New York Insurance Coverage Law Update

January 1, 2011 | Insurance Coverage

Losses From Madoff’s Ponzi Scheme Not Covered Under Homeowners Policy

After allegedly losing millions of dollars in Bernard Madoff’s Ponzi scheme, Sharon Lissauer brought suit against Fireman’s Fund Insurance Company to recover that money under her homeowners policy. In its decision dismissing the complaint, the U.S. District Court for the Southern District of New York explained that the plaintiff’s claim depended upon whether she had alleged “direct physical loss” to her property. It then decided that the plaintiff’s investment losses “were not a ‘direct physical loss,'” even if they involved personal property. Rather, the court ruled, the investment losses were the consequences of the plaintiff’s “unfortunate but unmistakably voluntary transfers of money to Madoff and his theft of the funds.” [Lissauer v. Fireman’s Fund Ins. Cos., 09 Civ. 10073 (LAK) (S.D.N.Y. Dec. 20, 2010).]

Work Product Exclusions Bar Coverage For Suit Against General Contractor

A contractor was sued for “substantial defects in the design and construction” of two condominiums. The insurer that had issued general liability insurance policies to the contractor maintained that it had no duty to defend against allegations of construction defects arising from the contractor’s work product or the work of subcontractors operating on its behalf, and the Appellate Division, Second Department agreed. The court explained that, “CGL policies like the one in this case are not intended to provide indemnification to contractors for claims that their work product is defective.” Thus, it concluded, because the complaint sought relief for conduct that fell “solely and exclusively under the work product exclusions of the CGL policies,” and the damages did “not arise from an occurrence resulting in damage to property” distinct from the work product of the contractor or its subcontractors, the insurer was not obligated to provide the contractor with a defense or to indemnify it in the underlying action. [Exeter Bldg. Corp. v. Scottsdale Ins. Co., 2010 N.Y. Slip Op. 09361 (2d Dep’t Dec. 17, 2010).]

No Duty To Indemnify With Respect To Treble Damages Awarded Against Attorney Under Judiciary Law § 487

The plaintiffs in a legal malpractice action against an attorney were awarded $226,000 in compensatory damages, which the court trebled pursuant to Judiciary Law § 487. The plaintiffs then brought suit against the insurer that had issued the attorney a professional liability insurance policy, contending that the insurer was liable for the full amount they had been awarded. The Appellate Division, Fourth Department, ruled that the insurer was not required to indemnify the attorney with respect to the award of treble damages because the award was punitive in nature and “New York public policy precludes insurance indemnification for punitive damage awards.” Moreover, it concluded, the policy covered compensatory damages only. [McCabe v. St. Paul Fire & Marine Ins. Co., 2010 N.Y. Slip Op. 09633 (4th Dep’t Dec. 30, 2010).]

Question Of Whether Certificate Of Insurance Estops Insurer From Denying Coverage Is Certified To NY Court Of Appeals

An important question in an insurance coverage dispute arising from an alleged injury at a construction site has been certified by the Court of Appeals for the Second Circuit to the New York Court of Appeals. The question is: “In a case brought against an insurer in which a plaintiff seeks a declaration that it is covered under an insurance policy issued by that insurer, does a certificate of insurance issued by an agent of the insurer that states that the policy is in force but also bears language that the certificate is not evidence of coverage, is for informational purposes only, or other similar disclaimers, estop the insurer from denying coverage under the policy?” We will follow the case and report when there is a decision. [10 Ellicott Square Court Corp. v. Mountain Valley Indem. Co., 2010 U.S. App. Lexis 26035 (2d d Cir. Dec. 28, 2010).]

Prior Knowledge Exclusion Dooms CPAs’ Coverage Claim

The Supreme Court, New York County, ruled that an insurer that had issued a professional liability insurance policy to an accounting firm did not have an obligation to defend it against a liability claim asserted in federal court. After the firm appealed, the Appellate Division, First Department, found that the firm, prior to the policy’s effective date, “had subjective knowledge of numerous facts pertaining to a fraudulent scheme undertaken by their clients.” It then affirmed the trial court’s decision that the prior knowledge exclusion, which precluded coverage for “any Interrelated Acts or Omissions” which, before the effective date of the policy, the firm “believed or had a basis to believe might result in a ‘Claim,'” applied in this case. [CPA Mut. Ins. Co. of Am. Risk Retention Group v. Weiss & Co., 2011 N.Y. Slip Op. 00018 (1st Dep’t Jan. 4, 2011).]

 Reprinted with permission.  All rights reserved.

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