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Ace American Insurance Company, Plaintiff, v. Consolidated Edison Company of New York, Inc., The City of New York, Defendants.
This action arises from an October 2020 insurance coverage dispute between the insurer ACE American Insurance Company ("ACE") and the alleged additional insureds, Consolidated Edison Company of New York, Inc. ("Con Ed"), and the City of New York. The underlying action was brought in March 2017 by a man named Enrique Rodriguez against Con Ed and the City. Rodriguez alleges that he sustained an injury in 2016 during the course of his employment with a company called Waterworks, and that this injury resulted from Con Ed and the City's failure to ensure that the work area was adequately protected, in violation of Labor Law §§ 200, 240 (1) and 241 (6). Waterworks is Rodriguez's employer. The City owns the property where the construction was being conducted. Con Ed owned and operated certain electrical and subterranean facilities at the property. ACE is Waterworks's insurer.
Con Ed and the City sought coverage from ACE as additional insureds under Commercial General Liability Policy issued to Waterworks for the period of June 29, 2016, to June 29, 2017. On October 11, 2017, ACE accepted the tender from Con Ed as an additional insured. On September 24, 2019, ACE sent a notice of disclaimer to Con Ed, denying coverage and any duty to defend based on allegations that further investigation confirmed that Rodriguez's injuries were not caused, in whole or in part, by Waterworks, as required by the policy.
On October 15, 2020, ACE filed a declaratory judgment action against Con Ed and the City, seeking a determination, among others, that Con Ed is not an additional insured under the policy. On February 2, 2022, the parties cross-moved for summary judgment. On August 3, 2022, this court issued an order that Con Ed is entitled to defense under the policy for the Rodriguez action, and ordered ACE to pay attorney fees and costs. The court did not determine whether Con Ed is entitled to indemnity coverage under the policy.
On August 4, 2022, Con Ed filed a counterclaim in its amended answer, alleging that ACE breached its duty of good faith and fair dealing in its handling of Con Ed's claim for coverage as an additional insured. Con Ed demands judgment on its counterclaims against ACE, including costs and disbursements. The City takes no position.
On September 23, 2023, plaintiff ACE brought this CPLR 3211 (a) (7) motion to dismiss Con Ed's second counterclaim in its amended answer. Con Ed opposes the motion.
DISCUSSION
Plaintiff moves to dismiss Con Ed's second counterclaim under CPLR 3211 (a) (7). In deciding an (a) (7) motion to dismiss, the court must determine "whether the pleading states a cause of action, and if from its four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law." (Guggenheimer v Ginzburg, 43 NY2d 268, 275 [1977] [internal quotation marks and citation omitted].) The pleading is afforded a liberal construction, in which all facts alleged in the complaint are accepted as true, and plaintiff is given the benefit of every possible favorable inference. (Leon v Martinez, 84 NY2d 83, 87 [1994].)
In moving to dismiss, plaintiff alleges that Con Ed's second counterclaim (1) is duplicative of its first counterclaim and seeks relief which had already been awarded; (2) fails to assert a cognizable cause of action for a breach of the duty of good faith and fair dealing; and (3) is premature because there has been no finding that indemnity coverage for Con Ed exists under the policy. (See NYSCEF No. 176.)
In opposing the motion, Con Ed contends that (1) this court has already rejected plaintiff's arguments; (2) the bad-faith claim is not duplicative of the breach-of-contract claim; and (3) Con Ed stated a cause of action for a breach of good faith and fair dealing. (See NYSCEF No. 183.) This court agrees with Con Ed that its second counterclaim states a cause of action and denies plaintiff's motion to dismiss.
I. Plaintiff's arguments are not barred by the law-of-the-case doctrine
Con Ed contends that this court already rejected plaintiff's arguments for dismissal of the counterclaim when the court denied plaintiff's summary-judgment motion and permitted Con Ed to amend its answer. Therefore, Con Ed contends, plaintiff's arguments must be denied under the law-of-the-case doctrine. This court disagrees. Con Ed relies on a decision of the Appellate Division, First Department, Lee v Chun Ka Luk (127 AD3d 612, 613 [1st Dept 2015]). In that case, the Court affirmed the motion court's order denying defendant's motion for leave to amend because defendant was foreclosed under law of the case from (re)asserting the proposed defense at issue. (See id. at 613.) But there, the evidence that defendant provided to support its proposed amendment had been in defendant's possession at the time of the prior motion-court ruling. (See id.) Here, on the other hand, the counterclaim at issue is based on new evidence and seeks damages on a different theory. Whether or not plaintiff is relying on arguments that this court previously rejected, that those arguments are being raised in a different legal and factual context means that they are not foreclosed by the law-of-the-case doctrine.
II. Con Ed's second counterclaim is not duplicative of the first counterclaim
This court is not persuaded by plaintiff's argument that Con Ed's second counterclaim is impermissibly duplicative. A claim for consequential damages can be asserted based on an insurer's breach of the covenant of good faith and fair dealing. (See Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of NY, 10 NY3d 187, 195 [2008].) Although there might be overlap in the facts alleged, a breach-of-implied-covenant claim is not duplicative of the breach-of-contract claim if it relies on different facts and seeks damages different from the contract claim. (See New York Botanical Garden v Allied World Assur. Co., 206 AD3d 474, 475 [1st Dept 2022].)
Con Ed's bad faith counterclaim is based on different facts and seeks different damages from its breach-of-contract claim. The breach-of-contract claim sought a declaration that plaintiff must provide defense and indemnity coverage to Con Ed under the policy. The breach of the implied duty of good faith is based on allegations that plaintiff failed, in good faith, to evaluate its obligations and Con Ed's rights under the policy. This part of the counterclaim relies on factual allegations that the plaintiff agreed to defend and indemnify Con Ed without a reservation of rights while being aware of a potential defense to coverage (ROR). Plaintiff allegedly acted in bad faith by controlling Con Ed's defense in the underlying action without an ROR for more than three years before asserting a "no coverage" position. (See NYSCEF No. 183.)
The second counterclaim is based on new discovery that plaintiff allegedly knew of a defense to coverage when it agreed to defend and indemnify Con Ed. Con Ed seeks consequential damages to account for bad faith handling in evaluating its coverage honestly and adequately. (See New York Botanical Garden, 206 AD3d at 475 [finding that plaintiff stated a cause of action for breach of implied covenant of good faith and fair dealing by alleging that defendant did not conduct a complete or fair investigation of its claim]; see also Bi-Economy Mkt., 10 NY3d at 195 [reversing dismissal of bad-faith claim on summary judgment where insured pleaded that insurer did not evaluate claim honestly, adequately, and promptly].) The second counterclaim may proceed. It was reasonably foreseeable and should have been contemplated that defendants would incur losses as a result of waiting for years of litigation to pass before being informed of the no-coverage position. (Id. at 193.) Because the second counterclaim pleads different conduct by plaintiff based on new discovery of facts, Con Ed's allegation of consequential damages is sufficient to survive a motion to dismiss.
III. Con Ed states a cause of action for a breach of duty of good faith and fair dealing
A. There are material issues of fact about whether plaintiff's reservation of rights was timely and effective
This court is not persuaded by plaintiff's argument that Con Ed has failed to state a cause of action for a breach of duty of good faith and fair dealing. Since insurers typically exercise complete control over the settlement and defense of claims against their insureds, a duty of good faith is implied in insurance contracts (See Pavia v State Farm Mutu. Auto. Ins. Co., 82 NY2d 445, 453 [1993].) To establish a prima facie case of bad faith, plaintiff must establish that the insurer's conduct constituted a "gross disregard" of the insured's interests—i.e., a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests. (See id. at 453.) The standard requires more than a showing of ordinary negligence and less than a showing of dishonest motives. (See id. at 454.) A bad-faith claim does not require a heightened pleading standard for consequential damages. (See D.K. Prop., Inc. v National Union Fire Ins. Co. of Pittsburgh, Pa., 168 AD3d 505, 507 [1st Dept 2019].)
Con Ed alleges that plaintiff acted in bad faith because it provided Con Ed with a defense without a reservation of rights. Plaintiff argues that it issued several letters to Con Ed reserving all rights, including, without limitation, the right to deny coverage, in its 2017 and 2019 Letters. (See NYSCEF No. 44, 45.) The 2017 Letter does not explicitly mention "reservations of rights" and is only an acceptance of tender. The 2019 Letter advises on the "supplemental reservations" under the policy. The question is whether the 2019 Letter effectively serves as a reservation of rights, preserving ACE's right to assert a defense.
Con Ed also alleges that plaintiff acted in bad faith because it knew about the basis of its defense to coverage years before it attempted to issue a reservation of rights in its 2019 Letter, rendering the reservation of rights untimely and ineffective. Insurance Law § 3420 (d) applies explicitly to disclaimers, not to the reservation of rights. While no rules or regulations specify the language necessary in a reservation of rights letter, a "general reservation of rights (such as, 'the insurer hereby reserves all its rights') is ineffectual; the insurer must give the insured fair warning of the bases for any possible coverage defenses. Once the necessary information is known, delay in the taking of a position on coverage may result in a finding that the insurer has waived the defense, even where a reservation of rights letter has been delivered." (1 Wolcott B. Dunham et al., New Appleman New York Insurance Law § 19.03 [2d ed 2022].) However, a " 'delay in giving notice of reservation of rights will be excused where it is traceable to the insurer's lack of actual or constructive knowledge of the available defense.' " (Federated Dept. Stores, Inc. v Twin City Fire Ins. Co., 28 AD3d 32, 36 [1st Dept 2006], quoting 14 Couch on Insurance 3d § 202:60 [2005].)
Here, May 26, 2017, email correspondence reveals that "Con Edison could potentially be found 100% at fault for the accident," establishing plaintiff's defense to coverage. (See NYSCEF No. 90.) This was five months before plaintiff accepted Con Ed's tender and two years before attempting to reserve rights in the 2019 Letter. Further, the subsequent three reports issued by ACE's investigator, Terrier Claims Service, and the City's Construction Report plausibly establish knowledge on the part of plaintiff of the alleged defense to coverage. It cannot be determined at the pleading stage whether the 2017 email correspondence and the receipt of three reports sufficiently establish actual or constructive knowledge on the part of plaintiff of the defense that would render the 2019 reservation of rights untimely and ineffective.
Because the record at the pleading stage does not resolve whether plaintiff was merely negligent or whether plaintiff was aware of and deliberately failed to assert its reservation of rights in a timely manner, the motion to dismiss is denied. (See Federal Ins. Co. v North Am. Specialty Ins. Co., 83 AD3d 401, 402 [1st Dept 2011] [denying plaintiff's summary judgment because material issue of fact remained as to whether defendant was "merely negligent" or whether defendant and its counsel "was aware that subrogation rule applied and deliberately failed to assert the defense" in order to escape liability.])
B. There are material issues of fact about whether plaintiff exercised exclusive control over Con Ed's defense, during which it failed to adequately investigate the underlying action
Con Ed alleges that plaintiff acted in bad faith because it controlled Con Ed's defense in the underlying Rodriguez action for years without a reservation of rights, leading it to relinquish control of its defense in reliance on plaintiff's unqualified defense. (NYSCEF No. 111.) Plaintiff denies exclusive control, alleging that there is a lack of evidence supporting Con Ed's theory that plaintiff participated in the strategy behind Con Ed's defense and controlled that defense. (See NYSCEF No 176. at 10.) But Con Ed has alleged that plaintiff's selected counsel, London Fischer, LLP, represented Con Ed for more than three years and reported solely to plaintiff. During this time, Con Ed alleges, plaintiff failed adequately to investigate Waterworks' responsibility in the underlying action. Given these allegations, the motion to dismiss is denied.
C. A cause of action for bad faith does not require an "extraordinary showing of disingenuous or dishonest failure"
Plaintiff argues that Con Ed must make an "extraordinary showing of disingenuous or dishonest failure to carry out a contract" to state a cause of action for bad faith. This court disagrees. The gross standard for bad faith, as the court has noted above, requires more than ordinary negligence but less than a showing of dishonest motives. (See Pavia v State Farm Mutu. Auto. Ins. Co., 82 NY2d 445, 454 [1993]; see also D.K. Property, Inc., 168 AD3d 505, 507 [1st Dept 2019] ["[T]here is no heightened pleading requirement for consequential damages."].) Therefore, the court agrees that Con Ed sufficiently stated a cause of action for a bad-faith claim.
IV. Finding indemnity coverage of defendant in the underlying action is not a prerequisite for the bad faith claim to proceed
This court is not persuaded by plaintiff's argument that Con Ed's bad-faith counterclaim is precluded because there is no initial finding that indemnity coverage for Con Ed exists under the policy. Plaintiff cites Zurich Ins. Co. v Texasgulf, Inc., in which the court modified the trial court's order to deny insured's bad-faith counterclaim on the ground that it was not predicated on the existence of coverage. (See NYSCEF No. 176 at 12, citing 233 AD2d 180 [1st Dept 1996].) However, the Court reached that decision after a trial-court finding that the insurance company had no duty to indemnify. This court has not found that plaintiff has no duty to indemnify Con Ed, and the court has held that plaintiff must defend Con Ed in the underlying action. Under CPLR 3211 (a) (7), a court may proceed on a favorable inference that plaintiff will be obligated to indemnify Con Ed. Moreover, the refusal to indemnify is not the sole basis of bad-faith liability, as it was in Zurich Ins. Co. v Texasgulf.
Accordingly, for the foregoing reasons, it is
ORDERED that plaintiff's CPLR 3211 (a) (7) motion to dismiss the second counterclaim is denied.
DATE 6/21/2023
Gerald Lebovits, J.
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Docket No: Index No. 655323 /2020
Decided: June 21, 2023
Court: Supreme Court, New York County, New York.
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