To be Argued by: CARL S. KRAVITZ (Time Requested: 30 Minutes) APL-2015-00048 New York County Clerk’s Index No. 600920/08 Court of Appeals of the State of New York MILLENNIUM HOLDINGS LLC, Plaintiff, THE NORTHERN ASSURANCE COMPANY OF AMERICA, Appellant, - and - CERTAIN UNDERWRITERS AT LLOYD’S, LONDON and CERTAIN LONDON MARKET INSURANCE COMPANIES, Intervenor Appellants, - against - THE GLIDDEN COMPANY, n/k/a AKZO NOBEL PAINTS LLC and AKZO NOBEL PAINTS LLC, Respondents. BRIEF FOR APPELLANT AND INTERVENOR APPELLANTS TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT LLP 900 Third Avenue New York, New York 10022 Tel.: (212) 508-6700 Fax: (212) 371-1084 - and - ZUCKERMAN SPAEDER LLP 1800 M Street, NW, Suite 1000 Washington, D.C. 20036 Tel.: (202) 778-1800 Fax: (202) 822-8106 Attorneys for Appellant and Intervenor Appellants Date Completed: April 17, 2015 CORPORATE DISCLOSURE STATEMENT Pursuant to Court of Appeals Rule 500.1(f), Appellants-Intervenor Plaintiffs Certain Underwriters at Lloyd's, London state that they are natural persons. Appellants-Intervenor Plaintiffs Certain London Market Insurance Companies are Swiss Union Insurance Company and World Auxiliary Insurance Company. Swiss Union Insurance Company states that it is affiliated with Columbia Insurance Company, Nederlandse Reassurantie Groep N.Y., NRG Victory Reinsurance Ltd, and NRG America Holding Company. World Auxiliary Insurance Company states that it is affiliated with Ocean Marine Insurance Company Ltd and A viva Plc. Appellant-Plaintiff The Northern Assurance Company of America states that it has been merged with OneBeacon America Insurance Company, which has been acquired and renamed Lamorak Insurance Company ("Lamorak"). Lamorak is a wholly owned subsidiary of Bedivere Insurance Company, which in turn is a wholly owned subsidiary of Trebuchet US Holdings, Inc., a Delaware corporation, which in turn is a wholly owned subsidiary of Trebuchet Investments, Limited, a Bermuda company, which in turn is a wholly owned subsidiary of Armour Group Holdings, Limited, a Bermuda company. Lamorak is affiliated with Employers' Fire Insurance Company and Potomac Insurance Company. TABLE OF CONTENTS TABLE OF AUTHORITIES .................................................................................... v PRELIMINARY STATEMENT .............................................................................. 1 QUESTIONS PRESENTED ..................................................................................... 6 STATEMENT OF JURISDICTION ......................................................................... 6 STATEMENT OF THE CASE ................................................................................. 7 A. Pre-1986 History: Glidden, SCM, and Appellants' Policies ....................................................................................... 7 B. The 1986 Transactions ............................................................... 8 1. ANP Buys Certain Assets and Liabilities from SCM (but Not the Policies) ....................................................... 8 2. ANP Agrees to Indemnify Millennium for the Lead Litigation Cases ............................................................. 10 C. The Lead Litigation Cases and the Disputes Between ANP and Millennium ........................................................................ 14 D. The Ohio Decision That ANP Was Not an Insured or Entitled to Coverage Under the Policies by Virtue of the 1986 Transactions or Otherwise .............................................. 16 E. The Ohio Decision That There Was No Coverage for the Santa Clara Action Under the Policies .................................... 18 F. Procedural History of This Case .............................................. 20 1. Millennium Sues and Appellants Intervene .................. 20 2. The Decision Below ...................................................... 20 (a) Scope of the Indemnity ........................................ 21 (b) Anti-Subrogation Rule ......................................... 23 11 (c) Voluntary Payment ............................................... 26 3. The First Department Affirms, and This Court Grants Appellants' Motion for Leave to Appeal ........... 27 STANDARD OF APPELLATE REVIEW ............................................................. 28 ARGUMENT .......................................................................................................... 28 POINT 1: THE ANTI-SUBROGATION RULE DOES NOT BAR APPELLANTS' CLAIMS ............................................................................ 28 A. Under This Court's Precedents, the Anti-Subrogation Rule Applies Only to Claims Against an Insured for the Risk for Which the Insured Was Covered ....................................... 28 B. The Motion Court's Application of the Anti-Subrogation Rule in This Case Undercuts and Is Inconsistent with the Purposes of the Rule ................................................................ 31 1. Purpose 1: Preventing the Insurer from Passing the Incidence of Loss to the Insured .................................... 31 2. Purpose 2: Guarding Against Conflicts of Interest ...... 33 C. The Motion Court's Holding Cannot Be Justified by the Fact That ANP Acquired Assets Previously Owned by the Insured Entities, Glidden and SCM's Glidden-Durkee Division .................................................................................... 37 D. The Decision Below Effectively Eliminates Subrogation for Insurers in New York, Deprives Insurers of an Important Economic Right, and Is Bad Policy ........................ 40 POINT II: THE VOLUNTARY PAYMENT DOCTRINE DOES NOT PRECLUDE APPELLANTS FROM RECOVERING THEIR SANTA CLARA PAYMENT .................................................................................... 42 A. Appellants Did Not Make a Voluntary Payment. .................... 42 111 B. Applying the Voluntary Payment Doctrine to Bar Appellants' Subrogation Claim Would Discourage Insurers from Making Good-Faith Payments to Their Insureds and Give Rise to More Litigation .............................. 46 C. The Voluntary Payment Doctrine Does Not Bar Subrogation Claims Based on Policies with Express Subrogation Clauses ................................................................. 47 CONCLUSION ....................................................................................................... 47 IV TABLE OF AUTHORITIES CASES Americas Ins. Co. v. Stolt-Nielsen, Inc., No. 97 Civ. 8018 (RCC), 2004 WL 2199497 (S.D.N.Y. Sept. 30, 2004) ....................................................................... 44, 45, 46 Andrea v. Arnone, Hedin, Casker, Kennedy & Drake, Architects & Landscape Architects, P. C., 5 N.Y.3d 514 (2005) ............................................................................................. 28 Colony Ins. Co. v. Peachtree Constr., Ltd., 647 F.3d 248 (5th Cir. 2011) ............................................................................... .44 Dillon v. Parade Mgmt. Corp., 268 A.D.2d 554 (2d Dep't 2000) ........................................................................ 29 Dillon v. UA Columbia Cablevision of Westchester, Inc., 100 N.Y.2d 525 (2003) ......................................................................................... 43 ELRAC, Inc. v. Ward, 96 N.Y.2d 58 (2001) ...................................................................................... 29, 42 EM Indus. Inc. v. Birmingham Fire Ins. Co., 141 A.D.2d 494 (2d Dep't 1988) ......................................................................... 38 Fed. Ins. Co. v. Arthur Andersen & Co., 75 N.Y.2d 366 (1990) .................................................................................... 41, 42 Fireman's Ins. Co. of Newark, N.J. v. Wheeler, 165 A.D.2d 141 (3d Dep't 1991) ................................................................. passim Gen. Accident Ins. Co. v. U.S. Fid. & Guar. Ins. Co., 193 A.D.2d 135 (3d Dep't 1993) ........................................................................ .43 Glidden Co. v. Lumbermens Mutual Casualty Co., 861 N.E.2d 109 (Ohio 2006) ........................................................................ passim Hartford Ins. Co. v. Ohio Cas. Ins. Co., 189 P.3d 195 (Wash. Ct. App. 2008) .................................................................. .44 Ins. Corp. of N.Y. v. Cohoes Realty Assocs., L.P., 50 A.D.3d 1228 ((3d Dep't 2008) ....................................................................... 29 v Jefferson Insurance Co. of New York v. Travelers Indemnity Co., 92 N.Y.2d 363 (1998) ................................................................................... passim Kaf-Kaf, Inc. v. Rodless Decorations, Inc., 90 N.Y.2d 654 (1997) ........................................................................................... 41 Med. Liab. Mut. Ins. Co. v. Schurig, 211 A.D.2d 518 (1st Dep't 1995) ...................................................... 24, 33, 34, 35 Mid-City Shopping Ctr. v. Consol. Mut. Ins. Co., 35 A.D.2d 1053 (3d Dep't 1970 .......................................................................... .43 N. Star Reins. Corp. v. Cont'l Ins. Co., 82 N.Y.2d 281 (1993) .......................................................................... 2, 29, 31,32 Nat'l Cas. Co. v. Beth Abraham Hosp., No. 97 Civ. 8091(LMM), 1999 WL 710780 (S.D.N.Y. Sept. 10, 1999) ............................................... passim National Union Fire Insurance Co. v. Ranger Insurance Co., 190 A.D.2d 395 (4th Dep't 1993) ....................................................................... .46 Pa. Gen. Ins. Co. v. Austin Powder Co., 68 N.Y.2d 465 (1986) ................................................................................ 2, 29, 32 Phoenix Ins. Co. v. Stamell, 21 A.D.3d 118 (4th Dep't 2005) ................................................................... 29, 36 Schneider v. Sobol, 76 N.Y.2d 309 (1990) ........................................................................................... 28 Sullivan v. Young Bros. & Co., 91 F.3d 242 (1st Cir. 1996) ................................................................................. .44 Viacom Int'l, Inc. v. Midtown Realty Co., 235 A.D.2d 332 (1st Dep't 1997) ......................................................................... 29 STATUTES N.Y. C.P.L.R. § 5602(a)(1)(i) .................................................................................... 6 Vl OTHER AUTHORITIES 2 Allan D. Windt, Insurance Claims and Disputes§ 10.10 (6th ed. 2013) .............................................................. 43, 46, 47 Vll PRELIMINARY STATEMENT Appellants are insurers who paid more than $15 million to their insured, Millennium Holdings LLC ("Millennium"), for defense and settlement costs that Millennium incurred in connection with lead-related claims (the "Lead Litigation Cases"). 1 Defendant-Appellee Akzo Nobel Paints LLC ("ANP"), a non-insured under Appellants' policies, was contractually obligated to indemnify Millennium for these same costs under a written indemnification agreement between Millennium and ANP. ANP, however, breached its agreement to pay, leaving the costs with Millennium, which passed them on to Appellants (its insurers). Appellants seek in this action to be subrogated to Millennium's contractual indemnity rights against ANP and recoup from ANP the millions of dollars they paid on behalf of their insured. ANP moved for summary judgment on two grounds - ( 1) that the costs at issue were not covered by their indemnity agreement with Millennium, and (2) if the costs incurred with respect to those cases were covered, Appellants' claims were barred by the anti-subrogation rule and for other reasons (including that 1 Claims for property damage, personal injury, and public nuisance were asserted against Millennium, as they were against other lead paint and pigment manufacturers, and it is these claims that are referred to as the Lead Litigation Cases. Appellants' contribution of $3.2 million to Millennium's settlement of a Lead Litigation Case known as the Santa Clara Action was a "voluntary payment"). Supreme Court (Kornreich, J.) held that all of Millennium's costs for the Lead Litigation Cases at issue were covered by the indemnity agreement. But it granted summary judgment for ANP on the basis of the anti-subrogation rule, and on a conditional basis, with respect to the $3.2 million payment, under the "voluntary payment" doctrine. The First Department affirmed, in a short order "for the reasons stated" by Justice Kornreich. The judgment should have been reversed, because the motion court erred in two significant ways. First, this Court's precedents hold that the anti-subrogation rule applies only when an insurer is seeking subrogation "against its own insured for a claim arising from the very risk for which the insured was covered." Pa. Gen. Ins. Co. v. Austin Powder Co., 68 N.Y.2d 465, 468 (1986); see also N. Star Reins. Corp. v. Cont'l Ins. Co., 82 N.Y.2d 281, 295 (1993). Both conditions- that 1) the subrogation claim must be against an insured and 2) it must arise from the risk covered by the insurer's policy - are necessary for the rule to apply and bar an insurer's claim. Id. 2 Here, the motion court acknowledged that ANP was not an 2 The typical anti-subrogation case is where the insurer pays for one insured and then tries to collect from another insured on the ground that the other insured owed indemnity to the first insured. In that situation, the insurance company (cont'd on next page) 2 insured under Appellants' policies. It noted that ANP had previously litigated and lost the issue of whether it had rights under the policies in Glidden Co. v. Lumbermens Mutual Casualty Co., 861 N.E.2d 109 (Ohio 2006) ("Glidden"), and that the Ohio Supreme Court's final judgment in that case precluded ANP from re- litigating the issue of whether it was an insured. Nonetheless, the motion court still applied the anti-subrogation rule to bar Appellants' claim, holding that ANP's lack of rights under the policies was "irrelevant" and that the rule applied because the second of the necessary conditions was present - namely, that the insurer was seeking subrogation for expenses related to the risk covered by the policies. The motion court's only support for this erroneous legal ruling was its misreading of Jefferson Insurance Co. of New York v. Travelers Indemnity Co., 92 N.Y.2d 363, 373 (1998), as applying the anti-subrogation rule to bar a claim against a non- insured. A-30. In fact, the defendant in Jefferson was an "additional insured" under the policy, so both conditions for application of the rule were present. If the First Department's affirmance is upheld, and the only condition for application of the rule is that the payment the insurer seeks to recoup is related to the risk covered by the policy (which, by definition, is the situation in virtually every case where an insurer has made a payment to an insured), then subrogation, would be pinning the burden on an insured and would be avoiding financial responsibility for a claim it agreed to cover. 3 which is an important economic right to insurers and one that is a feature of the law in commercial centers across the country, will effectively be eliminated in New York. Second, the motion court further erred with respect to the $3.2 million that Appellants paid for the Santa Clara Action. 3 The question of coverage for the Santa Clara Action under Appellants' policies was hotly disputed at the time the payment was made, and Millennium threatened to sue Appellants for bad faith if they refused to pay.4 Appellants thus contributed to the settlement subject to a reservation of rights to litigate coverage later and to recover the payment in the event that their coverage defenses were upheld. In the ensuing coverage litigation, the court in Ohio found that the Santa Clara Action was not a covered claim, but that Appellants were not entitled to recover the $3.2 million payment under their reservation of rights. Thus, even under the motion court's erroneous holding that the anti- subrogation rule applies on the sole condition that the insurer's payment relates to a covered risk (without the further requirement that the claim be against an 3 The $3.2 million payment for the settlement of the Santa Clara Action was one of the costs included in the over $15 million advanced on Millennium's behalf that Appellants are seeking to recover in this action. 4 Millennium, which was in bankruptcy, represented that it needed to settle the Santa Clara Action but could not do so without a contribution from Appellants. 4 insured), the rule would not bar subrogation for the payment towards the settlement because the Santa Clara Action was found not to be a covered claim, and thus not within the risk Appellants agreed to insure. Yet the motion court held that Appellants' claim for the $3.2 million was still barred by the anti-subrogation rule. The motion court compounded this error by characterizing Appellants' payment of the $3.2 million as a "voluntary payment," and granting summary judgment (conditionally) on the additional ground that an insurer cannot recover a "voluntary payment" in subrogation. Its characterization of Appellants' payment ignores the reality that, when an insurer makes a settlement payment on a claim for which there is a substantial coverage dispute, subject to a reservation of rights and under the threat of bad faith, it is not making a "voluntary payment." It also ignores the law in New York, and elsewhere, that holds that an insurer's decision to pay a claim where coverage is disputed - provided that the insurer's decision is in good faith and reasonable- is not voluntary, as is plainly the case here. Further, treating such a payment as "voluntary," and not subject to recoupment in subrogation, would not only discourage settlement and encourage more coverage litigation, but also would produce an inequitable result. It would diminish an insurer's rights when it acts in good faith towards its insured by paying a disputed claim, and instead favor a third-party indemnitor that refused to honor its indemnity contract with the insured. That is bad law and bad policy. 5 The judgment below should be reversed. QUESTIONS PRESENTED 1. Does New York's anti-subrogation rule, which this Court has applied only to claims by insurers against their insureds and as to the risk insured, apply where the defendant in subrogation is not and never has been an insured, the incidence of loss cannot be passed to the insured as a result of the subrogation claim, and the subrogation action raises no conflict of interest regarding the relationship between insurer and insured? 2. Does the voluntary payment doctrine bar an insurer's right to subrogation against a non-insured to recover the insurer's reasonable payment for a claim where coverage is in dispute, if it is later determined in litigation, pursuant to the insurer's reservation of rights, that the claim was not covered? STATEMENT OF JURISDICTION Appellants requested leave from this Court to appeal the First Department's October 7, 2014 order pursuant to N.Y. C.P.L.R. § 5602(a)(l)(i). This Court granted leave to appeal by Order issued February 19, 2015. 6 STATEMENT OF THE CASE A. Pre-1986 History: Glidden, SCM, and Appellants' Policies The Glidden Company ("Glidden") was incorporated in Ohio in 1917. Glidden made, marketed, and sold lead paint, including, until 1958, the lead pigment that it used as a key ingredient in that paint. A-398 [Ex. 3, 1928 Glidden Annual Report]; A-347-A-348 [Answer
