Insurance Rulings, Present and Past, by a Court in Transition

The New York Court of Appeals’ past term was as unusual a term as practitioners and judges ever could have imagined. Of course, COVID-19 continued to affect the Court’s operations. On top of that, the early retirement of Judge Paul Feinman, followed by his untimely death, the subsequent retirement of Judge Leslie Stein, and the impending retirement at the end of this year of Judge Eugene Fahey all are effecting a transformation of the Court the magnitude of which has not been seen in recent memory.

Similarly atypical was the fact that the Court issued only two significant insurance law rulings during the past term (explored below). That, however, presents the opportunity for this column to highlight a number of the most important insurance law decisions written over the years by Judge Stein, Judge Fahey, and Judge Feinman.

Interest

In late November, the Court decided Chen v. Insurance Co. of the State of Pennsylvania, 36 N.Y.3d 133 (2020).

The case arose after Jin Ming Chen was injured at a construction site and sued the general contractor, Kam Cheung Construction, Inc. At the time, Kam Cheung maintained a primary liability insurance policy with a limit of $1 million per occurrence from Arch Specialty Insurance Company and an excess liability insurance policy with a limit of $4 million per occurrence from Insurance Company of the State of Pennsylvania (ICSOP).

The trial court granted partial summary judgment to the plaintiff and awarded the plaintiff $2,330,000 plus $396,933.70 in prejudgment interest. During that time, Arch sought to rescind its policy due to material misrepresentations it alleged Kam Cheung had made in its application; Arch obtained a judgment declaring its policy void ab initio.

The plaintiff subsequently sued ICSOP, asserting that ICSOP had to pay the entire underlying damages award. The trial court ruled that the excess policy did not “drop down” to fill the gap created by the voided Arch policy. It decided that ICSOP had to pay the $1,330,000 in excess damages, prejudgment interest on those damages from the date summary judgment had been granted in the plaintiff’s personal injury action, and accrued interest from the date partial summary judgment had been granted to the plaintiff in the plaintiff’s action against ICSOP until the entry of judgment. ICSOP promptly paid the judgment.

The plaintiff appealed and the Appellate Division, First Department, affirmed. The case reached the Court of Appeals, which affirmed in an opinion by Chief Judge Janet DiFiore in which Judges Jenny Rivera, Michael Garcia, Stein, and Feinman concurred.

The Court explained that, in addition to the liability limit of $1 million per occurrence, the Arch policy provided “Supplementary Payments” coverage that included “[p]rejudgment interest . . . on that part of the judgment we pay” and “[a]ll interest on the full amount of any judgment that accrues after entry of the judgment and before we have paid.” Therefore, the Court continued, the Arch policy provided coverage for up to $1 million in damages plus certain interest in the form of Supplementary Payments, even if those interest payments brought the total award over $1 million.

The Court then reasoned that the ICSOP policy covered only losses in excess of those that would have been paid by Arch under the Arch policy. As a result, it ruled, ICSOP was “not obligated to pay the interest Arch agreed to pay as Supplementary Payments.”

Notably, the Court concluded that the inclusion of a standard “follow form” provision in the ICSOP policy did not alter the result because a general “follow form” provision did “not override the express payment terms set forth in the excess policy that define the limits of excess coverage.”

Judges Fahey and Rowan Wilson dissented in separate opinions.

Workers’ Comp

The Court’s second insurance law ruling of the term came down on April 1, when it decided Matter of Estate of Youngjohn v. Berry Plastics Corp., 36 N.Y.3d 595 (2021).

The case arose when Norman Youngjohn was injured in a fall while employed by Berry Plastics Corporation, sought workers’ compensation benefits, and was awarded temporary benefits.

Youngjohn subsequently informed the Workers’ Compensation Board that his injuries had become permanent. Before Youngjohn’s claim for permanent partial disability benefits could be resolved, however, he suffered a fatal heart attack unassociated with his work-related injuries. At the time of his death, Youngjohn had no surviving spouse, minor children, or other qualifying dependents.

Youngjohn’s estate and the insurance carrier stipulated to a 55 percent schedule loss of use (SLU) of his left arm, a 45 percent SLU of his right arm, and 23 weeks of protracted healing. They could not agree, however, on whether the estate was entitled to the full value of the SLU award or only the portion of the award up to the date of Youngjohn’s death, with the remainder of the award capped in accordance with Workers’ Compensation Law §15(4)(d).

The dispute reached the Appellate Division, Third Department, which held that, in addition to reasonable funeral expenses, the estate was entitled to payment of the portion of the SLU award that was due up to the date of Youngjohn’s death. The Third Department rejected the estate’s argument that it was entitled to the full value of the SLU award as a result of certain 2009 amendments to the Workers’ Compensation Law that authorized lump sum payments for SLU awards. The Third Department found that the amendments “did not alter the long-standing rule that, where an injured employee dies without leaving a . . . [qualifying survivor], only that portion of the employee’s SLU award that had accrued at the time of the death is payable to the estate, along with reasonable funeral expenses.”

The estate appealed, and the Court affirmed in a decision by Judge Stein in which Chief Judge DiFiore and Judges Fahey, Garcia, and Wilson concurred; Judge Rivera concurred in the result.

In its decision, the Court explained that, under Section 15(4), when the workplace injury has not caused the claimant’s death, payment of compensation for permanent partial disability may be continued for the benefit of a surviving spouse, child, or dependent. The Court added, however, that subdivision (d) provides for discontinuation of a such an award “upon the death of a claimant with no heirs (with the exception of reasonable funeral expenses).”

Therefore, the Court concluded, the “plain language” of Section 15(4)(d) foreclosed the estate’s contention that the legislature’s 2009 amendments authorizing lump sum payments for SLU awards rendered the full value of an SLU award payable to an estate.

Judge Stein’s Opinions

Two of Judge Stein’s most notable insurance law decisions involved “allocation” issues.

Matter of Viking Pump, Inc., 27 N.Y.3d 244 (2016), reached the Court when the Delaware Supreme Court asked it to decide how to allocate primary and excess liability insurance coverage for two companies facing significant asbestos exposure claims.

The Court first had to decide whether “all sums” allocation (which permits an insured to collect under any policy in effect during the periods that the damage occurred, up to the policy limits) or “pro rata” allocation (which limits an insurer’s liability to sums incurred by the insured during the policy period) applied where an excess insurance policy contained or was governed by a “non-cumulation” provision (which generally prevents “stacking,” which occurs when a policyholder facing a loss that occurred over time while insured by different policies seeks to recover the maximum limits under all of the policies). Then, the Court had to determine whether “horizontal” or “vertical” exhaustion was required before certain upper level excess policies attached. (Under “horizontal” exhaustion, all triggered primary and excess liability policies must be exhausted before policyholders may look to any additional excess policies. “Vertical” exhaustion allows policyholders to access each excess policy once the immediately underlying policies’ limits are depleted.)

The Court concluded, in a decision by Judge Stein, that all sums allocation and vertical exhaustion applied in this case based on the policies’ language.

Judge Stein also wrote the Court’s opinion in KeySpan Gas East Corp. v. Munich Reinsurance America, Inc., 31 N.Y.3d 51 (2018), which involved insurance claims stemming from environmental contamination caused by manufactured gas plants owned and operated by the predecessor of KeySpan Gas East Corporation. KeySpan sought coverage for the costs of remediating the contamination under insurance policies that had been issued decades earlier.

The insurer argued that the costs should be allocated pro rata over the entire period during which property damage at each site had occurred. For its part, KeySpan argued that the insurer’s pro rata share should not be reduced by factoring in the years in which pollution property damage liability insurance was unavailable – namely, before 1925 – and after a “sudden and accidental pollution exclusion” was generally adopted by the insurance industry in or after October 1970.

The Court agreed with the insurer and rejected the proposed “unavailability rule.” The Court pointed out that the insurer’s policies limited the insurer’s liability to losses and occurrences happening “during the policy period.” It reasoned that applying the unavailability rule to insurance policies that directed pro rata allocation would effectively provide insurance coverage to policyholders for years in which no premiums had been paid and in which insurers had made the choice not to assume or accept premiums for those risks. The Court concluded that the average insured would not expect to receive coverage without regard to the number of years for which it had purchased applicable insurance.

Judge Fahey’s Opinions

Judge Fahey’s two most significant decisions involved no-fault insurance law, and both were in favor of insurers.

Judge Fahey wrote the majority opinion in Contact Chiropractic, P.C. v. New York City Transit Authority, 31 N.Y.3d 187 (2018). Here, the Court concluded, 4-3, that the three-year statute of limitations set forth in CPLR 214(2), which applies to actions to recover on a liability created or imposed by statute, applied to a claim for no-fault benefits against a self-insurer. The Court reasoned that the disputed no-fault benefits were not provided by a contract with a private insurer but, rather, that the source of the claim was “wholly statutory.”

The next term, Judge Fahey wrote for the unanimous Court in Andrew Carothers, M.D., P.C. v. Progressive Ins. Co., 33 N.Y.3d 389 (2019) (a case in which my firm was among several counsel for the insurers), which, in reviewing a jury verdict in favor of the insurers, strengthened their ability to refuse to pay claims submitted by medical providers secretly owned by non-physicians in violation of New York’s prohibition of the corporate practice of medicine.

In particular, the Court ruled that, under State Farm Mutual Automobile Ins. Co. v. Mallela, 4 N.Y.3d 313 (2005) (a case in which my firm and I were co-counsel for State Farm), and 11 NYCRR 65-3.16(a)(12), an insurance carrier need not demonstrate that a professional service corporation or its managers engaged in common law fraud in order to deny payment of no-fault benefits. Rather, the Court stated, a corporate practice that shows “willful and material failure to abide by” licensing and incorporation statutes may support a finding that the provider is not an eligible recipient of reimbursement under the no-fault rules.

Judge Feinman’s Opinion

Writing for a unanimous Court, Judge Feinman wrote the decision in Global Reinsurance Corp. of America v. Century Indemnity Co., 30 N.Y.3d 508 (2017) – the only time he wrote the majority decision in an insurance law case during his all too brief tenure on the Court.

Here, the U.S. Court of Appeals for the Second Circuit asked whether, under Excess Insurance Co. Ltd. v. Factory Mutual Insurance Co., 3 N.Y.3d 577 (2004), a per occurrence liability cap in a reinsurance contract limited the total reinsurance available under the contract to the amount of the cap regardless of whether the underlying policy covered the reinsured’s expenses (such as defense costs).

The Court answered the certified question in the negative. It explained that reinsurance contracts are governed by the same principles that govern contracts generally and it held that New York law does not impose either a rule or a presumption that a limitation on liability clause necessarily caps all obligations owed by a reinsurer without regard for the specific language of that clause. The Court said that Excess was not controlling under the important appellate doctrine that principles of law “are not established by what was said, but by what was decided, and what was said is not evidence of what was decided, unless it relates directly to the question presented for decision.”

Conclusion

The Court’s significant insurance-related decisions from this past term, and the others specifically by Judges Stein, Fahey, and Feinman discussed above, help steer policyholders, carriers, and the courts themselves in this important area of law. Of course, just how a remodeled Court with Judge Madeline Singas and Judge Anthony Cannataro will rule when insurance law disputes reach it next term remains to be seen. Stay tuned!

Reprinted with permission from the August 23, 2021, issue of the New York Law Journal^©, ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.