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Ling v. Erie Insurance Co.

United States District Court, S.D. New York

July 19, 2017

THOMAS LING, as statutory subrogee of Edmund Neale, Plaintiff,
v.
ERIE INSURANCE COMPANY, Defendant.

          OPINION AND ORDER

          VALERIE CAPRONI United States District Judge.

         This 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”).[1] 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[2] (“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) (“SAC”).

         Erie has moved to dismiss the SAC. For the reasons that follow, Erie's motion to dismiss is GRANTED IN PART and DENIED IN PART.

         BACKGROUND

         Clark and Service Junction were hired in February 2012 to “design and build a kitchen.”[3]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, 31.[4] 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 Compl.

         Erie, 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.

         Erie 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, you[5] must: (1) Immediately record the specifics of the claim or ‘suit' and the date received; and (2) Notify us [Erie] as soon as practicable.”[6] 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.

         Ling 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 ¶ 31.

         Erie and Ling reached a revised settlement on August 11, 2014. SAC ¶ 53.[7] 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 . . . .”[8] 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.

         Ling 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.”[9] 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.

         Counts 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.

         DISCUSSION

         To 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).

         1. Section 3420(a)(2) Claims

         A. The Ling Release

         Erie 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.[10]

         New 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. 1989).

         Although 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 ...


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