Insurance Coverage: "Direct Actions" To Be Permitted in Injury & Death Cases
On July 21, 2008, NY’s Governor Patterson signed a bill into law that will prevent an insurance company from unilaterally disclaiming coverage for personal injury or wrongful death claims based upon untimely “notice of claim”.  Under the new law taking effect on July 19, 2009, before disclaiming coverage, the insurer will have to be able to demonstrate that they were materially prejudiced by the untimely claim (if it was filed within two years of the accident).  If the claim was filed more than two years after the accident, then the burden shifts to the insured to prove that the insurer was not prejudiced by the delay.  By signing this law, Gov. Paterson has brought New York into the company of just a handful of States that have similar “no prejudice” rules.  In doing so, New York has officially abandoned its prior tradition of allowing insurance companies to disclaim coverage for late notice regardless of whether the insurer suffered harm from the delay.

Perhaps more significantly, the new law will allow the injured party himself to file a declaratory judgment action suit against the insurer when the insurer has disclaimed for untimely notice.  Thus, the injured party will no longer be reliant on the insured to pursue coverage on the claim.  This change is intended to provide protection for the injured party and, according to the legislature, to reduce litigation in cases in which the insured does not have resources worth pursuing.  The injured party can determine at the outset whether their action will be covered by the insured’s policy and therefore, whether the claim is worth pursuing.  Three conditions must be satisfied for the new rule to apply.  First, the “no prejudice” rule only applies to personal injury and wrongful death claims.  Second, the denial of coverage must have been for failure by the insured to provide timely notice of the claim.  And third, neither the insured nor insurer shall have previously commenced a declaratory judgment action within sixty days of the disclaimer.1

The stimulus for this change came in 2005 when the Court of Appeals indicated that late notice should not be a “hard-and-fast” justification for the insurance company’s declination of coverage.2   Prior New York courts had a long history of “stringently upholding” the decision by the insurer to disclaim coverage for late notice.  But in 2005 the Court of Appeals found persuasive arguments for relaxing that rule, requiring an insurance company to show how it was actually prejudiced by an untimely claim.

Although this law is somewhat narrowly tailored, it seems unlikely that opening the door to a new class of declaratory action plaintiffs will reduce litigation.  Moreover, this law effectively removes what amounted to a condition precedent to coverage, opening a Pandora’s Box of fact-intensive inquiries on prejudice.

1.  S. 8610, 232nd Sess. (N.Y.2007); A. 11541, 232nd Sess. (N.Y.2007)
2. Argo Corporation v. Greater New York Mutual Insurance Co., 4 N.Y.3d 332, 827 N.E.2d 762, 794 N.Y.S.2d 704 (2005) and Rekemeyer v. State Farm Mutual Automobile Co., 4 N.Y.3d 468, 828 N.E.2d 970, 796 N.Y.S.2d 13 (2005)

 
Court Sends Air Crash Case to Europe for Trial Against American Company
Clerides et al. v. Boeing Co., 534 F.3d 623, 2008 WL 2746499 (7th Cir. July 16, 2008)

Simply suing an American corporation in the country where it is headquartered will not always be enough to maintain the action in the chosen American court.  Though factors such as Plaintiff’s preference and that the defendant corporation’s headquarters are close by remain significant, they can be outweighed by the many other forum non conveniens factors.  This may be particularly true if the cause of the action occurred/accrued outside of the United States.

In Clerides et al. v. Boeing Co., the US Court of Appeals in the 7th Circuit dismissed an action brought against Boeing that stemmed from a crash of a Helios Airways Boeing 737-300 flying from Cyprus to Athens, Greece.  Representatives of the estate of Nicos Karakostas brought their wrongful death action against Boeing in the United States District Court for the Northern District of Illinois.  At the time that they brought their action, a number of wrongful death suits had been filed against Boeing in the US arising out of this crash.  All those suits were subsequently consolidated and brought before the Northern District of Illinois for pretrial proceedings.  Boeing made a motion to dismiss based on forum non conveniens.  But Karakostas’ representatives argued that because Boeing’s Commercial Airplanes Division was headquartered in the state of Washington, and since all of Boeing’s documents relevant to the design, manufacture, certification, testing and customer support services for that model aircraft were located there, the American court was the appropriate forum.  However, the US District court disagreed, and dismissed the action finding that Cyprus or Greece would provide a more suitable, and convenient, forum.

According to the Final Report of the Greek Air Accident and Aviation Safety Board, working in conjunction with Cyprus Air Accident and Events Investigation Committee and the US’s National Transportation and Safety Board, the primary cause of the fatal crash was Helios flight crew error.   All crew members and passengers reportedly lost consciousness and were asphyxiated when the flight crew failed to recognize that the aircraft’s pressurization system was incorrectly set to manual.  The plane therefore, failed to automatically pressurize.  Secondary causes of the crash were listed as Helios’ deficiencies in organization, quality management, and safety culture, and Boeings’ inadequate response to prior pressurization incidents.

The US common law doctrine of Forum Non Conveniens authorizes a federal court to dismiss an action “if a court abroad is the more appropriate and convenient forum for adjudicating the matter” Sinochem Int’l Co. v. Malaysia Int’l Shipping Co., 127 S.Ct. 1184, 1186, 167 L.Ed.2d 15 (2007).  To determine if the foreign forum is more appropriate, the court must weigh various public and private interests.  These considerations include ease of access to proof and evidence, availability of compulsory attendance of the unwilling, possibility to view premises, enforceability of a judgment, any administrative difficulties such as court congestion, possible unnecessary conflicts of law or difficulty applying foreign law, and what the local interest is in the action.

After considering the relevant factors and balancing the public and private interests, the district court concluded that each of the factors favored dismissal.  Furthermore, the District Court stipulated dismissal on the condition that Boeing make available all its documents and witnesses to the European forum.  During the appeal, the plaintiffs conceded that Greece and/or Cyprus would be adequate and available forums for their action.  Therefore, the only issue before US Court of Appeals was whether the District Court had abused its discretion in dismissing the action on forum non conveniens grounds.  After reviewing the rest of the District Court’s findings, the US Court of Appeals found no such abuse and affirmed the dismissal.

Insurers Must Pay Out Now, Dispute Coverage Later
Axis Reinsurance Co. v. Bennett, 2008 WL 2600034 (S.D.N.Y. 2008)

In a claim arising from the US District Court for the Southern District, insurance companies have been warned: pay now and fight over the costs later.   In Axis Reinsurance Co. v. Bennet, a group of Insureds that were denied the advancement of costs of defending their claims sued their Insurer.  They alleged that their liability insurance policy required their Insurer, Axis, to indemnify them against the claims at issue. However, the Insurer refused to pay, disputing whether the claims were actually covered by the policy.  The Bankruptcy Court ultimately held for the Insureds, granting summary judgment for their costs.  The Insurers appealed to the US Southern District Court.  The Insurers claimed it had no obligation to pay under the policy since the claims were not covered.

The applicable Policy provided: “[t]he insurer will pay covered Defense Costs on an as-incurred basis.  If it is finally determined that any Defense Costs paid by the Insurer are not covered under this Policy, the Insureds agree to repay such non-covered Defense Costs to the Insurer.”  The Insureds’ interpreted this provision to mean that Axis should have fronted the defense costs, whether coverage was disputed or not.  They argued that if later a court were to determine that the policy did not cover their claim, they would then have to pay Axis back.  But as long as the claim on its face ‘falls within the policy’s insuring agreement, it is covered unless and until a court makes the final determination’ (emphasis added).

Axis argued that the policy meant only that it “covered Defense costs.”  Accordingly, Axis argued that it had the unilateral right to determine if the defense costs were covered.  Axis alleged it had made a good faith determination that the Insureds’ claims were not covered.  Therefore, Axis should not have been required to cover the defense costs unless a court determined the claim was in fact covered. 

The US District Court looked to New York law in rejecting Axis’ arguments.  In New York, where an insurance contract included the duty “to pay for the defense of its insured, that duty is a heavy one,” and “exists whenever a complaint against the insured alleges claims that may be covered under the insurer’s policy” (emphasis added).  If, as here, the court concludes policy terms are ambiguous, the burden is on the insurer to prove its interpretation is correct.  Therefore, on summary judgment, it was Axis’s burden to present extrinsic evidence demonstrating that no “legal or factual basis exists that would potentially obligate the insurer to indemnify the insured.”  If unable to satisfy this burden, coverage is ‘in dispute.’  If coverage is in dispute and the liability policy includes the payment of costs, then “insurers are required to make contemporaneous interim advances of defense expenses…subject to recoupment in the event it is ultimately determined no coverage was afforded.”  Here, Axis’ failure to demonstrate that the policy provision was unambiguous meant that they had to advance the insured’s defense costs and dispute them later.

In conclusion, Summary Judgment was affirmed - Axis was liable for the advancement of defense costs to the Insureds in connection with those Actions, subject to repayment at some future time if a court later determined that the claim was not covered.

Texas Court Holds Punitive Damages Insurable
Fairfield Ins. Co. v. Steven Martin Paving, L.P., 246 S.W.3d 653 (Tex. 2008)

In Fairfield Ins. Co. v. Stephens Martin Paving, LP., the Supreme Court of Texas held that insurance companies may be liable for indemnifying insureds for punitive damages.1

This case arose out of a 2003 accident involving Stephens Martin Paving (“SMP”) employee.  The employee was op­erating a brooming machine when it flipped over, killing him.  Prior to the accident, SMP had procured both worker’s compensation and employer’s liability insurance from Fairfield Insurance Co., (“the Insurer”).  The employee’s fam­ily received the worker compensation benefits, but also sued for exemplary damages.  They alleged that SMP’s gross negligence in training its employees, maintaining its equipment, and in failing to enforce OSHA safety rules and regulations had caused the accident.  In response, the Insurer sought a declaratory judgment in federal district court to the effect that it owed no duty to defend or indemnify SMP in the suit for exemplary damages pursuant to the public policy of Texas.  The US Court of Appeals for the Fifth Circuit did not agree with the Insurer.  It ruled that the insur­ance policy’s language allowed for coverage for exemplary damages and that Texas public policy did not prohibit in­surance coverage of those damages.  On appeal, the federal district court certified the issue of insurability of exem­plary damages for gross negligence to the Texas Supreme Court.

The exact question presented to the Supreme Court of Texas was, “Does Texas public policy prohibit a liability insur­ance provider from indemnifying an award for punitive damages imposed on its insured because of gross negli­gence?”2  The Texas Supreme Court used a two-part analysis to support its decision that in some circumstances it is not against Texas public policy to insure exemplary damages.  First, the Court looked to see whether the plain lan­guage of the policy covered exemplary damages sought in the underlying suit against the insured.3  Here, the court assumed that it was covered as the Federal court question addressed only the public policy of Texas.  In the second part of the analysis, the Court looked to see whether the public policy of Texas allows for or prohibits coverage on the facts before it.4  Ultimately, the Court weighed two competing public policies: 1) freedom of contract, and 2) the pur­pose of exemplary damages.

The Court agreed that the purpose of punitive/exemplary damages is to punish the wrongdoer.  But it held that Texas’ public policy did not specifically bar the insurability of exemplary damages in worker’s compensation and em­ployer’s liability suits.  The legislature had actually authorized this Insurer’s worker’s compensation policy, a policy that included language covering punitive and exemplary damages in workers compensation cases.5  Therefore, given the lack of legislative action specifically prohibiting insuring exemplary damages in worker’s compensation cases, the Court declined to enforce a public policy position that would go beyond the bounds established by the state legisla­ture.

The ruling in Fairfield must, for now, be limited to its facts: a working compensation policy specifically purporting to cover punitive damages.  It remains to be seen if Texas (or other states) will allow further inroads on the insurability of punitive damages.

Fairfield Ins. Co. v. Steven Martin Paving, L.P., 246 S.W.3d 653 (Tex. 2008)
2 Id at 654
3 Id at 655
4 Id at 655
5 Id at 670

Foreign Judgment Denied US Recognition
Byblos Bank Europe v. Sekerbank Turk Anonym Syrketi, 10 N.Y.3d 243, 885 N.E.2d 191, 855 N.Y.S.2d 427 (2008)

Lawyers with foreign clients that are hoping to have foreign judgments recognized and enforced by a New York court need to be aware that forum shopping abroad may undermine this recognition.

Plaintiff Byblos, a Belgium bank, initiated simultaneous lawsuits for breach of loan agreements by the defendant, a Turkish Bank, in each of the European countries where the Byblos believed the defendant had assets - Belgium, Tur­key and Germany.  In 1992, their suit was dismissed on the merits by the Turkish Court.  Subsequently the German court recognized the Turkish judgment and affirmed the Turkish court’s holding.  Unsatisfied with these two results, the Plaintiff continued the suit in Belgium, hoping for a more favorable outcome.  Plaintiff finally obtained the desired result in Belgium.  Byblos then proceeded to seek recognition of the Belgian court’s favorable ruling in New York, “citing the last in time rule applicable when the competing judgments are from American courts and fall under the full faith and credit umbrella.”

It is actually the doctrine of comity that allows a territory within the US to recognize “‘the legislative, executive or judicial acts of another nation… ’” (Id at 247, citing Hilton v. Guyot 159 U.S. 113, 163-164, 16 S.Ct. 139, 40 L.Ed. 95 [1895]).  However, Byblos incorrectly cited the full faith and credit clause.  Full faith and credit does not apply when “the competitors are foreign country judgments” and “the foreign country court that rendered the last judgment [did] not give the party against whom enforcement is sought any kind of opportunity to argue the binding effect of the ear­lier judgment” (Id at 247).

Applying the comity doctrine, Judge Pigott held that because the Belgian court arbitrarily refused to uphold the Turk­ish ruling, the Belgium court’s judgment does not “merit recognition” in New York.  This ruling was further sup­ported by the fact that the German court had already upheld the Turkish ruling, and New York’s CPLR 5304(b)(5) that states that a “foreign judgment need not be recognized if… (5) the judgment conflicts with another final and con­clusive judgment”.   The New York Court was not required to recognize the foreign judgment.  Furthermore, “the last-in-time rule should not be applied where, as here, the last-in-time court departed from normal res judicata principles by permitting a party to re-litigate the merits of an earlier judgment” (Id. at 248).  The New York Court of Appeals found that the Appellate Division properly exercised that discretion here.