Court Resolves Issues of Insurance Law and Cases Involving InsurersAugust 21, 2023 | Evan H. Krinick |
During this past term, the Court of Appeals decided a number of important insurance law questions and cases involving insurance carriers that established precedents for insurers and for other parties. The opinions of the Court in the four cases discussed here were written by different judges. Moreover, three were unanimous and reversed the rulings below. The Court only was divided (4-1) in the fourth case, which was certified to the Court by the U.S. Court of Appeals for the Eleventh Circuit.
In addition to these cases, the Court already has agreed to hear two significant insurance law disputes next term.
This column observed last year (Evan Krinick, “An Evolving Court Divides in New Insurance Cases,” NYLJ, Aug. 19, 2022) that the Court in recent years had demonstrated a strong interest in deciding workplace-related insurance cases – and that no other area of insurance law had received comparable attention. See, e.g., Verneau v. Consolidated Edison Co. of New York, Inc., 37 N.Y.3d 387 (2021) (workers’ compensation); Matter of Vega, 35 N.Y.3d 131 (2020) (unemployment insurance); Matter of Mancini v. Office of Children and Family Services, 32 N.Y.3d 521 (2018) (workers’ compensation).
That trend continued with the Court’s unanimous decision, by Justice Michael Garcia, on October 27, 2022, in Matter of Green v. Dutchess County BOCES, 39 N.Y.3d 35 (2022).
The case arose after Eric Watson sustained an injury in a work-related accident. He was classified as having a nonschedule permanent partial disability, and he received an award pursuant to Workers’ Compensation Law (WCL) §15(3)(w) of $500 per week. Pursuant to statutory caps imposed on the period for which nonschedule awards may be paid, Watson was to receive this amount for no longer than 350 weeks. Watson passed away due to unrelated causes after 311.2 weeks and his minor son sought the benefits for the 38.8 weeks that remained before Watson’s award would have reached the statutory durational cap.
A WCL judge rejected Watson’s son’s claim and the Workers’ Compensation Board affirmed. After the Appellate Division, Third Department, decided that Watson’s son was entitled to those benefits, the case reached the Court of Appeals.
In its decision, the Court observed that some categories of workers’ compensation benefits may pass, in certain circumstances, to the beneficiaries of injured employees who die from causes unrelated to the work injury. The Court held, however, that unaccrued portions of a nonschedule award under WCL §15(3)(w) do not.
The Court explained that WCL §15(3) provides for two categories of awards for injuries resulting in permanent partial disability. A “schedule loss of use” award is designed to compensate for loss of earning power, rather than the time that an employee actually loses from work or the injury itself. By contrast, the Court added, a nonschedule award seeks to reimburse a claimant for earnings lost due to injury. The Court reasoned that the “nature of nonschedule awards, dependent on an employee’s actual earnings and the continuance of the disability,” is such that there is “no remaining portion of the award that can pass through to a beneficiary.”
Accordingly, the Court concluded that Watson’s son was not entitled to the 38.8 weeks of benefits that he sought.
On the same day the Court decided Green, it decided 34-06 73, LLC v. Seneca Ins. Co., 39 N.Y.3d 44 (2022). The case holds significant lessons for the pleading of breach of contract and reformation causes of action in the insurance context and otherwise.
The plaintiffs in this case sued an insurance carrier for breach of contract, seeking over $2.4 million in damages for a fire loss the carrier determined was not covered by the insurance policy.
At trial, for the first time, the plaintiffs argued that the written insurance policy did not reflect the parties’ agreement. After the plaintiffs rested, they moved to amend their complaint to add a claim for reformation. The insurer opposed the proposed amendment, arguing that the reformation claim was time-barred.
The trial court granted the plaintiffs’ motion, concluding that the claim related back to the complaint because it was “part of the whole thrust of the complaint originally.” The jury returned a verdict in favor of the plaintiffs on the reformation claim. The Appellate Division, First Department, affirmed the judgment in the plaintiffs’ favor, concluding that the reformation claim was not barred by the statute of limitations because it related back to the complaint.
A unanimous Court of Appeals reversed in an opinion by Justice Jenny Rivera.
In its decision, the Court explained that the plaintiffs’ reformation claim related back to the original complaint – and thus was not barred by the statute of limitations – only if the complaint placed the defendant insurance carrier on “notice of the transactions, occurrences, or series of transactions or occurrences, to be proved” in support of that claim.
According to the Court, neither the trial court nor the Appellate Division should have looked “beyond the four corners of the original pleading” to determine whether the insurer was on notice of transactions or occurrences underlying the plaintiffs’ reformation claim. Moreover, the Court added, whether the trial evidence supported both the breach of contract and reformation claims was “irrelevant” to the notice issue. Similarly, the Court said, matters unearthed during discovery had “no bearing on whether an untimely claim” related back to the complaint.
The Court then ruled that the plaintiffs’ complaint failed to give notice to the insurer of the transactions or occurrences on which the plaintiffs based their reformation claim. In particular, the Court reasoned that the plaintiffs’ complaint referenced a specific written insurance policy that they identified as the parties’ agreement and that they alleged the insurer breached. The plaintiffs’ complaint further alleged that the plaintiffs complied “with all of the conditions precedent and subsequent pursuant to the terms of the subject policy.” In the Court’s view, this latter allegation was “fatal” to the plaintiffs’ assertion that their complaint provided notice of the transactions or occurrences to be proved in support of a reformation claim. In fact, the Court concluded, if anything, it suggested the opposite “because, by asserting total compliance, plaintiffs necessarily disclaimed any challenge to the policy’s terms.”
Department of Financial Services
The Court, in another unanimous October ruling, this time by Judge Madaline Singas – Matter of Independent Ins. Agents & Brokers of N.Y., Inc. v. New York State Dep’t of Financial Services, 39 N.Y.3d 56 (2022) – endorsed the broad regulatory power of the New York State Department of Financial Services (DFS)
The petitioners in this case challenged Insurance Regulation 187, which requires that “producers” (that is, agents and brokers), and insurers when no producer is involved, act in the “best interest of the consumer” when making a “recommendation.” The DFS regulation explains in detail what a producer or insurer must do to discharge this duty when making a recommendation with respect to sales transactions. In particular, the producer or insurer must, among other things, make “reasonable efforts” to obtain the consumer’s “suitability information”; base any recommendation “on an evaluation of the relevant suitability information” that “reflects the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the circumstances then prevailing”; “[o]nly [consider] the interests of the consumer . . . in making the recommendation” and not be influenced by compensation or other incentives; recommend only “suitable” transactions; and have a “reasonable basis” to believe that the consumer has been reasonably informed of the features of the policy, the potential consequences of the transactions, both favorable and unfavorable, and that the consumer would benefit from certain features of the policy and the particular policy as a whole.
The Court rejected the petitioners’ contentions that the regulation was unconstitutionally vague because certain key terms, including “best interest,” “recommendation,” and “suitability information,” were indefinite, ambiguous, and subjective; that the DFS exceeded its authority in promulgating the regulation because it conflicted with the Insurance Law and with the common law, and constituted improper policymaking; that the DFS violated the State Administrative Procedure Act; and that the regulation was arbitrary and capricious, unreasonable, and lacked a rational basis.
Among other things, the Court ruled that the petitioners had not established that the regulation would fail to give notice of its requirements in every application and, accordingly, the Court found that the regulation was “not impermissibly vague on its face.” The Court also decided that the petitioners’ arguments that the DFS exceeded its authority in promulgating the amended regulation, that the DFS violated the State Administrative Procedure Act, and that the regulation was arbitrary and capricious were “unavailing.”
The Court concluded that the petitioners fell “woefully short of their burden to sustain a facial due process challenge on vagueness grounds,” and that the “extensive administrative record” supporting the regulation refuted their alternative challenges.
In late April, the Court issued its final insurance-related decision of the term in a case, Cordero v. Transamerica Annuity Service Corp., 2023 N.Y. Slip Op. 02091 (Apr. 25, 2023), that was certified to the Court by the Eleventh Circuit.
As the Court explained, Lujerio Cordero suffered lead poisoning as a child from paint in his apartment building and entered into a structured settlement agreement with his landlord’s insurer providing for 30 years of periodic payments to Cordero. The applicable documents, governed by New York law, stated that none of the periodic payments could be “sold, assigned or encumbered.”
Nevertheless, Cordero later transferred his rights to various payments to entities known as factoring companies. A Florida state court approved each transfer agreement after a hearing pursuant to Florida’s Structured Settlement Protection Act (SSPA). Cordero did not attend the hearings, nor did counsel appear on his behalf.
Thereafter, Cordero filed a breach of contract lawsuit in Florida against the structured settlement obligor and the issuer of an annuity funding the settlement. He contended that the defendants had breached the implied covenant of good faith and fair dealing under New York law by not enforcing the documents’ anti-assignment clauses on his behalf.
The case reached the Eleventh Circuit, which asked the Court of Appeals to decide whether a plaintiff sufficiently alleges a breach of the implied covenant of good faith and fair dealing under New York law if the plaintiff pleads that the defendant drastically undermined a fundamental objective of the parties’ contract, even when the underlying duty at issue was not explicitly referred to in the writing.
The Court of Appeals reformulated the question as follows:
Does a plaintiff sufficiently allege a breach of the covenant of good faith and fair dealing under New York law by pleading that (1) an issuer or obligor failed to object to plaintiff’s sale of periodic payments in an SSPA proceeding, where the underlying agreements contain anti-assignment provisions, and (2) the sale approved by the SSPA court was not in plaintiff’s best interest?
The Court, in a decision by Judge Shirley Troutman over a dissent by Judge Rivera, answered that question in the negative.
The Court found that, under New York law, the defendants did not have “a duty to ‘enforce’ the anti-assignment language” pursuant to the implied covenant of good faith and fair dealing. In the Court’s view, it was not reasonable to believe, at the time the agreements were made, that the anti-assignment provisions required the issuer and obligor to object to any attempt the plaintiff made to execute prohibited assignments as part of an SSPA proceeding in which the court was charged with determining whether the transfer was “in the best interest of the payee.”
To hold otherwise, the Court continued, “would create an implied fiduciary duty” on the part of issuers or obligors to protect a plaintiff even though structured settlement agreements “do not contemplate a fiduciary relationship.” The Court reasoned that, under the SSPA, “the court, not the issuer or obligor, is tasked with being the gatekeeper who determines whether a plaintiff’s assignment of periodic payments under a structured settlement agreement is in [the plaintiff’s] best interests.”
The Court’s decision sets forth an important principle as to the contours of a claim for breach of the implied covenant of good faith and fair dealing as it relates to structured settlement agreements and, more generally, in connection with other contracts as well.
As noted above, the Court already has agreed to hear two insurance cases next term. Both of these cases require interpreting specific provisions of insurance policies.
On November 17, 2022, the Court granted leave to appeal in Consolidated Restaurant Operations, Inc. v. Westport Ins. Corp., 39 N.Y.3d 943 (2022). The dispute here involves whether the actual or possible presence of COVID-19 in the plaintiff’s restaurants caused “direct physical loss or damage” to its property within the meaning of the business interruption provisions of the insurance policy that the plaintiff purchased from the defendant insurer.
Then, on January 10, 2023, the Court agreed to hear Brettler v. Allianz Life Ins. Co. of North America, 39 N.Y.3d 978 (2023). In this case, the U.S. Court of Appeals for the Second Circuit certified the following question to the Court: Where a life insurance policy provides that “assignment will be effective upon Notice” in writing to the insurer, does the failure to provide such written notice void the assignment so that the purported assignee does not have contractual standing to bring a claim under the Policy?
These two cases bear watching as the upcoming decisions by the Court of Appeals could have significant practical implications for policyholders, assignees, and insurers alike.
Reprinted with permission from the August 21, 2023, issue of the New York Law Journal©, ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
- Evan H. Krinick