No Duty to Defend Affirmative Defenses
In P.J.P. Mechanical Corporation v. Commerce and Industry Insurance Company, 2009 N.Y. Slip Op. 04984 (June 18, 2009), New York’s Appellate Division, First Department, held that an insurer has no duty to defend its insured against an affirmative defense based on a claim of offset raised in the responsive pleadings. Imposing such a duty, held the court, was counter to long-established business practices and would lead to uncertainty.
In this case, the policyholder had entered into contracts with a general and subcontractor to perform heating and ventilation work. When a pipe separated from a water riser and caused damage to the building, the general contractor claimed the policyholder and subcontractor were solely responsible. The policyholder notified its insurer, who retained counsel to conduct pre-action discovery to preserve evidence in connection with the loss.
Litigation over the property damage did not materialize; however, the general contractor ultimately withheld final payment on the contract for the policyholder’s negligence. The policyholder tendered the claim to its insurer, demanding a defense, but the insurer declined on the basis that the claim did not qualify as a “suit.” Therefore, the policyholder retained its own counsel and sued the general contractor and others to recover the disputed contract balance.
The general contractor responded by asserting as an affirmative defense the right of offset against recovery based on damages caused by the policyholder’s negligence. It subsequently asserted counterclaims to recover for the property damage. The policyholder again demanded a defense, to which the insurer acquiesced, but only as required to defend the counterclaim of negligence; the insurer refused to reimburse for legal fees and expenses incurred in connection with the prosecution of the action, or in connection with the affirmative defense.
The policyholder brought a declaratory judgment action seeking reimbursement of legal expenses incurred in the underlying collection action. In cross-motions for summary judgment, the insurer argued that it was obligated only to defend against the counterclaim because the affirmative defense was not an “occurrence” that triggered coverage. It further argued that because the collection action was ultimately settled, plaintiff's demand for reimbursement did not constitute a claim for property damage and defendant was under no obligation to pay. Plaintiff argued that coverage was triggered because the policy did not differentiate among a pre-suit claim of negligence, an affirmative defense of negligence, and a counterclaim for negligence, arguing further that while the matter initially was not in suit, the insurer should have settled the property damage claim.
The court found in favor of the insurer, concluding that the policy required only the defense of “suits,” not the prosecution of, or reimbursement of costs incurred in connection with, a policyholder’s affirmative claims. In other words, in the courts view, the duty to defend “does not envision affirmative litigation.”
The court also held that the duty to defend was not triggered by the affirmative defense of offset. The court noted a substantive distinction between counterclaims, which it characterized as causes of action seeking affirmative relief, and affirmative defenses, which do not seek affirmative relief but merely dismissal of claims. In the court’s view, to impose a duty to defend such an affirmative defense would eliminate these pleading distinctions, and “would impact the long-established business practices of insurers, and lead to uncertainty in the drafting of insurance contracts.” In so holding, the court declined to follow Construction Protective Services v. TIG Specialty Ins. Co., 29 Cal.4th 189 (2002).
The policyholder would have been entitled to a defense had the general contractor sued the policyholder for property damage, rather than withhold final payment on the contract, and it was the policyholder’s filing of suit that precluded defense for the claim of offset. Could the policyholder have done something different to obtain a defense for the negligence claim given the procedural posture of the case? The court observed that if the policyholder believed the affirmative defense was in fact a counterclaim, it might have moved to dismiss the affirmative defense, thereby forcing the general contractor to assert the counterclaim sooner.
