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COVERAGE ADJUDICATION

What to Consider After the Insurance Coverage Analysis

by

Catherine Habermehl

Altreuter & Habermehl

Buffalo, New York

New York, New York

Presented at the New York State Bar Association Seminar on

Insurance Coverage Matters

11/1997

Insurance companies are paying more attention to whether a particular claim is covered. There is a reason. They charge a premium only for a particular type of loss, and they are under constant accountability for their company's bottom line. Insureds are becoming less likely to accept disclaimer letters without a fight. There is an equally good reason. They have been paying those premiums for years, and they are under constant accountability for their company's bottom line. Add to this the interest that other parties or entities have in whether or not and how much there is available coverage for a particular claim. The result is that more counsel are being asked to sit down, review a policy, and evaluate not only coverage, but also whether they should recommend legal action on the policy, when to bring it, and who must be involved. There is no sense in even thinking about the prosecution or defense of, or intervention in a claim until these preliminary issues have been straightened out.

Because (1) it is critical to consider these issues when a claim first arises, (2) you are certain at that time not to have all the information needed, (3) alignments on either side of the "versus" line can change, and (4) time is always "of the essence", we have drafted the following non-exhaustive outline for the practitioner to use as a mental checklist.

I Generally

Declaratory judgments actions afford judicial assistance in interpreting words and phrases and further determining the scope of insurance coverage or validity of a policy provision. The two applicable CPLR provisions relating specifically to these actions is Sections 3001 and 3017(b). The rest is decisional law. Examples of reviewable issues are:

Effective dates of policy

Whether insurance broker is "employed" by the insurance company

Discriminatory impact of a policy provision, premium setting, etc.

Sufficiency of cancellation notices, sufficiency of cooperation by insured

Risk within coverage territory, risks covered at all

Additional insured status, and corporate affiliations

Covered premises or property, and insurable interests

Covered risks, such as intentional torts, products liability, environmental costs

Duty to defend, and sometimes the duty to indemnify

Timely notice of claim, timely notice of disclaimer

Order of coverage in multiple insurer situations

II The Mechanics

A. Jurisdiction and Venue - As a rule, consider the underlying claim

1. Generally, Supreme Court, or federal court (sometimes Court of Claims).

2. In the court where the underlying claim exists or is most likely to be venued.

3. Exceptions. Pay attention to the type of underlying claim for which coverage is being sought, and assess it against the particular venue and jurisdictional prerequisites. For example, pursuant to New York Civil Court Act 212, the Civil Court shall have the jurisdiction to issue a declaratory judgment "with respect to any controversy involving the obligation of an insurer to indemnify or defend a defendant in an action in which the amount sought to be recovered does not exceed $25,000." In Appollon Waterproofing & Restoration Corp. v. Arthur Brandt, M.D. 1997 WL 277185 the court answered no, it did not have jurisdiction to issue a declaratory judgment with regard to the obligation of an insurer to defend and indemnify a plaintiff for a counterclaim asserted against it which exceeds $25,000.

But you are not always so limited. Eg., federal court can have jurisdiction over certain policies, such as ocean marine. Therefore, if a claim arises where the underlying litigation between insured and injured party may be in a state court, or even in another state's court, an action on the policy could be had in a federal court having jurisdiction over the insurers - which often includes federal courts situate in New York.

B. Statute of Limitations

1. Read the policy.

2. Read the policy again.

3. If there is no limit on time to sue or be sued, 6 years, but research anyway (CPLR 213[1])

4. If there is a government, tax, or real property aspect, drop everything and research. Those limitations period can be very short.

5. Accrual periods - sometimes stated in the policy

6. Tolling - sometimes available if insurer does not readily respond to a claim

C. The Complaint

Follow the CPLR for commencement of actions in general in Supreme Court.

Other civil procedure laws and rules for other courts.

Do not be intimidated.

Plead:

bona fide controversy and result to ordinary action is inadequate

facts which justify asking the court to grant relief

status of plaintiff

prayer for declaratory relief, (which may be joined by prayer for more traditional relief such as injunctive relief or money damages

Attach insurance contracts

Attach underlying claim summons and complaint if applicable

D. The Answer

Same as in ordinary actions, especially with respect to requirements on affirmative defenses such as statute of limitations - first responsive pleading or motion to dismiss.

Failure to name necessary party defense

E. The Parties, or Who Gets to Play?

1. All persons interested. Even nonparties. If you are going to disclaim, put everyone potentially affected by this decision on notice. If you are going to challenge the disclaimer, put everyone potentially affected by this action on notice.

2. Plaintiffs

3. Defendants

4. Third-party defendants

5. Intervenors -

F. Stays, Injunctive Relief, and Severance

1. Evaluate which action should be heard first - the action on the policy or the underlying claim, and request a stay of the other pending claim.

2. Injunctive relief to prevent irreparable injury and preserve status quo pending trial or resolution of the declaratory judgment action.

G. Additional Considerations

Wrap up coverage

Antisubrogation

Attorneys' Fees

The traditional rule against loser paying attorneys' fees does not always apply in declaratory judgment actions.

IV Direct Action by Judgment Creditors

Sometimes, carriers choose to disclaim coverage for one of their insured's - be it because of a policy exclusion, a failure to timely notify or some other breach of the insurance contract. Unless the insured uses its own money to pay for a defense, it is likely that a default judgment will eventually be entered against it. In that instance, Insurance Law §3420(a)(2) enables the judgment creditor to bring an action directly against the carrier in an effort to collect the amount of the judgment up to the policy limits.

The carrier has 30 days from service of notice of judgment upon it to pay. After that time, the judgment creditor, or an assignee of the judgment, may commence the suit. The action will be governed by the six-year statue of limitations for the enforcement of contractual obligations found in CPLR 213(2), Roldan v. Allstate Ins. Co., 149 A.D.2d 20, 31, 544 N.Y.S.2d 359 (N.Y.A.D. 2 Dept. 1989), and accrues upon the entry of the judgment against the insured. Id.

The judgment creditor will have no greater rights to coverage than was possessed by the insured, however, if the creditor is successful in showing that the carrier's disclaimer was improper, the carrier will be obligated to pay. It is important to note that where the carrier argues it had the right to disclaim on the basis of the insured's failure or refusal to cooperate, the burden of proof will be upon the carrier to prove the alleged failure or refusal. Insurance Law §3420(c).