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Issues of Fact Preclude Summary Judgment on Insured’s Breach of Duty to Cooperate

On September 13, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Colony Ins. Co. v. International Contr. Servs., LLC, 2019 NY Slip Op 32717(U), holding that issues of fact precluded summary judgment on a liability insurer’s disclaimer based on the insured’s failure to cooperate with the defense.

In the underlying personal injury litigation at issue in this case, the defendant ICS had its answer stricken based on its failure to cooperate in discovery (including failing to present a witness for a court-ordered deposition and to provide an affidavit supporting a claim that it had no responsive documents to produce).  The resulting default judgment was a pyrrhic victory for the plaintiff because ICS’ liability insurer promptly disclaimed coverage based on the insured's failure to comply with its duty to cooperate in the defense.  The insurer (Colony) commenced a declaratory judgment action, seeking to establish, inter alia, that it properly disclaimed coverage and that the injured party could not seek a payment from Colony with regard to any "settlement, award, verdict, or judgment rendered in the Underlying Action." Although the insured’s conduct in discovery appears to have been pretty egregious here, Justice Borrok held that issues of fact as to the insurer’s diligence in seeking the insured’s cooperation precluded summary judgment, explaining:

In Thrasher [v. United States Liab. Ins. Co., 19 N.Y.2d 159, 168 (1967)], the New York Court of Appeals held that an insurer bears a heavy burden of proving lack of cooperation by its insured and that the insurer must demonstrate that it (1) acted diligently in seeking to bring about the insured’s cooperation, (2) that the efforts employed by the insurer were reasonably calculated to obtain the insurer's cooperation, and (3) that the attitude of the insured was one of willful and avowed obstruction. . . . In light of the affidavit evidence adduced by Colony, there remain material issues of fact concerning whether Colony acted diligently in seeking ICS’s cooperation in the period of time preceding the denial of coverage issued to ICS.

The Court also found that issues of fact precluded summary judgment on a counter-argument based on the insurer’s delay in disclaiming coverage. As previously noted on this blog, Insurance Law § 3420(d)(2) requires liability insurers to “give written notice as soon as is reasonably possible” of a denial of coverage based on a policy exclusion, or, as in this case, the insured’s failure to satisfy a policy condition, such as the duty to cooperate.  Failure to do so can result in a waiver of the exclusion or condition.  The statute cannot create coverage where there is none – for example, if there is no policy in place for the relevant time period.  Moreover, this statutory timely-disclaimer requirement only applies to policies “issued or delivered” in New York.  The Court of Appeals has held that this encompasses policies issued to insureds that have a “substantial business presence and create risks in New York.” Carlson v. American Int’l Group, Inc., 20 N.Y.3d 288, 306 (2017).  Here, Justice Borrok held the summary judgment record contained insufficient “evidence to establish that ICS had substantial business presence in New York.”  Therefore, it remained uncertain whether “Insurance Law § 3240(d)(2) and its timeliness requirements apply to the Policy that was issued to ICS.”

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