Case Briefs

More than two years later, Arch informed H&H for the first time that the incident might fall within a so-called “Earth Movement Exclusion” in the policy for bodily injury and/or property damage “arising out of the subsidence, falling away, caving in, or other movement of earth.” Id. Arch reserved its right to disclaim coverage based on this exclusion, but confirmed that it would continue to provide H&H with a defense.

Sutphin then commenced a declaratory judgment action against Arch and H&H, seeking a declaration of its entitlement to coverage in the underlying lawsuits as an additional insured under the Arch policy. H&H likewise asserted cross-claims against Arch, claiming that it was also covered under the policy. On motions for summary judgment, the trial court held that “after two years of assuming a defense” Arch was equitably estopped from disclaiming coverage under the Earth Movement Exclusion. Id. at *2.

On appeal, the New York Supreme Court, Appellate Division, reversed and held that under New York law, although Arch waited more than two years to reserve its right to disclaim coverage based on the Earth Movement Exclusion, it was not necessarily equitably estopped from disclaiming because neither Sutphin nor H&H were prejudiced by the delay. In particular, the court noted that in the cases relied upon by Sutphin and H&H in which prejudice was found, the insurer had controlled the defense through settlement or trial. Here, by contrast, and by Sutphin's own admission, the underlying litigation was still in its “early phase.” Id. at *4. Accordingly, the court held that Sutphin and H&H failed to establish that they were prejudiced as a matter of New York law. The court also noted that while other means of prejudice may exist in some cases, such as manipulation of the defense, there was not even a suggestion that had taken place here.

In the end, the court held that Sutphin and H&H had failed to shift their burden on the motions and, accordingly, whether Arch should be equitably estopped from disclaiming coverage (if it decided to do so) was therefore left to the trier of fact. As a consequence, the court's holding shows that, under New York law, an insurer will not necessarily be prevented from disclaiming coverage even if it takes years to reserve its rights to do so. Rather, the focus of any claim of estoppel will be on whether and to what extent an insured was prejudiced by the delay.

Daren S. McNally, a managing partner, and Matthew I. Gennaro, senior counsel, in the New Jersey office of Clyde & Co US LLP contributed this month's Case Brief. McNally, a member of this newsletter's Board of Editors, maintains a practice that is focused on insurance coverage litigation and counseling, with an emphasis in complex insurance and reinsurance litigation, trials and arbitrations in both domestic and foreign arenas. Gennaro focuses his practice in the areas of insurance coverage law and litigation.

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Insurer May Disclaim Coverage Years After Commencement of Underlying Litigation

According to a recent decision by the New York Supreme Court, Appellate Division, an insurer is not necessarily equitably estopped from disclaiming coverage to an insured ' even years after the commencement of underlying litigation ' so long as the insured was not prejudiced by the delay. In 206-208 Main Street Associates, Inc. v. Arch Insurance Company, 2013 WL 1831452 (N.Y. App. Div. May 2, 2013), the plaintiff, doing business as Sutphin Blvd., LLC (“Sutphin”), hired H&H Builders, Inc. (“H&H”) to act as construction manager on a project to construct an office and retail building. H&H procured a CGL insurance policy from defendant Arch naming Sutphin as an additional insured.

During construction, on Aug. 30, 2007, the foundation of a building adjacent to the construction cracked, causing it to collapse and damage surrounding buildings. H&H notified Arch within several days of the incident. H&H was subsequently named in at least four actions beginning in October 2007, including one commenced by Sutphin that alleged the incident was caused by, among other things, “excavation work, underpinning [and] soil testing ' [that was] negligent.” Id. at *1. Arch retained a law firm to defend H&H in each of the actions.

More than two years later, Arch informed H&H for the first time that the incident might fall within a so-called “Earth Movement Exclusion” in the policy for bodily injury and/or property damage “arising out of the subsidence, falling away, caving in, or other movement of earth.” Id. Arch reserved its right to disclaim coverage based on this exclusion, but confirmed that it would continue to provide H&H with a defense.

Sutphin then commenced a declaratory judgment action against Arch and H&H, seeking a declaration of its entitlement to coverage in the underlying lawsuits as an additional insured under the Arch policy. H&H likewise asserted cross-claims against Arch, claiming that it was also covered under the policy. On motions for summary judgment, the trial court held that “after two years of assuming a defense” Arch was equitably estopped from disclaiming coverage under the Earth Movement Exclusion. Id. at *2.

On appeal, the New York Supreme Court, Appellate Division, reversed and held that under New York law, although Arch waited more than two years to reserve its right to disclaim coverage based on the Earth Movement Exclusion, it was not necessarily equitably estopped from disclaiming because neither Sutphin nor H&H were prejudiced by the delay. In particular, the court noted that in the cases relied upon by Sutphin and H&H in which prejudice was found, the insurer had controlled the defense through settlement or trial. Here, by contrast, and by Sutphin's own admission, the underlying litigation was still in its “early phase.” Id. at *4. Accordingly, the court held that Sutphin and H&H failed to establish that they were prejudiced as a matter of New York law. The court also noted that while other means of prejudice may exist in some cases, such as manipulation of the defense, there was not even a suggestion that had taken place here.

In the end, the court held that Sutphin and H&H had failed to shift their burden on the motions and, accordingly, whether Arch should be equitably estopped from disclaiming coverage (if it decided to do so) was therefore left to the trier of fact. As a consequence, the court's holding shows that, under New York law, an insurer will not necessarily be prevented from disclaiming coverage even if it takes years to reserve its rights to do so. Rather, the focus of any claim of estoppel will be on whether and to what extent an insured was prejudiced by the delay.

Daren S. McNally, a managing partner, and Matthew I. Gennaro, senior counsel, in the New Jersey office of Clyde & Co US LLP contributed this month's Case Brief. McNally, a member of this newsletter's Board of Editors, maintains a practice that is focused on insurance coverage litigation and counseling, with an emphasis in complex insurance and reinsurance litigation, trials and arbitrations in both domestic and foreign arenas. Gennaro focuses his practice in the areas of insurance coverage law and litigation.

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