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Inc. v. Endurance American Insurance Co.

United States District Court, S.D. New York

February 27, 2017

JD2 ENVIRONMENTAL, INC., Plaintiff,
v.
ENDURANCE AMERICAN INSURANCE COMPANY, Defendant.

          OPINION AND ORDER

          J. PAUL OETKEN, District Judge

         Plaintiff JD2 Environmental, Inc. (“JD2”) filed this action against Defendant Endurance American Insurance Company (“Endurance”) seeking a declaration that JD2 is an additional insured under an insurance policy issued by Endurance, such that Endurance's refusal to defend JD2 in a separate action constitutes breach of contract. (Dkt. No. 1 ¶ 21-36) JD2 also alleges that Endurance's delay in denying coverage to JD2 constitutes breach of the covenant of good faith and fair dealing. (Id. ¶ 37-43.)

         The parties each move for summary judgment under Rule 56 of the Federal Rules of Civil Procedure on the question whether Endurance breached its duty to defend JD2. (See Dkt. No. 28; Dkt. No. 32.) Endurance also moves for summary judgment on the question whether, under New York law, JD2 can maintain its claim for breach of the covenant of good faith and fair dealing. (See Dkt. No. 33 at 15.) For the reasons that follow, the Court grants JD2's motion for summary judgment that Endurance breached its duty to defend. The Court also grants Endurance's motion for summary judgment that JD2 cannot maintain its claim for breach of the covenant of good faith and fair dealing/bad faith under New York law.

         I. Background

         The following facts are taken from the parties' 56.1 statements and summary judgment briefing and are undisputed unless otherwise noted.[1]

         A. The Avis Action

         JD2 is an environmental consulting engineering firm with expertise in underground storage tank (“UST”) systems. (Dkt. No. 37 ¶ 3.) Avis Budget Car Rental, LLC (“Avis”) contracted with JD2 to provide engineering services for the replacement of the UST systems at its location at John F. Kennedy International Airport in Queens, New York (“JFK”). (Id. ¶ 4.) JD2 retained Gemstar Construction Corporation (“Gemstar”), a subcontractor, to perform the physical replacement of the UST system. (Id. ¶ 5; Dkt. No. 39 ¶ 1.)

         On December 15, 2011, while Gemstar was excavating at the JFK construction site, it encountered an obstruction while driving sheet piles approximately seventeen feet below grade. (Dkt. No. 39 ¶ 6 (citing First Amended Complaint, Avis Budget Car Rental, LLC v. JD2 Envtl., Inc., et al., No. 12 Civ. 5010 (E.D.N.Y May 31, 2013), Dkt. No. 41 ¶ 24 (“Avis FAC”)[2]).) At the time, Gemstar believed the obstruction to be a naturally occurring object, such as a tree stump or a boulder. (Id.) Without investigating the exact nature of the obstruction, Gemstar resumed excavation the next day. (Id. ¶ 7-8.) On December 16, 2011, Gemstar struck the same underground obstruction, which was in fact a sewer line, creating a sinkhole in which water was observed. (Id. ¶ 8.) Avis filed suit against JD2 and Gemstar to recover the cost of the repair to the damaged sewer line. (Id. ¶ 9 (citing Avis FAC ¶ 28-30).)

         Avis filed suit in the Eastern District of New York against JD2 and Gemstar (and another party not implicated in the present case) for recovery of the cost of the repair of the damaged sewer line (the “Avis Action”). See Avis FAC. The pending motions in this case concern whether Endurance has a duty to defend JD2 in the Avis Action, which depends on the contractual relationships between the parties.

         B. The Endurance Policy and Endurance's Refusal to Defend or Indemnify

         Endurance issued to Gemstar an insurance policy covering the period from October 1, 2011, to April 1, 2013. (Dkt. No. 29 Ex. 10 (“Policy”).) The Policy contains a Commercial General Liability Coverage Part (“CGL”) and a Contractors Pollution Liability Coverage Part (“CPL”). (Id. at EAIC 3479.) The Policy provides additional insured coverage[3] under two inclusion provisions relevant to this action: Endorsement Number 5 (id. at EAIC 3542), which modifies both the CGL and CPL, and Endorsement Number 23 (id. at EAIC 3577), which modifies only the CGL. If JD2 is an additional insured under either the CGL or the CPL, Endurance's duty to defend is triggered. The parties debate whether JD2 is an additional insured pursuant to either provision.

         Endurance points to two provisions under which an additional insured may be excluded from coverage under the Policy: Endorsement Number 23 (which, as noted, also contains an inclusion provision); and Endorsement Number 11 (id. at EAIC 3548) (which modifies only the CGL). Endurance also argues that JD2 is excluded from coverage under the CPL as the Avis Action is outside the scope of the CPL. To prevail, Endurance must show either (1) that JD2 is not entitled to coverage under Endorsement Numbers 5 and 23, or (2) that JD2 is nevertheless excluded from coverage under the CGL (through Endorsement Numbers 23 and 11) and CPL (as outside its scope).

         Based on its reading of the Policy, JD2 demanded defense and indemnification from Gemstar, and therefore Endurance, on March 12, 2012, and again on January 10, 2013.[4] (Dkt. No. 39 ¶ 13.) On June 6, 2014, more than two years later, Endurance replied, denying coverage to JD2 and refusing to defend or indemnify JD2 in the Avis Action. (Id. ¶ 14.) JD2 is defended in the Avis Action by another insurer, Ironshore Specialty Insurance Co. (“Ironshore”), though JD2 notes that its policy with Ironshore is subordinate to the primary coverage it argues Endurance is required to provide. (Dkt. No. 37 ¶¶ 23, 89-90.)

         After setting forth the legal framework necessary to resolve the current dispute, the Court turns to each of the Policy provisions at issue. The Court then addresses Endurance's arguments that the CPL does not apply because the Avis Action does not fall within its scope and that JD2's claim for breach of the covenant of good faith and fair dealing/bad faith cannot be maintained under New York law.

         II. Legal Standard

         Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56. A fact is material if it “might affect the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute is genuine if, considering the record as a whole, a rational jury could find in favor of the non-moving party. Ricci v. DeStefano, 557 U.S. 557, 586 (2009) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)).

         Subject matter jurisdiction in this case is based on the diversity statute, 28 U.S.C. § 1332.[5] Accordingly, the Court applies “the choice of law rules of New York, the forum State.” Aetna Cas. & Sur. Co. v. Gen. Time Corp., 704 F.2d 80, 82 (2d Cir. 1983); see also Klaxon Co. v. Stenor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). “New York law governs this dispute because it requires this Court to determine the obligations of an insurer with respect to the liability of New York insureds arising out of an accident occurring in New York.” U.S. Underwriters Ins. Co. v. 203-211 W. 145th St. Realty Corp., No. 99 Civ. 8880, 2001 WL 604060, at *3 (S.D.N.Y. May 31, 2001).

         Under New York law, an insurer's duty to defend is “exceedingly broader” than its distinct duty to indemnify. Md. Cas. Co. v. Cont'l Cas. Co., 332 F.3d 145, 160 (2d Cir. 2003). In assessing whether an insurance company has a duty to defend an insured, “courts first look to ‘the allegations within the four corners of the underlying complaint, '” which in this case is the Avis FAC. Westport Ins. Corp. v. Napoli, Kaiser & Bern, 746 F.Supp.2d 502, 506 (S.D.N.Y. 2010) (quoting Frontier Insulation Contractors, Inc. v. Merchs. Mut. Ins. Co., 91 N.Y.2d 169, 175 (N.Y. 1997)). However, even if the explicit language of the complaint does not trigger the duty to defend, “courts must also look beyond the four corners of the complaint to determine whether there is any potentially covered occurrence.” Id. (citing Fitzpatrick v. Am. Honda Motor Co., 78 N.Y.2d 61, 65-66 (N.Y. 1991)); see also Park Place Entm't Corp. v. Transcontinental Ins. Co., 225 F.Supp.2d 406, 410 n.2 (S.D.N.Y. 2002) (acknowledging New York Court of Appeals' holding that “courts are to look beyond the four corners of the complaint to determine whether there is any potentially covered occurrence” to prevent an insurer from using “a third party's pleadings as a ‘formal fortress' to avoid its contractual duty to defend its insured” (quoting Fitzpatrick, 78 N.Y.2d at 68)). Whenever “the complaint in the underlying action contains any allegations that arguably or potentially bring the action within the protection purchased, ” an insurer's duty to defend is triggered. Avondale Indus. v. Travelers Indem. Co., 887 F.2d 1200, 1204 (2d Cir. 1989). “Any doubt as to whether the allegations state a claim within the coverage of the policy must be resolved in favor of the insured and against the carrier.” Euchner-USA, Inc. v. Hartford Cas. Ins. Co., 754 F.3d 136, 141 (2d Cir. 2014) (internal quotation marks omitted) (quoting Brook Shopping Ctr. v. Liberty Mut. Ins. Co., 80 A.D.2d 292, 294, 439 N.Y.S.2d 10 (N.Y.App.Div. 1st Dep't 1981)).

         To the extent an insurer invokes an exception to the insurance policy, which would allow it to avoid defending the insured, the insurer must show that the allegations in the underlying complaint fall “solely and entirely within the policy exclusions, and, further, that the allegations, in toto, are subject to no other interpretation.” Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 312 (N.Y. 1984) (quoting Int'l Paper Co. v. Cont'l Cas. Co., 35 N.Y.2d 322, 325 (N.Y. 1974)). That is to say, “if any of the claims against the insured arguably arise from covered events, the insurer is required to defend the entire action.” Frontier, 91 N.Y.2d at 175; see also Hotel Des Artistes, Inc. v. Transamerica Ins. Co., No. 93 Civ. 4563, 1994 WL 263429, at *3 (S.D.N.Y. June 13, 1994) (Sotomayor, J.) (“[E]ven if only a single claim in the underlying complaint potentially falls within the indemnity coverage of the policy, the insurer must defend the entire action.”). As such, “[a]n insurer seeking to avoid its duty to defend bears a heavy burden, which, in practice, is rarely met.” Hotel Des Artistes, 1994 WL 263429, at *3.

         III. Discussion

         Three provisions of the Policy are relevant to the present motions for summary judgment: Endorsement Numbers 5, 11, and 23. Endorsement Number 5, which applies to both the CPL and CGL, provides a requirement for finding JD2 covered by the Policy (thereby triggering Endurance's duty to defend): namely, that JD2 is vicariously liable for Gemstar's negligent acts. Endorsement Number 23, which applies to the CGL, is another provision under which JD2 may be classified an additional insured under the contract. Endorsement Numbers 11 and 23 provide exceptions to coverage under the CGL that Endurance argues apply to the current situation. Each provision is discussed before the Court turns to two additional argument made by Endurance: whether the Avis Action falls within the scope of the CPL and whether New York law allows JD2 to maintain an action for bad faith denial of insurance.

         A. Endorsement Number 5

         The first path to coverage for JD2 under the Policy is as an additional insured as defined by Endorsement Number 5, “Automatic Additional Insured-Owners, Lessees or Contractors.” (Policy at EAIC 3542.) By its terms, Endorsement Number 5 modifies insurance provided under the CGL and CPL as follows:

         Name of Person or Organization:

Any person(s) or organization(s) whom the Named Insured agrees, in a written contract, to name as an additional insured. However, this status exists only for the ...

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