State Appeals Courts Divided – Insurance
Does an insurer have the right to recover defense costs when there is no obligation to indemnify?
In a first-impression case for the New York Supreme Court, Appeal Division, Second Department, the court chose not to follow past rulings from its sister court and federal courts applying New York law. The Second Department ruled that an insurer could not recover defense costs under its reservation of rights when there is no obligation to indemnify, resulting in a split with the First Department.
In American Western Home Insurance Co. v. Gjonaj Realty & Management Co., 192 AD3d 28, 30, 138 NYS3d 626, 628 (2020), the Second Department had to decide whether an insurance company could recover the defense costs of its policyholders “when there has been a reservation of rights by the company insurance and a determination by the court that the insurance company has no obligation to defend and provide insurance coverage to policyholders in an underlying bodily injury action brought against them. The second department ruled that an insurer cannot recover defense costs under a reservation of rights unless the insurance policy expressly allows it.
This detention is different from that of other New York cases. In 2018, the New York Supreme Court, Appeals Division, First Department, ruled that an insurance company had the right to recover incurred expenses that were not covered by the policy because it had failed. reserved the right to do so.1 Likewise, in 2013, the First Department upheld an order granting the insurance company the costs of defending against the defendants because the insurance company reserved the right to recover the costs if it was found not to. blanket.2 Several federal courts applying New York law have followed these First Department decisions.3
The events that led to the decision of the second department in American West lasted almost ten years. They began when American Western Home Insurance Company issued a policy to Gjonaj Realty & Management Co. and 28-47 Webb Associates, LLC that offered general liability coverage where, upon timely notice of an underlying claim, insureds were entitled to a defense and compensation from the company for lawsuits alleging bodily injury.4 In 2011, policyholders were taken to court after a person fell from a ladder at premises owned by 47 Webb and managed by Gjonaj Realty.5 Policyholders did not notify American Western of the accident or lawsuit until four years later, in 2014, when a damage investigation had already taken place and a judgment of $ 900,000 had been filed against insured.6 American Western advised policyholders that it would not defend or indemnify them and denied them coverage due to their failure to comply with the notice clause of the policy.7 However, American Western has said it will reconsider its disclaimer if the default judgment against policyholders is overturned.8
In 2015, the default judgment was overturned and American Western informed policyholders that it would defend and indemnify them in the underlying action.9 She also reserved her rights under the policy to deny coverage because she was unsure whether she had suffered prejudice in her investigation or her ability to defend herself due to the belated notice of policyholders.ten A few months later, after the defendant in the action appealed to set aside the default judgment, American Western advised policyholders that it further reserved its rights to refuse to defend or indemnify.11
After the nullity of the default judgment was set aside, American Western notified the insureds that it was denying coverage and reserved the right to recover all costs and expenses incurred in defending the insureds.12 American Western then brought an action for declaratory judgment and sought summary judgment stating that it: (1) had no obligation to defend the policyholders, (2) had no obligation to indemnify the policyholders for any judgment brought against them in the underlying action, and (3) was entitled to recover the defense costs and costs incurred on behalf of the insureds in the underlying action after the restoration of judgment.13
The trial court allowed American Western’s motion. The second department held that although the insurer had no obligation to defend itself or compensate, it was unable to recover the defense costs and costs it had already incurred.14 The court’s decision was guided by two predominant factors.
First, none of the other New York decisions relied on by the insurer considered whether reimbursement of defense costs was appropriate or permitted.15 Second, the court observed that there had been a change in precedent, citing two recent decisions of the United States District Court for the Eastern District of New York, ruling that it was not appropriate to allow a insurance company to recover expenses when the wording of the policy does not explicitly allow recovery of defense costs.16
Persuaded by these decisions from the Eastern District of New York, the Second Department ruled that an insurance company cannot recover expenses without explicit wording in the policy. To achieve this result, the court relied on the basic principle that the provisions of a contract must be observed as written.
Western American political language has stated, in the relevant part:
CHANGES IN NEW YORK –
GENERAL COMMERCIAL LIABILITY GUARANTEE FORM
* * *
a. We will pay the amounts that the insured is legally required to pay for damages due to “bodily injury” or “property damage” to which this insurance applies. We will have the right and the duty to defend the insured against any “lawsuit” aimed at obtaining such damages even if the allegations of the “lawsuit” are unfounded, false or fraudulent. However, we will have no obligation to defend the insured against any “suit” for damages for “bodily injury” or “property damage” to which this insurance does not apply.
* * *
(2) Our right and duty to defend ceases when we have exhausted the applicable limit of insurance in the payment of judgments or settlements …. No other obligation or liability to pay monies or to perform acts or services are not covered, unless explicitly provided for under Additional Payments ….
* * *ADDITIONAL PAYMENTS – GUARANTEES A AND B
1. We will pay, with respect to any claim we investigate or resolve, or any “lawsuit” against an insured that we defend:
a. All the expenses we incur.
* * *
D. All reasonable expenses incurred by the insured at our request to assist us in the investigation or defense of the claim or “lawsuit”, including actual loss of income up to $ 250 per day due to a work stoppage.
e. All costs imposed on the insured in the “costume”.17
The good news for insurers is that they can protect themselves by explicitly including a provision in the policy for recovery of defense costs.
American Home Assur. Co. v. Port Auth. from NY and NJ, 166 AD3d 464, 465, 89 NYS3d 81 (1st department 2018).
2. Identifier. at 36-37, 633; Certain Lloyd’s London policyholders subscribing to policy n ° SYN-1000263 c. Lacher & Lovell-Taylor, PC, 112 AD3d 434, 435, 975 NYS2d 870 (1st department 2013).
3. See Max Specialty Ins. Co. v. WSH Investors, LLC, 2012 WL 3150577, n ° 09-CV-05237 (EDNY August 2, 2012) (approving the recommendation of a magistrate that the insurer has the right to recover the costs incurred to defend the insured in an underlying action and indicating that the insured has not objected to this recommendation); OneBeacon Ins. Co. v. Freundschuh, 2011 WL 3739427, No. 08-CV-823 (WDNY 2011) (considering that the insurer was entitled to recover reasonable defense costs after the court declared non-coverage under the policy); Gotham Ins. Co. v. GLNX, Inc., 1993 WL 312243, n ° 92 CV 6415 (SDNY 1993) (provided that the insurer has the right to recover the costs incurred in defending the insured when the letter of reservation of rights from the insurer explicitly stated that it could and that no proof has been provided to show that the insured has not consented to the reservation of rights).
4. A m. W. Home Ins. Co. v. Gjonaj Realty & Mgmt. Co., 192 AD3d 28, 30-31, 138 NYS3d 626, 629 (2d Dep’t 2020).
5. Identifier. at 30 629.
6. Identifier. at 31, 629.
7. Identifier. The policy, effective August 1, 2009 through August 1, 2010, was issued after January 2009, when New York became a prejudicial notice state.
See Castillo v. Prince Plaza, LLC, 43 Miscellaneous 3d 335, 338, 981 NYS2d 906, 908 (Sup. Ct. 2014), confirmed, 142 AD3d 1127, 38 NYS3d 74 (2016) (discussing the prejudicial opinion rule in New York State).
Username. at 31-32, 629.
13. Identifier.at 32, 629.
14. Identifier.at 30, 628.
15. Identifier.at 36-37, 632-634; American Home Assur. Co. v. Port Auth. from NY and NJ, 166 AD3d 464, 465, 89 NYS3d 81 (1st department 2018); Certain Lloyd’s London policyholders subscribing to policy n ° SYN-1000263 c. Lacher & Lovell-Taylor, PC, 112 AD3d 434, 435, 975 NYS2d 870 (1st department 2013); Max Specialty Ins. Co. v. WSH Investors, LLC, 2012 WL 3150577, n ° 09-CV-05237 (EDNY August 2, 2012);
OneBeacon Ins. Co. v. Freundschuh, 2011 WL 3739427, No. 08-CV-823 (WDNY 2011); Gotham Ins. Co. v. GLNX, Inc., 1993 WL 312243, n ° 92 CV 6415 (SDNY 1993).
16. A m. W. Home Ins. Co. v. Gjonaj Realty & Mgmt. Co., 192 AD3d 28, 37-38, 138 NYS3d 626, 633-34 (2020) (referencing Crescent Beach Club LLC v. Indian Harbor Ins. Co., 468 F. Supp 515, 554 (EDNY 2020) and Century On. Co. v. Vas & Sons Corp., 2018 WL 6164724, n ° 17-CV-5392 (EDNY 2018)).
17. Username. at 35-36, 632.
18. Identifier.at 36, 632.
19. Identifier.at 38, 634.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.