U.S. Specialty Insurance Company v. Harleysville Worcester Insurance Company

Background

U.S. Specialty Insurance Company (USSIC) brought a declaratory judgment action against Harleysville Worcester Insurance Company concerning coverage for a state-court personal-injury action. USSIC was defending the Owner in that action and sought a ruling that Harleysville had a duty to defend the Owner, was responsible for the first $100,000 of defense costs, and had to share equally in defense costs above $100,000.

The underlying plaintiff, Craig Garcia, alleged that he was injured while working on a construction project at the Owner’s premises. Garcia was employed by E.M. & E.M. Chimney and Masonry Repair, Inc. (E.M.), which had agreed to perform project work as Aggressive Heating, Inc.’s subcontractor. The underlying complaint asserted negligence and New York Labor Law claims against the Owner and The Feil Organization, Inc. The Owner’s third-party complaint alleged that any injury was caused by Aggressive’s negligence, recklessness, or breach of contract.

Aggressive’s contract with the Owner required Aggressive to obtain insurance naming the Owner as an additional insured for claims caused in whole or in part by Aggressive’s negligent acts or omissions. Aggressive obtained a commercial general liability policy from Harleysville containing an additional-insured endorsement. The endorsement covered bodily injury caused, in whole or in part, by Aggressive’s acts or omissions or by acts or omissions of people acting on Aggressive’s behalf. The Owner was also insured under USSIC’s policy, which had a $100,000 self-insured retention.

Duty to Defend

The court applied New York law. Under that law, an insurer’s duty to defend is broad and arises when the allegations in the underlying pleadings create a reasonable possibility of coverage. The court examines the pleadings and the policy, and doubts about coverage are resolved in favor of the insured. An additional insured receives the same general protection for defense purposes as a named insured.

The court concluded that the underlying complaint and third-party complaint, read together, alleged facts potentially within Harleysville’s additional-insured endorsement. Garcia alleged that he was injured while working on the project as an E.M. employee. The third-party complaint alleged that Aggressive’s negligence or recklessness may have caused the injury, and E.M. was acting on Aggressive’s behalf under the subcontract.

The court rejected Harleysville’s argument that Aggressive was not the injury’s proximate cause. The pleadings did not establish that point as an undisputed fact, and it remained possible that Aggressive’s conduct was a proximate cause. That possibility was enough to trigger the duty to defend. The court therefore held that Harleysville had a duty to defend the Owner in the underlying action.

Allocation of Defense Costs

The Harleysville and USSIC policies contained identical other-insurance provisions that purported to make each policy excess to other available insurance. Under New York law, when policies covering the same risk contain competing excess clauses, those clauses generally cancel each other out, and the insurers contribute according to their policy limits. Because the policies had the same limits, the court concluded that USSIC and Harleysville were co-insurers required to share the Owner’s defense costs equally after the applicable self-insured retention.

The court separately addressed the Owner’s $100,000 self-insured retention under the USSIC policy. It held that the retention was not “other insurance” under the policies’ other-insurance provisions. USSIC therefore had no duty to defend until the Owner had paid $100,000 in defense costs, while Harleysville’s policy applied from the first dollar.

Disposition

The court granted USSIC’s motion for partial summary judgment. It ruled that Harleysville had a duty to defend the Owner, that Harleysville was responsible for the first $100,000 of the Owner’s defense costs, and that Harleysville and USSIC were each responsible for 50 percent of defense costs above $100,000. The opinion did not resolve every issue identified in USSIC’s broader declaratory judgment action, including the ultimate duty to indemnify for any damages assessed in the underlying action.