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NEW YORK STATE URBAN DEV. CORP. v. VSL CORP.

May 3, 1983

NEW YORK STATE URBAN DEVELOPMENT CORPORATION, Plaintiff, against VSL CORPORATION, Defendant and Third-Party Plaintiff, against AMMANN & WHITNEY, LIFT CONSULTANTS, VOLLMER ASSOCIATES, INC., HARVEY HUBBELL INCORPORATED and NORTHBROOK EXCESS AND SURPLUS INSURANCE COMPANY, Third-Party Defendants; NORTHBROOK EXCESS AND SURPLUS INSURANCE COMPANY, Third-Party Defendant and Fourth-Party Plaintiff, against ZURICH INSURANCE COMPANY, Fourth-Party Defendant.


The opinion of the court was delivered by: SAND

SAND, J.

Defendant and third-party plaintiff VSL Corporation ("VSL") has moved this Court for an order holding third-party defendant and fourth-party plaintiff Northbrook Excess and Surplus Insurance Co. ("Northbrook") in contempt for failure to comply with this Court's judgment of May 28, 1982. Northbrook has cross-moved for an order substituting counsel for VSL in the primary action.

 The questions raised by these motions concern first, an insurer's duty to provide a defense for its insured and second, the allocation of defense costs between two insurers, each of which has the duty to defend.

 The facts are as follows.

 On May 15, 1981, the New York State Urban Development Corporation ("UDC") commenced an action against VSL for damages allegedly sustained in connection with certain work performed by VSL in connection with the Roosevelt Island Tramway. VSL, by its attorneys Gold, Farrell & Marks ("Gold, Farrell"), sought to have Northbrook defend it in the suit brought by UDC pursuant to the Architects and Engineers Professional Liability Policy which Northbrook had issued to VSL. Northbrook refused to defend VSL, asserting that the UDC action was beyond the limited scope of the policy coverage, and VSL sued Northbrook for declaratory, injunctive and other relief. VSL also asserted a "bad faith" claim against Northbrook.

 Zurich-American Insurance Co. ("Zurich"), which had issued to VSL a Primary Comprehensive General Liability Insurance Policy, acknowledged its duty to defend with reservation as to its rights.

 On December 18, 1981, VSL moved for partial summary judgment against Northbrook. Charles B. Ortner, Esq., of Gold, Farrell submitted the principal affidavit, dated December 18, 1981, in support of that motion. Ortner's affidavit included numerous averments based on personal knowledge relating to VSL's claim of Northbrook's bad faith.

 On April 16, 1982, VSL's motion was denied on the ground that material questions of fact existed. The Court ordered the severance and separate trial of the issue of Northbrook's obligation to defend. On May 24, 1982, that issue was tried to the Court, and an oral Opinion in favor of VSL was rendered. In that Opinion, the Court stated:

 [It] is the Court's view that how Zurich and Northbrook allocated [the obligation to appear and defend] between themselves is, in the first instance, a matter for them to resolve, and it would be my intention to leave the matter in that posture; that is, to permit Northbrook and Zurich, who I believe are the only parties who are concerned, at least at this stage, with the manner in which they will discharge their mutual obligations, to determine such matters as the designation of counsel and the interim arrangements; to determine what percentage of the interim legal costs each will bear until such time as there shall be a resolution on the merits of the underlying action. . . .

 Transcript, May 24, 1982, pp. 7-8.

 On May 28, 1982, judgment was entered declaring, inter alia,

 "2. Northbrook has an obligation to and shall, pursuant to the terms and conditions of the Policy, provide a defense for VSL to the claims alleged against VSL in the UDC Complaint."

 Northbrook appealed that judgment but on July 13, 1982, the appeal was dismissed for failure to comply with the Civil Appeals Management Program.

 According to the Affidavit of Northbrook's counsel, Stephen H. Marcus (dated October 19, 1982, submitted in opposition to VSL's motion), on June 16, 1982, Northbrook's agent wrote to General Counsel for VSL. Northbrook's agent advised that Northbrook would undertake to select counsel if that was agreeable to VSL, or, in the alternative, VSL's General Counsel could provide the names of five or more firms acceptable to VSL to provide an independent defense, in which case one firm would be selected from that list to defend. VSL's General Counsel took the position that the firm that had represented it in all of the ...


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