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October 28, 1996

Safeguard Insurance Co. et alia, Plaintiffs, against Angel Guardian Home, Defendant.

The opinion of the court was delivered by: SIFTON

 SIFTON, Chief Judge.

 This is an action under an insurance policy for a declaratory judgment pursuant to 28 U.S.C. §§ 1332 and 2201. Plaintiffs Safeguard Insurance Company, American and Foreign Insurance Company, and Royal Insurance Company (together referred to as "Royal") *fn1" commenced this action to disclaim coverage of their insured, the Angel Guardian Home ("AGH"), for liability arising out of the case of Thomas v. City of New York, No. 92 CV 1316 (CPS) (the Thomas action). *fn2"

 The parties cross-moved for summary judgment pursuant to Federal Rule of Civil Procedure 56. Plaintiffs asked for a declaration that defendant is not entitled to coverage because of its failure to give timely notice of the claim underlying the Thomas complaint. In the alternative, plaintiffs sought judgment declaring that the incidents in question amounted to one "occurrence" under the policy and that plaintiffs are not required to cover any award for punitive damages. Plaintiffs also sought dismissal of defendant's counterclaims for breach of contract and bad faith. Defendant cross-moved for judgment on these counterclaims, judgment in its favor on Royal's claims, and attorney fees incurred in defending this action.

 Finding under New York law that the parties' claims could not be resolved as a matter of law, the Court denied all motions for summary judgment. By stipulation dated April 7, 1995, the parties agreed to submit the case to the Court for a bench trial based upon a stipulated evidentiary record and the briefs submitted in support of the cross-motions for summary judgment. Having reviewed the record, the Court makes findings of fact and conclusions of law as set forth below pursuant to Rule 52 of the Federal Rules of Civil Procedure. In sum, the Court finds that Royal is obligated to defend and indemnify AGH for losses resulting from the Thomas action; the exposure of the Thomas children to the conditions giving rise to injury constitutes one occurrence; Royal is not required to pay punitive damages arising out of the Thomas action; Royal has neither breached its contract with AGH nor acted in bad faith; and AGH is not entitled to attorney fees.


 Royal provided insurance to AGH from 1983 to 1989, at which time AGH changed carriers to Lloyds' of London. Throughout its period of coverage, Royal's policy provided that Royal would pay on behalf of AGH "all sums which [AGH] shall become legally obligated to pay as damages because of (A) bodily injury, or (B) property damage" subject to certain terms and conditions. The policy contained among others the following conditions:

(b) If claim is made or suit is brought against the insured, the insured shall immediately forward to the company every demand, notice, summons or other process received by him or other process received by him or his representative.

 The policy defined "occurrence" to mean

an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.

 Royal provided coverage with a $ 2 million per occurrence and a $ 2 million annual aggregate between January 24, 1983, and January 24, 1986. The policy was renewed for one year under substantially the same terms and conditions; it was then renewed for another year but with the policy limits reduced to $ 500,000. Royal also provided $ 2 million in excess coverage through yearly policies between January 24, 1983, and January 24, 1986.

 According to the complaint filed in the Thomas action, the City of New York ("the City") had contracted with AGH in 1983 to place the children of Yvonne Thomas in foster homes and to supervise them. Five of the children were placed in the home of Carole Webb, while others were placed in another home. The children who had been placed in the Webb home remained under AGH's care until 1989, when they were formally adopted by Webb. AGH had assisted in arranging the adoption, which occurred after AGH had changed insurance carriers.

 On October 10, 1990, Ellen Sheps, a supervisor at AGH, received a telephone call from Yvonne Thomas regarding Tosca Dean, one of her children whom Webb had adopted. According to Sheps' log notes, Thomas "stated Tosca was alleging [sic] that the adoptive mother's boyfriend [Mr. Bull] has sexually abused her since the age of 9." Pl. Ex. 5. In response to these allegations, Sheps promptly contacted the appropriate city officials as well as Harold Warren, an attorney for AGH, who advised her to contact AGH's insurance carrier.

 Sheps' log notes report a struggle between Thomas and Webb over the children, with AGH attempting to sort through the conflicting stories while working with the City to investigate the matter. By October 24, 1990, the Thomas children had been removed from the Webb home. The log notes reflect Thomas' dissatisfaction with AGH, since she blamed AGH for the situation and accused it of failing to serve her with adoption papers and failing to help her visit her children once they were removed from the Webb home.

 According to Sheps' log notes, the Webb foster home was officially closed in July 1991. Closure had been delayed because of the pending investigation by the City's Child Welfare Administration. According to the Thomas complaint, Bull was convicted in February 1991 of assaulting two of the Thomas children.

 On November 27, 1990, Estelle Moore, the Director of Human Resources at AGH, having been apprised of Warren's recommendation that the insurance carrier be informed of the situation, sent notice of the allegations of abuse to Christopher Waldorf, AGH's broker for its policy with Lloyd's of London. Pl. Ex. 6. Moore was responsible for personnel benefits at AGH and was also the liaison for AGH's other insurance needs. Her responsibilities included making reports of incidents when required.

 After the children were removed from the Webb home, AGH had little or no contact with Yvonne Thomas until it received the Thomas complaint in April 1992. AGH promptly forwarded this complaint to Royal. The complaint stated that the five children placed with Webb had been abused throughout the entire time they resided there, see Thomas Complaint at P38, and that Thomas informed AGH of the abuse in September of 1990. *fn3" The complaint alleges that "when Tosca disclosed that she and her siblings had been physically and sexually abused ... [Thomas] notified defendants City, Angel Guardian and Sheps immediately" and that at this point "defendants then had actual knowledge of the severity of both the physical and sexual abuse of the children." Thomas complaint at P53. The complaint charges AGH with, inter alia, improperly investigating the Webb home, acting with deliberate indifference to the safety of the children, failing to supervise the children in the home, failing to train its employees properly, acquiescing in the use of force against the children, breaching its contract with the City as a foster home provider, and failing to release the children from foster care when appropriate.

 In May 1992, AGH received a reservation of rights letter from Robert Connelly, claims consultant at Royal. Pl. Ex. 9. The letter expressly reserved Royal's rights on the grounds that punitive damages are not insurable under New York law and the amount of damages demanded exceeded the policy limits. Royal maintains that this letter also set forth its position that the pattern of abuse constituted one occurrence under the policy. The letter, however, did not question the timeliness of AGH's notice to Royal. The letter was addressed to the attention of Moore at AGH but on its face sought to "inform our insureds, The Angel Guardian Home, Ellen Sheps and Jacqueline McKelvey" that Royal was reserving its rights with regard to punitive damages. Connelly requested that AGH deliver copies of the letter to the individuals mentioned.

 In this letter, Connelly also explained that Royal had retained Anthony DeMarco as AGH's attorney in the Thomas action. He warranted that "Royal will not breach your attorney/client relationship by requesting any opinions of Attorney DeMarco concerning coverage or interests against his client." Although Connelly acknowledged that DeMarco would provide representation for both covered and non-covered matters, he recommended that the insureds retain separate counsel for non-covered matters and noted that Royal would not pay for such additional counsel.

 On June 3, 1992, Connelly sent a letter to DeMarco detailing Royal's ideas for AGH's defense. The letter stated that "as part of our complete claim service to your clients, we have a direct obligation to be directly involved as their liability insurance carrier." Def. Ex. M. In the letter, Connelly asked various questions about the extent of AGH's potential liability. For instance, he questioned whether or not AGH knew Bull was present in the Webb home, what role AGH had in the adoption process, when AGH was first informed of the abuse and what action was taken at that time. Connelly also sought "a complete duplicate of our insureds' records" and transcripts of relevant court records. The letter states that such information would assist Royal in formulating a defense for AGH. Connelly requested this information twice more, in June and July 1992. With the exception of the reservation of rights letter, Connelly's requests for information were directed to DeMarco. Connelly testified at his deposition that he never discussed coverage issues with DeMarco.

 Connelly retired in July 1992. During his tenure as the claims consultant on AGH's case, he kept notes on the progress of the claim. These notes record his analysis of the complaint and document his ideas for investigating the Thomas allegations. Royal argues that selected phrases from these notes evidence Connelly's concern with the timeliness of notice upon his receipt of the complaint, but read in context, that inference is not compelling. At his deposition, Connelly testified that he had some concerns regarding notice because he felt the complaint was unclear as to whether AGH knew in October 1990 that the alleged abuse occurred during Royal's policy period. He admitted, however, that he never asked anyone at AGH about the information received at that time, although he was in occasional contact with Moore. Royal further notes Connelly's concern with obtaining the ...

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