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The “Following the Settlements” Doctrine and “Following Form” Clauses as They Apply to Reinsurers Discussed in Some Depth

The First Department, in a full-fledged opinion by Justice Friedman, determined questions of fact precluded summary judgment in an action by an insurance company, New Hampshire, against a reinsurer, Clearwater.  The underlying actions were against the manufacturer Kaiser and consisted primarily, but not entirely, of asbestos-related products liability claims.  AIG, an insurer-participant in the Kaiser/AIG settlement of the claims, had allocated 100% of Kaiser’s settlement to asbestos liability claims. Clearwater challenged that allocation.  A summary of the nature of the primary action is quoted below, followed by descriptions of the “follow the settlements” doctrine and “following form” clauses:

New Hampshire has brought this action against defendant Clearwater Insurance Company (Clearwater), a reinsurer of the excess policy New Hampshire issued to Kaiser, seeking to require Clearwater to indemnify New Hampshire for the share prescribed by its reinsurance certificate of the portion of the Kaiser settlement payments (which are being made over a 10-year period) that AIG has allocated to the New Hampshire policy. In its defense, Clearwater challenges AIG’s allocation of 100% of the settled losses to asbestos products liability claims, contending that this allocation unreasonably results in the reinsured New Hampshire policy bearing part of the cost of settling the premises, bad faith and defense cost claims that Kaiser had not asserted against New Hampshire or that were not covered by the New Hampshire policy. … * * *

…[T]he “follow the settlements” doctrine “ordinarily bars challenge by a reinsurer to the decision of [the cedent] to settle a case for a particular amount” … . Specifically, under this doctrine,

“a reinsurer is required to indemnify for payments reasonably within the terms of the original policy, even if technically not covered by it. A reinsurer cannot second guess the good faith liability determinations made by its reinsured . . . . The rationale behind this doctrine is two-fold: first, it meets the goal of maximizing coverage and settlement and second, it streamlines the reimbursement process and reduces litigation . . .” … .

Stated otherwise, as “an exception to the general rule that contract interpretation is subject to de novo review” …, the “follow the settlements” doctrine “insulates a reinsured’s liability determinations from challenge by a reinsurer unless they are fraudulent, in bad faith, or the payments are clearly beyond the scope of the original policy or in excess of the reinsurer’s agreed-to exposure” … . * * *

The purpose of a “following form” clause is “to achieve concurrency between the reinsured contract and the policy of reinsurance, thereby assuring the ceding company, that by purchasing reinsurance, it has covered the same risks by reinsurance that it has undertaken on behalf of the original insured under its own policy” … . Accordingly, “[a] following form’ clause in a policy of reinsurance incorporates by reference all the terms and conditions of the reinsured policy, except to the extent that the reinsurance contract by its own terms specifically defines the scope of coverage differently” … .  * * * The authors of one treatise on reinsurance law caution that “a follow the form’ clause should not be confused with a follow the fortunes’ clause or a follow the settlements’ clause” (Ostrager § 2:03[a] at 73).  New Hampshire Ins. Co. v Clearwater Ins. Co., 2015 NY Slip Op 02438, 1st Dept 3-24-15

 

Single Use of Vehicle to Carry Passengers “For Hire” Did Not Justify Excluding Vehicle from Coverage Under the “For Hire” Exclusion

The Second Department determined that an insurer, GEICO, was not justified in disclaiming coverage of a vehicle under a “for hire” exclusion.  The evidence demonstrated, at most, that the vehicle was carrying passengers “for hire” on one occasion only (at the time of the accident), and was therefore not subject to the “for hire” exclusion:

Pursuant to regulations issued by New York State Department of Financial Services, an insurer may exclude, from an automobile owner’s policy of liability insurance, coverage for claims arising “while the motor vehicle is used as a public or livery conveyance” (11 NYCRR 60-1.2[a]). GEICO’s disclaimer was based on an exclusion contained in its policy relating to “any vehicle used to carry passengers or goods for hire [except a] vehicle used in an ordinary carpool on a ride sharing or cost sharing basis.” Exclusions from coverage are “construed strictly against the insurer” … . In accordance with this rule of strict construction, a “single use of a vehicle for hire has been held not to make out use as a public livery or conveyance'” … . The facts adduced at the hearing warranted the conclusion that, while GEICO’s insured might have been employing his mini-van to transport a passenger “for hire” at the time of the accident, his use of the vehicle for such purpose entailed a “single isolated use” that was “not tantamount to its employment as a public or livery conveyance'” … . Matter of New York Cent. Mut. Fire Ins. Co. v Byfield, 2015 NY Slip Op 01805, 2nd Dept 3-4-15

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Misrepresentation that Dwelling Was “Owner-Occupied” Justified Rescission of the Fire Insurance Policy

The Second Department determined the representation in a fire insurance policy that the dwelling was “owner-occupied” was a material misrepresentation which allowed rescission of the policy. Even if the property owner was unaware of the misrepresentation at the outset, he ratified the contract by permitting it to be renewed:

“[T]o establish its right to rescind an insurance policy, an insurer must demonstrate that the insured made a material misrepresentation” … . “A representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof” (Insurance Law § 3105[a]). “A misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented” (…Insurance Law § 3105[b]). “To establish materiality as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins, or rules pertaining to similar risks, that show that it would not have issued the same policy if the correct information had been disclosed in the application” … .

Here, the defendant demonstrated, prima facie, that the application for insurance contained a misrepresentation regarding whether the premises would be owner-occupied and that this misrepresentation was material … . Contrary to the plaintiff’s contention, the defendant established that the material misrepresentation is attributable to him since, even if the application for insurance had been submitted without his actual or apparent authority, he ratified the representations contained in the application by accepting the policy for owner-occupied premises and permitting it to be renewed for years thereafter on the same terms … . Morales v Castlepoint Ins Co, 2015 NY Slip Op 01618, 2nd Dept 2-25-15

 

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“Ensuing Loss” Exception to Coverage Exclusion for Water Damage Did Not Apply to Water Damage Stemming from an “Explosion” of a Water Main Outside Plaintiffs’ Home—The “Ensuing Loss” Exception in the Policy Referred Only to Water Damage which Stemmed from a Covered Peril (Like a Fire)

The Court of Appeals, in a full-fledged opinion by Judge Read, with a concurring opinion, determined the water-damage exclusion in the homeowner’s policy precluded recovery for water entering plaintiffs’ basement when a water main burst outside the home.  Plaintiffs argued that an exception in the policy for water damage resulting from an “explosion” allowed recovery.  The Court of Appeals held that the “explosion” exception was part of an “ensuing loss” exception referring to water damage which necessarily followed a covered event, like an explosion or fire, and did not cover water damage stemming from an “explosion” of a water main outside the home:

First, “[i]n determining a dispute over insurance coverage, we first look to the language of the policy” … . Concomitantly, we “construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect” … .

Second, although the insurer has the burden of proving the applicability of an exclusion …, it is the insured’s burden to establish the existence of coverage … . Thus, “[where] the existence of coverage depends entirely on the applicability of [an] [*5]exception to the exclusion, the insured has the duty of demonstrating that it has been satisfied” … .

And finally, “[w]here a property insurance policy contains an exclusion with an exception for ensuing loss, courts have sought to assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk” …

In this case, plaintiffs’ loss occurred when water from a burst water main flowed onto their property, flooding the basement of their home. Accordingly, their loss clearly falls within item 4 of the water loss exclusion, which bars coverage for “loss to the property . . . consisting of or caused by . . . 4. Water . . . on or below the surface of the ground, regardless of its source . . .[, including] water . . . which exerts pressure on, or flows, seeps or leaks through any part of the residence premises” … .

Turning … to the sudden and accidental exception, this clause is properly characterized as an ensuing loss provision, which “provide[s] coverage when, as a result of an excluded peril, a covered peril arises and causes damage” … . Platek v Town of Hamburg, 2015 NY Slip Op 01483, CtApp 2-19-15

 

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No-Fault Carriers Not Required to Pay “Facility Fees” for “Office-Based” Surgery

The Second Department, in a full-fledged opinion by Justice Balkin, determined that a no-fault insurer is not required to pay a “facility fee” for “office-based” surgery:

The No-Fault Law (Insurance Law art 51) and its implementing regulations specifically provide that the operator of a hospital or “ambulatory surgery center,” both of which are established under, and subject to, the comprehensive statutory and regulatory framework of Public Health Law article 28, may properly bill a no-fault carrier for facility fees (see e.g. 10 NYCRR 86-4.40). There is, however, no provision for recovery of a facility fee for the performance of an “office-based surgery” performed in a practice and setting accredited under Public Health Law § 230-d (Public Health Law § 230-d[1][b]). Public Health Law § 230-d, which is not contained in Public Health Law article 28, imposes a substantially more modest level of oversight and regulation than article 28. We hold that, absent express statutory or regulatory authorization, a no-fault insurer is not required to pay a facility fee for office-based surgery performed in a practice and setting accredited under Public Health Law § 230-d. * * *

The facility fee is a charge for the cost of providing “technicians, medical assistant[s] . . . [and] equipment,” such as X-ray and ultrasound equipment, for office-based surgery. Government Empls Ins Co v Avanguard Med Group PLLC, 2015 NY Slip Op 01413, 2nd Dept 2-18-15

 

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abor Law Definition of “General Contractor” Applies In Subrogation Action

The Second Department, over a dissent, determined that the Style defendants, whose role in a building project was limited to procuring the building permit and some minor carpentry, were not the general contractor for the project and were therefore entitled to summary judgment.  After paying the fire-related claim, plaintiff insurance company brought a subrogation action against the Style defendants (as the alleged general contractor). In finding the Style defendants were not the general contractor, the Second Department used the definition of “general contractor” applied under the Labor Law:

The Style defendants established, prima facie, that they were not the general contractor on the … renovation project through the submission of evidence showing that they did not undertake general contractor duties such as supervising, hiring, or paying contractors … . The evidence submitted in support of the Style defendants’ motion demonstrated, prima facie, that the Berensons hired the Baruch defendants as the general contractor on the project, and that the Baruch defendants undertook general contractor duties by coordinating and supervising the project, and hiring and paying subcontractors … . The evidence demonstrated that the only function the Style defendants performed in connection with the renovation project was obtaining the work permit and, at most, performing some minor carpentry and molding work at the beginning of the project … . * * *

…. [T]he rule enunciated in [the] Labor Law cases, which is based on the basic definition of a general contractor as one who, for instance, coordinates and supervises the work and hires and pays subcontractors … , applies equally to this subrogation action. To ignore our Labor Law precedent in this action would, in effect, create a different definition of a general contractor in the subrogation/property damage context, one that would confer general contractor status on an entity simply by virtue of it being listed as the contractor on a work permit. There is no persuasive reason for having two separate definitions of a general contractor, one for the Labor Law/personal injury context and another for the subrogation/property damage context… . Utica Mut Ins Co v Style Mgt Assoc Corp, 2015 NY Slip Op 01266, 2nd Dept 2-11-15

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Lowering Health Insurance Benefits for School-District Retirees Below Level Afforded Active Employees Violated the Insurance Moratorium Statute

The Fourth Department determined lowering the health insurance benefits for retired school district employees below the level of benefits afforded active employees violated the Insurance Moratorium Statute:

The moratorium statute sets a minimum baseline or “floor” for retiree health benefits, and that “floor” is measured by the health insurance benefits received by active employees … . In other words, the moratorium statute does not permit an employer to whom the statute applies to provide retirees with lesser health insurance benefits than active employees … . Matter of Anderson v Niagara Falls City School Dist, 2015 NY Slip Op 01098, 4th Dept 2-6-15


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Whether Arbitrator Erred In Applying the Applicable Law Is Beyond the Courts’ Review Powers

In affirming the arbitrator's award re: no-fault benefits, the Second Department explained the courts' limited review powers (re: arbitration awards):

“Consistent with the public policy in favor of arbitration, the grounds specified in CPLR 7511 for vacating or modifying a no-fault arbitration award are few in number and narrowly applied” … . Here, Allstate failed to demonstrate the existence of any of the statutory grounds for vacating the master arbitrator's award. In addition, the determination of the master arbitrator confirming the original arbitration award had evidentiary support and a rational basis … . “It is not for [the court] to decide whether [the master] arbitrator erred [in applying the applicable law]” … . Matter of Allstate Ins v Westchester Med Group, 2015 NY Slip Op 00876, 2nd Dept 2-4-15


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Where Extrinsic Evidence Indicates a Party’s Interpretation of Ambiguous Language Is the Only Fair Interpretation, Summary Judgment Is Appropriate

In finding that the meaning of a title insurance policy was properly determined as a matter of law, the Second Department explained the complicated analytical criteria:

Generally, courts determine the rights and obligations of parties under insurance contracts based on the specific language of the policies … . However, where the language is reasonably susceptible of more than one interpretation, and thus ambiguous, “the parties to the policy may, as an aid in construction, submit extrinsic evidence of their intent at the time of contracting” … . “[I]f the tendered extrinsic evidence is itself conclusory and will not resolve the equivocality of the language of the contract, the issue remains a question of law for the court” … . “Under those circumstances, the ambiguity must be resolved against the insurer which drafted the contract” … .

“It is only where such evidence does not resolve the equivocality that the ambiguity must be resolved against the insurer” … . Where there is ambiguity and the “determination of the intent of the parties depends on the credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence, then such determination is to be made by the jury” … . Where, however, a party’s extrinsic evidence demonstrates “not only that its interpretation is reasonable but that it is the only fair interpretation,” summary judgment is appropriate … . Demetrio v Stewart Tit Ins Co, 2015 NY Slip Op 00720, 2nd Dept 1-28-15

 

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Criteria for Denial of Coverage Based Upon Noncooperation of the Insured Party Explained/Default Judgment In Favor of Defendant American States Re: Other Defendants Did Not Preclude, Under the Doctrine of Collateral Estoppel, Plaintiff’s Direct Action Against American States

The Second Department determined a question of fact existed about whether the “noncooperation-of-an-insured-party” rationale for denying coverage applied.  The court noted that a prior default judgment in favor of defendant American States re: other defendants did not preclude, under the doctrine of collateral estoppel, plaintiff’s direct action against American States:

American States prevailed in that declaratory judgment action against the defendants in the underlying action which determined that American States is not obligated to defend and indemnify the defendants in the underlying action. However, those orders were entered upon the underlying defendants’ default, and thus, did not collaterally estop the plaintiff from bringing the instant, direct action against American States pursuant to Insurance Law § 3420(a)(2) … . …

The noncooperation of an insured party in the defense of an action is a ground upon which an insurer may deny coverage, and may be asserted by the insurer as a defense in an action on a judgment by an injured party pursuant to Insurance Law § 3420(a)(2) … . In order to establish a proper disclaimer based on its insured’s alleged noncooperation, an insurer is required to demonstrate that “it acted diligently in seeking to bring about its insured’s cooperation, that its efforts were reasonably calculated to obtain its insured’s cooperation, and that the attitude of its insured, after the cooperation of its insured was sought, was one of wilful [sic] and avowed obstruction'” … . The insurer has a “heavy” burden of proving lack of cooperation … . Here, the submissions of the American States defendants were insufficient to sustain their prima facie burden on the cross motion for summary judgment, with respect to American States. West St Props LLC v American States Ins Co, 2015 NY Slip Op 00751, 2nd Dept 1-28-15

 

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