County of Suffolk v. Ironshore Indemnity, Inc. 2020 N.Y. App. Div. Lexis 6336
In 2008 the Long Island Power Authority (“LIPA”) requested proposals for solar power installations in Long Island. EDF Renewable Development and its subsidiary, Eastern Long Island Solar Project, LLC (hereinafter “EDF Companies”) were ultimately selected as the successful bidder. Suffolk County, however, failed to issue the necessary building permits for EDF Companies to complete the project; essentially ending the development.
In December 2012, Suffolk County notified Ironshore and Lexington of a potential claim by the EDF Companies. Ironshore and Lexington had issued excess insurance policies above the County’s self-insured retention. In January 2013 Ironshore purported to disclaim coverage for the potential claim. Lexington acknowledged notice in January 2013 but did not issue a disclaimer.
Approximately six months later, EDF Companies commenced an action against Suffolk County in the Eastern District of New York seeking damages from breach of contract. Notice of the lawsuit was sent to Ironshore on June 19, 2013. Ironshore subsequently issued a second disclaimer on December 10, 2013, with Lexington issuing a disclaimer on November 14, 2014.
After a non-jury trial, the Eastern District awarded damages in excess of $10 million to EDF Companies. The County then commenced this declaratory judgement action – seeking a declaration that Ironshore and Lexington were required to indemnify the County for the resulting judgment. Ironshore and Lexington moved for summary judgment – seeking a declaration that no coverage was owed under the respective policies.
Initially, the court noted that the contract exclusions in the respective policies would have acted to eliminate coverage for the underlying action, with the Second Department stating:
Here, the subject loss sounded in contract, and the Eastern District awarded damages on that basis. In addition, there is no ambiguity in the language of Ironshore’s policy excluding, inter alia, coverage for “breach of any contract”. Accordingly, if Ironshore and Lexington issued timely disclaimers, this exclusion defeats coverage.
However, the court’s analysis did not end there. Instead, the court noted that while the strict requirements of a disclaimer under Insurance Law §3420(d) did not apply, the principle of estoppel could nonetheless act to bar an insurer from denying coverage. The court went on to hold that the insurers here failed to sustain their respective burdens of proofs to establish that they neither waived the contract exclusion, nor did they induce the County to detrimentally rely on their failure to invoke that provision.
Since the insurers did not sustain this initial burden of proof, the Second Department reversed the award of summary judgment in favor of the insurers which had been granted by the trial court. Concurrently, the court concluded that Suffolk County did not establish its entitlement to summary judgment.
In futuro: Generally, insurers are very cautious, and rightly so, about issuing disclaimers in compliance with Insurance Law §3420(d) in the context of bodily injury claims. While this concern is fully appropriate given the consequences of failing to abide by the requirements of the statute, the fact that a claim is outside the scope of the statute should not permit an insurer to issue a disclaimer with less efficiency. In general, an insurer is always in a better position when it can demonstrate a timely response to a tender or claim and does not have to explain it away.
What is troubling about the court’s decision, however, is that the court placed the burden of proof to establish a lack of detrimental reliance upon the insurers. In practical effect, the court is requiring insurers to prove what the insured believed, or did not believe, about the existence of coverage. This decision certainly raises the burden of proof upon any insurer in a similar position going forward. Proving the lack of detrimental reliance is (now) an affirmative requirement, as opposed to responding to the insured’s contention in reply papers.