Wentworth Group, Inc. v. Evanston Insurance Company

Background

The plaintiffs brought an action seeking a declaration of their rights under the Declaratory Judgment Act. They sought summary judgment, which is a decision without a trial when there is no genuine dispute over a fact that could affect the result, on whether Evanston Insurance Company had a duty to defend and indemnify them in an underlying New York state-court action.

Evanston issued a professional-liability policy to Wentworth covering real-estate and property-management services from July 17, 2014, through July 17, 2015. The policy identified FS Project Management and FirstService Residential New York, Inc. as additional named insureds. It covered damages resulting from a negligent act, error, or omission in the performance of covered services. The policy also excluded claims involving intentional, willful, dishonest, or fraudulent conduct and claims involving matters such as conversion, misappropriation, theft, or insufficient funds.

The Board of Managers of 325 Fifth Avenue Condominium sued FS Project Management and FirstService Residential New York, Inc., along with other professionals and contractors. The underlying complaint asserted claims including fraud, breach of fiduciary duty, constructive fraud, aiding and abetting, civil conspiracy, and breach of contract. At the time of the federal court’s decision, the only live claims against the two entities were the Board’s breach-of-contract claim and a contractor’s crossclaim for indemnification.

Evanston initially acknowledged that the allegations triggered coverage and paid 50 percent of the plaintiffs’ defense costs for five years. In June 2020, Evanston said it was discontinuing coverage because the remaining claims allegedly involved intentional conduct and therefore did not arise from a covered negligent act. It also discontinued coverage for the contractor’s crossclaim.

Magistrate Judge’s Report and the Objections

Magistrate Judge James L. Cott recommended granting the plaintiffs’ motion concerning Evanston’s duty to defend, denying their motion concerning the duty to indemnify, and denying Evanston’s cross-motion for summary judgment. Evanston objected to the recommendation that it had a duty to defend FS Project Management and FirstService Residential New York, Inc., arguing that the state-court complaint did not allege negligent conduct and that the claims fell within policy exclusions.

Judge Daniels reviewed the objections and adopted the report in full. Because the objections repeated arguments already presented and addressed in the report, the court reviewed the report for clear error and found none.

Duty to Defend

The court held that Evanston could not discontinue the defense because some allegations in the underlying action fell within the policy’s definition of a covered negligent act. The allegations included claims that FS Project Management improperly supervised the contractor’s reinstallation of balcony rails, failed to investigate or report a potentially code-violating rebar condition, and failed to inform the condominium about building-code violations. Other allegations concerned FirstService Residential New York, Inc.’s handling of assessments, invoices, contractor payments, and related property-management responsibilities.

The court concluded that the underlying action presented a reasonable possibility that the plaintiffs could be found liable based on negligent, rather than intentional, conduct. It also agreed that the policy’s intentional-conduct exclusion did not apply at that stage because the breach-of-contract claim had not yet been resolved by a factfinder. The court further concluded that the financial-misconduct exclusion did not apply to allegations concerning inadequate supervision and failure to report building-code violations.

Duty to Indemnify

The court did not decide whether Evanston ultimately had to indemnify the plaintiffs—that is, pay amounts the plaintiffs might become legally obligated to pay. That issue depended on how the underlying breach-of-contract claims were resolved. Indemnity could depend on whether the plaintiffs were found liable for negligent conduct or instead for fraud or conversion. Because the underlying action remained pending, the indemnity issue was premature.

Disposition

The court overruled Evanston’s objections and adopted the report and recommendation in full. The plaintiffs’ motion for summary judgment was granted to the extent the court declared that Evanston had a duty to defend the plaintiffs in the underlying action. Evanston’s cross-motion for summary judgment was denied. The court directed the clerk to close the two motions.