Insurance Coverage Newsetter
Vol. I, No. 1 (No.1)
September 18, 2017
Chelus, Herdzik, Speyer & Monte P.C. is pleased to announce the inaugural issue of the firm's insurance coverage newsletter.  The insurance coverage newsletter will be issued periodically (likely monthly during the slow summer months and bi-weekly during the remainder of the year) and will discuss emerging trends relative to insurance coverage.  This newsletter will cover varied topics such as additional insured coverage, contractual indemnity issues, duty to defend, priority of coverage, issues relating to bad faith, and miscellaneous other topics in the realm of insurance coverage.  It is designed to keep our insurance industry clients abreast of the emerging trends and important recent decisions that ultimately may make a practical difference in the manner in which you handle your individual cases and claims.

The insurance coverage team will include myself, Katie Renda, Andy Fiske and Michael M. Chelus.

As always, we appreciate any questions that you may have. You can certainly email the questions to me at tkawalec@cheluslaw.com or call me at (716) 852-3600.  The contact information for the remainder of our coverage team can be found at our website at cheluslaw.com.

That said, I hope you enjoy our inaugural issue of the insurance coverage newsletter.  Feel free to send it on to your colleagues.  If anyone would like to be included on our subscription list, please let me know by phone or email.

Considering that this is our inaugural issue, I thought that we would review a relatively new Court of Appeals decision that drastically changes the way that additional insured coverage is viewed in New York State.  See Burlington Ins. Co. v. NYC Transit Authority, 29 N.Y.3d 313 (2017).  As many of you may be aware, the New York Court of Appeals (the highest court in New York State) concluded that the term "caused, in whole or in part, by" in the blanket additional insured endorsements really means "proximately caused by".  Contrary to numerous prior appellate holdings, the term "caused by" is not synonymous with "arising out of".

Now that Burlington has been issued, a number of questions arise and, undoubtedly, will be litigated over the next few months and years.  The questions that will likely be discussed and eventually resolved include:
  • Does the additional insured have to prove negligence on the part of the primary insured to be insured under the AI endorsement?
  • Does Burlington impact your analysis with respect to "duty to defend"?
  • What exactly does "proximate cause" mean?
  • How does Burlington  impact your ability to pass on your insured's risk to another party?
If you are facing a predicament involving any of these questions, feel free to contact any of our insurance coverage unit's members.  We certainly would be available to speak with you or any of your team members regarding the consequences and the coverage landscape left in the wake of Burlington.

COVERAGE FOR ADDITIONAL INSUREDS LIMITED TO SITUATIONS WHERE NAMED INSURED IS A PROXIMATE CAUSE OF THE ACCIDENT

 
In Burlington Ins. Co. v. NYC Transit Authority, 29 N.Y.3d 313 (2017), nonparty Breaking Solutions, Inc. ("BSI") contracted with New York City Transit Authority ("NYCTA") for BSI to perform tunnel excavation work on a subway construction project.  To comply with NYCTA's insurance requirements, BSI purchased an insurance policy from plaintiff Burlington Insurance Company listing NYCTA, MTA New York City Transit ("MTA"), and New York City ('the City") as additional insureds. The language of the policy provided that NYCTA, MTA and the City are additional insureds with respect to "liability for 'bodily injury'...caused, in whole or part by" the acts and/or omissions of BSI or those acting on BSI's behalf.

During the course of the tunnel excavation work, a BSI machine came in contact with a live electrical cable that was buried in concrete, causing an explosion. In an attempt to avoid the explosion, an NYCTA employee fell from an elevated platform consequently sustaining various injuries.  The injured employee commenced a federal lawsuit against the City and BSI.

The City, as an additional insured under the BSI policy, tendered its defense to Burlington. The City also impleaded NYCTA and MTA under the theories of contribution and indemnification.  NYCTA likewise tendered its defense to Burlington as an additional insured under the BSI policy. Burlington accepted the defense of NYCTA and MTA subject to a reservation of rights based on NYCTA's and MTA's qualification as an "additional insured."

During the course of the employee's federal lawsuit, evidence revealed that NYCTA failed to identify, mark, or protect the electric cable, and that it also failed to turn off the power to the cable.  Documents further established that the BSI machine operator could not have known about the location of the cable or the fact that it was electrified. 
 
The district court dismissed the employee's claims against BSI with prejudice, and the City's third-party claims against NYCTA without prejudice. Burlington then settled the lawsuit for $950,000 and paid the City's defense costs.

Burlington thereafter disclaimed coverage of NYCTA and MTA, asserting that BSI was not at fault for the injuries and therefore NYCTA and MTA were not additional insureds under the policy.

After issuing its disclaimer, Burlington commenced a declaratory judgment action in state court, seeking a judgment that it did not owe defense and indemnity to NYCTA and MTA as additional insureds under BSI's policy. Burlington moved for summary judgment. Supreme Court granted Burlington's motion, holding that NYCTA and MTA were not additional insureds because the policy limited liability to instances where BSI, as the named insured, was negligent.

The Appellate Division, First Department reversed the trial court, finding that although the named insured, BSI, was not negligent, the act of the BSI machine operator coming into contact with the electrical wire triggered the explosion and was therefore a cause of the employee's injury within the meaning of the policy language. See Burlington Ins. Co. v. NYC Transit Authority, 132 A.D.3d 127 (1st Dept., 2015).

The New York State Court of Appeals granted leave to appeal to Burlington. Burlington argued that coverage does not apply where, as here, the actions of the additional insured (NYCTA) were the sole proximate cause of the injury.

In response, NYCTA and MTA claimed that, by its express terms, the endorsement applies to any act or omission by BSI that resulted in injury regardless of the additional insured's negligence. They further argued that the Appellate Division properly concluded that BSI's operation of its excavation machine provided the requisite causal nexus between injury and act to trigger coverage under the policy. As applied to the facts of this case, NYCTA and MTA argued that "but for" the contact between the BSI machine and the electrical cable, the accident would not have occurred. This act by BSI, although not an act of negligence for which BSI would be liable to the plaintiff in the personal injury action, was sufficient to connect ("cause in whole or in part") BSI to the accident and, therefore, afford additional insured status to NYCTA and MTA.

The Court of Appeals rejected NYCTA's and MTA's arguments and agreed with Burlington. The Court stated that the use of the word "liability" in the additional insured endorsement limits coverage for additional insureds to situations where the acts and/or omissions of the named insured (BSI) can result in legal responsibility. Said differently, coverage for additional insureds is limited to situations where the acts or omissions of the named insured are a proximate cause of the accident.

The Court therefore reversed the decision of the Appellate Division and granted Burlington's motion for summary judgment, holding that NYCTA and MTA are not additional insureds under BSI's policy because BSI's actions, as a matter of law, were not a proximate cause of the accident.

In a subsequent decision from the First Department (Burlington Ins. Co. v. NYC Tr. Auth., 217 NY Slip Op 06233 (1st Dept., August 22, 2017)) Burlington Insurance sought reimbursement of the $950,000 settlement payment that it made to the plaintiff in the underlying personal injury lawsuit.  NYCTA took the position that Burlington's payment was voluntary and therefore Burlington should not be reimbursed.

The Fist Department held that Burlington's defense and indemnity payments made on behalf of NYCTA were not voluntary since NYCTA, within the underlying personal injury action, took the position that it would withhold payments under the contract with BSI unless Burlington defended and indemnified NYCTA without reservations.  Burlington did so not to prejudice its primary insured and eventually, as discussed above, commenced the declaratory judgment action seeking a judicial determination relative to Burlington's duties to defend and indemnify NYCTA.

The First Department also, in short order, declined to adopt NYCTA's arguments relative to the prejudice, waiver and the anti-subrogation rule.  As such, the judgment in the amount of $950,000 pre-judgment interest, fees and costs was unanimously affirmed in favor of Burlington Insurance.  The question of defense costs will be later determined by the trial level Court.

In conclusion, the Burlington case significantly changes the insurance landscape with reference to duties and obligations under AI endorsements. Burlington likely changed the manner in which we view at least a portion of our own existing cases.  It may behoove you to re-evaluate the cases where you either took the position that you owe defense indemnity under the AI endorsement under the old standard or you thought that you would not be able to obtain defense and indemnity of your insured under the AI endorsement.

As always, do not hesitate to let us know if you have any questions.

Chelus Herdzik Speyer & Monte PC | tkawalec@cheluslaw.com | 716-852-3600 | www.cheluslaw.com
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