Category Archives: Coverage

Second Circuit Vacates District Court and Remands Sandy Case  

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It has been just over six years since Hurricane Sandy made its devastating landfall in New York and New Jersey, causing nearly $70 billion in damages, but Sandy-related insurance litigation is still steadily making its way through the courts.

In Madelaine Chocolate Novelties Inc v Great Northern Insurance Company., the Second Circuit Court of Appeals recently held that a potential internal ambiguity in the policy mandated that the District Court’s judgment in favor of the insurer be vacated and remanded for further proceedings.  The relevant facts are straightforward:  Madelaine Chocolate suffered significant damage caused by the Sandy “storm surge,” the water pushed onto land by the force of the storm winds.  Madelaine timely submitted its claim to Great Northern for $40 million in property damage, and $13.5 million in extra operational expenses.  Great Northern disclaimed most of the claim on the basis that storm surge damage was excluded from coverage.

The Policy contained a ‘Windstorm Endorsement’ that provided coverage for “wind, wind-driven rain, erosion of soil….regardless of any other cause or event that directly or indirectly: contributes concurrently to; or contributed in any sequence to, the loss or damage…,” an anti-concurrent causation clause (“ACC”).  Great Northern’s disclaimer, upheld by the District Court, was premised on the Policy’s Flood Exclusion, which states that there is no coverage for “waves, tidal water or tidal waves, rising, overflowing…of any..  body of water or watercourse…, regardless of any other cause or event that directly or indirectly contributes concurrently to, or contributes in any sequence to, the loss or damage.”

While the District Court agreed that the Flood Exclusion unambiguously excluded storm surge damage, the Appellate Court disagreed, parsing the lower court’s analysis.  First, the Court ruled that the District Court relied on non-precedential opinions to decide that a storm surge  can be fairly categorized as a “flood,” noting that the cases relied upon did not include endorsements that added an ACC to the definition of covered peril.  Second, the Court found that the District Court’s reliance on several 5th Circuit Katrina cases was also misplaced, as none of the policies at issue in those cases likewise added an ACC to the definition of covered peril insured.

The key question on remand is whether or not the ACC clause in the Windstorm Endorsement conflicts with, or creates an ambiguity, with respect to the Flood Exclusion, reminding the District Court to “be mindful of well-established precedents requiring exclusions to be set out in clear and unmistakable language.”  ACC clauses have been held ambiguous in certain Katrian cases.  As Madelaine Chocolate continues its path through the New York court system, further clarity to these complex coverage questions will continue to inform the way coverage is analyzed, and perhaps how coverage is written, as significant storms become more common.

Thanks to Vivian Turetsky for her contribution to this post.

 

 

 

Dismantling The Designated Ongoing Operations Exclusion

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In Tuscarora Wayne Ins. Co. v. Hebron, Inc., the Pennsylvania Superior Court analyzed when a policy’s Designated Ongoing Operations Exclusion may be triggered.  In brief, a fire occurred at the insured’s property, when a driver was pumping gas into a vehicle at the insured’s location.  The fire caused damage to the insured’s property, and the surrounding neighbors’ property as well.  The insured’s policy excluded coverage under its Designated Ongoing Operations Endorsement for ongoing operations including “vehicle dismantling”.  On the basis of this exclusion, the insurer commenced a declaratory judgment action seeking a declaration that the policy did not provide coverage for the claimed damages.  On summary judgment, the trial court ruled in favor of the insurer.

On appeal, the insured argued the trial court erred in finding that refueling a vehicle fell within the policy’s language of “vehicle dismantling”.  The Superior Court agreed with the insured.  As the phrase “vehicle dismantling” was not defined by the policy, the court looked to the ordinary meaning of the phrase, which generally involved stripping vehicles of their parts.  Thus, since the only connection the claimed damages had with “vehicle dismantling” was the fact that the fuel, which started the fire, was being pumped into vehicles that had been dismantled, the Superior Court believed this connection was insufficient to trigger the policy endorsement.

Accordingly, this case reveals, Pennsylvania courts will look to the actual operations being performed to determine whether there is a close enough link, as to trigger a policy’s Designated Ongoing Operations Exclusion.

Thanks to Colleen Hayes for her contribution to this post.

PA- Policyholder Not Entitled to Uninsured or Underinsured Motorist Coverage When Injured    in Work Vehicle.  

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In Erie Insurance Grp. v. Catania, in August 2009, Jack Catania was driving a delivery truck for work when he swerved to avoid another vehicle.  In doing so, he lost control of his truck and suffered injuries.  The other vehicle fled the scene.  Catania had a personal policy with Erie at the time.  Because the other driver fled, the other vehicle was considered an uninsured motor vehicle, and Catania made a claim for uninsured motorist coverage with Erie.

Erie filed a declaratory judgment action to determine it was not obligated to provide uninsured or underinsured motorist coverage for an employee who was injured while driving a work vehicle and subsequently made a claim under his personal insurance policy.  The court held Erie did not have to provide coverage because the work vehicle fit the “regularly used non-owned vehicle” exclusion contained in that policy.   While Catania regularly used the truck, he did not own it.  As a result, it was excluded under Catania’s personal policy with Erie.

Thanks to Robert Turchick for his contribution to this post.

 

NY-First Department Holds $286 Million SEC Disgorgement Is Not Covered

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In J.P. Morgan Sec., Inc. v Vigilant Ins. Co., the First Department held that the insurers of Bear Stearns were not required to pay for the $140 million disgorgement fine, and additional $146 million in statutory interest, resulting from the bank’s settlement with the SEC for improper profits acquired by third-party hedge fund customers.  The ruling represents the latest chapter in the costly, decade-old litigation between J.P. Morgan (into which Bear Stearns in 2008) and Bear Stearns’ insurers.

As background, in 2006, Bear Stearns paid out almost $215 million to the SEC as part of a settlement after the SEC brought proceedings for various trading violations.  Of the $215 million, $160 million was labeled a “disgorgement” and $90 million was labeled a “penalty.”  Bear Stearns’s insurance policies, which covered a “Loss,” provided that “Loss shall not include … fines or penalties imposed by law.”  When Bear Stearns sought reimbursement for $140 million of the $160 disgorgement from its insurers, the insurers disclaimed coverage on the basis that the $160 million payment was labeled “disgorgement”, and thus it did not represent a covered loss under the insurance policies.  In 2013, the New York Court of Appeals held that Bear Stearns was entitled to coverage, as the public policy rule against insuring “ill-gotten gains” “should apply only where the insured requests coverage for the disgorgement of its own illicit gains,” and that “the documentary evidence does not decisively repudiate Bear Stearns’ allegation that the SEC disgorgement payment amount was calculated in large measure on the profits of others. 21 N.Y.3d 324, 336.  Thus, because the disgorgement represented the gains of others, the public policy rationale was inapplicable.  On remand, the trial court granted summary judgment for J.P. Morgan, which included over $146 million of statutory interest, bringing the total amount to approximately $286 million.

In the present case, the First Department reversed the trial court in light of the United States Supreme Court’s 2017 decision in Kokesh v. Securities and Exchange Commission, 137 S.Ct. 1635 (2017).  Kokesh involved the application of a federal statute of limitations to any action for the “enforcement of any civil fine, penalty, or forfeiture.”  The Supreme Court held that SEC disgorgement was explicitly a penalty, and therefore the statute of limitations did not apply.  The First Department held that the Supreme Court’s “rationale at the nature of disgorgement … applies with equal force to the issue of whether the disgorgement … even if representing third-party gains, was a ‘Loss’ within the meaning of the policy.”  Because Kokesh established that disgorgement “punishes a public wrong, and its purpose is deterrence,” it was a penalty and not covered under the policy.

Given the amount at stake and significance of the claim, it is likely that the Court of Appeals will have a second crack this case.  On appeal, however, the argument will not focus on public policy rationales, as it had previously.  Rather, J.P. Morgan will attempt to argue that the Supreme Court’s holding in Kokesh is limited to its application to statutes of limitation, and should not be expanded to encompass language in an insurance policy.

Thanks to Douglas Giombarrese for his contribution to this post.

PA-No Extrinsic Evidence For You

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In Lupa v. Loan City, LLC, the Third Circuit Court of Appeals confirmed the standard upon which an insurer’s defense obligations are triggered under Pennsylvania law.

In Lupa, the insured sought coverage from its insurer for various claims asserted against it.  In response to the insured’s request for defense, the insurer denied the insured’s claim, contending the complaint against the insured did not trigger coverage under the policy.  On appeal, the insured contended that the four corners rule should not be applied to determine coverage under a policy.  The Court of Appeals disagreed.  The court held that, under Pennsylvania law, an insurer’s duty to defend could only be triggered by allegations within the four corners of the complaint.  The court continued that there were no exceptions to this rule, which would require an insurer to rely on facts introduced outside of the complaint, i.e. extrinsic evidence.

Accordingly, this case confirms that courts applying Pennsylvania law will apply the four corners test to determine whether an insurer’s obligation to defend has been triggered.

Thanks to Colleen Hayes for her contribution to this post.

 

Definition of “Premises” Defines Extent of Coverage (PA)

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A Pennsylvania federal court recently decided whether a landlord’s insurer can shift a shopping center’s responsibility in a slip and fall case to a tenant’s insurer, in Liberty Mutual Insurance Co. v. Selective Insurance Co. of America, case number 2:16-cv-00759, U.S. District Court for the Eastern District of Pennsylvania.

In this case, the plaintiff was injured while tripping on an allegedly defective sidewalk outside of Business 21 Publishing LLC, a tenant of Stoney Creek Center.  The plaintiff, an employee of Business 21, ultimately sued Stoney Creek Center and received a confidential settlement.  Stoney Creek Center’s insurer sought reimbursement from Business 21’s insurer for costs associated with defense and settlement of the suit, believing it was an additional insured under its policy.

Business 21 held a liability policy that extended additional insured status to companies that owned and operated the shopping center for claims of bodily injury involving premises owned or used by Business 21.  Stoney Creek Center believed it was an additional insured under Business 21’s policy, taking the position that “premises” included both internal offices and outside common areas.

In deciding whether additional Stoney Creek Center is owed insured status, the court turned its focus on the meaning of the word “premises” as used in the additional insured endorsement of Business 21’s policy.  The judge decided that Business 21’s lease agreement with Stoney Creek Center defines the word “premises” and not the policy.  The judge ruled that the terms of the lease agreement make a clear distinction between Business 21’s internal office space and its right to use the outside common areas, demonstrating that Business 21 intended for “premises” to solely mean its internal offices and not outside common areas such as the walkways and parking lot, thus determining that there was no additional insured coverage owed.

Thanks to Chelsea Rendelman for her contribution to this post.

Workers Compensation Exclusion Unambiguous (NJ)

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In DaSilva v. JDDM Enterprises LLC et. al., the Appellate Division for the Superior Court of New Jersey recently considered the interplay between worker’s compensation statutes and the common Workers’ Compensation Exclusion often present in contractor’s insurance policies.

The coverage action arose out of Utica Insurance Company’s disclaimer of coverage to JDDM, a general contractor insured by a Utica Contractor’s Special insurance policy.  Plaintiff DaSilva, an employee of a JDDM subcontractor, sued JDDM for injuries he incurred on the construction site.  His employer, the subcontractor, failed to obtain Worker’s Compensation insurance coverage, as it was required to do pursuant to the N.J. statute.  JDDM tendered to Utica, and Utica disclaimed all coverage pursuant to the policy’s Workers’ Compensation Exclusion, which excluded coverage for all bodily injury if “benefits are provided or required to be provided by the insured under a workers’ compensation law.”

JDDM argued that the exclusion was ambiguous, and should be construed in favor of coverage given the unequal bargaining power between JDDM and Utica.  The Court disagreed, holding the Workers’ Compensation Exclusion was unambiguous and Utica’s disclaimer was proper.

The Court found N.J. Statute 34:15-79(a) dispositive.  This statute required any contractor who places work with a subcontractor, to obtain workers’ compensation coverage “in the event of the subcontractor’s failing to carry workers’ compensation insurance as required by this article.”  Thus, the New Jersey regulation explicitly makes contractors liable for the workers’ compensation coverage that would otherwise be carried by their subcontractors, thus providing a powerful incentive for contractors to hire insured subs.  Given this rule, the Court found that JDDM, as Utica’s insured, was plainly required by law to provide workers’ compensation, and thus the plain language of the Exclusion barred coverage.

The DaSilva case is a reminder to contractors in New Jersey to be mindful of workers’ compensation coverage to all subcontractors hired, given the ubiquity of the Workers’ Compensation Exclusion in insurance policies.

Thanks to Vivian Turetsky for her contribution to this post.

Pennsylvania Court Rescinds Policy Based On Insured’s Fraudulent Acts

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The U.S. Eastern District Court for Pennsylvania recently rescinded an insurance policy based on the insured’s fraudulent misrepresentations.

In Pallante v. Those Certain Underwriters At Lloyd’s, a fire occurred at an insured’s property while the insured was away.  After the fire, during an inspection of the property with the insurer’s adjuster, the insured represented that there were also several personal items missing from the property and advised that a theft had also occurred.  Subsequently, the insured sent photographs of the items that were allegedly stolen from the property.  The insurer had the photographs analyzed and it was revealed that the photographs were all taken after the fire and theft were alleged to have occurred.  Consequently, the insurer denied the claim based on concealment and misrepresentation.

The insured subsequently commenced a declaratory judgment action asserting breach of contract and bad faith claims against the insurer.  The insurer moved for summary judgment.  In determining whether to grant the motion, the court reasoned that there was no dispute that the insured made material false misrepresentations regarding her claim.  Thus, looking to the policy language, the court concluded that since the policy did not provide coverage if the insured concealed or misrepresented facts, the insurer was entitled to rescind the policy on that basis.

Accordingly, this case shows that, under certain factual circumstances, Pennsylvania Courts will support a policy’s rescission, and it appears to be viable basis for insurers to contest coverage in Pennsylvania.

Thanks to Colleen Hayes for her contribution to this post.

Court Finds Spoofing Attack is Hacking Covered Under Cyber Coverage (NY)

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The Second Circuit recently declined to reconsider its July summary order that required an insurer to pay more than $4.8 million to its insured, a cloud-based services firm, lost as a result of “spoof” emails.  The case, Medidata Solutions Inc. v. Federal Insurance Company, provides insight into the burgeoning world of cyber insurance coverage, and how courts may handle the various policy provisions invoked by insureds seeking coverage

In June 2014, an employee at  Medidata Solutions received an email purporting to be from the company’s president instructing her to wire money to an outside bank account, which the firm eventually did.  Medidata sought coverage under its commercial crime policy.  The policy covered losses stemming from “entry of Data into” or “change to Data elements or program logic of” a computer system.  When the insurer denied coverage, Medidata sued. The insurer argued that the spoofing attack was not covered because the policy applied to hacking-type intrusions.  Medidata argued that the fraudsters entered data when they changed the “From” entry in “spoof” emails to make it seem like they were actual Medidata executives.

In unanimously affirming the district court, the Second Circuit held that “[w]hile Medidata concedes that no hacking occurred, the fraudsters nonetheless crafted a computer-based attack that manipulated Medidata’s email system.”  Moreover, because the spoofing code enabled the fraudsters to send messages which seemingly came from high-ranking members of the firm, the court held that “the attack represented a fraudulent entry of data into the computer system.”  Therefore, the court held the insurer was on the hook for the $4.8 million.

In declining to rehear this case, the Second Circuit let stand a major decision for policyholders.  In an era when claims for cyber attacks is at an all-time high, policyholders will welcome holdings in which courts find coverage for cyber attacks in non-cyber specific policies.  The holding could also put the Second Circuit at odds with a similar case currently pending before the Sixth Circuit. American Tooling Center Inc. v. Travelers Casualty & Surety Co. of America, No. 16-12108, 2017 WL 3263356 (E.D. Mich. Aug. 1, 2017).  There, the district court found no coverage under a crime policy where the Michigan firm wired $800,000 in funds to a fraudster’s account by finding the loss was not a “direct loss” caused by the “use of a computer.”  Insureds and insurers alike are keeping tabs on these and other decisions invoking cyber coverage in light of the magnitude of cyber cases in recent years.

Thanks to Douglas Giombarrese for his contribution to this post.

 

Indemnification Necessary Despite Procuring Insurance

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A contractor providing insurance to an owner that includes a provision that the policy will be primary may think he has already prevented exposure from any indemnification clause in their contract with the owner as the owner has already been made whole from future liability.  However, the underlying contract language may include additional clauses that render the procuring of liability insurance as a separate and unrelated obligation from the obligation to indemnify and hold harmless.  Thus, owners, even with procured insurance from a contractor, may still seek indemnification, even from the party that provided the original insurance.

According to New York State Department of Transportation v. North Star Painting Company, Inc., 2018 WL 3321495, 2018 N.Y. Slip Op. 05087 (4th Dep’t July 6, 2018) a contractor that procures a policy with a “policy as primary” clause was ruled to have not discharged its duty to provide indemnification, and thus, a conditional order for indemnification of an owner by the contractor who already provided an insuring policy was upheld.

In North Star Painting, Inc., a contractor to the State of New York Department of Transportation agreed to indemnify and hold harmless the State of New York from claims resulting from the work stated in the contract.  However, the contract further required the contractor to procure an owners and contractors protective liability (OPCL) policy to insure the State of New York.  Within the policy procured by the contractor, the coverage under the OCPL policy was to be primary and, further, the insurer would not seek contribution from other insurance available to plaintiff.  As the policy provides primary coverage, one would think that the procuring of insurance has already fulfilled the indemnification obligations of the contractor.

However, such a policy does not prevent an owner from still seeking indemnification when the underlying contract specifically exempts the procuring of insurance from fulfilling or discharging the indemnification requirement.  In North Star Painting, Inc., the  underlying contract included a clause that the indemnification and hold harmless clauses shall not “be deemed limited or discharged by the enumeration or procurement of any insurance for liability for damages imposed by law” upon the contractor.

When complete, clear and unambiguous, a contract must be enforced according to its plain meaning. The Court determined that the clause prevented the procurement of insurance by the contractor as a means to have already fulfilled or discharged their obligation to indemnify the owner.  As such, the Court found that NYSDOT was entitled to the conditional order of contractual and common-law indemnification against the contractor.

As this case demonstrates, there is nuance between the procurement of insurance and indemnification.  Even when one procures insurance for the other party in the contract, and even as per the contract, one may still be potentially separately obligated for indemnification.  Therefore, experienced counsel should be consulted regarding how to diminish or prevent an entity’s additional exposure through indemnification even when an insurance policy has already been procured for the other contracting party.

Thanks to Jonathan J. Pincus for his contribution to this post.