Risk Transfer, Employer Liability and Grave Injuries: Who Is Going to Pay?
There are four basic causes of action involved in pursuing risk transfer. Two based upon contractual requirements which are known as Contractual Indemnification and Insurance Procurement, and two based upon the common law: Common Law Indemnification and Contribution. Typically we see these causes of action exploited in New York Labor Law cases, but they are used whenever multiple tortfeasors or service providers are involved in personal injury actions. While this paper will discuss these four causes of action in general, it will primarily focus upon employer liability and the priority of coverage when a ‘grave injury’ is alleged.
A. Contractual Indemnification
Where parties such as a general contractor and subcontractor enter into a contract, it usually contains a provision that requires the subcontractor to defend, indemnify and hold harmless the general contractor and owner of the project. See, Levine v. Shell Oil Co., 28 N.Y.2d 205 (1971). The Court of Appeals has held, “A party is entitled to full contractual indemnification [for damages incurred in a personal injury suit] provided that the ‘intention to indemnify can be clearly implied from the language and purposes of the entire agreement and the surrounding facts and circumstances.’” (citations omitted) Drzewinski v. Atlantic Scaffold & Ladder Co., 70 N.Y.2d 774, 777 (1987). The following indemnification clause, or some variation thereof is found in most contracts:
To the fullest extent permitted by law, service provider shall indemnify and hold harmless the owner, their agents, assigns, officers, and employees from and against any claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from the performance of the work, provided that such claim, damage, loss or expense is attributable to bodily injury, death, sickness, disease or destruction of tangible property . . .
- Limitations and Extent of Contractual Indemnification
In New York, construction agreements indemnifying a party for their own negligence are deemed void as against public policy. N.Y. Gen. Ob. Law § 5-322.1 provides an indemnification provision is overly broad and voidable if it seeks to indemnify a party for its own negligence. However, an indemnification provision is still enforceable even if it does violate the General Obligations Law on its face if the party seeking indemnification can show they were free of negligence and the party whom they are seeking indemnification from was negligent. Brown v. Two Exchange Plaza Partners, 76 N.Y.2d 172 (1990); Itri Brick & Concrete Corp. v. Aetna Cas. & Sur. Co., 89 N.Y.2d 786 (1997).
New York Courts also allow for partial indemnification, where the provision contemplates same by including what is commonly known as a “Savings Clause.” The phrase, “To the fullest extent permitted by law,” has been held to create partial indemnification in cases where the indemnification provision violates the General Obligations Law. See Brooks v. Judlau Contracting, Inc., 11 N.Y.3d 204 (2008). In these cases, the party that has the indemnification obligation is required to provide indemnification for their percentage of negligence. From a practical perspective, a court may award conditional indemnification to a party via summary judgment, but then an apportionment of liability is required at the time of trial to determine the percentage of each party’s respective negligence.
The sample indemnification provision provided above requires the indemnification obligation when the accident or injury “arises out of the contractors work.” This is commonly known as “triggering language” and its wording applies different standards as to when the obligation to indemnify is activated. For example, when an indemnification provision has “arising out of” language, the standard is much easier to satisfy because the indemnity provision is broad-based. Such a provision merely requires a showing that the accident or injury arose out of the party’s work on the premises or project. A much more difficult standard is applicable when the language contains a negligence trigger such as “arises out of the performance of the work but only to the extent caused in whole, or in part, by the negligent act or omission of the service provider.” In such a case, the obligation to indemnify is not triggered until there has been a finding that the party that owes indemnification has been found negligent. Antoniak v. P.S. Marcato Elevator Co., 144 A.D.3d 407 (1st Dep’t 2016) (trial court erred in not granting a conditional order of contractual indemnity). In practice, a party seeking indemnification would move the court for an order of conditional indemnification, where the court would find the provision was applicable and triggered but the obligation to indemnify does not occur until a jury has found the indemnifying party negligent. Purcell v. Metlife Inc., 108 A.D.3d 431 (1st Dep’t 2013).
B. Insurance Procurement AKA the Paper Tiger
We often find that contracts will require one party to secure coverage for another naming the party as an additional insured on their policy of insurance. It should be noted that the duty to procure insurance and defend and indemnify under an insurance policy is completely separate and apart from duties under an insurance procurement provision. See Kinney v. Lisk, 76 N.Y.2d 215 (1990). Further the indemnifying party’s obligations under an indemnification provision are always broader than the obligations under an insurance policy. Put another way, the obligations under an indemnification provision are not limited to such things as policy exclusions or policy limits.
The question then becomes what happens when such a provision exists in the applicable contract, but either the adverse party’s insurance carrier does not provide coverage or the adverse party simply did not secure the required coverage? The cause of action asserted is based upon a breach of contract for failing to procure insurance. Such a claim was traditionally known as a Kinney claim based upon the case Kinney v. Lisk, 76 N.Y.2d 215 (1990), which provided that the breaching party was obligated to provide a full measure of contract damages to the party that was to be named as additional insured. Essentially, the breaching party stood in the shoes of the absent insurer and was liable for all damages including attorney fees and costs incurred defending against the plaintiff’s action. However, that measure of damages changed drastically in 2001 when the Court of Appeals decided Inchaustegui v. 666 5th Avenue Ltd. Partnership, 96 N.Y.2d 111 (2001).
Under the Inchaustegui standard, the measure of damages changed considerably and rendered these types of claims very weak. The current measure of damages in an insurance procurement claim varies depending upon whether the party seeking insurance has their own coverage. In instances where the non-breaching party has their own insurance policy the court will only award the damages which are not covered by that policy, which is, among other things, the premiums paid for coverage and the increased future premiums. The rationale behind this measure is based upon the idea that the party seeking additional insured status secured their own coverage and as a result it is insulated from the bulk of damages caused by the accident. Where the non-breaching party that is seeking coverage does not have their own insurance policy the measure of damages returns to those set forth in Kinney.
A cause of action sounding in contribution is based upon Article 14 of the CPLR, and seeks a determination that another tortfeasor bears some proportionate share of liability in a given personal injury matter. A claim for contribution lies where the tortfeasor who is being sued owes a duty directly to the injured plaintiff or where they owe a duty to the party asserting a cause of action. CPLR §1401; See Also Dole v. Dow Chemical Co., 30 N.Y.2d 143 (1972). The amount of contribution to which a defendant is entitled is the excess paid by it over and above their equitable share of the judgment recovered by the equitable party. CPLR § 1402. Further, the equitable shares are determined in accordance with the relative culpability of each person liable for contribution. CPLR§ 1402. It should be noted that claims for contribution are subject to the limitations set forth in Article 16 of the CPLR. More specifically, the general rule between tortfeasors allows for a plaintiff to recover the total amount of any verdict from a tortfeasor who is 51-percent or more negligent, and leave that tortfeasor to collect the proportionate shares from its co-tortfeasors. Under the limitations set forth in CPLR §1603, certain exceptions to this rule exist which allow the plaintiff to collect a full judgement from a tortfeasor who is just 1-percent liable. It should be noted that two of the most common personal injury cases we deal with (motor vehicle accidents and Labor Law claims) both fall into the exception category.
D. Common Law Indemnification
Where a party is legally compelled to pay damages to an injured party for the wrongful conduct of another, a cause of action arises in favor of the paying party against the actual wrongdoer for indemnification. See, Margolin v. New York Life Ins. Co., 32 N.Y.2d 149 (1973). “Common-law indemnification is generally available in favor of one who is held responsible solely by operation of law because of his relation to the actual wrongdoer.” McCarthy v. Turner Constr., Inc., 17 N.Y.3d 369, 375 (2011) (internal quotation marks and citation omitted).
Common-law indemnity is available from a party whose negligence caused plaintiff’s injuries, but the claim may only be asserted by a party whose role in causing plaintiff’s injury was solely passive, and thus is only vicariously liable, (see, Hawthorne v. South Bronx Community Corp., 78 N.Y.2d 433 (1991); Balladares v. Southgate Owners Corp., 40 A.D.3d 667, 671 (2d Dep’t 2007)), or whose liability is predicated solely on a statutory obligation (see, Bell v. Bengomo Realty, Inc., 36 A.D.3d 479, 481 (1st Dep’t 2007)). “The key element of a common-law cause of action for indemnification is not a duty running from the indemnitor to the injured party, but rather is a separate duty owed the indemnitee by the indemnitor.” Raquet v. Braun, 90 N.Y.2d 177, 183 (1997). Implied indemnity is predicated upon “vicarious liability without actual fault.” Edge Mgmt. Consulting, Inc. v. Blank, 25 A.D.3d 364 (1st Dep’t 2006).
E. The Workers’ Compensation Bar
Before 1996, there were few, if any, limitations on third-party (impleader) actions against an injured worker’s employer. Employers could be sued under theories such as contractual indemnification, common-law indemnification, contribution, and breach of contract for the failure to procure insurance. However, 1996 saw a dramatic shift in impleader litigation in New York with the passing of the Workers’ Compensation Reform Act. While third-party claims based upon contract remained, third-party claims for common-law indemnification and contribution were barred with few exceptions. One such exception is where a plaintiff is deemed to have suffered a “grave injury.”
The law substantially curtails the rights of a third-party tortfeasor, who is sued by an employee, to commence a third-party action against the employer as illustrated in Dole v. Dow Chemical Co., 30 N.Y.2d 143 (1972) and codified in CPLR Article 14. See, Castro v. United Container Machinery Group, Inc., 96 N.Y.2d 398 (2001). The law shielding employers from third-party actions is not available to employers who have not secured workers’ compensation coverage for the injured worker. See, Boles v. Dormer Giant, Inc., 4 N.Y.3d 235 (2005). The only determination to be made is whether the injury falls within the statute’s objective requirements. See, Castro, supra.
CPLR § 1602(4) addresses the issue of limitation of liability, when an employee injured while at work, sues someone other than the employer. See, Workers’ Compensation Law § 29. Such a defendant can implead the employer and obtain contribution provided the employee sustained a “grave injury.” See CPLR Article 14; Workers’ Compensation Law § 11; Dole v. Dow Chemical Co., 30 N.Y.2d 143 (1972). Under CPLR § 1602(4), where a defendant can establish that the plaintiff has sustained a “grave injury” as defined in Workers’ Compensation Law § 11, CPLR Article 16 will not apply “to the extent of the equitable share” of the employer. As a result, in such cases, a defendant remains fully liable to plaintiff for all economic and non-economic loss caused by the defendant and the employer, and apportionment will be made between defendant and the employer only for contribution purposes. Under CPLR Article 16, where the employer is found to be 50-percent or less culpable for the plaintiff’s injuries, the defendant’s recovery against the employer is limited to the employer’s proportionate share of the plaintiff’s non-economic loss. See, Frank v. Meadowlakes Dev. Corp., 6 N.Y.3d 687 (2006).
F. The Grave Injury Exception
Under the 1996 law, for third-party claims based on common-law indemnification or contribution to survive against an employer, the injured employee must have suffered a “grave injury” within the meaning of the Workers’ Compensation Law § 11. See, Majewski v. Broadalbin-Perth Cent. Sch. Dist., 91 N.Y.2d 577 (1998). A “grave injury” is a statutorily-defined threshold for catastrophic injuries and includes only those injuries that are listed in the statute and determined to be permanent. See, Blackburn v. Wysong & Miles Co., 11 A.D.3d 421 (2d Dep’t 2004). In other words, injuries qualifying as “grave” are narrowly defined in § 11. See, Castro v. United Container Mach. Group, Inc., 96 N.Y.2d 398 (2001). Workers’ Compensation Law § 11 provides that only certain, specified injuries will qualify as “grave”:
An employer shall not be liable for contribution or indemnity to any third person based upon liability for injuries sustained by an employee acting within the scope of his or her employment for such employer unless such third person proves through competent medical evidence that such employee has sustained a grave injury which shall mean only one or more of the following: death, permanent and total loss of use or amputation of an arm, leg, hand or foot, loss of multiple fingers, loss of multiple toes, paraplegia or quadriplegia, total and permanent blindness, total and permanent deafness, loss of nose, loss of ear, permanent and severe facial disfigurement, loss of an index finger or an acquired injury to the brain caused by an external physical force resulting in permanent total disability.
Section 11 was enacted in 1996 as part of a comprehensive reform intended to reduce costs for employers while also protecting the interests of injured workers. See, Omnibus Workers’ Compensation Reform Act of 1996, L 1996, ch 635; Governor’s Approval Mem, Bill Jacket, L 1996, ch 635, at 54, 1996 NY Legis Ann, at 459. Central to the reform was immunity from tort liability for employers who provide workers’ compensation coverage by exposing employers to third-party liability “only in cases involving narrowly defined ‘grave’ injuries.” See, Governor’s Approval Mem, Bill Jacket at 55, 1996 NY Legis Ann, at 460.
G.Often Litigated Grave Injury Categories
While most of the categories that are ‘grave’ as defined above are objective, two categories are often litigated because they are open to interpretation. The first category is facial disfigurement. How disfigured does someone’s face need to be for the injury to be grave? The second category is “an acquired injury to the brain caused by an external physical force resulting in permanent total disability.” These two categories of injury are often litigated because they are amorphous. However, the courts have given us guidance on how to define those categories.
- Permanent and Severe Facial Disfigurement
What constitutes “permanent and severe facial disfigurement” is unlike most of the other enumerated “grave” injuries, which are amenable to “objectively ascertainable” determinations as a matter of law. Generally, courts have been able to conclusively say, one way or the other, whether an injury is or is not so “severe” for Workers’ Compensation Law § 11 purposes. However, these determinations have been rendered without the aid of a reliable, fairly predictable legal guidepost. “Severe” is variously defined as something causing sharp discomfort or distress, or something extremely intense, as in severe pain; something of a great degree or an undesirable or harmful extent. Fleming v. Graham, 10 N.Y.3d 296 (2008). Plainly, the specification of “severe” in Workers’ Compensation Law § 11 points to the greater end of the disfigurement spectrum. Id. This needs to be combined with “disfigurement,” which the court defined as that which impairs or injures the beauty, symmetry, or appearance of a person or thing; that which renders unsightly, misshapen, or imperfect or deforms in some manner. Id. A disfigurement is severe if a reasonable person viewing the plaintiff’s face in its altered state would regard the condition as abhorrently distressing, highly objectionable, shocking, or extremely unsightly. Id. In finding that a disfigurement is severe, plaintiff’s injury must greatly alter the appearance of the face from its appearance before the accident. Fleming v. Graham, 10 N.Y.3d 296 (2008). The foregoing standard, ordinarily one for the court as a matter of law, removes the inquiry from plaintiff’s subjective self-assessment and most closely approximates what the Legislature contemplated. Id.
- An Acquired Injury to the Brain Caused by an External Physical Force Resulting in Permanent Total Disability
Often times we see a plaintiff who has suffered significant orthopedic and soft tissue injuries, but also has suffered a traumatic brain injury. These types of claims are coupled with a claim that the injured plaintiff cannot return to work. This begs the question, “is the person’s inability to return to work stemming from the brain injury or something else?” Also, “What extent of work disability is required?”
As an initial matter, expert testimony will be needed to determine the nature and extent of the brain injury as well as the extent of the disability. This places the party seeking to prosecute such a claim in a precarious position. The defendant seeking to establish a traumatic brain injury which causes the injured plaintiff to be unemployable is essentially conceding the fact that the plaintiff has a brain injury and can never return to work. Further, the defendant’s position is telegraphed rather early on in the case since defense medical experts need to render their opinions shortly after their exams. The reasoning behind taking such a position becomes obviated below in our discussions on the unlimited amount of available coverage from an employer’s liability policy. Typically we see a defendant pursue a Grave Injury claim under this theory when a plaintiff has suffered very severe injuries and the target defendant does not have enough insurance proceeds available to cover a potential verdict.
The Appellate Division, First Department addressed this issue in Anton v. West Manor Constr. Corp., 100 A.D.3d 523 (1st Dep’t 2012). In Anton, the injured plaintiff’s employer established that the plaintiff did not sustain a grave injury within the meaning of § 11. Id. The Appellate Division noted that the plaintiff’s bill of particulars, deposition testimony, medical records, and the independent medical examination reports showed that while the plaintiff may have been unable for a time to work in his chosen profession, his disability was caused by his neck and shoulder injuries, not by “an acquired injury to the brain”—the only potentially applicable category of grave injury under Workers’ Compensation Law § 11. Id. The Appellate Division ruled that the daily headaches and frustrating loss of focus from which the plaintiff testified he suffered did not satisfy the acquired brain injury standard. Id.
The seminal case on the extent of disability required is Rubeis v. Acquaclub Inc., 3 N.Y.3d 408 (2004). In Rubeis, the Court of Appeals addressed this split on the issue of a TBI and grave injury and pointed out that the definition of “permanent total disability” within § 11 had divided the Appellate Divisions. Id., 3 N.Y.3d at 416. The court bluntly recounted that the appeals “in fact place before us two possible definitions of permanent total disability: the Second Department’s standard essentially requiring a vegetative state, and the Third and Fourth Departments’ standard essentially requiring unemployability.” Id., at 416-17. In reaching its conclusion, the court focused on the ability to work, and noted that under the Workers’ Compensation Law, the term “disability” generally referred to the inability to work. Id., at 417. The court then concluded “we make clear that the test we adopt for permanent total disability under section 11 is one of unemployability in any capacity. ‘In any capacity’ is in keeping with legislative intent and sets a more objectively ascertainable test than equivalent, or competitive, employment.” Id.
The First Department in Mendez v. Union Theol. Seminary in City of N.Y., 26 A.D.3d 260 (1st Dep’t 2006) ruled that a TBI resulted in a worker being unemployable in any capacity, and met Rubeis standard. In Mendez, the Appellate Division concluded that the issue of “whether plaintiff had been rendered incapable of employment in any capacity” should go to the jury. Id., 26 A.D.3d at 260. Indeed, the Appellate Division noted plaintiff “suffered brain injury resulting in permanent disabilities, including memory loss, diminished intellect and traumatic seizure disorder. They also agreed that in consequence of his injuries the plaintiff is unable to care for himself, or independently perform his daily life activities, and requires a full-time home health care aide.” Id.
In Galindo v. Dorchester Tower Condo., 56 A.D.3d 285 (1st Dep’t 2008), the Appellate Division, First Department concluded that plaintiff’s employer failed to prove he did not suffer a “grave injury” under § 11. Id., 56 A.D.3d at 286. According to the Appellate Division, the employer relied upon the report of its expert who opined that “[w]ith continued improvement,” the plaintiff “may eventually” be a candidate for a TBI work program. Id. But this expert also stated the plaintiff was unemployable at that time. Id.
In Tzic v. Kasampas, 93 A.D.3d 438 (1st Dep’t 2012), a grave injury was found where the plaintiff had no orientation to place and time, was the subject of a court-ordered guardianship, required 24-hour-a-day supervision and the care of a nursing facility, and, due to his cognitive impairments, was not capable of giving any testimony, whatsoever, in the action.
H. Commercial General Liability Policies and Workers’ Compensation 1(b) Coverage
While the underlying case is being litigated, and issues concerning whether a plaintiff suffered a grave injury or not are being contemplated, these cases often pose other obstacles as well form an insurance perspective. Questions of whether carriers will accept tenders of defense and/or indemnification based on contractual indemnification or additional insured status may become a concern. Further, if a grave injury is involved, additional questions regarding whether a Workers’ Compensation’s 1(b) coverage will be implicated also may add to the puzzle. Disputes over priority of coverage can also prove to be costly.
As a practitioner and when speaking with insurance carriers, at times, lawyers and carriers will confuse the principles of contractual indemnification and additional insured status. In the construction setting, subcontractors will likely agree to both contractually indemnify a general contractor and owner, as well as agree to procure insurance for them and name them as an additional insured. While carriers may focus on additional insured status to analyze whether it should defend and/or indemnify, contractual-indemnification language can also be used to force a carrier’s hand. If a third-party subcontractor is facing liability in a law suit brought because of a construction accident, it may be better to control the defense at the outset and address coverage issues separately.
Often, questions of priority of coverage will arise as well; that is, will a policy act as primary, or will there be an equal or pro rata sharing of a defense and indemnity. These issues become slightly more complex when the Workers’ Compensation 1 (b) is involved.
I. Declaratory Judgment and Priority of Coverage
Pursuant to N.Y. C.P.L.R. § 3001, “the Supreme Court may render a declaratory judgment having the effect of a final judgment as to the rights and other legal relations of the parties to a justiciable controversy whether or not further relief is or could be claimed… A party who has brought a claim for personal injury or wrongful death against another party may maintain a declaratory judgment action directly against the insurer of such other party…” A party seeking a declaratory judgment must have standing to sue, meaning, “the plaintiff’s personal or property rights will be directly and specifically affected.” Wein v. New York, 47 A.D.2d 367, 370 (1st Dep’t 1975). An action for a declaratory judgment “requires an actual controversy between genuine disputants with a stake in the outcome, and may not be used as a vehicle for an advisory opinion.” Long Is. Light. Co. v. Allianz Underwriters Ins. Co., 35 A.D.3d 253, 253 (1st Dep’t 2006) (internal quotation marks and citation omitted).
Declaratory relief is a judicial remedy often used for determining priority of coverage in insurance disputes. See, e.g., State Farm Fire & Cas. Co. v. LiMauro, 65 N.Y.2d 369, 492 N.Y.S.2d 534; Lumbermens Mut. Cas. Co. v. Allstate Ins. Co., 51 N.Y.2d 651, 435 N.Y.S.2d 953 (1980). A court must review and consider all relevant policies at issue when determining the priority of coverage. BP Air Conditioning Corp. v. One Beacon Ins. Grp., 8 N.Y.3d 708, 716, 840 N.Y.S.2d 302, 307, 871 N.E.2d 1128, 1133. In examining priority of coverage, one must remember that “an insurer’s duty to defend its insured is exceedingly broad” (Regal Constr. Corp. v National Union Fire Ins. Co. of Pittsburgh, Pa., 15 N.Y.3d 34, 37, 904 N.Y.S.2d 338 ), and “is broader than the duty to indemnify” (Fieldston Prop. Owners Assn., Inc. v Hermitage Ins. Co., Inc., 16 N.Y.3d 257, 264, 920 N.Y.S.2d 763 ). “If a complaint contains any facts or allegations which bring the claim even potentially within the protection purchased, the insurer is obligated to defend” (Regal. Constr. Corp., 15 N.Y.3d at 37). The “exceedingly broad” duty to defend “applies equally to additional insureds and named insureds” (Id. at 37).
To determine the priority of coverage among different policies, a ‘court must review and consider all of the relevant policies at issue’ (see Paramount Ins. Co. v. Fed. Ins. Co., 174 A.D.3d 476, 477, 106 N.Y.S.3d 300 [1st Dept. 2019]). Where several policies cover the same risk and provide the same level of coverage, it is necessary to compare their “other insurance” clauses to determine priority of coverage. (See Sport Rock Intl., Inc.v. Am. Cas. Co. of Reading, 65 A.D.3d 12, 878 N.Y.S.2d 339 (1st Dept. 2009).
In examining the “other insurance clauses,” one must determine if the provisions are the same or if one is an excess clause. See, Flintlock Construction Serv. LLC v. Technology Ins. Co., 2019 N.Y. Misc. LEXIS 649 (Sct NY Cnty 2/15/19). If a clause provides where other primary insurance is available, we will share with that other insurance, the decision as to how priority of coverage is applied is simple. Equally, where a clause provides “this insurance is excess of such other and collectible insurance,” the decision is made easier.
“Where one of two concurrently applicable insurance policies contains an excess ‘other insurance’ clause and the other contains a pro rata ‘other insurance’ clause, the excess clause is given effect, meaning that the coverage under the policy containing the excess clause does not come into play, and the carrier’s duty to defend is not triggered, until the coverage under the policy containing the pro rata clause has been exhausted.” (Sport Rock Intl., Inc. v American Cas. Co. of Reading, Pa., 65 A.D3d 12, 878 N.Y.S.2d 339 (1st Dept. 2009). On the other hand, where both policies contain excess “other insurance” clauses, so that if both excess clauses are given effect, the result would leave the insured without any coverage, then the clauses are deemed to cancel each other out, and the insurers must cover the loss on a pro rata basis, as co-primary insurers (see Great N. Ins. Co. v Mount Vernon Fire Ins. Co., 92 N.Y.2d 682, 686-687, 685 N.Y.S.2d 411 (1999).
J. Anti-Subrogation Rules
An insurer’s right of subrogation, long recognized as a matter of equity, has traditionally been applied to claims against third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse. Pa. Gen. Ins. Co. v. Austin Powder Co., 68 N.Y.2d 465, 471, 510 N.Y.S.2d 67, 70 (1986). Under New York law, subrogation “entitles an insurer to stand in the shoes of its insured to seek indemnification.” N. Star Reins. Corp. v. Cont’l Ins. Co., 82 N.Y.2d 281, 294, 604 N.Y.S.2d 510 (1993). However, “an insurer may not be subrogated to a claim against its own insured, at least when the claim arises from an incident for which the insurer’s policy covers that insured.” Pa. Gen. Ins. Co., 68 N.Y.2d at 471. This rule is to “prevent the insurer from passing the incidence of loss to its own insured and to guard against the potential for conflict of interest that may affect the insurer’s incentive to provide a vigorous defense for its insured.” N. Star Reins. Corp., 82 N.Y.2d at 294-95.
Insurers are barred under the anti-subrogation rule from seeking subrogation from a named insured or additional insureds. Subrogation is typically permissible where the third party is not a named or additional insured (See, e.g., Utica Mutual Ins. v. Brooklyn Navy Yard, 52 A.D.3d 821, 861 N.Y.S.2d 724 (2d Dept. 2008). The anti-subrogation rule, therefore, requires a showing that the party the insurer is seeking to enforce its right of subrogation against is its insured, an additional insured, or a party who is intended to be covered by the insurance policy in some other way. The principal element for application of the anti-subrogation rule is that the insurer seeks to enforce its right of subrogation against its own insured, additional insured, or a party intended to be covered by the insurance policy—is absent.
K. Priority of Coverage and Workers’ Compensation 1(b)
When a case involves a “grave injury,” an issue that will always arise is the priority of coverage among the commercial general liability carriers and the employer liability coverage under the Workers’ Compensation coverage 1(b). The CGL carriers will demand the unlimited coverage be first in line; the 1(b) carriers will demand that the CGL carriers’ limits be exhausted before its policy is implicated. Often this dispute is mediated among the parties. The courts have not provided much guidance in this area to assist the practitioner. The First Department, however, may have offered some guidance in Bozquez v. RXR Realty, LLC, 2020 N.Y. Misc. LEXIS 4244 (Sct NYCnty August 8, 2020), aff’d, 195 A.D.3d 536 (1st Dept. 2021).
In Bozquez, the plaintiff, an employee of a subcontractor and third-party defendant, was allegedly injured while working at a project and allegedly suffered a “grave injury.” The plaintiff brought an action against the owner of the project and construction manager asserting Labor Law and negligence claims. The defendants brought a third-party action against the plaintiff’s employer and only asserted common-law contribution and indemnification claims. Both the construction manager and employer were enrolled in a CCIP program (or contractor-controlled insurance program) which provided general liability coverage, gap-filling excess, a lead excess, and a high excess policy. The primary and gap-filling policies covered the enrollees in the CCIP program. The lead and high excess policies only applied in excess of all applicable insurance, including the unlimited 1B coverage. Each contractor was to get their own Workers’ Compensation coverage.
The third-party defendant employer moved to dismiss and asserted that the owner and construction manager could have asserted contractual indemnification claims against the employer that would have been covered by the CCIP and, therefore, were in violation of anti-subrogation rules. The third-party employer also argued that the owner and construction manager omitted the contractual indemnification claims to avoid coverage under the GL policies. The trial court denied the motion and found the anti-subrogation rule was not implicated. In affirming the trial court’s decision, the Appellate Division, First Department has ruled that once the limits of the primary GL policy and gap-filling policy were exhausted, the owner and construction manager could pursue a third-party action against the employer. See, Welcome Clarity: The Priority of Coverage in Construction-Accident Cases, November 14, 2022, ALM/Law.com.
This case may re-enforce the idea, in grave injury cases, that excess policies will not cover the employer when they apply only after the exhaustion of all underlying insurance and where the employer’s 1B coverage is not exhaustible.
The issue between the unlimited 1B coverage and CGL policies, however, remains in flux. Practitioners have been successful in arguing, in grave injury cases, that the 1B carrier and CGL carriers must be co-primary since the 1B picks up for the common-law indemnity and the CGL picks up for the contractual liability claims. These arguments must be asserted on a case-by-case basis.
The use and applicability of the available Risk Transfer Causes of Action are complex to say the least. Often, from a practical perspective, both defense and coverage counsel need to work together for optimum effect. Here at Goldberg Segalla, our attorneys are well-versed at the interplay of these issues.
If you have any questions or concerns, please do not hesitate to reach out to Joseph A. Oliva or Theodore W. Ucinski.