City of New York v Zurich-American Ins. Group
Annotate this CaseDecided on October 22, 2004
Supreme Court, Kings County
City of New York, Plaintiff,
against
Zurich-American Insurance Group,, Defendant.
40406/03
Mark I. Partnow, J.
in this declaratory judgment action by plaintiff the City of New York (the City), defendant Zurich-American Insurance Group (Zurich) moves for an order granting it leave to amend its answer and for summary judgment declaring that it has no obligation to defend or indemnify the City in the underlying action entitled Mendez v City of New York (Sup Ct, Kings County, Index No. 49149/98) (the Mendez action). The City cross-moves for recovery of the attorney's fees and costs incurred by it in defending against Zurich's motion.
On December 29, 1998, Milagros Mendez (Mendez) brought the Mendez action against the City, the Board of Education, and Varsity Transit, Inc. (Varsity), seeking to recover damages for injuries that she allegedly sustained when she was sexually assaulted and harassed by a bus driver hired by Varsity to transport special education students to and from Hillcrest High School. On March 30, 1999, the City forwarded the summons and complaint in the Mendez action to Zurich, advising Zurich that it was an additional insured under a general liability insurance policy issued by Zurich to Varsity (the Zurich policy) and requesting that Zurich provide it with a defense under the Zurich policy. Despite several follow-up letters from the City, Zurich ignored the City's tendered request for a defense and failed to provide the City with any written response to such request. As a result, the City was forced to provide its own defense to the Mendez action. Consequently, on October 20, 2003, the City brought this action against Zurich, seeking a declaratory judgment that [*2]Zurich was required to defend and indemnify it and demanding recovery of the defense costs, which it had incurred due to Zurich's refusal to provide it with a defense.
Subsequently, the City moved for summary judgment in this action as against Zurich. The court, in its decision and order dated March 19, 2004, held that the claims alleged in the Mendez action plainly fell within the scope of the blanket additional insured endorsement of the insurance policy and that, pursuant to the express terms of the additional insured endorsement, the City was an additional insured under the policy. The court thus ruled that Zurich's refusal to defend the City was unjustifiable, and it granted the City's motion for summary judgment in its favor as against Zurich, declaring that Zurich was obligated to defend and indemnify the City as an additional insured under the policy issued by Zurich to Varsity and that Zurich was required to reimburse the City for the reasonable fees and costs incurred by it to date in defending the Mendez action.
During the time in which the City was required to provide its own defense to the Mendez action, discovery took place. Two preliminary conference orders directed the City to comply with certain discovery requests. In a third order dated May 29, 2002, the court denied a motion by Mendez to strike the City's answer for failure to provide documentary discovery material and for failure to produce any witnesses for deposition; it directed that all discovery be completed by August 13, 2002. On September 10, 2002, a fourth court order was issued directing the City to provide the outstanding discovery, and, on November 19, 2002, the court permitted Mendez to file a note of issue notwithstanding the City's lack of compliance with the September 10, 2002 order.
After Mendez filed her note of issue, Varsity (whose defense had, from the outset of the Mendez action, been undertaken by Zurich) moved to strike the City's answer based upon the City's lack of compliance with the court orders directing its compliance with the discovery demands, or, alternatively, to strike Mendez's note of issue. Mendez also cross-moved to strike the City's answer. By order dated March 31, 2003, Justice Laura Jacobson denied Varsity's motion and Mendez's cross motion. Mendez and Varsity, however, appealed the March 31, 2003 order.
On May 24, 2004, following this court's March 19, 2004 decision and order granting the City summary judgment in its favor in this declaratory judgment action, the Appellate Division, Second Department, reversed the March 31, 2003 order by Justice Jacobson in the Mendez action and granted Varsity's motion and Mendez's cross motion to strike the City's answer. It ruled that this was appropriate due to the City's willful and contumacious conduct, which it inferred from the City's repeated failure to comply with the court orders directing disclosure and the inadequate excuses offered by the City.
By letter dated July 9, 2003, 46 days following the May 24, 2004 decision and order of the Appellate Division, Second Department, Zurich disclaimed coverage "due to the City's prejudicial actions in allowing its answer to be stricken." Zurich, however, on August 10, 2004, appointed defense counsel for the City. On September 27, 2004, the parties entered into a settlement of the Mendez action for the total sum of $1,666,666.67.
Zurich, in support of its instant motion, argues that the May 24, 2004 ruling by the Appellate Division, Second Department, in the Mendez action is new evidence concerning the City's willful refusal to defend itself and that such refusal constitutes a material breach of the Zurich policy. Zurich contends that it should now be granted leave to amend its answer to assert as an eighth affirmative defense that the willful failure by the City's counsel to comply with discovery orders in the Mendez action, which resulted in the City's answer being stricken, constitutes a breach of the implied covenant of good faith in the Zurich policy, and bars the City from coverage under the Zurich policy in the Mendez action. Zurich further seeks, upon such amendment, summary judgment in its favor, declaring that the City is not entitled to coverage under the Zurich policy.
Zurich's proposed affirmative defense, which is predicated upon its argument that insurance coverage by it under the Zurich policy is barred by the City's breach of its continuing duty of good faith, relies upon the general premise that in every contract, "there exists an implied covenant of good faith and fair dealing" (Kirke La Shelle Co. v Armstrong Co., 263 NY 79, 87 [1933]). Zurich asserts that this implied covenant exists in the insurance contract at issue and governs the City's obligations under this insurance contract. Zurich contends that this implied covenant is a continuing [*3]duty on the part of the insured even after the insurer breaches its defense obligation.
Zurich, in support of its motion, argues that the City had a continuing obligation under the Zurich policy to mitigate its damages and to dispose of the claim against it in a way that did not prejudice it, as the insurance carrier. Zurich contends that, therefore, even after it denied coverage, the City was obligated to conduct its own defense reasonably and in good faith and in such a manner so as not to have its answer stricken. Zurich claims that since the drastic remedy of the striking of the City's answer was granted, this demonstrates bad faith and a breach of the implied covenant of good faith on the City's part, which should absolve it from having to indemnify the City for its loss. Zurich states that the City has engaged in intentional, outrageously prejudicial conduct, and is now simply submitting the "bill" resulting from its conduct to Zurich for payment.
Zurich's argument is rejected. It is well settled that "an insurer declines coverage at its own risk" (Park Place Entertainment Corp. v Transcontinental Ins. Co., 225 F Supp 2d 406, 413 [SD NY 2002]; see also Texaco A/S [Denmark] v Commercial Ins. Co. of Newark, NJ, 160 F3d 124, 128 [2d Cir 1998]; American Ref-Fuel Co. of Hempstead v Resource Recycling, 281 AD2d 573, 574 [2001]). "[A]n insurer cannot insist upon cooperation or adherence to the terms of its policy after it has repudiated liability on the claim" (Rajchandra Corp. v Title Guar. Co., 163 AD2d 765, 769 [1990]).
If an insurer has unjustifiably and wrongfully denied coverage and refuses to defend the insured, it has materially breached its contractual obligation to the insured and it cannot escape liability on the ground that the insured failed to comply with other terms of the contract, such as obligations under a cooperation clause or any other basic contractual obligations created by the insurance contract (see AJ Contracting Co. v Forest Datacom Servs., 309 AD2d 616, 617-618 [2003]; American Ref-Fuel Co. of Hempstead, 281 AD2d at 574; Matter of State Farm Ins. Co. v Domotor, 266 AD2d 219, 220 [1999]; Matter of State Farm Mut. Auto. Ins. Co. [Callisto], 255 AD2d 876, 876 [1998]; Rajachandra Corp., 163 AD2d at 768-769; Ocean-Clear, Inc. v Continental Cas. Co., 94 AD2d 717, 718 [1983]). An insurer's disclaimer of liability or coverage waives the insured's further compliance with any policy provisions or duties created by the policy and relieves the insured from the duty to cooperate (see Rajchandra Corp., 163 AD2d at 768-769).
Here, Zurich breached its contractual duty to defend the City in the Mendez action in 1999 when Zurich refused to respond to the City's letter requesting a defense and failed to provide the City with a defense in the Mendez action. Upon that breach, the City's obligation to cooperate with Zurich terminated and it had no duty to defend itself in a manner that would reduce Zurich's potential defense costs. Zurich waived any rights which may have been available by declining to undertake the City's defense and repudiating liability, excusing the City from any further performance of the conditions of, or compliance with any of its obligations under the Zurich policy (see AJ Contracting Co., 309 AD2d at 617-618; American Ref-Fuel Co. of Hempstead, 281 AD2d at 574; Matter of State Farm Ins. Co., 266 AD2d at 220; Matter of State Farm Mut. Auto. Ins. Co., 255 AD2d at 876; Rajachandra Corp., 163 AD2d at 768-769; Ocean-Clear Inc., 94 AD2d at 718).
Zurich argues that its claim for breach of the implied covenant of good faith is analytically distinct from a duty to cooperate clause, and attempts to distinguish those cases which have held that an insurer who has disclaimed liability cannot relieve itself from its duty to indemnify its insured based upon the insured's breach of a cooperation clause. Zurich's argument is unavailing. A claim for breach of the implied covenant of good faith contained in every contract is simply redundant of Zurich's breach of contract claim (see New York Univ. v Continental Ins. Co., 87 NY2d 308, 319-320 [1995]; Cornhusker Farms v Hunts Point Coop. Mkt., 2 AD3d 201, 206 [2003]; Engelhard Corp. v Research Corp., 268 AD2d 358, 358-359 [2000]). Such a claim is necessarily dependent upon the insurance contract in which this covenant is impliedly contained. Thus, Zurich's repudiation of the insurance contract excused any lack of compliance by the City with any implied duties created thereunder (see AJ Contracting Co., 309 AD2d at 617-618; American Ref-Fuel Co. of Hempstead, 281 AD2d at 574; Matter of State Farm Ins. Co., 266 AD2d at 220; Matter of State Farm Mut. Auto. Ins. Co., 255 AD2d at 876; Rajachandra Corp., 163 AD2d at 768-769; Ocean-Clear, Inc., 94 AD2d at 718).
Moreover, the City did not impliedly covenant to attempt to minimize Zurich's exposure in [*4]the event of Zurich's breach of its duty to defend and the City had no duty to mitigate Zurich's damages. Zurich itself refused to take any action in an effort to minimize its potential exposure in the Mendez action and, thus, it could not expect and cannot complain of the City's failure to adequately take such action. Zurich, "by its conduct, demonstrated that it was 'content to remain on the sidelines and allow th[is] situation to develop without becoming actively involved'" (Matter of State Farm Mut. Auto. Ins. Co., 255 AD2d at 877, quoting Rajchandra Corp., 163 AD2d at 769). Indeed, Zurich was well aware of the City's continued lack of compliance with discovery requests and the risk that the City's answer could be stricken since Zurich's own counsel was representing Varsity in the Mendez action and Varsity was the very party (along with Mendez) which had moved to strike the City's answer therein.
It is, therefore, disingenuous for Zurich to argue, and Zurich may not now be heard to complain that the defense, which the City was forced to undertake for approximately five years due to Zurich's wrongful refusal to itself provide the City with such defense, was inadequate or deficient. Furthermore, while the City may have erred in its handling of its discovery obligations, there is no showing that it did so to willfully obstruct Zurich's ability to defend it (see New York State Ins. Fund v Merchants Ins. Co. of New Hampshire, 5 AD3d 449, 450-451 [2004]; Commercial Union Ins. Co. v Burr, 226 AD2d 416, 417 [1996]).
It is noted that Zurich, in support of its motion, relies upon the holding of the Appellate Division, First Department, in Atlantic Cement Company, Inc. v Fidelity & Casualty Company of New York (91 AD2d 412, 419-420 [1983], affd 63 NY2d 798 [1984]), that "[w]here the insurer wrongfully refuses to provide the insured with a defense, the insurer's liability extends only to those reasonable sums paid in settlement." This holding, however, does not support Zurich's position as the Appellate Division, First Department, in Atlantic Cement Company, Inc. (91 AD2d at 420), merely ruled that it was necessary for the jury therein to determine the reasonableness of the settlement in the underlying claim because the terms of the settlement deviated from the Court of Appeals' decision on damages. In the case at bar, no genuine issue can be raised as to the reasonableness of the settlement in the Mendez action. Indeed, Justice Allen Hurkin-Torres, in the September 27, 2004 stipulation of settlement, noted on the record that the settlement sum agreed to by the parties was entirely reasonable; that the verdict, if it had gone to trial, "would probably [have] be[en] well in excess of a million [dollars]"; and that the contention by Varsity and Zurich that the City's answer had any relationship to the amount of the settlement was "disingenuous to say the least."
Zurich's reliance upon Servidone Construction Corporation v Security Insurance Company of Hartford (64 NY2d 419, 421 [1985]) is also misplaced. The Court of Appeals, in Servidone Construction Corporation (64 NY2d at 426), held that where an insurer breaches a contractual duty to defend its insured in an underlying action, the insurer is not liable to indemnify the insured where the loss is not covered by the policy. Here, this case does not involve an uncovered claim against the insured. Rather, as declared in the court's March 19, 2004 decision and order, Zurich has a duty to indemnify the City under the Zurich policy.
Thus, Zurich cannot claim that the City's failure to act in good faith relieved it of its obligation to pay under the policy (see Rajchandra Corp., 163 AD2d at 768-769). It is well established that leave to amend an answer should be denied where the amendment is patently devoid of merit (see Joyce v McKenna Assocs, 2 AD3d 592, 594 [2003]; Monteiro v R.D. Werner Co., 301 AD2d 636, 637 [2003]; Hodgson, Russ, Andrews, Woods & Goodyear, LLP v Isolatek Intl. Corp., 300 AD2d 1047, 1048 [2002]; Shellberry v Albright, 281 AD2d 892, 892-893 [2001]; Bencivenga & Co. v Phyfe, 210 AD2d 22, 22 [1994]). Therefore, since, here, Zurich's proposed amendment plainly lacks merit, its motion, insofar as it seeks leave to amend its answer, must be denied (see Joyce, 2 AD3d at 594; Monteiro, 301 AD2d at 637; Hodgson, Russ, Andrews, Woods & Goodyear, LLP, 300 AD2d at 1048; Shellberry, 281 AD2d at 892-893; Bencivenga & Co., 210 AD2d at 22). Similarly, Zurich's motion, insofar as it seeks summary judgment based upon this proposed defense, must likewise be denied.
The City, by its cross motion, seeks recovery of its attorney's fees in defending itself as [*5]against Zurich's instant motion. New York courts have carved out a narrow exception to the American rule that a prevailing party cannot recover attorney's fees (see U.S. Underwriters Ins. Co. v City Club Hotel, 369 F3d 102, 110 [2d Cir 2004]; Mighty Midgets, Inc. v Centennial Ins. Co., 47 NY2d 12, 21 [1979]; U.S. Fidelity & Guaranty Co. v New York, Susquehanna & Western Railway Corp., 277 AD2d 1026, 1026 [2000]). This exception is that the prevailing party is entitled to recovery of its attorney's fees when "cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations" (Mighty Midgets, Inc., 47 NY2d at 21 [1979]; see also U.S. Underwriters Ins. Co., 369 F3d at 110). Thus, attorney's fees are granted to an insured where an insurer has brought a declaratory judgment action against it, seeking to avoid its obligation to defend the insured in an underlying action (U.S. Fidelity & Guaranty Co., 277 AD2d at 1026; Mohawk Minden Ins. Co. v Ferry, 251 AD2d 846, 849 [1998]; U.S. Underwriters Ins. Co. v Mesiftah Eitz Chaim of Bobov, 210 AD2d 218, 218 [1994]).
Here, Zurich has brought this motion after the City's declaratory judgment action was already resolved and concluded by summary judgment in the City's favor. By doing so, Zurich has placed the City in a defensive posture by affirmatively requiring the City to relitigate anew the declaration of coverage issue based upon a new theory. Zurich has thus compelled its insured to defend against its attempt to obtain a declaration of its right to disclaim coverage, and Zurich's motion is, therefore, tantamount to an action brought by the insurer seeking to free itself from its policy obligations (see Mighty Midgets, Inc., 47 NY2d at 21). In fact, Zurich actually states that it "could [have] commence[d] a new declaratory judgment action based on the facts concerning the City's willful refusal to respond to discovery leading to its [a]nswer being stricken," but that it has, instead, elected to make this motion because the parties are already before the court. (In this regard, it is noted that Zurich's motion is procedurally defective since it seeks to vacate a final judgment of this court by way of a motion to amend rather than properly moving for renewal.)
Thus, under these circumstances, since the defense now raised by Zurich, which plainly lacks merit, was initiated by Zurich following the determination and conclusion of the City's declaratory judgment action, the court finds that an award of attorney's fees to the City is proper (see U.S. Fidelity & Guaranty Co., 277 AD2d at 1026-1027; Mohawk Minden Ins. Co., 251 AD2d at 849; U.S. Underwriters Ins. Co., 210 AD2d at 218; see also Rules of the Chief Administrator [22 NYCRR] § 130-1.1). An order granting the City's cross motion is, consequently, warranted.
Accordingly, Zurich's motion for leave to amend its answer to add an affirmative defense and for summary judgment declaring that it has no obligation to defend or indemnify the City in the Mendez action is denied. The City's cross motion for recovery of its reasonable attorney's fees incurred by it in defending against Zurich's motion, is granted. A hearing to determine the reasonable amount of these fees shall be scheduled and held at a future date.
This constitutes the decision and order of the court.
E N T E R
J. S. C
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