Insurance Coverage Update March 2014

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NEW YORK             
Duty to Defend
New York's Highest Court Vacates Controversial 2013 Ruling and Rejects Minority "Coverage by Estoppel" Rule
 
K2 Inv. Group, LLC v American Guar. & Liab. Ins. Co., 2014 N.Y. LEXIS 201 (N.Y. Feb. 18, 2014)
 
The New York Court of Appeals issued a rare reversal of its own prior ruling that an insurer found to have breached the duty to defend will be estopped from later relying upon potentially applicable coverage exclusions to deny coverage for indemnification.  The New York Court of Appeals' 2013 ruling in K2 Inv. Group v. American Guar. & Liab. Ins. Co. ("K2-I") held that an insurer found to have wrongfully failed to defend may be liable to pay up to its policy limits even if the policy contains an exclusion that would otherwise exclude coverage for indemnification.  The K2-I holding represented a significant departure from established New York law which had refused to adopt this minority paradigm often referred to as the "coverage by estoppel" rule.
 
Bad Faith - Sandy Claims Handling
New York Trial Court Rejects Bad Faith Claims Handling Claim in Superstorm Sandy Litigation 
 
Orient Overseas Assoc. v. XL Ins. Am., Inc., 2014 N.Y. Misc. LEXIS 867 (N.Y. Sup. Ct. Feb. 26, 2014)
 
The New York Supreme Court ruled after recognizing a split in New York law that an insurer's alleged misrepresentations and alleged refusal to pay does not give rise to a separate cause of action based on bad faith claims handlng in the context of a Superstorm Sandy first-party coverage dispute.
 
The owner of a building damaged by Superstorm Sandy sought coverage under multiple policies providing coverage through a quota share program.  The owner alleged that the insurer's misrepresentations during the claims process and refusal to pay gave rise to a separate cause of action for bad faith, particularly since other insurers in the quota share had paid under the same policies.   
 
Voluntary Parting Exclusion - Fraudulent Conduct
Voluntary Parting Exclusion Bars Coverage for Losses Caused By Voluntarily Parting with Property, Even Where Losses Resulted from Fraudulent Scheme or False Pretense.
 
Martin, Shudt, Wallace, DiLorenzo & Johnson v. Travelers Indem. Co. of Conn., 2014 U.S. Dist. LEXIS 14323 (N.D.N.Y Feb. 5, 2014)
 
A New York Federal District Court ruled that a business owner's policy excluded coverage for funds lost after the insured deposited a forged check and forwarded the proceeds to a third party.
The insured brought the declaratory judgment action alleging bad faith and breach of contract after the insurer disclaimed coverage for a loss.  The loss in question arose from a check in the amount of $95,000 made payable to the insured, to be held in escrow, that was subsequently wired to a third-party.  Shortly thereafter, the insured was notified that the check was forged and the insured was charged the amount of the check.  After submitting the loss to the insurer, the insurer denied coverage pursuant to the Voluntary Parting Exclusion which excluded any loss caused by or resulting from "[v]oluntary parting with any property."  
Professional Liability - Direct Action 
Court Finds Injured Party Does Not Have Standing to Pursue Insurer Directly 
 
Commonwealth Land Title Ins. Co. v. Am. Signature Servs., Inc., 2014 U.S. Dist. LEXIS 22172 (E.D.N.Y. Feb. 20, 2014)
 
The Eastern District of New York dismissed an injured party's complaint against an insurer on the basis that such a right at common law and the injured party failed to meet the pre-conditions set forth in N.Y. Insurance Law § 3420.
 
A title insurance business sought coverage under its professional liability carrier for a suit alleging, inter alia, the insured failed to record various real estate documents exposes them to potential liability in excess of $10 million.  The insurer filed suit seeking rescission of the policy and, in the alternative, a declaration that the policy does not provide coverage for the underlying plaintiff's claim.  
 
NEW JERSEY
Bad Faith - Rescission
Insurer Delay in Seeking Rescission is Not Bad Faith, But May Be Relevant to Estoppel Defense
 
Nova Cas. Co. v. Col-Mor Apts., Inc., 2014 U.S. Dist. LEXIS 2522 (D.N.J. Jan. 9, 2014)
 
A policyholder argued that insurer acted in bad faith by pursuing policy rescission after participating in the policyholder's defense for two years. The District Court dismissed the bad faith counterclaim, finding that an insurer who pays its insured's defense costs cannot thereby be prevented from pursuing its due process right to argue for policy rescission.
 
The insurer sought an injunction rescinding a property and liability insurance policy issued by it to insured, a New Jersey partnership that owned and operated apartment complexes. It argued that the policyholder -- who sought coverage in relation to tenants' claim that it knowingly provided them with tainted drinking water -- secured coverage by concealing knowledge that one of its properties was radioactively contaminated. The insurer's rescission claim occurred after it had paid part of the policyholder's defense costs pursuant to a reservation of rights letter.
 
 
Fraud Prevention Act - Duplicative Payments
Insurer Allowed to Pursue Fraud Prevention Act Claim; Policyholder Ordered to Repay Insurer for Duplicative Sums Recouped from Third Party
 
AIG Cas. Co. of N.Y. v. Walsh, 2014 N.J. Super. Unpub. LEXIS 283 (App. Div. Feb. 12, 2014)
 
The New Jersey Appellate Division found that an insurer was entitled to reimbursement of indemnification payments made to policyholders who received independent payment for their losses from a third party. Since the insureds allegedly concealed the third party payment, the appellate panel reversed a trial court ruling and allowed the insurer to pursue a claim under the Fraud Prevention Act claim.
 
The insurer issued a policy covering the insureds' yacht. Damage to the yacht's engine occurred within the policy period, and the insurer provided the insureds with an indemnification payment pursuant to the policy. The insureds subsequently learned that the engine manufacturer would pick up the entire cost of the replacement engine and its installation. The insurer eventually learned of the third party payment and demanded that the insureds refund the money they received under the policy. The insureds refused. 
 
 
Applicability of Policy Exclusions
Insurer Policy Reformation Claim Survives Summary Judgment Motion 
 
Indian Harbor Ins. Co. v. NL Envtl. Mgmt. Servs., 2014 U.S. Dist. LEXIS 23240 (D.N.J. Feb. 25, 2014)
 
An insurer filed this declaratory judgment action seeking a ruling that an entity claiming additional insured status is not entitled to coverage and the policy should be reformed to reflect the same.  The issue before the Court was whether the relevant policy exclusions applied to the additional insured even though the exclusions did not identify the additional insured entity by name.  Applying New York law, a New Jersey Federal District Court ruled that summary judgment was premature since more evidence was needed to evaluate the legitimacy of the insurer's policy reformation claim.
 
Bad Faith - Attorney's Feels
Policyholder's Claims for Bad Faith and Counsel Fees Rejected
 
Johnson v. Plasser Am. Corp., 2014 N.J. Super. Unpub. LEXIS 372 (App. Div. Feb. 26, 2014)
 
A policyholder claimed bad faith and sought attorney's fees from its insurer after an excess insurer contributed to a settlement resolving an underlying matter. In rejecting both claims, the New Jersey Appellate Division ruled that a bad faith claim requires more than simple negligence, and that an excess insurer cannot be required to pay attorney's fees where its policy had not been triggered prior to settlement of the underlying claim.
 
An employee of the insured was injured while working. He sued the insured, arguing that the company committed an intentional wrong in refusing to maintain its equipment in proper working order. One of the policyholder's insurers, who provided workers' compensation coverage and $1 million in employment liability coverage, defended against the suit. The insured also was covered by a $4 million umbrella liability policy from an excess insurer.