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Insurer Must Defend and Indemnify Insured Because of Indemnity Agreement in Construction Contract

The Metropolitan Transit Authority and Long Island Railroad (collectively, “LIRR”), and Admiral Insurance Company (“Admiral”), appeal from the March 3, 2020 judgment of the United States District Court for the Southern District of New York (Furman, J.), granting declaratory judgment in favor of Century Surety Company (“Century Surety”) based upon its January 29, 2019 Memorandum Opinion and Order. In Century Surety Company v. Metropolitan Transit Authority, Long Island Railroad, Admiral Insurance Company, Rukh Enterprises, Inc., Marcelo DeJesus, No. 20-1474-cv, United States Court of Appeals, Second Circuit (October 5, 2021) the insurer’s claim that it was excess ignored the indemnity agreement signed by its insured.

FACTS

On April 8, 2013, LIRR contracted with general contractor Defendant Rukh Enterprises, Inc. (“Rukh”) to complete a railroad bridge lead paint removal and repainting project on Metropolitan Transit Authority property-the Cypress Bridge in Queens, NY (the “trade contract”). To execute this project, Rukh hired a non-party subcontractor, East Coast Painting & Maintenance (“East Coast”), to complete certain lead-related work on the project because Rukh was not certified to perform lead-related activities. This project implicated not only the underlying trade contract, but four insurance policies.

On September 13, 2013, an employee of subcontractor East Coast suffered an injury while working on the Cyprus Bridge project, prompting the East Coast employee to sue Rukh and LIRR in New York State court alleging negligence. Rukh, East Coast, and LIRR eventually reached a settlement on December 16, 2019, for which three of the four implicated insurance companies- Admiral (for LIRR), Arch (for Rukh), and Harleysville (for East Coast)-agreed to pay into the settlement amount. Century Surety did not contribute to the settlement and disclaimed all coverage.

On January 27, 2017, Century Surety sued Rukh (its insured), Marcelo DeJesus (the injured employee in the underlying state court action), and LIRR, seeking a declaratory judgment that it had no duty to defend or indemnify any party in the state court action. On April 4, 2017, Admiral sued Century Surety, also seeking a declaratory judgment that Century Surety was obligated to defend and indemnify Admiral’s insured, LIRR, and that the policy limits in Century Surety’s excess policy would have to be exhausted before Admiral’s policy would be implicated. Century Surety moved for summary judgment against Rukh, LIRR, Admiral, and Marcelo DeJesus (who was ultimately dismissed as a party in the district court action for failure to serve). LIRR, Admiral, and Rukh cross-moved for summary judgment.

The district court granted summary judgment in part in favor of Century Surety. The district court concluded that based upon the language contained in the “Other Insurance” provision in the Century Surety policy, that policy was a “true excess policy” that was not liable to tender payment until the other available insurance policies, including the Admiral policy, had tendered payments pursuant to their policy limits. The district court “granted[] [Century Surety] a declaratory judgment that it is not obligated to provide insurance coverage for the Underlying Action” and closed the case.

ANALYSIS

As a threshold matter, Century Surety argued on appeal that the district court correctly concluded that the “Other Insurance” provision in the Century Surety policy qualifies that policy as a “true excess policy,” such that Century Surety is not liable to tender payment until all other applicable insurance policies, including the Admiral policy, are exhausted. Appellants, however, do not dispute Century Surety’s contention that the Century Surety policy is a “true excess policy.” Instead, appellants argue that the district court erred in failing to recognize the legal effect of the indemnity agreement in the underlying trade contract between Rukh and LIRR, under which Rukh agreed to indemnify LIRR for liabilities arising out of the Cyprus Bridge project. According to appellants, regardless of whether the Century Surety policy is a “true excess policy,” the indemnity agreement between Rukh and LIRR controlled and Century Surety must tender payment and exhaust its policy limits ahead of Admiral.

The principal issue on appeal is which relevant contractual term governs-the indemnity agreement in the underlying trade contract between Rukh and LIRR or the “Other Insurance” provision in the Century Surety policy. On the one hand, if the indemnity agreement controls, then Century Surety must pay into the settlement amount and exhaust its policy limits before Admiral pursuant to Rukh’s obligation to indemnify LIRR. On the other, if the “Other Insurance” provision in the Century Surety policy controls, then Admiral must pay into the settlement amount and exhaust its policy limits before Century Surety because the Century Surety policy would be excess to any other applicable insurance policy, including the Admiral policy.

Specifically, even if the contractor’s insurance was excess to the owner’s insurance, the contractor’s insurance would pay first because the owner’s liability still would pass through to the contractor and its insurers. Based on the most recent decisions of New York State’s Appellate Division, the federal court predicted that the New York Court of Appeals would adopt the holdings that an indemnity agreement in the underlying trade contract between insureds governs over the terms of an insurance policy concerning priority of coverage.

Century Surety nevertheless maintains that New York law requires that the terms of an insurance policy regarding priority of coverage always govern over any underlying indemnity agreement between the insureds. Century Surety, however, failed to point to any New York case that would support Century Surety’s understanding of New York law.

The Second Circuit concluded that New York’s highest court would not require a separate action to enforce the parties’ indemnity agreement, and that the parties’ rights and obligations based upon both the terms of the Century Surety policy and the underlying indemnity agreement should be determined in one action.

Finally, the Second Circuit concluded that under New York law, Century Surety, as Rukh’s insurer, is liable to pay into the underlying settlement and exhaust its policy limits before Admiral, LIRR’s insurer.

The Second Circuit reached its conclusion notwithstanding the “Other Insurance” provision in the Century Surety policy that purports to qualify the policy as a “true excess policy” because the indemnity agreement in the underlying trade contract between Rukh and LIRR governs the resolution of this case. Accordingly, the district court erred in granting a declaratory judgment that Century Surety is not obligated to provide insurance coverage for the underlying action. The judgment of the district court was reversed and remanded for further proceedings consistent with its order.

ZALMA OPINION

Other insurance clauses are important contractual terms to allow multiple insurers to decide which insurer is obligated to defend and indemnify the insured and in what order. In this case Century Surety claimed that its “other insurance” clause controlled making it excess to all other insurers while the other insurers, and the Second Circuit, found that the construction contracts’ indemnity agreement controlled before the other insurance clauses came into effect. In the Second Circuit it is important to have insurance and indemnity agreements in every construction contract to control the risk transfer.


© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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