New York Appellate Ruling Challenges Allocation Assumptions
Any insurer who complacently assumes that New York courts will follow a "time on the risk" approach in the wake of the Court of Appeals ruling a few years ago in Consolidated Edison would do well to consider the October 16 ruling of the First Department in State of New York Ins. Dept. v. Generali Ins. Co. 2007 NY Slip Op. 07767.
The claims at issue arose out of a 1993 law suit suit filed a mother who claimed that her children had suffered lead poisoning while they lived in an apartment building owed by Rosan Realty. Ever the reputable business, Rosan had only purchased insurance for fifteen months of the four years that the tenants lived there. After Generali, which had only been on the risk for five months, disclaimed coverage (for reason not apparent from the opinion), Rosan's defense was undertaken by the Insurance Department on behalf of the remaining insurer (Transtate), which had insured Rosen for ten months but was now insolvent. Ultimately, the State paid $600,000 to settle the lead claims and sued Generali to recover defense and indemnity. Meanwhile, the insured itself went out of business.
Generali argued that at most it owed only 10% of defense and indemnity reflecting its "time on the risk" as a fraction of the overall period of injury. The motion court and, on appeal, the First Department, disagreed. As to defense, the Appellate Division ruled that Generali should pay half, caustically observing that:
having unjustifiably disclaimed that obligation and left plaintiff to absorb all of the defense costs, Generali may not now have its defense obligation finely tailored to its time on the risk, particularly where the insured is defunct and there is no reasonable possibility that it will bear any share of the defense costs.
More surprisingly, the Appellate Division held 3-2 that the denominator for calculating Generali's share of indemnity was 15 months (the period of available insurance), not the 50 month period when the children suffered lead poisoning as tenants in the insured's building. The First Department declared that cases such as Consolidated Edison did not address the problem of orphan shares and did not support an allocation to the insured for coverage gaps, particularly where the insured was no longer economically viable.
The majority's indemnity analysis was criticized in a dissenting opinion by Justice Catterson (joined by Justice Malone), who pointed out that the majority had ignored cases such as Stonewall (2d Cir. 1995) and Treadwell (SDNY 1999), in which federal courts had required policyholders to bear responsibility for orphan shares. The dissent noted that, far from encouraging insurers to sit on the sidelines, refusing to require insureds to bear responsibility for gaps in coverage would be more likely to encourage policyholders to be less diligent about buying insurance.
Plainly, the court's analysis was affected by factors that are not always present in allocation disputes, notably the involvement of the State as an actor; the insolvency of the insured and the uncooperative attitude of Generali in refusing to defend in the first instance, all of which may have titled the equities against Generali. Even so, this new opinion highlights how much of New York law on allocation remains unsettled five years after Con Ed.
Under New York, a losing party may appeal as of right from a divided opinion of the Appellate Division. While the enthusiasm of the Court of Appeals for long-tail claims may be waning (see the Court's recent drop kick in Foster Wheeler), it will be interesting to see if Generali chooses to risk the gains achieved by insurers in ConEdI by giving the Court of Appeals a chance to retrench on issues like defense or orphan shares.
