United Specialty Insurance Company v. JD Commercial Builders Inc.

Background

United Specialty Insurance Company (USIC) issued a commercial insurance policy to JD Commercial Builders Inc. covering May 26, 2015, through May 26, 2016. The policy included an endorsement excluding coverage for bodily injury to an independent contractor or an employee of an independent contractor while working directly or indirectly for an insured. The policy defined “independent contractor” broadly to include a general contractor, prime contractor, subcontractor, or entity performing work for the named insured.

Ralph Spero was injured on November 14, 2015, while working at 3781 Broadway in Manhattan. He was an employee of American Flooring Concepts, which JD Commercial had retained as a flooring subcontractor. Spero was struck by an improperly placed temporary heavy barrier. He later sued JD Commercial and the owners of the property, alleging that they failed to maintain a safe construction site. Boston Market Corporation was involved as the tenant that had retained JD Commercial for a renovation.

JD Commercial notified USIC of the underlying lawsuit on March 21, 2018. After reviewing the complaint, USIC’s claims handler suspected that Spero worked for a subcontractor but sought confirmation. On April 10, 2018, JD Commercial’s president confirmed that Spero worked for American Flooring, a JD Commercial subcontractor. USIC sent a written disclaimer on May 1, 2018, stating that the policy did not cover claims involving injuries to subcontractors or their employees. On May 16, 2018, USIC also offered JD Commercial a courtesy defense while the court considered whether the disclaimer was valid, while reserving its rights.

The court had already entered a default judgment against JD Commercial on December 3, 2019. USIC sought summary judgment against the remaining defendants. Spero filed a cross-motion for summary judgment, arguing that USIC’s disclaimer was untimely under New York Insurance Law § 3420 and that the courtesy-defense offer barred USIC from disclaiming coverage.

Timeliness of the Disclaimer

Under New York Insurance Law § 3420(d)(2), an insurer must disclaim coverage for certain bodily-injury claims as soon as reasonably possible after it has enough information to know that coverage can be denied. If the insurer does not act timely, it may lose the ability to disclaim coverage.

Judge McMahon concluded that USIC did not have enough information when it received the complaint on March 21, 2018. The complaint did not identify American Flooring by name or make clear that Spero was an employee of an independent contractor. The court treated the period from March 21 to April 10 as an excusable investigative delay. After receiving confirmation on April 10, USIC issued its disclaimer 21 days later, on May 1, 2018. The court held that this delay was reasonable as a matter of law, particularly because courts have found longer delays reasonable when insurers were investigating coverage.

The opinion contains one later reference to the disclaimer as being issued on May 1, 2019, but the factual discussion, the surrounding dates, and the May 1, 2018 letter identify 2018 as the relevant year.

Policy Exclusion and Coverage

The court held that the independent-contractor exclusion plainly applied because Spero was an employee of American Flooring, an independent contractor of JD Commercial, and was injured while working in that capacity. No party disputed those facts or the applicability of the exclusion.

Because the exclusion applied and the disclaimer was timely, the court held that USIC had no duty to defend or indemnify any party in the underlying lawsuit. The court said it therefore did not need to decide whether the property owners or Boston Market could independently rely on JD Commercial’s policy for coverage.

Courtesy Defense and Disposition

The court rejected Spero’s argument that USIC’s May 16 courtesy-defense offer prevented the disclaimer. The letter repeated USIC’s coverage position and expressly reserved the right to disclaim coverage for valid reasons under the policy. The court held that providing a defense while seeking judicial confirmation of a disclaimer does not, by itself, waive the insurer’s right to seek a declaration that it has no duty to defend or indemnify.

The court granted USIC’s motion for summary judgment that it had no duty to defend or indemnify the underlying lawsuit. It denied Spero’s cross-motion for summary judgment, ordered the motions and case file closed, and stated that a declaratory judgment had been entered against all defendants.