Late Notice: Disclaiming Coverage Under Commercial General Liability Policy. Stranger-Owned Life Insurance Policies. Economic Loss Doctrine

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1 2010 Vol. 4 Late Notice: Disclaiming Coverage Under Commercial General Liability Policy Stranger-Owned Life Insurance Policies Economic Loss Doctrine Clausen Miller 75th Anniversary in 2011 A summary of significant recent developments in the law focusing on substantive issues of litigation and featuring analysis and commentary on special points of interest.

2 Features 15 CM News 16 Case Notes Report Staff Editor-In-Chief Robert A. Stern Contributing and Featured Attorneys Rebecca Ahdoot Peter N. Billis Jeffrey W. Varcadipane Matthew J. Vinciguerra Yoko Yamamoto Jacob R. Zissu Case Notes Attorney Melinda S. Kollross The CM Report of Recent Decisions is provided as a general information source and is not intended, nor should it be considered, the rendition of legal advice. Please contact us to discuss any particular questions you may have Clausen Miller P.C. Articles ECONOMIC LOSS 3 New Jersey Supreme Court Clarifies The Economic Loss And Integrated Product Doctrines by Jeffrey W. Varcadipane FEDERAL COURT REMOVAL 5 Removal From State Court May Be Timely Even After 30 Days From Service Of A Complaint by Jacob R. Zissu LATE NOTICE 7 Insured s Failure To Provide Reasonable Excuse For Late Notice May Serve As Basis To Disclaim Coverage Under A Commercial General Liability Policy by Peter N. Billis LIABILITY COVERAGE 9 Oral Agreement To Procure Insurance May Trigger Additional Insured Coverage Despite Written Requirement In Additional Insured Endorsement by Yoko Yamamoto LIFE INSURANCE 11 Insured Purchased, But Stranger-Owned Life Insurance Policies Are Acceptable by Rebecca Ahdoot PROPERTY COVERAGE 13 Court Finds An Issue Of Fact Regarding Whether Damage To A Structural Foundation Wall Constitutes Collapse by Matthew J. Vinciguerra 2

3 New Jersey Supreme Court Clarifies The Economic Loss And Integrated Product Doctrines ECONOMIC LOSS by Jeffrey W. Varcadipane In New Jersey, the economic loss doctrine typically bars recovery under the Product Liability Act (the Act ), for damages to the product itself. In Dean v. Barrett Homes, Inc., 204 N.J. 286 (November 15, 2010), the issue involved whether the Act would preclude recovery for damage to a home caused by defective synthetic stucco siding. Plaintiffs/homeowners purchased their home equipped with a stucco siding system, which acted as both insulation and finishing. Soon thereafter, Plaintiffs discovered that toxic mold leaked into their home, allegedly as the result of the defective siding system. Plaintiffs sued the manufacturer of the siding system under the Act seeking recovery for the cost of replacing the defective siding and remediation of consequential damage to other parts of the home. The trial court granted the manufacturer s summary judgment motion, holding that the economic loss rule barred recovery, and the Appellate Division affirmed. The question the Supreme Court confronted was whether the stucco siding system was fully integrated into the home, or whether it constituted a separate product. The implications were significant because if the stucco siding system was considered to be fully integrated into the home, Plaintiffs products liability claim for damages caused to the rest of the home would be completely barred by the economic loss doctrine. The New Jersey Supreme Court reversed in part. The Court noted that many federal courts have expand[ed] the economic loss rule through the adoption of an approach referred to as the integrated product doctrine. Id. at 6. That doctrine extend[s] the economic loss rule to preclude tort-based recovery when a defective product is incorporated into another product which the defective product then damages. Id. While declining to resolve whether New Jersey adhered to the integrated product doctrine, the Court concluded that the siding system did not become an integral part of the structure itself, but was at all times distinct from the house. Id. at 10. Therefore, the Court held that Plaintiffs could recover in tort for damages the siding caused to other parts of the house; however, the economic loss rule precluded recovery for replacing the siding itself. Learning Point: Plaintiffs and Defendants involved in a products liability action in New Jersey must first consider whether the failed product caused damage to other property. Then, the parties must determine whether the product was an integral part of the other property. If the product was at all times distinct from the other property, recovery may be allowed for the damage to the other property. However, recovery will not be allowed for damage to the product itself, unless an exception within the Product Liability Act applies. t Jeffrey W. Varcadipane is an associate in the New York and New Jersey offices of Clausen Miller P.C. He handles a variety of civil and commercial litigation matters including products liability, construction defects and professional malpractice. Mr. Varcadipane received his law degree from Fordham University School of Law, studied international dispute resolution at the Queens University in Belfast and the University College Dublin, and received his Bachelor of Business Administration in Economics from the University of North Florida, summa cum laude. jvarcadipane@clausen.com 3

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5 FEDERAL COURT REMOVAL Removal From State Court May Be Timely Even After 30 Days From Service Of A Complaint by Jacob R. Zissu The U.S. Court of Appeals for the Second Circuit recently held that the time for removal of a State Court action to Federal Court is calculated from the service of the first paper stating on its face the amount of damages sought. In Moltner v. Starbucks Coffee Co., (No cv (2d Cir., November 2, 2010)), a 76 year old female plaintiff, Rachel Moltner, purchased a venti sized cup of tea at a Starbucks Coffee Co. ( Starbucks ) location. Ms. Moltner had difficulty removing the lid to add sugar, and in the course of her efforts spilled the tea on herself, causing burn injuries which required a skin graft and an extended hospital stay with secondary injuries. Moltner filed a Complaint on July 31, 2008, in New York State Supreme Court. Pursuant to New York s CPLR 3017(c), her complaint described her injuries but did not state the amount of monetary damages sought. Starbucks then Answered the Complaint in State Court and served a Request for a Supplemental Demand for Relief upon Moltner. Moltner responded on October 21, 2008, seeking an amount in excess of $3 million. Eight days later, on October 29, 2008, Starbucks removed the action to the U.S. District Court, pursuant to 28 U.S.C Thereafter, Moltner moved to remand the action back to State Court, asserting that Starbucks removal was not timely, because it did not take place within 30 days of its receipt of Moltner s Complaint. 28 U.S.C. 1446(b) provides, in pertinent part, as follows: The notice of removal of a civil action or proceeding shall be filed within thirty days after the receipt by the defendant, through service or otherwise, of a copy of the initial pleading setting forth the claim for relief upon which such action or proceeding is based. If the case stated by the initial pleading is not removable, a notice of removal may be filed within thirty days after receipt by the defendant, through service or otherwise, of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable, except that a case may not be removed on the basis of jurisdiction conferred by section 1332 of this title more than 1 year after commencement of the action. Jacob R. Zissu is an associate in the New York office of Clausen Miller. His practice concentrates on first-party property coverage litigation. Mr. Zissu holds a B.S. from the U.S. Naval Academy and a Juris Doctor from The Catholic University of America s Columbus School of Law. jzissu@clausen.com 5

6 FEDERAL COURT REMOVAL 28 U.S.C provides that the District Court may exercise jurisdiction over a civil action where the parties are diverse in citizenship and the matter in controversy exceeds $75,000.00, exclusive of interest and costs. As Starbucks removal was filed within eight days of the first paper establishing that the amount in controversy exceeded $75,000.00, the Southern District denied Moltner s motion for remand. Moltner, 2009 WL at *2 (S.D.N.Y February 27, 2009), citing Whitaker v. American Telecasting, Inc., 261 F.3d 196 (2d Cir. 2001). Moltner appealed the decision; she argued that if Starbucks applied a reasonable amount of intelligence to its reading of the description of her injuries in the Complaint, it would have deduced that the amount in controversy exceeded the jurisdictional threshold. The Appellate Court, however, rejected this reasoning: [In Whitaker, we] explained: A case is removable when the initial pleading enables the defendant to intelligently ascertain removability from the face of such pleading, so that in its petition for removal, the defendant can make a short and plain statement of the grounds for removal as required by 28 U.S.C. 1446(a). In cases where removal is based upon diversity, the facts required to support the removal petition include the amount in controversy and the address of each party. While this standard requires a defendant to apply a reasonable amount of intelligence in ascertaining removability, it does not require a defendant to look beyond the initial pleading for facts giving rise to removability. [Whitaker, 261 F.3d at ] *** To the extent that our holding in Whitaker does not foreclose [Moltner s] argument, we now reject it. We join the Eighth Circuit, as well as all of the district courts in this Circuit to have addressed the issue, in holding that the removal clock does not start to run until the plaintiff serves the defendant with a paper that explicitly specifies the amount of monetary damages sought. See In re Willis, 228 F.3d 896, 897 (8th Cir. 2000) (per curiam) ( We find the thirty-day time limit of section 1446(b) begins running upon receipt of the initial complaint only when the complaint explicitly discloses the plaintiff is seeking damages in excess of the federal jurisdictional amount. ); Quintana v. Werner Enters., Inc., No. 09 Civ. 7771, 2009 WL (S.D.N.Y. Nov. 2, 2009); Gourgue v. Red Lobster Rest., No , 2008 WL (E.D.N.Y. Mar. 26, 2008); Pinson v. Knoll, Inc., No. 07 Civ. 1739, 2007 WL (S.D.N.Y. June 18, 2007); Yonkosky v. Hicks, 409 F.Supp.2d 149 (W.D.N.Y. 2005). Moltner, No cv at 4, 6. Thus, the Court, in noting that Moltner s own response to the Request for a Supplemental Demand for Relief was outside the 15-day window specified in CPLR 3017(c), affirmed the Order of the District Court in favor of Starbucks. Learning Point: Actual service of a pleading that meets the requirements of 28 U.S.C. 1446(b) is the trigger which begins the 30 day period for removal. Even though a Plaintiff s State Court complaint may be technically sufficient under New York practice, the 30 day period in which a litigant may remove a cause of action to Federal Court based upon diversity of citizenship is not triggered where the Complaint fails to state the amount in controversy such that Federal jurisdiction can be determined. t 6

7 LATE NOTICE Insured s Failure To Provide Reasonable Excuse For Late Notice May Serve As Basis To Disclaim Coverage Under A Commercial General Liability Policy by Peter N. Billis Commercial general liability policies generally require an insured to notify its insurer of an occurrence as soon as practicable. If the insured fails to do so, and the insurer subsequently disclaims coverage on the grounds of late notice, the courts usually allow the insured to present a reason for the delay. The reasonableness of the delay is generally an issue of fact to be determined at trial. However, if the insured should have realized that there was a reasonable possibility of the policy s involvement months prior to providing notice, the courts can hold the reason for delay unreasonable as a matter of law and declare that the insurer is not obligated to defend and indemnify its insured. This point was illustrated in McGovern-Barbash Associates, LLC v. Everest National Insurance Company, 2010 NY Slip Op 9481; 2010 N.Y. App. Div. LEXIS 9593 (N.Y. App. Div., 2010). On August 22, 2007, John Wehrheim was injured while working at a construction project on a premises owned by McGovern-Barbash Associates, LLC ( McGovern- Barbash ). On November 17, 2007, Wehrheim commenced an action to recover damages for personal injuries entitled Wehrheim v. McGovern-Barbash Associates, LLC, in New York Supreme Court, Suffolk County, (hereinafter the underlying action ). At the time of the accident, McGovern-Barbash was insured by Defendant, Everest National Insurance Company ( Everest ), under a commercial general liability insurance policy. The policy required notice of any occurrence that might result in a claim as soon as practicable. Although the injury occurred on August 22, 2007, McGovern-Barbash did not notify Everest of the accident until December 10, 2007, almost four months after the occurrence, and one month after being sued. Following an investigation, Everest disclaimed coverage upon the ground of late notice. McGovern-Barbash then commenced an action against Everest requesting, among other things, a judgment declaring that Everest is obligated to defend and indemnify it in the underlying personal injury action. It stated that its reasoning for delay in providing notice was that it had a good faith belief that it was not liable to Wehrheim. Everest filed Peter N. Billis is an associate in the New York office of Clausen Miller P.C. His practice is primarily concentrated in the area of insurance coverage. Mr. Billis received his Bachelor of Arts degree in Political Science from Boston University and he graduated from Brooklyn Law School with a Juris Doctor degree. pbillis@clausen.com 7

8 LATE NOTICE a motion to dismiss on the ground of late notice, which was, in effect, a motion for summary judgment declaring that it was not obligated to defend and indemnify McGovern- Barbash in the underlying action. The trial court denied Everest s motion; the Appellate Court then modified the ruling. The Appellate Court held that where an insurance policy requires notice of an occurrence be given as soon as practicable, notice must be given within a reasonable [period of] time under all the circumstances. Id. at *2. An insured s failure to satisfy the notice requirement constitutes a failure to comply with a condition precedent which, as a matter of law, vitiates the contract. Id. The insurer need not establish that it was prejudiced by the late notice, except in certain situations not applicable in this litigation. Id. In McGovern, Everest established its prima facie entitlement to judgment as a matter of law by demonstrating that McGovern-Barbash had knowledge of the accident within days, but failed to notify it of the occurrence until almost four months thereafter. Id. Under New York law, McGovern-Barbash had the burden of raising a triable issue of fact as to the existence of a reasonable excuse for the delay in opposition to Everest s prima facie showing, but it failed to do so. Id. The Court stated that while the reasonableness of an insured s good faith belief in non-liability is a matter ordinarily left for a trial, it may be determined as a matter of law where the evidence, construing all inferences in favor of the insured, establishes that the belief was unreasonable or in bad faith. Id. The Court then noted evidence showing McGovern-Barbash s representative learned of the accident several days after it occurred. Id. Despite having this knowledge, McGovern-Barbash failed to provide notice of the occurrence to Everest, as required by the policy. Further, McGovern-Barbash did not provide notice to Everest after a letter dated September 11, 2007, from the injured person s attorney, warning it of the claim and specifically advising it to refer this letter to your insurance carrier immediately for further attention. Rather, it was not until December 10, 2007, one month after the November, 2007, filing of the underlying action, and approximately four months after the occurrence, that McGovern- Barbash finally notified Everest of the accident. The Court held that, at the very least, McGovern-Barbash should have realized that there was a reasonable possibility of the subject policy s involvement as early as August, 2007, and the proffered excuse for delay was unreasonable as a matter of law. Id. Since McGovern-Barbash failed to offer a valid excuse for its delay in providing notice of the occurrence to Everest, the Appellate Court held that Everest s motion for summary judgment should be granted, with a declaration that it was not obligated to defend and indemnify McGovern-Barbash in the underlying action. Id. at *3. Learning Point: Pursuant New York law, if a commercial general liability policy requires an insured to notify its insurer of an occurrence as soon as practicable, absent a reasonable excuse for delay, failure to provide timely notice may preclude the insured its right to defense and indemnification. While the reasonableness of an excuse is generally an issue of fact to be determined at trial, if the evidence shows that the insured should have realized that there was a reasonable possibility of the policy s involvement months before it actually provided notice, a court may hold an insured s reason for delay unreasonable as a matter of law. t 8

9 LIABILITY COVERAGE Oral Agreement To Procure Insurance May Trigger Additional Insured Coverage Despite Written Requirement In Additional Insured Endorsement by Yoko Yamamoto In Empire Builders & Developers, Inc. v. Delos Ins. Co., 910 N.Y.S.2d 548, 2010 N.Y. Slip Op (2d Dep t 2010), the Appellate Court held that a premises owner and a construction manager were not additional insureds under a liability policy s additional insured endorsement which provided additional insured coverage to a person or organization whom the named insured is required to add as an additional insured under a written contract, agreement or permit which must be executed prior to the loss. Plaintiff Empire Builders & Developers, Inc. ( Empire ) was the construction manager for a construction project on a property owned by Plaintiff th Realty Corp. ( Realty ). When a personal injury action was commenced against Empire and Realty by the estate of an employee of a subcontractor, Lecapife Corp. ( Lecapife ), who was killed while working for the construction project, they tendered their interests to Scottsdale Insurance Company ( Scottsdale ), which issued a liability insurance policy to Lecapife (the Policy ). Scottsdale disclaimed coverage to both Empire and Realty, asserting that they did not qualify as additional insureds under the Policy. Empire and Realty then commenced a declaratory judgment action against Scottsdale, seeking a judicial declaration that Scottsdale was obligated to defend and indemnify Empire and Realty as additional insureds under the Policy. Id. at 549. The Policy did not list either Empire or Realty as an additional insured. Id. at 549. However, the Policy contained a Blanket Additional Insured Endorsement ( Endorsement ), which provided additional insured coverage to any person or organization whom the named insured [Lecapife] is required to add as an additional insured under a written contract, agreement or permit which must be executed prior to the injury. Id. at 549. Plaintiffs sought additional insured coverage under the Endorsement. There was no written agreement requiring Lecapife to procure additional insured coverage to Plaintiffs. However, Empire s agent testified that he had a verbal understanding with Lecapife s agent that Lecapife would provide Empire with additional insured status. Yoko Yamamoto is an associate in the New York office of Clausen Miller P.C. Her practice is primarily concentrated in the areas of insurance coverage, commercial and corporate litigation. In addition to an LL.B. degree from Ritsumeikan University in Kyoto, Japan, Ms. Yamamoto received an LL.M. degree from Benjamin N. Cardozo School of Law, an LL.M. degree from the University of British Columbia and a Bachelor of Arts degree in Political Science from the University of Oregon. yyamamoto@clausen.com 9

10 LIABILITY COVERAGE Although the Court noted that the oral agreement to procure insurance constituted an agreement to have plaintiffs named as additional insureds within the meaning of the Endorsement, the Court ultimately concluded that Plaintiffs did not qualify as additional insureds under the Endorsement because the oral agreement was not executed prior to the accident -- the agreement was neither reflected in a signed document nor fully performed by the parties. Id. at 549. Learning Point: Some courts will strictly construe the "written" requirement in an additional insured endorsements. There is also a line of cases in which the courts found that the phrase written contract, agreement or permit under additional insured endorsements is ambiguous because the word written could be interpreted to modify the words contract, agreement and permit, but it also can be reasonably interpreted to only modify the word contract. In such cases, the courts will likely find coverage in favor of an additional insured even if there is no written agreement requiring the named insured to name the purported additional insured under its liability policy. t 10

11 LIFE INSURANCE Insured Purchased, But Stranger-Owned Life Insurance Policies Are Acceptable by Rebecca Ahdoot In Kramer v. Phoenix Life Ins. Co., 15 N.Y.3d 529, 2010 WL (Ct. App. 2010), New York s highest court answered in the affirmative the question of whether an individual may, under New York s insurable interest law, take out an insurance policy on his/her own life and immediately transfer the policy to a person without an insurable interest in the insured s life, in a stranger-owned life insurance ( SOLI ) scheme. Plaintiff, a widow, as representative of her deceased husband s estate, brought an action against life insurers, trustees, an insurance broker and stranger investors allegedly involved in a SOLI scheme in which her deceased husband participated. Her husband, a prominent New York trial attorney, procured approximately $56,200,000 in coverage, and transferred his life insurance benefits to the various defendant-investors. The District Court granted motions to dismiss most of Defendants claims, but denied that of one Defendant who served as a broker to the Policy, holding that this Defendant breached insurance laws by causing to be procured a contract of insurance upon the life of a decedent, for the benefit of strangers without an insurable interest in that decedent s life. Kramer v. Lockwood Pension Services, Inc., 653 F.Supp.2d 354, 388 (S.D.N.Y. 2009). New York s insurable interest requirement is codified in Insurance Law 3205(b). Section 3205(b)(1) addresses individuals obtaining life insurance on their own lives: Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated. Section 3205(b)(2) addressees a person s ability to obtain insurance on another s life and requires, in that instance, that the policy beneficiary be either the insured himself or someone with an insurable interest in his life. An insurable interest is defined as, in the case of persons closely related by blood or by law, a substantial interest engendered by love and affection or for others, a lawful and substantial economic interest in the continued life, health or bodily safety of the insured. N.Y. Ins. Law 3205(a)(1). Rebecca Ahdoot is an associate in the New York office of Clausen Miller P.C. doing general practice. She received her Juris Doctor, cum laude, from Brooklyn Law School in May of Rebecca is a board member of the Iranian American Bar Association of New York. rahdoot@clausen.com 11

12 LIFE INSURANCE Disagreeing with both the District Court and Plaintiff, who urged the Court to apply Section 3205(b)(2) to her decedent husband s procurement of his own life insurance, the Court held that only Section 3205(b)(1) applies to an insured s procurement of life insurance on his/her own life. Utilizing statutory analysis, the Court found Section 3205(b)(1) to be unambiguous and not limited by the statutory text of Section 3205(b)(2) requiring a beneficiary with an insurable interest. The Court further opined that it was equally plain and unambiguous that a contract procured by an insured can be immediately transferred and assigned under the statute. This person, under the statute, can even be a stranger. Learning Point: An insured can buy life insurance on his own life and immediately transfer it to strangers, in a stranger owned life insurance scheme, even if the insured never intended on providing insurance protection to a person with an insurable interest in the insured s life. t 12

13 PROPERTY COVERAGE Court Finds An Issue Of Fact Regarding Whether Damage To A Structural Foundation Wall Constitutes Collapse by Matthew J. Vinciguerra In Khuns v. Bay State Insurance Company, 910 N.Y.S.2d 822 (4th Dep t 2010), Susan C. Khuns ( Khuns ) brought a breach of contract action against her property insurer, Bay State Insurance Company ( Bay State ), seeking coverage under her homeowner s policy ( Policy ) for damage to a structural foundation wall in her home that she claimed collapsed. Bay State previously denied the claim by letter, finding that the loss did not constitute a collapse under the Policy and thus no coverage was available. Also cited in Bay State s denial were the Policy exclusions for water damage, loss caused by earth movement and inadequate construction or design. The trial court denied both Bay State s motion for summary judgment seeking to dismiss the Complaint as well as Plaintiff s cross motion seeking partial summary judgment on the issue of liability. The Appellate Court affirmed the trial court s decision. The Court began its analysis noting that Bay State failed to meet its initial burden establishing as a matter of law that the loss did not involve a collapse within the meaning of the Policy. Zuckerman v. City of New York, 49 N.Y.2d 557, 562 (1980). The Court reviewed the specific language of the Policy, which defined collapse as an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its intended purpose. Id. at 823. In analyzing the provision, the Court reviewed Plaintiff s deposition testimony that was submitted by Bay State in support of its Motion, describing the loss as a cave in and describing a crack below the middle of the wall where light was visible from outside, and that the wall fell in to the point where [one] could see the outside in one portion. Id. In comparing the language of the Policy with Plaintiff s testimony, the Court concluded that the evidence submitted by Bay State in support of its Motion was insufficient on the issue of whether the loss constituted a collapse as provided by the Policy. The Court next addressed the Policy exclusions, specifically Bay State s contention that coverage for a loss caused by water pressure to a foundation was excluded because the Policy does not insure for loss [c] aused by [f]reezing, thawing, pressure or weight of water or ice to a [f] oundation. Id. at 824. In its analysis, the Court took specific issue Matthew J. Vinciguerra is an associate in the New York office of Clausen Miller P.C. His practice concentrates on casualty/liability defense and coverage, construction litigation, premises liability and first-party property. Mr. Vinciguerra holds a B.A.from Marist College, an M.A. from the University of Connecticut and a J.D. from Albany Law School. Prior to joining Clausen Miller, he was an Assistant District Attorney at the Bronx County District Attorney's Office. mvinciguerra@clausen.com 13

14 PROPERTY COVERAGE with Bay State s characterization of the provision as an exclusion, noting that the provision appears in the perils insured against section of the Policy and not the exclusions section. The Court opined that [t]o the extent that the subject language conflicts with other policy language providing coverage for loss caused by decay, that conflict is to be resolved against defendant, which drafted the policy. Id. The Court also held that, based upon the submissions, an issue of fact was raised by Plaintiff s expert concluding that the loss was caused by decay located inside of the basement wall of the home. Finally, the Court reviewed the water damage exclusion raised by Bay State in its coverage denial. That provision excluded loss caused by water damage, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure. Id. The Court again found an issue of fact, explaining that despite the opinion of Bay State s expert that the loss was attributed to hydrostatic ground forces that would trigger the Policy exclusion, Plaintiff s expert found that the damage was caused by structural weakening, a peril that did not fall within the water damage exclusion. Id. at Therefore, the Court held that an issue of fact was raised pointing to the conflicting opinions provided by the parties. There was a dissenting opinion. The dissent stated that Bay State was entitled to summary judgment based upon the terms and conditions of the Policy. Learning Point: Khuns illustrates the difficulties insurers face in denying coverage to a homeowner and exemplifies the reluctance of courts to enforce policy provisions or exclusions based on the underlying facts and circumstances of a particular loss. t 14

15 CM NEWS Stern Speaks On Issue Spotting In Large Loss Subrogation Cases At The Annual NASP Conference Clausen Miller Partner Robert A. Stern (New York/New Jersey), presented a Seminar on Issue Spotting in Large Loss Subrogation Cases at the 12th Annual National Association of Subrogation Professionals (NASP) Conference in Dallas, Texas on November 8, Robert, along with two other speakers, discussed various issues which arise in large loss subrogation cases. Robert A. Stern Stern Presents Subrogation Seminar At PLRB/LIRB Western Conference On November 2-3, 2010, CM Partner Robert A. Stern presented, "Subrogation: Initial Recognition, Roadblocks and Strategies for Effective Recoveries," at PLRB/ LIRB Western Regional Adjusters Conference This was an interactive program of three case studies to identify subrogation potential, roadblocks and effective strategies for developing, prosecuting and defending subrogation claims. If you are interested in a similar seminar, please contact Robert (rstern@clausen.com). Tyler J. Lory two Clausen Miller ATTORNEys Honored As New York Super Lawyers Clausen Miller is pleased to announce that Tyler J. Lory and Robert A. Stern were named NewYork Super Lawyers. New York has thousands of lawyers, but only the Top 5% of New York attorneys are named Super Lawyers. 15

16 CASE NOTES ACCOUNTING MALPRACTICE ACCOUNTANT DID NOT OWE A DUTY OF REASONABLE CARE TO THIRD-PERSON WHO RELIED UPON ACCOUNTANT S REPORT Barrett v. Freifeld, 908 N.Y.S.2d 736 (N.Y. App. Div. 2d Dep t) Buyers brought negligence and fraud action against accounting firm with whom it had no privity of contract. Held: In limited circumstances, an accountant may be liable in negligence to a third-party who relies upon his work, provided the accountant understood that his report would be used and relied upon by the third-party. The accountant s single phone call to the buyers was insufficient to create such a duty in the absence of privity of contract. CIVIL PROCEDURE FAILURE TO ADEQUATELY OPPOSE MOTION TO STRIKE PROPERLY RESULTED IN DEFAULT M & C Bros., Inc., v. Torum, 907 N.Y.S.2d 78 (N.Y. App. Div. 3d Dep t) Plaintiff filed motion to strike defendant s answer for discovery violations. Defendant did not file written opposition and only contested matter at oral argument on the motion. Trial court granted motion, treating as a failure to oppose and a default, and defendants appealed. Held: Appeal dismissed. Oral argument was not competent evidence and further was not even on record. Accordingly, trial court had properly treated as default and defendants only recourse was to move to vacate the judgment. COMMERCIAL LAW SUBCONTRACTOR DOES NOT HAVE THIRD-PARTY BENEFICIARY STATUS FOR PURPOSES OF CONSTRUCTION LOAN AGREEMENT Steffy & Sons, Inc. v. Citizens Bank of Pennsylvania, 7 A.3d 278 (Pa. Super.) Subcontractor sued bank which commenced foreclosure proceedings on a construction project after the developer defaulted on a loan. Subcontractor alleged a cause of action based on its asserted thirdparty beneficiary status. Held: Where the terms of a construction loan agreement show that its drafters specifically rejected the idea of subcontractors as third-party beneficiaries, subcontract must be denied third party beneficiary status. CONTRACT NO ORAL AGREEMENT ON SPLITTING BROKERAGE COMMISSIONS Strauss v. Newmarket Global Consulting Group, LLC, 5 A.3d 1027 (D.C.) Former stockbroker brought an action for breach of contract against colleague stockbroker and investment company seeking to enforce an oral agreement to split brokerage commissions and consulting fees. Following the alleged oral agreement which took place over a lunch meeting, the former stockbroker wrote a memo to the colleague stockbroker confirming that [f]uture deals... will be split on case by case basis. Held: Given the oral nature of the alleged agreement involving a complex business transaction and the lack of evidence of the material terms of the contract, the plaintiff failed to meet its burden of proving the mutual agreement. 16

17 EMPLOYMENT RESTRICTIVE COVENANT NOT ENFORCED AGAINST LAID-OFF EMPLOYEE HIRED BY COMPETITOR Eastman Kodak Co. v. Carmosino, 909 N.Y.S.2d 247 (N.Y. App. Div. 4th Dep t) Employer brought action to enforce a restrictive covenant against a laid-off employee who obtained work with a competitor. Held: The employer failed to demonstrate irreparable harm or a legitimate interest in enforcing the agreement. The court refused to uphold the covenant, explaining that non-compete agreements are judicially disfavored because powerful considerations of public policy militate against sanctioning the loss of a person s livelihood. LABOR LAW INTERIOR DECORATOR WHO TRIPPED ON CONSTRUCTION PAPER IN HOTEL LOBBY WAS NOT PROTECTED BY STATE S LABOR LAWS Rajkumar v. Budd Contracting Corp., 909 N.Y.S.2d 453 (N.Y. App. Div. 1st Dep t) Plaintiff, an interior decorator, tripped and fell on construction paper covering a recently installed floor while hanging a 300 pound mirror in a hotel lobby. Held: Even assuming that plaintiff s work constituted construction, demolition or excavation, his alleged accident did not occur in a passageway and did not involve misplaced tripping hazards. Plaintiff s claims against the hotel therefore fell outside of the protections of New York s labor law. LIABILITY INSURANCE COVERAGE NO DUTY TO DEFEND DUE TO AUTO EXCLUSION DMP Contracting Corp. v. Essex Ins. Co., 907 N.Y.S.2d 487 (N.Y. App. Div. 1st Dep t) Snow removal company sought declaratory judgment that insurer had duty to defend it under CGL policy in underlying action brought by woman who slipped and fell while getting into car on property company had removed snow from. The policy in question had an exclusion for bodily injury caused by the ownership, non-ownership or entrustment to others of any auto. Held: The policy exclusion s language was broad enough to exclude coverage for injuries caused by any automobile, regardless of whether the insured had any connection to the vehicle or not. CASE NOTES INSURER NOT REQUIRED TO DEFEND AND INDEMNIFY HOME BUILDER Westfield Ins. Co. v. R. L. Diorio Custom Homes, Inc., 932 N.E.2d 369 (Ohio App.) Homeowners sued contractor for breach of contract and negligence in connection with new construction. Held: Contractor s poor workmanship, delays in completing work, and misrepresentations did not constitute covered occurrences under a CGL policy. Defective or negligent workmanship does not constitute an accident for policy purposes. The policy also contained exclusions for claims of breach of contract based on faulty workmanship. INSURED, BUT NOT INSURED S EMPLOYEE, WAS ENTITLED TO ATTORNEY S FEES AND COSTS FOR PREVAILING IN COVERAGE ACTION RLI Ins. Co. v. Smiedala, et. al., 909 N.Y.S.2d 263 (N.Y. App. Div. 4th Dep t) Insurer lost a declaratory judgment action it filed against its insured and insured s employee, who were jointly sued in an underlying tort action. Held: The insurer was required to reimburse its insured for attorney s fees and costs incurred in the coverage action. In the absence of a contractual agreement, no similar duty was owed to the insured s employee. 17

18 CASE NOTES MEDICAL MALPRACTICE CHILD MAY PROCEED WITH CLAIM FOR IN UTERO EXPOSURE TO CHEMOTHERAPY DRUGS Chang ex rel. Chang v. Harvard Vanguard Medical Associates, Inc., 933 N.E.2d 701 (Mass. App.) Following chemotherapy treatments given to mother, ultrasound showed that unborn child had not grown as expected and so was diagnosed with intrauterine retardation. Held: The exposure to toxic substances and radiation may cause substantial injury which is compensable even if the full effects are not immediately apparent. A genuine issue of fact existed as to whether the chemotherapy treatments caused the growth retardation and will cause future problems. DOCTOR S ALLEGED MALPRACTICE WAS NOT A PROXIMATE CAUSE OF DECEDENT S INJURIES Pichardo v. Herrera-Acevedo, 908 N.Y.S.2d 446 (N.Y. App. Div. 2d Dep t) Estate of deceased patient brought medical malpractice and wrongful death action against the decedent s doctor. Estate alleged that defendant s failures lead to delayed diagnosis and treatment of colorectal cancer. Held: Defendant was entitled to summary judgment because the doctor s alleged departure from good and accepted medical practice was not the proximate cause of the patient s death. MUNICIPAL LIABILITY LEAVE TO FILE LATE NOTICE OF TORT CLAIM AGAINST VILLAGE GRANTED, DESPITE LACK OF REASONABLE EXCUSE FOR THE DELAY Carpenter v. N.Y. Advance Electronic, Inc., 908 N.Y.S.2d 297 (N.Y. App. Div. 4th Dep t) Plaintiffs sought leave to serve village with notice of a claim arising out of an accident at the local water treatment facility. Held: The trial court is vested with broad discretion to grant or deny an application for leave to serve late notice of a claim under General Municipal Law. Leave can be granted even in the absence of reasonable excuse if the defendant had actual notice of the claim and there is no compelling showing of prejudice. NEGLIGENCE HEIGHTENED LEVEL OF FORESEEABILITY APPLIES TO DEFENDANT S RESPONSIBILITY FOR INTERVENING CRIMINAL ACTS Sigmund v. Starwood Urban Retail VI, LLC, 617 F.3d 512 (D.C. Cir.) Plaintiff was injured when driving his father s automobile out of a parking garage, by a pipe bomb placed in the vehicle by the plaintiff s half brother who intended to kill the plaintiff s father. The parking garage s overhead door was broken and had been stuck open for several weeks prior to the incident, thereby allowing access to the garage by the half brother. Plaintiff sued the owner and operators of the garage claiming that the open garage door had compromised the garage s security and that the defendants therefore bore responsibility for his injury. Held: Applying D.C. law, the court held that the injury did not satisfy the heightened foreseeability standard required where an injury is caused by the intervening criminal act of a third-party. There was no crime reported in the garage during the period when the door was open, and the level of crime in the area was not high. 18

19 CASE NOTES SOCIAL HOSTS AND ORGANIZER OF BACKYARD BASEBALL GAME OWE DUTY OF CARE TO SPECTATOR Judge v. Carrai, 934 N.E.2d 276 (Mass. App.) Guest watching a backyard baseball game was injured by a foul line drive. Held in a split decision: The guest organizing the game owed a duty of care. The proximity of the field to the spectators made the injury foreseeable. The organizer pitched the ball that struck the spectator. Also held: As property owners, the hosts also owed a duty of care. The dissent concluded that the majority view is adrift from common real life happenings and flies in the face of common sense. ADJACENT LANDOWNER NOT RESPONSIBLE FOR PUBLIC SIDEWALK AROUND GRATE Storper v. Kobe Club, 906 N.Y.S.2d 543 (N.Y. App. Div. 1st Dep t) Plaintiff sued owner of land adjacent to raised, broken portion of public sidewalk on which she had tripped and sustained injuries. The area on which she fell surrounded a Metropolitan Transit Authority grate. Existing New York statutory provisions provided both that abutting property owners are liable for negligent sidewalk maintenance and that grate owners are responsible for maintenance of a 12-inch zone around grates. The lower court dismissed the action. Held: Affirmed. The property owners and MTA were not concurrently liable. Statutory provisions creating liability are to be strictly construed and nothing within the statutory construct confirmed that the obligations of a grate owner were intended to be imposed upon a property owner. EXPERT OPINION UNABLE TO RAISE ISSUE OF FACT IN LIGHT OF EYEWITNESS TESTIMONY Rodrigues v. VIll. of Ossining, 907 N.Y.S.2d 504 (N.Y. App. Div. 2d Dep t) Plaintiffs brought wrongful death suit against driver of a vehicle, alleging that his negligent driving forced sanitation truck to take evasive maneuvers resulting in worker falling to his death. Lower court granted summary judgment to driver based on affidavits from driver and sanitation workers averring that the truck had taken no evasive maneuvers. Plaintiffs submitted the affidavit of a certified accident reconstruction expert stating that the only way the accident could have occurred was if the truck driver had taken evasive action. Held: Affirmed. The speculative, conclusory opinion of the expert was insufficient to raise an issue of fact given the uncontroverted eyewitness testimony. MOTHER NOT LIABLE FOR NEGLIGENT SUPERVISION OF HUNTERS Ware v. King, 931 N.E.2d 1138 (Ohio App.) Minor and his parents sued the mother of his hunting companion following accidental shooting. Held: Absent evidence of actual or constructive knowledge of the minors plans, mother was not liable for negligent supervision. She had heard minors talk about a hunting contest but did not know when or where it was scheduled. Minors did not ask her for permission to hunt. She had previously told them to not take her husband s weapons without permission. TORTS STATE DOES NOT HAVE DUTY TO PREVENT STUDENTS FROM BEING FED ALLERGENS Pace v. State of Maryland, 5 A.3d 1121 (Md. App.) Mother of public school student who suffered a severe allergic reaction after eating a peanut butter sandwich filed suit against the State Department of Education and Superintendent of Schools for the State of Maryland alleging negligence in failing to ensure that public schools had an effective program in place Continued on back F 19

20 Case Notes cont. from pg. 19 to flag students with food allergies. Held: The State did not have a special relationship with student giving rise to a duty to prevent the student from being fed allergens. In addition, neither the National School Lunch Program Act nor its regulations imposed a duty on the State to prevent the student from being fed a peanut butter sandwich by school personnel. PHYSICAL DISCOMFORT NEEDED AS EVIDENCE OF DAMAGES IN NUISANCE CLAIM Banford v. Aldridge Chemical Co., 932 N.E.2d 313 (Ohio) Following a chemical factory explosion requiring evacuation of a neighborhood, residents brought a class action for nuisance. Held: Plaintiffs must present evidence of physical discomfort to recover damages for annoyance and discomfort in a nuisance case. By itself, fear is not compensable. Also held: Evidence of prior incidents at the chemical factory was irrelevant. 10 South LaSalle Street Chicago, IL Telephone: (312) Facsimile: (312) One Chase Manhattan Plaza 39th Floor New York, NY Telephone: (212) Facsimile: (212) One Gatehall Drive Suite 203 Parsippany, NJ Telephone: (973) Facsimile: (973) Main Street Suite 500 Irvine, CA Telephone: (949) Facsimile: (949) Market Street Suite 2200 San Francisco, CA Telephone: (415) Facsimile: (415) Manchester Road Suite 1700 Wheaton, IL Telephone: (630) Facsimile: (630) Shanghai Representative Office 20/F The Center 989 Changle Road Suite 2049 Shanghai, China Telephone: Facsimile: Clausen Miller L.L.P. 41 Eastcheap London EC3M 1DT U.K. Telephone: Facsimile: Clausen Miller Europe: TLJ & Associés 83, boulevard Raspail Paris, France Telephone: Facsimile: Studio Legale Corapi Via Flaminia, Roma Telephone: Facsimile: van Cutsem-Wittamer-Marnef & Partners Avenue Louise 137/1 B-1050 Brussels, Belgium Telephone: Facsimile: Clausen Miller Speakers Bureau Clausen Miller Offers On-Site Presentations Addressing Your Business Needs As part of Clausen Miller's commitment to impeccable client service, our attorneys are offering to share their legal expertise by providing a client work-site presentation regarding legal issues that affect your business practice. If you are interested in having one of our attorneys create a custom presentation targeting the specific needs of your department, please contact our Marketing Department: Whitney Melchiori Clausen Miller P.C. 10 South LaSalle Street Chicago, IL (312) marketing@clausen.com