New York Law on the issue of "Bad Faith" has held fast against many onslaughts since the Court of Appeals decided Pavia v. State Farm in 1993. What duty does a primary insurer have to an excess carrier?  When should a primary carrier advise its' insured of a conflict between the primary and excess insurers?
 
An insurer does not breach its duty of good faith when it makes a mistake in judgment or behaves negligently. To establish bad faith, an excess insurer must show that the primary insurer's conduct constituted a "gross disregard" of the excess insurer's interests and that the insurer's conduct involved a "deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer" (Pavia, 82 NY2d at 453). Under New York law, since an insurer has exclusive control over a claim against its insured once it assumes defense of the suit, it has a duty to act in "good faith" when deciding whether to settle and may be held liable for breach of that duty (see Pavia v. State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 452, 626 N.E.2d 24, 605 N.Y.S.2d 208 (1993]). This duty also applies where an excess insurer is exposed to liability (see Hartford Acci. & Indem. Co. v. Michigan Mut. Ins. Co.., 61 N.Y.2d 569, 463 N.E.2d 608, 475 N.Y.S.2d 267 [1984]; Elm Ins. Co. v GEICO Direct, 23 AD3d 219, 805 N.Y.S.2d 34 [2005]), and requires a primary insurer to give as much consideration to the excess carrier's interests as it does to its own (Pavia, 82 NY2d at 453; St. Paul Fire & Mar. Ins. Co. v. United States Fid. & Guar. Co., 43 NY2d 977, 978-979, 375 N.E.2d 733, 404 N.Y.S.2d 552, [1978]).
 
Mary S. Elacqua, v. Physicians' Reciprocal Insurers (21 A.D.3d 702), Appellate Division, Third Department 2005, stands for the proposition that an insurance carrier, when faced with a conflict, whereby they are seeking to disclaim coverage to their insured, must disclose to the insured, that they have a right to counsel of their choosing, whose fees would be paid by the carrier. (Public Serv. Mut. Ins. Co. v. Goldfarb, 53 NY2d 392, 401)

"If defendant (insurance carrier) was obligated to defend plaintiffs in the underlying action and, as the decision in Public Serv. Mut. Ins. Co. v. Goldfarb (supra) makes clear, provide them independent counsel of their own choosing, it follows that defendant was required to advise them of that right. To hold otherwise would seriously erode the protection afforded."
 
Good practice dictates notice to the insured of any potential conflict between the excess and primary carrier and notice to the insured of the right to retain their own counsel. As Professor Siegel often said at St. John's Law, "Let the Court make precedent on someone else's case, not yours."   

Triangle R Inc. a/a/o Michael Torres v. New York Central Mutual Fire Insurance Company, decided on September 9, 2011 by the Appellate Term, First Department, (2011 NY Slip Op 51663U) reversed the order of Judge Raul Cruz, of Bronx County Civil Court on a motion for summary judgment in a  no-fault action with a defense of lack of medical necessity. In opposition to the motion, Judge Cruz accepted an unsworn and undated medical report which stated the durable medical equipment provided by the plaintiff was medically necessary. The Appellate Term properly reversed stating, "The undated medical report relied upon by plaintiff was not properly sworn (see CPLR 2106, 2109), and should not have been considered (see CPT Med. Servs., P.C. v New York Cent. Mut. Fire Ins. Co., 18 Misc 3d 87, 88, 852 N.Y.S.2d 573 [2007]).   Moreover, even if considered, the report was insufficient to defeat summary judgment (id.)." The same rules should also apply at trial where the defendant insurer produces a qualified medical expert and the provider relies solely upon cross examination without producing an expert.

 

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East 75th Street Diagnostic Imaging a/a/o TIFFANY JONES v. Clarendon National Insurance Co., (2011 NY Slip Op 21315) decided by Judge Michael A. Ciaffa, of the First District Court of Nassau County on September 8, 2011, involved a motion for summary judgment dismissal of a no-fault claim based on the report of a PEER review by a physician who indicated the treatment rendered was not medically necessary. The Court addressed what was characterized as, "an increasingly common practice by no-fault insurers: moving for summary judgment based upon "naked" peer review reports." Judge Ciaffa is apparently dissatisfied with the Insurance carrier's tactics on summary judgment motions, stating,  "Based upon the Court's experience deciding countless no-fault summary judgment motions and trials, the Court has every reason to believe that allowing discovery of the treating doctors' medical records might "lead to relevant evidence" that may justify opposition to defendant's motion." Here the provider was given the benefit of CPLR 3212(f) which authorizes court-ordered disclosure where it appears from opposing papers that "facts essential to justify opposition may exist but cannot then be stated."

This issue, however, was addressed by the Appellate Term in Elmont Open MRI & Diagnostic Radiology, P.C. v. New York Central Mutual Fire Ins. Co (30 Misc. 3d 126A) in December of 2010." Defendant's affirmed peer review report, submitted in support of its motion, established, prima facie, that there was a lack of medical necessity for the services at issue. The fact that defendant's peer review doctor considered medical records from plaintiff, as well as from other providers who had treated the assignor, in forming his opinion as to the medical necessity of the relevant services, does not warrant a contrary result."

"We further note that plaintiff did not demonstrate that it needed the records from the other providers in order to raise a triable issue of fact as to whether the services at issue which plaintiff provided were medically necessary when they were rendered...and that it had served discovery demands during the ample opportunity that it had to commence discovery proceedings to obtain such records before the instant summary judgment motion was brought ... Consequently, plaintiff failed to establish a basis to defeat the branch of defendant's motion seeking summary judgment." 

 

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Unless the United States Supreme Court agrees to review the case, the 18-year history of litigation over the 1993 bombing of the World Trade Center has been silenced by the Court of Appeals decision on September 22, 2011 in "In the Matter of World Trade Center Bombing Litigation, Steering Committee, et al., Respondents, and The Port Authority of New York and New Jersey, Appellant. (2011 NY Slip Op 6501).

The Port Authority was granted governmental immunity in the case which involved lack of security at the World Trade Center (WTC).  On February 29, 1993, terrorists Ramzi Yousef and Eyad Ismoil drove a rented van containing a fertilizer bomb into the B-2 level of the WTC parking garage. Without entering an actual parking lot, they parked the van on the side of one of the garage access ramps and lit the fuse on the bomb for a timed detonation to occur approximately 10 minutes later. Both men were able to enter and exit the parking garage area undetected. The resulting explosion, occurring at 12:18 p.m., created a blast crater six stories deep and killed six people, including four Port Authority employees. 648 plaintiffs commenced 174 actions against the Port Authority for injuries sustained as a result of the bombing. In 2005, following a bifurcated trial solely on liability, a jury found that the Port Authority was liable for negligently failing to maintain the WTC parking garage in a reasonably safe condition. The jury apportioned 68% of the fault to the Port Authority and 32% to the terrorists.

Substantial evidence was presented at the trial and appellate level below of the security errors at the WTC made by the Port Authority. In January 1993, the Port Authority received intelligence that an "office complex" within New York was a potential target of an attack due to turmoil in the Middle East.

The Court of Appeals held The Port Authority's administration of security at the WTC involved discretionary decision-making." While the Port Authority's decision-making could have proceeded along different acceptable paths of action, in this case, it reached a reasoned discretionary conclusion to heighten security in sectors of the WTC considered more susceptible to harmful attack. This is the type of assiduous behavior that governmental agencies should be encouraged to undertake in rendering informed decisions that involve the balancing of burdens and risks, competing interests, and allocation of resources. To hold otherwise would create a disincentive for governmental agencies to investigate these types of security threats. And to expose the Port Authority to liability because in the clarity of hindsight its discretionary determinations resulted in harm would engender a chilling effect on government and dissuade public entities from investigating security threats and exercising their discretion, especially in a time when the risk of terrorist attack is more apparent than ever before."   

 

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October in New York means baseball playoff time for Yankee fans hoping for the 28th World Series Championship. Another baseball participant from the Bronx, Chelise Navarro, struck out before the Appellate Division, First Department last month based on an "assumption of risk" defense in Navarro v. The City of New York (2011 NY Slip Op 6412), decided on September 8, 2011. A verdict of 2.7 million was vacated by the First Department and the case was dismissed. Chelise Navarro was a 16 year old high school student in the Bronx on June 11, 2004 at Walton High School. During gym class, she was hitting ground balls as a warm up exercise. She handed the bat to a fellow student who took a full swing and hit Chelise in the face, causing serious injuries. A verdict before Judge Massaro in 2009 found the City at fault for lack of supervision and negligence. The Appellate Division dismissed the matter on a long line of cases holding a participant in a sporting activity assumes the risk of injuries associated with the activity.

"Because the record establishes that plaintiff assumed the risk that resulted in her injury, defendant is entitled to judgment as a matter of law (see CPLR 4404[a]). A participant in an athletic activity is deemed to have assumed "those commonly appreciated risks which are inherent in and arise out of the nature of the sport generally and flow from such participation" (Morgan v State of New York, 90 NY2d 471, 484, 685 N.E.2d 202, 662 N.Y.S.2d 421 [1997]). The record is devoid of evidence that plaintiff's injury resulted from any "unassumed, concealed or unreasonably increased risks" (Benitez v New York Bd. of Educ., 73 NY2d 650, 658, 541 N.E.2d 29, 543 N.Y.S.2d 29 [1989]) from which she should have been protected by her teacher."

The negligent supervision claim also failed. "We note that the verdict cannot be sustained on a theory of negligent supervision for an additional and independent reason. Plaintiff testified that only three to five seconds elapsed between her giving  the bat to Johanny and the bat's striking her face. "Where an accident occurs in so short a span of time that even the most intense supervision could not have prevented it, any lack of supervision is not the proximate cause of the injury and summary judgment in favor of the [defendant school district] is warranted'".

 

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What to do about fraud?  A recent fact pattern from one our clients highlights the severe restrictions an automobile insurance carrier is faced with when they encounter a fraud perpetrated by their policy holder. In our set of facts the insurance carrier canceled the policy for non-payment of premium. The insured comes to the agent a week later, with full payment in hand, and swears an affidavit that no losses have occurred during the lapse of coverage and the carrier reinstated coverage. The inevitable claim arose, during the week the policy was canceled with third parties claiming serious injury. The question presented was, "May the carrier deny coverage to the innocent third parties based on the fraud perpetrated by their insured." The answer is an unfortunate, NO.
 
"Vehicle and Traffic Law § 313(1)(a) supplants an insurance carrier's common-law right to cancel a contract of insurance retroactively on the grounds of fraud or misrepresentation, and mandates that the cancellation of a contract pursuant to its provisions may only be effected prospectively" (Matter of Metlife Auto & Home v Agudelo, 8 AD3d 571, 572, 780 N.Y.S.2d 21, quoting Matter of Liberty Mut. Ins. Co. v McClellan, 127 AD2d 767, 769, 512 N.Y.S.2d 161; see Matter of Integon Ins. Co. v Goldson, 300 AD2d 396, 397, 751 N.Y.S.2d 527; Matter of Insurance Co. of N. Am. v Kaplun, 274 AD2d 293, 297-298, 713 N.Y.S.2d 214).
 
The law is settled that a purported ab initio or retroactive cancellation of automobile insurance based upon fraud by the insured is not permitted in New York, unless the claimant was a participant in the fraud (see Matter of Co. of N. Am. v Kaplun, 274 A.D.2d 293, 713 N.Y.S.2d 214; Eagle Ins. Co. v Liberty Mut. Ins. Co., 267 A.D.2d 347, 699 N.Y.S.2d 919).
 
Moreover, in Fireman's Fund Insurance Company v. Corcoran, 156 A.D.2d, (1st Dept. 1987), a First Department case, the Court held:
"Insurers have a duty to discover fraud at the earliest possible moment, before, as herein, an accident occurs and the rights of innocent third parties are implicated, because as it has often been said, insurance is not the concern solely of the insured and the insurer." 

 

The Court adopted the Appellate Division decision which stated that the common-law right of rescission ab initio for fraud did not survive adoption of the Compulsory Insurance Law, and that the statutory method of terminating coverage on notice is the sole and exclusive method by which insurance coverage can be terminated. 

 

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