Case by Case: Auto Policy Held Primary in Construction Accident

By Lawrence N. Rogak.

First Mercury Insurance Co. v State Farm Mutual Auto Ins. Co., 2019 NYSlipOp 51773 (Supreme Court, New York County) (Lebovitz, j) (10/29/2019)

In this declaratory judgment action arising out of an injury to a construction worker who was unloading pallets of cement from a flatbed truck, his employer’s GL carrier sought an order declaring that his employer’s auto carrier had the primary duty to defend and indemnify the owner, GC and subcontractor on the job. The Court concluded that the auto insurer, State Farm, had a duty to defend and indemnify all parties, except for the breach of contract claim against the employer.

DaSilva, a construction worker employed by subcontractor Europa Construction, was injured while he was standing on the flatbed of a truck attempting to unload pallets of cement; he tripped on a pallet and then slipped on cement mixed with stones that had accumulated on the floor of the truck. Europa was insured, under different policies, by plaintiff First Mercury Insurance Company and by defendant State Farm Mutual Automobile Insurance Company.

DaSilva, sued the property owner and general contractor, who in turn brought third-party complaints against Europa. First Mercury then brought this DJ against State Farm, seeking a judgment that State Farm owes the primary duty to defend and indemnify Europa, the property owner and the general contractor in the underlying personal-injury action. First Mercury also sought reimbursement of the attorney fees and costs that it expended defending the underlying action. First Mercury then moved for an order declaring that State Farm must: (i) defend and indemnify Europa against the third-party claims brought against it by El-Ad and New Line in the underlying action; (ii) defend and indemnify El-Ad and New Line for their vicarious liability (if any) to DaSilva in the underlying action; (iii) provide primary, rather than pro rata or excess insurance coverage to Europa.

DaSilva’s BI complaint alleged that El-Ad (the owner) and New Line (the GC) negligently failed to make certain that correct methods were used to unload cement pallets from trucks, to provide proper equipment for safe unloading, and to ensure that work areas were free of slipping hazards. The owner and GC then impleaded Europa into the BI suit.

Europa was insured by a First Mercury general liability policy, and a State Farm automobile policy. First Mercury requested that State Farm share in Europa’s defense; State Farm denied coverage.

The First Mercury policy defines “insured” as the entity named on the declarations page of the policy—here, Europa. The policy provides that it also covers “as an additional insured any person or organization for whom” Europa is “performing operations when Europa and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on Europa’s policy.” This provision limits additional-insured coverage to “liability for ‘bodily injury’ . . . caused, in whole or in part, by the acts or omissions of those acting on Europa’s behalf . . . in the performance of Europa’s ongoing operations for the additional insured.”

The First Mercury policy also contains provisions about the relationship between that policy and other insurance policies. In relevant part, those provisions provide that if First Mercury’s insured has other available insurance for a loss covered by First Mercury and the loss arises out of the maintenance or use of an “auto” and is not subject to the auto exclusion, First Mercury’s insurance is excess over the coverage provided by the insured’s other policy or policies. When the insurance is excess, First Mercury has no duty to defend the insured if another insurer has a duty to defend. And First Mercury will pay out on the policy only once the limit of the other insurance policy has been reached. An “auto” includes “a land motor vehicle, trailer or semitrailer designed for travel on public roads, including any attached machinery or equipment.”

State Farm issued Europa an automobile insurance policy that covers, in relevant part, “damages an insured becomes legally liable to pay because of . . . bodily injury to others caused by an accident that involves a vehicle from which that insured is provided liability coverage by this policy.” The policy excludes, however, an insured’s “liability assumed under any contract or agreement.”

The policy defines “insured” to include the following: (i) Europa for the “ownership, maintenance, or use” of a Europa vehicle; (ii) “any person” for “his or her use” of a Europa vehicle; and (iii) “any other person or organization vicariously liable for the use of a vehicle” by an insured as defined in (i) and (ii), “but only for such vicarious liability,” and only if “the vehicle is neither owned by nor hired by that other person or organization.” The policy limits the definition of a Europa vehicle to the particular vehicle listed on the policy’s declarations page; that page lists the Europa truck that was involved in the underlying accident.

The State Farm policy’s other-insurance provision provides that “if other valid and collectible vehicle liability coverage applies,” State Farm will pay “the proportion of damages payable” that the State Farm policy limit bears to the sum of that limit and “the limits of all other valid and collectible liability coverage that applies to the accident.”

First Mercury brought this DJ action against State Farm seeking declaratory relief to determine First Mercury and State Farm’s respective insurance-coverage obligations to the parties to the underlying action; and seeking reimbursement of First Mercury’s defense costs in that action.

The parties disputed whether the scope of the State Farm policy includes the accident at issue in the underlying action. First Mercury argued that the policy covers the claims against Europa, because DaSilva’s accident involved a covered vehicle. State Farm argued that the dispositive question was whether DaSilva was using Europa’s vehicle at the time of the accident, and that DaSilva’s activities leading to his alleged injury did not constitute “use” of the vehicle within the meaning of the policy.

The Court held that First Mercury was correct that under the language of the State Farm policy, coverage depends on whether the accident “involved” a covered vehicle, rather than whether the accident arose out of the “use” of a covered vehicle. The policy has two definitions involving the relationship between the policy’s coverage and a vehicle owned by the insured. First, the policy defines “insured” as being Europa, at least as pertains to the “ownership, maintenance, or use” of Europa’s vehicle. The policy further defines Europa’s vehicle to mean the vehicle “shown . . . on the Declarations Page” of the policy; and the Declarations Page, in turn, lists the Europa vehicle that was involved in the accident. Second, the policy provides that it protects an insured from liability related to bodily injury “caused by an accident that involves a vehicle from which that insured is provided liability coverage by the policy.”

In other words, stated the Court, the State Farm policy employs “use” of a vehicle when defining who is covered, and “involves” a vehicle when defining what is covered. “It is undisputed—and appears indisputable—that Europa is covered under the policy. The present inquiry thus implicates only the scope of what liability Europa is covered for.”

Answering that question requires first determining whether the State Farm policy’s reference to an “accident that involves a vehicle,” rather than to an “accident arising from the use of a vehicle,” materially affects the scope of the policy. That the policy uses different verbs when defining the scope of who qualifies as an insured and what coverage the insured receives would ordinarily imply that the definitions have different scope. And as a matter of ordinary usage, one might well argue that “involves a vehicle” would apply to “injuries occurring in or near a motor vehicle,” even if those injuries are not “connected with the use of an automobile qua automobile,” as the phrase “use or operation of a vehicle” ordinarily requires. However, held the Court, “even if ‘involves’ and ‘use’ in the State Farm policy have the same meaning, First Mercury is correct that the policy covered the underlying accident—with respect to both State Farm’s duty to defend and its duty to indemnify.”

Insurance coverage for injuries suffered as a result of “the use of a motor vehicle” encompasses “bodily injury suffered during the loading or unloading of the vehicle.” It is not sufficient, however, merely for the injury to have occurred within the time period in which unloading occurred. There must be a “causal relationship between the accident and the movement of the goods to or from the vehicle.”

Here, DaSilva’s complaint and verified bill of particulars in the underlying action allege (a) that the accident at issue occurred at the construction site’s loading dock; (b) that the defendants negligently failed to provide for the use of proper methods of unloading cement pallets from trucks; and (c) that the defendants negligently failed both to ensure that work areas were free from slipping and tripping hazards and to correct those hazards once they had arisen. “These allegations plainly describe acts and omissions related to the unloading process and identify a causal relationship between the accident and the movement of goods from Europa’s truck to the construction site.”

“State Farm argues, though, that DaSilva’s testimony at a deposition in the underlying action (and in a related workers-compensation proceeding) rule out a causal connection between the injury and negligence on Europa’s part; and therefore that liability for any injury DaSilva suffered is outside the scope of coverage of State Farm’s auto policy. State Farm is correct that, at a minimum, DaSilva’s testimony regarding the circumstances of the accident less clearly points toward defendants’ negligent acts or omissions than does his complaint and bill of particulars. But State Farm’s conclusion does not follow.”

The State Farm auto policy covers damages that Europa “becomes legally liable to pay because of . . . bodily injury to others . . . caused by an accident” involving a covered vehicle. That liability would arise only if DaSilva were to recover against El-Ad and New Line in the underlying action, and if El-Ad and New Line were, in turn, to recover on their third-party claims for indemnity and contribution against Europa. And to recover in indemnity and contribution, El-Ad and New Line would have to prove that Europa was at fault in the underlying accident. Under the allegations in DaSilva’s bill of particulars, fault could conceivably flow from Europa’s requiring DaSilva physically to unload pallets from the Europa truck himself, rather than providing a safer hoisting mechanism for unloading the truck; or it could flow from Europa’s failing to ensure that the bed of the truck was free, and kept free, of potential tripping or slipping hazards in the unloading process. In either case, Europa’s damages would necessarily stem from negligent acts or omissions related to the process of unloading Europa’s truck—i.e., from the use of the truck. Those damages are therefore necessarily within the scope of the policy.”

“Thus, although the underlying action remains unresolved, First Mercury has established that Europa’s potential damages for indemnification and contribution are within the scope of coverage provided by State Farm’s auto policy—whether measured by the allegations of DaSilva’s pleadings or by the facts that DaSilva may be able to establish at trial. As a result, unless Europa’s damages are subject to a policy exclusion, State Farm owes a duty as a matter of law both to defend and indemnify First Mercury on these claims.”

With regard to State Farm’s policy exclusions, State Farm contended that the claims for contractual indemnification and breach of contract are subject to a provision in the auto policy that excludes coverage “for liability assumed under any contract or agreement.” State Farm, by letter dated December 21, 2015, denied coverage for the contractual-indemnification and breach-of-contract claims on this basis.

“However,” ruled the Court, if an accident causing “death or bodily injury” would be covered under an insurance policy’s coverage provisions but for an asserted policy exclusion, the Insurance Law requires the insurer to provide written notice “as soon as is reasonably possible” that the insurer is disclaiming coverage. Failure to provide timely written notice precludes what would otherwise be an effective disclaimer. An “unexplained delay of two months in disclaiming liability for late notice has been held unreasonable as a matter of law.”

State Farm did not provide timely written notice of its decision to deny coverage for the claims against Europa in the underlying action. Rather, the record establishes that State Farm did not provide written notice to Europa of the denial of coverage until more than eight months after State Farm received notice of the claims against Europa. “This unexplained delay in disclaiming coverage is unreasonable as a matter of law.”

Thus, if Insurance Law § 3420 (d) (2) required a timely disclaimer for the contractual-indemnification and breach-of-contract claims against Europa, State Farm is foreclosed from denying coverage for those claims. State Farm argues, though, that § 3420 (d) (2) does not require timely disclaimer of coverage for either type of claim. “This court agrees with State Farm about the breach-of-contract claim but disagrees as to the contractual-indemnification claim.”

The dispositive question in this context is thus whether the underlying liability for which indemnification is sought has arisen from death or bodily injury—not whether that liability sounds in tort or contract. Without the personal injury claims there would be no basis for indemnification. The ultimate source of liability on the contractual-indemnification claim, therefore, would be the bodily injuries suffered by the underlying plaintiff.

By contrast, a breach-of-contract claim would arise “from the third-party defendant’s failure to procure insurance benefiting the third-party plaintiff.” That failure would “constitute a breach even absent the underlying personal injury action.” As a result, liability for the breach of contract cannot be traced back to the underlying plaintiff’s bodily injuries, as required to implicate § 3420 (d) (2).

“This court concludes in this case, therefore, that Insurance Law § 3420 (d) (2) required State Farm timely to disclaim coverage to Europa on the contractual-indemnification claims, but it did not require a timely disclaimer of coverage on the breach-of-contract claims. And since State Farm did not timely disclaim coverage for the contractual-indemnification claim, State Farm is obliged to cover that claim. First Mercury is entitled to a declaration that State Farm has a duty both to defend and to indemnify Europa on that claim.”

State Farm’s disclaimer for the breach-of-contract claim, on the other hand, was effective notwithstanding State Farm’s eight-month delay in sending the disclaimer letter. Thus, the record demonstrates as a matter of law that State Farm does not owe a duty to indemnify Europa on this claim, and State Farm is entitled to summary judgment in its favor on this issue without need to file a cross-motion. However, because this claim is part of an action in which other claims did arise from covered events, State Farm owes Europa a duty to defend this claim notwithstanding the disclaimer of coverage.

“In summary: As to the claims for common-law indemnification and contribution, State Farm must defend Europa and indemnify it for any liability incurred in the underlying action, because those claims are within the scope of coverage of State Farm’s policy as a matter of law and are not subject to any policy exclusion. As to the claim for contractual-indemnification, State Farm must defend and indemnify Europa, because, as a matter of law, the claim is within the policy’s scope of coverage and State Farm’s disclaimer of coverage on the basis of a policy exclusion was ineffective. As to the claim for breach of contract for failure to procure insurance, State Farm is required to defend Europa, but not required to indemnify, because State Farm properly disclaimed coverage on the basis of a policy exclusion.”

As for the duty to defend, “This court concludes that El-Ad and New Line are additional insureds and that as a matter of law State Farm has a duty to defend El-Ad and New Line; but this court finds that factual questions remain about whether State Farm also owes a duty to indemnify.”

The State Farm auto policy provides liability coverage for “damages an insured becomes legally liable to pay because of bodily injury to others” caused by an accident involving a covered vehicle. In relevant part, the State Farm policy defines “insured” to include “any other person or organization vicariously liable for the use of a vehicle” by Europa, “but only for such vicarious liability,” and only if the “vehicle is neither owned by, nor hired by, that other person or organization.”

DaSilva’s allegations, taken together, “raise a reasonable possibility that DaSilva was injured while using a covered vehicle and that he is seeking to hold El-Ad and New Line vicariously liable for the negligence of the named insured, Europa—and thus that El-Ad and New Line are covered as additional insureds under the State Farm policy.”

To be sure, the additional-insured provision of the policy does exclude coverage for vicarious liability for injuries from the use of a vehicle where the vehicle is owned or hired by the putative additional insured. State Farm contends that a question of fact exists about whether El-Ad or New Line hired the Europa truck involved in the accident. But the only support that State Farm provides for this contention is a vague reference to “evidence from the pleadings in the third and fourth party actions.” State Farm does not identify the nature of that evidence or where in the pleadings that evidence appears; and this court has itself been unable to locate any such evidence.

This court therefore holds that as a matter of law, State Farm owes a duty to defend El-Ad and New Line in the underlying action as additional insureds under the State Farm policy. Any duty of State Farm to indemnify, on the other hand, will apply only if El-Ad and New Line are ultimately found liable to DaSilva in the underlying action, and only to the extent that such liability is vicarious. But these issues have not yet been resolved in the underlying action. Granting summary judgment on the duty to indemnify would be premature at this time.

One additional point on this topic bears discussion. Because State Farm owes both a duty both to defend El-Ad and New Line against the claims of DaSilva, on the one hand, and to defend Europa against the claims of El-Ad and New Line, on the other hand, State Farm and Europa’s interests may conflict. In these circumstances, Europa is entitled to be defended by counsel of its choosing, with State Farm responsible for Europa’s reasonable counsel fees.

Finally, the parties dispute how State Farm and First Mercury’s respective insurance policies interact with each other. First Mercury argues that State Farm must provide primary insurance, with First Mercury covering only excess liability for which it is responsible after the limit of the State Farm auto policy has been reached (if any). State Farm argues that the two policies are co-primary, such that they should each be responsible for paying out pro rata on any claims from Europa.This court agrees with First Mercury.

In assessing the relationship between two applicable insurance policies, the court “must review and consider all of the relevant policies at issue to determine the priority of coverage among them.” Where several policies cover the same risk and each provides the same level of coverage, it is necessary to compare their “other insurance” clauses to determine priority of coverage.

An other-insurance clause is considered an “excess” clause if it provides that the insurance is excess to that provided by other policies, and it is considered a “pro rata” clause if it provides that all insurers are responsible for a stated portion of the loss when other insurance is available. If one applicable policy contains an excess clause and the other a pro rata clause, the excess clause is given effect. This means that “the coverage under the policy containing the excess clause does not come into play, and the carriers’ duty to defend is not triggered until the coverage under the policy containing the pro rata clause has been exhausted.” But when both applicable policies contain excess clauses, the insurers must cover the cost of defending and indemnifying on a pro rata basis as co-primary insurers.

Here, First Mercury’s other-insurance clause provides that the policy’s coverage is excess to any other insurance where a covered loss has occurred that arises out of the use or maintenance of an auto. Therefore, if it were determined that Europa’s claims were covered by First Mercury’s policy such that First Mercury would owe a duty to defend, the coverage provided by the policy would be excess to any other valid and collectible insurance. The policy’s other-insurance clause further provides that when coverage is excess, First Mercury will have no duty to defend if any other insurer has such a duty. This provision is thus an “excess” clause.

State Farm’s other-insurance provision states that State Farm will “pay the proportion of damages payable that their applicable limit bears to the sum of their applicable limit and the limits of all other valid and collectible liability coverage that applied to the accident.” But coverage applies as excess over any other valid coverage that is provided for a non-owned car or a temporary substitute car. Nothing in the record indicates that the truck at issue was either non-owned or a temporary substitute. Thus, as relevant here, this provision is a “pro rata” clause.”

Because the First Mercury other-insurance provision is an excess clause and State Farm’s other-insurance provision is a pro rata clause, State Farm’s insurance coverage is primary. First Mercury’s obligation does not arise until the State Farm policy’s coverage is exhausted.

Accordingly, it is

ORDERED that the branch of First Mercury’s motion for summary judgment declaring that State Farm owes a duty to defend Europa in the underlying action is granted; and it is further

ORDERED that State Farm permit Europa to select defense counsel in the underlying action, with reasonable attorney fees to be paid by State Farm; and it is further

ORDERED that the branch of First Mercury’s motion for summary judgment declaring that State Farm owes a duty to indemnify Europa in the underlying action is granted only to the extent that it is declared that State Farm owes a duty to indemnify Europa as to claims against Europa for common-law and contractual indemnification and for contribution; and it is further

ORDERED that the branch of First Mercury’s motion for summary judgment declaring that State Farm owes a duty to indemnify Europa as to claims for breach of contract is denied, and summary judgment is instead granted to State Farm declaring that State Farm has no duty to indemnify Europa for breach-of-contract claims in the underlying action; and it is further

ORDERED that the branch of First Mercury’s motion for summary judgment declaring that the coverage provided by State Farm’s insurance policy is primary and the coverage provided by First Mercury’s policy is excess is granted; and it is further

ORDERED that the branch of First Mercury’s motion for summary judgment declaring that State Farm owes a duty to defend El-Ad and New Line as additional insureds on the State Farm insurance policy is granted; and it is further

ORDERED that the branch of First Mercury’s motion for summary judgment declaring that State Farm owes a duty to indemnify El-Ad and New Line as additional insureds on the State Farm policy is denied.

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Lawrence N. Rogak, Partner
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