Scottsdale Insurance Company v. Acceptance Indemnity Insurance Company

Background

Scottsdale Insurance Company, OneTeam Restoration, Inc., Nautilus Realty Limited Partnership, and DNA Contracting and Waterproofing sued Acceptance Indemnity Insurance Company for a declaration of insurance coverage and damages. The dispute concerned an Acceptance policy issued to non-party Miranda Contracting Corporation. The plaintiffs alleged that OneTeam, Nautilus, and DNA qualified as additional insureds under that policy.

The dispute arose from a December 27, 2017 construction-site accident involving Patricio Cedillo. Cedillo brought related New York state-court claims alleging negligence and violations of the New York Labor Law. The state cases were later consolidated. Scottsdale notified Acceptance of the underlying litigation and requested defense, indemnification, and additional-insured coverage for OneTeam, Nautilus, and DNA.

Acceptance received Scottsdale’s January 2019 tender of the claim on January 20, 2019. Acceptance investigated the identity of Cedillo’s employer and sent a disclaimer dated March 11, 2019. The disclaimer cited several policy provisions, including exclusions concerning employee injuries, independent contractors, employer-liability claims, and the additional-insured endorsement. Acceptance argued that the disclaimer was timely and that the plaintiffs were not entitled to coverage.

Summary-Judgment Ruling

The plaintiffs moved for partial summary judgment under Rule 56, which allows judgment when there is no genuine dispute about a material fact and the moving party is entitled to judgment as a matter of law. The court granted the motion in part and denied it in part.

The court first held that Acceptance had a duty to defend OneTeam, DNA, and Nautilus. Under New York law, an insurer’s duty to defend can arise from the allegations in the underlying complaint or from facts actually known to the insurer that create a reasonable possibility of coverage. The court found that Acceptance knew there was uncertainty about whether Cedillo worked for DNA, Miranda, or another contractor. The information provided to Acceptance also showed that Miranda had subcontracted with OneTeam to perform work at the site. Those facts created a reasonable possibility that Cedillo’s injuries resulted from Miranda’s acts or omissions and fell within the Acceptance policy.

The court then applied New York Insurance Law section 3420(d), which requires an insurer denying coverage to provide written notice as soon as reasonably possible when the denial is based on a policy exclusion. The court treated January 20, 2019, as the operative tender date because the plaintiffs had not provided sufficient evidence that Acceptance received three earlier alleged tenders.

The court found Acceptance’s disclaimer untimely as a matter of law. Acceptance did not begin investigating until February 8, 2019, nineteen days after receiving the tender, and did not explain that initial delay. After receiving additional information by February 12, Acceptance waited until March 11 to disclaim. The court held that Acceptance could have issued a disclaimer based on the exclusions it already knew about while continuing to investigate the employer-identity question. Its approximately twenty-seven-day delay after February 12, combined with the unexplained nineteen-day delay before beginning its investigation, was unreasonable.

Because the disclaimer was untimely, Acceptance was precluded from relying on the cited exclusions to deny defense coverage to OneTeam, DNA, and Nautilus. The court did not need to decide the plaintiffs’ separate argument that the disclaimer was also defective because it was not separately directed to each additional insured.

Indemnification and Defense Costs

The court distinguished the duty to defend from the duty to indemnify. The duty to indemnify depends on the actual basis for liability to the injured person, including which party’s negligence, if any, caused the injury. Because the underlying state-court litigation had not resolved that issue, the court held that a declaration requiring conditional indemnification was premature. The plaintiffs’ request for conditional indemnification was denied without prejudice.

The Acceptance policy required primary and non-contributory coverage when its coverage applied, and Acceptance did not dispute that characterization of the additional-insured endorsement. The court therefore declared that OneTeam, Nautilus, and DNA were entitled to defense in the underlying action on a primary and non-contributory basis and were entitled to reasonably incurred defense costs.

The court did not set a dollar amount for defense costs. The plaintiffs had not submitted defense-cost invoices, and the parties had not adequately briefed the extent to which Scottsdale could recover costs after defending the other plaintiffs. The court stated that those issues could be addressed through renewed motion practice and additional briefing.

Disposition

Judge Laura Taylor Swain granted the plaintiffs’ motion for summary judgment in part as to Count One of the complaint. The court declared that, because of Acceptance’s untimely disclaimer, OneTeam, Nautilus, and DNA were entitled to primary and non-contributory defense coverage and to reasonably incurred defense costs in an amount to be determined later. The plaintiffs’ motion was denied in all other respects. The order resolved docket entry number 72.