Erie Insurance Exchange, Appellant,v.J.M. Pereira & Sons, Inc., et al., Respondents.BriefN.Y.March 20, 2018To be Argued by: DAN D. KOHANE, ESQ. (Time Requested: 15 Minutes) Appellate Division Docket No. CA 16-00324 Monroe County Clerk’s Index No. 6973-2014 New York Supreme Court Appellate Division—Fourth Department ERIE INSURANCE EXCHANGE, Plaintiff-Appellant, – against – J.M. PEREIRA & SONS, INC., RPC, INC. a/k/a RUBBER POLYMER CORPORATION, RICHARDO VEGA, and ROBERT MARCHESE, as the Administrator of the ESTATES of ANTONIA TAPIA and GILBERTO VEGA-SANCHEZ, Defendants-Respondents. BRIEF FOR PLAINTIFF-APPELLANT HURWITZ & FINE, P.C. Attorneys for Plaintiff-Appellant Erie Insurance Exchange 424 Main Street 1300 Liberty Building Buffalo, New York 14202 (716) 849-8900 Of Counsel: Dan D. Kohane, Esq. TABLE OF CONTENTS TABLE OF CONTENTS 1 iiiTABLE OF AUTHORITIES QUESTIONS PRESENTED 1 2PRELIMINARY STATEMENT STATEMENT OF FACTS 5 Underlying Incident Underlying Actions Insurance Policies A. Ultraflex Policy B. Business Catastrophe Policy C. The SWIF Policy Tenders/Disclaimers I. 5 II. 5 III. 6 6 7 10 IV. 12 ARGUMENT: POINT I 13 PENNSYLVANIA LAW GOVERNS THE INTERPRETATION OF THE BUSINESS CATASTROPHE POILCY ISSUED BY A PENNSYLVANIA DOMICILED INSURANCE COMPANY TO A PENNSYLVANIA INSURED POINT II 15 THE EMPLOYER’S LIABILITY EXCLUSION OF THE BCL POLICY BARS COVERAGE FOR THESE CLAIMS FOR DAMAGES DUE TO BODILY INJURY TO EMPLOYEES OF PEREIRA i I. The Exceptions to the Employer’s Liability Exclusion Do Not Apply 17 A. No “Insured Contract” Was In Place Between Pereira and RPC 17 B, No Valid Underlying Insurance for the Employer’s Liability Risks Exists 25 1. There is no valid underlying insurance because the SWIF Policy excludes employer’s liability coverage for accidents occurring outside of Pennsylvania 25 2. In that the SWIF Policy does not provide coverage, the BCL Policy does not provide coverage, as its coverage follows the form of the underlying insurance 27 3. Even if the SWIF Policy provided valid underlying insurance, in that the limits of that underlying insurance have not been exhausted, the BCL Policy provides no coverage 32 POINT III 32 THE SWIF IS NOT A NECESSARY PARTY TO THIS ACTION CONCLUSION 36 ii TABLE OF AUTHORITIES Auten v. Auten, 308 NY 155 [1954] Brooks v. Colton, 760 A2d 393 [Pa Super Ct 2000] Cordero v. Potomac Insurance Company of Illinois, 794 A2d 897 [Pa Super Ct 2002] Delta Seaboard Well Services, Inc. v. Am. Int’l Specialty Lines Ins. Co., 602 F3d 340 [5th Cir. 2010] Dow Chem. Co. v. Assoc. Indem. Corp., 724 F Supp 474 [ED Mich 1989] General Refractories Co. v. First State Ins. Co., 500 F.3d 306 [3d Cir 2007] Hanover Insurance Company v. State Workers’ Ins. Fund of Com., 35 A3d 849 [Pa Commw Ct 2012] Hartford Cas. Ins. Co. v. ACC Meat Co., LLC, 2012 U.S. Dist. LEXIS 141593, at **19-20 [M.D. Pa. Apr. 26, 2012] .... Hertz Corp. v. Smith, 657 A2d 1316 [Pa Super Ct 1995] Houbigant, Inc. v. Fed. Ins. Co., 374 F3d 192 [3d Cir 2003] Howden N. Am. Inc. v. ACE Prop. & Cas. Ins. Co., 875 F Supp 2d 478 [WD Pa 2012] Jacobs Constructors, Inc. v. NPS Energy Services, Inc., 264 F3d 365 [3rd Cir. 2001] Koons v. XL Insurance America, Inc. 2012 WL 1946825 [ED Pa May 30, 2012], revd on other grounds 516 Fed Appx. 217 [3d Cir 2013] Kropa v. Gateway Ford, 974 A2d 502 [Pa Super Ct 2009], appeal denied 990 A2d 730 [Pa 2010]] 14 18 29, 31 31 29 33, 34 34 22 17-18 28 28 19 31 28 iii Native American Arts, Incorporated v. Hartford Casualty Insurance Company, 2004 WL 2065065 [ND 111 Sept 10, 2004] QBE Ins. Corp. v. Adjo Contracting Corp., 976 NYS2d 534 [App. Div. 2013] Quincy Mut. Fire Ins. Co. v. Imperium Co., 2016 U.S. App. LEXIS 3620 [3rd Cir. 2016] Standard Venetian Blind Co. v. Am. Empire Ins Co., 469 A2d 563 [Pa 1983] Travelers Cas. & Sur. Co. v. Ins. Co. o/N. Am., 609 F3d 143 [3d Cir 2010] Tremco, Inc. v. Mfrs. Assoc. Ins. Co., 832 A2d 1120 [Pa Super 2003] Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 84 NY2d 309 [1994] 31 15 24 33 28 18, 19, 22 14 Statutes CPLR 1001[a] Restatement of Conflict of Laws § 370 Restatement [Second] of Conflict of Laws § 188[1] Restatement [Second] of Conflict of Laws § 188[2] Restatement [Second] of Conflict of Laws § 193 33 13 14 14 14-15 iv QUESTIONS PRESENTED Where an umbrella policy of liability insurance contains an exclusion for1. bodily injury to an employee of the insured, but excepts from the operation of that exclusion liability under an “insured contract”, defined as a contract under which the insured assumed the tort liability of another party, is there an issue of fact as to whether such a contract exists, when the only contractual obligation alleged is an obligation to procure insurance? ANSWER OF THE COURT BELOW: Yes. Where an umbrella policy of liability insurance contains an exclusion for2. bodily injury to an employee of the insured, but excepts from the operation of that exclusion circumstances where there is underlying insurance for employer’s liability risks, in which case the umbrella policy states that coverage follows the provisions and limitations of the underlying insurance, if the underlying insurance limits the geographical scope of its employer’s liability coverage, is that limitation applicable to the umbrella policy? Question not reached.ANSWER OF THE COURT BELOW: 3. Is an agency of a sister-state, over which jurisdiction is not available in New York, a necessary party to a declaratory judgment action where an issue is presented as to the interpretation of insurance coverage issued by the agency? ANSWER OF THE COURT BELOW: Question not reached. PRELIMINARY STATEMENT Generally stated, an umbrella policy of insurance is triggered where the underlying coverage is exhausted and the terms of the umbrella policy provide (and do not exclude) coverage. It is appellant’s position on this appeal that the umbrella policy at issue is not triggered and judgment should be granted in its favor. ERIE INSURANCE EXCHANGE (“ERIE”) issued a Business Catastrophe Liability Policy (“the BCL Policy”) to its insured, J.M. PEREIRA & SONS, INC. (“PEREIRA”). This BCL Policy, in effect, provided excess coverage above the coverage afforded by two underlying policies, a policy designated as an Ultraflex policy, issued by ERIE, and a Workers Compensation and Employers Liability Policy, issued by the State Workers’ Insurance Fund (the “SWIF”), an entity of the Commonwealth of Pennsylvania (the “SWIF Policy”). In order for the BCL Policy to be invoked, there must be valid underlying insurance that would cover the loss, the limits of which have been exhausted, and coverage under the terms of the BCL Policy. The BCL Policy excludes coverage on account of bodily injury to employees of the insured injured in the course of their employment (the “Employer’s Liability Exclusion”) except, as relevant here, where there is an “insured contract”, defined as a contractual obligation to assume the tort liability of another party, or where there is “valid 2 underlying insurance”, in which case the BCL Policy will provide coverage in accordance with the terms and limitations of that underlying coverage, upon its exhaustion. Following a fire and explosion at a worksite in New York, in which two employees of PEREIRA were killed and a third injured, actions were commenced by the injured worker and the estates of the deceased workers against RPC, INC. a/k/a RUBBER POLYMER COPRPORATION (“RPC”), the manufacturer of a waterproofing compound the workers were using at the time of the fire. It was alleged that the fire was caused by the volatile and flammable nature of the compound. Causes of action sounding in negligence, failure to warn, breach of warranty and violation of the Federal Hazardous Substance Act were alleged. Third-party actions were commenced by RPC against PEREIRA seeking contribution and common law indemnity and alleging an obligation to provide liability insurance coverage. No claim was asserted based upon any alleged contractual obligation of indemnification (as opposed to an obligation to procure insurance) and no such contract has been identified. Thus, the “insured contract” exception to the Employer’s Liability Exclusion is not invoked. The underlying Ultraflex policy was exhausted by the payment of property damage claims arising out of the fire. The SWIF policy restricts the 3 geographic scope of its Employers Liability Insurance (as distinct from its obligation to pay workers’ compensation benefits) to work in Pennsylvania. The SWIF, in accordance with that limitation of its coverage, disclaimed any obligation to PEREIRA with respect to the third-party claims asserted against it. Thus, because the SWIF policy does not cover the loss (and if it did, it has not been exhausted, a precondition to triggering the excess coverage), and the BCL Policy follows the coverage limitations of the SWIF Policy, the “valid underlying insurance” exception to the Employer Liability Exclusion is not applicable. Thus, the Employer Liability Exclusion applies, not subject to any exception, and the BCL Policy is not triggered. ERIE provided a defense to PEREIRA in the third-party actions subject to a reservation of rights while pursuing this declaratory judgment action. ERIE commenced this action seeking a judgment declaring that it owed no obligation to its insured in connection with the underlying actions. ERIE moved for summary judgment, which motion was denied, the Court below finding a question of fact as to whether there was an “insured contract” within the meaning of the BCL Policy. ERIE brings this appeal on the ground that the decision below was erroneous and that it is entitled to summary judgment as a matter of law declaring that its BCL Policy does not provide coverage for the losses alleged. 4 STATEMENT OF FACTS I. Underlying Incident PEREIRA was retained to perform waterproofing of an indoor pool/mikvah in the basement of premises located in Brooklyn, New York. (See R. at 118, 138). On June 6, 2006, three employees of PEREIRA were working as waterproofers/laborers (R. at 118-125, 138-160), using rubber polymer, manufactured by RPC when a flash fire and explosion occurred. (R. at 118-125, 138-160). The three workers were injured, and two died of their injuries. (R. at 118-125, 138-160). II. Underlying Actions In two separate actions commenced in 2008, the injured worker and the estates of the deceased workers brought claims against RPC and others (collectively “the Underlying Actions”). (R. at 118-125, 138-160). In 2009, RPC filed third-party complaints against PEREIRA in the Underlying Actions (collectively “the Third-Party Actions”). (R. at 161-169). In the third-party complaints, RPC alleges that the injuries sustained by PEREIRA’S employees resulted from PEREIRA’S negligence and failure to adequately warn, train and supervise its employees and its failure to provide a reasonably safe working environment. (R. at 164). The third-party complaints further allege that there was 5 no active or primary wrongdoing on the part of RPC. (R. at 164). To the extent that these causes of action allege a right of indemnification, it is a claim for common law indemnification. No contractual provisions requiring that PEREIRA defend, indemnify and hold RPC harmless are alleged. The final cause of action of the third-party complaints alleges that PEREIRA was to obtain insurance coverage for the benefit of and to name RPC as an additional insured. (R. at 167). The third-party complaints allege that PEREIRA did procure such insurance, and then allege in a confusing non-sequitur that any recovery by plaintiff is due to the active and affirmative negligence of PEREIRA and that PEREIRA is obligated to defend and indemnify RPC. (R. at 167-168). The gravamen of this claim is not clear; what is clear is that it is not a claim for contractual indemnification. III. Insurance Policies A. Ultraflex Policy ERIE issued an Ultraflex policy of insurance to PEREIRA, which was in effect on the date of the accident, with a policy limit of $1 million per occurrence (“the Ultraflex Policy”). (R. at 187). ERIE exhausted the Ultraflex Policy’s $1 million per occurrence policy limit in payment of direct claims against PEREIRA for property damage arising out of the fire and explosion. (See R. at 216-219). 6 B. Business Catastrophe Policy ERIE also issued a Business Catastrophe Policy to PEREIRA, which was also in effect on the date of the accident, with a policy limit of $5 million per occurrence. (See R. at 219). The Declarations page attached to the BCL Policy sets forth the Schedule of Underlying Insurance, which includes both the Ultraflex Policy and an Employers Liability policy issued by the State Workers’ Insurance Fund (“SWIF”). (R. at 221). The BCL Policy states in relevant part: SECTION I - COVERAGES COVERAGE A - BODILY INJURY AND PROPERTY DAMAGE LIABILITY Insuring Agreement We will pay on behalf of the insured the “ultimate net loss” in excess of the “retained limit” because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages when the “underlying insurance” does not provide coverage or the limits of “underlying insurance” have been exhausted. When we have no duty to defend, we will have the right to defend, or to participate in the defense of, the insured against any other “suit” seeking damages to which this insurance may apply. However, we will have no duty to defend the insured against suit seeking damages for “bodily injury” or 1. a. 7 “property damage” to which this insurance does not apply. At our discretion, we may investigate any “occurrence” that may involve this insurance and settle any resultant claim or “suit”, for which we have the duty to defend. (R. at 244). Exclusions This insurance does not apply to: 2. *** Employer’s Liability “Bodily injury” to: An “employee” of the insured arising out of and in the course of: Employment by the insured; or Performing duties related to the conduct of the insured’s business; g- 1) a) b) *** This exclusion applies whether the insured may be liable as an employer or in any other capacity, and to any obligation to share damages with or repay someone else who must pay damages because of the injury. This exclusion does not apply to liability assumed by the insured under an “insured contract”. *** This exclusion does not apply to the extent that valid “underlying insurance” for the employer’s liability risks described above exists or would have existed but for the 8 exhaustion of underlying limits for “bodily injury”. Coverage provided will follow the provisions, exclusions and limitations of the “underlying insurance” unless otherwise directed by this insurance. (R. at 245). SECTION V - DEFINITIONS “Insured contract” means:9. *** That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for “bodily injury” or “property damage” to a third person or organization. Tort liability means a liability that would be imposed by law in absence of any contract or agreement. g- (R. at 254). “Retained limit” means the available limits of “underlying insurance” scheduled in the declarations or the “self-insured retention”, whichever applies. 19. (R. at 255). *** 9 “Ultimate net loss” means the total sum, after reduction for recoveries or salvages collectible, that the insured becomes legally obligated to pay by reason of settlement of judgments or any arbitration or other alternative dispute method entered into with our consent or the “underlying insurer’s consent. 23. “Underlying insurance” means any policies of insurance listed in the declarations under the schedule of “underlying insurance”. 24. (R. at 256). C. The SWIF Policy The Pennsylvania State Workers Insurance Fund issued a Workers Compensation and Employers Liability Insurance Policy to PEREIRA, which was in effect on the date of the accident (“the SWIF Policy”). (R. at 263). Part One of the SWIF Policy provides coverage for workers compensation benefits required by law in the event of bodily injury by accident or disease, including resulting death. (R. at 267). Part Two of the SWIF Policy is Employers Liability Insurance. (R. 268). The Employers Liability Insurance portion of the SWIF Policy provides coverage as follows: B. We Will Pay We will pay all sums you legally must pay as damages because of bodily injury to your employees, provided the 10 bodily injury is covered by this Employers Liability Insurance. The damages we will pay, where recovery is permitted by law, include damages: for which you are liable to a third party by reason of a claim or suit against you by that third party to recover the damages claimed against such third party as a result of injury to your employee; 1. (R. at 268). The Employers Liability Insurance provided by the SWIF Policy is, however, geographically limited. “Item 3B” of the Information Page, relates to “Employer’s Liability Insurance,” which is Part Two of the SWIF Policy. It states: B. Employers Liability Insurance: Part Two of the Policy applies to work in the State of Pennsylvania. (R. at 263). The SWIF Policy also provides: How This Insurance AppliesA. The bodily injury must arise out of and in the course of the injured employee’s employment by you. The employment must be necessary or incidental to your work in a state or territory listed in Item 3A. of the Information Page. 1. 2. (R. at 268). The only state identified in “Item 3A” of the Information Page of the SWIF Policy is Pennsylvania. (R. at 263). Thus, for this employer’s liability coverage to apply, the employment must be necessary and incidental to the insured’s work in Pennsylvania and the work must be performed in Pennsylvania. IV. Tenders/Disclaimers RPC tendered its defense and indemnity in the Underlying Actions to PEREIRA. (R. at 285, 294). ERIE denied the tender as there was no contract or written agreement in place between RPC and PEREIRA at the time of the incident that contained such an obligation or required additional insured status be provided to RPC. (R. at 288, 297). ERIE also advised PEREIRA that it was reserving its rights under the BCL Policy with regard to the accident based, in part, upon the Employer’s Liability Exclusion in the Policy. (R. at 289). ERIE also forwarded the tender letter to the SWIF, which denied the tender. (R. at 298, 300-302, 317-18). In its letter of January 21, 2010, the SWIF confirmed its denial stating: ...you will note on the information page of the Fund’s policy the limitation that employer’s liability coverage only applies to work conducted in the confines of the Commonwealth. Since this loss occurred in the course of work in New York, there exists no “valid ‘underlying insurance’” from the Fund for Pereira’s work conducted 12 there that obliges the Fund to defend and indemnity Periera [sic] in the New York actions.” (R. at 318). When the Third-Party Actions were filed, ERIE maintained its reservation of rights, but agreed to provide a defense to PEREIRA. (R. at 305). ERIE then filed this declaratory judgment action seeking a determination that it owes no obligation to PEREIRA with respect to the Underlying Actions and Third- Party Actions. ARGUMENT POINT I PENNSYLVANIA LAW GOVERNS THE INTERPRETATION OF THE BUSINESS CATASTROPHE POLICY ISSUED BY A PENNSYLVANIA DOMICILED INSURANCE COMPANY TO A PENNSYLVANIA INSURED In considering ERIE’S position that it owes no coverage to PEREIRA under the BCL Policy due to the operation of the Employer’s Liability Exclusion, the threshold issue is which state’s law governs the interpretation of the Policy. Historically, courts faced with a choice of law question in contract cases applied the law of the state where the contract was made or was to be performed ( see Restatement of Conflict of Laws § 370). However, as the flaws in the mechanical application of these rigid rules became apparent, the Court of 13 Appeals developed more flexible approaches to choice of law questions {Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 84 NY2d 309, 317 [1994]). In Auten v. Auten (308 NY 155 [1954]), the Court of Appeals inaugurated the use of “center of gravity” or “grouping of contacts” as the appropriate analytical approach to choice of law questions in contract cases. The purpose of grouping contacts was to establish which state had “the most significant relationship to the transaction and the parties” {see Restatement [Second] of Conflict of Laws § 188[1]). The Second Restatement, in addition to the traditionally determinative choice of law factor of the place of contracting, offers four other factors to be considered in establishing this “most significant relationship”: the places of negotiation and performance; the location of the subject matter; and the domicile or place of business of the contracting parties {see id., § 188 [2]). Beyond these general contract principles, however, the Second Restatement also separately addresses that special subset of contracts that involves insurance, and takes the position that where liability insurance contracts are concerned, the applicable law is “the local law of the state which the parties understood was to be the principal location of the insured risk. . .unless with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties” {see Restatement 14 [Second] of Conflict of Laws § 193). In addition, when a liability insurance policy covers risks in multiple states, “the state of the insured’s domicile should be regarded as a proxy for the principal location of the insured risk.” ( QBE Ins. Corp. v. Adjo Contracting Corp., 976 NYS2d 534, 548 [App. Div. 2013] [Pennsylvania law applied to a New York construction defect coverage dispute]). Here, the BCL Policy was issued through a Pennsylvania insurance agency (Body-Bomeman Insurance) to PEREIRA, a Pennsylvania incorporated company with a principal place of business located in Langhorne, Pennsylvania. The policy contains only Pennsylvania specific change endorsements. ERIE is a Pennsylvania domiciled insurance company. Thus, Pennsylvania has the most significant relationship to his matter, and the law of that state should apply to the interpretation of the BCL Policy. Even if the BCL Policy were construed to insure risks located in multiple states, the principal location of the insured risk is Pennsylvania where PEREIRA is domiciled. POINT II THE EMPLOYER’S LIABILITY EXCLUSION OF THE BCL POLICY BARS COVERAGE FOR THESE CLAIMS FOR DAMAGES DUE TO BODILY INJURY TO EMPLOYEES OF PEREIRA ERIE denied coverage for the Third-Party Actions pursuant to Exclusion (g), Employer’s Liability, contained in the BCL Policy. Exclusion (g) provides, in relevant part, that there is no coverage under the BCL Policy for 15 “bodily injury” to an employee of the insured arising out of and in the course of “employment by the insured” or “performing duties related to the conduct of the insured’s business.” (R. at 245). Here, there is no dispute that the workers who were injured in the accident were, at the time of the accident, employees of PEREIRA performing duties related to their employment. This fact is alleged in the complaints in the Underlying Actions. (R. at 118, 138). It is also deemed admitted in this action, as the fact was alleged in a Notice to Admit and was not denied. (R. at 107). The exclusion specifically applies, by its clear terms, whether the insured may be liable as an employer or in any other capacity, and to any obligation to share damages with or repay someone else who must pay damages because of the injury. (R. at 245). In other words, this exclusion applies irrespective of whether the claims against the insured are direct claims by an injured employee or third-party indemnity/contribution claims, such as the claims asserted in the third-party complaints by RPC against PEREIRA. It was not disputed on the motion before the trial court that Exclusion (g), standing alone, bars coverage for these claims. The disputed issue is whether or not stated exceptions to the Employer’s Liability exclusion are applicable and negate the exclusion. There are three exceptions to the exclusion of coverage for bodily injury to an employee of the insured. The first exception is for an “insured 16 contract.” The second exception relates to injury arising out of a covered auto. The third exception to the exclusion is for circumstances where there is valid underlying insurance for employer’s liability, in which case the BCL Policy provides coverage in accordance with the terms, provisions and limitations of that underlying insurance. Putting aside the exception related to auto claims, which exception is, without dispute, not applicable on these facts, it is ERIE’S position that neither of the other exceptions apply and, thus, the Employer’s Liability Exclusion is operative to exclude coverage for these claims. I. The Exceptions to the Employer’s Liability Exclusion Do Not Apply A. No “Insured Contract” Was In Place Between PEREIRA and RPC The first exception states that this exclusion does not apply to liability assumed by the insured under an “insured contract.” (R. at 245). An “insured contract” is defined to include “[t]hat part of any other contract or agreement pertaining to your business. . .under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization.” (R. at 254). As a general precept, an “insured contract” refers to a contractual duty of indemnification that is owed when the named insured assumes, by contract, the duty to indemnify a third-party for the latter’s tortious conduct. ( See e.g, Hertz 17 Corp. v. Smith, 657 A2d 1316, 1319 [Pa Super Ct 1995] [“The purpose of insured contract coverage, therefore, is to provide benefits for tort liability that an insured contractually assumes, not liability that is based on a breach of contract”]). The applicability of an “insured contract” exclusion was at issue in the case of Tremco, Inc, v. Mfrs. Assoc. Ins. Co., (832 A2d 1120, 1122 [Pa Super 2003]). In that case, Tremco sold roofing products to a roofing contractor, Gooding, Simpson & Mackes (“GS&M”), for use in a school construction project. In its contract with Tremco, GM&S agreed to indemnify and hold Tremco harmless from claims for bodily injury caused in whole or in part by the negligent act or omission of GM&S. Some teachers and students later brought actions against Tremco and others alleging injuries caused by toxic exposure to the roofing products. The policy at issue excluded coverage for liability assumed in a contract, but excepted from that exclusion tort liability assumed in an “insured contract,” in language identical to that used in the BCL Policy. Tremco sought coverage under an insurance policy issued to GM&S. The court found that the contract under which the tort liability of Tremco was assumed by GM&S was an “insured contract” within the meaning of the policy. However, Tremco, not being named as an additional insured on the policy, was not entitled to its coverage. In determining the meaning of the exception for an “insured contract”, the court contrasted the case before it with the case of Brooks v. Colton (760 A2d 18 393 [Pa Super Ct 2000]), noting in that case that the collective bargaining agreement between the insured Township and the defendant employee did not expressly bind the Township to assume liability for defendant’s torts, and therefore it was not an “insured contract”. (Tremco, Inc., 832 A2d at 1122; see also Jacobs Constructors, Inc. v. NPS Energy Services, Inc., 264 F3d 365 [3rd Cir. 2001]). What these cases and the language of the “insured contract” exception in the BCL Policy make clear is that no contractual undertaking by an insured falls within the scope of an “insured contract”, as defined, unless that contractual obligation is an assumption of the tort liability of another party. The “insured contract” exception to the Employer’s Liability exclusion in the BCL Policy is inapplicable as there was no “insured contract” between RPC and PEREIRA at the time of the accident. That is, there was no contract by which PEREIRA agreed to assume the liability of RPC to pay damages on account of bodily injury to an employee of PEREIRA. That no such contract existed in evidenced in several ways. First, there is no allegation in the third-party complaints that PEREIRA undertook a contractual obligation to defend, indemnify and hold RPC harmless from claims, such as the claims of the injured workers who seek damages in the Underlying Actions. That is, there is no allegation of any agreement between PEREIRA and RPC that would qualify as an “insured contract”. There is 19 an allegation that PEREIRA is obligated to defend and indemnify RPC premised on an allegation that PEREIRA was obligated to obtain liability insurance coverage for the benefit of RPC. An obligation to procure insurance to provide coverage for a loss is not an obligation undertaken by an indemnitor to assume the tort liability of an indemnitee. The third-party complaints allege the former and specifically do not allege the existence of - and, as will next be discussed, PEREIRA has not produced- any contract evidencing an obligation by PEREIRA to indemnify RPC. Second, no such contract was identified through discovery. ERIE served a Notice to Admit on RPC seeking admission of the following factual statement: “[o]n June 6, 2006, there was no written contract and/or agreement in place between J.M. Pereira & Sons, Inc. and RPC, Inc. a/k/a Rubber Polymer Corporation relative to the work being done at 1166 East 31st Street, Brooklyn, New York.” (R. at 110). In response, RPC admitted the statement. (R. at 112). ERIE also served a Demand for Document Production on RPC requesting, among other things, “[a] copy of any agreement, contract and any amendments or changes to same entered into by either JM Pereira & Sons Inc., Rubber Polymer Corporation and/or RPC, Inc. relating to work which forms the basis of the Vega-Sanchez Underlying Action and Tapia Underlying Action.” In response, RPC advised that it had “none.” (R. at 116). These judicial admissions 20 establish that no insured contract existed such as would bring the claims within the exception to the Employer’s Liability exclusion. Finally, in opposing the motion below, PEREIRA and RPC abandoned their discovery responses and submitted that there was, in fact, an agreement or contract in place between PEREIRA and RPC. Specifically, RPC alleged that in 1993, at the time PEREIRA became a certified applicator of RPC products, PEREIRA and RPC entered into an agreement by which PEREIRA agreed to include RPC as an additional insured on any insurance policies entered into by PEREIRA. (R. at 386-87). No written contract was identified, no less one with an indemnity agreement. What was produced was an unsigned letter to “All Applicators” (attached to Affidavit of Mr. Veazey’s), which states only that RPC must be named as an additional insured on a policy of insurance, without any reference to PEREIRA agreeing to hold RPC harmless. (R. at 389). Similarly, Jose Carlos Pereira, in an Affidavit submitted in opposition to the motion below (R. at 329), attests that “[i]n connection with the agreement between Pereira and RPC to have Pereira use the products of RPC, Pereira agreed to have RPC become an additional insured on its insurance policies”, (emphasis supplied) (R. at 331). A commitment to procure insurance is a far different obligation than an obligation to assume tort liability, i.e., to defend, indemnify and hold a party 21 harmless from claims of bodily injury. An obligation to provide insurance coverage, assuming such an obligation was undertaken, would not be an indemnity agreement, and thus not an “insured contract” within the meaning of the BCL Policy. This declaratory judgment action does not involve any claim for insurance coverage for RPC. Regardless, if asserted, any separate claim by RPC against ERIE for additional insured coverage would not be successful, as neither the BCL Policy nor the underlying SWIF Policy contains an additional insured endorsement. Absent this endorsement, RPC is not entitled to insured status; the mere allegation of an agreement between RPC and PEREIRA to procure such insurance is, without such a provision in the ERIE BCL Policy, insufficient to confer “additional insured” status on RPC as a matter of law. {Hartford Cas. Ins. Co. v. ACC Meat Co., LLC, 2012 U.S. Dist. LEXIS 141593, at **19-20 [M.D. Pa. Apr. 26, 2012]; Tremco, Inc., 832 AD2d at 1121-22). This was confirmed in Hartford Cas. Ins, Co. v. ACC Meat Co., LLC, wherein defendant sought coverage under a policy of insurance issued to a separate entity. The court was clear that “[standing alone, an ‘insured contract’ provision does not demonstrate the explicit intent necessary to confer third-party beneficiary status [i.e. additional insured status]). 22 Certificates of insurance referenced by the affidavits submitted in opposition to the motion below bear brief mention. All but one of the certificates are certificates that were not issued to RPC referencing any policy issued by ERIE. Those certificates are wholly without relevance. Mr. Veasey (R. at 386) and Mr. Pereira (R. at 329) each attached to their affidavits in opposition a certificate of insurance issued to RPC dated 11/1/02 listing policies of insurance for PEREIRA, as insured, with effective dates of 9/30/02 through 9/30/03, including policies issued by ERIE. (R. at 352, 391). Aside from the fact that the policies listed expired long before the accident involved in the Underlying Actions, the certificate of insurance annexed by its terms does not establish coverage in that it states: THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICES BELOW. THIS The certificate further states: NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. (R. at 352, 391). 23 Whatever coverage is afforded under the BCL Policy is measured by the terms of the Policy itself. There simply is no relevance to this action of the certificates of insurance upon which Respondents place such value, (see Quincy Mut. Fire Ins. Co. v. Imperium Co., 2016 U.S. App. LEXIS 3620 [3rd Cir. 2016] [“the certificate of insurance specifically stated that it was for informational purposes only and did not modify the terms, exclusions, or conditions of the policy. The statement in the certificate of insurance that Sunrise Concrete was an additional insured was without effect”]). The Court below denied ERIE’S motion on the ground that “triable questions of fact exist concerning whether there exists an insured contract between J.M. Periera and Rubber Polymer Corporation, and if so, its scope and content.” (R. at 8, 57-58). What questions of fact exist are not identified. Respondents have not produced any written agreement by which PEREIRA agreed to indemnify RPC for its tort liability on account of bodily injury to PEREIRA’s employees. They have not alleged that any such agreement existed. Rather, Respondents have alleged an agreement between the parties for PEREIRA to procure insurance coverage for the benefit of RPC, a wholly different obligation, and not an “insured contract” within the meaning of the exception to the Employer’s Liability Exclusion, as that meaning has been time and again confirmed by the Pennsylvania courts and courts applying Pennsylvania law. 24 Thus, the “insured contract” exception to the Employer’s Liability Exclusion is inapplicable. B. No Valid Underlying Insurance for the Employer’s Liability Risks Exists Under the BCL Policy, ERIE agreed to pay the “ultimate net loss” in excess of the “retained limit” because of “bodily injury” to which the insurance applies. (R. at 244). The Policy excludes coverage for bodily injury to employees of the insured, but excepts from that exclusion employer’s liability risks which are otherwise insured. Specifically, the exception states: This exclusion does not apply to the extent that valid “underlying insurance” for the employer’s liability risks described above exists or would have existed but for the exhaustion of underlying limits of “bodily injury”. Coverage provided will follow the provisions, exclusions and limitations of the “underlying insurance” unless otherwise directed by this insurance. (R. at 245). 1. There is no valid underlying insurance because the SWIF Policy excludes employer’s liability coverage for accidents occurring outside of Pennsylvania. The “underlying insurance” exception to the Employer’s Liability Exclusion in the BCL Policy provides additional limits only in the event and to the extent that a loss was covered by a policy of “underlying insurance” and the limits of that “underlying insurance” were exhausted. “Underlying insurance” is defined 25 as any policies of insurance listed in the declarations under the schedule of “underlying insurance.” (R. at 256). The Schedule of Underlying Insurance, as applicable, lists two policies: the Ultraflex Policy and the Employers Liability coverage in the SWIF Policy. (R. at 221). As the Ultraflex Policy is not intended to cover injuries to an insured’s employees and, in fact, specifically, excludes same, in order for this exception to apply, the Employers Liability section of the SWIF Policy must provide coverage for this loss. In other words, the BCL Policy would afford coverage for employer’s liability risks only if and to the extent that the SWIF Policy covered the loss and only after the SWIF paid the entirety of its policy limits for that loss. Part Two of the SWIF Policy provides Employers Liability Insurance that is limited in its geographical scope. Item 3B of the Information Page of the SWIF Policy specifically limits the Employer’s Liability Insurance coverage to “work in the State of Pennsylvania.” (R. at 263). The coverage, by its terms, is inapplicable to the accident involved in the Underlying Actions, which occurred in New York. The SWIF has disclaimed coverage for the claims asserted against PEREIRA in the Third-Party Actions based upon the geographical limitation on the scope of its employer’s liability coverage. In so disclaiming, the SWIF stated: [Y]ou will note on the information page of the Fund’s policy the limitation that employer’s liability coverage 26 only applies to work conducted in the confines of the Commonwealth. Since this loss occurred in the course of work in New York, there exists no ‘valid ‘underlying insurance’ from the Fund [SWIF] for Pereira’s work conducted there that obliges the Fund [SWIF] to defend or indemnify Pereira in the New York actions. (R. at 318). The SWIF has not been challenged in its denial of coverage by either PEREIRA or RPC. Given the geographical limitation of the SWIF’s employer’s liability coverage, there is no valid underlying insurance for employer’s liability risks, as is required by the “underlying insurance” exception to the Employer’s Liability Exclusion in the BCL Policy. In that the SWIF Policy does not provide coverage, the BCL Policy does not provide coverage, as its coverage follows the form of the underlying insurance. 2. The exception in the BCL Policy to the exclusion for bodily injury to an employee of the insured where valid underlying insurance covers the employer’s liability risk incorporates the limitations on coverage in that underlying insurance. The exception states: “Coverage provided will follow the provisions, exclusions and limitations of the ‘underlying insurance’ unless otherwise directed by this insurance.” (R. at 245). Thus, even if an argument were made that the SWIF Policy, by its mere existence, constitutes valid underlying insurance, any 27 coverage afforded to PEREIRA under the BCL Policy would be subject to the limitations of coverage in the SWIF Policy. Such coverage has been described as “follow form” coverage, as it “follows” and incorporates the coverage provisions and limitations set forth in another policy of insurance (see Kropa v. Gateway Ford, 974 A2d 502, 505 [Pa Super Ct 2009], appeal denied 990 A2d 730 [Pa 2010] [“By definition, a following form policy incorporates terms from an underlying, primary policy.”]; see also Howden N. Am. Inc. v. ACE Prop. & Cas. Ins. Co., 875 F Supp 2d 478, 485 [WD Pa 2012] [“The second and third excess policies are ‘follow-form’ policies, i.e., they each incorporate by reference the same form as the first excess policy, LH9813535”]). Under such “follow form” coverage, “the coverage issues presented turn solely on the interpretation of the underlying policfy]” (Houbigant, Inc. v. Fed. Ins. Co., 374 F3d 192, 203 [3d Cir 2003]; see also Travelers Cas. & Sur. Co. v. Ins. Co. of N. Am., 609 F3d 143, 166 [3d Cir 2010] [“[w]here a following form clause is found in the reinsurance contract, concurrency between the policy of reinsurance and the reinsured policy is presumed, such that a policy of reinsurance will be construed as offering the same terms, conditions and scope of coverage as exist in the reinsured policy, i.e., in the absence of explicit language in the policy of reinsurance to the contrary”]). 28 When determining whether there is coverage under a “follow form” provision like that contained in the BCL Policy, therefore, a court must first determine whether there is coverage under the underlying policy, and then apply that interpretation of the underlying policy to the excess policy (see e.g. In re Liquidation of Midland Ins. Co., 20 Misc 3d 488, 506 (Sup Ct, New York County 2008] [“Thus, the excess policy following form predictably would adopt the coverage determinations of the underlying policy”]; Dow Chem. Co. v. Assoc. Indem. Corp., 724 F Supp 474, 480 [ED Mich 1989] [noting that “the Court must focus on the language of the relevant primary insurance policies”]). The Pennsylvania Superior Court considered and applied such “follow form” coverage in Cordero v. Potomac Insurance Company of Illinois, (794 A2d 897 [Pa Super Ct 2002]). In that case, Javier Cordero took his vehicle to Z&A Auto Sales (“Z&A”) to be repaired, and Z&A loaned him a vehicle it owned for him to use while his vehicle was being repaired (Id. at 898). Z&A, and the automobile it loaned Cordero, were insured under a Garage Policy and a Commercial Umbrella Policy, both of which were issued by defendant Potomac (Id.). While operating the loaner car, Cordero was involved in a motor vehicle accident, and his three passengers sustained serious injuries (Id). The injured passengers filed a declaratory judgment action against Potomac seeking a declaration that they were entitled to the proceeds of the Potomac policies (Id. at 29 899). The parties agreed that the plaintiffs were entitled to coverage under the Garage Policy; however, because that policy specifically limited coverage for customers to the compulsory limits of $30,000 under Pennsylvania’s financial responsibility law, the plaintiffs acknowledged that they were only entitled to that amount {Id. at 900-01). As regarded the Umbrella Policy, which had limits of $1,000,000, the court held that the plaintiffs were not entitled to coverage {Id. at 901-02). According to the court, the Umbrella Policy was a “follow form” policy, as coverage under the Umbrella Policy was “subject to the same terms, conditions, agreements, exclusions, and definitions as the underlying insurance [the Garage Policy]” {Id. at 901). The court acknowledged that the Garage Policy provided coverage for Cordero as a permissive user of one of Z&A’s covered automobiles, but that it did so as a matter of statute {Id. at 902) [“Javier Cordero’s primary coverage under the Garage Policy was by virtue of the statutory mandates”]). As such, the Court held that the “clear import” of the language providing coverage for Cordero was that “permissive users of principally garaged automobiles under the Garage Policy are not insureds under the policy, except for that which is legally required” {Id.). Because Cordero was not an “insured” under the underlying policy, the court held that he was not entitled to coverage under the Umbrella Policy owing to its “follow form” provisions {Id. [“We specifically conclude that the Commercial Umbrella Policy was designed to expand the amount, but not the 30 scope of coverage...Statutes mandating minimum primary coverage are not intended to affect umbrella policies, whose purpose is to protect the assets of the named insured and not the customers’ assets”]). (see also Koons v. XL Insurance America, Inc. 2012 WL 1946825 [ED Pa May 30, 2012], revd on other grounds 516 Fed Appx. 217 [3d Cir 2013] and Native American Arts, Incorporated v. Hartford Casualty Insurance Company, 2004 WL 2065065 [ND 111 Sept 10, 2004]). Thus, to the extent that there is no coverage under an “underlying insurance” policy, there will likewise be no coverage under the BCL Policy, as the BCL Policy follows “the provisions, exclusions and limitations” set forth in the underlying insurance. (Cordero, 794 A2d at 902; see also Delta Seaboard Well Services, Inc. v. Am. Int’l Specialty Lines Ins. Co., 602 F3d 340, 344-45 [5th Cir. 2010] [“By its plain language, the Umbrella policy provides coverage only if an underlying primary policy provides coverage.”]). The BCL Policy affords additional limits of liability, but no broader coverage than the valid underlying insurance. Thus, because there is no coverage under the explicit terms of the SWIF Policy, there is likewise no coverage under the BCL Policy for the claims alleged in the Third-Party Actions. 31 Even if the SWIF Policy provided valid underlying insurance, in that the limits of that underlying insurance have not been exhausted, the BCL Policy provides no coverage. 3. The BCL Policy obligates ERIE to pay the “ultimate net loss” in excess of the “retained limit” on account of bodily injury to which the insurance applies. (R. at 244). The “ultimate net loss” is the total sum after reduction for recoveries that the insured is legally obligated to pay. (R. at 256). The “retained limit” is the available limits of the underlying insurance. (R. at 255). The SWIF Policy provides Employers Liability Insurance with limits of $100,000 for bodily injury by accident for each accident. (R. at 263). The limits have not been exhausted, because the SWIF has disclaimed coverage based upon the geographical limitation of its employer’s liability coverage. Thus, even assuming the SWIF Policy provided “valid underlying insurance”, the BCL Policy is not triggered, because the retained limits of the underlying insurance have not been exhausted. POINT III THE SWIF IS NOT A NECESSARY PARTY TO THIS ACTION Respondents argued in the Court below that the SWIF is a necessary party to this action. In New York, necessary parties are defined as “(p)ersons who ought to be parties if complete relief is to be accorded between the persons who are 32 parties to the action or who might be inequitably affected by a judgment in the action” (CPLR 1001 [a]). The issue before the Court in the instant action is whether there is coverage under the BCL Policy for the allegations in the Third-Party Actions filed by RPC against PEREIRA. Although this determination necessarily requires the Court to review and interpret the SWIF Policy because the Employer’s Liability exclusion in the BCL Policy has “follow form” language, such a determination does not require the presence of the SWIF in the case, as the determination whether there is coverage under the SWIF Policy is a matter of law for the court to decide (see Standard Venetian Blind Co. v. Am. Empire Ins Co 469 A2d 563, 566 [Pa 1983] [holding that the interpretation of an insurance policy is a matter of law to be resolved by the court]). A finding that the SWIF Policy is or is not ambiguous will have no preclusive effect on the SWIF’s ability to argue that it is not required to provide coverage in another action, nor would a determination as to coverage bind the SWIF to provide coverage in the Third-Party Actions. Moreover, as the Third Circuit held in General Refractories, the argument “that the ‘absent insurers whose policies must be interpreted in [this] declaratory judgment action have an interest relating to the subject of the action - the interpretation of their policies - and the disposition of the action in their absence might, as a practical matter, impair their 33 ability to protect the interpretation of their policies’” is without merit (General Refractories Co. v. First State Ins. Co., 500 F.3d 306, 316 [3d Cir 2007]). Put simply, the interest of the SWIF regarding coverage under its Policy is only incidental— not “essential” — to the issues raised in this declaratory judgment action, and a declaratory judgment can clearly be issued without violating the due process rights of the SWIF. Furthermore, this Court would not have jurisdiction over the SWIF if ERIE were to join it in the instant action. In Hanover Insurance Company v. State Workers’ Ins. Fund of Com., “SWIF” (35 A3d 849 [Pa Commw Ct 2012]), the plaintiff insurance companies filed a declaratory judgment action seeking a declaration as to their rights under a policy issued by the SWIF (Id. at 850). The SWIF was named as a defendant (Id.). The SWIF filed preliminary objections, arguing that the sole jurisdiction over the plaintiffs’ claims was with the Board of Claims (Id. at 851-52). Finding that a claim for coverage under a SWIF Policy was a claim under a contract with the Commonwealth of Pennsylvania, the Court sustained the preliminary objections and transferred the matter to the Board of Claims (see Id. at 855-57). Accordingly, this Court has no jurisdiction to bind the SWIF in a coverage matter, and the SWIF therefore would not have a right that would be affected by the Court’s decision in the instant case with respect to the BCL Policy. Moreover, the SWIF’s interests and rights are fully protected by the 34 exclusive jurisdiction of the Board of Claims. Thus, the SWIF is not an indispensable party. ERIE previously filed this action in the Court of Common Pleas, Bucks County, Pennsylvania. In opposition to ERIE’S motion for summary judgment in that case, PEREIRA argued that the underlying plaintiffs and the SWIF were indispensable parties to the action. The Court denied ERIE’S motion for summary judgment on that basis. (R. at 397). ERIE then refiled the action in New York, as Pennsylvania did not have jurisdiction over the underlying plaintiffs. If this Court were to hold that the SWIF is a necessary party, there is no forum left in which ERIE can seek relief as it has no claim against the SWIF and cannot, in such a situation, file suit in the Board of Claims. 35 CONCLUSION The BCL Policy excludes coverage for damages on account of the injuries to PEREIRA’s employees. The exceptions to the exclusion of coverage do not apply. In that its Policy does not afford coverage for the losses for which damages are sought in the Underlying Actions and Third-Party Actions, ERIE is entitled to a declaration that, as a matter of law, it is not obligated to provide a defense or indemnity to PEREIRA in connection with the Underlying Actions or the Third-Party Actions pursuant to the terms of the BCL Policy. ERIE respectfully prays that the Order appealed from be reversed and judgment entered in its favor. DATED: Buffalo, New York May 13, 2016 Respectfully submitted, HURWITZ & FINE, P.C. By: Dan D. Kohane, Esq. Attorneys for Plaintiff ERIE INSURANCE EXCHANGE 424 Main Street Suite 1300 Buffalo, New York 14202 (716) 849-8900 36