United States District Court, S.D. New York
OPINION AND ORDER
VALERIE CAPRONI United States District Judge.
action is the culmination of a long-running dispute between
plaintiff Thomas Ling (“Ling”), his general
contractors, Kellam Clark and Service Junction LLC, and their
insurance carrier, the defendant, Erie Insurance Company
(“Erie”). Ling hired Clark and Service Junction to
renovate his kitchen. The renovation did not go smoothly,
leading Ling to sue Clark, Service Junction, and Edmund
(“Neal”). Erie settled Ling's claims as
against Clark and Service Junction, but not as against Neal.
Neal defaulted and Ling was awarded a $439, 013.00 default
judgment. Thereafter, Ling instituted this action to recover
on his default judgment from Erie, which he claims wrongfully
denied Neal coverage. He brings five claims, three pursuant
to New York's “direct action” statute, N.Y.
Ins. L. § 3420(a)(2), and two claims for breach of New
York's consumer protection statute, N.Y. Gen. Bus. L.
§ 349. See Second Am. Compl. (Dkt. 22)
has moved to dismiss the SAC. For the reasons that follow,
Erie's motion to dismiss is GRANTED IN PART and DENIED IN
and Service Junction were hired in February 2012 to
“design and build a kitchen.”Decl. of Judith
Treger Shelton (“Shelton Decl.”) (Dkt. 19) Ex. A
(“Ling Compl.”) ¶ 1. Neal's relationship
to the project is unclear and disputed by the parties. It is
enough for purposes of this motion to say that Neal assisted
in the renovation, as another contractor, a hired assistant,
or as a favor to his friend Clark. See Ling Compl.
¶¶ 15, 24, 67, 126; SAC ¶¶ 14, 28,
The work done on the kitchen was not to Ling's liking. On
February 25, 2013, Ling sued Clark, Neal, and Service
Junction (the “Ling Action”) in New York Supreme
Court for violations of New York's licensing laws,
consumer protection statutes, and common law torts related to
damage to Ling's apartment. See generally Ling
which had insured Clark and Service Junction pursuant to a
“Fivestar Contractor's Policy” (the
“Policy” or “Policies”), partially
disclaimed coverage and assumed the defense of Clark and
Service Junction on March 11, 2013. Shelton Decl. Ex. I; SAC
¶ 29. Erie did not defend Neal. SAC ¶ 30. According
to Ling, Erie was on notice that Neal might be covered under
the Policy as a “volunteer worker” or an employee
of Service Junction, SAC ¶¶ 28, 31, 35-37, but
concealed this fact from Neal. SAC ¶ 39. Erie neither
interviewed Neal nor issued a formal disclaimer of coverage.
SAC ¶ 42.
contends that it did not have notice that Neal might be
entitled to coverage under the Policy. Section Four of the
Policy requires that “[i]f a claim is made or
‘suit' is brought against any insured,
must: (1) Immediately record the specifics of the claim or
‘suit' and the date received; and (2) Notify us
[Erie] as soon as practicable.” Shelton Decl. Ex. F CG 00
01/UF-9708 § 4 ¶ 2(b). “To the extent
possible, ” notice must include the “[h]ow, when
and where” of the occurrence, the “nature and
location of any injury or damage, ” and the
“names and addresses” of involved persons.
Shelton Decl. Ex. F. CG 00 01/UF-9708 § 4 ¶ 2(a).
Paragraph 2(c) requires the policyholder and “any other
involved insured” to turn over records of a suit
immediately and to cooperate with Erie. Shelton Decl. Ex. F.
CG 00 01/UF-9708 § 4 ¶ 2(c). An addendum to the
Policy specifies that written notice given by or on behalf of
the insured must include “particulars sufficient to
identify the insured.” Shelton Decl. Ex. F. CG 01
63/UF-9700 § C.
alleges that he notified Erie's agent of his claims four
days before he filed the Ling Action, SAC ¶ 25, and
provided Erie with copies of the pleadings once the action
was filed, SAC ¶ 26. According to the SAC, Clark also
provided Erie with information about Neal's role on the
job. The SAC references, without citation, an interview of
Clark conducted by an Erie claims adjuster on March 14, 2013.
According to the SAC, during that interview Clark described
Neal's involvement as limited to helping Clark remove
things from Ling's apartment and attending a meeting with
Clark. SAC ¶ 28; Shelton Decl. Ex. H (Tr. of Mar. 14,
2013 Interview) at 25. On March 15, 2013, Erie was provided
with a copy of an affidavit completed by Neal in which he
wrote that his role in the project was “limited to
assisting [Clark] ‘as a friend . . . .'” SAC
and Ling reached a revised settlement on August 11, 2014. SAC
¶ 53. Ling agreed to release fully
“Service Junction, Clark, and Erie . . . from any and
all rights and claims, demands, actions, and/or suits of
whatever kind or nature whatsoever, known or unknown, arising
from, in connection with, or as a consequence of . . . the
Ling Action . . . .” Shelton Decl. Ex. J. § 2 (the
“Ling Release”). Ling further agreed “not
to commence, maintain, initiate, or prosecute (or cause or
encourage any other person or entity to commence, maintain,
initiate, or prosecute) any action . . . against Service
Junction, Clark and/or Erie . . ., based on or concerning, in
whole or in part, any of the claims, demands, actions, and/or
suits released herein.” Shelton Decl. Ex. J § 5.
The settlement did not release Ling's claims against
Neal. See Shelton Decl. Ex. J. § 8.
secured a default judgment against Neal in the amount of
$439, 013.75 and instituted this action to collect under New
York's “direct action” statute, N.Y. Ins. L.
§§ 3420(a)(2), (b)(1). SAC ¶ 1. That statute
requires all insurance policies to include a provision
permitting victims such as Ling to bring an action against
the insurer “under the terms of the policy or contract
for the amount of such judgment not exceeding the amount of
the applicable limit of coverage under such policy or
contract.” N.Y. Ins. L. § 3420(a)(2). Section
3420(b)(1) creates a cause of action co-extensive with the
victim's rights under Section 3420(a)(2). N.Y. Ins. L.
§ 3420(b)(1). In other words, New York law permits a
victim to hold an insurer liable for a covered judgment
against its insured.
I-III of the SAC assert claims under Section 3420 for breach
of Erie's duty to defend and indemnify Neal and to settle
on his behalf. See SAC ¶¶ 65-79. Counts IV
and V assert claims under New York's consumer protection
statute, N.Y. Gen. Bus. L. § 349.
survive a motion to dismiss under Rule 12(b)(6), “a
complaint must allege sufficient facts, taken as true, to
state a plausible claim for relief.” Johnson v.
Priceline.com, Inc., 711 F.3d 271, 275 (2d Cir.
2013) (citing Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555-56 (2007)). In reviewing a Rule 12(b)(6) motion to
dismiss, courts “accept all factual allegations as
true and draw all reasonable inferences in favor of the
plaintiff.” N.J. Carpenters Health Fund v. Royal
Bank of Scotland Grp., PLC, 709 F.3d 109, 119 (2d Cir.
2013) (quoting Litwin v. Blackstone Grp., LP, 634
F.3d 707, 715 (2d Cir. 2011)). Nonetheless, in order to
survive a motion to dismiss, “a complaint must contain
sufficient factual matter . . . to ‘state a claim to
relief that is plausible on its face.'”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Twombly, 550 U.S. at 544).
“Plausibility” is not certainty. Iqbal
does not require the complaint to allege “facts which
can have no conceivable other explanation, no matter how
improbable that explanation may be.” Cohen v.
S.A.C. Trading Corp., 711 F.3d 353, 360 (2d Cir. 2013).
But “[f]actual allegations must be enough to raise a
right to relief above the speculative level, ”
Twombly, 550 U.S. at 555, and “[courts]
‘are not bound to accept as true a legal conclusion
couched as a factual allegation, '” Brown v.
Daikin Am. Inc., 756 F.3d 219, 225 (2d Cir. 2014)
(quoting Twombly, 550 U.S. at 555) (other internal
quotations marks and citations omitted).
Section 3420(a)(2) Claims
The Ling Release
argues that Ling's direct action claims are barred by the
Ling Release, which released Erie, Service Junction, and its
employees and agents from “any and all rights and
claims, demands, actions and/or suits of whatever kind or
nature . . . as a consequence of . . . the Ling Action . . .
.” According to Erie, the Release is co-extensive with
any liability it might have for a judgment against Neal. Mem.
(Dkt. 29) at 15. Thus, any judgment Ling has against Neal
could not be for a covered occurrence. “[T]o the extent
Ling alleges Neal is liable as Service Junction's
employee or volunteer worker, then Neal was clearly
released in the settlement, and Ling's subsequent
judgment against Neal in [the Ling Action] was in breach of
the [Ling Release] . . . .” Mem. at 15. Erie also
argues that the Release covers any claims Ling might have
personally against Erie, including the direct action claims
in this case.
York's direct action statute creates a cause of action
for victims against their tortfeasor's insurer.
“Under the common law, ‘an injured person
possessed no cause of action against the insurer of the tort
feasor.'” Lang v. Hanover Ins. Co., 3
N.Y.3d 350, 353 (2004) (quoting Jackson v. Citizens Cas.
Co., 277 N.Y. 385, 389 (1938)). The common law rule led
to potential injustice if the insured was insolvent or
otherwise judgment-proof. “Before [Section 3420's]
enactment, the insolvency of the assured was equivalent to a
release of the surety” because the victim had no claim
against the insurer directly. Coleman v. New Amsterdam
Cas. Co., 247 N.Y. 271, 275 (1928) (Cardozo, J.).
Section 3420 mitigates that potential injustice by creating a
cause of action personal to the victim. The cause of action
is limited, however, by the terms of the policy, and a
victim's right to recover is co-extensive with the
insured's rights against the insurer. See McCormick
& Co. v. Empire Ins. Grp., 878 F.2d 27, 29 (2d Cir.
Neal might have been able to defend the Ling Action by
arguing that the Ling Release limited his liability, New York
law does not permit Erie to raise that argument as a defense
to a direct action claim. “[O]nce an entry of judgment
is had, an insurer who was given notice and opportunity to
defend such action, . . ., cannot collaterally attack the
underlying judgment and instead assumes the risk as to what
might be proven against its insured.” Univ. of Cal.
Press v. G.A. Ins. Co. of N.Y., No. 94-CV-4950 (CPS),
1995 WL 591307, at *7 n.3 (E.D.N.Y. Sept. 27, 1995) (citing
United States Fid. & Guar. Co. v. Copfer, 406
N.Y.S.2d 201, 203 (4th Dep't 1978)); see also Rucaj
v. Progressive Ins. Co., 797 N.Y.S.2d 79 (1st Dep't
2005) (“‘Having disclaimed its duty to defend its
insured in the underlying action, [an insurer] may not raise
defenses extending to the merits of plaintiff's claim
against the insured'” (quoting Robbins v.
Michigan Millers Mut. Ins. Co., 653 N.Y.S.2d ...