New York Insurance Coverage Law Update

December 29, 2021 | Insurance Coverage

New York Court of Appeals Holds That Disgorgement Payment Under SEC Settlement Not Excluded As A Penalty Imposed By Law

The Securities and Exchange Commission (SEC) alleged that Bear Stearns facilitated late trading and deceptive market timing practices by its customers in connection with the purchase and sale of mutual fund shares.  Bear Sterns sought coverage from its insurers for part of its settlement with the SEC under policies providing coverage for “loss” that Bear Sterns became liable to pay in connection with any governmental investigation into violations of laws or regulations. The policies defined “loss” as including certain types of damages, but not “fines or penalties imposed by law.”  Bear Sterns argued that $140 million of its settlement payment for “disgorgement” (which was to be deposited into a “Fair Fund” to compensate mutual fund investors allegedly harmed by the trading practices) was derived from estimates of client gain and investor harm and, therefore, was not an uncovered “penalty imposed by law”.  The New York Court of Appeals agreed, reasoning that a reasonable insured purchasing a policy covering losses for wrongful acts would have understood the term “penalty” to refer to “non-compensatory, purely punitive monetary sanctions.”  The Court of Appeals concluded that the insurers failed to establish that the payment falls within the policies’ exclusion for “penalties imposed by law” and that the lower court erred in granting summary judgment to the insurers on that basis. [J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 2021 N.Y. LEXIS 2519 (N.Y. Nov. 23, 2021).]

First Department Holds That Tenant’s Insurer Owes Additional Insured Coverage To Landlord Where Claimant Fell Through Cellar Door Used By Tenant

The claimant fell through an outside cellar door when he was delivering bread to the tenant’s restaurant at its leased premises.  The claimant sued the landlord, which was insured by Seneca Insurance Company. Seneca sought additional insured coverage for the landlord under the tenant’s policy with New York Marine and General Insurance Company, which covered bodily injury “arising out of the ownership, maintenance or use of that part of the premises leased to” the tenant.  The Appellate Division, First Department, affirmed the lower court’s decision finding that New York Marine had a primary duty to defend and to indemnify the landlord. The court held that contrary to New York Marine’s contention, the outside staircase that was used by the tenant for access in and out of its space was, by implication, part of the leased premises.  In addition, the court found that the accident necessarily arose out of the tenant’s “use” of the leased premises because the claimant was traversing the cellar door to deliver items for the tenant’s business when the accident occurred.  [71 Lafayette Ave. LLC v. New York Mar. and Gen. Ins. Co., 199 A.D.3d 603 (1st Dep’t Nov. 30, 2021).]

Fourth Department Holds That Maintenance Company’s Removal Of Items From Home And Placement Into Dumpster Not “Theft” Under Homeowner’s Insurance Policy

The insured defaulted on his mortgage, vacated his home, and filed for bankruptcy. Geddes Federal Savings and Loan hired a maintenance company to inspect, secure and maintain the property, and it cleared out the house and placed items in a dumpster on the front lawn.  The insured sought coverage under his homeowners policy with Liberty Mutual, which disclaimed coverage on the ground that the loss was not a theft (a covered peril).  On appeal, the Appellate Division, Fourth Department, agreed with the insurer that “‘the average policyholder of ordinary intelligence’ would not think that the maintenance company’s employees committed theft by removing items from plaintiff’s house and placing them in garbage dumpsters on the front lawn.”  However, the court found a triable issue of fact for trial as to whether “some unknown person or persons entered the residence before it was cleaned out by the maintenance company and stole the items that plaintiff claims were missing.” [Purisk v. Liberty Mut. Ins. Grp. Inc., 2021 N.Y. App. Div. LEXIS 6332 (4th Dep’t Nov. 12, 2021).]

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