “be a causal link to the injury.”
Instead, the Court held, this policy language described “proximate causation” and legal liability “based on the insured’s negligence or other actionable deed.”
Among other things, the Court reasoned that the endorsement’s reference to “liability” caused by BSI’s acts or omissions confirmed that coverage for additional insureds was limited to situations where the insured was the proximate cause of the injury. According to the Court, the fact that the policy extended coverage to an additional insured “only with respect to liability” established that the “caused, in whole or in part, by” language limited coverage for damages resulting from BSI’s negligence or some other actionable “act or omission.”
The Court observed that BSI had not been at fault, and that the employee’s injury was due to the NYCTA’s sole negligence in failing to identify, mark, or de-energize the cable. Although “but for” BSI’s machine coming into contact with the live cable, the explosion would not have occurred and the employee would not have fallen or been injured, that triggering act “was not the proximate cause of the employee’s injuries,” the Court ruled, because BSI was not at fault in operating the machine in the manner that led it to touch the live cable.
The Court was not persuaded by the dissent’s contention that the majority’s decision might have a “destructive” impact on liability insurance coverage in New York. The Court reasoned that to the extent additional insured coverage in this case would allow the NYCTA to compel a subcontractor to pay for injuries to its employee that the NYCTA had proximately caused, it was an outcome “not intended by the parties and contrary to the plain language of the endorsement.”
The Court’s decision restricts additional insured coverage in construction injury cases involving additional insureds in those situations where there is no liability on the part of the named insured. Had the Court decided the case in favor of the NYCTA and MTA and ruled that only a “but for” connection was necessary for additional insured coverage, untold numbers of entities might have received an unexpected—and unintended—windfall.
The Crane Case
On Feb. 14, 2017, the Court issued its decision in Lend Lease (US) Constr. LMB v. Zurich Am. Ins. Co., 28 N.Y.3d 675 (2017), which involved a dispute over insurance coverage for a tower crane damaged in October 2012 by Superstorm Sandy. The crane had been installed on a reinforced slab on the 20th floor of a building being constructed on West 57th Street in Manhattan.
The question before the Court was whether the contractor’s tools exclusion to the builder’s risk insurance program excluded coverage for the crane. The Court, in a decision by Judge Fahey, in which Chief Judge DiFiore and Judges Rivera, Abdus-Salaam, Stein, and Garcia concurred, with Judge Wilson taking no part, ruled that the exclusion precluded coverage for damage to the crane.
Construing various provisions of the insurance policy, which it found unambiguous, the Court ultimately reasoned that the exclusion precluded coverage for tools, equipment, and machinery, and that the crane fell “squarely” within the definition of machinery as something “mechanically, electrically, or electronically operated device for performing a task.” The Court added that, assuming that the policy contained coverage for the crane in the first instance, the fact that the exclusion defeated that coverage did not render the coverage afforded under the policy illusory.
There were several notable memorandum decisions issued by the Court this past term. For example, in Estee Lauder v. OneBeacon Ins. Group, 28 N.Y.3d 960 (2016), the Court held, without dissent, that an insurance carrier that had identified a “late notice” defense in early communications with a policyholder but had not specifically identified late notice in its disclaimer letters had not waived the right to assert the defense as a matter of law. Rather, under common law principles of waiver, triable issues of fact existed as to whether there was an intent to abandon the defense.
Finally, in Town of Amherst v. Granite State Ins. Co., 29 N.Y.3d 1016 (2017), a memorandum decision in which Chief Judge DiFiore and Judges Rivera, Garcia and Wilson concurred (and in which Judge Fahey took no part), the Court decided that, given the terms of the parties’ insurance policy, which incorporated the rules of the American Arbitration Association, the issue of whether a later agreement between the parties affected the arbitrability of their dispute had to be resolved by the arbitrator.
Judge Stein dissented, concluding that the arbitration clause should be interpreted narrowly and that the determination of the arbitrability of the parties’ dispute should be made by the courts.
Judge Feinman joined the Court after it had issued all of its insurance decisions for the term, and Judge Wilson concurred, without writing a decision of his own, in the few insurance cases in which he participated after he joined the Court. It will be interesting to see the positions these two new judges take in the insurance cases that come to the Court next term, and in future years.
Reprinted with permission from the August 21, 2017 issue of the New York Law Journal.