City of New York v. Western Heritage Insurance

Citations: 98 F. Supp. 3d 557; 2015 U.S. Dist. LEXIS 27780; 2015 WL 1003407Docket: No. 13 CV 4693(RJD)(JO)

Court: District Court, E.D. New York; March 5, 2015; Federal District Court

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In a declaratory judgment action, the City of New York, Dragonetti Brothers Landscaping Nursery and Tree Care, Inc., and Scott V. Paolino seek a determination regarding their entitlement to defense and indemnity under a commercial general liability policy issued by Western Heritage Insurance Company related to an automobile accident. The accident, occurring on May 13, 2010, involved a vehicle owned by John Battocchio and a dump truck driven by Paolino, resulting in Battocchio's death and subsequent litigation against Dragonetti, the City, and Paolino, alleging negligence in vehicle operation and service management.

Western Heritage issued a policy to Dragonetti, effective from February 15, 2010, to February 15, 2011, with coverage limits of $1 million per occurrence and a $2 million aggregate, subject to a $5,000 deductible. The policy includes provisions that designate Paolino as an insured employee of Dragonetti and contends that the City is an additional insured based on a prior contract with the New York City Department of Parks. 

The policy obligates Western Heritage to pay for damages related to bodily injury or property damage, but it excludes coverage for injuries or damages arising from the ownership, maintenance, or use of any automobile owned or operated by an insured. This exclusion holds even if claims suggest negligence in the supervision or operation related to the vehicle involved in the incident. The only exception to this exclusion pertains to the parking of vehicles on premises owned or rented by the insured, as long as the vehicle is not owned or rented by the insured. 

Western Heritage's motion for partial summary judgment has been granted, indicating that the court has found some merit in the insurer's position regarding the applicability of the policy exclusions.

On July 7, 2010, attorney Howard Newman notified the retail broker for Western Heritage about a pre-suit claim from the Battocchio estate concerning an auto accident involving Dragonetti's dump truck. Documents, including a notice of claim and police report, were forwarded to Western Heritage on July 12, 2010, marking their first notice of the claim. Western Heritage’s claims analyst noted the claim’s details and intended to verify the accident with the insured the following day. Initial attempts on July 14 to contact both Dragonetti and Newman were unsuccessful due to their absences. Disputes arose regarding when Newman confirmed the accident details to Western Heritage; plaintiffs claim this occurred on July 16, while Western Heritage states it was July 29, when Newman also mentioned a claim against the City. On August 9, Western Heritage received information on the Battocchio estate's claim against the City, which led to their conclusion to deny coverage based on an auto exclusion. A denial letter was sent to Dragonetti on August 13, 2010. Western Heritage also rejected a request from the City for coverage as an additional insured, citing the same exclusion. Subsequently, on August 2, 2011, Dragonetti's counsel forwarded a complaint from the Battocchio action, leading to another denial of coverage on August 11, 2011. The plaintiffs filed for a declaration of coverage on August 20, 2013, and after discovery, both parties moved for summary judgment.

Summary judgment under Fed. R. Civ. P. 56(a) can only be granted when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. When determining the existence of a genuine issue, all ambiguities must be interpreted and factual inferences drawn in favor of the nonmoving party. The parties in this case have filed cross-motions for summary judgment regarding plaintiffs' entitlement to defense and indemnity under the Western Heritage policy. The Court must assess whether the 'auto' exclusion in the policy prevents coverage for the underlying accident and if Western Heritage appropriately disclaimed coverage.

Western Heritage argues that the 'auto' exclusion explicitly bars coverage, while plaintiffs contend that it does not apply or is ambiguous. The Court first needs to ascertain if the exclusion is unambiguous, as initial contract interpretation is a legal matter for the court. If deemed unambiguous, the provision must be interpreted based on its plain meaning. Plaintiffs bear the burden of proving coverage, while Western Heritage must demonstrate that the exclusion applies. Any ambiguity must be resolved in favor of the plaintiffs.

The 'auto' exclusion in section I(2)(g) denies coverage for bodily injury related to the ownership, maintenance, or use of any insured’s vehicle. The Court finds this language unambiguous, aligning with prior rulings that similar exclusions are clear and not open to interpretation. Given that the complaint alleges bodily injury resulting from Paolino’s operation of a dump truck, the exclusion applies to the underlying accident, releasing Western Heritage from any obligation to defend or indemnify related parties. Under New York law, the term 'arising out of' is interpreted broadly, extending to injuries connected with vehicle use.

The second paragraph of the 'auto' exclusion states that the exclusion applies to claims against any insured alleging negligence related to supervision, hiring, employment, training, or monitoring, if the 'occurrence' causing 'bodily injury' or 'property damage' involves the ownership, maintenance, use, or entrustment of any auto owned, operated, rented, or loaned to any insured. Western Heritage contends this paragraph reinforces the first paragraph's broad application, while the plaintiffs argue it restricts the exclusion to specific claims listed. The plaintiffs assert the exclusion should not apply to allegations of negligence in landscaping services, claiming ambiguity. However, the court finds that the exclusion is clear and broad, as the phrase 'even if' indicates that the exclusion applies regardless of the negligence theory alleged. The existence of specific carve-outs in the exclusion implies broader coverage, contradicting the plaintiffs' interpretation. The court emphasizes that the act causing liability is decisive, not the theories of liability, and concludes that the 'auto' exclusion in section I(2)(g) of the policy unequivocally bars coverage for the Battocchio accident, regardless of the alleged negligence.

The court determined that the 'auto' exclusion in the insurance policy prevents coverage, and it assessed whether Western Heritage properly disclaimed coverage under New York Insurance Law § 3420(d). Insurers must provide written notice of a disclaimer as soon as reasonably possible after obtaining sufficient information. A reasonable delay for thorough investigation does not render a disclaimer untimely. However, failure to provide timely notice without justification can result in estoppel against the insurer. The timing of a disclaimer is typically a factual question, but can be decided as a matter of law in exceptional cases. In this instance, a material dispute exists regarding the timeliness of Western Heritage’s disclaimer to Dragonetti. Western Heritage was notified of a potential claim on July 12, 2010, and denied the claim on August 13, 2010, leading plaintiffs to argue that the 32-day delay was unreasonable. Western Heritage contends that further investigation was necessary before issuing the denial. Disputes also arise over the occurrence of a verification call on July 16, 2010, and whether the delay in denial was justified. The court will not categorize the 32-day delay as unreasonable as a matter of law, citing the absence of a definitive standard for measuring such delays.

Western Heritage's obligation to disclaim coverage to Paolino under section 3420(d) cannot be determined as a matter of law, despite plaintiffs' claim that no disclaimer was sent. Western Heritage contends it was excused from this duty due to Paolino's failure to notify it of a claim. Under New York law, an insurer's coverage obligation hinges on timely notice from the named insured, a requirement that extends to additional insureds, where notice by one insured typically does not equate to notice for another. However, in cases where multiple insureds are involved in the same action and are united in interest, notice by one can suffice for all. Given that Paolino, as an employee of Dragonetti, shares a united interest with his employer, Dragonetti’s notice to Western Heritage is treated as notice for both.

Plaintiffs argue that Western Heritage is estopped from denying coverage to Paolino due to its failure to provide a separate disclaimer. However, a strict interpretation of section 3420(d) that leads to inequitable results is inappropriate. If Paolino is exempt from giving separate notice, then Western Heritage is not obligated to issue a separate disclaimer to him if it has already disclaimed to Dragonetti. Furthermore, the effectiveness of a coverage denial is not undermined by the lack of formal notice to a nominal party when there is an expectation that the informed party will relay it.

Additionally, a factual dispute exists regarding the timeliness of Western Heritage's disclaimer to the City. Western Heritage's position that the City is not an additional insured is incorrect, as Dragonetti had explicitly agreed to include the City as such under the policy, which covers additional insureds for vicarious liability linked to the insured.

Western Heritage contends that it cannot determine the City's liability beyond vicarious liability due to the ongoing nature of the underlying action. However, New York law mandates that an insurer must defend a claim if any allegations fall within the coverage purchased. The policy in question names the City as an additional insured, contingent upon operations performed under a permit issued by the City. Thus, Western Heritage is required to defend the City in the underlying action.

There is a dispute regarding the timeliness of Western Heritage's disclaimer to the City. Plaintiffs assert that Western Heritage was notified of the City’s claim on July 16, 2010, but delayed 28 days to issue a disclaimer. Western Heritage counters that it did not receive the notice until July 29, 2010, and documentation until August 9, 2010, making its August 13 disclaimer timely. Due to conflicting accounts of when Western Heritage became aware of the City’s claim, summary judgment on this issue is denied.

Plaintiffs argue that the disclaimer lacked sufficient specificity as required by section 3420(d) of New York law. However, the disclaimer, which cited an "auto" exclusion from coverage, was deemed sufficiently specific, as it adequately informed the City of the basis for the disclaimer without needing to quote specific policy terms.

Lastly, Western Heritage seeks to classify its coverage as excess insurance, but the Court refrains from ruling on this matter until the question of the timeliness of the disclaimer is resolved. If the disclaimer was timely, there would be no coverage under the policy, rendering the classification moot. The Court will not address the allocation of costs among insurers until all parties are involved in the action. Western Heritage's motion for summary judgment is partially granted, while plaintiffs' cross-motion is denied. The opinion clarifies the spelling of the plaintiff's name as 'Paolino.'