New York Insurance Coverage Law Update

Second Circuit Holds That Malpractice Insurer Has No Duty to Defend or to Indemnify Lawyer Because Of Business Enterprise Exclusion

 Associated Industries Insurance Company sued its insureds, a lawyer, and his former law firm, seeking a declaration that it had no duty to defend or to indemnify an underlying lawsuit brought by their former client. The client sought damages for legal malpractice, breach of fiduciary duty, elder abuse, and fraud related to the client’s 2017 sale of land to the lawyer’s separate company. The insurer disclaimed coverage under the law firm’s policy because of an exclusion for activities undertaken in the capacity of an officer of another business enterprise.  The federal district court granted judgment to the insurer based on the pleadings. On appeal, the lawyer argued that the insurer had a duty to defend him in the underlying action because the client’s underlying complaint included potentially covered conduct that predated the existence of the lawyer’s company, including that the lawyer allegedly misadvised the client to reject two earlier offers. The United States Court of Appeals for the Second Circuit rejected the lawyer’s argument and affirmed, finding that the actual claims stated in the underlying complaint and the lawyer’s potential liability all arose at least, in part, from the lawyer’s position with his company. [Associated Indus. Ins. Co. v. Kleinhendler, 2023 U.S. App. LEXIS 32327 (2d Cir Dec. 7, 2023).]

Court Finds Subcontract Requiring Additional Insured Coverage Enforceable and That Insurer Must Reimburse Post-Tender Defense Costs

An owner, general contractor (GC) and subcontractor (Sub) were sued by injured workers at a construction site, and they were defended by the Sub’s insurer, U.S. Specialty Insurance Company. U.S. Specialty tendered their defenses to the insurer of a sub-subcontractor (Sub-Sub), State National Insurance Company. State National’s policy contained a blanket additional insured endorsement providing additional insured coverage to the owner, GC and Sub if required by a written contract. The Sub-Sub signed a contract with the Sub that required that the Sub-Sub obtain such additional insured coverage, but State National disclaimed coverage because the contract was not signed by the Sub and the Sub-Sub’s signature was not dated. The Supreme Court, New York County, held that the contract was enforceable because it was signed “by the party to be charged” and that even though the signature was not dated, the agreement stated that it was made before the alleged accidents. The court found that the affidavit of the Sub-Sub’s owner stating that the Sub-Sub did not sign the contract until after the personal injury suits were filed did not undermine the court’s conclusion that the contract was enforceable beforehand. Because a comparison of the “other insurance” clauses in the two insurers’ policies reflected that State National’s coverage obligation was primary, State National was ordered to reimburse post-tender defense costs. [U.S. Specialty Ins. Co. v. State Natl. Ins. Co., Inc., 2023 N.Y. Misc. LEXIS 23258 (Sup. Ct., N.Y. Cnty. Nov. 30, 2023).]

Court Permits Putative Additional Insured to Intervene in Coverage Action Where Insurer Sought Recission of Policy

A contractor was sued in two personal injury actions arising from construction accidents at a construction site, and the contractor sought coverage under a policy it purchased from Prime Property and Casualty Insurance Company. Prime denied coverage so the contractor filed a declaratory judgement action against the insurer. Prime counterclaimed to rescind the policy based on the contractor’s alleged misrepresentations in its application for the policy. A putative additional insured under the Prime policy was also sued in one of the underlying actions, and it filed a motion to intervene in the coverage action. Prime and the contractor opposed the motion. The Supreme Court, New York County, granted the putative additional insured’s motion to intervene, reasoning that the putative additional insured had a “bona fide interest in an issue” in the action and timely filed its motion. The court rejected the argument by Prime and the contractor that intervention would hinder a settlement. [Manhattan Concrete LLC v. Prime Prop. & Cas. Ins. Inc., 2023 N.Y. Misc. LEXIS 23318 (Sup. Ct., N.Y. Cnty. Dec. 21, 2023).]