Case Briefs

Insurer Obligated to Defend CEO Until Court Permits Rescission

In Federal Ins. Co. v. Tyco Int'l Ltd., Index No. 600507/03 (N.Y. Sup. Ct. Mar. 5, 2004), the New York Supreme Court ordered an insurer to fulfill its defense obligation to its policyholder unless and until it prevails on its rescission claim.

Federal Insurance Company (“Federal”) sold Executive Protection Policies to Tyco International Ltd.'s (“Tyco”) former Chief Executive Officer L. Dennis Kozlowski. The policies require Federal to: 1) defend Kozlowski against fiduciary liability claims, and 2) reimburse his defense costs for executive liability claims arising from certain enumerated “wrongful acts.” After Kozlowski allegedly gave himself unapproved bonuses, artificially pumped up the Tyco stock's value, and lied about Tyco's finances, Kozlowski was criminally indicted and sued in various ERISA and securities-related cases. Kozlowski demanded that Federal provide him with a defense or pay his defense costs. Federal, however, then purported to unilaterally rescind the policies and returned the premiums paid for them, asserting that its policyholders made material misrepresentations in their insurance applications. Federal also filed suit seeking declaratory judgment that its policies were void at inception or that coverage is barred by various policy exclusions.

Kozlowski successfully moved for partial summary judgment regarding Federal's defense obligations. The court rejected Federal's claim that its duty to defend was extinguished because it validly rescinded the policies or because coverage is barred by the policies' “personal profit” exclusion. According to the court, Federal's defense obligation is unaffected by its “unproven” rescission claim. Until Federal succeeds in having the policies declared void, they remain in effect and bind Federal. The court also rejected Federal's contention that the “personal profit” exclusion barred coverage, finding that various claims in the civil and criminal actions fall outside its scope and, therefore, require Federal to defend each entire action. The court noted, however, that if Federal ultimately prevails it might be entitled to recover its defense costs.

The court's decision is particularly significant for, at least, two reasons. First, it was rendered in a high stakes case. The policyholder's criminal trial lasted approximately 6 months and ended in a mistrial. Defense bills for it, alone, likely run into the millions. Even if Federal prevails, its policyholder is unlikely to be in a position to repay defense costs even if he is later ordered to do so. Moreover and much more importantly, the court rejected Federal's claim that its unilateral rescission, even if valid, somehow distinguished its circumstance from those of insurers that merely seek a judicial declaration of rescission or assert misrepresentation as a defense to coverage. No matter what the circumstances, an insurer remains obligated to defend its policyholder until its decision to rescind either is accepted by its policyholder or vindicated by a court.

State May Prohibit Uninsured Motorists from Seeking Non-Economic Damages

In Caviglia v. Royal Tours of Am., No. A-72-02 (N.J. Feb. 19, 2004), the Supreme Court of New Jersey determined that the state Legislature did not violate the due process and equal protection rights of uninsured motorists when it prohibited them from asserting claims for non-economic damages.

Prior to 1997, uninsured motorists were permitted to seek recovery for non-economic damages if their injuries surpassed a particular measure of severity. In 1997, the New Jersey Legislature amended the statutory framework to prohibit uninsured motorists from bringing all such claims, regardless of the severity of the injury.

Plaintiff and his wife were driving in their car when it was struck by a bus operated by the defendant. The plaintiff was uninsured at the time of the accident. The trial court initially granted the defendant's motion for summary judgment based upon the aforementioned statutory bar, but reinstated the complaint on a motion for reconsideration when the plaintiff raised constitutional objections. The Appellate Division affirmed the reinstatement of the complaint, holding that this complete bar on bringing suit for a common-law claim violated the plaintiff's rights to due process and equal protection under the New Jersey Constitution. The court found that the bar did not “substantially relate” to any of the stated goals behind the statutory framework addressing automobile insurance.

The Supreme Court of New Jersey reversed, holding that the statute was a legitimate effort by the Legislature to advance “a policy of cost containment by ensuring that an injured, uninsured driver does not draw on the pool of accident-victim insurance funds to which he did not contribute.” The Supreme Court ruled that the statute did not prohibit uninsured motorists from bringing a common law claim, but rather placed a permissible condition on bringing such a suit, comparable to such other conditions as satisfying the statute of limitations, providing notice to the state in suits against public entities, or filing certificates of merit in professional malpractice claims. The Supreme Court rejected the due process claim, noting that the statute provided “a powerful incentive to comply with the compulsory insurance laws,” and asserted that “[a] motorist does not have a fundamental right to operate an automobile without liability coverage.” The court also warned that the task of determining the effectiveness of a given law was best left to the Legislature. In order to support the goals of cost containment and increased insurance availability, the Legislature could “bar the claims of those who fail to contribute to the system by obtaining insurance.”

The Supreme Court also rejected the argument that the statute violated plaintiff's right to equal protection, noting that uninsured motorists are not a class entitled to heightened protection. Disparate treatment was permissible because uninsured motorists, unlike those with insurance, were violating the law.

The condition on bringing suit for non-economic damages had a “reasonable basis,” thus satisfying the equal protection requirements of the state constitution.

Insurer Obligated to Defend CEO Until Court Permits Rescission

In Federal Ins. Co. v. Tyco Int'l Ltd., Index No. 600507/03 (N.Y. Sup. Ct. Mar. 5, 2004), the New York Supreme Court ordered an insurer to fulfill its defense obligation to its policyholder unless and until it prevails on its rescission claim.

Federal Insurance Company (“Federal”) sold Executive Protection Policies to Tyco International Ltd.'s (“Tyco”) former Chief Executive Officer L. Dennis Kozlowski. The policies require Federal to: 1) defend Kozlowski against fiduciary liability claims, and 2) reimburse his defense costs for executive liability claims arising from certain enumerated “wrongful acts.” After Kozlowski allegedly gave himself unapproved bonuses, artificially pumped up the Tyco stock's value, and lied about Tyco's finances, Kozlowski was criminally indicted and sued in various ERISA and securities-related cases. Kozlowski demanded that Federal provide him with a defense or pay his defense costs. Federal, however, then purported to unilaterally rescind the policies and returned the premiums paid for them, asserting that its policyholders made material misrepresentations in their insurance applications. Federal also filed suit seeking declaratory judgment that its policies were void at inception or that coverage is barred by various policy exclusions.

Kozlowski successfully moved for partial summary judgment regarding Federal's defense obligations. The court rejected Federal's claim that its duty to defend was extinguished because it validly rescinded the policies or because coverage is barred by the policies' “personal profit” exclusion. According to the court, Federal's defense obligation is unaffected by its “unproven” rescission claim. Until Federal succeeds in having the policies declared void, they remain in effect and bind Federal. The court also rejected Federal's contention that the “personal profit” exclusion barred coverage, finding that various claims in the civil and criminal actions fall outside its scope and, therefore, require Federal to defend each entire action. The court noted, however, that if Federal ultimately prevails it might be entitled to recover its defense costs.

The court's decision is particularly significant for, at least, two reasons. First, it was rendered in a high stakes case. The policyholder's criminal trial lasted approximately 6 months and ended in a mistrial. Defense bills for it, alone, likely run into the millions. Even if Federal prevails, its policyholder is unlikely to be in a position to repay defense costs even if he is later ordered to do so. Moreover and much more importantly, the court rejected Federal's claim that its unilateral rescission, even if valid, somehow distinguished its circumstance from those of insurers that merely seek a judicial declaration of rescission or assert misrepresentation as a defense to coverage. No matter what the circumstances, an insurer remains obligated to defend its policyholder until its decision to rescind either is accepted by its policyholder or vindicated by a court.

State May Prohibit Uninsured Motorists from Seeking Non-Economic Damages

In Caviglia v. Royal Tours of Am., No. A-72-02 (N.J. Feb. 19, 2004), the Supreme Court of New Jersey determined that the state Legislature did not violate the due process and equal protection rights of uninsured motorists when it prohibited them from asserting claims for non-economic damages.

Prior to 1997, uninsured motorists were permitted to seek recovery for non-economic damages if their injuries surpassed a particular measure of severity. In 1997, the New Jersey Legislature amended the statutory framework to prohibit uninsured motorists from bringing all such claims, regardless of the severity of the injury.

Plaintiff and his wife were driving in their car when it was struck by a bus operated by the defendant. The plaintiff was uninsured at the time of the accident. The trial court initially granted the defendant's motion for summary judgment based upon the aforementioned statutory bar, but reinstated the complaint on a motion for reconsideration when the plaintiff raised constitutional objections. The Appellate Division affirmed the reinstatement of the complaint, holding that this complete bar on bringing suit for a common-law claim violated the plaintiff's rights to due process and equal protection under the New Jersey Constitution. The court found that the bar did not “substantially relate” to any of the stated goals behind the statutory framework addressing automobile insurance.

The Supreme Court of New Jersey reversed, holding that the statute was a legitimate effort by the Legislature to advance “a policy of cost containment by ensuring that an injured, uninsured driver does not draw on the pool of accident-victim insurance funds to which he did not contribute.” The Supreme Court ruled that the statute did not prohibit uninsured motorists from bringing a common law claim, but rather placed a permissible condition on bringing such a suit, comparable to such other conditions as satisfying the statute of limitations, providing notice to the state in suits against public entities, or filing certificates of merit in professional malpractice claims. The Supreme Court rejected the due process claim, noting that the statute provided “a powerful incentive to comply with the compulsory insurance laws,” and asserted that “[a] motorist does not have a fundamental right to operate an automobile without liability coverage.” The court also warned that the task of determining the effectiveness of a given law was best left to the Legislature. In order to support the goals of cost containment and increased insurance availability, the Legislature could “bar the claims of those who fail to contribute to the system by obtaining insurance.”

The Supreme Court also rejected the argument that the statute violated plaintiff's right to equal protection, noting that uninsured motorists are not a class entitled to heightened protection. Disparate treatment was permissible because uninsured motorists, unlike those with insurance, were violating the law.

The condition on bringing suit for non-economic damages had a “reasonable basis,” thus satisfying the equal protection requirements of the state constitution.