K2 Investment Group, LLC, et al., Respondents-Appellants,v.American Guarantee & Liability Insurance Company, Appellant-Respondent.

Brief

N.Y.January 7, 2014

Qtourt of ~ppeals STATE OF NEW YORK K2 INVESTMENT GROUP, LLC, and AT AS MANAGEMENT GROUP, LLC, Plaintiffs-Respondents-Appellants, vs. AMERICAN GUARANTEE & LIABILITY INSURANCE COMPANY, Defendant-Appellant-Respondent, Docket Number: APL-2012-00055 BRIEF OF AMICI CURIAE COMPLEX INSURANCE CLAIMS LITIGATION ASSOCIATION AND Al\IIERICAN INSURANCE ASSOCIATION IN SUPPORT OF DEFENDANT-APPELLANT-RESPONDENT Laura A. Foggan Jennifer A. Williams WILEY REIN LLP 1776 K Street, NW Washington, DC 20006 (202) 719-7000 (202) 719-7049 (fax) Of Counsel K. Wade Eaton CHAMBERLAIN D' AMANDA OPPENHEIMER & GREENFIELD LLP 1600 Crossroads Building Two State Street Rochester, NY 14614 (585) 232-3730 Attorneys for Amici Curiae Complex Insurance Claims Litigation Association and American Insurance Association TABLE OF CONTENTS Page CORPORATE DISCLOSURE STATEMENT ....................................................... l INTEREST OF AMICI CURIAE ............................................................................. 2 STATEMENT OF FACTS ....................................................................................... J SUMMARY OF ARGUMENT ............................................................................... 5 ARGUMENT ........................................................................................................... 8 I. "Automatic" Indemnity is Inconsistent with Established Principles of Coverage Law ................................................................ 8 A. The Duty to Indemnify Differs From, and Is Narrower Than, the Duty to Defend ........................................................ l 0 B. The Remedies for Breach of the Duty to Defend Should Relate to the Harm From That Breach .................................... 11 C. Contlating the Duty to Defend and the Duty to Indemnify Contradicts Fundamental Contract Principles ......................... 19 II. Adequate Incentives Already Exist Under New York Law to Enforce Insurers' Defense Obligations ............................................. 21 lll. Important Policy Considerations Weigh Against "Automatic" Indemnity ........................................................................................... 24 CONCLUSION ...................................................................................................... 27 -1- TABLE OF AUTHORITIES Page(s) FEDERAL CASES BMW of North America, Inc. v Gore, 517 us 559 [ 1996} ............................................................................................. 27 Capital Environmental Services, Inc. v North River Insurance Co., 536 F Supp 2d 633 [2008] .................................................................................. 18 Colonial Oil Industries, Inc. v Underwriters, 133 F3d 1404 lith Cir [1998] ............................................................................ 12 Cooper Industries, Inc. v Leatherman Tool Group, Inc., 532 US 424 [200 I] ............................................................................................. 27 Emhart Industries, Inc. v Home Insurance Co., 515 F Supp 2d 228 [2007] .................................................................................. 17 Esicorp, Inc. v Liberty Mutual Insurance Co. 193 F3d 966 8th Cir [1999] .......................................................................... 13, 16 Flannery v Allstate Insurance Co., 49 F Supp 2d 1223 [ 1999] .............................................................................. 9, 14 Hartford Casualty Co. v Cruse, 938 F2d 601, 5th Cir [1991] ............................................................................... 18 Servants of Paraclete, Inc. v Great America/ Insurance Co., 857 F Supp 822, DNM [1994] ........................................................................... 17 State Farm Mutual Insurance Co. v Campbell, 538 us 408 [2003] ............................................................................................. 27 State v Amro Realty Corp., 936 F2d 1420 2d Cir [1991] ................................................................................. 2 Time Oil Co. v CIGNA Property & Casualty Insurance Co., 743 F Supp 1400 [1990] ..................................................................................... 19 -II- STATE CASES TABLE OF AUTHORITIES (Continued) 25 Avenue C New Realty, LLC v Alea North American Insurance Co .. Page(s) 96 AD3d 489 [1st Dept 2012) ............................................................................ 20 Alabama Hospital Association Trust v Mutual Assurance Society of Alabama, 538 So 2d 1209 [Ala. 1989) ............................................................................... 14 American States Insurance Co. v State Auto Insurance Co., 721 A2d 56 [Pa Super Ct 1998] ......................................................................... 17 Arceneaux v Amstar Corp., 66 So 3d 438 [La. 2011 ] ............................................................................... 16, 21 Aselco, Inc. v Hartford Insurance Group, 28 Kan App 2d 839, 21 P3d lOll [2001] .......................................................... 15 Ashland Managment Inc. v Janien, 82 NY2d 395 [1993] .......................................................................................... 19 Belardo v Fulmont Mutua/Insurance Co., 271 AD2d 837 [3d Dept 2000] .......................................................................... 20 Bibeau v Ward, 228 AD2d 943 [3d Dept 1996] .......................................................................... 19 Bovis Lend Lease LMB Inc. v Garito Contracting, Inc., 65 AD3d 872 [1st Dept 2009] .............................................................................. 8 Colonial Oil industries v Underwriters, 268 Ga 561,491 SE2d 337 [1997] ..................................................................... 15 Consolidated Edison Co. of New York, Inc. v Allstate Insurance Co., 98 NY2d 208 [2002] ...................................................................................... 2, 25 Continental Casualty Co. v Rapid-American Corp., 80 NY2d 640 [ 1993] ...................................................................................... 2, l 0 -lll- TABLE OF AUTHORITIES (Continued) County of Columbia v Continental Insurance Co., Page(s) 83 NY2d 618 [1994] ............................................................................................ 2 Dependable Janitorial Services v Transcontinental Insurance Co., 212 AD2d 946 [3d Dept 1995] .......................................................................... 25 Elliott v Hanover Insurance Co., 711 A2d 1310 [Me 1998] ................................................................................... 16 In re Estates of Covert, 97 NY2d 68 [200 !] ............................................................................................ 10 Federal Insurance Co. v North America Specialty Insurance Co., 83 AD 3d 40 1 [1st Dept 2011] ............................................................................ 22 Fireman's Fund Insurance Co. v Rairigh, 59 Md App 305,475 A2d 509 [1984] ................................................................ 16 Foster-Gardner, Inc. v National Union Fire Insurance Co., 18 Cal 4th 857, 959 P2d 265 [ 1998] .................................................................. 22 Frontier Insulation Contractors, Inc. v Merchants Mutual Insurance Co., 91 NY2d 169 [1997] ...................................................................................... 8, 10 Garvey v State Farm Fire & Casualty Co., 48 Cal 3d 395, 770 P2d 704 [ 1989] ................................................................... 24 Giovanielli v Certain Underwriters at Lloyds, London, 23 Mise 3d 1128[A], 2009 NY 50984[0] [Sup Ct, Queens County 2009] ....... 21 Graf v Hope Building Corp., 254 NY 1 [1930] ................................................................................................ 25 Hirst v St. Paul Fire & Marine Insurance Co. 106 Idaho 792, 683 P2d 440 [Ct App 1984] ................................................ 14, 15 Hough v USAA Casualty Insurance Co., 93 AD3d 405 [1st Dept 2012] .............................................................................. 8 -IV- TABLE OF AUTHORITIES (Continued) lucorporated Village of Cedarhurst v Hanover Insurance Co., Page(s) 89 NY2d 293 [19961 ............................................................................................ 2 Je.fferson Insurance Co. of New York v Travelers Indemnity Co., 92 NY2d 363 [ 1998] .......................................................................................... 20 K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co., 91 AD3d 401, [1st Dept 2012] ajfd sub nom. K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co., 21 N.Y.3d 384 [2013} ..................................................................................................... 22, 23, 26 K2 Investment Group, LLC v American Guarantee & Liability Insurance Co. 21 NY3d 384 (2013) ...................................................................................... 5, 23 Kenford Co. v Erie County, 108 AD2d 132 [4th Dept 1985], revd on other grounds 73 NY2d 312 [1989] ................................................................................................................. 19 Lang v. Hanover Insurance Co. 3 NY3d 350 [2004] .................................................................................. 5, 21, 23 Matijiw v New York Central Mutual Fire Insurance Co., 292 AD2d 865 [4th Dept 2002] ......................................................................... 10 Matychak v Security Mutua/Insurance Co., 181 AD2d 957 [3d Dept 1992] .......................................................................... 24 McCreary v Florida Residential Property & Casualty Joint Underwriting Association, 758 So 2d 692 [Fla Dist Ct App 2000] .............................................................. 15 Northville Industries Corp. v National Union Fire Insurance Co., 89 NY2d 621 [ 1997] ............................................................................................ 2 Pavia v State Fann LV!utual Automobile Insurance Co., 82 NY2d 445 [ 1993] .......................................................................................... 22 Polaroid Corp. v Travelers Indemnity Co. 414 Mass 747,610 NE2d 912 [1993] .................................................... 12, 15, 16 -v- TABLE OF AUTHORITIES (Continued) Republic Franklin Insurance Co. v Pistilli, Page(s) 16 AD3d 477 [2d Dept 2005] ............................................................................ 25 Robbins v 1\1iclzigan Millers Mutua/Insurance Co., 236 AD2d 769 [3d Dept 1997] .............................................................. 10, 21, 23 Rosen v State Farm Genera/Insurance Co., 30 Cal 4th 1 070, 70 P3d 351 [2003] .................................................................. 22 Rucaj v Progressive Insurance Co., 19 AD 3d 270 [1st Dept 2005] ............................................................................ 23 Ruder & Finn v Seaboard Surety Co., 52 NY2d 663 [ 1981] .......................................................................................... 10 Sellie v North Dakota Insurance Guarantee Association, 494 NW2d 151 NO [ 1992] ................................................................................. 16 Sentinel Insurance Co. v First Insurance Co. of Hawaii, 76 Haw 277,875 P2d 894 [1994] ................................................................ 15,21 Servidone Construction Corp. v Security Insurance Co., 64 NY2d 419 [ 1985] ................................................................................... passim Technicon Electronics Corp. v American Home Assurance Co., 74 NY2d 66 (1989) .............................................................................................. 2 Teichman v Community Hospital of West Suffolk, 87 NY2d 514 [ 1996] .......................................................................................... 25 Timberline Equipment Co. v St. Paul Fire & 1\1arine Insurance Co., 281 Or 639,576 P2d 1244 [1978] ...................................................................... 17 Town of Harrison v National Union Fire Insurance Co., 89 NY2d 308 [ 1996] ............................................................................................ 2 Zappone v Home Insurance Co., 55 NY2d 131 [1982] .......................................................................................... 20 -VI- OTHER AUTHORITIES TABLE OF AUTHORITIES (Continued) I Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Page(s) Coverage Disputes§ 5.06 [16th ed 2013] .......................................................... 12 1 Allan D. Windt, Insurance Claims and Disputes §§ 4.34, 4.35, 4.37 [6th ed 2013] ..................................................................................................... 6, 9, 12, 19 22 Eric Mills Holmes, Holmes' Appleman on Insurance§ 136.8 [20 121 .............. 19 C. Booth, M. Anania, and D. Steinke, Another View On K2 Investment V. American Insurance, Law 360 New York [September 10, 2013, 12:40 PM ET] ........................................................................................................... 8, 18 RULES Rules of Ct of Appeals [22 NYCRR] § 500.1 ........................................................... 1 STATE STATUTES Insurance Law § 3420 (d) .................................................................................. 24, 25 -VIl- CORPORATE DISCLOSURE ST A TE~IENT I. Pursuant to the Rules of the Court of Appeals (22 NYCRR) § 500.l(t), the Complex Insurance Claims Litigation Association ("CICLA") states that it is a trade association incorporated under the laws of Delaware. It has no parents, subsidiaries or affiliates. 1 2. Pursuant to the Rules of the Court of Appeals (22 NYCRR) § 500.1 (t), the American Insurance Association ("AlA") states that it is an incorporated entity that is not publicly traded and of which no publicly traded entity has an ownership interest. It has no parents, subsidiaries or affiliates. 1 CICLA makes the following additional disclosures regarding the CICLA member comQanies participating m this submission: CICLA submits this brief on behalf of the lollowmg member comQanies: Chubb & Son - a Division of Federal Insurance Company, Liberty Mutuallnsurance Company, The Travelers Indemnity Company and Travelers Casualty and Surety Company, and TIG Insurance Company. Chubb & Son is a division of Federal Insurance Company. Federal Insurance Company is a wholly owned subsidiary of The Cliubb Cm:poration, a publicly traded corporation with a primary listing on the New York Stock Exchange (CB.N). Liberty Mutual Holding Company Inc. owns 100% of the stock of LMHC Massachusetts Holdings Inc. LMHC Massachusetts Holdings Inc. owns 100% of the stock of Liberty Mutual Group Inc. Liberty Mutual Group Inc. owns 100% of the stock of Liberty Mutual Insurance Company. The Travelers Indemnity Company and Travelers Casualty and Surety Company, formerly known as The Aetna Casualty and Surety ComQany, are wholly owned subsidiaries of Travelers Insurance Group Holdings, Inc., which is a wholly owned subsidiary of Travelers Property Casualty Corp., which is in tum wholly owned by The Travelers Companies, Inc., a pub1icly field company. TIG Insurance Company is a wholly owned subsidiary of TIG Insurance Group, Inc., which in tum IS a wholly owned subsidiary of TIG Holdings, Inc. TIG Holdings, Inc. is a wholly owned subsidiary of Fatrfax (US), Inc., which in tum is a wholly owned subsidiary of FFHL Grou_p Ltd., which in tum is a wholly owned subsidiary of Fairfax Financial Holdings Limited, a public company traded on the Toronto Exchange. -1- INTEREST OF Aili/CI CURIAE The Complex Insurance Claims Litigation Association ("CICLA") and the American Insurance Association ("AlA") (jointly, "amici") are leading trade associations of major property and casualty insurance companies. Together the members of amici write a substantial amount of insurance both in New York and nationwide. On issues of importance to the property and casualty insurance industry and marketplace, AlA advocates sound and progressive public policies on behalf of its members in legislative and regulatory forums and files amicus curiae briefs in significant cases.2 CICLA also seeks to assist courts in understanding and resolving important insurance coverage issues, and it has participated in numerous cases throughout the country, including cases before this Court.3 CICLA and AlA have a national perspective and in-depth knowledge of the important insurance contract issues presented in this case, which will substantially impact insurers and policyholders throughout the State. Amici are vitally interested 2 An affiliate of AGLIC is a member of AIA but did not contribute to the funding of this brief. 3 CICLA, or its predecessor the Insurance Environmental Litigation Association ("lELA''), has apQeared as an amicus curiae in the folfowing New York cases: Consol. Edison Co. of N.Y., Inc. v Allstate Ins. Co., 98 NY:ld 208 r20021~ Northville Indus. Corp. v Nat/. Union Fire Ins. Co., 89 NY2d 621JI997]; Town of Harrison v Nat/. Umon Fire Ins. Co., 89 NY2d 308 [1996]; Inc. il. of Cedarhurst v Hanover Ins. Co., 89 NY2d 293 [1996]; County of Columbia v Cont. Ins. Co., 83 NY2d 618 [19941; Cont. Cas. Co. v Rapid-Am. Cop., 80 NY2d 640 [ 1993]; State v Amro Rea/tv Corp., 936 F2d 1420 [2d Cir 1991 j; and Technicon Elecs. Corp. v Am. Home Assur. Co., 74 NY2d 66 [1989]. -2- in this Court's review and respectfully submit that the Court should reverse the grant of summary judgment to Plaintiffs-Respondents and remand this case for further proceedings. Amici respectfully submit that their unique perspective will assist the Court in deciding this case and the important insurance principles at stake. STATEMENT OF FACTS Defendant-Appellant American Guarantee & Liability Insurance Company ("AGLIC") issued a professional malpractice insurance policy to Jeffrey Daniels, an attorney and one of two members of Goldan, LLC ("Goldan"), a real estate company. Subject to its terms and conditions, the policy provided limits of liability of $2 million per claim and in the aggregate for legal malpractice claims. Mr. Daniels provided notice of a suit filed by Plaintiffs-Respondents K2 Investment Group, LLC ("K2") and ATAS Management Group, LLC ("AT AS") against Goldan, Mr. Daniels, and Goldan's other member and owner, Mark Goldman. The suit arose out of claims by K2 and AT AS concerning legal services that Mr. Daniels and his firm provided to Goldan, and in which the plaintiffs asserted that they believed Mr. Daniels was representing their interests in ensuring that multiple loans to Goldan were secured by filed mortgages against real property. -3- The suit included claims against Nlr. Daniels t(lr legal malpractice and in his capacity as guarantor of the loans. AGLIC disclaimed any duty to defend or indemnify Mr. Daniels in the suit based on, among other policy provisions, exclusions for claims based on or arising out of. in whole or part: (I) Mr. Daniels' capacity or status as an officer, director, partner, etc., of a business enterprise the ("Insured's Status Exclusion"); and (2) the alleged acts or omissions by Mr. Daniels for any business enterprise in which he had a controlling interest (the "Business Enterprise Exclusion"). AGLIC also declined to pay a settlement demand from the plaintiffs to Mr. Daniels of $450,000. Mr. Daniels failed to appear in the underlying action and K2 and AT AS obtained a default judgment against him. The default was entered on the claims asserting legal malpractice; plaintiffs voluntarily dismissed their other claims. Mr. Daniels then assigned his claims against AGLIC to plaintiffs. K2 and AT AS filed this insurance coverage action against AGLIC, demanding that AGLIC pay the full policy limits for breach of contract and the full default judgment amount for bad faith. The Supreme Court granted K2 and AT AS summary judgment on their breach of contract claims, but dismissed their bad faith claims. On appeal to the Appellate Division, a divided court affirmed, with two Justices dissenting on the grounds that summary judgment was not warranted due to factual issues concerning the application of the AGLIC policy exclusions. -4- On June II, 2013, this Court issued its initial opinion in AGLIC' s appeal, affirming the result below on the ground (with respect to the breach of contract claims) that "when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him." (K2 lnv. Grp., LLC v Am. Guar. & Liab. Ins. Co., 21 NY3d 384, 387 [2013]).) With the support of amici AlA and CICLA, AGLIC moved for reargument, urging that the mling on this issue departed from the weight of authority nationwide and specifically from settled New York law, as reflected in Lang v. Hanover Insurance Co. 3 NY 3d 350 (2004) and Servidone Construction Corp. v. Security Insurance Co., 64 NY2d 419 (1985). This Court granted reargument. (K2 lnv. Grp., LLC v Am. Guar. & Liab. Ins. Co., 21 NY3d I 049 [20 13]).) SUMMARYOFARGUMENT Amici respectfully submit that refusing to allow an insurer to raise defenses to its indemnity obligation departs from established contract law and creates a new remedy for the breach of the duty to defend. In this case, even assuming arguendo that AGLIC breached the duty to defend, it should have been permitted to demonstrate the absence of indemnity coverage under the AGLIC policy terms. The AGLIC policy does not apply to any claim based upon or arising out of, in whole or part: (l) Mr. Daniels' capacity or status as an officer, director, partner, -5- etc .. of a business enterprise; or (2) the alleged acts or omissions by Mr. Daniels for any business enterprise in which he had a controlling interest. Here, even if AGLIC is precluded from challenging the default judgment, there are unresolved factual issues concerning whether Mr. Daniels' conduct fell within one or more of the AGLIC policy exclusions. In other words, as the dissenting Justices stated in their opinion below, even if the default judgment for malpractice triggered the policy's insuring agreement, there were issues of fact as to whether it "at least in part, [was] based upon or arose out of Daniels' capacity or status as an officer, director, shareholder or employee of Goldan, or out of his alleged acts or omissions on behalf of Goldan, a business enterprise in which he had a controlling interest." (J.A. at 378.) Further, AGLIC should have been permitted discovery to determine whether Mr. Daniels may have intentionally failed to record the mortgagees to protect his own interests as a partner in Goldan, or in acting on behalf of Goldan. As amici demonstrate below, insurance contracts make a clear distinction between the duty to defend and the duty to indemnify. A failure to defend should not result in the "automatic" imposition of indemnity upon an insurer, estopping it from raising any coverage defenses. That result is contrary to the overwhelming weight of authority in New York and nationwide. (See, e.g., Servidone Constr. Corp. v Security Ins. Co., 64 NY2d 419,424 [1985]); 1 Allan D. Windt, Insurance Claims and Disputes§ 4.37 [6th ed 2013] [collecting cases].) Rather, damages for -6- breach of the duty to defend should be limited to the cost of the defense, or other damages that the insured proves arise directly from the breach. In an instance of a wrongful refusal to defend, adequate remedies exist to protect the policyholder. Indeed, New York law provides that the insurer cannot challenge facts determined, or a judgment or settlement reached, in an underlying suit it wrongfully refused to defend, absent proof of fraud or collusion. However, in these circumstances, an insurer should have the opportunity to test the underlying judgment for fraud or collusion, and to litigate its coverage defenses as to indemnity. In this setting, imposing "automatic" indemnity on the insurer is overbroad and unfairly punitive. In addition, it may have constitutional due process implications. Moreover, this case has broad policy implications, potentially extending far beyond the present case. Unless the Court's initial opinion is modified, it will give policyholders a windfall well beyond the natural consequences of the insurer's breach of the duty to defend. It also will force New York insurers to consider the prospect of liability untethered to the terms and limits of the policies they issue. For these reasons, amici respectfully submit that this Court should reverse the entry of summary judgment for the plaintiffs and remand this case for further proceedings. -7- ARGUI\'IENT I. "'Automatic" Indemnity is Inconsistent with Established Principles of Coverage Law Under settled New York law, indemnity coverage has never been imposed as an "automatic" penalty for any breach of the duty to defend. (See Servidone, 64 NY2d at 424.) As a commentary recently noted, "Servidone is a highly respected and oft-cited ruling. Shepardizing it shortly after the K2 decision yielded nearly 350 favorable citations over the course of 28 years."4 [n Servidone, the insurer was permitted to raise policy exclusions in defense to a claim for indemnity of a settlement after a wrongful disclaimer of defense. The Servidone court explained: By holding the insurer liable to indemnify on the mere "possibility" of coverage perceived from the face of the complaint-the standard applicable to the duty to defend-the court has enlarged the bargained-for coverage as a penalty for breach of the duty to defend, and this it cannot do. (/d.) The holding in Servidone thus reflects one of the most fundamental principles of New York insurance law: the scope and determination of the duty to defend and the duty to indemnify are very different. (/d.; see also Frontier Insulation Contrs., Inc. v Merchants Mut. Ins. Co., 91 NY2d 169, 178 [1997]; Hough v USAA Cas. Ins. Co., 93 AD3d 405 [1st Dept 2012]; Bovis Lend Lease LMB Inc. v Garito Contr., Inc., 65 AD3d 872,876 [1st Dept 2009].) C. Booth, M. Anania, and D. Steinke, Another View On K2 Investment V. American Insurance, Law 360 New York [September 10, 2013, 12:40 PM ET]. -8- Given the wide acceptance of the fundamental ntle that the standard applicable to the duty to defend does not control the duty to indemnify, it is not surprising that authorities nationwide agree that an insurer is not barred from litigating indemnity coverage by virtue of the breach of a duty to defend. As has long been the case in New York, this is the law in most jurisdictions across the country, including Alabama, Colorado, Florida, Georgia, Hawaii, Idaho, Kansas, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Missouri, New Mexico, Oregon, Pennsylvania, Rhode Island, Texas, and Virginia. (See Windt§§ 4.35, 4.37 [collecting cases].) Under the prevailing view, "an insurer does not forfeit its right to contest coverage when it has breached its obligation to defend its insured." (Flannery v Allstate Ins. Co., 49 F Supp 2d 1223, 1227 [D Colo 1999].) In reaching this conclusion, courts nationwide have generally rested on one or more of three fundamental coverage principles: ( 1) the duty to indemnify is narrower than the duty to defend; (2) the penalties for breach of the duty to defend are distinct from those for the breach of the duty to indemnity~ and (3) contlating the duty to defend and the duty to indemnify violates fundamental tenets of contract law. These are all core principles of New York insurance law. -9- A. The Duty to Indemnify Differs From, and Is Narrower Than, the Duty to Defend Insurance policies are contracts, which are interpreted under the rules established for the construction of contracts generally. (See In re Estates of Covert, 97 NY2d 68, 76 [200 I).) Under these contracts, and New York law, an insurer's obligation to indemnify a policyholder is distinct from its obligation to defend. (See Frontier, 91 NY2d at 178; Servidone, 64 NY2d at 423-24; Matzjiw v N.Y. Cent. Mut. Fire Ins. Co., 292 AD2d 865 [4th Dept 2002]; Robbins v Mich. Millers Mut. Ins. Co., 236 AD2d 769 [3d Dept 1997].) Under New York law, the duty to defend is "measured against the allegations of the pleadings" in the underlying action-i.e., the possibility of recovery. (Servidone, 64 NY2d at 424; see also Frontier, 91 NY2d at 178.) It is, in a sense, '"litigation insurance' expressly provided by the insurance contract." (Servidone, 64 NY2d at 423-24.) The duty to defend may exist even where the claims against the insured are "groundless, false or fraudulent." (!d. at 423.) The duty to indemnify, on the other hand, is separate and much narrower. (See Frontier, 91 NY2d at l78, citing Cont. Cas. Co. v Rapid-Am. Corp., 80 NY2d 640 [1993]; Servidone, 64 NY2d 419; Ruder & Finn v Seaboard Sur. Co., 52 NY2d 663 [ 1981] ["[A ]n unbroken line of cases establishes that an insurer's duty to defend is broader than its duty to indemnify."].) The duty to indemnify is "determined by the actual basis for the insured's liability to a third person." -to- (Servidone, 64 NY2d at 424.) It is triggered only when a determination is made that the insured's claims actually fall within the provisions of the policy. [n Servidone, the court held that applying the same standard to both the duty to defend and the duty to indemnify would make an insurer liable to indemnify (m the mere possibility of coverage perceived on the face of the complaint. (/d.) [n doing so, the court further held, a court would "enlarge[] the bargained-for coverage as a penalty for breach of the duty to defend, and this it cannot do." (!d.) New York cases thus consistently have distinguished between the duty to defend and the duty to indemnify and rejected the rationales adopted by the minority of courts imposing "coverage by estoppel" or "automatic" indemnity. B. The Remedies for Breach of the Duty to Defend Should Relate to the Harm From That Breach Because the contractual obligations of defense and indemnity are distinct, the remedies for their breach are similarly distinct and should arise from the breach itself. Where an insurer has breached the duty to defend, the damages should be those that t1ow from the breach of that duty, such as the cost of the defense. (See, e.g., Sue rest Corp. v. Fisher Governor Co., 371 NY2d 927, 941 [Sup Ct, New York County 1975] ["the insured's damages are the expenses reasonably incurred by it in defending the action after the carrier's refusal to do so"].)5 5 "[W]hen the insurer breaches the contract by wrongfully refusing to provide a defense, the insured is entitled to receive only what it is owed under the -11- For this reason, the "vast majority" of jurisdictions hold that an insurer's unjustified refusal to defend does not bar it from later denying indemnity coverage. (Windt, § 4.37.) Professor Windt explains the basis for this basic rule of insurance juris prudence: If an insurer wrongfully refuses to defend an insured, it should be liable for the damages that the insured thereby incurs . . .. The insurer's breach of contract should not, however, be used as a method of obtaining coverage for the insured that the insured did not purchase. When a contract is breached, the injured party is entitled to receive what would have been obtained if there had been no breach; the injured party is not entitled to receive more. (/d.; see also l Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes § 5.06 [16th ed 20 13].) Courts in at least 20 states agree. For instance, following the majority approach, the Massachusetts Supreme Judicial Court applied this principle in Polaroid Corp. v Travelers Indemnity Co. (414 Mass 747, 610 NE2d 912 [1993].) The Massachusetts high court reasoned that "there is no reason not to apply normal contract damages principles" to breaches of the duty to defend and ruled that "[a] failure to defend does not bar an insurer from contesting its indemnity obligation." (/d. at 762, 610 NE2d at 921.) The court further explained that: contract-the cost of defense.'' (Colonial Oil Indus., Inc. v Underwriters, 133 F3d 1404, 1405 [11th Cir 1998}.) -12- l w le align ourselves with those authorities that treat an insurer's unjustified refusal to defend as a breach of contract and seek then to determine what is recoverable as contract damages. [f any underlying claim . . . is not within the coverage of an insurance policy, an insurer's improper failure to defend that claim would not ordinarily be a cause of any payment that the insured made in settlement of that claim (or to satisfy a judgment based on that claim). (!d. at 762-63,610 NE2d at 921.) Another example is found under Missouri law, in Esicorp, Inc. v Liberty Mutual Insurance Co. ( 193 F3d 966 [8th Cir 1999]), which holds that the proper measure of damages are those "reasonably flowing from the breach." (/d. at 970.) The policyholder argued that, because the insurer had breached its duty to defend, the insurer was liable for the full amount of the settlement, regardless of the fact that much of the settlement was related to uncovered claims. The court held, however, that providing coverage for the uncovered claims in this circumstance would award the policyholder a "windfall in the form of greater insurance coverage than [the policyholder] would have obtained had the insurer defended the underlying case." (/d. at 970) The policyholder was not entitled to recover indemnity for the uncovered claims, despite the insurer's breach of its duty to defend. As an Idaho appellate court persuasively explained, an insurer should not be estopped from raising coverage defenses as a consequence of breaching its duty to -13- defend. In Hirst v St. Paul Fire & i\1arine Insurance Co. (I 06 Idaho 792, 683 P2d 440 [Ct App 1984 1), the court refused to grant indemnity as a necessary consequence of the insurer's breach of its duty to indemnify: We decline to adopt the ["automatic" indemnity] rule. We question the propriety of utilizing a form of estoppel as a punitive measure against an insurer for breach of a contractual duty to defend. Rather, we believe the sanctions for that breach should be governed by ordinary principles of contract law. In Idaho, the purpose of awarding damages for breach of contract is to fully recompense the non-breaching party for its losses sustained because of the breach, not to punish the breaching party. (!d. at 799, 686 P2d at 447.) The court instead awarded the unpaid defense costs as damages. (!d.) On this point, federal and state courts applying the law of the majority of states agree with long established New York law: Alabama: Ala. Hosp. Assn. Trust v Mut. Assur. Socy. of Ala., 538 So 2d 1209, 1216 [Ala 1989] [A failure of an insurer to defend a claim against an insured does not bar the insurer from relying on exclusions on the issue of coverage.]; Colorado: Flannery, 49 F Supp 2d at 1229 [Colorado law] [Colorado Supreme Court would adopt the "majority rule"; "an insurer is not precluded from contesting coverage when it has breached its obligation to defend its insured, even if such breach was in bad faith"] -l..f- Florida: McCreary v Fla. Residential Prop. & Cas. Joint Underwriting Assn., 758 So 2d 692. 695 [Fla Dist Ct App 2000) ["[A}n unjustitied failure to defend does not require the insurer to pay a settlement where no coverage exists."] Georgia: Colonial Oil Indus. v Underwriters, 268 Ga 561, 562, 491 SE2d 337, 339 [ 19971 ["[Tlhe insured is entitled to receive only what it is owed under the contract-the cost of defense. The breach of the duty to defend ... should not enlarge indemnity coverage beyond the parties' contract."] Hawaii: Sentinel Ins. Co. v First Ins. Co. of Haw., 76 Haw 277, 290-97, 875 P2d 894, 907-14 [ 19941 [Hawaii "adopt[s] the view of the Supreme Judicial Court of Massachusetts in Polaroid" and explicitly rejects the approach whereby a "breach of the duty to defend results in an irrebuttable presumption that the insurer is obligated to indemnify its insured"] Idaho: Hirst v St. Paul Fire & Marine Insurance Co. 106 Idaho 792, 683 P2d 440 [Ct App 1984] [refusing to adopt the automatic indemnity rule; "[w]e question the propriety of utilizing a form of estoppel as a punitive measure against an insurer for breach of a contractual duty to defend. Rather, we believe the sanctions for that breach should be governed by ordinary principles of contract law."] Kansas: Aselco, Inc. v Hartford Ins. Grp., 28 Kan App 2d 839, 851,21 P3d 1011, 1020 [2001] [Kansas Supreme Court would not adopt a doctrine creating indemnity coverage as a penalty for the breach of a duty to defend ] -IS- Louisiana: Arceneaux v Amstar Corp., 66 So 3d 438, 452 lLa 20 llll"'The duty to defend is provided in the insurance contract; therefore, its breach is determined by ordinary contract law principles and the insurer is liable for the insured's reasonable defense costs."] l\llaine: Elliott v Hanover Ins. Co., 711 A2d 1310, 1313 [Me 1998] [declining to compel provision of indemnity coverage in event of defense breach J l\llaryland: Fireman's Fund Ins. Co. v Rairigh, 59 Md App 305, 320, 475 A2d 509, 516 [ 1984] [declining to compel provision of indemnity coverage in event of defense breach] Massachusetts: Polaroid Corp. v Travelers Indemnity Co., 414 Mass 747,610 NE2d 912 [ 1993] [holding that "there is no reason not to apply normal contract damages principles" to breaches of the duty to defend and that "[a] failure to defend does not bar an insurer from contesting its indemnity obligation."] Minnesota: Sellie v N.D. Ins. Guar. Assn., 494 NW2d 151, 156 [ND 1992] [Minnesota law] [an insurer that has breached its duty to defend is still "entitled to challenge coverage under the insurance policy"] l.VIissouri: Esicorp, Inc. v Liberty Mutual Insurance Co. 193 F3d 966, 970 [8th Cir 1999] [the proper measure of damages for a breach of the duty to defend are those "reasonably flowing from the breach" and that to award more would result in a -16- ''windfall in the form of greater insurance coverage than [the policyholder] would have obtained had the insurer defended the underlying case. ''l New Mexico: Servants of Paraclete, Inc. v Great Am. Ins. Co., 857 F Supp 822, 835 [DNM 1994] [New Mexico law} ["a breach of the duty to defend cannot create coverage where none actually exists" I Oregon: Timberline Equip. Co. v St. Paul Fire & Marine Ins. Co., 281 Or 639, 646, 576 P2d 1244, 1248 [ 1978] [insurer did not waive the right to rely on policy exclusions because"[ w ]hen a contract is breached the injured party is entitled to receive what he would have if there had been no breach; he is not entitled to receive more"] Pennsylvania: Am. States Ins. Co. v State Auto Ins. Co., 721 A2d 56, 64 [Pa Super Ct 1998] ["[WJe will not adopt a blanket rule that if there is a breach of a duty to defend and a settlement, then it automatically requires the breaching insurer to indemnify .... The recovery for breaching a duty to defend is to require the breaching insurer to pay for costs of defense."] Rhode Island: Emhart Indus., Inc. v Home Ins. Co., 515 F Supp 2d 228, 261-263 [DRI 2007] [Rhode Island law] ["[T]he proper measure of damages for breach of contract is that which the injured party can tie to the breach itself."] -17- Texas: Hartford Cas. Co. v Cruse, 938 F2d 60 l, 605 [5th Cir 1991 I [Texas law I !holding the finding of the policyholder's liability '"is distinct from the question of coverage, which cannot be created ex nihilo by estoppel"] Virginia: Capital Envtl. Servs., Inc. v N. Riv. Ins. Co., 536 F Supp 2d 633, 645 [ED Va 2008] [Virginia law] ["even if an insurer breaches the duty to defend, it remains free to argue that the assumed liability was not in actuality covered under its policy, and thus no duty to indemnify arises"] Nearly twice as many states, and the overwhelming weight of authority, support the conclusion that the remedies for breach of an insurer's duty to defend do not include "automatic" indemnification of the policyholder's claim. The remedies for breach of a defense obligation are a separate and distinct inquiry from determining the contractual scope of the insurer's duty to indemnify. Holding that an insurer that breaches the duty to defend may not rely on insurance contract exclusions to disclaim a duty to indemnify would undo nearly thirty years of New York precedent since Servidone and place New York in a distinct minority view. As a legal commentary recently noted, under that disfavored approach, "the insurer is forced to insure a risk it never actually covered and for which it never charged a premium. This has never been the rule in New York."6 6 C. Booth, M. Anania, and D. Steinke, Another View On K2 Investment V. American Insurance, Law 360 New York [September 10, 2013, 12:40 PM ET]. -l8- C. Conflating the Duty to Defend and the Duty to Indemnify Contradicts Fundamental Contract Principles ln an action for breach of contract, the plaintiff should not be put in a better position than if the defendant had actually performed. (See Kenford Co. v Erie County, 108 AD2d 132, 135 [4th Dept 1985], revd on other grounds 73 NY2d 312 [ 1989].) In other words, "[d]amages must be reasonably contemplated by the parties at the time of the contract and definitely related to the breach." (Bibeau v Ward, 228 AD2d 943, 945 [3d Dept 1996]; see also Ashland Mgt. Inc. v Janien, 82 NY2d 395,403 [1993].) Imposing "automatic" indemnity as a penalty for breach of the duty to defend would contravene this bedrock principle and allow potential windfalls. A policyholder would "automatically" be entitled to indemnity-potentially outside policy terms and above and beyond any actual damages that the policyholder incurred-as a result of an insurer's mistaken failure to defend. This is a dramatic departure from both existing New York law and fundamental contract principles. "Automatic" indemnity, quite simply, turns contract law on its head. There is no basis under these circumstances for the Court to "provide for a 'rewriting' of the policy contract to award insured more than their purchased coverage." (Time Oil Co. v CIGNA Prop. & Cas. Ins. Co., 743 F Supp 1400, 1421 [WD Wash 1990] [quotation omitted]; Windt,§ 4.34 [collecting cases]; accord 22 Eric Mills Holmes, Holmes' Appleman on Insurance§ l36.8[B][l] [2003] [collecting cases].) -19- As this Court previously has recognized: "[A]n insurer's breach of duty to defend does not create coverage and ... even in cases of negotiated settlements, there can be no duty to indemnify unless there is first a covered loss." (Servidone, 64 NY2d at 423.) New York courts consistently have held that "equitable remedies cannot create insurance coverage where none exists." (25 Ave. C New Realty, LLC v A leaN. Am. Ins. Co., 96 AD 3d 489, 491 [ l st Dept 20 12]; see also Belardo v Fulmont Mut. Ins. Co., 271 AD2d 837, 837 [3d Dept 2000] [the "liability of an insurer cannot be extended beyond the express terms of the contract" [citation omitted]]; Jefferson Ins. Co. of N.Y. v Travelers lndem. Co., 92 NY2d 363, 370 [ 1998] ["[E]stoppel cannot create coverage when none existed under the policy's terms."]; Zappone v Home Ins. Co., 55 NY2d 131, 135-36 [ 1982].) As a matter of contract law, New York has long held that a failure to defend does not, and should not, bar an insurer from contesting its indemnity obligation. Breach of an insurer's duty to defend does not negate all of the contract's terms and conditions related to indemnity, and that result should not be imposed as an extra-contractual penalty. An insurer's failure to defend should not entitle the policyholder "automatically" to obtain indemnity beyond the terms of the insurance policy. Thus, New York courts consistently have allowed insurers to litigate as yet undetermined issues regarding the existence of coverage after -20- judgment has been entered against the insured in the underlying action. (See Robbins, 236 AD2d 769 ["As defendant's breach of its duty to defend cannot create coverage, defendant is not precluded from demonstrating that the actual basis of the insured's liability to plaintiff is such that the loss falls entirely within the policy exclusion."t see also Lang v Hanover Insurance Co., 3 NY3d 350, 356 [2004 J) ["the insurance carrier may litigate only the validity of its disclaimer and cannot challenge the liability or damages determination underlying the judgment"]; Giovanielli v Certain Underwriters at Lloyds, London, 23 Mise 3d ll28[A], 2009 NY Slip Op 50984[U], at *2 [Sup Ct, Queens County 2009].) Accordingly, imposing "automatic" indemnity on the insurer for the entire claim-without regard to whether the policy actually provides coverage-would be a punitive measure, inappropriately imposed in lieu of contract damages. II. Adequate Incentives Already Exist Under New York Law to Enforce Insurers' Defense Obligations To hold that an insurer forfeits its right to contest coverage when it has breached its duty to defend would unfairly "punish the insurer for breach of a contractual duty." (Sentinel, 875 P2d at 912.) It would impose punitive liability where an insurer erroneously denied a defense, without regard for the actual contract damages incurred by a policyholder. This Court should not sanction that result. (See, e.g., Arceneaux, 66 So 3d at 452 ['The result of the trial court's holding is judicial legislation, imposing a penalty on the insurer that is not -21- provided for by the legislature and is in fact on top of penalties already provided by the legislature."]~ Rosen v State Farm Gen. Ins. Co., 30 Cal 4th 1070, 1077,70 P3d 351, 355 [20031 (courts should not "rewrit[ e 1 the coverage provision to conform to their notions of sound public policy"); Foster-Gardner, Inc. v Nat!. Union Fire Ins. Co., 18 Cal 4th 857,888,959 P2d 265,286 [1998] (rejecting arguments to expand coverage based on "social and economic considerations").) Such indiscriminate "deterrence" is neither necessary nor wise. First, "well-settled" New York law Pavia v State Fann Mutual Automobile Insurance Co., (82 NY2d 445, 452-53 [ 1993]), already recognizes the specific circumstances under which insurers should be "punished" for bad faith or misconduct. The imposition of "automatic" indemnity would substitute for that established framework potentially draconian penalties for any errors by an insurer in the application of its duty to defend. An insurer that merely acts negligently or makes an error in judgment has not acted in bad faith. (Pavia, 82 NY2d at 445; Fed. Ins. Co. v N. Am. Specialty Ins. Co., 83 AD3d 401,402 [1st Dept 2011].) lndeed, in this case, the lower courts properly dismissed K2 and AT AS's claims for bad faith. The Appellate Division specifically found that K2 and AT AS had failed to establish a prima facie case of bad faith. (K2 Inv. Grp., LLC v. Am. Guar. -22- & Liab. Ins. Co., 91 AD 3d 40 I, 405 [I st Dept 2012 }, ajj'd sub nom. K2 lnv. Grp., LLC v. Am. Guarantee & Liab. Ins. Co., 21 N.Y.3d 384 [2013].)7 Moreover, an insurer that declines to defend loses the ability to control the litigation, which can have direct and severe consequences on the insurer's ability to contest coverage issues. For example, under Lang, an insurer that breaches its duty to defend runs the risk that a court will bar it from re-litigating in a coverage action issues relating to the policyholder's liability and damages that were determined in the underlying action. (Lang, 3 NY3d at 356 ["[T]he insurance carrier may litigate only the validity of its disclaimer and cannot challenge the liability or damages determination underlying the judgment."]; see also Rucaj v Progressive Ins. Co., 19 AD3d 270, at 273 [1st Dept 2005] ["An insurer, having disclaimed its duty to defend its insured in the underlying action, ... may not ... raise defenses extending to the merits of plaintiffs claim against the insured, even where the judgment was rendered by default. The insurer's defenses in such an action are limited to those it would have against the insured." [internal citations omitted]]; Robbins, 236 AD2d at 771 ["Having disclaimed its duty to defend its insured in the underlying action, defendant may not now go behind the underlying default judgment to raise defenses extending to the merits of plaintiffs claim against the 7 In its June 11, 2013 decision, this Court also specifically found that K2 and AT AS had alleged no facts showing that bad faith was present here. (21 NY3d at 391.) -23- insured."!~ A1atychak v Sec. JV!ut. Ins. Co., 181 AD2d 957, 958-59 [3d Dept 1992] ["defendant [insurer! may not now go behind the underlying default judgment, which found that plaintiff had been injured and De Franco [policyholder] was liable, to raise defenses extending to the merits of plaintiff's claim"].) Thus, existing New York law provides adequate incentives to protect policyholders and deter insurers from disregarding their duty to defend. Adding on an additional penalty of "automatic" indemnity is overbroad and unnecessary. III. Important Policy Considerations Weigh Against "Automatic" Indemnity Rejecting "automatic" indemnity properly acknowledges the contractual basis of the insurance relationship, and binds the policyholder to the limits and terms of the contract it purchased. It permits insurers, writing risks within the State of New York, accurately to appraise their exposure, and set premiums based on the limits of their policies. [t also avoids the unnecessary burden on "ordinary insureds ... of increased premiums necessitated by the erroneous expansion of their insurers' potential liabilities." (See Garvey v State Farm Fire & Cas. Co., 48 Cal 3d 395,407-08, 770 P2d 704, 711 [1989] [noting the destabilizing effects of judicial expansions of coverage on the insurance underwriting process, which relies heavily on contract predictability].) 8 Any application of "automatic" indemnity would also be in tension with New York's statutory disclaimer scheme found in Insurance Law§ 3420 (d). -24- Moreover, enforcing the limits and terms of the policy as written is not only required by New York law, but it also promotes the proper functioning of the insurance market. Commercial entities throughout New York, including the banking, finance and insurance industries, conduct their affairs with the expectation that the courts will enforce contracts as written. New York's settled approach to contract enforcement is critical to its role as a world-wide center of finance, including insurance. (See Grafv Hope Bldg. Corp., 254 NY I, 4 [1930] ["We are not at liberty to revise while professing to construe .... [S]tability of contract obligations must not be undermined by judicial sympathy."]).9 Judicial Section 3420 (d) requires insurers to "disclaim liability or deny coverage ... as soon as it is reasonably possible" in bodily injury cases. Failure to comply with this statutory requirement invalidates the insurer's disclaimer or denial. (Dependable Janitorial Servs. v Transcontinental Ins. Co., 212 AD2d 946, 947 [3d Dept 1995].) "Automatic" indemnity would require insurers to ensure that all relevant facts are known and disclaim carefully because if they are wrong they will be barred from contesting indemnity. The disclaimer statute, however, requires insurers to disclaim promptly "when the insurer has a reasonable basis upon which to disclaim coverage and cannot ... delay ... indefinitely until all issues of fact regarding the insurer's coverage obligations have been resolved." (Republic Franklin Ins. Co. v Pistilli, 16 AD3d 477, 479 [2d Dept 2005] [emphasis supplied].) 9 New York law is clear that "[c]ourts 'may not make or vary the contract of insurance to accomplish [their] notions of abstract justice or moral obligation."' (Teichman v Cmty. Hasp. ofW. Suffolk, 87 NY2d 514,520 [1996] [citations omitted; internal modifications in original]; See also Consol. Edison Co. of N.Y., Inc. v Allstate Ins. Co., 98 NY2d 208, 221-22 [2002] ["In determining a dispute over insurance coverage, we first look to the language of the policy. We construe the policy in a way that 'affords a fair meaning to all of the language employed by -25- fidelity to these basic principles is critical to retain the confidence of the business community at large that the bargain made will be the bargain enforced. In addition, "automatic" indemnity is against public policy because it would negate the insurer's ability to demonstrate even the absence of indemnity coverage for intentional wrongdoing or ciminality, or to challenge an underlying settlement or judgment for fraud or collusion, which would result in instances where insurance would be afforded in violation of strong New York public policy concerns. Indeed, in this case, the Appellate Division, in the only unanimous section of that court's decision, recognized "the overall questionable circumstances of the underlying transactions." (K2 lnv. Grp .. LLC v. Am. Guar. & Liab. Ins. Co., 91 AD3d at 405) And further, the dissent in the Appellate Division expressly stated that "New York's public policy prohibits indemnification for intentionally caused injuries" as support for the argument that AGLIC "should be allowed discovery to determine if [Mr.] Daniels intentionally failed to record the mortgages [because ... t]o hold otherwise and allow the insured to shift liability to the insurer would allow the wrongdoer to evade responsibility for his actions." (Id. at 411.) This Court should not adopt a draconian approach, unsupported by prior New York authority, that would sanction such a result. the parties in the contract and leaves no provision without force and effect."'] [citations omitted].) -26- Finally, imposition of "automatic" indemnity may violate the Due Process Clause of the United States Constitution. There can be gross disproportionality in the "automatic" award of indemnity coverage as a penalty for a breach of the duty to defend. (See Cooper Indus., Inc. v Leatherman Tool Group, Inc., 532 US 424 [200 1 ]; BMW of N. Am., Inc. v Gore, 517 US 559 [ 1996].) Such grossly excessive and arbitrary damages, untethered to any underlying contractual liability, would raise significant due process concerns. (See State Farm Mut. Ins. Co. v Campbell, 538 US 408 [2003] [$145 million punitive damage award struck down, where plaintiff was entitled to only $1 million in compensatory damages].) CONCLUSION For the foregoing reasons, amici respectfully request that this Court rule that a liability insurer's failure to defend a claim should not result in the "automatic" imposition of indemnity such that the insurer is estopped from relying on coverage defenses that otherwise would be available. November 18,2013 Laura A. Foggan Jennifer A. Williams Wiley Rein LLP 1776 K Street, NW Washington, DC 20006 (202) 719-7000 (202) 719-7049 (fax) Resp5~~fu~Jn~ted, By: /j1./M2-- I K. Wade Eaton, Esq. CHAMBERLAIN D' AMANDA OPPENHEIMER & GREENFIELD LLP 1600 Crossroads Building Two State Street Rochester, NY 14614 (585) 232-3730 -27- Of Counsel Attorneys for Amici Curiae Complex Insurance Claims Litigation Association and American Insurance Association -28-