New York Insurance Coverage Law Update

June 30, 2020 | Insurance Coverage

United States District Court Orders Insured To Produce Certain Pre-Litigation Documents But Not Others Deemed Work Product

99 Wall sued Allied World seeking coverage under a property policy for water losses at 99 Wall’s condominium complex. 99 Wall withheld certain documents concerning communications between 99 Wall and its consultants in connection with the adjustment of the insurance claim as work product in anticipation of litigation.  99 Wall argued that most of the documents involved strategy to prepare for the coverage litigation.  The United States District Court for the Eastern District of New York explained that the key factor in determining the applicability of the work product doctrine is whether the documents were prepared “with an eye towards” or “in anticipation of” or ‘because of the prospect of litigation.”  Applying these principles, the court held that certain documents were not protected because they were prepared in the normal course of presenting the claim to the insurer.  Another document was deemed protected work product because it reflected strategy as to settlement in lieu of litigation.  And certain documents generated after the settlement meeting but before the insurer disclaimed coverage were deemed protected while others were deemed in pursuit of a business function.  [99 Wall Dev. Inc. v. Allied World Specialty Ins. Co., 220 U.S. Dist. LEXIS 91888 (E.D.N.Y. May 26, 2020)].

District Court Awards Insurer’s Attorneys’ Fees In Prosecuting DJ Against Another Insurer Owing Duty To Defend

Houston Casualty filed a declaratory judgment against New York Marine in the United States District Court for the Eastern District of New York, seeking a declaration that New York Marine had a duty to defend Houston Casualty’s named insured as an additional insured under New York Marine’s policy. Houston Casualty prevailed and sought its attorneys’ DJ fees from New York Marine. The district court acknowledged that the “American Rule” does not permit the prevailing party to recover attorneys’ fees and that New York’s “narrow exception” limits such a recovery to where an insured prevails in a declaratory judgment action brought by the insurance company to free itself from its policy obligations.  Notwithstanding, under the “fact-ual record before it,” the district court found that Houston Casualty was entitled to the attorneys’ fees it incurred to establish the duty to defend.  The court stressed that New York Marine resisted, “from the jump,” its now-conceded duty to defend, including in its answer and counterclaim seeking a declaration that it owed no duty to defend, and that New York Marine “persistently and seemingly reflexively denied this duty” despite the documentation and the New York Marine policy which made this duty “plain.”  [Houston Cas. Co. v. Prosight Specialty Ins. Co., 2020 U.S. Dist. LEXIS 92728 (S.D.N.Y May 27, 2020)].

Bankruptcy Exception To Insured Versus Insured Exclusion Applies, Court Finds

Westchester Fire Insurance Co. sought a declaration that it had no coverage obligations under an excess Directors and Officers (“D & O”) liability insurance policy issued to RCS Capital Corporation (“RCS”) in connection with an underlying action filed by RCS’s creditor trust against RCAP’s directors and officers alleging they breached their fiduciary duties to the company.  In 2014, a financial scandal decimated RCS’s business, and RCS entered into a restructuring support agreement with its unsecured creditors.  The agreement provided for the creation of a creditor trust.  In turn, RCS filed for bankruptcy, and the bankruptcy court issued an order declaring that the creditor trust shall retain and “may enforce, sue on, settle, or compromise . . . all Claims, rights, Causes of Action, suits, and proceedings . . . against any Person without the approval of the Bankruptcy Court [and] the Reorganized Debtors ….” Westchester maintained that the “insured versus insured” exclusion of the D&O policy barred coverage for the underlying action because the creditor trust was a successor-in-interest to RCS (an insured) and RCS’s directors and officers were also insureds under the policy.  The insureds argued that the bankruptcy exception to the insured versus insured exclusion applied because it restored coverage for claims asserted by the “bankruptcy trustee” or “comparable authority”. The Appellate Division, First Department, held that the bankruptcy exception applied to restore coverage, reasoning that the creditor trust was an authority comparable to a “bankruptcy trustee” because the trust was created and granted authority as part of the bankruptcy reorganization proceeding and empowered by the bankruptcy court’s order of confirmation.  [Westchester Fire Ins. Co. v. Schorsch, 2020 N.Y. App. Div. LEXIS 2979 (1st Dep’t May 14, Sp. 2020)].

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