An Evolving Court Divides in New Insurance Cases

The Court is undergoing a remarkable, and continuing, makeover. After Chief Judge Janet DiFiore’s successor joins the Court, a majority of judges will have taken their seats since June 2021. Indeed, the Court’s most senior member, Judge Jenny Rivera, has not yet even served a full decade on the Court.

Recognizing that the Court has decided relatively few insurance disputes in its most recent terms and, correspondingly, that the Court’s newer judges in particular have not opined on a significant number of insurance law issues, there nevertheless seem to be two insurance law trends worth noting.

First, the Court is continuing its interest in deciding workplace-related insurance cases. Specifically, the Court decided two workers’ compensation insurance cases this past term (discussed below). It also decided a workers’ compensation case in its 2020-2021 term, Matter of Estate of Youngjohn v. Berry Plastics Corp., 36 N.Y.3d 595 (2021); an unemployment insurance case in its 2019-2020 term, Matter of Vega, 35 N.Y.3d 131 (2020); another workers’ compensation case, Matter of Mancini v. Office of Children and Family Services, 32 N.Y.3d 521 (2018), in its 2018-2019 term; and yet one more workers’ compensation case, American Economy Ins. Co. v. State of New York, 30 N.Y.3d 136 (2017), in its 2017-2018 term. No other area of insurance law has received comparable attention.

Second, it is worth noting Judge Rowan D. Wilson’s record in insurance cases since he joined the Court in February 2017. The first insurance decision by Judge Wilson was the majority opinion in Carlson v. American International Group, Inc., 30 N.Y.3d 288 (2017) – a pro-policyholder ruling. In the same term, Judge Wilson wrote the majority opinion in Gilbane Building Co./TDX Construction Corp. v. St. Paul Fire and Marine Ins. Co., 31 N.Y.3d 131 (2018), which favored carriers, but he also joined the dissent in Contact Chiropractic, P.C. v. New York City Transit Authority, 31 N.Y.3d 187 (2018), which, like Carlson, was in favor of policyholders.

In insurance cases since then, Judge Wilson often has dissented, invariably in favor of the policyholder position in disputes with insurance carriers; at times, Judge Wilson has been the sole dissenter in a case. See Matter of Mancini v. Office of Children and Family Services, supra (sole dissenter); Nadkos, Inc. v. Preferred Contractors Ins. Co. Risk Retention Group LLC, 34 N.Y.3d 1 (2019) (sole dissenter); Matter of Vega, supra; Chen v. Insurance Co. of the State of Pennsylvania, 36 N.Y.3d 133 (2020).

The Court divided in all four of its notable insurance decisions this past term – and Judge Wilson dissented in two of them, both on the policyholder side. Judge Wilson was the sole dissenter in Johnson v. City of New York, Nos. 29, 30 (Apr. 21, 2022). He also dissented, in a pro-policyholder opinion in which Judge Rivera joined, in Bonem v. William Penn Life Ins. Co., 165 N.Y.S.3d 790 (2022).

It will be interesting to observe the dynamics of the Court as the new judges gain more experience and a new chief judge is appointed.

The Penalty Case

An insurance dispute that has its origins in the last millennium, that over the years has yielded multiple trial and appellate decisions, and that already had reached the Court of Appeals once before has, finally, been resolved by the Court of Appeals. Well, at least one insurance coverage issue has been determined. J.P. Morgan Securities Inc. v. Vigilant Ins. Co., 37 N.Y.3d 552 (2021).

In 2000, The Bear Stearns Companies purchased a primary insurance policy providing coverage for “wrongful acts.” Bear Stearns also purchased various excess insurance policies that followed form to the primary insurance policy. The policies provided coverage for “loss” that Bear Stearns became liable to pay in connection with any civil proceeding or governmental investigation into violations of laws or regulations, defining “loss” as including various types of damages – including compensatory and punitive damages (“where insurable by law”) – but not including “penalties imposed by law.”

In 2003, the Securities and Exchange Commission (SEC) and other regulatory agencies began investigating Bear, Stearns & Co. Inc. and Bear, Stearns Securities Corporation – securities broker-dealers that processed and cleared trades for clients (together, Bear Stearns). The investigation concerned allegations that, between 1999 and 2003, Bear Stearns had facilitated late trading and deceptive market timing practices by its customers in connection with the purchase and sale of shares of mutual funds.

Bear Stearns eventually settled with the SEC, agreeing to a $160 million “disgorgement” payment and a $90 million payment for “civil money penalties.”

Bear Stearns (technically, its successor companies) subsequently filed suit against its insurers, seeking coverage for the disgorgement payment. The insurers moved to dismiss, arguing, among other things, that the disgorgement component of the SEC settlement was a penalty that was not covered by the policies.

The Supreme Court, Nassau County, denied the insurers’ motions to dismiss, but the Appellate Division, First Department, reversed and granted the motions. In 2013, the Court of Appeals reinstated the complaint, concluding that the insurers were not entitled to dismissal because the disgorgement payment was not clearly uninsurable as a matter of public policy.

Following additional motion practice, Bear Stearns moved for summary judgment, arguing that $140 million of the disgorgement payment represented disgorgement of its clients’ gains, as compared with Bear Stearns’ own revenue, and was an insurable “loss” under the policies rather than a penalty as the insurers contended.

After the insurers cross-moved for summary judgment, the Supreme Court granted summary judgment to Bear Stearns, concluding that the disgorgement of $140 million in client gains constituted an insurable loss.

The Appellate Division again reversed the Supreme Court, denied Bear Stearns’ motion for summary judgment, and granted the insurers’ motions for summary judgment declaring that Bear Stearns was not entitled to coverage for the SEC disgorgement payment as it was a penalty. The case again reached the Court of Appeals.

Last November, the Court held that the payment was not a penalty within the meaning of the insurance policies. The Court reasoned that inasmuch as the payment was derived from estimates of the allegedly ill-gotten gains and harm flowing from Bear Stearns’ allegedly improper trading practices, and was intended – at least in part – to compensate those injured by the wrongdoing allegedly facilitated by Bear Stearns, the $140 million disgorgement payment “could not fairly have been understood as a ‘penalty.’” Therefore, the Court ruled, the Appellate Division erred in granting summary judgment to the insurers on that basis.

It is worth noting that the parties had raised additional arguments that were not reached by the Appellate Division’s most recent decision due to its resolution of the penalty issue, including additional defenses to coverage proffered by the insurers. Therefore, the Court, over Judge Rivera’s dissent, remitted the case to the Appellate Division for further proceedings.

Workers’ Comp

The Court decided its first of two workers’ compensation cases, Verneau v. Consolidated Edison Co. of New York, Inc., 37 N.Y.3d 387 (2021), in November.

This case involved the Special Fund for Reopened Cases. The Special Fund was established in 1933, primarily to ensure benefits for claimants in cases of insurance carrier insolvency, employer inability to pay benefits, or upon the reopening of a long-closed matter. Under Workers’ Compensation Law (WCL) § 25-a, liability for a claim could be transferred from the employer or carrier to the Special Fund once certain statutory conditions had been satisfied. This statutory scheme continued until 2013, when the legislature amended the law by adding WCL § 25-a(1-a) and closed the Special Fund to all new claims submitted on or after January 1, 2014.

The issue before the Court in Verneau was whether WCL § 25-a(1-a) foreclosed the transfer of liability for a death benefits claim submitted on or after the cut-off date of January 1, 2014, regardless of the prior transfer of liability for a worker’s disability claim arising out of the same injury.

After examining the statutory language, which Judge Rivera, writing for the Court, said “broadly applies to all claims submitted after the deadline,” and the Court’s precedent that a death benefits claim accrues at the time of death and “is a separate and distinct legal proceeding” from the worker’s original disability claim, the Court concluded that liability for the death benefits claims in this case “could not be transferred to the Special Fund.” Judge Michael J. Garcia dissented in an opinion in which then-Judge Eugene Fahey joined.

In April, the Court, in an opinion by Judge Anthony Cannataro, decided another workers’ compensation case, Johnson v. City of New York. This case involved “schedule loss of use” (SLU) awards (as did Matter of Estate of Youngjohn v. Berry Plastics Corp., supra, which the Court decided in its 2020-2021 term, noted above).

In Johnson, the Court considered appeals in two cases and found that separate SLU awards for different injuries to the same statutory “member” (e.g., hand, arm, leg) were contemplated by WCL § 15 and that when a claimant proved that a second injury, “considered by itself and not in conjunction with the previous disability,” has caused an increased loss of use, the claimant was entitled to an SLU award commensurate with that increased loss of use. As previously noted, Judge Wilson dissented.

Life Insurance 

In Bonem v. William Penn Life Ins. Co., the Court was asked to decide whether a policyholder’s failure to pay a life insurance premium within what the insurer asserted was the 31-day grace period caused the policy to lapse – days before his death.

The policyholder in this case purchased a life insurance policy in 2002 that provided that “[t]he due date for the first premium is the Date of Issue,” identified as January 14, 2002, and the due date for subsequent premiums is “the day after the end of the period for which the previous premium was paid.” The policy further provided that premiums were payable as shown in a policy schedule, which also identified the “premium due date” as January 14.

According to the terms of the policy, premiums had to be paid by the due date of January 14 or the end of a 31-day grace period following that date, after which policy coverage lapsed. After more than a decade, and despite notice that the premium was due January 14, 2018, the policyholder failed to pay by that date or within the following 31 days.

The policyholder died on February 26, 2018, and the insurer denied his widow’s claim for benefits on the basis that the policy had lapsed prior to the policyholder’s death. She sued.

The Court ruled in an unsigned memorandum decision that the plaintiff was not entitled to benefits under the policy. According to the Court, the policy “clearly and unambiguously” tied the due date of the annual premium to the date of issue, January 14, 2002, and expressly stated that January 14 was the premium due date. The Court found “no ambiguity” in the policy “in light of the clear policy language” identifying January 14 as the “premium due date.”

The Court also found that any ambiguity claimed by the plaintiff in the definition of “policy date” was “irrelevant” inasmuch as the policy did not tie the premium due date to the “policy date” but, rather, to the date of issue, which was January 14. Accordingly, the Court concluded that because the policyholder failed to pay the 2018 premium by January 14, 2018, or within the 31-day grace period, the policy lapsed prior to his death. As noted above, Judge Wilson dissented in an opinion in which Judge Rivera joined.

Next Term

The Court already has accepted certification of one noteworthy insurance case for next term, Cordero v. Transamerica Annuity Service Corp., 2022 N.Y. Slip Op. 67295 (June 14, 2022), continuing its propensity to accept certified questions on insurance law (as well as on other areas of law) from federal courts and other courts of last resort. See N.Y. CLS Rules Ct. App. § 500.27.

The Cordero case involves a plaintiff who received a structured settlement because of a tort injury but who ultimately sold his periodic payments to a factoring company. The issue is whether the plaintiff may hold the insurers that issued and funded his periodic payments liable for breaching the implied covenant of good faith and fair dealing under New York law where the insurers consented to his assignments of the periodic payments and allegedly “undermined a fundamental objective” of the structured settlement – even though the alleged underlying duty was not explicitly referred to in any written agreement the plaintiff entered into with the insurers.

The Court’s decision may be an important statement as to the contours of a claim for breach of the implied covenant of good faith and fair dealing.

Reprinted with permission from the August 22, 2022, issue of the New York Law Journal^©, ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.