NY High Court Takes Common Sense Approach to Additional Insured Coverage

For years parties have disputed just how far “caused in whole or in part” stretches in the context of coverage afforded an additional insured for the acts or omissions of a named insured. New York’s highest court settled the dispute and decreed “caused” refers to proximate, rather than the impermissibly broad “but for,” causation.

The Court of Appeals decided Burlington Ins. Co. v. NYC Tr. Auth., on June 6, 2017, and was presented with a familiar fact pattern in the world of coverage:  a coverage dispute over the scope of additional insured coverage afforded in the scope of construction project.

Burlington insured Breaking Solutions, Inc. (“BSI”), which supplied equipment and personnel for the project. Plaintiff, a Transit Authority employee, fell from scaffolding after BSI equipment came into contact with a live electrical cable that was under concrete.  Burlington initially recognized a duty to defend the Transit Authority, subject to a reservation of rights, based on the Transit Authority’s status as an additional insured.  Burlington reserved its right to deny coverage based on the limitations of the pertinent additional insured endorsements, which afforded coverage:

…only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury cause, in whole or in part, by:

  1. Your acts or omissions; or
  2. The acts or omissions of those acting on your behalf.

Subsequent discovery revealed internal Transit Authority memos admitting they were solely at fault, and BSI neither operated the machinery improperly, nor knew of the existence of the cable. Based on these admissions, Burlington disclaimed coverage.

The Court of Appeals held the plain language of the endorsement, including the reference to “liability,” calls for proximate causation. Significantly, the Court rejected the argument that “caused by” is equivalent to “arising out of,” the latter of which signals but for causation.  In the end, the Transit Authority’s sole negligence was not covered under the Burlington policy’s additional insured endorsement.

The Court’s plain language interpretation reflects the common sense recognition that additional insured endorsements are meant to apportion loss to the party with the most control over the risk. In the real world construction context, the endorsement is meant to create a coverage chain in parallel to the contractual chain of indemnification running from the bottom rung subcontractor to the property owner at the top.  Sole acts of negligence of entities higher up the chain always break the liability and indemnification chain in New York, and coverage is no different.

Thanks to Chris Soverow for his contribution to this post.



Defense Of “Abusive Acts” Not Covered Under CGL Policy

In a recent New Jersey case regarding allegations of a board of education’s knowledge of a teacher’s inappropriate conduct involving students, the United States District Court for the District of New Jersey held that the board’s commercial general liability insurer properly disclaimed coverage as its policy excluded coverage for “abusive acts.”

In Montville Township Board of Education v Zurich American Insurance Co., Jason Fennes was a teacher at Montville Township Board from September 1998 to June 30, 2010.  Shortly after he resigned from Montville, he began working for Cedar Hill Prep.  In March 2012, while working as a teacher at Cedar Hill, Fennes was arrested for sexually abusing a Montville student in 2005.  At that time, Montville notified Zurich American Insurance Company, its commercial general liability carrier, of a potential claim, and Zurich issued a general reservation of rights.  In August 2012, a six year old student at Cedar Hill, “Child M,” and her parents sued Fennes and Cedar Hill, alleging that Fennes sexually abused her in February 2012.  In January 2015, Child M filed a third amended complaint naming Montville as a defendant, alleging that Montville knew about, or was on notice of, Fennes’ sexual abuse of students at Montville, and that it failed to report Fennes to the authorities, as required by law.  Child M also alleged that Montville entered into an agreement with Fennes in 2010 in which it agreed to limit the information it would pass along to potential employers in exchange for Fennes’ resignation.  Finally, Child M alleged that but for Montville’s failure to report and provide information about Fennes to prospective employers like Cedar Hill, Child M would not have been sexually abused by Fennes.  Cedar Hill filed a cross-claim against Montville for contribution and indemnification based on these allegations.

The Zurich policy, which was effective July 1, 2011, contained a CGL Part, which provided an exclusion for bodily injury “arising out of or relating in any way to an ‘abusive act’” or “any loss, cost or expense arising out of or relating in any way to an ‘abusive act.’”  An “abusive act” was defined as “any act or series of acts of actual or threatened abuse or molestation done to any person, including any act or series of acts of actual or threatened sexual abuse or molestation done to any person by anyone who causes or attempts to cause the person to engage in a sexual act: a. without the consent of or by threatening the person … b. if that person is incapable of appraising the nature of the conduct or us physically incapable of declining participation in or communicating unwillingness to engage in the sexual act …”.  The Zurich policy also contained an Abusive Act Coverage Part (the “AA Coverage Part”), which provided insurance for “loss because of ‘injury’ resulting from an ‘abusive act.’”  However, the AA Coverage Part excluded coverage for any “‘abusive act’ of which any insured, other than the insured actually committing the ‘abusive act’, has knowledge prior to the effective date of this Coverage Part.”  Zurich disclaimed any duty to defend or indemnify Montville under the CGL and AA Coverage Parts, as Child M’s bodily injury arose out of or related to “abusive acts” per the terms of the CGL Part and its exclusion, and as Child M alleged that Montville knew about Fennes’ abusive acts but failed to report them, bringing the allegations within the exclusion of the AA Coverage Part.  Montville filed an insurance coverage action against Zurich following Zurich’s disclaimer of coverage.

After Montville and Zurich filed cross-motions for summary judgment, the United States Court for the District of New Jersey granted Zurich’s motion and denied Montville’s motion, holding that the CGL Part’s “abusive acts” exclusion was not only clear and unambiguous, but that it was broad and expansive, as it excluded coverage for bodily injury “arising out of or relating in any way to an ‘abusive act’” and therefore barred coverage under the CGL Part.  It did not matter that the abuse to Child M occurred after Fennes’ employment by Montville to a child who was not a Montville student, as the definition of “abusive act” broadly included “any act or series of acts of actual or threatened sexual abuse or molestation done to any person by anyone.”  While the Court did not go into a detailed analysis of the AA Coverage Part, it did outline the substantial evidence to support the allegations that Montville knew about Fennes’ abusive acts, and found that Montville “virtually knew” that Fennes would continue to abuse students at other schools when it agreed not to disclose his past abusive acts to potential employers in exchange for his resignation.

This case serves as a useful reminder that insurance carriers can protect themselves from certain claims when their policies of insurance are clear, unambiguous, and broad reaching.

Thanks to Rebecca Rose for her contribution to this post.

Terms Used in the Complaint Determine Defense Coverage to the Insured

In Hillcrest Coatings Inc v Colony Ins Co, the Appellative Division recently affirmed the trial court’s order requiring Colony Insurance provide a defense to its insured in an underlying environmental tort action despite the CGL policy’s hazardous materials exclusion.

The allegations in the underlying environmental action stated that Hillcrest Coatings operated their glass and recycling facility in a negligent manner, causing hazardous materials to contaminate the surrounding areas.  The underlying complaint also alleged that Hillcrest’s negligent actions “caused a malodorous condition to be created in the surrounding neighborhood.”

In disclaiming coverage to Hillcrest, Colony relied upon an exclusion that excepts from coverage all bodily injury and property damage resulting from “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘hazardous materials’ at any time.”  ‘Hazardous materials’ was defined by the policy as “pollutants” including any “solid, liquid, gaseous or thermal irritant or contaminant…” The court found that ‘Malodorous’ is not necessarily ‘Hazardous,’ and Colony owed a duty to defend its insured.

The Hillcrest decision serves to underscore the breadth courts attribute to the insurer’s duty to defend.  The Court stated that Colony had failed to meet the high burden of establishing that the hazardous materials exclusion precluded coverage in this instance because, despite the fact that the underlying complaint specifically alleged that the “malodorous condition” resulted from hazardous materials, “foul odors are not always caused by the discharge of hazardous materials.”  Thus, because “malodorous” may not be hazardous, Colony was ordered to provide a defense and to reimburse its insured for costs expended.

This decision is a reminder that in terms of coverage, courts can find even an unlikely possibility of coverage to be “reasonable” when assessing the insurer’s duty to defend.

Thanks to Vivian Turetsky for her contribution to this post.

Pennsylvania Court Finds Stacked UIM Coverage

The Pennsylvania Superior Court recently held stacked coverage is permitted under a policy, when the insurer failed to obtain an executed underinsured motorist (UIM) waiver when a new vehicle was added to the insureds’ policy.

In Pergolese v. The Standard Fire Ins. Co., the insureds obtained an insurance policy from their insurer.  At the time the insureds originally obtained this policy, they executed a waiver of stacked UIM benefits in connection with the four vehicles being insured by the policy.  Several years later, the insureds removed one of their vehicles from the policy.  Two months later, the insureds requested coverage for a newly purchased vehicle.  The newly purchased vehicle was reflected on the policy with an amendment to the policy’s declarations page.  No UIM waiver was executed at the time this new vehicle was added to the policy.  Subsequently, the insureds were injured in a motor vehicle accident and sought stacked UIM coverage under the policy.

Cross-motions for summary judgment were filed in the lower court.  On appeal, the Superior Court was asked to determine whether the insureds were entitled to stacked coverage under the policy because of the insurer’s failure to execute a new waiver.  In analyzing this issue, the Superior Court noted the Pennsylvania Supreme Court had previously held the addition of a new vehicle constituted a purchase under a policy, which required a new stacking waiver.  Conversely, the addition of a vehicle through a policy’s after-acquired clause did not require a new waiver.  As such, the Superior Court had to determine whether the vehicle added to the policy qualified as a new purchase.

Looking to the facts, the Superior Court reasoned since the insureds’ new vehicle was added to their policy through an amendment to their declarations page, the new vehicle constituted a purchase under the policy.  As such, under Pennsylvania law, a new waiver had been required.  Thus, since there was no new waiver, the insureds were entitled to stacked coverage under the policy.

This case illustrates the importance of clearly establishing whether a vehicle is being added as a new purchase under a policy, as merely amending a policy’ declarations page may unintentionally result in stacked UIM coverage being provided under a policy.

Thanks to Colleen Hayes for her contribution to this post.






Renewal Application Creates No Obligation for Coverage

“He who represents himself has a fool for a client”  – a saying often attributed to Abraham Lincoln, and just last week apparently co-signed by the Appellate Division of the New Jersey Superior Court in Sicari v Hartford Insurance Company of the Midwest.

The Plaintiff attorney appeared pro se in the action.  He obtained insurance through Hartford for 2010-2011 to cover his law practice, including coverage for general liability, business property liability, and lawyer’s professional liability.  He paid over $2,000 in premiums.  In May 2011, Hartford sent Plaintiff a letter advising that they were “no longer writing lawyer’s professional liability coverage.”  Plaintiff testified he never received Hartford’s notice.

In June 2011, Plaintiff sent Hartford a renewal application for lawyer’s professional liability coverage, to which he received no response.  Hartford then issued insurance policies to Plaintiff for the years 2011-2012, and 2012-2013.  These policies did not contain lawyer’s professional liability coverage, a fact the Court noted was suggested by a drastic reduction in premiums.

In July 2013, Plaintiff found himself the subject of a potential malpractice claim, and only then did he “discover” he no longer had professional liability coverage.  His suit against Hartford sought retroactive coverage based on Hartford’s failure to notify him of the decrease in coverage, and a contractual obligation to provide coverage ostensibly triggered by his renewal application and Hartford’s failure to adequately respond to same.  The Court was unmoved by Plaintiff’s arguments, noting “an insured is chargeable with knowledge of the contents of a policy.”

Although the case represents a confirmed victory for Hartford, the Court provided one bit of practical advice to insurance providers:  when in receipt of a renewal application, “the better practice would [be] to notify the [insured] or the broker” that the coverage requested will not be renewed or is no longer offered.

Thanks to Vivian Turetsky and Christopher Soverow for their contributions to this post.

Limited Business Interruption Coverage in Superstorm Sandy Litigation

In a recent New Jersey decision regarding business interruption coverage, the Appellate Division held that plaintiff’s insurance policy only covered damage that occurred on the plaintiff’s premises, and that coverage was limited by a coverage extension endorsement.

In Schultz Furriers. Inc. v. Travelers Casualty Ins. Co. of America, plaintiff operated a business selling luxury outerwear and fur, and provided garment cleaning, repair, and storage services.  Schultz procured a commercial liability policy from Travelers with an October 31, 2011 to October 31, 2012 policy period.  In October 2012, during Superstorm Sandy, electrical transformers were knocked down, disrupting the power supply and forcing Schultz to close its business from October 29, 2012 through November 5, 2012.  Schultz filed a business interruption insurance claim and Travelers offered $2,500 while relying on the policy’s “Power Pac Endorsement,” and disclaimed coverage as to any additional loss.  Schultz, seeking coverage for more than $2,500, filed a lawsuit against Travelers.

The Court held that Travelers would have been required to cover actual loss of business income caused by the direct physical loss of or damage to the property at Schultz’s premises pursuant to the Business Income and Extra Expense section of the Travelers policy.  However, Schultz alleged that the business loss was a result of the damaged electrical transformers offsite, as opposed to direct damage to Schultz’s premises.  Furthermore, the Travelers policy contained an exclusion barring coverage for loss caused directly or indirectly by the “failure or fluctuation of power or other utility service … if the cause of the failure or fluctuation occurs away from the described premises.”  The policy’s Equipment Breakdown Coverage Extension did not provide coverage for the loss, as the equipment breakdown occurred away from the premises and the extension excluded coverage for damage resulting from a windstorm.

Additionally, the Court held that Travelers was correct in capping coverage for the loss at $2,500 pursuant to the policy’s Power Pac Endorsement, which provided a coverage extension for the loss of business income caused by the interruption of service to Schultz’s premises.  This endorsement provided that the interruption must have resulted from direct physical loss or damage to, among other things, power supply services “not on the described premises.”  The coverage extension under the Power Pac Endorsement was capped at $2,500 per occurrence.  The Court found that the Power Pac Endorsement allowed Schultz’s claim while capping the amount of coverage, and that Travelers had satisfied its obligation to Schultz by paying that amount for the business interruption due to power outage.

While Superstorm Sandy occurred over four and a half years ago, this case serves as a reminder that the resulting insurance litigation remains ongoing and provides useful instruction for carriers looking to fully satisfy their obligations towards their insureds while minimizing exposure by including similar endorsements and limitations in their policies with respect to business interruption coverage.

Thanks to Rebecca Rose for her contribution to this post.




Continuous Trigger Coverage Expanding in PA or Still Only About Asbestos?

That was the question (effectively) posed before the Commonwealth Court in the case of Pennsylvania Manufacturers’ Association Insurance Company v. Johnson Matthey, et al. In the case (which was brought in the Commonwealth Court because PA’s Department of Environmental Protection was a defendant), Pennsylvania Manufacturers sought a declaration that it did not owe coverage for an environmental contamination lawsuit filed by DEP against Johnson Mathey. In the underlying lawsuit, DEP alleged that from 1951 through to 1969, a Johnson Mathey predecessor company allowed hazardous substances (arising out of the manufacture of alloy tubes) to escape into Chester County, PA. Pennsylvania Manufacturers insured Johnson Mathey from 1969 through to 1971. The contamination was not discovered until 1980 and thus no contamination at the Site was detected during the Policy period.

Pennsylvania Manufacturers, which assumed its insured’s defense under a reservation of rights, argued that for coverage to attach, the property damage must manifest itself during the policy period. The Commonwealth Court agreed with this basic coverage principle and noted that the “trigger of coverage under an “occurrence” insurance policy is ordinarily the first manifestation of the injury that is alleged to have been caused by the insured.” If only the decision had ended there!

However, the court went on to write that under the reasoning of the J.H. France Refractories Co. v. Allstate Insurance Co., 626 A.2d 502 (Pa. 1993) decision (which expanded the trigger of coverage with respect to asbestos bodily injury claims and held that all “occurrence” policies from the date of exposure to the date of first manifestation are triggered), there was no specific reason for continuous trigger coverage to be limited to asbestos cases. The Commonwealth Court wrote that “the justification for the multiple trigger of coverage was not the peculiar nature of asbestos disease, but the long latency of the claim for which coverage was sought.” Applying this reasoning to the facts at bar, the Commonwealth Court held “On the record before us, this case therefore presents the long latency of continuing, undetected injury or damage that supports a trigger of insurance coverage prior to manifestation under the Supreme Court’s decisions in J.H. France Refractories Co. and St. John.”

So, what does this mean for the insurance marketplace? What it means is that there are now, at least, two possible scenarios in which continuous trigger exposure applies in PA – asbestos and environmental pollution. We suspect to see the plaintiff’s bar citing Pennsylvania Manufacturers’ Association Insurance Company v. Johnson Matthey, et al. in other contexts – and our suspicion is that the attack will start in the construction defect arena. Stay tuned for what happens next!

For more information about this post please e-mail Bob Cosgrove.

Clear and Unambiguous AI Endorsement Trumps Lease Language (NJ)

In Killeen v. J&M, plaintiff, a firefighter, was injured while responding to a fire after falling through a glass panel on the roof. He filed a complaint against defendant NSPC, Inc., the owner of the building, and Jenson & Mitchell, Inc. (J&M), the tenant of the property. The lease  required J&M to obtain general liability insurance, naming NSPC as an additional insured against liability on the premises. J&M procured insurance through Travelers Property Casualty Company of America (Travelers), and an additional insured endorsement provision provided coverage to NSPC for “liability arising out of the ownership, maintenance or use” of the premises leased by J&M, but Travelers disclaimed coverage as to NSPC because the lease itself required NPSC to maintain the roof.  NSPC to filed third-party complaint against Travelers seeking coverage.

NSPC moved for summary judgment, seeking an order declaring that Travelers owed coverage under the policy, or, in the alternative, a ruling that J&M breached the lease by failing to procure insurance coverage. Travelers filed a cross-motion for summary judgment, seeking an order that NSPC was not entitled to coverage under the insurance policy. The motion court  granted Travelers’ motion, dismissing the third-party complaint against Travelers, because the lease obligated NSPC to maintain the roof.  Therefore, no coverage for NSPC.

Pursuant to an assignment of NSPC’s rights, plaintiff appealed the finding of summary judgment in favor of Travelers.  The appellate court reversed, since the additional insured endorsement under the Travelers policy provided NSPC coverage “with respect to liability arising out of the ownership, maintenance or use of that part of any premises leased to J&M.” The appellate court opined that the roof was a vital part of the “premises” leased to J&M, and the insurance policy was clear and unambiguous.  As such, there was no need to look to the lease to determine coverage.

Had the AI endorsement been vague, then the Court may have looked to the lease provision, and ruled differently.  But the clear policy language rendered the lease moot. Thanks to Steve Kim for his contribution to this post.  Please email Brian Gibbons with any questions.


Court Resists Urge to Assault English Language, and Enforces Assault Exclusion (NY)

Insurers are well aware of the length courts go to in declining to enforce intentional acts exclusions.  Even in cases where the intentional nature of alleged misconduct is obvious, courts often refuse to apply intentional acts exclusions.  While the reasoning is often artfully worded, the logic often goes something like this – – “well, the defendant may have intended to set that house on fire, but he may not have.  Exclusion inapplicable.”

The Third Department recently resisted this approach in Graytwig v. Dryden.  There, the insured was the owner of a bar whose employee allegedly injured a claimant when he forcibly ejected him from a bar.  In the underlying action, the claimant alleged that he suffered injuries when the insured’s employee put him in a headlock and pushed him onto an icy sidewalk, where he allegedly hit his head.

The insured sought coverage under his policy, which contained an assault exclusion.  The exclusion, which stated it was “subject to the terms contained in the General Liability Coverage,” provided that “notwithstanding anything contained herein to the contrary…this policy excludes any and all claims arising out of assault, battery, fight, altercation, or similar misconduct…”

The insured argued the exclusion was inapplicable because it was subject to the terms contained in the policy’s general liability coverage.  The court rejected this “attempted assault” on the English language, based on the fact the exclusion contained the words “notwithstanding anything contained herein to the contrary.”  The insured also argued the assault exclusion was inapplicable because the insured could be held liable under a negligence theory, the implication being that assault is an intentional tort.  The court also rejected this argument, based on the reasoning that no cause of action would exist but for the alleged assault.  Thus, there was no coverage.

Negligence theories can often defeat intentional acts exclusions, but that often isn’t the case when the theory is assault, and the exclusion is specific.  An exclusion generally referring to intent is often insufficient, but Graytwig is an excellent reminder that exclusions are more likely to apply when they are specific.  Thanks to Michael Gauvin for his contribution to this post.  Please email Brian Gibbons with any questions.

Sewage “Backup” Deemed Ambiguous, Prompting SJ Denial (PA)

On May 1, the Superior Court of Pennsylvania affirmed a lower court’s decision to deny Erie Insurance Exchange’s (“Erie”) motion for summary judgment in Windows v. Erie Insurance.  The case arises out of raw sewage infiltration into the home of Howard and Eleanor Windows in May 2012.  On May 2, 2013, Erie denied the claim citing a water damage exclusion in the Windows’s homeowner’s policy.  The Windows’s then filed a complaint alleging Erie breached the policy. Erie filed a motion for summary judgment arguing that raw sewage damage was unambiguously excluded from coverage by the water damage exclusion language.  Erie’s motion was denied and it appealed the decision. The policy excluded water damage, which meant, “water or sewage which backs up through sewers or drains or water which enters into and overflows from within a sump pump, sump pump well or any other system designed to remove subsurface water which is drained from the foundation area”. In Pennsylvania, it is for the finder of fact to resolve any ambiguities in a contract, such as an insurance policy, and to determine the parties’ intent in entering into that contract.   When an ambiguity exists, outside evidence is admissible to clarify the ambiguity and the parties’ intent. The court determined that the policy did not define the term “backs up”.  Erie argued that “backs up” entails any water or sewage that enters a premises no matter where it originated.  The alternative definition is that water or sewage “backs up” only when it returns to the premises from which it originated. Because the court found there was no definition of “backs up” in the policy and that there were conflicting definitions of the term found in other case law, it found that Erie subsequently failed to meet is burden for its motion for summary judgment. This case illustrates the importance of clear and unambiguous language in insurance policies.  If an exclusion or other provision in a policy is clearly written with adequate definitions then it can greatly decrease the chance of a court later rewriting a policy or extending coverage to claims a carrier would wish to deny.  Thanks to Peter Cardwell for his contribution to this post.  Please email Brian Gibbons with any questions.