Whenever There are Multiple Insurers the Question is: Who's on First?

When the Loss Happens Before the Policy There is Never Coverage

Western Waterproofing Company, Inc. (“Western”) sued Defendants Zurich American Insurance Company (“Zurich”), Allied World Specialty Insurance Company (“Allied Specialty”), Allied World Assurance Company (U.S.) Inc. (“AWAC”), BDG Gotham Residential, LLC (“Gotham”), and ZDG, LLC (“ZDG”). Western seeks among other relief, declaratory judgments that Zurich and AWAC are obligated to defend and indemnify Western in a related case before this Court, BDG Gotham Residential, LLC et al v. Western Waterproofing Company, Inc. et al., No. 19-cv-06386. In that related case, Gotham and ZDG seek damages against Western for injuries that Western allegedly caused in a construction project (“the Underlying Lawsuit”). The Court has granted the intervention of five additional insurance companies, Starr Indemnity & Liability Company (“Starr”), Navigators Insurance Company (“Navigators”), Philadelphia Indemnity Insurance Company (“PIIC”), Markel American Insurance Company (“Markel”), and Berkley Insurance Company (“Berkley”) (collectively, “the Excess Insurers”).

In Western Waterproofing Company, Inc. v. Zurich American Insurance Company, et al., No. 20-cv-3199 (AJN), United States District Court, S.D. New York (February 3, 2022) the court was faced with cross-motions for summary judgment on Zurich's and AWAC's duties to defend Western in the Underlying Lawsuit and a motion filed by Gotham and ZDG to consolidate this action with the Underlying Lawsuit.

The Excess Insurers, who could face financial liability if Zurich is found to have a duty to defend or indemnify Western, also oppose Western's motion for summary judgment and support Zurich's motion for summary judgment.

FACTUAL BACKGROUND

Gotham, the owner of the land at 158 East 126th Street, New York, New York, in September 2016 contracted with construction manager ZDG for construction of an eleven-story mixed-use building known as the Gotham Plaza Project (“the Project”). In April 2017, ZDG entered into a subcontract with Western for the installation of a curtainwall facade at the Project.

The subcontract required, among other provisions, that Western “furnish all of the labor, materials, equipment, and services, including, but not limited to, competent supervision, shop drawings, samples, tools and scaffolding as are necessary for the proper performance of the Work,” and that it “use its best care, skill and diligence in supervising, directing and performing the Work.” It further required that Western “comply with all applicable city, state and federal laws, rules, regulations and codes of any governmental authority having jurisdiction over the Project.” On June 25, 2018, performing under the subcontract, Western used a Jekko MPK20 Minipicker (“the Jekko”) to lift facade panels into place. While lifting a panel into place, the Jekko tipped over, allegedly damaging certain property and injuring two ironworkers under Western's employ, Christopher Jackson and Jorge Delgado.. Delgado and Jackson filed personal injury suits against Gotham and ZDG and worker compensation claims against Western that are currently pending in New York state court.

ZDG declared Western to be in default under the subcontract “for, among other things and without limitation, its failure to proceed with its work in a timely manner and failure to obey all applicable laws, rules, codes, etc.” ZDG provided Western 48 hours to cure its default. On August 9, 2018, ZDG sent Western a second letter, this one providing notice of termination for cause under the subcontract.

Gotham and ZDG sued Western and Western Surety Company (“Surety”). Gotham and ZDG's amended complaint raises three causes of action against Western for breach of contract, negligence, and gross negligence, and seeks damages in excess of $37,147,390. The Underlying Complaint alleges that Western's acts and omissions set into motion a chain of events that resulted in the June 25 accident, serious physical injury to Christopher Jackson and Jorge Delgado, physical damage to the Premises and the Project (including loss of use), and extensive cost overruns and delays. Further, it states that ZDG had to “replace Western with another subcontractor” to complete the project and that, “[i]n addition to the foregoing, certain portions of the work performed by Western under the Subcontract prior to the termination thereof were defective and required remedial work and/or replacement.” Gotham and ZDG also alleged a breach of contract claim against Surety for its failure to perform under the performance bond following Western's default under the subcontract. The Underlying Lawsuit has proceeded and is presently in discovery.

Zurich's Coverage

ZDG maintained a Contractor Controlled Insurance Plan (“CCIP”), which provided certain insurance coverage to contractors that provided direct labor to the Project and were enrolled in the CCIP. The CCIP included a Commercial Insurance policy issued by Zurich which contained a Commercial General Liability Coverage Form (the “Zurich CGL Policy”).

To be covered, “[t]he ‘bodily injury' or ‘property damage' [must be] caused by an ‘occurrence.'” An occurrence is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Zurich disclaimed coverage for the Underlying Lawsuit. Zurich stated that the Underlying Complaint did not allege an “occurrence” of “property damage,” that the BusinessRisk Exclusion precluded coverage, and that the Contractual-Liability Exclusion precluded coverage. It further reserved its rights to decide whether the Professional-Liability Exclusion applied and to decide whether Zurich was obligated to cover any claims seeking punitive damages against Western, as the Underlying Complaint's gross negligence cause of action did.

AWAC's Coverage

The second insurance policy involved here was issued to Western by AWAC. The AWAC Policy has a limit of $5 million for each act, error, or omission.

The AWAC Policy requires that “[i]f during the policy period, the insured becomes aware of an act, error or omission in professional services . . . which may be expected to give rise to a claim (thereafter referred to as a ‘possible claim') under the policy, the insured must provide written notice to [AWAC] during the policy period.”

On September 25, 2019, Western sent AWAC notice of the Underlying Lawsuit and sought defense and indemnity under the AWAC Policy. AWAC denied coverage for the Underlying Lawsuit because (1) the Underlying Complaint did not allege that Western provided professional services, such as “construction/project management”; (2) ZDG's two letters in 2018 qualify as claims that Western was obligated to report to AWAC; (3) ZDG's two letters also qualify as prior claims or incidents and so are excluded from coverage; (4) Western failed to disclose the known circumstances of the June 25, 2018 incident to AWAC in its policy application submitted September 6, 2018, violating the terms of the application; and (5) coverage for the June 25, 2018 incident falls under the separate 2017-2018 policy that AWAC issued to Western but Western did not timely report the claim under that policy.

The Excess Insurers

In addition to the primary coverage issued by Zurich, ZDG also acquired excess insurance policies that sit on top of Zurich's coverage.

LEGAL STANDARD

Duty To Defend

Under New York law, an insurer's duty to defend its insured is exceedingly broad. While the duty to indemnify is generally adjudicated at the end of the proceeding, an insurer will be called upon to provide a defense whenever the allegations of the complaint suggest a reasonable possibility of coverage. If, liberally construed, the claim is within the embrace of the policy, the insurer must come forward to defend its insured no matter how groundless, false or baseless the suit may be.  

Though broad, the duty of defense is not boundless. An insurer can be relieved of its duty to defend if it establishes as a matter of law that there is no possible factual or legal basis on which it might eventually be obligated to indemnify its insured under any policy provision. In New York State, an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract. If the provisions are clear and unambiguous, courts are to enforce them as written. However, if the policy language is ambiguous, particularly the language of an exclusion provision, the ambiguity must be interpreted in favor of the insured

DISCUSSION

Zurich and the Excess Insurers disclaim any duty to defend Western in the Underlying Lawsuit because, they claim, the Underlying Complaint does not allege an “occurrence” as defined in the Zurich CGL Policy. In the alternative, they argue that even if an occurrence is alleged, it falls within at least one of three express exclusions in the Zurich CGL Policy: (1) the Contractual-Liability Exclusion; (2) the Business-Risk Exclusion; or (3) the Employer-Liability Exclusion.

The Underlying Complaint Alleges An “Occurrence” Under The Zurich CGL Policy

Under the Zurich CGL Policy, Zurich has a “duty to defend” Western in any suit seeking damages “because of ‘bodily injury' or ‘property damage' to which this insurance applies.” That bodily injury or property damage must be “caused by an ‘occurrence, '” which, for present purposes, is defined simply as “an accident.”

The Court concludes that the allegations of the Underlying Complaint “suggest a reasonable possibility of coverage” by alleging damages incurred because of bodily injury or property damage caused by an accident. The Underlying Complaint alleges the “occurrence” in question:

Although only Delgado and Jackson, not Gotham or ZDG, are alleged to have suffered bodily injury the Underlying Complaint repeatedly alleges that Gotham and ZDG incurred damages because of the bodily injury that Delgado and Jackson suffered.

The Underlying Lawsuit alleges an occurrence that is presumptively covered by the Zurich CGL Policy. The burden thus falls on Zurich and the Excess Insurers to prove that an otherwise-covered claim falls under the ambit of a policy exclusion.

The Contractual-Liability Exclusion does not apply

The Business-Risk Exclusions apply

Most of these exclusions stand for the same basic principle upon which the parties already agree but the Business-Risk Exclusion-exclusion j(5)-does defeat Western's claim to coverage on the basis of damages because of “property damage.” That exclusion applies to property damage to “[a]ny part of any ‘designated project(s)', including materials, machinery and equipment intended to become a part of the ‘designated project(s)', if such ‘property damage' occurs during the course of construction.” Thus, Western ultimately abandons its position that the property damage alleged in the Underlying Complaint is a basis for Zurich's duty to defend. Only remaining is Western's argument that Underlying Lawsuit also involves damages because of bodily injury.

The Employer-Liability Exclusion applies

Zurich and the Excess Insurers argued that the Employer-Liability Exclusion excludes from Western's coverage any claims of damages liability because of bodily injury to Western's employees. The Court agreed. Western does not suggest that bodily injury to any non-employee was a cause of Gotham and ZDG's damages or that Delgado's and Jackson's injuries did not arise out of their employment. The Employer-Liability Exclusion, therefore, was applied.

Western has, as a threshold matter, failed to point to any ambiguities in the Employee Exclusion that would prevent its application to the Underlying Lawsuit.

The Employer-Liability Exclusion is likely to extend beyond claims where workers' compensation would apply. After all, the immediately preceding exclusion in the policy already excludes coverage for “[a]ny obligation of the insured under a worker's compensation, disability benefits or unemployment compensation law or any similar law.” Ultimately, applying the Employer-Liability Exclusion here is consistent with the basic principle that a commercial general liability policy is not designed to provide coverage for an employer's liability for injuries to its employees.

The Court concluded, therefore, that Zurich does not have a duty to defend Western in the Underlying Lawsuit under the Zurich CGL Policy.

Because there is no obligation to defend Western under the Zurich CGL Policy, there is no duty to indemnify either.

The Court therefore concludes that because there is no duty to defend Western in the Underlying Lawsuit under the Zurich CGL Policy, there is also no duty to indemnify Western in the Underlying Lawsuit under the Zurich CGL Policy.

AWAC's duty to defend Western

AWAC also disclaims any duty to defend Western in the Underlying Lawsuit. It claims, first, that the Underlying Lawsuit does not concern “professional services.” Second, it claims that the claim arose with ZDG's August 9, 2018 letter, and is therefore barred by the AWAC Policy's October 1, 2018 inception date; the Non-Disclosed Known Conditions Exclusion; and the Prior Claims or Incidents Exclusion. Third, AWAC claims that Western's notice of the Underlying Lawsuit was untimely. Last, AWAC argues that, at the least,

The Court concluded that the Underlying Lawsuit is a claim arising from the rendering of professional services that falls within the scope of coverage.

The AWAC Policy defines a claim as a “demand, notice or assertion of a legal right seeking a remedy or alleging liability or responsibility on the part of the insured.”

Courts do not have the power to create for the parties a contract that they did not make and cannot insert language that one party now wishes were there. The August 9 letter alleged errors in rendering professional services and was a claim. Whether framed as violations of particular provisions of the subcontract or Western's tort-based duty to Gotham and ZDG, the August 9 letter alleges an error in rendering professional services and is therefore a claim potentially covered by the policy. Under the multiple-claims provision, the two are considered a single claim and predate the inception date. The Underlying Lawsuit therefore falls outside the coverage period of the AWAC Policy.

Having concluded that the August 9 letter is a “claim, ” the Court also concludes that the Underlying Lawsuit is excluded from coverage by both the Non-Disclosed Known Conditions Exclusion and the Prior Claims or Incidents Exclusion. The Non-Disclosed Known Conditions Exclusion excludes claim:

Based upon or arising out of a pollution incident or an actual or alleged act, error or omission in professional services or protective professional services in existence prior to the inception date of the policy or prior to the effective date of an endorsement to this policy and known by or reported to a responsible manager.

The allegations in the Underlying Complaint do not suggest a reasonable possibility of coverage under the AWAC Policy because they unambiguously fall outside the policy period and within the scope of the Non-Disclosed Known Conditions Exclusion and the Prior Claims or Incidents Exclusion.

Conclusion

For the reasons above, the Court concludes that there is no duty to defend or indemnify Western in the Underlying Lawsuit under the Zurich CGL Policy. The Court therefore granted Zurich's motion for summary judgment on Counts One and Two of the amended complaint and GRANTS IN PART Starr and Navigators' motion for summary judgment insofar as their duty to defend or indemnify Western in the Underlying Lawsuit arises from the Zurich CGL Policy. The Court DENIES Western's motion for summary judgment against Zurich.

The Court further concludes that there is no duty to defend Western in the Underlying Lawsuit under the AWAC Policy. The Court therefore granted AWAC's motion for summary judgment on Counts Five and Six of the amended complaint.

ZALMA OPINION

Insurance policies are contracts and will be applied by an appellate or trial court as written. In this case the court read the policies and ignored the obfuscation of the briefs and applied the contracts as written. The claims made policy only applied to claims made and reported during the policy period so there was no coverage for a loss or claim that preceded the inception of the policy and the since the Zurich policy clearly and unambiguously excluded the loss there was neither a duty to defend or indemnify.

© 2022 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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