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Certificates of Bond Insurance Are Insurance Policies to Be Interpreted Under Insurance and Contract Law—Restructuring in Bankruptcy and Reduction of Value of the Bonds Did Not Affect the Insurer’s Obligation to Cover the Bond Payments

In a full-fledged opinion by Justice Gische, the First Department determined the defendant, which issued certificates of bond insurance (CBI’s) insuring bonds against nonpayment, was obligated to cover payment on the bonds even after a bankruptcy restructuring in which the bonds were revalued:

Defendant acknowledges that it would have been contractually obligated to pay for any loss suffered by plaintiffs under the original bonds when they matured, in the event of the issuer’s bankruptcy, but it claims that as a result of the Restructuring Plan that was adopted, the original bonds were cancelled, completely relieving it of any obligation to pay under the CBIs. The court rejects this position because it is inconsistent with the terms of the policies and contrary to law.

The CBIs are financial guaranty insurance policies, which defendant is specially licensed to sell throughout the United States, including New York. …The policies are primarily governed by Article 69 of the Insurance Law. While they have some unique characteristics, they are generally subject to the same laws and principles underlying insurance policies in general (see Insurance Law § 6908). Thus, CBIs are policies of insurance that should be analyzed in accordance with general principles of contract interpretation and insurance law … .

Insurance policies are to be afforded their plain and ordinary meaning and interpreted in accordance with the reasonable expectations of the insured party… . Exclusions from policy obligations must be in clear and unmistakable language …, and if the terms of a policy are ambiguous, any ambiguity must be construed in favor of the insured and against the insurer … . …

The plain meaning of the contractual language contained in the CBI requires defendant to absolutely and unconditionally guarantee payment on the individual bonds in the event of the issuer’s nonpayment. Issuer insolvency is clearly a covered risk, as is bankruptcy, which is a societal hallmark of insolvency. These are the very risks for which defendant received payment of premiums. The CBIs were noncancellable, with a narrow exception not applicable here, and did not provide for any exclusion in the event of bankruptcy. … The restructuring occurred only after the default under the trust agreement had occurred. Confirmation of the restructuring plan made it a certainty that the issuer would not make any future payments to plaintiffs on the original bonds at their respective maturity dates. It is the restructuring of the bonds and their reissuance in a lower principal amount with a longer payment period that concretely represents that plaintiffs have sustained a loss. Neither the restructuring plan, nor the issuer’s discharge of debt in the bankruptcy proceeding, changed the obligations under the parties’ contracts of insurance. Oppenheimeer AMT-Free Municipals v ACA Fin. Guar. Corp., 2013 NY Slip Op 05768, 1st Dept 9-3-13

 

Plaintiff Can Not Recover Under Her Own Supplemental Uninsured/Underinsured Motorist Policy When Her Recovery Exceeded the Limit of that Policy

The Second Department explained how plaintiff’s supplemental uninsured/underinsured motorist (SUM) policy related to her recovery of damages under the policy when she, as a pedestrian, was struck by a car and recovered damages in excess of the SUM limit:

When a policyholder purchases supplemental uninsured/underinsured motorist (hereinafter SUM) coverage in New York, he or she is insuring against the risk that a tortfeasor’s underinsurance (or complete lack of insurance) will provide less protection for the policyholder than the policyholder provides to others when at fault in causing bodily injury … . SUM coverage is not a “stand-alone policy to fully compensate the insureds for their injuries” … .

Here, the respondent, who was struck by a car while walking in the street, had an automobile policy of her own. In that policy, she chose to provide coverage in the amount of $100,000 per person in the event she was at fault in causing bodily injuries. By paying for SUM coverage in the amount of $100,000 per person, she also ensured that she was protected for that same amount in the event that an uninsured or underinsured motorist caused her to sustain injuries. Although the respondent was injured, she received $400,000 from the tortfeasors, which is $300,000 more than the coverage she provided to others. Consequently, under paragraph 6 of her SUM endorsement, the amount she was entitled to recover under her SUM coverage was reduced to zero. Matter of Unitrin Auto & Home Ins Co v Gelbstein, 2013 NY Slip Op 05749, 2nd Dept 8-28-13

 

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Choice of Law Criteria Re: Insurance Contracts Explained

The Second Department, in reversing Supreme Court’s finding that New York, not New Jersey, law applied to a disclaimer of insurance coverage based on late notice, explained the relevant choice of law principles:

The first step in any case presenting a potential choice of law issue is to determine whether there is an actual conflict between the laws of the jurisdictions involved”…. Here, there is a clear conflict inasmuch as New Jersey law requires insurers asserting a disclaimer based on late notice to show that they were prejudiced by the untimely notice…, while, with respect to an identical disclaimer made under an insurance policy that, like the one in dispute here…, New York law does not ….

In contract cases, the court then applies a “center of gravity” or “grouping of contacts” analysis in order to determine which State has the most significant relationship to the transaction and the parties … . The court considers significant contacts such as the place of contracting, the place of negotiation and performance, the location of the subject matter of the contract, and the domicile or place of business of the contracting parties … .”In the context of liability insurance contracts, the jurisdiction with the most significant relationship to the transaction and the parties’ will generally be the jurisdiction which the parties understood was to be the principal location of the insured risk . . . unless with respect to the particular issue, some other [jurisdiction] has a more significant relationship’ “…. Where the covered risks are spread over multiple states, “the state of the insured’s domicile should be regarded as a proxy for the principal location of the insured risk” … . Jimenez v Monadnock Constr Inc, 2013 NY Slip Op 05616, 2nd Dept 8-14-13

 

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Automobile Policy Does Not Cover Injury to Passerby Bitten by a Dog Which Was Inside a Vehicle

In finding that the underinsured endorsement for automobile insurance did not cover injuries incurred when plaintiff was bitten by a dog through the window of a car as she walked past, the Second Department explained:

Use of an automobile encompasses more than simply driving it, and includes all necessary incidental activities such as entering and leaving its confines … . To satisfy the requirement that it arose out of the “ownership, maintenance or use of” a motor vehicle, the accident must have arisen out of the inherent nature of the automobile and, as such, inter alia, the automobile must not merely contribute to the condition which produces the injury, but must, itself, produce the injury … . “[T]he vehicle itself need not be the proximate cause of the injury,” but “negligence in the use of the vehicle must be shown, and that negligence must be a cause of the injury” … . “To be a cause of the injury, the use of the motor vehicle must be closely related to the injury” … .

Here, as a matter of law, Reyes’s injuries did not result from the inherent nature of Kazimer’s vehicle, nor did the vehicle itself produce the injuries. The injuries were caused by Kazimer’s dog, and the vehicle merely contributed to the condition which produced the injury, namely, the location or situs for the injury. Allstate established that a causal relationship between the car and the incident was lacking, and Reyes failed to rebut that showing … .  Matter of Allstate Ins Co v Reyes, 2013 NY Slip Op 05566, 2nd Dept 8-7-13

 

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Agent Owed No Special Duty to Insured; No Duty to Advise Insured of Unpaid Premiums for Policy Assigned to Insured

The Fourth Department dismissed a negligence cause of action as time-barred and a contract cause of action because the defendant insurance agent owed no special duty to advise the plaintiff.  The plaintiff asked for and received an assignment of a workers’ compensation policy which had been held by nonparty API. Unbeknownst to the plaintiff at the time of the assignment, API owed unpaid premiums. In reversing Supreme Court’s denial of defendant’s motion for summary judgment, the Fourth Department determined the statute of limitations for the negligence cause of action started when the assignment of the workers’ compensation insurance policy to plaintiff was signed, not when plaintiff learned of the unpaid premiums, and the contract between plaintiff and the defendant insurance agent did not impose a special duty on the agent to advise the plaintiff about the unpaid premiums:

…[U]pon the execution of the assignment, which shifted liability for arrears in policy premiums from API to plaintiff, plaintiff’s damages were “sufficiently calculable to permit plaintiff to obtain prompt judicial redress of that injury” and plaintiff therefore had a “complete cause of action” …. The fact that plaintiff may not have learned of the amount owed … on the date on which NYSIF commenced the action against it [for the unpaid premiums], does not alter the analysis for statute of limitations purposes… .  * * *

“ ‘[A]n insurance agent’s duty to its customer is generally defined by the nature of the customer’s request for coverage’ ” ….  “ ‘Absent a specific request for coverage not already in a client’s policy or the existence of a special relationship with the client, an insurance agent or broker has no continuing duty to advise, guide[ ] or direct a client to obtain additional coverage’ ” …. “To set forth a case for negligence or breach of contract against an insurance broker, a plaintiff must establish that a specific request was made to the broker for the coverage that was not provided in the policy” ….  “A general request for coverage will not satisfy the requirement of a specific request for a certain type of coverage”… .

Here, plaintiff requested only that defendant procure the “best policy value” for plaintiff’s workers’ compensation coverage.  This is “the very kind of request that has been repeatedly held to be insufficient” to trigger a special duty requiring defendant to advise plaintiff concerning its insurance coverage… . Defendant procured workers’ compensation coverage for plaintiff through the assignment of API’s policy.  …[T]he assignment itself indicated that plaintiff would be responsible “for the payment of any premiums or additional premiums . . . which may become due on account of this policy up to the effective date of this assignment of interest agreement.”  Plaintiff has thus failed to state a breach of contract cause of action because there was no specific request for coverage that defendant failed to meet… .  5 Awnings Plus, Inc v Insurance Group, Inc, 678, 4th Dept 7-19-13

 

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Question of Fact About Whether Private Entity Managing Public Funds Can Recoup Payments Which Were Above Minimum Fees Required by the Medicare Fee Schedule

Plaintiffs, emergency and ambulance service-providers, brought an action in response to defendant’s reduction in Medicare payments made to recoup alleged overpayments in prior years.  In finding plaintiffs had raised a question of fact about whether defendant was entitled to recoup the alleged overpayments, the Fourth Department wrote:

We agree with plaintiffs that the applicable Medicare fee schedule set a minimum payment, but not a maximum payment, for the services that plaintiffs provided (see 42 USC § 1395w-22 [a] [2] [A]).  On the one hand, if defendant had paid plaintiffs the minimum fees required by the applicable Medicare fee schedule, then plaintiffs would not be entitled to object to those payments as being insufficient (see 42 CFR 422.214 [a] [1]).  On the other hand, however, while defendant paid plaintiffs more than the minimum amount required by the fee schedule for a period of time, defendants have failed to establish that defendant is entitled as a matter of law to recoup any or all of those funds from plaintiffs.  Although the common law right of a governmental agency to recoup erroneously distributed public funds is well established … , that right does not necessarily extend to defendant, a private entity managing public funds… . Canandaigua Emergency Squad, Inc. … v Rochester Area Health Maintenance Organization, Inc…, 632, 4th Dept 7-19-13

 

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“Direct Financial Loss” Caused by Employee Defined

The First Department explained what “direct financial loss” means in the context of bonds issued to indemnify a commodities futures broker [MF Global] for loss caused by a wrongful act by an employee:

In the bonds, plaintiffs agreed to indemnify MF Global for losses “sustained at any time for . . . any wrongful act committed by any employee . . . which is committed . . . with the intent to obtain financial gain for [the employee]” (emphasis omitted). “Loss” means “the direct financial loss sustained by [MF Global] as a result of any single act, single omission or single event, or a series of related or continuous acts, omissions or events.” The bonds exclude coverage for “[i]ndirect or consequential loss.” A “[w]rongful act,” with respect to trading in commodities and futures, is defined as “any . . . dishonest . . . act committed with the intent to obtain improper financial gain for . . . an employee” … .. * * *

The motion court properly concluded that MF Global’s loss constituted a “direct financial loss.” Although that term is not defined in the bonds, “[a] direct loss for insurance purposes has been analogized with proximate cause”… …

Here, [a broker’s] conduct in making unauthorized trades beyond his margin was the direct and proximate cause of MF Global’s loss… . New Hampshire Ins Co v MF Global, 2013 NY Slip Op 05291, 1st Dept 7-16-13

 

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Order to Compel Acceptance of Answer Upheld—Delay Caused by Insurance Carrier is Valid Excuse—Precedent to the Contrary Overruled

In a personal injury action, the Fourth Department affirmed Supreme Court’s order compelling plaintiff to accept the answer as timely.  In so finding, the Fourth Department noted that a prior decision holding that a delay caused by the defendant’s insurance carrier is not a reasonable excuse should no longer be followed:

It is well settled that “ ‘[p]ublic policy favors the resolution of a case on the merits, and a court has broad discretion to grant relief from a pleading default if there is a showing of merit to the defense, a reasonable excuse for the delay and it appears that the delay did not prejudice the other party’ ”….  Furthermore, “[t]he determination whether an excuse is reasonable lies within the sound discretion of the motion court”…. Here, defendant met her burden with respect to a meritorious defense by demonstrating that there is factual support for her defenses… .  * * *

Insofar as we indicated in our decision in Smolinski v Smolinski (13 AD3d 1188, 1189) that “ ‘an excuse that the delay in appearing or answering was caused by the defendant’s insurance carrier is insufficient’ ” to establish a reasonable excuse for a delay in answering, it is no longer to be followed. Rather, the determination whether delay caused by an insurer constitutes a reasonable excuse for a default in answering lies “in the discretion of the court in the interests of justice” (Castillo v Garzon-Ruiz, 290 AD2d 288, 290; see CPLR 2005).   Accetta v Simmons, 676, 4th Dept 7-5-13

 

Policy Exclusions Not Affected by Additional Insured Endorsement

The Second Department explained how the exclusion provisions of a policy are affected by the language of an additional insured endorsement:

Here, the plain meaning of the exclusion … was that the …policy did not provide coverage for damages arising out of bodily injury sustained by an employee of any insured in the course of his or her employment…. Contrary to the plaintiffs’ contentions, the fact that the blanket additional insured endorsement contained its own additional exclusions did not eliminate the exclusions contained in the …policy. In construing an endorsement to an insurance policy, the endorsement and the policy must be read together, and the words of the policy remain in full force and effect except as altered by the words of the endorsement…. Accordingly, since the employee exclusion clause in the …policy unambiguously recited that coverage was precluded, the Supreme Court properly granted … a judgment declaring that [the insurer] is not obligated to defend and indemnify the plaintiffs in the underlying action. Soho Plaza Corp v Birnbaum, 2013 NY Slip Op 05058, 2nd Dept 7-3-13

 

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Attorney General’s Civil Suit Against Former Officers of AIG Survived Summary Judgment

In a full-fledged opinion by Judge Smith, the Court of Appeals determined the Attorney General’s civil suit, seeking equitable relief (based upon allegations of fraud) against two former officers of AIG, survived summary judgment.  The Court explained the nature of the suit as follows:

The Attorney General began this civil suit against AIG, Maurice Greenberg and Howard Smith in 2005. Until shortly before the suit was brought, Greenberg was the Chief Executive Officer, and Smith the Chief Financial Officer, of AIG. AIG has settled the case; Greenberg and Smith remain as defendants.

The Attorney General alleges that Greenberg and Smith violated section 63(12) of the Executive Law and Article 23-A of the General Business Law (the Martin Act), and committed common law fraud. The statutes on which the Attorney General relies are broadly worded anti-fraud provisions, prohibiting among other things “repeated fraudulent or illegal acts” (Executive Law § 63[12]), “persistent fraud or illegality” (id.), and “fraud, deception, concealment, suppression [or] false pretense” (General Business Law § 352-c [1] [a]). It is not disputed that the Attorney General is empowered to sue for violation of these statutes.

The gist of the Attorney General’s claim, to the extent that it is now before us, is that Greenberg and Smith participated in causing AIG to enter into a sham transaction with General Reinsurance Corporation (GenRe) in which AIG purported to reinsure GenRe on certain insurance contracts. The Attorney General asserts that the transaction transferred no real risk from GenRe to AIG, and therefore should not have been treated as an insurance transaction on AIG’s books; and that the transaction’s sole purpose was to increase the insurance reserves shown on AIG’s financial statements, thereby creating the impression of a healthy insurance business and bolstering AIG’s stock price.  People v Greenberg, et al, No 63, CtApp, 6-25-13

 

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