Court Applies Pro Rata “Time on the Risk” Method to Allocate Loss From Environmental Damage Among Liability Insurance Policies

On October 14, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., 2014 NY Slip Op. 24306, applying a pro rata “time on the risk” allocation to determine damages in an insurance coverage matter arising from an environmental clean-up at two former manufactured gas plant sites located in Hempstead and Rockaway Park New York.

Where environmental damages occur over a period of years, triggering coverage under multiple insurance policies, allocating the losses has proved “a nettlesome problem.” As Justice Scarpulla explained, courts faced with this dilemma have allocated the loss among the carriers and the insured on a pro rata basis based on their respective “time on the risk”:

A pro rata “time on the risk” allocation requires costs to be allocated according to the number of years that the insurer was on the risk by multiplying the total loss by a fraction that has as its denominator the entire number of years of the claimant’s injury, and as its numerator the number of years within that period when the policy was in effect. Proration of liability among the insurers acknowledges the fact that there is uncertainty as to what actually transpired during any particular policy period.

For years where an insured has no insurance coverage, the insured generally bears its own pro rata share of the loss. Proration to the insured is appropriate for the years where the insured elected not to purchase insurance or purchased insufficient insurance. For those years, the insured is treated as self-insured and bears responsibility for its pro rata share of damages.  Proration to the insured is inappropriate, however, for those years where insurance was unavailable in the marketplace.

(Citations omitted).

In Keyspan, the court found issues of fact precluding summary judgment as to (1) the time period over which the damage occurred, and (2) when insurance coverage was available. The Court did find that Keyspan should be required to bear losses incurred during the period 1971 to 1982 when New York law precluded insurance coverage for “liability arising out of pollution.” The policy reason underlying the rule was “to prohibit commercial or industrial enterprises from buying insurance to protect themselves against liabilities arising out of their pollution of the environment.” Justice Scarpulla concluded: “Given the Legislature’s clear intent that companies such as Keyspan bear the full burden of their own actions affecting the environment, I decline to exclude the period between 1971 and 1982 from the allocation period when pollution insurance was prohibited.”

No Claim for Breach of Covenant of Good Faith and Fair Dealing When Claim Has Same Basis as Breach of Contract Claim

On October 21, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in J. Kokolakis Contracting Corp. v. Evolution Piping Corp., 2014 NY Slip Op. 24321, dismissing a claim for breach of the covenant of good faith and fair dealing.

In J. Kokolakis Contracting Corp., the plaintiff building contractor sued a subcontractor in connection with work the defendant did on a job site, as well as its insurer. The defendant insurer moved to dismiss the plaintiff’s causes of action against it for breach of the covenant of good faith and fair dealing and for attorney’s fees. In granting the motion, the court explained:

Distinguishable [from tort claims] are claims premised upon a breach of the covenant of good faith and fair dealing which the law of this state imposes upon all contracting parties. This covenant mandates that none of such parties shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. The covenant is breached when a party to a contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement.

A claim for breach of the implied covenant of good faith and fair dealing is generally actionable only where wrongs independent of the express terms of the contract are asserted and demands for the recovery of separate damages not intertwined the damages resulting from a breach of a contractual are advanced. Where a contractual party is merely seeking to reap the benefits of its contractual bargain, the implied covenant breach claim will not lie, as it is considered duplicative of the breach of breach of contract claim.

Federal appellate authorities have long held that a breach of the implied duty of good faith is a breach of the underlying contract. There is however, recognition of authority to the contrary.

. . .

Here, the court finds merit in the moving defendant’s contention that the plaintiff’s claims for recovery of consequential damages arising from any breach of the implied covenant of good faith and fair dealing and its claims for recovery of litigation costs, including attorneys fees due to the moving defendant’s alleged bad faith denial of coverage are not actionable and are thus subject to dismissal pursuant to CPLR 3211(a)(7). Review of the allegations set forth in complaint reveal that the facts which underlie these claims are the same as those which underlie the plaintiff’s breach of contract claim. There are no allegations of independent breaches of tort duties such as fiduciary duties owing to the plaintiff from the moving defendant which would support a breach of fiduciary duties claim or other tort claim.

(Internal quotations and citations omitted) (emphasis added).

Reinsurer Entitled to Discovery on Reasonableness of Insurer’s Settlement and Allocation Decisions

On September 15, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Lexington Insurance Co. v. Sirius America Insurance Co., 2014 NY Slip Op. 32429(U), ruling that a reinsurer was entitled to discovery regarding (1) the reinsured’s settlement of a claim covered by the underlying policy, and (2) the allocation of the settlement proceeds, notwithstanding a policy provision that generally requires deference to the reinsured’s settlement decisions.

Reinsurance contracts like the ones at issue in Lexington Ins. Co. commonly contain a provision known as a “follow-the-fortunes” (or “follow the settlements”) clause, which precludes the reinsurer from “second guess[ing] the good faith liability determinations made by its reinsured,” and therefore requires the reinsurer “to indemnify for payments reasonably within the terms of the original policy, even if technically not covered by it.” Such provisions are designed to prevent extensive collateral litigation on the reasonableness of the settlement amount. As the Court of Appeal recognized in a recent decision cited by Justice Scarpulla on this issue, such deference is sensible because, in general, the interests of reinsurer and the reinsured are presumptively aligned (both want to settle for as little as possible). When it comes to issues of allocation, however, the interests may diverge, since, the reinsured could structure the settlement so as to shift responsibility for all, or a larger portion, of the settlement amount to the reinsured. Thus, in evaluating allocation issues, even where the reinsurance contract has a follow-the-fortunes clause, the courts defer to the reinsured’s decision only if it is “objectively reasonable.” In light of that background law, Justice Scarpulla found that the reinsurer was entitled to discovery concerning the settlement to establish a potential defense:

In United States Fid. & Guar. Co. v. American Re-Ins. Co., the New York Court of Appeals recently held that, while a cedent’s decision on allocation is entitled to deference under a follow-the-settlements clause, the reinsurer will only be bound by the cedent’s allocation if it is objectively reasonable. Further, it is well-settled that under a follow-the-settlements clause, a reinsurer is bound by the settlement or compromise of a claim agreed to by a cedent unless it can show impropriety in arriving at the settlement. Under these doctrines, Sirius is entitled to discovery regarding National and Lexington’s settlement and allocation decisions.

(Citations omitted).

Federal Arbitration Act Does Not Apply to California Insurance Law Requiring Arbitration Agreements to be Filed With State

On September 11, 2014, the First Department issued a decision in Matter of Monarch Consulting, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA., 2014 NY Slip Op. 06158, addressing the interplay between the Federal Arbitration Act’s preemption of state rules invalidating arbitration agreements and the McCarran-Ferguson Act, 15 U.S.C. § 1011, which prevents federal statutes from preempting state laws “regulating the business of insurance,” unless the statute “specifically relates to the business of insurance.”

In Matter of Monarch Consulting, an insurance carrier sought to enforce arbitration provisions in payment agreements collateral to workers’ compensation insurance policies. The policyholders argued that the arbitration provisions were unenforceable because the payment agreements had not been filed with the California Division of Insurance, as required by California law. Ordinarily, notwithstanding state laws to the contrary, the Federal Arbitration Act requires that disputes concerning the validity of a contract containing an arbitration provision (as opposed to a challenge to the validity of the arbitration clause alone) are to be decided by the arbitrators in the first instance, rather than the courts. In this case, the analysis was complicated by the McCarran-Ferguson Act, which, in an effort to preserve the supremacy of the states in regulating the insurance industry, establishes a rule of “reverse preemption”: i.e., that no federal statute “shall be construed to invalidate, impair or supersede any law by any State for the purpose of regulating the business of insurance,” unless the federal statute “specifically relates to the business of insurance.” The First Department held that “applying the FAA to mandate arbitration in this case would, in fact, invalidate, impair, or supersede the California Insurance Code. Therefore, the McCarran-Ferguson Act prevents the FAA from preempting the Code.” The Court explained:

As noted above, the McCarran-Ferguson Act was an attempt to assure that the activities of insurance companies in dealing with their policyholders would remain subject to state regulation. Courts have established a four-part test to determine whether the McCarran-Ferguson Act precludes application of a federal statute (in this case, the FAA). Under this test, a federal statute is precluded if: (1) the statute does not specifically relate to the business of insurance; (2) the acts challenged under the statute constitute the business of insurance; (3) the state has enacted laws regulating the challenged acts; and (4) the state laws would be invalidated, impaired, or superseded by application of the federal statute.

First of all, the FAA does not specifically regulate the business of insurance, and an act specifically relating to the business of insurance is the only type of federal legislation that can preempt state insurance law under McCarran-Ferguson. Furthermore, application of the FAA would modify California law because it would mandate arbitration even though National Union did not, as required by California law, file the payment agreements, and the payment agreements, in turn, contained the arbitration clauses.

* * *

While the California Insurance Code § 11658 does not provide any prohibition against arbitration, enforcing the arbitration clause in this case would nonetheless undermine the goals of California law relating to workers’ compensation insurance by enforcing the arbitration provision in a payment agreement that National Union failed to file. Indeed, the filing requirements are a fundamental underpinning for California’s regulation of workers’ compensation insurance, and those filing requirements are intended largely to permit review of arbitration provisions — provisions, as we noted above, with which the CDI has stated that it is particularly concerned.

(Internal quotations, elision and citations omitted.)

Justice Gische dissented in an opinion joined by Justice Manzanet-Daniels. The dissenters concluded that application of the FAA to require arbitration did not “impair” California insurance law, and therefore “the arbitrators, and not the court, should decide the gateway issue of whether the Payment Agreements containing the arbitration clauses are enforceable”:

Neither California Insurance Code § 11658, nor any other provision of the California Workers’ Compensation Laws, provide an express or implied prohibition against arbitration in insurance disputes. . . .

Relatedly, arbitration does not impair the California legal requirement that workers’ compensation insurance policies must be filed, thereby providing the Commissioner of Insurance with an opportunity to review the policies, because California law does not restrict the power of an arbitrator to address whether the Payment Agreements in these cases were required to be filed, and if so, what the consequences for the failure to file the agreements would be.

(Citations omitted).

Matter of Monarch Consulting is second recent First Department Decision on commercial arbitration that is likely headed to the Court of Appeals, given the 2-justice dissent at the First Department. On August 25, we blogged about the Court’s decision in In re Flintlock Construction Services, LLC v. Weiss, NY Slip Op 05818, which held (by a 3-2 vote) that a choice of law provision providing that the parties’ agreement was to be “construed and enforced” in accordance with New York law was not sufficient to invoke the state’s public policy against the imposition of punitive damages in a private arbitration, and therefore, the issue of punitive damages could be submitted to the arbitrators. We will continue to follow both of these cases.

Insured Must Act Promptly to get Advancement of Defense Costs; Past Defense Costs Need not be Paid until any Coverage Litigation is Resolved

On August 27, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in QBE Americas, Inc. v. ACE America Insurance Co., 2014 NY Slip Op. 51330(U), granting in part and denying in part a motion a summary judgment motion seeking advancement of defense costs.

This insurance coverage dispute arose from underlying litigations where consumers sued QBE for various improper mortgage practices. In this action, QBE sought indemnification from its insurers, including its primary insurers AIG and Darwin, and also sought defense costs from AIG and Darwin. QBE moved for summary judgment on its claim for defense costs.

The court divided the claims into three groups: “(1) litigation that has already settled or has been discontinued for which AIG and Darwin refuse to advance defense costs; (2) pending litigation for which AIG and Darwin refuse to advance defense costs; and (3) pending litigation for which Darwin has consented to advance defense costs and concluded litigation for which Darwin has agreed to reimburse past defense costs.”

For the first group, the court refused to award summary judgment. The applicable policies defined defense costs as part of the covered loss, so entitlement to defense costs was derivative of entitlement to coverage. Because fact issues existed as to entitlement to coverage, summary judgment was not available. The court also noted that, because the litigations were over, there was no urgent need to rule on defense costs. “Hence, there is no compelling reason why an insured should not wait to recover until a coverage determination is made because a claim for defense costs rises and falls with the underlying coverage claim . . . . Indeed, the pendency of litigation is the gravamen of a claim for the advancement of defense costs.”

For the second group, the court analyzed AIG and Darwin’s duties separately.

AIG’s policies required advancement of defense costs but did not impose a duty to defend on AIG. Accordingly, AIG was only required to advance defense costs attributable to covered claims. Furthermore, QBE had a $1.5m retention applicable to all loss, including defense costs, meaning that AIG was not required to advance anything until QBE had spent $1.5m of its own funds. “An application for the advancement of defense costs, where no duty to defend exists, must be denied where the insured does not establish, at a minimum, which claims in each pending lawsuit are subject to coverage and that the applicable retention for such claims has been exhausted.” (Emphasis in the original.) Because QBE did not prove that it had exhausted the $1.5m retention, its motion against AIG was denied, with leave to renew upon proper proof.

Darwin’s policies, on the other hand, contained an explicit duty to defend, which required Darwin to “advance all of QBE’s litigation costs so long as each lawsuit presents the possibility that any of the QBE entities or any of the claims asserted might be covered.” (Emphasis in the original.) Darwin was therefore obliged to advance future defense costs in any such action. However, relying on its previous reasoning, the court held that even in those cases, Darwin was not required to pay QBE’s past defense costs, only its future costs.

For the third group, where liability for defense costs was not in dispute, the matter was referred to a Special Referee to hear and report on the reasonable attorney fees owing.

For an attorney seeking to obtain advancement of attorney fees for a client in litigation, several lessons can be learned. First—and regardless of whether the insurer has a duty to defend or a duty to indemnify—the party must seek advancement as soon as possible. The court was quite explicit that QBE’s failure to get preliminary injunctions requiring advancement while the litigations were under way hampered QBE, because past defense costs need not be reimbursed before a final decision on coverage is made. In a practical sense, QBE’s failure to move for a preliminary injunction also elevated the burden of proof for payment of defense costs from “likelihood of success on the merits” to “actual success on the merits.” And second, when moving for advancement under a “duty to indemnify” policy, care must be taken to ensure that the claim is ripe, i.e. that all applicable retentions have been exhausted.

Insured Demanding Reinstatement Must Pay Premiums on Improperly Terminated Life Insurance Policy

On July 25, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Rubenstein v. The Lincoln National Life Insurance Co., 2014 NY Slip Op. 31957(U), ruling that the holder of life insurance policy that was improperly terminated without the required statutory notice must pay premiums due for the period when the policy lapsed.

The court explained that the policyholder had to pay the premiums on the policy it sought to have the court reinstate:

Plaintiff cites Weld v MidAmerica Mutual Life Insurance Company, 385 N.W.2d 58 (Court of Appeals, Minnesota, 1986) to support the position that insurance premiums need not be paid during a period when no coverage was in effect. In Weld, the plaintiffs health insurance policy had lapsed for non-payment of premiums, however the defendant reinstated the policy by accepting subsequent premium payments. Unbeknownst to the plaintiff, the payments he made after the policy’s reinstatement were being applied by defendant retroactively to pay the prior defaults. When plaintiff suffered an injury a few months after the policy was reinstated, the carrier declined coverage as the insurance premiums were deemed two months overdue, beyond the 31 days grace period for making a claim after missing a premium payment. The court found that the language of the policy failed to give the plaintiff notice that his premium payments will be applied to prior defaults. Rather, the language of the policy implied that coverage would begin anew upon the reinstatement date. As such, the court found that the plaintiff had commenced a new term of insurance when his policy was reinstated, and that the defendant was obligated to pay plaintiff’s claim and it could not retroactively apply plaintiff’s premiums to a period during which he had no coverage.

The facts in Weld are completely distinguishable from the facts in this case. In Weld, the plaintiff was paying monthly premiums without any notice that his insurance company was accepting these payments while considering itself under no obligation to provide coverage to him. The court found that defendant was not entitled to claim that it was reinstating the plaintiff’s insurance policy without advising the plaintiff that he would be paying back past due premiums before his coverage would commence. The court found that coverage began anew on the reinstatement date and thus plaintiff was covered for his losses incurred during the period that he was paying premiums on the reinstated policy.

In the present case, the policy in question is a life insurance policy, and at the time the defendant declared it in lapse, it was actually in effect. Moreover, unlike Weld, once the policy is reinstated, plaintiff cannot claim that he was not covered for the entire time in question. Plaintiff has not demonstrated any legal or factual basis to find that defendant’s error in declaring the policy to have lapsed relieves the plaintiff of the obligation to pay the premiums for the coverage that he purchased for the entire time period that it is in effect. This would result in plaintiffs obtaining an unearned windfall of having a Five Million Dollars life insurance policy while not paying any premiums towards it for four years. Moreover, unlike Weld, the insurance contract here clearly states that to reinstate the policy, the holder must pay the amount of the debt.

This decision serves as a reminder that statutory notice requirement prior to the termination of an insurance policy are strictly enforced and if not complied with can give the insured another chance to reinstate coverage. Another take-away from this decision is that the courts are not inclined to give the insured a windfall, so back premiums will likely have to be paid.

Policy Exclusions Bar Coverage For Banks Sued By Investors Who Lost Funds In Madoff Ponzi Scheme

On June 24, 2014, the First Department issued a decision in Associated Community Bancorp, Inc. v. St. Paul Mercury Ins. Co., 2014 NY Slip Op. 04697, affirming the dismissal of insurance coverage claims by banks that were sued by customers who suffered losses as a result of investments in Bernard L. Madoff Investment Securities through custodial accounts managed by the banks.

In Associated Community Bancorp, the First Department found that several exclusions to the plaintiff banks’ “Bankers Professional Liability Insuring Agreements” barred coverage, including (1) an exclusion for claims arising from a loss of “money, securities, property or other items of value” in the possession of the bank, and (2) an exclusion for claims arising from the “insolvency” of any “investment company, investment bank or [] broker dealer”:

The Loss of Money Exclusion bars coverage for claims for “the actual loss of money, securities, property or other items of value in the custody or control of [the bank].” Contrary to plaintiffs’ contention, the investors’ allegation that the money in their accounts with Bernard L. Madoff Investment Securities (BLMIS) was stolen, unlawfully retained, or misappropriated is a claim for an actual loss of money (see Blenzak Black, LLC v Allied World Natl. Assur. Co., 2012 WL 1365973, *2-3 [NJ Super Ct App Div 2012]). Moreover, “[a]n insurance policy is not illusory if it provides coverage for some acts; it is not illusory simply because of a potentially wide exclusion'” (ACE Capital Ltd. v Morgan Waldon Ins. Mgt., LLC, 832 F. Supp. 2d 554, 572 [WD Pa 2011]). The subject policies provide a broad range of coverage for liability that may arise in connection with plaintiffs’ provision of ordinary banking services.

* * *

The Insolvency Exclusion bars coverage for loss “based upon, arising out of, or attributable to the insolvency . . . of . . . any . . . investment company, investment bank, or any broker or dealer in securities or commodities.” Insolvency exclusions have been held to apply despite the fact that the underlying claims are made against parties that are “independent of the insolvent entity” (Coregis Ins. Co. v American Health Found., Inc., 241 F3d 123, 130-131 [2d Cir 2001]). Further, the courts of Connecticut (whose law applies to this action) have interpreted broadly the term “arising out of” in insurance policies (see Board of Educ. of the City of Bridgeport v St. Paul Fire & Marine Ins. Co., 801 A2d 752, 758 [Conn 2002]). The investors’ claims certainly are “connected with,” “had [their] origins in,” “grew out of,” “flowed from” or “[were] incident to” Madoff’s Ponzi scheme and the insolvency of BLMIS (see id. [internal quotation marks omitted]). Thus, the Insolvency Exclusion bars coverage for those claims.

This decision illustrates that exclusions from coverage in an insurance policy that are not ambiguous will be enforced as written, even when they sharply limit the scope of coverage.

Absent Precise Language To the Contrary, Limitations Period In Insurance Policy Runs From Date Coverage Was Denied, Not Date of Underlying Loss

On June 30, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Flat Ridge 2 Wind Energy LLC v. Those Underwriter at Lloyd’s, 2014 NY Slip Op. 31804(U), holding that unless an insurance policy contains precise language to the contrary, a limitations period provided for the in the policy runs from the date the insurance company denies coverage, rather than the date of the underlying injury.

In Flat Ridge 2, the plaintiff (a wind power generation company) brought an action against its insurer, seeking coverage for damages to a wind farm caused by a tornado. The insurer moved to dismiss the complaint as time barred under a provision of the policy requiring that any suit against the insurance company be “commenced within twelve (12) months next after the happening becomes known to the Insured.” The insurer argued that this 12-month limitations period ran from the date of the underlying loss and therefore the insured’s claim was time barred. The Court rejected this argument and found the claim timely because it was filed within 12 months of the insurance company’s denial of coverage:

New York law has consistently distinguished between generic policy language, like that used [in Flat Ridge 2’s policy], which is read to set the limitations period to run from the date the insured’s claim accrues, and more specific, precise language, which sets the period to run from the liability triggering event. In Steen v. Niagara Fire Ins. Co., 89 NY 315, 322-23 (1882), the first New York case to address the issue, the court held that the generic language, “next after the loss or damage shall occur” should be construed to mean that the limitations period does not begin to run until “the right to bring an action exists” rather than when the loss “in fact occurs.” The default rule in dealing with these contractual provisions then, is that, the time within which an action must be commenced shall be computed from the time the cause of action accrued, unless the parties agree that the date of loss or damage shall be looked to as the “happening” that starts the clock and they express this intention through clear and precise language. In Fabozzi [v. Lexington Ins. Co., 601 F3d 88 (2d Cir. 2010),] the Second Circuit concluded that only a limitations provision that uses the term of air “after the inception of the loss” or similarly precise language, “can tie a limitations period to the date of the accident or peril insured against.” Fabozzi, 601 F3d at 93. Although the exact language used in the provision in Flat Ridge 2’s policy was not construed by any of these New York courts, a leading insurance treatise quoted in Fabozzi addresses the phrase “after the happening of the loss,” stating that, “language such as ‘after the happening of the loss’ is considered to be ‘lacking in precision’ such that the limitations period
is computed not from the time of the occurrence of the physical loss . . . but from the time that liability accrues.” 601 F3d at 93 (quoting 71 NY Jur. 2d Insurance§ 2528 (2010)). Here, the provision at issue, stating only “after the happening becomes known [ … ]” is similarly lacking in precision, as it does not employ any of the exacting language that would be sufficient to tie the limitations period to the occurrence of the loss or damage itself. For example, it does not make reference to “the physical damage out of which the claim arose,” a particular type of damage causing occurrence itself, or even to “the loss.” Since the language of the limitations provision here is vague and generic, it should be computed from the time that Flat Ridge 2’s claim against Underwriters accrued – the date upon which Underwriter denied coverage – not from the date of the windstorm.

(Some internal citations and quotation marks omitted) (emphasis added). This decision illustrates that special limitations periods in insurance contracts are enforced. However, they must be written in precise language, and if ambiguous, they will be construed in a manner favorable to the insured.

Insurance Policy Flood Damage Cap Applies to All Flood Damage, Even Categories of Damage With a Separate, Higher Cap

On June 27, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in El-Ad 250 W. LLC v. Zurich American Insurance Co., 2014 NY Slip Op. 24173, ruling that an insurance policy’s coverage limit for losses “arising during” a flood applied not only to property damage claims but also to “downstream” financial losses resulting from a flood.

In El-Ad, the plaintiff real estate developer made a claim under a Builders Risk Insurance Policy for delay-in-completion losses after a construction project was delayed by damage caused by Hurricane Sandy. The policy had a special limit for flood claims, which provided: “The maximum amount [Zurich] will pay for loss or damage in any one OCCURRENCE, and/or in the aggregate annually for loss or damage from all OCCURRENCES, shall not exceed [$5 million] by the period of FLOOD.” “As respects the peril of FLOOD,” the policy defined as a covered “OCCURRENCE” “all loss or damages arising during” a flood.

The plaintiff argued that the flood limit applied only to claims for property damage, not other more remote harms, such as delay-in-completion losses. Justice Kornreich rejected this narrow interpretation of the flood limit, explaining:

[A] loss that would not have occurred but for a flood is subject to a $5 million annual aggregate limit, without regard to the type of loss suffered since the expression “all losses or damages arising during [a flood]” clearly does not exclude non-physical losses. Moreover, the delay in completion endorsement clearly and unambiguously states that it does not alter the sublimits in the Policy. Nor does any portion of the endorsement state that the delay in completion’s $7 million sublimit is not subject to the flood loss $5 million aggregate limit, just as all of the Policy’s other sublimits are so limited.

Finally, it should be noted that it is of no moment that El-Ad paid an extra premium for delay in completion coverage. Had El-Ad not paid this extra amount, it would not have been entitled to such coverage under any circumstances. To be sure, there are myriad possible causes of delay in completion losses. If the cause is something other than a flood (i.e. a terrorist attack, which has a $108 million sublimit), the full $7 million would have been available. However, where, as here, the cause of the loss has its own, lower aggregate limit, that lower limit applies.

Special flood exclusions, caps and deductibles have figured prominently in insurance coverage litigation arising from Hurricane Sandy. This decision illustrates that such provisions are enforced even if they reduce (or eliminate) the insured’s recovery under the policy.

Litigation Trustee Denied Intervention in Lawsuit Between Insureds and Insurers

On June 18, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in American Casualty Co. of Reading, PA v. Gelb, 2014 NY Slip Op. 31597(U), denying a motion for intervention.

In American Casualty Co., the plaintiff insurers sought a declaration that the insurance policies they had issued to Lyondell Chemical Company and the defendants–Lyondell’s directors and officers–did not cover defense costs from a claim prosecuted by a litigation trust against the defendants in bankruptcy court. The trustee of the litigation trust moved to intervene. The court denied the motion, explaining:

Under New York law, a party may seek intervention as of right under CPLR 1012 (a) or permissive intervention under CPLR 1013 (McKinney). Whether a party seeks to intervene as of right or as a matter of discretion is of little practical significance since a timely motion for leave to intervene should be granted, in either event, where the intervenor has a real and substantial interest in the outcome of the proceedings.

A third party is not entitled to intervene in a pending action in which the rights of the prospective intervenors are already adequately represented, and there are substantial questions as to whether those seeking to intervene have any real present interest in the property which is the subject of the dispute. A non-direct or speculative interest is insufficient to satisfy this burden. Courts also deny intervention where parties in the case adequately represent the proposed intervenor’s interests.

[The] Litigation Trustee, cannot properly intervene in the coverage litigation because he does not have a real and substantial interest in the outcome of the proceedings. The Litigation Trustee’s claims for insurance coverage under the Policies are speculative and indirect. The Litigation Trustee argues he has a real and substantial interest in the outcome of the coverage litigation because the resolution of the matter against the directors and officers may effectively eliminate its ability to recover on its claims against the directors and officers in the Adversary Proceeding. However, the Litigation Trustee’s interest is·first conditioned upon succeeding in the Adversary Proceeding, then obtaining a recovery from the Insureds and, finally, establishing that funding for such a recovery will not exist absent insurance coverage. [The Litigation Trustee] has no legally recognized claim to assert against the Insureds: he has not obtained a judgment against the Insureds, and is not a party or third party beneficiary of the policies. [The Litigation Trustee] has a speculative interest that is not subject to a potential res judicata effect.

(Internal quotations and citations omitted) (emphasis added). The court also ruled that the defendants were adequately represented, and thus there was no basis upon which to grant intervention.

Intervention is liberally granted, but as this decision shows, it is by no means automatic.