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Balaban-Krauss v. Executive Risk Indemnity Inc.

United States District Court, N.D. New York

June 23, 2015

JUDY BALABAN-KRAUSS et al., Plaintiffs,




GARY L. SHARPE, Chief District Judge.

I. Introduction

Plaintiffs Judy Balaban-Krauss, Robert Callaghan, Ronald Field, and Laura Donaldson, the insured, commenced this diversity action against defendant Executive Risk Indemnity, Inc. (ERII), the insurer, seeking a declaratory judgment that ERII must pay plaintiffs' expenses incurred to defend underlying lawsuits against them, pursuant to an insurance policy issued by ERII. ( See generally Compl., Dkt. No. 1, Attach. 1 at 3-8.) Pending are motions for summary judgment filed by both ERII, (Dkt. No. 27), and plaintiffs, (Dkt. No. 28). For the reasons that follow, ERII's motion is denied, and plaintiffs' motion is granted.

II. Background[1]

ERII issued a Directors and Officers Liability policy to the New York State Association of Health Care Providers, Inc., for a policy period of January 1, 2011 to January 1, 2012. (Def.'s Statement of Material Facts (SMF) ¶¶ 1-2, Dkt. No. 27, Attach. 2; Dkt. No. 29, Attach. 13 at 10.) The policy covers "any past, present or future director, officer, [or] trustee... of the Insured Entity, " namely, the Association, and the policy was subsequently amended to add the Health Care Providers Self-Insurance Trust (the "Trust"), for which plaintiffs served as trustees, as an additional insured under the policy. (Dkt. No. 29, Attach. 13 at 13, 46.) Pursuant to the policy, ERII is obligated to "pay on behalf of the Insured Persons Loss from Claims first made against them during the Policy Period." ( Id. at 12.) As these terms are further defined within the policy, ERII is responsible for paying "Defense Expenses, " which include "reasonable legal fees and expenses incurred by an Insured in defense of" an underlying claim in which one seeks to "hold any Insured responsible for a Wrongful Act, or... a legal... proceeding against an Insured Person." ( Id. at 12-13.) Wrongful acts are specifically defined to include "any actual or alleged error, omission, misstatement, misleading statement or breach of duty... by an Insured Person solely in his or her capacity as such." ( Id. at 13.)

As relevant here, the policy also contains certain exclusions, and notes that ERII "shall not pay Loss, including Defense Expenses, for Claims" that are "based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving... any commingling or mishandling of funds with respect to any... Insurance Contract." ( Id. at 14, 53.) While "mishandling of funds" is not further defined, for purposes of this exclusion clause, "Insurance Contract" is defined as "any policy or agreement of insurance, reinsurance, or indemnity, including... risk management self-insurance programs." ( Id. at 54.)

On July 8, 2011, an action was commenced in New York State Supreme Court by the New York State Workers' Compensation Board (the "WCB action") against Balaban-Krauss, Callaghan, Field, and Donaldson, among others. (Def.'s SMF ¶ 3.) An amended complaint was filed in that action on January 23, 2012, ( id. ¶ 5), which alleges that the defendants acted improperly in the administration and maintenance of the Trust, which the defendants had established in order to comply with their obligations under New York law to provide workers' compensation benefits to their employees, ( id. ¶ 6). ( See generally Dkt. No. 29, Attachs. 9, 10.) A separate but similar action (the "Trust action") was commenced by numerous plaintiffs, including the Trust and several of its members, against Field, among others, with an amended complaint filed in that action on January 6, 2012. (Def.'s SMF ¶¶ 14-16; Pls.' SMF ¶ 6, Dkt. No. 29, Attach. 6; see generally Dkt. No, 29, Attach. 12.) In general, both actions allege that plaintiffs here, who are named as defendants in the underlying actions as trustees of the Trust, acted improperly and failed to satisfy their duties as trustees, resulting in the Trust being underfunded by several million dollars.[2] ( See generally Dkt. No, 29, Attachs. 9, 10, 12.)

Following commencement of the underlying actions, plaintiffs notified ERII and sought coverage for their defense expenses in connection with these underlying actions, pursuant to the policy. (Pls.' SMF ¶¶ 4, 9; Def.'s SMF ¶ 18; Dkt. No. 29, Attach. 14 at 2-3.) By letters dated January 9 and January 17, 2013, ERII disclaimed coverage, citing the exclusion provision, and refused to provide coverage based on ERII's assessment that the underlying actions involved "mishandling of funds." (Defs.' SMF ¶¶ 20, 22; Dkt. No. 29, Attach. 15 at 5; Dkt. No. 29, Attach. 17 at 3.) Plaintiffs then commenced this action in New York State Supreme Court, Albany County, seeking a declaration that ERII is obligated to pay plaintiffs' past and future defense expenses in the underlying actions. ( See generally Compl.) ERII removed the action to this court, (Dkt. No. 1), and the parties subsequently filed their now-pending motions for summary judgment, (Dkt. Nos. 27, 28).

III. Standard of Review

The standard of review pursuant to Fed.R.Civ.P. 56 is well established and will not be repeated here. For a full discussion of the standard, the court refers the parties to its decision in Wagner v. Swarts, 827 F.Supp.2d 85, 92 (N.D.N.Y. 2011), aff'd sub nom. Wagner v. Sprague, 489 F.Appx. 500 (2d Cir. 2012).

IV. Discussion[3]

ERII contends that it has no duty to provide coverage for plaintiffs' defense expenses in the underlying actions because the underlying complaints fit within the Errors and Omission Exclusion of the insurance policy issued by ERII. (Dkt. No. 27, Attach. 1 at 6-8; Dkt. No. 30 at 2-6.) In response, plaintiffs argue that the underlying allegations do not clearly and entirely fall within the policy's exclusion provision, and that they are thus entitled to summary ...

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