New York Insurance Coverage Law Update

March 29, 2018 | Alan C. Eagle | Insurance Coverage

Second Circuit Rules Professional Services Exclusion In D&O Policy Barred Coverage For Facebook Investors’ Claims Against NASDAQ

After conducting the initial public offering for Facebook, Inc., the NASDAQ public stock exchange was sued. NASDAQ settled for $26.5 million. An insurer that issued a directors and officers policy to NASDAQ contended that the claims against NASDAQ were excluded by the policy’s exclusion for customer claims arising out of the rendering of professional services. A federal district court in New York agreed. NASDAQ appealed to the United States Court of Appeals for the Second Circuit, which affirmed. The Second Circuit reasoned that Facebook’s retail investors were NASDAQ’s “customers,” and that the claims against NASDAQ arose out of NASDAQ providing professional services. [Beazley Ins. Co. v. ACE Am. Ins. Co., 880 F.3d 64 (2d Cir. 2018).]

Second Circuit Holds Policy’s Definition Of “Bodily Injury” Did Not Include Mental Injury Without Independent Physical Injury

The Incorporated Village of Old Westbury filed a declaratory judgment action against its insurer seeking coverage for an underlying action alleging mental injury. The United States Court of Appeals for the Second Circuit held that “mental injury” without physical injury was not covered “bodily injury” under the Village’s policy.  The policy defined “bodily injury” as including “mental injury . . . resulting from bodily injury.”  The Second Circuit explained that a 1992 decision by the New York Court of Appeals that held that purely mental injuries were bodily injuries did not govern the Village’s claim because that decision interpreted an insurance contract that did not limit coverage for mental injury to mental injury that resulted from bodily injury, and thus allowed the inference that bodily injury and mental injury were distinct under the definition at issue. [Incorporated Vill. of Old Westbury v. American Alternative Ins. Corp., No. 17-1275 (2d Cir. Feb. 8, 2018).]

Absolute Pollution Exclusions Precluded Coverage For Release Of Chlorine Gas, Federal Court Concludes

Ben Weitsman & Son of Scranton, LLC, was sued for injuries allegedly suffered as a result of the release of a “toxic cloud of chlorine gas” from a scrap-metal recycling facility it operated in Scranton, Pennsylvania. Weitsman’s insurer denied coverage based on the absolute pollution exclusions in its policies, which precluded coverage for injury from the “release” of and/or “exposure” of pollutants, among other things.  The United States District Court for the Northern District of New York granted the insurer’s motion for summary judgment, reasoning that the exclusions were “stated in clear and unmistakable language.” [Ben Weitsman & Son of Scranton, LLC v. Hartford Fire Ins. Co., No. 3:16-CV-0780 (GTS/DEP) (N.D.N.Y. Feb. 13, 2018).] 

Post-Loss Assignments By Insureds To Auto Body Shop Deemed Valid

An auto body shop sued an automobile insurance company to recover for repairs the shop claimed it made to insureds’ vehicles after the insureds assigned their rights to the shop. The insurer moved to dismiss, con-tending that it had not consented to the assignments by its insureds and, as a result, the shop could not enforce their rights. The court denied the motion, finding the post-loss assignments by the insureds to the auto body shop were valid, reasoning that such post-loss assignments losses do not “materially increase [ ] the risk to the insurer.” [M.V.B. Collision Inc. v. State Farm Ins. Co., 2018 N.Y. Slip Op. 28043 (Dist. Ct. Nassau Co. Feb. 20, 2018).]

First Department Finds Duty to Defend Additional Insured But Indemnity Premature Because Not Determined That Named Insured Proximately Caused Injury

New York City entered into a construction contract with a joint venture that entered into a subcontract with L&L Painting.  Robert Vargas sued all three for alleged bodily injury at the job site, alleging that they operated, maintained, managed and controlled the site and that they were negligent.  The City sought a defense and indemnity for Vargas’ action as an additional insured under L&L’s policy.  L&L’s insurer maintained that the City was not covered as an additional insured because Vargas’ bodily injury was not “caused by” L&L or those acting on its behalf as required by the policy.  The Appellate Division, First Department, held that L&L’s insurer had a duty to defend because Vargas’ complaint alleged at least the possibility that Vargas’ injury was caused by L&L. However, the court found that it was “premature to declare” that the insurer had a duty to indemnify the City because it “has not yet been determined if L&L was the proximate cause” of Vargas’ injury, citing the Court of Appeals’ recent decision in Burlington Ins. Co. v. NYC Tr. Auth., 29 N.Y.3d 313 (2017).

Finally, the court held that the insurer’s late disclaimer did not preclude the insurer from maintaining that the City was not covered as an additional insured, but that the late disclaimer precluded its reliance upon a lead exclusion in the policy.  The court noted that the insurer was correct that “when a putative insured first makes a claim for coverage in a complaint, the insurer may disclaim via its answer,” but ruled that the City “did not waive” its argument that the disclaimer was untimely by agreeing to extend the insurer’s time to answer.  [Vargas v. City of N.Y., 2018 N.Y. Slip Op. 01136 (1st Dep’t Feb. 15, 2018).]

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