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Fieldston Property Owners Association, Inc. v. Hermitage Insurance Co.

February 26, 2009

FIELDSTON PROPERTY OWNERS ASSOCIATION, INC., PLAINTIFF,
v.
HERMITAGE INSURANCE COMPANY, INC., DEFENDANT-APPELLANT,
CHUBB GROUP OF INSURANCE COMPANIES, DEFENDANT-RESPONDENT.
HERMITAGE INSURANCE COMPANY, INC., PLAINTIFF-APPELLANT-RESPONDENT,
FIELDSTON PROPERTY OWNERS ASSOCIATION, INC., ET AL., DEFENDANTS,
FEDERAL INSURANCE COMPANY, DEFENDANT-RESPONDENT-APPELLANT.



In action No. 1, defendant Hermitage Insurance Company, Inc. appeals from an order of Supreme Court, New York County (Herman Cahn, J.), entered August 10, 2006, which granted the motion of Federal Insurance Company for summary judgment dismissing the amended cross claims against it, and denied the cross motion of Hermitage Insurance Co. for summary judgment. In action no. 2, cross appeals from an order of the same court and Justice, entered January 25, 2007, which denied both Federal's motion and Hermitage's cross motion for summary judgment.

The opinion of the court was delivered by: Mcguire, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

David B. Saxe, J.P., John W. Sweeny, Jr., James M. McGuire, Rolando T. Acosta, JJ.

Index Nos. 600177/03, 402063/05 & 32603261

This is a consolidated appeal in two declaratory judgment actions involving a dispute between two insurers, Hermitage Insurance Co., Inc. and Federal Insurance Co., over responsibility for the costs of defending their mutual insured, Fieldston Property Owners Association, Inc., and certain of its officers or directors (collectively, the Fieldston parties), in two actions that brought essentially the same set of claims alleging various wrongful acts and statements by officers or directors of Fieldston. The plaintiff in the first of the underlying actions is Chapel Farms Estate, Inc. Although nominally a distinct entity, the plaintiff in the second of the underlying actions is Chapel Hill.

Hermitage issued a "Commercial General Liability Policy" (the CGL policy) with an effective policy period of July 5, 2000 to July 5, 2001 and a per occurrence limit of liability of $1,000,000. The CGL policy is an "occurrence policy" that provides coverage for certain acts giving rise to liability occurring during the policy period. Pursuant to the policy, Hermitage provides coverage for "bodily injury," "property damage" and "personal and advertising injury" within the meaning of those terms as defined in the policy. Federal issued an "Association Directors and Officers Liability Policy" (the D & O policy), having an effective policy period of February 13, 1999 to February 13, 2002 and a "per loss" limit of liability of $1,000,000. The D & O policy is a claims-made policy that provides coverage to Fieldston and its officers and directors, also insureds under the policy, for an array of "Wrongful Acts," a term broadly defined in the policy, as well as for losses relating to specified "offenses," a term defined to include, among other things, defamation, wrongful entry and eviction, provided the act or offense is committed during or before the policy period. Except to the extent that the "other insurance" clause may so provide, the D & O policy does not purport to be an excess policy. Federal also issued a "Commercial Umbrella Policy" (the umbrella policy), the particulars of which need not be detailed for the reason set forth below.

Hermitage communicated its position to Federal that only one of the eight causes of action, for injurious falsehood, in the first action might trigger its defense obligation. Although Federal did not dispute that its D & O policy provided coverage, Federal took the position that the D & O policy was excess to the Hermitage policy and refused for this reason to provide coverage for or contribute to the defense of the action. Consistent both with the settled principle that the duty to defend is broader than the duty to indemnify and with the obligation of an insurer to provide a defense whenever there is "a reasonable possibility of coverage" (Fitzpatrick v American Honda Motor Co., 78 NY2d 61, 67 [1991]), even when some of the claims asserted against its insured "fall outside the policy's general coverage or within its exclusionary provisions" (BP Air Conditioning Corp. v One Beacon Ins. Group, 8 NY3d 708, 714 [2007] [internal quotation marks omitted]), Hermitage undertook the defense of the action subject to a full reservation of rights. With respect to the second action, Hermitage took the position that only 1 of the 21 causes of action, for injurious falsehood, in the original complaint, and only 1 of the 17 causes of action in the first amended complaint, also for injurious falsehood, might trigger its defense obligation. Although Federal conceded that at least some of the causes of action fell within the coverage provided by the D & O policy, Federal again took the position that the D & O policy was excess to the Hermitage policy and refused to provide coverage for or contribute to the defense of the second action. Hermitage once again undertook the defense of the second action subject to a full reservation of rights.

The first action was dismissed as to all defendants prior to the commencement of the second action. After this Court upheld the dismissal of certain of the causes of action in the first amended complaint in the second action, including the claim for injurious falsehood (Villanova Estates, Inc. v Fieldston Prop. Owners Assn., Inc., 23 AD3d 160 [2005]), Hermitage demanded that Federal assume the defense of the action and Federal complied.

Hermitage appeals from an order entered in each of the declaratory judgment actions relating to the respective obligations of the insurers in connection with the underlying actions. The first declaratory judgment action was brought by Fieldston against both insurers, and Supreme Court, by an order entered on August 10, 2006, granted Federal's motion for summary judgment dismissing the cross claims against it brought by Hermitage and denied Hermitage's cross motion for summary judgment seeking, among other things, a declaration that Federal is required to reimburse it, in whole or in part, for the defense costs it incurred in the first underlying action. In relevant part, Supreme Court concluded that Hermitage "was the primary insurer and Federal the excess insurer" with respect to that action because of the "other insurance" clause in Federal's D & O policy. The second declaratory judgment action was brought by Hermitage against Federal, and Supreme Court, by an order entered January 25, 2007, denied both Federal's motion for summary judgment dismissing the action and Hermitage's cross motion for summary judgment seeking, among other things, a declaration that Federal is required to reimburse it in full for the defense costs it incurred in the second underlying action or, in the alternative, that Federal is required to contribute to those costs on an equitable basis. In relevant part, Supreme Court concluded that "neither party ha[d] demonstrated as a matter of law that the Federal policies are excess to the Hermitage policy" with respect to that action. In addition to the appeal by Hermitage, Federal cross appeals from the January 25, 2007 order.

In its main brief, Federal maintains that "there is no real dispute that the causes of action asserted in both [underlying] actions fell within the coverages afforded to Fieldston under both the Hermitage CGL policy and the Federal D & O policy." Of course, however, Hermitage has maintained from the outset - and Federal does not contend otherwise - that at most only one cause of action in each of the underlying actions falls within its CGL policy. Moreover, as noted earlier, Federal does not dispute that at least some of the causes of action asserted in both underlying actions fall within the coverage afforded by its D & O policy. Indeed, although Federal made clear at all times that its position was that the D & O coverage is excess to Hermitage's CGL policy, by a letter dated December 10, 2001, Federal informed Fieldston with regard to the first underlying action that "[i]n the context of this matter, coverage will be afforded to Fieldston"; by a letter dated January 6, 2004, Federal informed Fieldston with regard to the second underlying action that "[i]n the light of the allegations of the ... Complaint, we will provide coverage for Fieldston ... for this matter." Accordingly, with the possible exception of the injurious falsehood claim asserted in both underlying actions, it is undisputed that the Hermitage CGL policy and the Federal D & O policy do not provide coverage for the same risks. Indeed, Federal expressly so conceded in one of its submissions to Supreme Court. Finally, it also is undisputed that certain of the causes of action are based on alleged wrongful acts by the Fieldston parties that occurred after the policy period of the Hermitage CGL policy but during the period in which the Federal D & O policy was in effect.

Although the coverage provided by its D & O policy otherwise is primary and at least some of the causes of action asserted in the underlying actions otherwise would trigger its defense obligation, Federal contends that it is relieved of any obligation to defend because of the "other insurance" clause in the D & O policy. This is so, Federal maintains, because the "other insurance" clause effectively renders it an excess insurer and Hermitage a primary insurer, which "has a duty to defend without any entitlement to contribution from an excess insurer" (General Motors Acceptance Corp. v Nationwide Ins. Co., 4 NY3d 451, 456 [2005] [internal quotation marks omitted]). Accordingly, Federal's position entails the proposition that regardless of the number of claims asserted against one of its insureds that are covered under a policy providing primary coverage but containing such an "other insurance" clause, it is absolved of any obligation to defend its insured as long as the complaint in the underlying action includes even a single cause of action that falls within the coverage of another primary insurer's policy, regardless of whether it also falls within the Federal policy, and even though all the other causes of action fall outside the coverage of the other insurer's policy. Only if the single cause of action within the scope of the other insurer's policy is dismissed before the dismissal of all the other causes of action would Federal then be obligated to defend its insured.

Moreover, Federal thus would be absolved of its duty to defend regardless not only of the number of causes of action that fall within its policy but also of both the extent of the financial burden imposed on the other insurer in also defending these causes of action and of how unrelated the sole cause of action within the other insurer's policy is to all the other causes of action that are covered by Federal's policy. Federal defends this position in part on the basis of the obligation of the other insurer to provide a defense even when some of the causes of action asserted against its insured "fall outside the policy's general coverage or within its exclusionary provisions" (BP Air Conditioning, 8 NY3d at 714). Of course, the other insurer might well contend that because the law imposes the same obligation on Federal, at the very least Federal also must defend the insured and that requiring Federal to do so is particularly appropriate when the bulk of the claims against the insured fall within only the Federal policy. Federal, however, seeks to avoid the force of this contention by arguing that the "other insurance" clause of its policy requires the conclusion that the obligation to defend uncovered claims is not a reciprocal one that it shares.

The anomalies inherent in Federal's position might well be of no moment if they were compelled by the terms of the "other insurance" clause. They ...


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