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P.J.P. Mechanical Corp. v. Commerce and Industry Insurance Co.

June 18, 2009


Plaintiff appeals from a judgment of the Supreme Court, New York County (Karla Moskowitz, J.), entered April 24, 2007, which, upon the parties' respective motions for summary judgment, declared that defendant has no duty to pay the legal fees and other litigation expenses incurred by plaintiff in an underlying action plaintiff brought against the general contractor to recover the balance due under the subcontract.

The opinion of the court was delivered by: Sweeny, 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.

Luis A. Gonzalez, P.J., David B. Saxe, John W. Sweeny, Jr., Dianne T. Renwick, Leland DeGrasse, JJ.

No. 604351/05

Index 604351/05

This case involves the extent of an insurer's duty to defend under the terms of its policy. Specifically, does an insurer have a duty either to fund or to reimburse for separate litigation commenced by its insured, where the responsive pleadings raise an affirmative defense based on a claim of offset? For the following reasons, we hold that it does not.

Plaintiff was insured under a commercial general liability policy issued by defendant. It entered into a contract with Cauldwell, a general contractor, to perform heating and ventilation work in a building leased by JP Morgan Chase Bank. Plaintiff subcontracted out part of its work to Penava Mechanical Corp. On November 30, 2001, a pipe separated from a water riser, causing damage to the building in excess of $500,000. Cauldwell immediately advised plaintiff and Penava that it considered them solely responsible for the property damage caused by the ruptured pipe.

Plaintiff, in turn, immediately notified defendant of Cauldwell's claim. Defendant conducted an investigation pursuant to the terms of its insurance policy and determined that preservation of the burst pipe was necessary in the event of litigation. Counsel was assigned to file a pre-suit motion to preserve the pipe. This counsel attended various meetings, inspections and tests conducted by the insurance carriers for the parties involved in this incident, with each taking differing positions on the question of liability. On December 14, 2001, Cauldwell's insurer filed a notice of claim against plaintiff. However, no litigation was commenced by any of the parties for damages resulting from the burst pipe incident.

Thereafter, Cauldwell advised plaintiff that it was withholding the contract balance of approximately $650,000 owed to plaintiff because of Cauldwell's position that plaintiff was solely responsible for the property damage resulting from the ruptured pipe. Plaintiff requested defendant to assign counsel to defend it against Cauldwell's claim of negligence that resulted in the withholding of the contract balance. Defendant refused, taking the position that pursuant to the terms of the policy, Cauldwell's claim of negligence did not fall within the definition of a "claim" as defined in the insurance policy, as it was not a "suit, [or] a demand for injunctive or equitable relief."

In February 2003, plaintiff hired its own counsel and served an amended complaint*fn1 on Cauldwell, JP Morgan and others to recover the disputed contract balance. Cauldwell and the other named defendants joined issue, asserting three affirmative defenses. The only substantive affirmative defense was Cauldwell's claim of the right to offset any recovery based on damages sustained as a result of the negligence of plaintiff or its subcontractor.

In November 2004, plaintiff filed a second amended complaint against Cauldwell, JP Morgan and others. In their answer, Cauldwell and JP Morgan asserted counterclaims against plaintiff to recover for property damage caused by the alleged negligence of plaintiff or its subcontractors. Plaintiff again forwarded this answer to defendant and demanded a defense. At this point, defendant notified plaintiff that counsel would be assigned to represent it, but that such representation would be limited solely to the defense of Cauldwell's counterclaim for negligence. In exchanges of correspondence, plaintiff demanded that defendant also reimburse it for legal fees and expenses it incurred and would incur in connection with the prosecution of the underlying action to collect the contract balance. Defendant refused such demands, again taking the position that the policy only provided for the defense of covered claims, not claims for breach of contract, and that it would only pay for legal expenses incurred at its request.

In December 2005, plaintiff commenced this declaratory judgment action, alleging that defendant had a duty to pay all legal expenses and costs directly incurred by plaintiff in the underlying collection action. Defendant moved for summary judgment, arguing that Cauldwell's affirmative defense of negligence in the underlying collection action was not an "occurrence" as defined in the policy, which would trigger coverage. Defendant contended that once Cauldwell and JP Morgan, in response to the second amended complaint, asserted counterclaims against plaintiff, it appointed counsel to represent plaintiff solely with respect to those counterclaims, while plaintiff's counsel continued to represent it in the collection action. Defendant further argued that since the collection action was ultimately settled for $930,000, plaintiff's demand for reimbursement of legal costs incurred in connection therewith did not constitute a claim for property damage or bodily injury as defined in the policy, and defendant thus was under no obligation to pay those sums.

Plaintiff cross-moved for summary judgment, arguing that the policy did not differentiate among a pre-suit claim of negligence, an affirmative defense of negligence, and a counterclaim for negligence with respect to the insured's duty to defend. Plaintiff contended that although defendant maintained it could take no action as the matter was not in suit, it should ...

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