Opinion
03 Civ. 1420 (J6K)
December 18, 2003
OPINION and ORDER
Underwriters at Lloyd's of London ("Underwriters") have appealed pursuant to Federal Rule of Bankruptcy Procedure 8001(a) and 28 U.S.C. § 158 (a) from a Bankruptcy Court order and judgment in Nassau Equities, LLC v. Greenwich Agency, Inc. (In re Nassau), Ch. 11 Case No. 99 B 43087, Adv. No. 01-02561 (S.D.N.Y. Jan. 14, 2003). Following a trial, the Bankruptcy Court found that Underwriters had the duty to defend and indemnify Nassau Equities, LLC ("Nassau") in connection with claims raised by four tenants of 150 Nassau Street, a building previously owned by Nassau. After the appeal was filed and the parties had submitted their papers, the underlying tenant claims, except for the claim by Internation, Inc. ("Internation"), settled. This appeal therefore concerns only Underwriters' duty to defend Nassau in its litigation against Internation. See Internation, Inc. v. Nassau Equities, LLC (In re Nassau Equities, LLC), Ch. 11 Case No. 99 B 43087, Adv. No. 99-8653A (S.D.N.Y. filed Oct. 12, 1999).
I.
The following facts are based on the record designated by the parties and the findings by the Bankruptcy Court. In May 1999, Nassau filed for chapter 11 bankruptcy, and in July 1999 it was authorized to purchase a building (the "`Premises") at 150 Nassau Street, New York. Nassau purchased a "Commercial General Liability Coverage" policy (the "Policy") from Underwriters that covered the Premises, effective from October 11, 1999 to October 11, 2000. (Insurance Policy No. LGL991059, attached at R-A, SR-1.) Under the Policy, Underwriters had a duty to defend Nassau in a suit for "bodily injury" or "property damage," and to pay for damages arising out of such a suit. (Policy § 1(1)(a).) The Policy covered damages caused by an "occurrence," which was defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Id. § V(13).) The Policy excluded coverage for "bodily injury" or "property damage" that was "expected or intended from the standpoint of the insured." (Id. § I(2)(a).)
Citations t: the Record ("R") refer to the "Designation of Contents of Record for Appellant Certain Underwriters at Lloyd's of London Subscribing to Policy #LGL 9910159 Appeal of Judgment and Order of Bankruptcy Court Judge Blackshear." Citations to "SR" refer to the supplemental record designated by Appellee Nassau.
On or around October 12, 1999, Internation filed a Complaint and an Order to Show Cause For Preliminary Injunction And Temporary Restraining Order to prevent Nassau from discontinuing Internation's tenancy and electrical services. (See R-D; SR-4.) On December 15, 1999, Internation filed an amended and supplemental complaint adding a cause of action for constructive eviction after Nassau allegedly retaliated against Internation and forced it from the Premises. (R-I; SR-8.) These two "initial complaints" alleged that Nassau engaged in a "widespread course of conduct of harassment" intended to coerce Internation into vacating the Premises. (See SR-8, I 9.) Among other things, Internation claimed that its business, which was dependent on equipment requiring a dust-free environment, was harmed by unlawful construction and demolition work done in the building. (Id. ¶ 11.) It also alleged that Nassau, intentionally or with gross negligence, removed security services from the building, allowing Internation's office to be vandalized. (Id. ¶ 13.) Aside from constructive eviction, the initial complaints asserted causes of action for harassment, breach of contract, declaratory relief, and injunctive relief.(See SR-4; SR-8.)
As explained below, on February 20, 2001, Internation filed an amended complaint that included a cause of action for negligence. (R-I; SR-21.) For the purposes of this appeal, the 1999 complaint and amended complaint (the "initial complaints") are treated similarly.
Around the same time that Internation filed its complaints, three other tenants brought similar actions against Nassau.(See R-E, F, T; SR-5, 6, 7.) All of the complaints alleged campaigns of harassment by Nassau through it principal, Jack Lefkowitz ("Lefkowitz"). Unlike Internation, the other tenants alleged that their premises had been flooded as another act in the pattern of intentional harassment.See, e.g., Gross v. Nassau Equities, L.L.C. (In re Nassau Equities, L.L.C.), Ch. 11 Case No. 99 B 43087, Adv. No. 00-2015 (S.D.N.Y. filed Jan. 5, 2003) (Compl. ¶¶ 28-33, attached at R-E, SR-6). As all parties have recognized, the tenant complaints stated claims for intentional misconduct and breach of contract, and there is no contention that any of the claims were covered by the Policy. Nassau did not notify Underwriters of the filing of those lawsuits at that time.
In October 2000, in the course of discovery, counsel for Nassau interviewed a former caretaker of the Premises who stated that the flooding alleged in some of the complaints was caused by construction and pipe problems related to the age of the building. (See Tr. of Dep. of Michael Butler, dated Dec. 20, 2000, at 30-31, attached at SR-14.) Alerted to a potential claim for negligence for improper construction and/or renovation of the Premises, Nassau sent letters dated November 1 and November 7, 2000 to notify Underwriters of the initial complaints. (SR-10, 11.)
During December 2000 and January 2001, W. Thomas Harkin ("Harkin") of the Harbin Adjustment Company, Inc., acting on behalf of Underwriters, wrote to Nassau concerning the tenant complaints. (See R-L, SR-15 to SR-17 (letters from Harkin to Nassau, dated Dec. 28, 2000, regarding all complaints except Internation's); R-N (letter, dated January 18, 2001, regarding Internation).) The letters reserved the insurer's rights under the Policy pending an investigation, but noted the possible problem with coverage-specifically, that the complaints alleged intentional conduct not covered by the Policy. Additionally, the letters briefly advised Nassau of its duty to notify the insurer of any claims and that the alleged incidents had occurred over a year earlier.
In early 2001, the tenants amended their complaints to assert claims for negligence, though the factual allegations were not changed. Internation's amended complaint was filed on February 20, 2001. It was largely identical to its initial complaints, but it added a cause of action for negligence:
As a result of the lack of due care and/or the carelessness and negligence of the debtor in failing to maintain, operate and control the building in a proper and safe manner; . . . and in furthering its alteration, renovation and construction activities in such a way as to jeopardize . . . the business operations of plaintiff . . . debtor caused injury to the business of the plaintiff. . . .
(SR-21, ¶ 34.) Internation still alleged that the "the removal of security services from the building . . . resulted in the vandalization of plaintiff's premises," but it specifically added that "Debtor's actions in this regard negligently violated its duty of due care to plaintiff and its property." (Id. 5 15.) All complaints were promptly transmitted to the insurer.
On March 29, 2001, Underwriters sent letters to Nassau disclaiming coverage for the tenant complaints, primarily on the grounds that they alleged intentional misconduct and did not involve an "occurrence" as defined by the Policy. (See R-Q; SR-27 to 30.) With respect to Internation, Underwriters did not refer to the amended complaint filed in February 2001 and instead described the five causes of action from the complaint filed in December 1999. (See SR-28, at 1-2.) Underwriters also informed Nassau that the Policy "imposes duties upon you in the event of a claim, including that you provide Underwriters notice of such a claim and cooperate in any investigation." (Id. at 4.) Quoting the Policy's notice provisions, Underwriters declared that because it was not notified in accordance with the Policy requirements, "it is denying coverage based upon this violation." (Id. at 5.)
In April 2001, Nassau filed an action in bankruptcy court for declaratory relief to require Underwriters to defend and/or indemnify it as to the adversarial tenant proceedings. Both parties moved for summary judgment on the duty to defend. In an opinion dated October 31, 2001, Judge Blackshear determined that the tenants' claims could potentially fall within the Policy's coverage. (R-LL.) With respect to Internation in particular, the Court stated that "the amended complaint . . . seeks damages that arose as a result of the lack of due care and/or the carelessness and negligence of the debtor." (Id. at 8 (citing Internation's February 2001 amended complaint ¶¶ 34, 35).) The Bankruptcy Court, however, did not grant summary judgment for Nassau, stating that "the Debtor has not satisfied this Court that it gave notice to Lloyd's within a reasonable time, as a matter of law." (Id. at 7.) Noting that the reasonableness and timeliness of notice is normally a question of fact, the Court decided that it needed a trial to review "the circumstances surrounding the failure of Nassau to provide notice of the lawsuits sooner, including whether Nassau had a justifiable lack of knowledge of coverage, and whether the Underwriters have suffered any prejudice as a result of the delay." (Id.)
The case went to trial in May 2002. After accepting post-trial briefing, Judge Blackshear found that Underwriters were required to defend Nassau against the underlying tenant complaints. In its opinion after trial, the Court first addressed whether the underlying claims were covered by the Policy. See Nassau Equities, LLC v. Greenwich Agency, Inc. (In re Nassau), Ch. 11 Case No. 99 B 43087, Adv. No. 01-02561, slip op. at 5 (Bankr. S.D.N.Y. decided Nov. 19, 2002) ("Decision"). The Court noted that it had "already determined, in its October Decision, that the claims made in the Tenant Actions fall within the scope of the coverage under the Policy. Nothing offered by the Underwriters at the trial or in its post-trial briefing convinces this Court to alter its prior finding." (Id.)
Turning to the issue of notice, the Bankruptcy Court found "that the Debtor was not obligated to notify the Underwriters of the Initial Complaints, because the Initial Complaints sought damages for alleged intentional acts committed by the Debtor and/or its agents. The plain language of the policy precludes coverage for intentional acts."Id. at 6. The Court held "that Nassau did provide timely notice to the Underwriters of the possible covered claims to be filed by the Tenants, once Nassau was aware that the Tenants might amend their Complaints to include claims for negligence." Id. After finding that notice was timely, Judge Blackshear added that "Underwriters did not suffer any prejudice" because of Nassau's failure to provide notice sooner. Id. at 7.
Underwriters have appealed Judge Blackshear's decision, presenting several issues of fact and law. During the pendency of this appeal, three of the underlying tenant actions settled. Because the only remaining tenant suit involves Internation, the relevant issues are whether the Bankruptcy Court erred:
(1) in finding that Underwriters had a duty to defend or indemnify Nassau based upon Internation's initial complaints and amended complaint;
(2) in finding that Nassau's notice of the lawsuit was timely and in requiring that Underwriters show prejudice due to the allegedly late notice;
(3) in not dismissing Nassau's claims on the grounds that Nassau violated its duty to cooperate under the terms of the Policy; and
(4) in allowing evidence to be submitted at trial as to the underlying adversarial plaintiffs' notice to Underwriters.
II.
A district court reviews the findings of fact of a bankruptcy court under a "clearly erroneous" standard: "Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." F.R.Bankr.P. 8013. A bankruptcy's court's conclusions of law are reviewed de novo. See, e.g., Shugrue v. Air Line Pilots Assoc. Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 988 (2d Cir. 1990); Nova v. Premier Operations (In re Premier Operations), 294 B.R. 213, 217 (S.D.N.Y. 2003). When there are mixed questions of law and fact, district courts should review legal conclusions de novo while giving deference to the bankruptcy court's factual determinations unless they are clearly erroneous.See U.S. Lines, Inc. v. Am. Steamship Owners Mut. Protections Indem. Assoc. (In re U.S. Lines, Inc.), 197 F.3d 631, 640-41 (2d Cir. 1999); Premier Operations, 294 B.R. at 217; In re Brunswick Hosp. Ctr., 156 B.R. 896, 899-900 (E.D.N.Y. 1993).III.
The first issue is whether Underwriters have a duty to defend Nassau against the claims asserted by Internation. In its summary judgment decision, the Bankruptcy Court found that Underwriters' duty to defend was based solely on the terms of the Policy and the pleadings in the underlying tenant actions. (See R-LL.) Because it simply affirmed that decision without making findings of fact after trial, the Court reached that decision as a matter of law, and it will be reviewed de novo.
Under New York law, an insurer's duty to defend is extremely broad and distinct from the duty to indemnify. See, e.g., Md. Cas. Co. v. Cont'l Cas. Co., 332 F.3d 145, 160 (2d Cir. 2003); Cowan v. Codelia, P.C., No. 98 Civ. 5548, 1999 WL 1029729, at *5-*6 (S.D.N.Y. Nov. 10, 1999); Seaboard Sur. Co. v. Gillette Co., 476 N.E.2d 272, 275 (N.Y. 1984). The duty to defend arises when "the allegations within the four corners of the underlying complaint potentially give rise to a covered claim, or where the insurer `has actual knowledge of facts establishing a reasonable possibility of coverage.'" Frontier Insulation Contractors, Inc. v. Merchants Mut. Ins. Co., 690 N.E.2d 866, 868 (N.Y. 1997) (quoting Fitzpatrick v. Am. Honda Motor Co., 575 N.E.2d 90, 93 (N.Y. 1991)); see also Cont'l Cas. Co. v. Rapid-Am. Corp., 609 N.E.2d 506, 509 (N.Y. 1993) ("An insurer must defend whenever the four corners of the complaint suggest — or the insurer has actual knowledge establishing a reasonable possibility of coverage."), quoted in Md. Cas. Co., 332 F.3d at 160; Int'l Bus. Machs. Corp. v. Liberty Mut. Fire Ins. Co., 303 F.3d 419, 424 (2d Cir. 2002).
The insurer must defend the insured unless "there is no possible legal or factual basis on which the insurer will be obligated to indemnify the insured." Md. Cas. Co., 332 F.3d at 160 (internal quotation omitted); see also Frontier, 690 N.E.2d at 868-69. To be relieved of the duty to defend on the basis of a policy exclusion, the insurer faces a "heavy burden of demonstrating that the allegations of the complaint cast the pleadings wholly within that exclusion."Frontier, 690 N.E.2d at 868. The duty to defend exists unless "each and every claim asserted by [the underlying complaints] is either unambiguously not covered or unambiguously excluded from coverage."Cowan, 1999 WL 1029729, at *5. "If any of the claims against the insured arguably arise from covered events, the insurer is required to defend the entire action." Frontier, 690 N.E.2d at 869; Seaboard Sur. Co., 476 N.E.2d at 310 (noting that it is immaterial if other claims fall within exclusions; duty to defend rests solely on whether any alleged facts or grounds bring action within protection purchased).
Underwriters argue that Internation's suit against Nassau is essentially for intentional harassment and breach of contract and thus is not covered under the Policy. Underwriters point out that the initial complaints did not allege negligence, and even when Internation amended its complaint to add a negligence claim, the underlying factual allegations remained the same. Citing cases for the proposition that the duty to defend "depends on the facts which are pleaded, not the conclusory assertions," Underwriters urge the Court to disregard the negligence claims and relieve it of the duty to defend. See Allstate Ins. Co. v. Mugavero, 589 N.E.2d 365, 370 (N.Y. 1992) (rejecting duty to defend in case involving violent sexual abuse despite complaint's assertion that acts may have been performed negligently or carelessly).
The cases cited by Underwriters, however, involved "intrinsically intentional acts," such as sexual assault, which could not be transformed into a claim of negligent infliction of harm simply by pleading negligence. See Mugavero, 589 N.E.2d at 371; see also Allstate Ins. Co. v. Oles, 838 F. Supp. 46, 54 (E.D.N.Y. 1993) (refusing to characterize "acts of assault, rape, sodomy, and sexual abuse . . . as anything other than intentional conduct"). Among the underlying allegations in this case are that Nassau's construction and renovation of the building interfered with Internation's business, and that Nassau failed to provide adequate security, which resulted in Internation's offices being vandalized. Although those incidents were initially alleged as part of an intentional pattern of harassment, they are not intrinsically intentional acts such as sexual assault. Now that Internation has added a claim for negligence, it is possible that Nassau would be liable even if Internation could not prove a pattern of intentional conduct behind every incident.
This case is thus similar to Cowan v. Codelia, 1999 WL 1029729, where this Court enforced the duty to defend. InCowan, the complaint alleged malicious and unlawful disclosure of personal information by defense lawyers concerning the prosecution in a criminal case that they were defending. But an intent to harm was not required for liability, and the defendants claimed that there was no such intent. Id. at *7. Distinguishing cases where the underlying facts involved acts such as sexual assault, this Court found that the duty to defend existed because the insurer could not show that there was "no possible factual or legal basis upon which the insurer may eventually be held obligated to indemnify the insured." Id. at *8 (internal quotation omitted);see also Park Place Entm't Corp. v. Transcont'l Ins. Co., No. 01 Civ. 6546, 2003 WL 1913709 (S.D.N.Y. Apr. 18, 2003), at *5 (enforcing duty to defend where complaint alleged campaign of fraud and defamation, but where there was "a reasonable possibility of a jury finding defamation without knowledge of falsity, raising a duty to indemnify").
Underwriters repeatedly assert that the factual allegations in the underlying complaints have not changed. But the factual allegations in the amended complaint are sufficient to state claims for negligence, and the duty to defend exists when "the complaint in the underlying action contains any allegations that arguably or potentially bring the action within the protection purchased." Avondale Indus., Inc. v. Travelers Indem. Co., 887 F.2d 1200, 1204 (2d Cir. 1989); see also Park Place Entm't Corp., 2003 WL 1913709, at *5; Cowan, 1999 WL 1029729, at *8; Cont'l Cas. Co., 609 N.E.2d at 509 ("An insurer must defend whenever the four corners of the complaint suggest . . . a reasonable possibility of coverage."). Internation can reasonably allege that the damage resulting from the construction or lack of security was caused intentionally, or, in the alternative, negligently. It is entirely possible that a finder of fact will find that at least some of the damage to Internation's property and business was caused by negligent and not intentional acts. Cf. Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. AARPO, Inc., No. 97 Civ. 1438, 1999 WL 14010, at M (S.D.N.Y. Jan. 14, 1999) (finding no duty to defend where complaint alleged "massive criminal fraud" and plaintiff added "a last-minute allegation of negligence wholly at odds with the factual assertions of the complaint" (emphasis added)).
Underwriters also argue that because the duty to provide security and other services was covered in the lease agreement, the failure to do so is a contract claim, which is excluded by the Policy. This argument is meritless. First, the law is clear that the duty to defend exists unless the allegations in the complaint are "solely and entirely within the policy exclusions." Seaboard Surety Co., 476 N.E.2d at 276 (internal quotation omitted). If an allegation states a claim both in tort and contract, it does not fall solely within the policy exclusion. Second, the Policy's Contractual Liability exclusion explicitly does not apply to liability that "the insured would have in the absence of the contract or agreement." (Policy § 1(2)(b)(1).) Because the duty to provide a safe environment arises regardless of the contract, the-claim is not excluded by the terms of the Policy.
Internation has stated a possible factual and legal basis for liability covered by the Policy. Because one claim potentially falls within the Policy's coverage, the insurer is required to defend the entire action.See Cowan, 1999 WL 1029729, at *5; Frontier, 690 N.E.2d at 869; Seaboard Sur. Co., 476 N.E.2d at 275. Therefore, the Bankruptcy Court did not err, as a matter of law, in ruling that Underwriters has a duty to defend Nassau in the underlying lawsuit by Internation.
IV.
Underwriters also argue that Nassau violated the notice provision of the Policy. On the notice issue, the Bankruptcy Court's post-trial opinion first held that "the Debtor was not obligated to notify the Underwriters of the Initial Complaints, because the Initial Complaints sought damages for alleged intentional acts committed by the Debtor. . . . The plain language of the policy precludes coverage for intentional acts." (Decision at 6.) Second, the Court also found that Underwriters were not prejudiced by the delay. (Id. at 7.)
Under New York law, an insured's failure to comply with a policy's notice provisions relieves the insurer of its obligations to defend or indemnify. See, e.g., Am. Ins. Co. v. Fairchild Indus., Inc., 56 F.3d 435, 438 (2d Cir. 1995) (calling notice "a condition precedent" to insurer's duty); New York v. Blank, 27 F.3d 783, 793 (2d Cir. 1994); Unigard Sec. Ins. Co. v. N. River Ins, Co., 594 N.E.2d 571, 573 (N.Y. 1992). It is well settled that the insurer is not required to demonstrate that it was prejudiced by the lack of notice. See Green Door Realty Corp. v. TIG Ins. Co., 329 F.3d 282, 287 (2d Cir. 2003); AXA Marine Aviation Ins. (UK) Ltd, v. Seajet Indus. Inc., 84 F.3d 622, 624-27 (2d Cir. 1996) (applying "no prejudice" rule to notice-of-claim provisions as well as notice-of-occurrence provisions);Unigard, 594 N.E.2d at 573. The Bankruptcy Court, therefore, erred to the extent that it required Underwriters to prove prejudice. However, the comments about prejudice were not necessary to the Court's decision, which explicitly found that notice was timely prior to making any findings about prejudice. Any error with respect to a requirement of prejudice was harmless.
With respect to whether Nassau gave timely notice, the Policy contained a notice-of-occurrence provision and a notice-of-claim (or suit) provision. The Policy required notice "as soon as practicable of an `occurrence' . . . which may result in a claim." (Policy § IV(2)(a).) It also required notice "as soon as practicable" "[i]f a claim is made or `suit' is brought" (Id. § IV(2)(b)), where "suit" is defined as "a civil proceeding in which damages . . . to which this insurance applies are alleged" (Id. § V(18)). The Bankruptcy Court focused on the initial complaints and found that there was no requirement that Nassau advise Underwriters about those complaints. (See Decision at 6.) The Bankruptcy Court did not distinguish between the notice-of-occurrence and notice-of-claim provisions in the Policy. But, given the facts in this case concerning Internation and the timing of the relevant occurrence and the initial complaints, there is effectively no difference in the analysis of the provisions in determining whether Nassau provided timely notice as to Internation.
The Policy requires Nassau to provide notice of an occurrence "as soon as practicable," which generally means "`within a reasonable time under all of the circumstances.'" Green Door Realty Corp., 329 F.3d at 287 (quoting Sec. Mut. Ins. Co. of N.Y. v. Acker-Fitzsimmons Corp., 293 N.E.2d 76, 79 (N.Y. 1972)); Olin Corp. v. Ins. Co. of N. Am., 966 F.2d 718, 723 (2d Cir. 1992) (same). A notice-of-occurrence provision is triggered when the insured becomes aware of events that "reasonably might give rise to liability covered by the policy." AXA Marine Aviation Ins., 84 F.3d at 625;see also, e.g., Paramount Ins. Co. v. Rosedale Gardens, 743 N.Y.S.2d 59, 62 (App.Div. 2002) (stating that notice requirement is triggered when "insured could glean a reasonable possibility of the policy's involvement"). Prompt notice enables an insurer to investigate claims, prevent fraud, and maintain adequate reserves, among other things. Olin Corp., 966 F.2d at 723 (giving policy reasons behind notice requirement); Unigard, 594 N.E.2d at 573.
A delay in giving notice may be excused if the insured lacked knowledge of the occurrence or had a reasonable belief in nonliability. Olin Corp., 966 F.2d at 724; Sec. Mut. Ins. Co., 293 N.E.2d at 78-79. As the Court of Appeals for the Second Circuit recently explained, "a good-faith belief by the insured that an incident does not trigger coverage under its insurance policy" may excuse a seeming failure to give timely notice. Green Door Realty Corp., 329 F.3d at 287;see also Am. Ins. Co., 56 F.3d at 439 (noting that late notice may be excused if "the insured has a good faith and reasonable belief that no liability covered by the policy will result"). The insured bears the burden of proving that its delay was reasonable under the circumstances. See, e.g., Green Door Realty Corp., 329 F.3d at 287; Olin Corp., 966 F.2d at 724. Whether a delay is reasonable is an issue of fact, but courts may find a delay unreasonable as a matter of law if no excuse is given or if the excuse is not credible. See Green Door Realty Corp., 329 F.3d at 287; Olin Corp., 966 F.2d at 724.
Nassau obtained title to the building in July 1999. In August 1999, vandalism occurred at the offices of Internation, and on September 3, 1999, Nassau began demolition work on the tenth floor where Internation was located. (SR-2, Aff. of Peter Budieri, sworn to Sept. 3, 1999, ¶¶ 5, 15.) On September 3, 1999, Internation and other tenants brought an Order to Show Cause in New York State Court to enjoin Nassau from engaging in any demolition or construction work or performing other intentional activities against the tenants, including discontinuing water service or other services. (SR-2.) The Order to Show Cause was supported by a complaint that alleged intentional activities by Nassau and sought declaratory and injunctive relief. Thereafter, all of the tenants except Internation, which had withdrawn without prejudice from the proceeding, entered into a stipulation of settlement, dated October 29, 1999, that resolved the tenant dispute by providing, among other things, that there would be certain additional security services. (SR-3.) Meanwhile, as explained above, on or about October 12, 1999 Internation filed its initial complaint in its adversary proceeding alleging solely intentional conduct against Nassau. (SR-4.)
The Policy became effective on October 11, 1999. At about that time, with respect to Internation, Nassau was faced with events that were being alleged solely as intentional conduct. Nassau argues that it reasonably believed that the potential liability implicated by the initial complaint would not be covered by the Policy. Such a reasonable belief would excuse notice to the insurer. See Green Door Realty Corp., 329 F.3d at 287;Am. Ins. Co., 56 F.3d at 439; Sparacino v. Pawtucket Mut. Ins. Co., 50 F.3d 141, 143 (2d Cir. 1995) (stating that delay will be excused if insured "in good faith reasonably believed there is no policy coverage or that the insured was not liable" (internal quotation omitted)). The issue, then, is whether the Bankruptcy Court clearly erred in finding that under all of the circumstances, Nassau's belief was reasonable. See Olin Corp., 966 F.2d at 724.
The Bankruptcy Court found that Nassau was reasonable in not notifying Underwriters of the initial complaints because they alleged causes of action that were excluded by the plain language of the Policy. (Decision at 6.) The reasonability of Nassau's belief finds some support in the Court of Appeals' decision in Hugo Boss Fashions, Inc. v. Fed. Ins. Co., 252 F.3d 608 (2d Cir. 2001). In that case, although not in a notice context, the Court of Appeals stated that "[u]nder some circumstances, the allegations contained in the complaint against the insured will by themselves eliminate all potential doubt and relieve the insurer of any duty to defend." Id. at 621 (discussing when insurer can deny duty to defend on grounds that policy exclusion is clear). The Court stated that there would be "no uncertainty as to the applicability of the policy exclusion" in a situation where "a complaint alleges an intentional tort, and the insurance contract provides coverage only for harms caused by negligence." Id. The plain language of the Policy was sufficient for the Bankruptcy Court to find that there was no uncertainty as to coverage in the initial complaint, and that Nassau reasonably believed that it did not need to notify the insurer.
The Bankruptcy Court also explicitly cited the trial testimony of Underwriters' insurance adjuster Peter Zapf, where he admitted that Underwriters would not have acted to investigate the claims until an actual allegation of negligence or other covered behavior appeared in the complaint. (See Decision at 7.) The Bankruptcy Court cited Zapf's testimony to show that there was no prejudice to Underwriters, but the testimony is also strong evidence of the reasonability of Nassau's belief. If the initial complaints would not have induced the insurer to investigate the occurrences, it supports the insured's conclusion that there was no reasonable possibility of coverage.
Indeed, as the Bankruptcy Court noted, Underwriters are trying to "have their cake and eat it too." (Decision at 5.) They argue that there is no duty to defend the amended complaint because it so clearly is based only on excluded intentional conduct — an argument that can only be successful if there is no "reasonable possibility" of coverage stated in the underlying complaint. See, e.g., Cowan, 1999 WL 1029729, at *8. But they simultaneously argue that the initial complaints raised the reasonable possibility of a covered claim, triggering the duty to notify.
Moreover, as soon as Nassau became aware that the incidents underlying Internation's complaint would likely be restated as "occurrences" covered under the Policy, Nassau provided notice. Nassau's actions not only show that it fulfilled its duty once it was aware of facts creating a reasonable possibility of covered liability, but they also show that Nassau had a good faith belief that the initial complaints were not covered. Although Underwriters, in their papers, argue that Nassau had information in January or May of 2000 that the water damage alleged in other complaints was negligently caused, Internation made no similar complaint about water damage, and Underwriters has presented no similar evidence with respect to Internation's claims.
Nassau's notice was also timely under the notice-of-claim provision because that provision was not triggered until the February 20, 2001 amended complaint added a cause of action for negligence. While the notice-of-occurrence provision required notice whenever events occur that "may result in a claim" (Policy § IV(2)(a)), section IV(2)(b) of the Policy required notice of an actual claim or suit, where "suit" was defined as a proceeding alleging damages "to which this insurance applies" (Policy § V(18)). Any ambiguity in the Policy should be construed in favor of the insured. See Vill. Of Sylvan Beach v. Travelers Indem. Co., 55 F.3d 114, 115 (2d Cir. 1995). The Policy's plain language indicated, as the Bankruptcy Court noted, that Internation's initial complaints did not constitute a claim or "suit" triggering the notice provision. (See Decision at 6.) Nassau provided notice as soon as it had reason to believe a "suit" was likely to be brought, and it promptly provided Internation's amended complaint once negligence was alleged. (Id. at 6-7.) Therefore, the Bankruptcy Court correctly concluded that Nassau did not violate its duty to provide notice of Internation's suit or claim.
While the notice-of-occurrence duty is triggered by the insured's knowledge and "leaves room for differences of opinion as to whether a particular event is likely to lead to liability under the relevant policy," a notice-of-claim provision is triggered simply by an assertion of liability "within the risks covered by the policy." Am. Ins. Co., 56 F.3d at 439. Courts in the Second Circuit have thus distinguished the two notice provisions and have questioned whether the failure to give notice of a claim can be excused by a belief in nonliability. See Blank, 27 F.3d at 795-96; Rooney v. Chi. Ins. Corp., No. 00 Civ. 2335, 2001 WL 262703, at *9-*10 (S.D.N.Y. Mar. 16, 2001), aff'd, No. 01-7396, 2001 WL 1486527 (2d Cir. Nov. 14, 2001).
The Bankruptcy Court's decision that Nassau did not violate the notice provisions of the Policy is affirmed. The Court, therefore, does not need to reach the issues of whether Underwriters timely disclaimed coverage and whether Nassau could assert the notice given by the complainant tenants.
V.
Underwriters also appeal the Bankruptcy Judge's rejection, without specifically addressing, of Underwriters' argument that Nassau violated its duty to cooperate with Underwriters. (See Policy § IV(c)(3).) Underwriters' argument is wholly without merit. Under New York law, the insurer bears a heavy burden in showing that the insured breached the duty to cooperate. See Thrasher v. U.S. Liabiliy Ins. Co., 225 N.E.2d 503, 508 (N.Y. 1967); Hartford Fire Ins. Co. v. Masternak, 390 N.Y.S.2d 949, 952 (App.Div. 1977). It is well-settled that to deny coverage for a failure to cooperate, the insurer must show (1) that it acted diligently in seeking to bring about the insured's cooperation, (2) that the efforts employed by the insurer were reasonably calculated to obtain the insured's cooperation, and (3) that after the insured's cooperation was sought, the insured's attitude was one of willful and avowed obstruction. U.S. Underwriters Ins. Co. v. 203-211 W. 145th Street Realty Corp., No. 99 Civ. 8880, 2001 WL 604060, at *7 (S.D.N.Y. May 31, 2001); Thrasher, 225 N.E.2d at 508; Baghaloo-White v. Allstate Ins. Co., 704 N.Y.S.2d 131, 131 (App.Div. 2000).Underwriters' only basis for asserting Nassau's lack of cooperation is its failure to notify Underwriters of the complaints. This allegation is patently insufficient when one of the elements is that after Underwriters contacted Nassau, Nassau must have willfully and avowedly obstructed Underwriters' efforts to investigate the claims. There is no evidence that Underwriters presents to show willful and avowed obstruction. Indeed, while the Policy required cooperation in an "investigation," Underwriters never began an investigation. (See Policy § IV(c)(3) (requiring insurer to "[c]ooperate with us in the investigation or settlement of the claim")); cf. U.S. Underwriters Ins. Co., 2001 WL 604060, at *7 (criticizing insurer's lack of diligence in starting investigation five months after first receiving notice of claim). Therefore, the Bankruptcy Court was correct in not relieving Underwriters of the duty to defend on the grounds that Nassau failed to cooperate.
Conclusion
For the reasons explained above, the Bankruptcy Court's order and judgment requiring Underwriters to defend Nassau in its litigation against Internation is affirmed.
SO ORDERED.