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U.S. Underwriters Ins. Co. v. Image By J&K, LLC
Citation: 335 F. Supp. 3d 321Docket: 16-CV-6176 (MKB)
Court: District Court, E.D. New York; August 14, 2018; Federal District Court
United States Underwriters Insurance Company initiated a legal action on November 7, 2016, against Defendants Image By J. K, LLC, Sphinx Cleaning Systems, Inc., and Margarita LeClerc, seeking a declaratory judgment to establish that it has no obligation to defend or indemnify Image in a related state court case, Margarita LeClerc v. Image By J. K, LLC and Image Building Maintenance, Inc. This request is grounded in the Declaratory Judgment Act, 28 U.S.C. § 2201. On September 22, 2017, both U.S. Underwriters and Image filed cross-motions for summary judgment under Rule 56 of the Federal Rules of Civil Procedure concerning their rights and responsibilities under the insurance agreement, with Image also seeking reimbursement for related costs. The court ultimately ruled in favor of Image’s cross-motion while denying that of U.S. Underwriters. In the background of the case, U.S. Underwriters is identified as a North Dakota insurance company operating in New York, while Image is a Virginia-based limited liability corporation. Image had entered into a janitorial services agreement with Walgreens Eastern Co. Inc. on March 4, 2010, and subsequently subcontracted these services to Sphinx on March 23, 2011. Sphinx was responsible for cleaning tasks at a Walgreens location, including obtaining general liability insurance that named Image as an additional insured under policy number CP 3554491. The incident in question occurred on June 2, 2011, when LeClerc, a Walgreens employee, fell and sustained injuries due to allegedly unsafe wet floors, which had not dried properly after cleaning. LeClerc asserted that Image or its agents were negligent in ensuring the safety of the premises, leading to her injuries. The dispute centers on whether Image qualifies as an additional insured under the Policy. The Additional Insured Provision defines an additional insured as those listed in the Schedule, covering liability for bodily injury, property damage, or personal and advertising injury resulting from the acts or omissions of the named insured, Sphinx, or those acting on its behalf during ongoing operations at specified locations. The Exclusions Provision specifies that coverage does not apply to bodily injury or property damage occurring after all work related to the project has been completed, except for service, maintenance, or repairs, or after the portion of work causing the injury has been put to its intended use by someone other than another contractor or subcontractor involved in the same project. The document also outlines the standards for summary judgment, stating it is appropriate when, viewing evidence favorably for the non-movant, there is no genuine dispute of material fact. The court's role is to ascertain whether a genuine factual dispute exists, guided by precedents that emphasize the necessity of substantial evidence for a jury to find in favor of the plaintiff. Additionally, the Declaratory Judgment Act allows courts to declare the rights of parties in cases of actual controversy, defined as a significant dispute between parties with adverse interests, requiring immediacy and reality for a declaratory judgment to be warranted. A demand for declaratory relief alone does not establish a case or controversy necessary for federal subject matter jurisdiction. A case may be dismissed if the remedy sought is merely a declaration of law without practical enforcement implications. Federal courts have significant discretion under the Declaratory Judgment Act to determine whether to declare the rights of litigants. The Second Circuit outlines prudential factors for courts to consider, including: the usefulness of the judgment in clarifying legal issues; whether it will finalize the controversy; if the remedy is being used for procedural advantage; potential friction with state or foreign courts; and if a more effective remedy exists. In the case at hand, the plaintiff argues that Image does not qualify as an additional insured under the policy because the terms "caused, in whole or in part" and "ongoing operations" disqualify it. The parties agree that Image must qualify as an additional insured for coverage. The Additional Insured Provision states that an entity listed in the policy is an additional insured regarding liability for bodily injury caused by Sphinx's acts or omissions. The plaintiff cites a precedent that interprets "caused, in whole or in part" to require Sphinx's acts to be the proximate cause of the injuries. The plaintiff contends that the proximate cause of the injuries was Walgreens' decision to allow employees on wet premises, arguing that Sphinx's responsibilities were fulfilled before the incident. Conversely, Image claims that Sphinx's acts were the proximate cause of the injuries, asserting that Sphinx had contractual responsibility to ensure dry premises on the incident day and that courts have broadly interpreted similar language in the Additional Insured Provision to support coverage. Image distinguishes the case of Burlington by noting that the injured party was an employee of the additional insured, rather than a third-party. Under New York law, an insurer's obligation to defend policyholders is extensive and exceeds the duty to indemnify. The narrower indemnity duty arises only when claims lie within policy coverage. If there is a reasonable possibility of coverage, the insurer must provide a defense. The determination of the duty to defend is typically made by comparing the complaint's allegations with the insurance contract language. This duty persists even if facts outside the pleadings suggest the claim might be meritless. While the New York Court of Appeals does not rigidly apply the four corners rule, any extrinsic evidence must not relate to the merits of the underlying case to avoid undermining the duty to defend. Courts generally do not allow the simultaneous adjudication of the duty to defend based on extrinsic facts that overlap with the tort suit's facts. In evaluating LeClerc's complaint, the insurer cannot deny coverage solely on the complaint's content, as it adequately alleges that Sphinx's actions or omissions led to LeClerc's injuries, emphasizing a duty of reasonable care in maintaining safe conditions. LeClerc claims that Image and its agents were negligent by failing to adequately dry the floors, creating a hazardous condition that resulted in her injuries. The court finds that LeClerc cannot deny Image's status as an additional insured based on allegations of lack of proximate cause. The plaintiff's argument relies on extrinsic evidence that overlaps with the merits of the underlying LeClerc Action, asserting that LeClerc and Walgreens were the proximate causes of her injuries. It is undisputed that Walgreens was responsible for ensuring the floors were dry and that both the Walgreens manager and LeClerc were aware of wet areas when employees were allowed into the store. If LeClerc or Walgreens are solely at fault, Image cannot be held liable in the underlying case. The court emphasizes that considering evidence related to the merits of the underlying suit when determining the duty to defend would undermine the principle that insurers must defend even meritless claims. The duty to defend differs from the duty to indemnify, and allowing insurers to withdraw defenses based on merit would negate the role of the insurer as 'litigation insurance.' The case referenced, Burlington, highlights that while the language of additional insured policies may be similar, it did not involve merits of the underlying action. The New York Court of Appeals focused on fault allocation rather than the validity of LeClerc's claim. The court concludes that the insurer must defend the action and can prove any relevant facts within that action to seek withdrawal of its defense later. Plaintiff's argument to deny coverage to Image is based on the assertion that LeClerc's injuries were proximately caused by either LeClerc or Walgreens, which is rejected. The Additional Insured Provision specifies that coverage applies to bodily injuries caused by Sphinx’s acts or omissions during its ongoing operations for additional insureds at designated locations. Plaintiff contends that "ongoing operations" implies coverage only for injuries occurring before the completion of work, asserting that Sphinx had finished its work before LeClerc's injuries, thus excluding Image from additional insured status. In contrast, Image claims that New York law interprets "ongoing operations" broadly, encompassing scenarios where the named insured is not present, and argues that coverage extends throughout the duration of its contracts with Walgreens and Sphinx, which were active at the time of the incident. New York law mandates that insurance policies be interpreted in accordance with general contract interpretation rules, aiming to realize the parties' intent as expressed clearly in the contract language. Clear policy provisions are enforced as written, while ambiguous terms, especially in exclusion provisions, must be interpreted in favor of the insured. Plaintiff misinterprets the Additional Insured Provision by suggesting that the requirement for coverage is limited to injuries occurring before work completion, ignoring the grammatical structure that separates bodily injuries from the conditions of coverage. The provision should instead be understood as tying ongoing operations to the acts or omissions of Sphinx or its representatives, not limited by the timing of work completion. The last antecedent rule indicates that limiting phrases in a list apply only to the last item, not all preceding items. This principle has been utilized in insurance disputes, particularly regarding clauses that specify coverage related to "acts or omissions" occurring during the performance of the named insured's ongoing operations. The Additional Insured Provision clarifies that coverage is based solely on the named insured's actions during these operations. In the case of Sphinx, its actions leading to injuries were deemed to occur during ongoing operations, specifically related to the failure to properly dry the premises, which is a relevant omission. Despite the plaintiff's claims that the Exclusions Provision negates coverage for Image as an additional insured, the argument hinges on whether Sphinx's work was completed before the injuries occurred. The All Work Clause excludes injuries occurring after all work is finished. The plaintiff contends that all work was completed before the incident because Sphinx had vacated the premises prior to the injury. Conversely, Image asserts that "all work" should encompass the entire contract duration, arguing that since both contracts were active at the time, Sphinx had not completed all work when the injury took place. Thus, the dispute revolves around the interpretation of ongoing operations and the timing of work completion relative to the injuries sustained. Image contends that Plaintiff incorrectly emphasizes the completion of a single work day, rather than the ongoing nature of the relationship between the parties. An insurer can only avoid its duty to defend if it proves that the allegations in the underlying complaint fall entirely within a policy exclusion, that the exclusion has no reasonable alternative interpretation, and that there is no factual or legal basis for indemnification. The insurer carries the burden of demonstrating that a claim is clearly within the exclusion's scope, using unmistakable language, and that it applies to the specific circumstances at hand. Plaintiff cannot deny its duty to defend Image based on the assertion that the injury occurred after "all work" on the "project" was "completed," as the policy lacks clear definitions for these terms. Without extrinsic evidence clarifying the parties' intent or relevant legal standards, the terms remain ambiguous. While the term "completed" is defined within the Products-Completed Operations Hazard Provision, which is not directly tied to the Additional Insured and Exclusions Provisions, it provides useful guidance. One interpretation indicates that work is considered completed when all contractual obligations have been fulfilled, suggesting that the exclusion may not apply if the injury occurs while the contract with Sphinx is active. New York law mandates a strict and narrow interpretation of policy exclusions, favoring the insured in cases of ambiguity. The term "project" might refer to a specific part of a contract or could be reasonably interpreted to include the entire agreement for which coverage is sought. There is a triable issue regarding whether the contractual work was completed by the time of the property damage, leading the Court to deem the All Works Clause inapplicable as the work was ongoing during the contract period. The Intended Use Clause, which excludes coverage for bodily injuries if "that portion of Sphinx's work" causing the injury has been utilized as intended, is also analyzed. The plaintiff argues this clause applies since the work linked to LeClerc's injuries was in use after Sphinx left and Walgreens opened. Conversely, Image contends the clause does not apply, but fails to clarify why Sphinx's work was not in its intended use. To evaluate the Intended Use Clause, the Court focuses on defining "that portion" and "intended use" as they pertain to Sphinx's work, noting the lack of definitions or extrinsic evidence from either party. The Court concludes that the clause would exclude coverage irrespective of how those terms are interpreted. The term "that portion" implies Sphinx's work can be divided, suggesting that coverage is excluded for each part of the work that has been utilized as intended. The Court identifies two reasonable methods to subdivide the work: by individual tasks or timeframes, and by specific areas of the Premises worked on. In the context of janitorial services, the phrase "put to its intended use" includes the opening of the Premises to customers. Supporting case law illustrates that work is considered to be in use once the premises are operational. Thus, the Court finds that the Intended Use Clause would apply, excluding coverage for the injuries arising from Sphinx's work that was in use. Manufacturing work is considered to be put to its intended use once the product begins to be utilized, as established in Martco Ltd. P'ship v. Wellons, Inc. Maintenance activities, including janitorial services, serve the primary purpose of ensuring customer access to retail items for sale, rendering the adequacy of such services irrelevant when determining if they were put to their intended use. This principle is supported by case law, including J.Z.G., which affirmed that infrastructure can fulfill its intended purpose despite defects, and Emp'rs. Ins. Co. of Wausau, which recognized that a door in use met the intended use criterion despite alleged flaws. Consequently, Sphinx's services on June 2, 2011, the date of LeClerc's injury, were deemed to have been put to their intended use as the premises, including the incident location, were open to customers. LeClerc herself noted that a customer had previously fallen in the same area before her incident. Moreover, the court found no reasonable interpretation that would exclude the applicability of the Intended Use Clause in this case. However, the Plaintiff was unable to rely on this exclusion due to failure to comply with New York Insurance Law § 3420(d)(2) regarding disclaimer requirements. Regarding common law estoppel, Image argues that the Plaintiff cannot deny coverage, highlighting a history of coverage with reservations since October 6, 2014. Image claims that the reservations were not related to the additional insured provisions now invoked by the Plaintiff and points to a lengthy delay in the Plaintiff's denial of coverage as a reason to prevent withdrawal of coverage. The Plaintiff disputes this characterization, asserting that its reservations were based on uncertainties about the timing of LeClerc's injuries concerning ongoing operations. The Plaintiff maintains that insurers can withdraw coverage at any time if a claim falls outside the insurance contract. Additionally, the Plaintiff argues that Image has not demonstrated the unreasonable delay or prejudice necessary for a successful estoppel claim, as outlined in Bluestein, Sander v. Chi. Ins. Co. Under New York common law, an insurer that defends an insured may be estopped from denying coverage if it unreasonably delays in disclaiming and the insured suffers prejudice from that delay. This principle remains applicable even after the enactment of Section 3420(d), which does not preclude common law defenses such as waiver or estoppel, both of which require proof of prejudice. Courts generally presume prejudice if an insurer provides a defense without reserving the right to assert policy defenses. However, if an insurer expressly reserves this right, as demonstrated by case law, the presumption of prejudice may not apply. In the case at hand, the party asserting estoppel (Image) failed to provide evidence of actual prejudice, relying instead on a presumption that was inadequate. The plaintiff had reserved its right to disclaim coverage in its communications. Furthermore, mere undertaking of defense by the insurer does not constitute legally cognizable prejudice unless it significantly restricts the insured's ability to control their own defense or occurs without a reservation of rights. Prejudice must be proven in circumstances where the insurer becomes aware of its basis for denial after initially undertaking the defense. Overall, Image's claims of common law equitable estoppel were found to lack merit, as both parties reiterated their previous arguments regarding the applicability of New York Insurance Law § 3420(d)(2). Under New York Insurance Law § 3420(d)(2), insurers are required to notify insured parties of their intention to disclaim coverage for bodily injury "as soon as is reasonably possible." The timeliness of such notice is measured from when the insurer first learns of the grounds for the disclaimer. This law aims to protect insured individuals from delays that could result in wasted efforts to recover damages. Notice sent solely to an additional insured's primary insurer does not fulfill the statutory requirement. Unlike traditional common-law defenses like waiver and estoppel, which consider the insurer's intention or prejudice to the insured, § 3420(d)(2) imposes a strict timeline based on the passage of time. A mere reservation of rights letter does not satisfy the requirement for timely notice of disclaimer. Insurers must demonstrate justification for any delays in issuing the disclaimer, and if the grounds for denial were apparent before the delay, the insurer’s explanation is legally insufficient. While insurers may need reasonable time to investigate claims, they are obligated to conduct their investigations promptly and thoroughly. The reasonableness of a delay is typically a factual question, influenced by the specifics of the situation, including the length and rationale for the delay. Summary judgment may be warranted in "exceptional" cases where an insurer fails to provide an explanation for delays in disclaiming liability. New York courts have determined that unexplained delays of two months or more are unreasonable as a matter of law, thereby preventing insurers from denying coverage (citing cases including Guzman v. Nationwide Mut. Fire Ins. Co. and Hartford Ins. Co. v. Nassau Cnty.). Timely notice is essential when denying coverage due to policy exclusions; however, no disclaimer is needed when a claim falls outside the policy's coverage. The distinction between a lack of coverage and a lack of coverage due to an exclusion can be complex. Insurers must issue timely disclaimers when denying coverage based on exclusions. For instance, to invoke an "intended use" exclusion, an insurer must disclaim in accordance with section 3420(d). The New York Court of Appeals emphasizes that the effect of a policy provision, rather than its label, determines its classification as an exclusion. The intended use provision denies coverage by exclusion since it reveals circumstances that were initially covered under the Additional Insured Provision, which provides coverage for liabilities arising from the named insured's operations. Denial of coverage based on additional insured status was deemed a lack of coverage, with the Intended Use Clause revealing coverage for the named insured's acts or omissions linked to subsequent events. The insurer was required to timely disclaim coverage due to the basis being a policy exclusion rather than additional insured status. The plaintiff's failure to justify a three-and-a-half-month delay in disclaiming coverage, despite available information post-deposition, was deemed unreasonable as a matter of law. Consequently, the plaintiff could not disclaim coverage due to the additional insured endorsements or exclusions and was mandated to defend Image in the LeClerc Action. Furthermore, the plaintiff must indemnify Image for any liability arising from this action, as the duty to indemnify was unaffected by pending facts in the LeClerc Action. Image also sought reimbursement for defense costs, arguing it was placed in a defensive position due to the plaintiff's declaratory relief efforts, claiming it is entitled to reimbursement as a prevailing policyholder. Plaintiff argues that Image is not entitled to reimbursement from Scottsdale Insurance Company, asserting that Scottsdale is the actual defendant in this case. Plaintiff claims that Scottsdale disputes its coverage position, has issued objections to coverage letters, and has engaged in correspondence regarding its defense and indemnification duties in the LeClerc Action. Moreover, Plaintiff notes that Scottsdale, via Image, has filed a counterclaim for a declaratory judgment regarding obligations under the policy. As such, Plaintiff contends that Image is not in a "defensive posture" since the real dispute lies between the two insurers. Plaintiff asserts that should the court require reimbursement, Image must demonstrate that it has incurred actual defense costs, rather than Scottsdale. Under New York law, an insured may recover attorneys' fees and expenses when defending against an insurer's attempt to withdraw from its policy obligations, provided the insured prevails. The rights to recover such fees arise specifically when an insured successfully counters an insurer's declaratory judgment action asserting a lack of duty to defend or indemnify. The rationale is that an insurer's duty to defend encompasses actions arising from occurrences related to the policy, including defense against declaratory judgment actions initiated by the insurer. Counterclaims that directly mirror the insurer's claims do not place the insurer in a defensive posture. The motion court correctly found that the defendant is entitled to recover legal fees incurred from successfully opposing its insurer's declaratory judgment counterclaim. A precedent indicates that fees are recoverable in these scenarios, while it is noted that an insured may seek reimbursement for defense costs but not for prosecuting counterclaims. Image is entitled to attorneys' fees after successfully defending against a declaratory action initiated by the Plaintiff, which forced Image to assert its rights to defense and indemnification under its insurance policy. The court cites precedent establishing that a prevailing insured is eligible for attorneys' fees in such situations, even if they did not initiate the action. The Plaintiff's argument that Image is not entitled to reimbursement because Scottsdale is the real defendant is rejected, as the Plaintiff initiated the action against Image. The court emphasizes that the key factor is whether Plaintiff's actions placed Image in a defensive posture. The absence of a direct claim against an insured does not negate their entitlement to fees if the insurer attempts to disclaim its obligation to defend. The court concludes that Image was indeed placed in a defensive position by the Plaintiff's actions and orders reimbursement for the costs incurred. In the event of a dispute regarding fee reasonableness, parties must submit their positions in writing after attempting to resolve the issues in good faith. The Court grants Image's cross-motion and denies U.S. Underwriters' cross-motion for summary judgment, affirming U.S. Underwriters' duty to defend and indemnify Image in the LeClerc Action. U.S. Underwriters is also ordered to reimburse Image for incurred costs. The Court references the Complaint and Image's Answer solely for background context, citing relevant case law on judicial admissions and choice-of-law principles. Under New York law, the jurisdiction with the most significant relationship to the transaction and parties is determined by five factors: the place of contracting, negotiation, performance, location of the subject matter, and the domicile of the parties. In cases where policies cover multiple states, the domicile of the insured serves as a proxy for determining applicable law. Both parties agree to the application of New York substantive law, supported by the fact that Sphinx, the named insured, is a New York corporation, and the relevant work occurred in New York. The Additional Insured Provision specifies coverage for liabilities arising from the acts or omissions of the named insured or those acting on their behalf during ongoing operations for additional insured parties at designated locations. The excerpt addresses several legal arguments regarding the interpretation of a contract between Sphinx and Image. It critiques the applicability of the case Perez v. New York City Housing Authority, noting that the First Department did not consider the intended use argument, which was improperly raised on appeal. The court highlights that Sphinx’s contract does not allow for subdivision of work due to ongoing obligations, referencing Liberty Surplus Ins. Corp. v. Norfolk S. Ry. Co. to support this view. The ruling emphasizes that segmenting tasks would make it impossible to determine when Sphinx's work could be deemed complete, potentially nullifying the Intended Use Clause. Citing Nautilus Ins. Co. v. Bd. of Dirs. of Regal Lofts Condo. Ass'n, the court underscores the principle that contract provisions should not render other clauses meaningless. Additionally, it addresses Image’s late introduction of the common law waiver argument in its reply, asserting that waiver and estoppel are distinct under New York law and thus not requiring further discussion. The court notes that it is within its discretion to disregard arguments presented for the first time in reply papers during summary judgment. Image's claims about the plaintiff's failure to reserve rights concerning Additional Insured and Exclusions Provisions are countered by the plaintiff's October 6, 2014 letter, which explicitly stated a disclaimer of coverage due to insufficient facts. This letter, along with a subsequent communication, is deemed sufficient to counter Image's waiver claim, supported by Long Island Lighting Co. v. Am. Re-Ins. Co. Waiver involves the voluntary relinquishment of a known right and requires awareness of the facts underlying that right. The plaintiff contests the applicability of New York Insurance Law § 3420(d)(2) solely on the grounds that Image does not meet the Additional Insured Provision, implying acceptance of the law's relevance to this case. Section 3420(d)(2) applies to insurance cases involving death or bodily injury from New York accidents and is relevant when the policy is issued or delivered in New York, covering risks and insureds based in the state. A named insured is considered located in New York if it has a substantial business presence there. In this case, LeClerc sustained injuries in New York, and the policy covers risks in the state, with Sphinx having a significant presence due to its operations. The parties have conflated various legal theories, including common law waiver and estoppel, without adequately addressing the applicability of § 3420(d)(2). The court granted an opportunity for clarification on this matter. The plaintiff has indicated that the Exclusions Provision does not invalidate the applicability of § 3420(d)(2), focusing instead on the Additional Insured Provision. It is noted that common law estoppel can prevent insurers from denying coverage even when coverage does not exist, unlike § 3420(d)(2), which does not create obligations beyond the policy's terms based on the insurer's conduct. The plaintiff's only legitimate argument for denying coverage centers on the Intended Use Clause, with the timeline for disclaiming coverage beginning at the LeClerc deposition, where sufficient information was provided to support this claim. The excerpt addresses the requirements for an effective disclaimer of insurance coverage under New York law. Timeliness of the disclaimer is determined from when the insurer first learns of the grounds for disclaiming liability or coverage. Prior letters sent by the insurer were deemed inadequate because they did not clearly disclaim coverage; instead, they reserved the right to disclaim in the future. New York Insurance Law mandates that a disclaimer must be communicated in unequivocal and unambiguous language. The letters in question failed to provide clear notice of the insurer’s position regarding coverage, as they indicated uncertainty about the existence of grounds for a disclaimer. Additionally, the excerpt notes that while reservations of rights letters may provide a defense, they do not equate to an effective disclaimer. It is also highlighted that claims for indemnification are typically not justiciable until a liability has been established against the indemnified party. Hence, several district courts have ruled such claims as unripe for adjudication until the underlying action is resolved. In the case No. 16-CV-1541, the court addressed the jurisdiction of declaratory judgment actions in relation to contingent liability. It noted that such liability does not prevent jurisdiction if there is a practical likelihood of the contingencies occurring, emphasizing the importance of assessing the likelihood of future litigation that may necessitate indemnification. The court found that the existence of pending lawsuits against the indemnitee indicates a real possibility of liability, thus rendering the indemnification claim ripe for adjudication. Specifically, the action by LeClerc against Image establishes a practical basis for the indemnification claim, independent of the underlying action's merits. The court ruled that Image is entitled to a defense and indemnification but cautioned against allowing Image to recover more than its actual incurred costs, referencing the principle that insured parties should not receive a windfall. The court concluded that Image cannot seek reimbursement beyond its documented expenses, including any owed to Scottsdale for costs advanced.