New York Insurance Coverage Law Update - September 2021

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Court Dismisses Claims Against Insurer For Bad Faith Failure To Settle, And For Consequential And Punitive Damages

Scottsdale issued a policy to Watershed Ventures, LLC, which included Directors and Officers Liability Coverage.  Scottsdale filed a declaratory judgment action seeking a declaration that Patrick McGrath was not covered under the policy for a claim against McGrath.  McGrath filed counterclaims for bad faith, and consequential and punitive damages, which the United States District Court for the Southern District of New York dismissed as a matter of law.  As to the claim that Scottsdale was liable for bad faith failure to settle the claim, the court stressed that an “essential element of any claim for bad faith refusal to settle” is that the insurer assumed the insured’s defense and had “exclusive control” over the claim, which was not the situation here.  The court also rejected the claim for consequential damages under the New York Court of Appeals’ Bi-Economy decision, stressing that this is not a case where the insurer engaged in a “bad faith delay of payment” or where it can be said that consequential damages fell within the “reasonable contemplation” of the contracting parties.  Finally, the court dismissed the punitive damages claim, reasoning that punitive damages are only available to “vindicate a public right” where the conduct amounts to “criminal indifference to civil obligations”.  [Scottsdale Ins. Co. v. McGrath, 2021 U.S. Dist. LEXIS 134969 (S.D.N.Y July 19, 2021).]

Court Finds Insurer Owed Duty To Defend Additional Insured Relying Upon Additional Insured’s Own Third Party Complaint

Axis Construction (Axis), a general contractor, hired American Wood In-stallers (AWI) as a subcontractor for a construction project, and AWI’s employee was injured and sued Axis.  Axis sought coverage under AWI’s policy with Travelers which covered Axis as an additional insured for injury “caused by the acts or omissions” of AWI, but not Axis’s “independent actions or omissions.” The United States District Court for the Eastern District of New York held that Travelers had a duty to defend because the allegations in the action or facts known to the insurer gave rise to the possibility that AWI’s operations “prox-imately caused” the bodily injury.  The court rejected the argument that Axis’s “self-serving” third-party complaint against AWI should not be used to trigger a duty to defend Axis.  The court also rejected the argument that the Travelers policy’s “other insurance clause” es-tablished it was excess to another contractor’s insurance policy, reasoning that “[p]olicies insuring different risks are not ‘other insurance’ with respect to each other.”  [Axis Constr. Corp. v. Travelers Indem. Co. of Am., 2021 U.S. Dist. LEXIS 166083 (E.D.N.Y. Sept. 1, 2021).]

Suffolk County Trial Court Holds That COVID-19 Claim For Lost Business Income Not Covered

The insureds, Island Gastroenterology Consultants and Island Endoscopy Center, obtained business owners’ insurance policies with General Casualty Company of Wisconsin that covered lost business income caused by “direct physical loss of or damage” to covered property and “civil authority that prohibits access” to the covered premises “due to direct physical loss of or damage to property, other than at the described premises.”  Due to the COVID-19 pandemic, the insureds were unable to perform all but a de minimis number of emergency medical pro-cedures, resulting in a substantial loss of business income.  The Supreme Court of New York, Suffolk County, held that the insureds’ complaint for coverage against their insurer did not allege a covered claim for “direct physical loss of or damage” to the insureds’ premises.  The court also found the insureds’ allegations insufficient to allege coverage under the civil-authority provisions, noting that access to the premises was not prohibited due to direct physical loss or damage to neighboring property.  The court con-cluded that the claimed losses also “fall squarely within the policies’ virus exclusion.”  Accordingly, the court dis-missed the insureds’ complaint.  [Island Gastroenterology Consultants, PC v. General Cas. Co. of Wis., 2021 N.Y. Misc. LEXIS 4582 (N.Y. Sup. Ct., Suffolk Cnty, Aug. 25, 2021).]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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