N.Y. case may set commercial insurers precedent

Leaky windows in a mixed-use building in Manhattan’s East Village led to a protracted 12-year lawsuit that may have scored a precedent-setting win for policyholders challenging commercial insurers over coverage even before the case is resolved.

Utica Mutual Insurance Co. and Utica National Assurance Co. had asked New York’s Supreme Court for a pre-emptive declaratory judgment of the dispute brought by the window company, Crystal Window and Door System LTD., claiming it had no duty to indemnify Crystal for any judgment or settlement in the construction-related property damage action. Utica, however, did not prevail, and then some.

The court not only dismissed Utica’s insurers’ “premature” request for summary judgment, but also awarded attorneys’ fees to Utica based on a New York rule that an insurer’s duty to defend its policyholders extends to “any action” arising out of a claim or occurrence, “including a defense against an insurer’s declaratory-judgment action.” In other words, Utica not only has to pay for Crystal’s defense against the building’s owner but also pay the attorney fees and court costs that it incurred by having been sued by the insurer.

A first for commercial insurers

Court watchers said it appears this is the first case in New York in which a commercial insurer’s duty to defend a policyholder in a legal action exists even if it is the insurer who is suing the policyholder. Previous cases had found that a policyholder who successfully files a coverage action against its own insurer could not recover attorney fees, although they would be able to recover fees if it successfully defended the insurer’s coverage action.

The lawyers for Crystal, Keith McKenna and Chelsea Ireland of Cohen Ziffer Frenchman & McKenna, argued that those legal decisions were made in error and asked the court to dismiss Utica’s request for summary judgement since the underlying case was ongoing and no settlement or judgement had been entered. Utica argued that certain exclusions in the insurance policy governing “Your Work” and “Your Product” precluded coverage as a matter of law. Crystal opposed Utica’s motion and further argued that, because Utica does not dispute its duty to defend Crystal, Crystal is entitled to an award of the attorneys’ fees that it incurs.

None of the parties would speak publicly about the case since it is still ongoing.

Supreme Court Judge Gerald Lebovits declined to stay the action based on the “complex and slow-moving” nature of the underlying case, noting that Utica had failed to “provide clarity” as to “when the factual questions bearing on Utica’s potential duty to indemnify” would be resolved.

Request for attorney's fees granted

In a second ruling, the judge granted Crystal’s request for attorneys’ fees saying that when an insured “is cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations,” and the commercial insured then prevails, it may recover attorney fees “incurred in defending against the insurer’s action.” Such fees were typically awarded when an insurer contests its “duty to defend” and Judge Lebovits acknowledged that neither the Appellate Division nor the Court of Appeals has addressed “whether a prevailing policyholder is entitled to attorney fees when the insurer has acknowledged a duty to defend but contested the duty to indemnify.”

The case may impact future decisions by commercial insurers to bring legal action against their policyholders if they have to pick up the costs of doing so.

Ultimately, Judge Lebovits determined that Utica’s obligation to cover Crystal’s fees derives from “the insurer’s duty as a matter of contract to defend its insured” and that where “an insurer bringing an unsuccessful coverage action has a duty to defend its insured,” the insured may be entitled to its attorney’s fees.

“In short, this court is not persuaded by the Second Circuit decisions applying New York law on which Utica relies, and declines to follow them here,” Judge Lebovits wrote.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].