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East Ramapo Central School District v. New York Schools Insurance Reciprocal

Supreme Court of New York, Second Department

May 3, 2017

East Ramapo Central School District, appellant- respondent,
v.
New York Schools Insurance Reciprocal, respondent-appellant. Index No. 600963/13

          Morgan, Lewis & Bockius, LLP, New York, NY (David J. Butler, Randall M. Levine, and Stephanie Schuster of counsel), for appellant-respondent.

          Miranda Sambursky Slone Sklarin Verveniotis, LLP, Mineola, NY (Steven Verveniotis of counsel), for respondent-appellant.

          JOHN M. LEVENTHAL, J.P., JOSEPH J. MALTESE, HECTOR D. LASALLE, VALERIE BRATHWAITE NELSON, JJ.

          DECISION & ORDER

         Appeal by the plaintiff from (1) an order of the Supreme Court, Nassau County (Stephen A. Bucaria, J.), entered June 15, 2015, and (2) a judgment of that court entered March 24, 2016, and cross appeal by the defendant from the judgment. The judgment is in favor of the plaintiff and against the defendant in the principal sum of $187, 500. The appeal and cross appeal from the judgment bring up for review orders of that court entered October 22, 2013, February 5, 2014, March 28, 2014, June 18, 2014, and September 2, 2014, and the order appealed from entered June 15, 2015.

         ORDERED that the appeal from the order entered June 15, 2015, is dismissed, without costs or disbursements; and it is further, ORDERED that the judgment is reversed, on the law, the facts, and in the exercise of discretion, without costs or disbursements, (a) the determination in the order entered February 5, 2014, denying the plaintiff's motion pursuant to CPLR 3124 to compel the defendant to comply with discovery demands is vacated, (b), upon reargument and renewal, the determination in the order entered February 5, 2014, made upon renewal, in effect, vacating the order entered October 22, 2013, and thereupon granting that branch of the defendant's cross motion which was for summary judgment declaring that it was not obligated to defend the plaintiff in the underlying action after September 30, 2013, and otherwise denying the cross motion, and granting that branch of the plaintiff's motion which was for summary judgment declaring that the defendant was obligated to defend the plaintiff in the underlying action through September 30, 2013, and otherwise denying the motion, is adhered to, (c) the determination in the order entered June 15, 2015, that the plaintiff was entitled to an award of damages in the principal sum of $187, 500 on its cause of action to recover damages for breach of contract is vacated, the orders entered March 28, 2014, and June 18, 2014, are modified accordingly, and the matter is remitted to the Supreme Court, Nassau County, for further proceedings consistent herewith.

         The appeal from the intermediate order entered June 15, 2015, must be dismissed because the right of direct appeal therefrom terminated with the entry of the judgment in the action (see Matter of Aho, 39 N.Y.2d 241, 248). The issues raised on the appeal from the order are brought up for review and have been considered on the appeal from the judgment (see CPLR 5501[a][1]).

         These appeals arise out of an insurance coverage dispute between the plaintiff, East Ramapo Central School District (hereinafter the School District), and its insurer, the defendant, New York Schools Insurance Reciprocal (hereinafter NYSIR). The policy issued by NYSIR provided coverage for claims, "made against the Insured and reported to [NYSIR] during the Policy Period and any Extended Reporting Period, " for "Wrongful Act(s) by the Insured in the performance of duties for the School Entity." The policy defined the term "School Entity" as the School District. The term "Insured" was defined, in relevant part, as "the School Entity, the Board of Education of the School Entity, all present and former members of the Board of Education, officers, trustees, employees... but only [ ] while acting solely within the course and scope of their duties or employment for the School Entity." The term "Wrongful Act" was defined under the policy as "any actual or alleged breach of duty, negligent error, misstatement, misleading statement or omission by an Insured solely in the course and scope of the Insured's duties or employment for the School Entity." The policy excluded coverage for claims related to, among other things, "any fraudulent, dishonest, malicious, criminal or intentional wrongful act or omission by an Insured."

         While the policy was in effect, a putative class action entitled Montesa v Schwartz (hereinafter the underlying action) was commenced under Docket No. 12-cv-06057 in the United States District Court for the Southern District of New York (hereinafter the District Court). The complaint in the underlying action alleged that the defendants in the underlying action, who are former and present members, employees, or attorneys of the School District's Board of Education, "engaged in numerous schemes to siphon off public money to support private religious institutions in various yeshivas, forcing a large cut in instructional programming in the public schools to a degree that the right of public school children to an education is impugned." The School District, initially named as a plaintiff in the underlying action, subsequently intervened as a defendant in that action.

         The complaint in the underlying action alleged, inter alia, violations of the Establishment Clause of the First Amendment and the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution and article VIII of the New York Constitution, and claims of breach of fiduciary duty and fraud. The School District provided notice of the underlying action to NYSIR. NYSIR disclaimed coverage on several grounds, including that the alleged acts of the defendants in the underlying action fell outside the scope of their duties and employment with the School District and that the allegations in the underlying action cast the pleadings in that action wholly within the policy's exclusion for claims related to intentional, wrongful acts.

         After an amended complaint was filed in the underlying action, which was substantially similar to the original complaint in that action, the School District commenced this action against NYSIR. It asserted a cause of action alleging breach of contract, a cause of action alleging breach of the implied covenant of good faith and fair dealing, and a cause of action seeking a declaration that NYSIR had a duty to defend and indemnify it in the underlying action. Thereafter, the School District moved for summary judgment on its cause of action seeking a declaration that NYSIR was obligated to defend it in the underlying action. NYSIR cross-moved for summary judgment declaring that it was not so obligated. By order entered October 22, 2013, the Supreme Court granted the School District's motion and denied NYSIR's cross motion, concluding that the allegations of the amended complaint in the underlying action, construed liberally, suggested a reasonable possibility of coverage. The court emphasized that the cause of action alleging breach of fiduciary duty was premised on both intentional and negligent conduct and, therefore, found that the allegations of the amended complaint did not fall entirely within a policy exclusion.

         "A duty to defend is triggered by the allegations contained in the underlying complaint" (BP A.C. Corp. v One Beacon Ins. Group, 8 N.Y.3d 708, 714). "An insurer's duty to defend is broader than the duty to indemnify and arises whenever the allegations of the complaint against the insured, liberally construed, potentially fall within the scope of the risks undertaken by the insurer" (Salt Constr. Corp. v Farm Family Cas. Ins. Co., 120 A.D.3d 568, 569; see BP A.C. Corp. v One Beacon Ins. Group, 8 N.Y.3d at 714). " If any of the claims against [an] insured arguably arise from covered events, the insurer is required to defend the entire action'" (Town of Massena v Healthcare Underwriters Mut. Ins. Co., 98 N.Y.2d 435, 443, quoting Frontier Insulation Contrs. v Merchants Mut. Ins. Co., 91 N.Y.2d 169, 175). "Indeed, [t]he duty to defend arises whenever the allegations in a complaint against the insured fall within the scope of the risks undertaken by the insurer... [and, it is immaterial] that the complaint against the insured asserts additional claims which fall outside the policy's general coverage or within its exclusory provisions'" (Town of Massena v Healthcare Underwriters Mut. Ins. Co., 98 N.Y.2d at 443-444, quoting Seaboard Sur. Co. v Gillette Co., 64 N.Y.2d 304, 310).

         Nonetheless, "an insurer can be relieved of its duty to defend if it establishes as a matter of law that there is no possible factual or legal basis on which it might eventually be obligated to indemnify its insured under any policy provision" (Allstate Ins. Co. v Zuk, 78 N.Y.2d 41, 45; see Cumberland Farms, Inc. v Tower Group, Inc., 137 A.D.3d 1068, 1070). Policy exclusions are to be strictly and narrowly construed and are not to be extended by interpretation or implication (see Pioneer Tower Owners Assn. v State Farm Fire & Cas. Co., 12 N.Y.3d 302, 307; Seaboard Sur. Co. v Gillette Co., 64 N.Y.2d at 311). "To be relieved of its duty to defend on the basis of a policy exclusion, the insurer bears the heavy burden of demonstrating that the allegations of the complaint [in the underlying action] cast the pleadings wholly within that exclusion, that the exclusion is subject to no other reasonable interpretation, and that there is no possible factual or legal basis upon which the insurer may eventually be held obligated to indemnify the insured under any policy provision" (Frontier Insulation Contrs. v Merchants Mut. Ins. Co., 91 N.Y.2d at 175; see 492 Kings Realty, LLC v 506 Kings, LLC, 88 A.D.3d 941, 943; Exeter Bldg. Corp. v Scottsdale Ins. Co., 79 A.D.3d 927, 929).

         In the order entered October 22, 2013, the Supreme Court properly determined that NYSIR had a duty to defend the School District in the underlying action. The amended complaint included allegations that the defendants breached their fiduciary duty "[b]y failing to take reasonable steps to ascertain the value'" of certain properties that were sold by the School District "and not utilizing a method of sale, which is apt to bring in the best price.'" Those allegations, liberally construed, suggest a reasonable possibility of coverage, and therefore, triggered NYSIR's duty to defend in the underlying action (see Frontier Insulation Contrs. v Merchants Mut. Ins. Co., 91 N.Y.2d at 175; GMM Realty, LLC v St. Paul Fire & Mar. Ins. Co., 129 A.D.3d 909, 910; Barkan v New York Schools Ins. Reciprocal, 65 A.D.3d 1061). In addition, the court properly determined that the alleged acts of the defendants in the underlying action, including allegations that those defendants mishandled and misused School District funds, occurred within the course and scope of their employment with the School District (see Matter of Dreyer v City of Saratoga Springs, 43 A.D.3d 586, 587-588).

         Our analysis, however, does not end here. On September 30, 2013, in the underlying action, the District Court dismissed 8 of the 10 causes of action asserted in the amended complaint, including the cause of action alleging breach of fiduciary duty. Thereafter, NYSIR moved for leave to renew its cross motion for summary judgment. By order entered February 5, 2014, the Supreme Court granted leave to renew, and upon renewal, in effect, vacated the order entered October 22, 2013, and ...


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