Sum Fall 08 Newsletter

Insurance and Litigation Newsletter

Manufacturer’s Proof of Inspection of a Transformer Earns Summary Judgment where Plaintiff Failed To Exclude Other Causes of Injury In June 1997, plaintiff John Ramos sustained personal injuries when a transformer designed and manufactured by defendant Howard Industries, Inc. allegedly exploded. According to plaintiff, the explosion occurred shortly after he energized the transformer in the course of his employment as a lineman for nonparty Niagara Mohawk Power Corporation. Initially, plaintiff reported to his employer and doctors that he was injured when he reached out of an aerial bucket while installing the transformer on a utility pole. More than two years later, however, plaintiff claimed that the transformer exploded, the force of which caused him to fall inside the bucket, injuring his back. By that time, the transformer could not be located for inspection or testing to determine the cause of its failure. Plaintiff explained that he failed to promptly disclose the transformer explosion because he feared disciplinary action or the loss of certain employment-related benefits. Supreme Court denied defendant's motion for summary judgment. It concluded that, although Defendant's expert's assertion that a defect in the transformer would have been readily identified during the manufacturing process "might be a sufficient statement to obtain Summary Judgment if other causes of the accident were excluded," here, "other possible causes of the accident have not been excluded by the Defendant in the first instance." The Appellate Division, Fourth Department with one Justice dissenting, affirmed, but for different reasons than Supreme Court. The court held that defendant failed to meet its burden on summary judgment, concluding that its evidence "does not establish as a matter of law that the transformer was not defective and that a manufacturing defect therefore did not cause the explosion" 38 A.D.3d 1163 (4th Dept., 2007). That

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court thereafter granted defendant leave to appeal and certified the following question: "Was the order of this Court, entered March 16, 2007, properly 223 made[?]" The Court of Appeals answered the question in the negative, reversing the order of the Appellate Division and granting defendant's motion for summary judgment dismissing the complaint. Defendant established its prima facie entitlement to judgment as a matter of law, and plaintiff failed to present evidence excluding all other causes for the transformer's malfunction not attributable to defendant such that a reasonable jury could find that the transformer was defective in the absence of evidence of a specific defect. Although the transformer was not available for testing and inspection, defendant presented competent evidence that its transformers were designed and manufactured under state of the art conditions, that its manufacturing process complied with applicable industry standards, and that each transformer was individually tested. Defendant, through its expert, also posited other possible causes of an explosion such as rewiring or rebuilding by other employees of the power company after it left defendant's possession. Although plaintiff was not required to identify a specific defect in his circumstantial case, his theory that the explosion resulted from a manufacturing defect in the form of an "internal electrical fault," was pure speculation. Moreover, plaintiff's expert failed to exclude the possibility that the transformer exploded because it was improperly rewired or rebuilt. (Ramos v. Howard Industries, Inc., 10 N.Y.3d 218). (March, 2008).

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Unexcused Failure To Investigate And Adjust A Claim Supports Consequential Damages Against Insurer Panasia Estates is the owner of commercial rental property located at 33 West 19th Street in Manhattan. Panasia had a commercial property insurance policy with Hudson Insurance Company, which included Builders' Risk Coverage, covering damage to its property while undergoing renovation. During the policy period, the roof of its building was opened in order to perform construction work. Inclement weather caused rain to enter the building through the roof opening, resulting in extensive damage to the property. Shortly after the occurrence, Panasia claimed it promptly notified Hudson of the loss. According to Panasia, however, Hudson failed to investigate or adjust the claim until several weeks later. Hudson then denied the claim three months after that, stating that Panasia's loss was the result of repeated water infiltration over time and wear and tear rather than from a risk covered under the builders risk policy provision. Panasia commenced this action against Hudson, alleging that it breached the insurance contract by failing to properly investigate the loss and denying the loss as not covered under the policy. Panasia sought both direct and consequential damages that it claimed stemmed from Hudson's breach. Hudson moved for partial summary judgment "dismissing all of [Panasia's] bad faith allegations and all prayers for consequential, extra-contractual, or incidental damages or attorneys [sic] fees." Hudson argued, among other things, that a contractual exclusion for "[a]ny other consequential loss" precluded Panasia's request for consequential damages. Supreme Court denied that part of Hudson's motion to dismiss Panasia's claims for consequential damages. The Appellate Division affirmed, stating that "[a]n insured may recover foreseeable damages, beyond the limits of its policy, for breach of a duty to investigate, bargain for and settle claims in good faith" The Court of Appeals affirmed holding that consequential damages are not recoverable in a claim for breach of an insurance contract. Rather, consequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance

SUMMER/ FALL UPDATE 2008 contract context, so long as the damages were 'within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting' " (at 192, quoting Kenford Co. v. County of Erie, 73 N.Y2d 312 (1989). In this case, the courts below failed to consider whether the specific damages sought by Panasia were foreseeable damages as the result of Hudson's breach. Such claim must be considered by Supreme Court. Ultimately, it was decided that the Appellate Division correctly concluded the contractual exclusion for consequential loss does not bar the recovery of consequential damages. (Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y3d 200) (April, 2008).

Forfeiting Insurance Coverage Defendant bear Sterns & Companies, Inc, having executed a consent agreement in settlement of the underlying federal lawsuit against it which provided for the payment of $80 million and certain other relief three days before it notified plaintiff liability carriers and asked for their consent to the settlement, breached a provision in its liability policies with plaintiffs obligating it to obtain plaintiffs' consent before settling claims in excess of $5 million. The policy provision provided that defendant would not "settle any Claim, incur any Defense Costs or otherwise assume any contractual obligation or admit any liability with respect to any Claim in excess of" $5 million without plaintiffs' consent. Upon signing the consent agreement defendant acquiesced to the relief sought in the federal action and agreed that a final judgment could be presented to the federal court for signature and entry without further notice to defendant. Three days after executing the Plaintiff settlement agreement, Bear Stearns sent letters to insurers requesting their consent to the settlement. The insurers disclaimed coverage and commenced this declaratory judgment action seeking a declaration that the $45 million sought by Bear Stearns (after depletion of the $10 million selfinsured retention) was not covered by the policies. The Plaintiff insurers moved for summary judgment in this declaratory judgment action arguing that they were not liable for all or part of the $45 million sought by Bear Stearns for four reasons. First, they asserted that Bear Stearns could not recover any of the settlement because it had breached the policy provision obligating it to obtain the insurers' consent before settling the case. Second, they claimed that the investment banking exclusion precluded recovery of the settlement proceeds. Third, the insurers contended that the $25 million disgorgement payment was uncollectible either as

Insurance and Litigation Newsletter a matter of public policy or under contract interpretive principles. Finally, they argued that neither the $25 million payment for independent research nor the $5 million payment for investor education was covered because those liabilities were not "losses" within the meaning of the policies. The Appellate Division concurred with the Supreme Court in finding an issue of fact as to whether Bear Stearns breached the provision obligating it to obtain the consent of the insurers. The insurers contend that the Bear Stearns settlement is not recoverable because Bear Stearns breached the policy provision obligating it to obtain their consent prior to settling the regulator lawsuits. Specifically, the insurers claim that Bear Stearns resolved and completed the settlement of the case when it executed the settlement-in-principle in December 2002 or, at the latest, when it signed the consent agreement in April 2003 without advising the insurers. Bear Stearns counters that the courts below properly found a triable issue of fact as to whether its execution of these two documents constituted a breach of the policy provision. The Court of Appeals reversed the Appellate Division , holding that in executing the April 2003 agreement, Bear Stearns settled a claim within the meaning of the insurance policy provision. As a sophisticated business entity, Bear Stearns expressly agreed that the insurers would "not be liable" for any settlement in excess of $5 million entered into without their consent. Aware of this contingency in the policies, Bear Stearns nevertheless elected to finalize all outstanding settlement issues and executed a consent agreement before informing its carriers of the terms of the settlement. Therefore, the Court of Appeals determined that Bear Stearns may not recover the settlement proceeds from the insurers. (Vigilant Ins. Co. v. Bear Sterns Companies, Inc., 10 N.Y.3d 170). (March, 2008). “STORM IN PROGRESS” DEFENSE AND FAILURE TO HAVE ACTUAL OR CONSTRUCTIVE NOTICE OF ACCUMULATING SNOW AND ICE WARRANTS SUMMARY JUDGMENT Plaintiff, Andrew Radatz, allegedly slipped and fell on a hotel sidewalk owned and operated by Defendant BF Saul Company. According to both Plaintiff and Defendant Expert affidavits, approximately two inches of snow fell throughout the day with the temperatures not exceeding thirty degrees on or about January 4, 2001.

SUMMER/ FALL UPDATE 2008 Defendant argued that summary judgment is warranted pursuant to the “storm in progress” defense which suspends a duty of the landowner to remedy a snow and ice condition until a reasonable time after the weather event ceases. Plaintiff argued that, since there were no severe weather warnings or school closings that this defense should not apply. However, Defendant, represented by TREVETT CRISTO SALZER & ANDOLINA, P.C., cited numerous cases thereby applying this defense to instances of sleet, freezing rain, light snowfall and ice. Defendant further asserted that summary judgment is proper as the insured had no actual or constructive notice of any accumulating snow and or ice on the property. On the day of the alleged accident, there had been no complaints to the front desk regarding the sidewalks being treacherous. Also, throughout the day, hotel maintenance crews salted the premises on atleast three different occasions including once prior in time to Mr. Radatz’ alleged fall. The Supreme Court, Monroe County, agreed with Defendant’s arguments and granted summary judgment dismissing the complaint based upon the fact that the hotel took reasonable steps to remedy the snow and ice condition on its premises, that it had no notice of any condition that might be deemed hazardous to its guests and that, as a storm was in progress, the hotel’s duty to ice and salt was suspended. (* Decided Supreme Court, Monroe County, October 2, 2008. Defendant BF Saul represented by TREVETT CRISTO SALZER & ANDOLINA, P.C., Louis B. Cristo, Esq. and Christopher T. Pusateri, Esq.).

Injured’s Rights Under Labor Law 240(1) Reinforced As The Court of Appeals Rules That A Property Owner Is Liable Under Labor Law 240(1) Even Though A Tenant Entered Into An Improvement Contract Without Owner’s Knowledge And Against Express Terms of Lease Defendant Consolidated Investing Company (“Consolidated”) owned a commercial building in Manhattan. C2 Media, LLC (“Media”) occupied the 11th floor of the building under a lease assignment from the original tenant, Chroma Copy International (“Chroma”).

Insurance and Litigation Newsletter Media agreed to abide by the terms of Chroma's lease, including a provision that the “[t]enant shall make no changes in or to the demised premises of any nature without Owner's prior written consent.” In addition, a rider to the lease stated that “[a]ll renovations, decorations, additions, installations, improvements and or alterations of any kind or nature in the Demised Premises ... shall require the prior written consent of Landlord.” In direct contravention to the terms its lease and without notifying Consolidated, Media hired a contractor to install a commercial air conditioning unit. During the installation, an employee of the contractor incurred injuries while working on a scaffold. The contractor commenced an action against, among others, Consolidated, seeking damages for his injuries. Consolidated immediately moved for summary judgment, and the Supreme Court granted same dismissing the complaint, holding that Consolidated could not be held liable because it had no knowledge of the improvement, and the improvement violated the terms of the lease. After the First Department affirmed the lower court’s decision, the Court of Appeals reversed the First Department’s decision. In support of its holding, the Court of Appeals cited several well-settled cases standing for the proposition that an out-of-possession owner is still liable under 240(1). Using those cases as its foundation, the Court held that the terms of the lease agreement barring improvements are still inadequate to preclude an owner from liability. Thus, even a complete lack of knowledge, coupled with a lease agreement barring improvement contracts, is insufficient to insulate an owner from liability under Labor Law 240(1). N.Y. Labor Law 240(1) (McKinney’s 2008).

Erosion of Wicks Law Begins New York’s former Wicks Law, enacted in 1912, required municipalities in New York to issue multiple construction contracts for most public works projects when the cost exceeded $50,000. The government entity must award separate prime contracts for at least three major components of the work: electrical, plumbing and HVAC. A fourth contract is usually awarded to a general contractor for the remainder of the project scope. The Wicks Law has faced increasing criticism as antiquated

SUMMER/ FALL UPDATE 2008 and creating inefficiency, particularly on small sized projects. The purpose of Wicks Law has been described “to insure some form of expertise in these areas of construction, rather than having all bids made by general contractors who would subcontract these various classes of work in their own discretion and at a potential hazard to the State…” Nager Elec. Co. v. Office of General Services, 56 Misc.2d 975, 977 (N.Y. Sup. Ct. Albany County 1967), aff ’d, 30 AD2d 626 (3rd Dep’t 1968). In contrast to private improvement projects, which are often managed by a project manager or the general contractor, the Wicks Law forces the public owner to manage the construction process, coordinate schedules of the separate prime contractors and resolve disputes. In response to mounting pressure from the AGC and other lobbyists, the Wicks Law has now been amended. New York public works contracts advertised or solicited for bid on or after July 1, 2008 will now be subject to a new statutory scheme. The new statutory scheme consists of two major components: (1) raising the monetary threshold triggering the multiple prime requirement and (2) allowing public owners to avoid the multiple prime requirements through Project Labor Agreements (“PLA”). New Threshold Amounts: As of July 1, 2008, the Wicks Law’s threshold amount triggering the requirement of multiple prime contractors will increase to: $3 million in the counties of the Bronx, Kings, New York, Queens, and Richmond; $1.5 million in the counties of Nassau, Suffolk and Westchester; and $500,000 in all other counties within the State. PLA: Public owners can now also avoid the Wicks Law requirements of multiple primes for a project which exceeds the monetary threshold. To avoid the multiple prime requirement, the public owner must require a PLA that satisfies certain criteria. The new legislation defines a PLA as “a pre-hire collective bargaining agreement between a contractor and a bona fide building and construction trade labor organization establishing the labor organization as the collective bargaining

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representative for all persons who will perform work on a public project, and which provides that only contractors and subcontractors who sign a pre-negotiated agreement with the labor union organization can perform project work.”

Court of Appeals reverses finding of duty to defend and indemnify by Appellate Division

This PLA option has raised criticism, with come believing that this option greatly favors union contractors. Proponents of the legislation believe that non-union contractors can still qualify to do work provided that, among other things, they comply with union work rules for all trades, standard hours of work per day, and obligations to pay union dues and contribute to employee benefit funds.

Clayton Park Development, LLC, owner, retained plaintiff Worth Construction Co., Inc., general contractor, for the construction of an apartment complex. Worth subcontracted with Pacific Steel, Inc. for construction of a staircase and handrailings. As part of the subcontract, Pacific provided commercial general liability insurance through defendant Farm Family Casualty Insurance Company naming Worth and Clayton Park Development as additional insureds. Pacific’s work at the site involved the fabrication and installation of a staircase, which consisted of steel pan stairs and handrailings. Each individual stair was comprised of two “stringers” (or sides) welded to a steel pan. After Pacific installed the stairs, the project was turned over to Worth, who hired a concrete subcontractor to fill the pans. Once the concrete had been poured and walls were erected around the stairs, Pacific was to return to the site to complete its portion of the project by affixing the handrailings to the walls. After the stairs had been installed, but before the walls had been raised, Michael Murphy, a journeyman ironworker employed by Fasciano Iron Works Inc., sustained injuries when he slipped on fireproofing that had been applied to the stairs by subcontractor Central Enterprises. Pacific played no role in either contracting for or applying the fireproofing, nor did it subcontract with Fasciano for the performance of any work at the site.

Others argue that the recent amendment is not enough. However, they welcome any change and hope this amendment is just the beginning of a broader erosion.

Employers’ Liability Insurance Coverage limited to amount stated in the policy. In Preserver Insurance Co. v. Ryba, the Court of Appeals reversed a finding of the Supreme Court, which was affirmed by the Appellate Division, determining that the insured was required to provide unlimited employers’ liability coverage. Arthur Ryba, a construction worker employed by subcontractor, East Coast Stucco, fell from a scaffolding while performing work on premises owned by the general contractor, Joaquim Almeida. East Coast Stucco maintained an employers’ liability policy issued by Preserver Insurance Company. The policy at issue was a standard employers’ liability contract, mirroring the format and language of model policies that appear in New York Liability Manuals. According to the Court of Appeals, no statutory provision mandates unlimited employers’ liability coverage, and the terms of the Preserver policy at issue provided a clear limitation of coverage.

Murphy commenced a personal injury action against Clayton Park Development as owner of the premises and Worth as the general contractor. Because the complaint alleged that Murphy was injured on the staircase installed by Pacific, Worth forwarded a copy of the complaint to Farm Family demanding defense and indemnification under the terms of the policy. Worth also commenced a third-party action against Pacific seeking contribution and indemnification. Worth also commenced a declaratory judgment action against Farm Family, seeking defense and indemnification in the underlying action and reimbursement of attorneys’ fees it had expended to date in defense of the action. The additional insured endorsement states in pertinent part: “WHO IS AN INSURED (Section II) is

Insurance and Litigation Newsletter amended to include as an insured the person or organization shown in the Schedule as an insured [Worth] but only with respect to liability arising out of your [Pacific’s] operations or premises owned by or rented to you” (emphasis supplied). The policy also defines “Your work” as “(a) Work or operations performed by you or on your behalf; and (b) Materials, parts or equipment furnished in connection with such work or operations. “ In a 3-2 decision, the Appellate Division modified the order of Supreme Court, holding that, based on the definition of “Your work” in the policy, it was immaterial, for purposes of deciding additional insured coverage, whether Pacific had completed the installation of the stairs, whether its installation was negligent or whether Pacific or a contractor in privity with it was Murphy’s employer. Rather, for coverage purposed, it was sufficient that Murphy’s injury was sustained on the stairs. The Court of Appeals reversed (Worth Construction Co., Inc. v Admiral Ins. Co., 10NY3d 411 [2008]) holding that it was evident that the general nature of Pacific’s operations involved the installation of a staircase and handrails. An entirely separate company was responsible for applying the fireproofing material. At the time of the accident, Pacific was not on the job site, having completed construction of the stairs, and was awaiting word from Worth before returning to affix the handrails. Worth conceded that the staircase was merely the situs of the accident. As a result, it could no longer be argued that there was any connection between Murphy’s accident and the risk for which coverage was intended. In addition, since Worth conceded the stairs were not the proximate cause of Murphy’s injuries, the fact that the stairs constituted “[m]aterials, parts or equipment furnished in connection with [Pacific’s] work or operations” under the “Your work” provision did not entitle Worth to defense and indemnification.

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