United States: New York Trial Court Finds Lexington Has No Duty To Provide Coverage For Damages Stemming From An Insured's Knowing And Intentional Conduct

Last Updated: April 17 2018
Article by Rob DiUbaldo and Nora A. Valenza-Frost

Under New York law, the requirement of a fortuitous loss is a necessary element for coverage to exist under a liability insurance policy. New York law is also clear that there can be no "Wrongful Act" within the meaning of a policy's Errors & Omissions (E&O) coverage where an insured acts in an intended manner and intends the result of those actions.

Applying these principles, the Supreme Court of the State of New York, Suffolk County, recently granted summary judgment to Carlton Fields' client, Lexington Insurance Company ("Lexington"), in a suit brought by its insured seeking coverage for damages stemming from the insured's breach of a lease agreement with a third-party. The court held that the insured's knowing and intentional breach of the lease could not be construed as a "Wrongful Act" implicating the E&O coverage part of the Lexington excess policy at issue, nor were the damages awarded against the insured due to the breach the result of a "fortuitous event," as required by New York law. In addition, the court found the Lexington policy's breach of contract exclusion further operated to bar coverage for the insured's claim, and that Lexington's coverage disclaimer was valid, despite challenges by the insured to the contrary.

The Underlying Action

The County of Suffolk (the "County") entered into several lease agreements with EDF Renewable Development, Inc. (EDF) for the installation and operation of solar carport facilities at various County-owned properties. While the County initially complied with its obligations under the lease agreements for several of the properties, it ultimately reversed course and refused to honor the lease agreement for the final carport facility at the Ronkonkoma site.

EDF brought suit against the County in the U.S. District Court for the Eastern District of New York, seeking monetary damages and asserting causes of action for breach of the lease agreement, promissory estoppel/justifiable reliance and breach of the covenant of good faith and fair dealing. EDF prevailed at trial, as the district court found the County knowingly and intentionally breached the lease agreement, and that EDF was entitled to damages as a result. A final judgment was awarded in EDF's favor in the amount of $10,884,225.70. The County appealed the decision to the U.S. Court of Appeals for the Second Circuit, which affirmed the district court's ruling.

During the period relevant to the underlying EDF action, the County was insured by a tower of excess insurance that attached above a $3 million self-insured retention. The first layer excess insurer was Ironshore Indemnity, Inc. ("Ironshore"), the second layer insurer was Lexington, the third layer of insurance was also provided by Ironshore, and the fourth layer by Starr Indemnity & Liability Company ("Starr"). The County sought coverage from these insurers for the underlying EDF action, and each insurer disclaimed coverage for various reasons.

The Declaratory Judgment Action and Trial Court's Decision in Lexington's Favor

The County subsequently brought a declaratory judgment action against each of the insurers in the relevant tower, seeking coverage for the judgment awarded against it in the underlying EDF action. Both the County and the insurers moved for summary judgment on the disputed coverage issues. In a decision and order dated March 28, the trial court ruled in favor of Lexington and the other insurer-defendants on each of the issues.

First, the court rejected the County's argument that the underlying EDF action fell within the scope of the Lexington policy's E&O coverage part, which only applied to a "Wrongful Act" committed by the County. "Wrongful Act" was defined as "any actual or alleged negligent act, error or misstatement, omission, or breach of duty." The court agreed with Lexington that this provision was not implicated because, as recognized by the both the district court and Second Circuit in the underlying action, the damages awarded against the County in the underlying EDF action were the result of the County's knowing and intentional breach of the lease agreement for the Ronkonkoma site. Accordingly, there was no "actual or alleged negligent act, error or misstatement, omission, or breach of duty" committed by the County in this regard, as required to constitute a "Wrongful Act" under the policy's plain terms and New York law.1

Next, the court agreed with Lexington and the other insurer-defendants that the underlying EDF action did not involve a "fortuitous loss," as required for coverage to exist under New York insurance law and policy. Specifically, the court found that the damages awarded to EDF were a direct consequence of the County's affirmative decision to breach the operative lease agreement, rather than the result of an accident, occurrence, or other fortuitous event. The "fortuity" requirement is a necessary element for coverage to exist under liability insurance policies and applies as a matter of public policy, irrespective of a specific policy terms. New York courts have defined a "fortuitous event" as "any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party" or an event "happening by chance or accident." Here, the County made the decision not to go forward with its contractual obligations under the lease agreement and to cease all efforts to cooperate with EDF with respect to the Ronkonkoma site. Thus, the court found that the County's decision was neither an "accident" nor an "occurrence," but rather a deliberate choice to breach the lease agreement, with the resulting damages the direct (and expected) consequence of that breach. As such, the County could not meet its burden of proving the claims alleged in the underlying action, and damages awarded to EDF, were the result of a fortuitous event.

Further, even if the E&O insuring agreement was satisfied, and the underlying EDF action involved the requisite "fortuity," the court agreed with Lexington and other insurer-defendants that the relevant breach of contract exclusion barred coverage for the County's claim. The breach of contract exclusion provided that Lexington had no obligation to "make any payment for or defend the [County] with respect to any [lawsuit] or matter" to which the insurance otherwise applied "based upon, resulting from, arising out of, in consequence of, or in any way involving or in connection with, directly or indirectly" the "actual or alleged failure to perform or breach of any contract, agreement or other guarantee or promise." The district court found that the County breached the lease agreement, and awarded EDF damages for that breach – a ruling the Second Circuit affirmed. No damages were awarded for anything other than the County's breach of contract. Thus, the only amounts the County sought to recover under the policies were based upon, arose from, were the result of, and were directly connected with its decision to breach the lease agreement, and thus were barred from coverage by the breach of contract exclusion.  

Last, the court rejected the County's argument that challenged the validity of the coverage disclaimers issued by Lexington and other insurer-defendants. With respect to Lexington, the court found it had no obligation to issue a disclaimer because the underlying EDF action fell outside the scope of its policy's insuring clause and that coverage could not be created by waiver and estoppel under the facts of the case.

Footnotes

1 Lexington also argued the underlying EDF action did not fall within the scope of the other insuring agreements in its policy, as EDF's complaint did not allege or involve: bodily injury; property damage; personal injury or advertising injury; an employment practices wrongful act; or an employee benefit wrongful act, as those terms were defined. The County did not challenge Lexington's position in this regard.

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