HNRK Coverage Corner

On January 31, 2018, Judge Spatt of the EDNY issued a decision in Striker Sheet Metal II Corp. v. Harleysville Ins. Co. of N.Y., Case No. 16-cv-5916 (ADS)(AYS), holding that an insurance company was relieved of its duty to defend where “extrinsic evidence” (including an email from the insured in response to questions from the insurer) demonstrated conclusively that the accident at issue was excluded from coverage.

In Striker Sheet Metal an employee of the insured company was injured while in the process of unloading HVAC ductwork from the insured's truck and delivering it to a construction site. The policy at issue excluded coverage for any “bodily injury” “arising out of” the “use” of “any ‘auto’,” owned by the insured, and defined “use” to include the “handling of property . . . [w]hile it is being moved from an . . . ‘auto’ to the place where it is finally delivered.” The complaint in the employee’s personal injury suit was “largely devoid of any of the specific factual circumstances surrounding the incident” and made “no mention that he was in the process of delivering HVAC ductwork when he was injured.” However, in written responses to questions from the insurance company, the insured employer stated that the injury occurred while the employee was “unloading the truck,” which was owned by the insured. Although the undisputed facts triggered an exclusion to coverage, the insured argued that the duty to defend was governed solely by the allegations in the complaint, which did not plead these facts.

Judge Spatt disagreed, explaining:

New York State law recognizes a narrow exception to the duty to defend, which permits a disclaimer of defense prior to litigation or a withdrawal during the course of litigation, if extrinsic evidence to the complaint or insurance policy is unrelated to the merits of the plaintiff’s action and plainly takes the case outside the policy coverage. . . . The insurer is only relieved of the duty to defend where the extrinsic evidence offered allows a court to eliminate the possibility that the insured’s conduct falls within the coverage of the policy. . . .

Judge Spatt acknowledged “that the precise delineations of the use of extrinsic evidence to prevent an insurer from exercising its duty to defend are unclear under New York law.” One important limitation, however, is that the extrinsic evidence must be “unrelated to the merits” of the case for which the insured seeks defense coverage. City of N.Y. v. Liberty Mut. Ins. Co., 2017 WL 4386363, at *13 (S.D.N.Y. Sept. 28, 2017); see also National Union First Ins. Co. v. Xerox Corp., 6 Misc. 3d 763, 776 (Sup. Ct. N.Y. Co. 2004) (dismissing insurer’s declaratory judgment action where facts relevant to coverage defenses “will likely be fully determined in the context of the various securities actions”); Nationwide Mutual Ins. Co. v. Dennis, 14 A.D.2d 188, 189 (3d Dep’t 1961) (“the policy in this State has been to deny the [insurer’s] declaratory judgment where the matter in dispute can be determined in the [underlying] action”). Judge Spatt concluded it was appropriate in this case to consider “extrinsic evidence, from the insured,” which (1) was “wholly irrelevant to the principal merits of the Underlying Action,” and (2) “conclusively establishes that [there is] no possible factual or legal basis on which Harleysville might eventually be obligated to indemnify its insured under any policy provision.” This decision illustrates that an insured’s communications with the insurer in the claims handling process can have a significant impact on the availability of coverage. Insureds are, therefore, well advised to seek the advice of coverage counsel early in the process.