Spring 08 Newsletter

Spring 2008 Volume 1, Issue

1

1000 Crossroads Building • Two State Street • Rochester, New York 14614 Telephone: (585) 454-2181 www.trevettlaw.com Facsimile: (585) 454-4026 The Insurance Defense Update ARTICLES IN THIS ISSUE

Carrier Held Liable for Consequential Damages Incurred By Its Insured

1. Carrier Held Liable for Consequential Damages Incurred By Its Insured

Bi-Economy Market, Inc. v. Harleysville Mutual Ins. Co., 2008 NY Slip Op 01418 (2008)

2. Insurer Responsible for Defense Costs Pursuant to Agreement Between Counsel 3. Equitable Subrogation May Give Insurer Cause of Action Against Negligent Counsel 4. Defendant Has the Right to Request Ex Parte Interview with Plaintiff’s Treating Physician 5. Baseball Club Found Not Liable When a

Bi-Economy Market, Inc.. v. Harleysville Mutual Ins. Co., was commenced in the Monroe County Supreme Court, and sought the recognition of consequential damages arising out of an insurance carrier’s breach of business interruption coverage. In this action, Bi-Economy Market, Inc. (“Bi-Economy”) was insured under a business owner’s policy procured from Harleysville Insurance Company of New York (“Harleysville”). The policy at issue covered Bi-Economy from losses of business income arising out of a covered event.

Teenager Was Hit by a Car While Chasing Foul Ball

In October 2002, a fire rendered BiEconomy’s physical structure and food inventory a total loss; BiEconomy thereafter pursued a fire loss and business interruption claim under its policy. A lengthy dispute between the parties thereafter developed regarding the value of Bi-Economy’s total loss. As a result of lengthy settlement negotiations to resolve the total loss issue, Bi-Economy’s operations were completely shut down and have not re-opened. Bi-Economy thereafter, as a result of these protracted negotiations, commenced suit against Harleysville, alleging that its conduct had tortiously interfered with Bi-Economy’s business relations, and that it had negotiated the claim in bad faith. Bi-Economy

further argued that as a result of this breach of contract, it was entitled to an award of consequential damages over and above the negotiated amount. While Bi-Economy argued that Harleysville’s conduct was foreseeable, and caused the plaintiff’s business to flounder and ultimately fail, Harleysville argued that consequential damages were outside of the scope of the insurance agreement, and that even if intended, several policy provisions excluded coverage for “consequential loss”. The trial court agreed with Harleysville’s position and dismissed BiEconomy’s claim for consequential damages as they were outside of the scope of the insurance policy. The Fourth Department confirmed the lower court’s determination, but relied on the policy exclusions as a basis for denying consequential damages. This case was ultimately brought before the Court of Appeals, which for the first time recognized an insured’s right to recover consequential damages under a first party claim. The Court found that there was an implied covenant of good faith and fair dealing between the parties, and that Harleysville had violated that covenant. As such,

the Court determined the plaintiff was entitled to an award in excess of those contemplated by the terms of the policy. In analyzing whether Harleysville should have foreseen that such a breach would have resulted in Bi-Economy’s loss of business, it concluded that the loss of one’s ability to operate a business was understandable and foreseeable, and as such resulted in a breach of Harleysville’s implied duty. The Court further concluded that the “purpose of business interruption insurance is to indemnify the insured against losses arising from inability to continue normal business operation”, and that is intended to get the insured “back on its feet as soon as possible”. The Court reasoned that Harleysville knew its actions, which resulted in excessive delays and an improper denial of coverage, would undercut the very intent of the agreement, and thus determined it could be held liable for consequential damages arising from its breach.

2

TYPE TITLE HERE

Insurer Responsible for Defense Costs Pursuant to Agreement Between Counsel

A TT TT O O RR N N EE Y Y SS A A TT LL A AW W A

TREVETT CRISTO A LL ZZ EE R R & & A AN ND DO O LL II N NA A PP .. C C .. SS A

Wronka v. GEM Community Mgmt., 2008 NY Slip Op 02835 (2d Dept 2008)

The plaintiff had been injured when he slipped on ice on a walkway owned by Hillside Village Condominium Association and managed by GEM Community Management. Upon being sued by plaintiff, Hillside and GEM commenced a third-party action against both Keller Equipment, the contractor responsible for snow and ice removal on the property, and Keller’s insurer, Farm Family Casualty. Hillside and GEM sought contractual indemnification and defense costs pursuant to their status as additional insureds under the policy issued by Farm Family to Keller. For reasons not elaborated upon in the Second Department’s decision, the trial court granted Keller summary judgment dismissing the third-party

complaint. The trial court had, at the same time however, directed that Farm Family pay Hillside and GEM’s defense costs incurred up until that time, pursuant to the terms of the liability insurance policy. The Appellate Division reversed this portion of the lower court’s order, noting that the claims against Keller had been dismissed, that it had been determined the plaintiff’s injuries did not result from a covered accident and, therefore, Farm Family could properly deny coverage under the policy. However, the Court then held that the trial court should have granted that portion of Hillside and GEM’s motion which had sought leave to amend the third-party complaint to add a cause of action alleging breach of contract against Farm Family. The Court also determined that, upon amendment, Hillside and GEM were entitled to summary judgment on that claim. The contract in this case was an agreement between Farm Family and Hillside and GEM to share the costs of defending the main action. There had been no formal written

agreement signed by the parties themselves, but the Court found that letters exchanged between the attorneys for each party were sufficient to demonstrate the mutual agreement of the parties and to constitute a binding and enforceable stipulation. Thus, while it avoided responsibility under the liability policy, the insurer was bound by its separate agreement to split the fees incurred in defending the action, as set forth in correspondence from its counsel. While fee-sharing agreements are often undertaken to the mutual advantage of various defendants, it is important to remember that a party may be undertaking obligations entirely separate from, and potentially in addition to, obligations which may exist under the terms of the relevant policy. Additionally, both counsel and insurers must remain cognizant of the fact that an attorney’s correspondence may be sufficient to bind the insurer.

Equitable Subrogation May Give Insurer Cause of Action Against Negligent Counsel Kumar v. American Transit Ins. Co. and Hiscock & Barclay, 2008 NY Slip Op 02674 (4th Dept 2008) American Transit issued an insurance policy to Jeffrey Tisack. Pursuant to its obligations under that policy, it retained Hiscock & Barclay to defend Tisack when he was sued by the Kumars. However, Hiscock apparently failed to appear and defend the insured, resulting in a default judgment. Prior to the default, and perhaps even before initiation of the lawsuit, it appears that American Transit had rejected an offer to settle the claims by the Kumars for less than the policy limit. Tisack considered American Transit’s actions to be in bad faith and, presumably in exchange for an agreement not to enforce the

default judgment, assigned his bad faith claim to the Kumars. The Kumars then brought suit against American Transit, which in turn brought a third-party action against Hiscock, claiming that if it was liable on the bad faith claim it was due to Hiscock’s negligence. The trial court granted Hiscock’s motion to dismiss the third-party complaint and American Transit appealed. In a 3-1 decision, the Fourth Department agreed with the trial court that American Transit, the insurer, could not maintain a malpractice action against the attorney it hired to defend its insured because there was no privity. However, the majority

2

found that the third-party complaint nevertheless “survives the motion to dismiss based on the principle of equitable subrogation.” Because the third-party complaint alleged that the loss sustained by American Transit’s insured was the result of Hiscock’s negligence in failing to appear and defend the insured, the Court found it sufficient to withstand the motion to dismiss. The Court also held that this claim was not barred on the ground that American Transit had not yet made payment.

Defendant Has the Right to Request Ex Parte Interview with Plaintiff’s Treating Physician

3

The issue as to whether a defendant has the right to request an ex parte interview of the plaintiff’s treating physician has come up in a number of cases recently before the Fourth Department (Kish v. Graham, 40 AD3d 118 (4th Dept 2007)) and before the Second Department (Webb v. New York Methodist Hosp., 35 AD3d 457 (2d Dept 2006) and Arons v. Jutkowitz, 37 AD3d 94 (2d Dept 2006)). In all three cases, the court held that no such right existed. All three panels granted leave to appeal to the Court of Appeals. A TT TT O O RR N N EE Y Y SS A A TT LL A AW W A

TREVETT CRISTO A LL ZZ EE R R & & A AN ND DO O LL II N NA A PP .. C C .. SS A

Arons v. Jutkowitz, 9 NY3d 393 (2007)

In a consolidated 6-1 decision, the Court of Appeals disagreed with all three decisions of the appellate division courts and upheld the defendant’s right to seek the ex parte interview. The Court found that there was

no reason why a nonparty treating physician should be less available for an off-the-record interview than a corporate employee or a former corporate executive. Furthermore, the Court found that Article 31 of the CPLR does not prohibit these avenues of “informal discovery” and does not solely require costlier and more cumbersome discovery devices. The Court makes clear that when approaching the treating physician, defendant’s counsel must steer clear of any privileged information that does not fit under the waiver of confidentiality that the mere commencement of the tort suit generates. Also, any discussion between the physician and defendant’s counsel is entirely voluntary and must be limited in scope to the particular medical condition at issue.

In the three cases before the Court of Appeals, the plaintiffs received requests for HIPPAcompliant authorizations restricted to the medical condition(s) at issue, prior to the requested interviews, which the plaintiffs’ refused to provide. Defendants sought court orders compelling the interviews, which the Court of Appeals granted. The Court added that it is left to the physician’s discretion whether to cooperate with defendant’s counsel.

Baseball Club Found Not Liable When a Teenager Was Hit by a Car While Chasing Foul Ball Haymon v. Pettit, 9 NY3d 324 (2007) The plaintiff, a fourteen yearold teenager who ran into the street after a foul ball was hit in that direction, was hit by a car. The plaintiff commenced a lawsuit against the ball club for his injuries. The Court of Appeals held that the club owed no duty to warn about the risks of pursuing the ball into the road, thereby dismissing the action against the club. The defendant ball club offered the incentive of free tickets to anyone who retrieved a ball. The Court of Appeals found that this incentive did not create a duty to warn about the dangers of crossing the street

to retrieve the ball. The Court held that the dangers of crossing the street exist independent of the ball club’s promotion. This, combined with the fact that the ball club neither controlled the street nor the third persons who used the street, caused the Court to find that the ball club owed no such duty. Interesting to note in this case was that the plaintiff was a regular participant in the ball retrieving practice and was wearing headphones at the time of the incident, thereby rendering him unable to hear the traffic on the street.

3