Opinion
09-CV-5237 (CBA) (JMA)
04-20-2012
MAX SPECIALTY INSURANCE COMPANY, Plaintiff, v. WSG INVESTORS, LLC, MAND RESTORATION CORP., 530 CANAL STREET REALTY CORP., and ANDREZEJ STEPIEN, Defendants.
APPEARANCES: Eric D. Suben Meryl L. Lieberman Traub Lieberman Straus & Shrewsberry LLP 7 Skyline Drive Hawthorne, NY 10532 Attorneys for Plaintiff Joshua Cole Zimring Lester Schwab Katz & Dwyer, LLP 120 Broadway New York, NY 10271 Attorney for Defendant Mand Restoration Corp.
REPORT AND RECOMMENDATION APPEARANCES: Eric D. Suben
Meryl L. Lieberman
Traub Lieberman Straus & Shrewsberry LLP
7 Skyline Drive
Hawthorne, NY 10532
Attorneys for Plaintiff Joshua Cole Zimring
Lester Schwab Katz & Dwyer, LLP
120 Broadway
New York, NY 10271
Attorney for Defendant Mand Restoration Corp. AZRACK, United States Magistrate Judge :
Plaintiff Max Specialty Insurance Company ("Max Specialty") brought this action against defendants Mand Restoration Corp. ("Mand"), WSG Investors, LLC ("WSG"), Andrezej Stepien ("Stepien"), and 530 Canal Street Realty Corp. ("530 Canal"), collectively, "defendants," seeking a declaratory judgment of its rights and obligations relating to the defense and indemnification of parties to a lawsuit currently pending in New York State Supreme Court.
Max Specialty has moved for summary judgment, seeking a declaratory judgment that it has no obligation to indemnify or defend any party in the underlying lawsuit and is entitled to recoup fees it has already expended in relation to the underlying lawsuit. Max Specialty's Mot. for Summ. J., ECF 44. Mand has cross-motioned, asking for a declaratory judgment that Max Specialty has obligations to defend and/or indemnify parties in the underlying suit. Mand's Mot. for Summ. J., ECF No. 32. Chief Judge Carol Bagley Amon referred these motions to me for a Report and Recommendation. ECF Order, Jan. 17, 2012.
For the reasons set forth below, I respectfully recommend that the Court: (1) grant Max Specialty's motion for summary judgment for a declaratory judgment that it has no obligation to defend or indemnify any party in the underlying action and is thus entitled to recoup fees expended thus far in its defense of WSG; and (2) deny Mand's cross-motion for summary judgment.
I. BACKGROUND
This complicated dispute began with a simple incident. On August 8, 2008, Stepien fell off a ladder while doing exterior work on a scaffold at a construction site at 530 Canal Street, New York, NY ("the Stepien incident"). Decl. of Eric Suben in Supp. of Pl.'s Mot. for Summ. J. ("Suben Decl."), Ex. 1, ECF No. 44; Decl. of Joshua Zimring in Supp. of Def.'s Cross Mot. for Summ. J. ("Zimring Decl."), Ex. 1, ECF No. 33. Stepien suffered injuries from the fall. Zimring Decl. ¶ 4.
The events that ensued after Stepien's fall involve several parties:
(1) WSG, a construction subcontracting business. At the time of his fall, Stepien was an employee of WSG, and also a partner in the business with a man named Marek Wnorowski. Deposition of Marek Wnorowski ("Wnorowski Dep.") 8:19-23 June 3, 2011, Zimring Decl., Ex. J.
(2) Mand, a general construction contractor. Mand hired WSG to perform brick pointing and other exterior work at the 530 Canal Street construction site. Aff. of Richard Mand in Supp. of Cross Mot. for Summ. J. ("Mand Aff.") ¶ 8; ECF No. 33; Wnorowski Dep. 8:19-23; 48:6-25.
At his deposition, Wnorowski testified that WSG did not do any work inside the building. Wnorowski Dep. 48:23-25. In a written statement that Wnorowski gave later to an insurance investigator, however, he stated that he personally had done some interior painting at the site. Max Specialty Investigator's Report ("Invest. Report") at 4, Suben Decl., Ex. 7. Neither party disputes that Stepien was performing exterior work at the time of his fall. Therefore, Wnorowski's conflicting testimony about whether the overall job included any interior work is irrelevant.
(3) 530 Canal Street Realty Corp., the owner of the 530 Canal Street premises. See Zimring Decl., Ex. I (Max Specialty's insurance policy with WSG).
Defendant 530 Canal has not appeared in this matter, and there has been no stipulation of voluntary dismissal of Max Specialty's claims against 530 Canal. However, in its October 17, 2011, letter to Judge Amon requesting a premotion conference for its motion for summary judgment, Max Specialty asserted that "Defendant 530 Canal Street Realty Corp. has been voluntarily dismissed further to that entity's agreement to be bound by the Court's coverage determination." Max Specialty's Ltr. of Oct. 17, 2011, ECF No. 31.
(4) Max Specialty, WSG's general commercial liability insurer. Id. ¶ 5. WSG had a policy with Max Specialty covering the date of the Stepien incident. Mand was added as an additional insured party to that policy for some part of the policy term. Zimring Decl., Ex. I.
The parties raised numerous arguments in their summary judgment papers, implicating several aspects of the complicated relationships between the parties. Because I find that the only determinative issue in this case is the scope of the coverage provided by Max Specialty's policy, recitation of all of the facts related to the parties' other issues is unnecessary. The relevant facts are listed below.
The parties dispute several issues in addition to the determinative issue: (1) whether WSG was bound by a general services agreement with Mand that listed an entity other than WSG as the party to be bound, but was signed by WSG's president (and, consequently, whether that agreement required WSG to take on Mand's liability obligations); (2) whether the tender of Max Specialty's policy came too long after the Stepien incident occurred, and whether that delay precludes Max Specialty from having any obligation to cover the litigation; (3) whether one (or several) of the policy exclusions in Max Specialty's insurance policy apply and thus preclude Max Specialty from any obligation to cover the underlying lawsuit; and (4) whether Max Specialty's disclaimer of coverage was untimely, and thus triggered a statute that, in effect, waived Max Specialty's ability to disclaim coverage based on policy exclusions. See Mand's Mem. in Supp. of Cross Mot. for Summ. J. ("Mand's Mem."), ECF No. 35; Max Specialty's Mem. in Supp. of Mot. for Summ. J. ("Max Specialty's Mem."), ECF No. 44.
A. The Underlying Proceedings
Some months after his fall, Stepien brought suit in Supreme Court of the State of New York, County of Kings against 530 Canal and Mand (the "Stepien action"). Zimring Decl., Ex. A (complaint in the matter of Andrezej Stepien v. 530 Canal St. Realty Corp. et al, Index No. 28668/08 (Sup. Ct. King's Cty.)). Stepien alleged that his injuries occurred as a result of defendants' negligence, and also that defendants violated New York Labor Law and Industrial Codes and are thus strictly liable for his injuries. Id. Mand impleaded WSG as a third-party defendant. Id., Ex. B. Thereafter, Mand's insurance carrier sent a letter to Max Specialty, asking that Max Specialty tender their $1 million policy for defense and indemnification of WSG as a primary insured, and Mand as an additional insured. Id., Ex. C.
B. Max Specialty's Insurance Policy
WSG had an insurance policy with Max Specialty for the period of March 7, 2008, to March 7, 2009, listing WSG as a limited liability company performing services as a contractor. Id., Ex. I at MAX0149. A document entitled "Commercial General Liability Coverage Part Declarations" lists the name of the insured, the monetary limits of the insurance, and the classes of coverage for Max Specialty's policy with WSG. Id. The declarations page lists two classes of coverage: "Carpentry—Interior" and "Dry Wall or Wallboard Installation." Id. The policy does not define the classes "Carpentry—Interior" or "Dry Wall or Wallboard Installation." Id.
The insurance policy documents are attached as an exhibit to several different pleadings. Compl., Ex. 1; Zimring Decl. Ex. I; Suben Decl. Ex. 3. In each instance, the documents are in a different order. In Exhibit I to the Zimring Decl., however, the documents have been given a Bates stamp number beginning with "MAX." For the sake of easy reference, I will refer to the policy documents in that exhibit and list their MAX number.
The policy also contains a "Limitation to Designated Class Endorsement," which provides:
This insurance applies only to "bodily injury," "property damage," "personal injury," "advertising injury," and "medical expenses" arising out of only those operations designated, listed and described in the declarations page.Id. at MAX0160. The policy contains several other provisions, including some denoted "Endorsements" and some entitled "Exclusions."
For example, the policy contains "Endorsements," including a "Total Pollution Exclusion Endorsement," an "Independent Contractors Conditional Endorsement," and a "Service of Suit Endorsement." Zimring Decl. Ex. I MAX0189; MAX0161; MAX0151. The "Exclusions" include a "New Residential Construction Exclusion," a "Pre-Existing or Progressive Damage or Defect Exclusion," and an "Exclusion—Injury to Independent Contractors, Contractors and/or/Subcontractors." Zimring Decl. Ex. I MAX0159, MAX0162; MAX0163. In addition to the individual Exclusions, the "Commercial General Liability Form" Section I, "Coverage," lists several policy exclusions. Id. at MAX0171-75.
According to a policy document entitled "Monied Change Endorsement No. 2," WSG added Mand as an "additional insured" effective November 17, 2008. Id., at MAX0133-34. The policy indicates that WSG paid an additional premium to add Mand to the insurance policy. Id. at MAX0133.
Max Specialty received notification of the Stepien incident in a letter dated September 2, 2009, which explained that Stepien had sustained injuries on the job site, and asked Max Specialty to "assume immediate defense and indemnity obligations in this matter." Zimring Decl., Ex. C. The letter referred to Stepien as "plaintiff" but otherwise did not refer to the underlying litigation. Id. Shortly thereafter, Max Specialty sent a letter acknowledging receipt of the claim and confirming that it had commenced investigation of the claim. Id., Ex. D.
The claim notes of Max Specialty's investigation indicate that the its investigation included an interview of Wnorowski, as well as a review of the insurance policy, the general services agreement between WSG and Mand, and the litigation documents from the Stepien case. See id., Ex. H (containing Max Specialty's claim notes and the documents reviewed in the course of the investigation).
On November 20, 2009, attorneys for Max Specialty sent a letter to Wnorowski, informing him that Max Specialty was disclaiming coverage for Stepien's lawsuit. Zimring Decl., Ex. E. Max Specialty gave several reasons for disclaiming coverage, including its contention that the activities giving rise to Stepien's claims were outside the categories of work covered by the insurance policy. Id. at 2-8. Max Specialty also disclaimed based on several policy exclusions relevant to the nature of the Stepien incident and Stepien's status within WSG. Id. The letter advised WSG that Max Specialty intended to seek a judicial declaration of the parties' rights and obligations under the policy at issue, but that in the interim, Max Specialty would provide and pay for the defense of WSG in the Stepien action. Id. at 1.
C. The Instant Proceedings
On December 1, 2009, Max Specialty filed a complaint in this Court against Stepien, Mand, WSG, and 530 Canal, seeking a declaratory judgment regarding its obligation to defend or indemnify any party in the Stepien action. Compl., ECF No. 1. Mand was the only defendant to respond, and on February 9, 2010, Max Specialty moved for an entry of default as to WSG and Stepien. ECF Nos. 11-12.
Shortly thereafter, however, Max Specialty informed the Court that it would not seek default judgments against WSG or Stepien. Max Specialty's Ltr. of April 16, 2010, ECF No. 22. Rather, Max Specialty proposed to file a motion for summary judgment against Mand, WSG, and Stepien to resolve the rights and obligations of all of the parties. Max Specialty's Ltr. of Oct. 17, 2011, ECF No. 31. Per the arrangement of the parties, discussed above, Max Specialty's obligations in the underlying suit are being litigated in these summary judgment motions. See Max Specialty's Not. of Mot. for Summ. J., ECF No. 44 (asking for a judgment declaring that Max Specialty "has no obligation to defend or indemnify any entity with respect to the underlying action or the third-party action").
Max Specialty has now moved for summary judgment, arguing, inter alia, that Stepien's work was not within the covered classes specified in the policy's designated class endorsement. Max Specialty's Mem. in Supp. of Mot. for Summ. J. ("Max Specialty's Mem."), ECF No. 44. Mand has cross-motioned for summary judgment, arguing that the policy's designated class endorsement amounts to an exclusion, and that Max Specialty has waived its right to cite policy exclusions as grounds to disclaim coverage because it delayed unreasonably before informing WSG that it would not cover the underlying litigation. Mand's Mem. in Supp. of Cross Mot. for Summ. J. ("Mand's Mem."), ECF No. 35. Mand seeks a declaratory judgment that Max Specialty "must provide defense and indemnity to WSG in the underlying Stepien action." Mand Not. of Mot. for Summ. J., ECF No. 32. In other words, Mand is seeking indemnification or contribution from WSG in the underlying suit, and Mand wants a declaration that Max Specialty has to cover WSG's expenses and liabilities in the underlying suit. These motions are now before me for a Report and Recommendation.
II. DECLARATORY JUDGMENT
A district court may, in its discretion, enter a judgment declaring the "rights and legal relations" of parties. 28 U.S.C. § 2201(a); Cardinal Chem. Co. v. Morton Int'l, Inc., 508 U.S. 83, 95 (1993). To merit a declaratory judgment, an action must state an actual case or controversy, meaning that it is "real and immediate, allowing specific and conclusive relief . . . it must also be ripe for adjudication." U.S. Underwriters Ins. Co. v. Kum Gang, Inc., 443 F. Supp. 2d 348, 352 (E.D.N.Y. 2006) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992) and quoting Dow Jones & Co., Inc. v. Harrods Ltd., 237 F. Supp. 2d 394, 406 (S.D.N.Y. 2002)). In cases where the declaratory judgment may interfere with a state court action already filed, a court should not order a judgment "if it will interfere with an orderly and comprehensive disposition of the litigation in state court." Id. (citing Brillhart v. Excess Ins. Co. of America, 316 U.S. 491 (1942)).
Max Specialty is currently providing a defense to WSG in the underlying suit. Max Specialty is not, however, a party to the suit, and thus cannot litigate its obligations there. Thus, this issue is ripe for adjudication, and a determination of the duty to defend can be made to clarify Max Specialty's obligations in the underlying suit without interfering with the orderly disposition of the litigation. See id. at 353-54 (citations omitted). Therefore, a declaratory judgment is proper in this case.
III. SUMMARY JUDGMENT STANDARD
A court shall grant summary judgment when, "construing the evidence in the light most favorable to the non-moving party, 'there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.'" Rojas v. Roman Catholic Dioceses of Rochester, 660 F.3d 98, 104 (2d Cir. 2011) (quoting Fed. R. Civ. P. 56(a)). A fact is "material" when it "might affect the outcome of the suit under the governing law." Id. (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). "An issue is 'genuine' if 'the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'" Id. (quoting Anderson, 477 U.S. at 248.) The moving party bears the burden of showing the absence of any genuine issue of material fact. Id.
IV. ANALYSIS
For the reasons explained below, I conclude that there is no genuine issue of material fact that the activities giving rise to the Stepien incident were not covered under WSG's insurance policy with Max Specialty. Therefore, analysis of the parties' other arguments is unnecessary, and Max Specialty is entitled to a declaratory judgment that: (1) it need not indemnify or defend any party in the underlying action, and (2) it is entitled to recoup fees from its defense of WSG in the underlying action.
A. Max Specialty's Disclaimer of Coverage
Max Specialty argues that its insurance policy with WSG only covers activities in the categories of "interior carpentry" and "drywall or wallboard installation," and that WSG's work on the exterior of the building are not within the classes of activities covered by the policy. Therefore, because the Stepien incident arose from operations that exceeded the limits of coverage provided by the policy, Max Specialty has no obligation to defend or indemnify any of the parties in the underlying case. Max Specialty Mem. 16-18; Max Specialty Reply 9-11.
In response, Mand disputes the legal designation of the two categories of coverage. Mand does not dispute that Stepien's work on the day of the incident did not fall within the classes of "interior carpentry" or "drywall," see Mand Mem. 13-16; Mand Reply 11-14, and concedes that the part of the policy listing those two categories, "excludes all insurance coverage for WSG except if its [sic] arises out of 'carpentry-interior' or 'dry wall' operations," Mand Mem. at 16. Mand argues, however, that the policy language regarding these categories operates as a policy exclusion, and that New York law imposes an obligation on an insurer to issue a timely disclaimer of coverage if it is disclaiming based on any policy exclusion. Id. Mand argues that Max Specialty did not timely disclaim coverage, and thus Max Specialty is statutorily barred from disclaiming coverage based on the categories of coverage. Id.
The facts presented by both parties plainly indicate that Stepien's activities on the day of the incident did not fall within either category enumerated in the insurance policy. See Max Specialty Investigative Report, Written Statement of Marek Wnorowski ("Wnorowski Stmt."), Suben Decl. Ex. 7 at 6 (wherein Wnorowski explained that Stepien fell after having gone up the scaffold to pick up "hammers rollers, brushes and scrapers."); Wnorowski Dep. 48:13-19; 49:09-10 (Wnorowski was asked what type of work WSG did at 530 Canal, and he responded that WSG did brick pointing and pressure washing on the exterior of the building).
New York Insurance Law requires an insurer disclaiming liability for death or bodily injury to give written notice as soon as reasonably possible. N.Y. Ins. L. § 3420(d)(2) (McKinney's 2009). An insurance carrier failing to do so waives the right to disclaim coverage by reason of any policy exclusion. Zappone v. Home Ins. Co., 55 N.Y.2d 131, 135-37 (1982). What constitutes notice "as soon as reasonably possible" can vary under the circumstances, but is measured from the date that the insurer "first learned of the grounds for disclaimer or liability or denial of coverage." First Fin. Ins. Co. v. Jetco Contr. Corp., 1 N.Y.3d 64, 68-69, 70 (2003). The insurer bears the burden of justifying any delay in giving written notice of disclaimer. Id. at 69.
The New York Court of Appeals has clarified, however, that the statutory waiver of an insurer's right to disclaim does not apply in situations where there is lack of coverage "by reason of lack of inclusion." Id. at 137. "Lack of inclusion" is, by the Court of Appeals' definition, where "the policy as written could not have covered the liability in question under any circumstances." Zappone, 55 N.Y.2d at 134. Denial of coverage based on exclusion, on the other hand, is "denial of liability predicated upon an exclusion set forth in a policy which, without the exclusion, would provide coverage for the liability in question." Id. The Court of Appeals drew this distinction because it determined that the legislature's purpose in enacting § 3420(d)(2) was to avoid prejudice to the insured and the insured claimants, "not, however, to provide an added source of indemnification which had never been contracted for and for which no premium had ever been paid." Zappone, 55 N.Y.2d at 137-38. To decline to make such a distinction would allow courts to rewrite insurance policies and impose an intolerable burden on insurance carriers. Id.
The difference between a policy "exclusion," for which the insurer must give a reasonably timed notice disclaiming coverage, and a policy "lack of inclusion," which does not require notice, can be problematic for courts to determine. NGM Ins. Comp. v. Blakely Pumping, Inc., 593 F.3d 150, 153 (2d Cir. 2010). This threshold determination is critical in cases where timely disclaimer under § 3420(d)(2) is at issue because "[o]nly if the provision is an exclusion does the adequacy of any alleged disclaimer by [the insurer] need to be examined." Britt v. General Star Indem. Co., 775 F. Supp. 2d 454, 466 (N.D.N.Y. 2011).
In NGM Ins. Co., the Second Circuit applied Zappone and reversed a district court's determination that a policy term was an exclusion. NGM Ins. Co., 593 F.3d at 154. The insurance policy in that case did not generally cover auto accidents, but covered only accidents arising from the use of a rented vehicle. Id. Thus, the Circuit court reasoned, an accident that occurred in an employee's own vehicle could never be covered under the policy. Id. This is distinct from a situation where a vehicle was at one point covered, but "became 'uncovered' upon the happening of a subsequent event," such as rental of the vehicle for a longer period than the policy allowed. Id. (quoting Planet Ins. Co. v. Bright Bay Classic Vehicles, 75 N.Y.2d 394, 401 (1990)).
In this case, Mand argues that the Limitation to Designated Class Endorsement in Max Specialty's policy is an exclusion because it excludes coverage of all activities except the two classes listed. Mand's Mem. at 16. The Insuring Agreement states that "[Max Specialty] will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." Id. (quoting Zimring Decl., Ex. I). According to Mand, the Limitation to Designated Class Endorsement, which provides that "[t]his insurance applies only to [damages] arising out of only those operations designated, listed and described in the declarations page," operates as an exclusion to the "broad coverage obligation" of the Insuring Agreement. Zimring Decl., Ex. I.
Mand's argument conflicts with the Court of Appeals' reasoning in Zappone. Max Specialty's policy covered WSG's general commercial activities in two specific areas: interior carpentry, and drywall and wall board installation. According to Zappone, these are the activities that are covered in the first place. Here, as in NGM, the happening of a subsequent event did not uncover activities that were originally covered—the policy was defined such that WSG's exterior construction activities giving rise to Stepien's fall from the scaffold were never covered under the policy in the first place. Conversely, Max Specialty's policy contained numerous exclusions, including exclusions relating to asbestos, new residential construction, and injury to independent contractors. Under Zappone, these exclusions are the limitations that could "uncover" an activity that was covered in the first place.
For example, exterior concrete pouring could never be covered under the policy, because it is not interior carpentry or drywall installation. However, interior carpentry injuries initially covered could be "uncovered" if they fell under the policy's asbestos exclusion, or the exclusion requiring prompt notice of a covered claim.
Mand relies on Atlantic Cas. Ins. Co. v. C.A.L. Constr. Corp., No. 06-CV-4036, 2008 WL 2946060 (E.D.N.Y. July 30, 2008), where the court considered whether the insurer was liable for damages arising out of activities that may have exceeded the scope of the "defined and insured operations." Id. at *5. The Atlantic court, however, was not considering the distinction between an "exclusion" and a "lack of inclusion" for purposes of a reasonably timed disclaimer under § 3420(d)(2). The mere fact that the Atlantic court considered scope of liability using the term "exclusion" in a context where the distinction between "exclusion" and "lack of inclusion" was of no import does not establish that such a limitation must be considered an "exclusion" in this context.
If anything, the court's holding in Atlantic supports the notion that Stepien's activities were outside the scope of the policy's coverage, because the policy declarations at issue in that case contained the same two classifications as the instant case. Id. at *2. The Atlantic court determined that rooftop renovations, exterior brick work, and exterior construction did not fit within the enumerated categories and were therefore outside the policy's coverage. Id. at *5. The court emphasized that the insured had the opportunity to "declare and purchase insurance for any number of additional trades," but had declined to do so. Id. Here, Max Specialty insured for interior carpentry and drywall work, and exterior work is outside the enumerated categories and thus outside the policy's coverage.
The New York Court of Appeals cases Mand relies on are similarly unavailing to Mand's position. In Planet Ins. Co., 75 N.Y.2d 394, the policy definition at issue was an exclusion because it caused a car that was originally covered under the policy to become "uncovered" by the happening of a subsequent event. Id. at 401. In Jefferson Ins. Co. of New York v. Travelers Indem. Co., 92 N.Y.2d 363 (1998), the court clarified the difference between asking whether an entity is covered in the first place or asking whether a covered entity was subject to exclusions that could uncover it, and determined that a policy term was an exclusion. Mand seems to argue that because the policy terms in these cases were referred to as "limitations of coverage" and "endorsements," the cases stand for the proposition that limitations and endorsements must always be considered exclusions. Thus, Mand's argument goes, the "limited class endorsement" regarding the two categories of work covered by Max Specialty's policy must be an exclusion.
The holdings in both cases, however, seem to underscore the fact that the terms used by an insurance policy are not necessarily determinative on the question of whether a lack of coverage is due to an exclusion or a lack of inclusion. Rather, the distinction comes from a practical examination of what the policy terms amount to. See id. at 371 ("The endorsement indicated that [the insured] was to be included in Paragraph 3 of the "WHO IS INSURED" provision, and any limitation on [the insured's] inclusion in the policy amounts to an attempt by [the insurer] only to exercise a policy exclusion.") (emphasis added); Planet Ins., 75 N.Y.2d at ("[A]lthough Planet's claim of lack of coverage is based not on language in the exclusions section of the policy but on limiting language in the definition of coverage, the limiting language amounts to an exclusion") (emphasis added); see also NGM Ins. Co., 593 F.3d at 154-55 (explaining that a case where a policy definition was considered an exclusion did not stand for the proposition that "all definitions that limit coverage are exclusions," and holding that, in that particular policy, a definition amounted to a lack of inclusion) (emphasis in original).
Here, the insurance policy's designation of some terms as "endorsements" and some as "exclusions" is not determinative: the critical fact is that the two classes of activities covered under the contract did not include exterior construction in the first place. Under Zappone, this amounts to lack of inclusion and does not trigger the statutory waiver.
The semantics of distinguishing an exclusion from a "lack of inclusion" may be confusing, but this case comes down to a very simple concept: WSG did not purchase an insurance policy that covered the risks involved in Stepien's exterior work on the day of the incident. The Court of Appeals has decided that it would be unfair for insurers in Max Specialty's position to be forced to cover liabilities that were not covered under their policies in the first place. For the activities giving rise to this controversy, "there is simply no insurance at all and, therefore, no obligation to disclaim or deny." Zappone, 55 N.Y.2d at 139.
In sum, Mand unsuccessfully argues a purely legal distinction, without any factual dispute. Thus, there is no genuine issue of material fact that the policy did not cover the activities giving rise to Stepien's action, and Max Specialty is therefore entitled to judgment as a matter of law that the Stepien incident, and subsequent litigation, are outside the scope of its insurance policy with WSG. Rojas, 660 F.3d at 104. I respectfully recommend that Max Specialty be granted a declaratory judgment that it has no duty to indemnify or defend any defendant in the underlying litigation arising from the Stepien incident.
Once again, because the policy did not cover the activities in the first place, the other issues raised by the parties have no bearing on the outcome of this opinion and need not be explored.
B. Max Specialty's Entitlement to Recoup Fees
Max Specialty also seeks a declaration that it is entitled to recoup fees already expended defending WSG in the underlying action. Max Specialty Not. of Mot. for Summ. J. at 1. Other than arguing that Max Specialty is obligated to defend WSG in the underlying action, Mand does not offer any counter to this claim.
"Generally, New York law provides that where coverage is disputed and a liability policy includes the payment of defense costs, insurers are required to make contemporaneous interim advances of defense expenses . . . subject to recoupment in the event it is ultimately determined no coverage was afforded." Axis Reinsurance Co. v. Bennett, No. 07 Civ. 7924, 2008 WL 2600034, at *2 (S.D.N.Y. June 27, 2008) (quoting National Union Fire Ins. Co. of Pittsburgh, PA. v. Ambassador Group, Inc., 556 N.Y.S.2d 549, 553 (N.Y. App. Div. 1st Dep't 1990)).
In Gotham Ins. Co. v. GLNX, Inc., No. 92 Civ. 6415, 1993 WL 312243 (S.D.N.Y. 1993), an insurer sued for a declaratory judgment that it was not obligated to defend or indemnify an insured in an underlying lawsuit, and sought reimbursement for defense costs it had incurred. After finding that the insurer was entitled to summary judgment that it had no obligation to defend, the court also declared that the insurer was entitled to recover defense costs. Id. The court relied on the fact that the insurer had sent the insured a letter explicitly stating that it reserved its right to seek reimbursement in the event of a determination that it had no duty to defend. Id. at *4. Because the insured offered no evidence that it refused to consent to this reservation, the court found this reservation valid and issued a declaration that the insurer was entitled to reimbursement of defense costs. Id.; see also One Beacon Ins. Co. v. Freundschuh, No. 08-CV-823, 2011 WL 3739427 (W.D.N.Y. Aug. 24, 2011) (granting summary judgment to an insurer seeking a declaration that the insurer had no obligation to defend the insured in an underlying action, and determining that the insurer was entitled to a judgment that it could recoup fees from the underlying action).
Here, as in Gotham, Max Specialty made an explicit reservation of the right to pursue recoupment in its letter to WSG disclaiming coverage. Suben Decl., Ex. 8 at 8 ("Max reserves the right to seek recovery of defense expenses incurred in connection with the lawsuit."). Mand has put forth no evidence that WSG objected to this reservation. Therefore, because Max Specialty specifically reserved this right and is entitled to it under New York law, Max Specialty is entitled to a declaration that it may recoup the legal fees it expended in defense of WSG in the underlying action.
The Declaratory Judgment Act allows a Court to order further relief based on a declaratory judgment, but only after "reasonable notice and hearing." 28 U.S.C. § 2202; Powell v. McCormack, 395 U.S. 486, 499 (1969). Max Specialty has asked for a declaration that it is entitled to recoup fees, but has not asked for judgment as to any specific fees amount. Max Specialty Not. of Mot. for Summ. J. at 1. Thus, the question of whether Judge Amon should order that Max Specialty is entitled to any sum certain is not before me at this time.
Because Max Specialty has no obligation to defend any party in the Stepien action, it is entitled to recoup all legal fees expended thus far defending WSG as a third-party defendant. Therefore, I respectfully recommend that Max Specialty be granted a declaratory judgment that it is entitled to recoup the costs it has expended defending WSG in the Stepien action.
V. CONCLUSION
For the reasons explained above, I respectfully recommend that the Court: (1) grant Max Specialty's motion for summary judgment for a declaratory judgment that it has no obligation to defend or indemnify any party in the underlying action and is entitled to recoup fees expended thus far in its defense of WSG; and (2) deny Mand's cross-motion for summary judgment.
Max Specialty is directed to serve a copy of this Report and Recommendation on defendants 530 Canal, WSG, and Andrezej Stepien, and to promptly file proof of service by ECF. Any objections to this Report and Recommendation must be filed with the Clerk of the Court, with a copy to the undersigned, within fourteen (14) days of receipt of this report. Failure to file objections within the specified time waives the right to appeal the District Court's order. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 6(a), 72. SO ORDERED. Dated: April 20, 2012
Brooklyn, New York
/s/_________
JOAN M. AZRACK
UNITED STATES MAGISTRATE JUDGE