Opinion
99 Civ. 11519 (RCC)
February 16, 2001
OPINION AND ORDER
Plaintiffs Bluestein Sander, Martin J. Bluestein and Ronni Sander (collectively, "Bluestein Sander") move for summary judgment as to their first cause of action, alleging that defendant Chicago Insurance Company ("CIC") improperly disclaimed coverage of certain damages sought in an underlying legal malpractice litigation against Bluestein Sander. Bluestein Sander requests a declaratory judgment that CIC is obligated under the terms of the policy to indemnify Bluestein Sander for those sums, or alternatively, that CIC is estopped from denying coverage because its unreasonable delay prejudiced plaintiffs. For the reasons set forth below, Bluestein Sander's motion is granted.
I. BACKGROUND
In the fall of 1996, CIC issued a lawyers professional liability insurance policy to Bluestein Sander. The policy covered claims made against Bluestein Sander during the policy period "arising out of any negligent act, error, omission or Personal Injury in the rendering of or failure to render Professional Services by an Insured covered under this policy." Policy at 1 (emphasis in original). The parties did not engage in any communications or negotiations with respect to the policy or its provisions.
On July 15, 1997, a legal malpractice action was filed against Bluestein Sander in New York State Supreme Court. The underlying complaint in essence alleges that Bluestein Sander failed to prosecute a suit to recover on a promissory note, resulting in the dismissal of the case. The complaint catalogues damages "including the inability to collect . . . the balance of the promissory note, interest thereon, other attendant costs and legal fees all in the sum of $2,016,751.68." Underlying Complaint ¶ 11. On July 17, 1997, Bluestein Sander reported the claim and forwarded a copy of the complaint to CIC.
CIC responded by letter dated July 22, 1997, advising Bluestein Sander that it had appointed counsel to defend the suit. Although the letter reserved CIC's right to deny coverage exceeding the policy limits, or in the event that Bluestein Sander was aware of the claim prior to the inception of the policy, the letter did not raise any other defenses. Bluestein Sander turned over its files to appointed counsel and provided information with respect to its invoices for legal fees. In turn, in August 1997, appointed counsel filed an answer and counterclaims in the underlying action on behalf of Bluestein Sander. The counterclaims set forth the amount of legal fees and disbursements billed by Bluestein Sander, including payments made and the balance owed.
During the course of discovery on December 7, 1998, plaintiff in the underlying action served interrogatory responses which described the composite elements of its damages claim. Plaintiff listed "legal fees incurred" and suggested that services rendered for certain work performed by Bluestein Sander "had no value." Response to Interrogatories at 11, 13. By letter dated September 3, 1999, CIC, citing those interrogatory responses, disclaimed coverage with respect to the return of legal fees incurred. CIC based its disclaimer on the definition of "Damages" contained in the policy:
" Damages" means compensatory judgments, settlements or awards but does not include punitive or exemplary damages, fines or penalties assessed directly against any Insured, the return of fees or other consideration paid to the Insured, or that portion of any award or judgment caused by the trebling or multiplication of actual damages under federal or state law.
Policy at 5 (emphasis in original).
After an exchange of letters with CIC, Bluestein Sander filed the instant action on November 8, 1999, in New York State Supreme Court and obtained an order to show cause which, inter alia, temporarily restrained CIC from retaining defense counsel in the underlying action and directed CIC to fund counsel of plaintiffs' choice. CIC subsequently removed the case to the Southern District of New York, and this Court, after conducting a hearing on February 10, 2000, refused to continue the temporary relief and denied Bluestein Sander's application for a preliminary injunction.
Bluestein Sander now asks for summary judgment with respect to its first cause of action on the grounds that (1) CIC is obligated to indemnify it for all sums at issue in the underlying litigation up to the policy limits, including the element of legal fees incurred, and (2) even if such legal fees are excluded under the policy, CIC is estopped from asserting this defense due to unreasonably delay and resulting prejudice to plaintiffs. CIC argues that such relief is premature, as no judgment has yet been rendered against Bluestein Sander in the underlying litigation. Moreover, CIC contends that summary judgment is appropriate in its favor because its reservation of rights accords with the policy language and because Bluestein Sander has failed to show that the disclaimer was untimely and prejudicial.
With respect to its motion for a preliminary injunction, Bluestein Sander argued that, given the coverage dispute, it would suffer prejudice in the underlying action by the continued representation of counsel selected by CIC. Bluestein Sander requested that the Court permit it to retain counsel of its own choosing, at CIC's expense. This Court denied the motion, noting that while the insured may retain counsel at its own expense, the insured is not entitled to counsel of its choosing paid for by the insurer. See Transcript dated Feb. 10, 2000, at 35-36. Here, Bluestein Sander does not argue that it was prejudiced by foregoing the right to select defense counsel funded by CIC, but rather that it was prejudiced by foregoing the right to retain and pay for its preferred counsel at the outset of the underlying litigation.
II. DISCUSSION
Summary judgment may be granted where there is no genuine issue of material fact to be tried, and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c); White v. ABCO Engineering Corp., 221 F.3d 293, 300 (2d Cir. 2000). The moving party bears the initial burden of proof on such a motion. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The Court must draw all inferences in favor of the non-movant who, in turn, must "offer such proof as would allow a reasonable juror to return a verdict in his favor." Graham v. Long Island R.R., 230 F.3d 34, 38 (2d Cir. 2000). The Federal Rules of Civil Procedure provide that the non-movant may not rest on the pleadings but must further set forth specific facts in the affidavits, depositions, answers to interrogatories, or admissions showing a genuine issue exists for trial. See Fed.R.Civ.P. 56(e); Cifarelli v. Village of Babylon, 93 F.3d 47, 51 (2d Cir. 1996).
CIC first argues that Bluestein Sander's motion is premature because no judgment or award has been entered yet in the underlying action which would implicate CIC's duty to indemnify. However, it is well settled that the declaratory judgment mechanism may be used to address coverage issues even though the underlying tort claimant has not yet reduced his claim against the insured to judgment. See Morris v. Progressive Cas. Ins. Co., 662 F. Supp. 1489, 1491 (S.D.N.Y. 1987) ("Disputes over coverage afforded by an insurance policy present an actual case or controversy, so that declaratory judgment is appropriate."); see also 10 Fed. Proc. § 23:35 (1994) ("The mere pendency of a related action against the insured in state court does not in and of itself require a federal court to refuse an insurer's request for declaratory relief on coverage issues."); cf. Watson v. Aetna Cas. Sur. Co., 246 A.D.2d 57, 61, 675 N.Y.S.2d 367, 370 (2d Dep't 1998) (declaratory judgment action against liability insurer was "justiciable" although the injured party had not yet obtained a tort judgment). Courts in this circuit routinely entertain such actions without any discussion of justiciability. See e.g., Mount Vernon Fire Ins. Co. v. J.J.C. Stucco Carpentry Corp., No. 95-CV-5202, 1997 WL 117864 (E.D.N.Y. Apr. 3, 1997); Lone Star Indus. Inc. v. Liberty Mut. Ins. Co., No. 87 Civ. 4748 (PKL), 1988 WL 96084 (S.D.N.Y. Sept. 9, 1988). Likewise, this Court will exercise its jurisdiction to consider the instant motion.
Although CIC now takes a contrary position in its brief, CIC admitted in its Answer that the instant dispute presents an actual justiciable controversy. See Answer ¶¶ 28, 31.
With respect to the merits of the motion, the Court need not even analyze the policy at issue because, given the uncontested facts, summary judgment for plaintiffs is appropriate on the basis of estoppel. See Frazier v. Royal Ins. Co. of Am., 110 F. Supp.2d 110, 116 (N.D.N.Y. 2000) (if delay in disclaiming coverage is unreasonable, whether or not coverage existed at all need not be determined). Under New York common law, which both parties agree is applicable, an insurer may be estopped from asserting a valid defense to coverage if the insurer unreasonably delays in disclaiming coverage and the insured is prejudiced as a result of that delay. See Albert J. Schiff Assoc., Inc. v. Flack, 51 N.Y.2d 692, 699, 417 N.E.2d 84, 87, 435 N.Y.S.2d 972, 975 (1980); see also American Home Assurance Co. v. Republic Ins. Co., 984 F.2d 76, 79 (2d Cir. 1993);J.J.C. Stucco Carpentry Corp., 1997 WL 117864 at *2.
The reasonableness of the delay is judged from the time the insurer is aware of sufficient facts to issue the disclaimer. See Mount Vernon Fire Ins. Co. v. Unjar, 177 A.D.2d 480, 481, 575 N.Y.S.2d 694, 696 (2d Dep't 1991); Mount Vernon Fire Ins. Co. v. Kent Development of New York. Inc., No. 93 Civ. 3919 (CSH), 1996 WL 521426, at *3 (S.D.N Y Sept. 12, 1996). CIC admits that it received a copy of the underlying complaint in July 1997 see Answer ¶ 7, which contained a specific reference to "legal fees" as an element of damages. However, CIC argues that this "vague" language just as easily could have referred to fees paid to other counsel in an effort to mitigate Bluestein Sander's inadequate representation. Cavaliere Affidavit ¶ 5. CIC thus contends that there was no "clear basis" for a reservation of rights. Id.
Bluestein Sander moves to strike the affidavit filed on behalf of CIC by Kevin F. Cavaliere, Esq. on the grounds that the affidavit is not based upon personal knowledge and contains improper speculation and argument. Reply Mem. at 2. To the extent that portions of the affidavits submitted by both parties constitute argument, rather than facts based upon personal knowledge, the Court will treat those sections as extensions of the parties' briefs.
This argument ignores the obvious point that even if CIC indeed believed that the reference to "fees" in the underlying complaint was ambiguous, it had sufficient information to raise the relevant policy provision as a potential defense at that time, subject to a later conclusive determination. See Safeguard Ins. Co. v. Angel Guardian Home, 946 F. Supp. 221, 229 (E.D.N.Y. 1996) (even though underlying complaint may have been ambiguous, it did not "mask completely" the issue of notice and thus insurer should have conducted further investigation). Moreover, when CIC finally issued a reservation of rights letter with respect to the legal fees element of damages in September 1999, CIC referred to interrogatory responses dated nine months earlier as a basis for its disclaimer. CIC has proffered no explanation for this nine month delay. If the insurer offers no explanation for its delay, such delay is unreasonable as a matter of law. See J.J.C. Stucco Carpentry Corp., 1997 WL 117864 at *3; see also Kent Development, 1996 WL 521426 at *3 (noting that, where the grounds for denial of coverage are readily apparent, even a two-month delay is unreasonable as a matter of law) (citing cases).
Once unreasonable delay is established, the movant must demonstrate prejudice resulting therefrom. However, courts consistently hold that prejudice is presumed as a matter of law where the insurer disclaims coverage after undertaking the defense of its insured, thereby depriving the insured from controlling its own defense. See Albert J. Schiff Assoc., 51 N.Y.2d at 699, 417 N.E.2d at 87, 435 N.Y.S.2d at 975 (estoppel is appropriate "where an insurer, though in fact not obligated to provide coverage, without asserting policy defenses or reserving the privilege to do so, undertakes the defense of the case, in reliance on which the insured suffers the detriment of losing the right to control its own defense"); Globe Indem. Co. v. Franklin Paving Co., 77 A.D.2d 581, 582, 430 N.Y.S.2d 109, 111 (2d Dep't 1980) ("[I]t is equally well settled that where an insurer has undertaken the defense of an action on behalf of an insured, with knowledge of the facts constituting a defense to coverage under the policy, and where, during the interim, the insured is thereby deprived of the control of his defense, the former may be estopped from asserting that its policy does not cover the underlying claim.") (citations omitted); see also J.J.C. Stucco Carpentry Corp., 1997 WL 117864 at *4; Lone Star Indus. Inc., 1988 WL 96084 at *4 ("Courts have often presumed prejudice from the fact that the insurer took over the defense of the case and deprived the insured of control of its case.").
The Court is not persuaded by the cases raised in opposition by CIC. Indeed, in Commercial Union Ins. Co. v. International Flavors Fragrances, 822 F.2d 267 (2d Cir. 1987), cited in Opp. Mem. at 8, the Second Circuit did not even address the issue of prejudice because it found that the insurer's disclaimer was timely.
CIC assumed the defense of the underlying action by letter dated July 22, 1997. For over two years, the litigation proceeded under the direction of appointed counsel without any disclaimer by CIC. Discovery is now substantially complete with respect to defense issues. See Bluestein Reply Affidavit ¶ 20. Prejudice must be presumed in such circumstances. See Lone Star Indus. Inc., 1988 WL 96084 at *5 (estopping insurer from denying coverage where its appointed attorneys controlled the underlying litigation for two years and conducted substantial pre-trial discovery).
Mr. Bluestein asserts that opposing counsel in the underlying litigation precluded him from delving into the legal fees issue at a May 2000 deposition. Id.
III. CONCLUSION
For the foregoing reasons, this Court hereby grants Bluestein Sander's motion for summary judgment as to its first cause of action and declares that CIC is obligated to indemnify plaintiffs with respect to the legal fees element of the underlying claim.