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The Rogak Report: 18 Jan 2006 ** Disclaimers - Equitable Estoppel **

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  • Lawrence Rogak
    Message 1 of 1 , Jan 18, 2006

      Federated Department Stores Inc. v. Twin City Fire Insurance Co.
      (NYLJ 1/19/06) (1st Dept 2006)

      The issue on this appeal was whether a liability insurer's 20-month
      pre-disclaimer defense of an insured without a reservation of rights
      is sufficient to invalidate a disclaimer and force the insurer to
      provide coverage on the basis of equitable estoppel.

      Twin City Fire Insurance Company issued a general liability insurance
      policy to defendant Jones Apparel Group, the parent company of Polo
      Jeans Company, for the period April 1, 1999 to April 1, 2000. The
      coverage question presented by this declaratory judgment action arose
      in the context of an underlying action against plaintiff Federated
      Department Stores, doing business as Macy's, for an accident that
      occurred on April 30, 1999 in a Macy's department store when a
      customer (the plaintiff in that action), attempted to remove a pair
      of Polo brand jeans from a shelf in a Polo Jeans "vendor shop"
      located within the store and was injured when the shelf collapsed
      onto her foot.

      A vendor shop is a small specialty shop within a larger department
      store displaying merchandise furnished solely by the manufacturer or
      distributor of an established brand name. There were a series
      of "arrangements" by Polo Jeans and Jones to install vendor shops in
      Federated stores. According to Federated/Macy's, all of its vendor
      shops were subject to one of three forms of written agreements, each
      requiring that the vendor and/or its contractor procure insurance
      covering Federated/Macy's and indemnify it for any injuries arising
      out of the display.

      Under the Twin City policy issued to Jones, an additional insured is
      defined to include "any person or organization with whom you agreed,
      because of a written contract or agreement or permit, to provide
      insurance such as is afforded under this policy."

      Upon the commencement of the underlying action, Federated/Macy's
      retained the law firm of Lester Schwab Katz & Dwyer to represent it.
      Initially, Lester Schwab mistakenly sent notice of the action to Polo
      Ralph Lauren, which, having no relationship to Polo Jeans, forwarded
      the pleading to Jones with notice to Lester Schwab. The latter, after
      first communicating with Polo Jeans on January 25, 2001, wrote to
      Jones on February 7, 2001, requesting a defense and indemnification
      under its written agreement with Federated/Macy's as well as a copy
      of its liability policy.

      Under the purported Jones/Federated agreement, according to Lester
      Schwab, Jones was required to procure and maintain a liability policy
      naming Federated/Macy's as an additional insured. Jones forwarded the
      summons and complaint in the underlying action to defendant Specialty
      Risk Services (SRS), its claims administrator.

      By letter dated February 12, 2001, SRS, on behalf of Twin City,
      accepted Lester Schwab's tender and, without any reservation of
      rights, agreed "to pay for the defense and indemnification of
      Federated/Macy's, contingent upon your office's cooperation." In the
      same letter, SRS requested copies of all pleadings and significant
      correspondence in Lester Schwab's file, and that it be furnished with
      copies of all future documentation, pleadings and correspondence. It
      also requested that Lester Schwab complete a "litigation strategy and
      budget form." In addition, SRS asked Lester Schwab to remain as
      defense attorneys in the underlying action, to which request the
      latter agreed with the understanding that "all future defense costs
      be billed to SRS for payment by the insurer."

      On March 8, 2001, SRS wrote to Lester Schwab regarding a prior
      conversation about the institution of a third-party action against
      two specified contractors and advised, "Please immediately take the
      appropriate steps to join both of those entities . . . into the
      litigation." As SRS explained, any potential liability should rest
      with the two contractors - the supplier and installer, respectively,
      of the shelves - and not Polo Jeans, which was, according to
      SRS, "merely a passive player in the chain of commerce." Twin City
      continued to provide a defense to Federated/Macy's, and for the next
      year and a half, through SRS, participated in the litigation.

      According to Jones, despite repeated requests, Lester Schwab failed
      to provide SRS with the contracts containing Jones's purported
      agreement to procure insurance coverage for Federated/Macy's. In
      April 2001, Federated provided as evidence of such an agreement a
      copy of an August 18, 1998 letter from Polo Jeans to Macy's detailing
      the responsibilities connected with a store build-out. There is no
      reference in the letter to any insurance procurement obligation or
      indemnification agreement by Jones. On October 2, 2002, Lester Schwab
      forwarded two documents to SRS - a "Letter of Intent for 2000" and a
      second copy of the aforementioned August 18, 1998 letter - apparently
      purporting to evidence the contract between Jones and
      Federated/Macy's. The letter of intent did not contain the agreement

      Noting that it had requested - and Federated had failed to produce -
      the contract requiring Polo to defend and indemnify Federated, Twin
      City, on October 18, 2002, disclaimed coverage and withdrew its
      defense of Federated/Macy's in the underlying action. In subsequent
      correspondence to Lester Schwab supplementing the disclaimer, SRS
      stated, "As you are aware, Twin City responded to the tender on
      February 12, 2001 and agreed to coverage based upon Federated's
      express representations regarding the existence of an agreement
      between Federated and Polo." In addition, the letter stated, "On
      numerous occasions, Twin City has requested that Federated produce a
      copy of the purported agreement referenced in the January 25, 200l
      letter. Despite repeated requests, Federated has failed to produce
      this agreement. Moreover, our insured has been unable to locate any
      agreement and, in fact, is unaware of the existence of any such

      Since the disclaimer, Lester Schwab has continued its representation
      of Federated/Macy's in the underlying action and, on behalf of
      Federated/Macy's, commenced this declaratory action against Twin
      City, SRS and Jones Apparel, asserting that Twin City is estopped
      from denying coverage to Federated/Macy's because it assumed its
      defense without a reservation of rights. The claim against Jones is
      based on its alleged breach of the indemnification provision of the
      purported contract with Federated/Macy's.

      Twin City and SRS, as well as Jones, each moved for summary judgment
      dismissing the complaint. Twin City/SRS sought a declaration that the
      disclaimer was valid. In support of its motion, Jones submitted,
      inter alia, the affidavit of its Director of Business Analysis, who
      conducted a survey of Jones's records and concluded that "there
      exists no agreements that require Jones . . . to defend and/or
      indemnify Federated/Macy's" with respect to the underlying action.
      Federated/Macy's cross-moved for summary judgment declaring that Twin
      City was obliged to defend and indemnify it under the policy issued
      to Jones with respect to the underlying action.

      Supreme Court denied the Twin City/SRS motion and granted the
      Federated/Macy's cross motion, finding that Twin City, having assumed
      Federated's defense without a reservation of rights, was equitably
      estopped from disclaiming coverage, and declaring that Twin City was
      obliged to defend and indemnify Federated/Macy's in the underlying
      action. In concluding that Twin City was equitably estopped from
      disclaiming coverage, the court held that prejudice to an insured may
      be presumed where an insurer assumes the defense and the insured, in
      reliance thereon, loses the right to control its own defense. Twin
      City appealed.

      The Appellate Division reversed.

      "It is well settled that when an insurer defends an action on behalf
      of an insured, in his stead, with knowledge of facts constituting a
      defense to the coverage of the policy, it is thereafter estopped from
      asserting that the policy does not cover the claim. By the same
      token, however, an insurer should not be charged with the obligation
      to reserve its rights against unknown policy defenses."

      "A delay in giving notice of reservation of rights will be excused
      where it is traceable to the insurer's lack of actual or constructive
      knowledge of the available defense, especially where, in addition to
      such lack of knowledge, the insurer is misled by misrepresentations
      into defending the suit. Accordingly, where the insurer does not have
      knowledge of the insured's breach until after the insurer has
      commenced the defense of the action, there is no estoppel through
      delay where the insurer gives prompt notice upon obtaining such

      "Here, there is no evidence in the record that Twin City was aware
      that Federated was not an additional insured under the Jones policy."

      "Insurers are not obligated to speculate about each and every
      conceivable defense to coverage at the time a defense is assumed in
      response to a tender. To impose such a burden would necessarily
      require that every defense of an insured be a conditional one,
      thereby thrusting unnecessary concern as well as initial expense upon
      the insured, i.e., the retention of personal counsel, which, as
      subsequent events might very well show, was unwarranted."

      "Moreover, the imposition of such an obligation would take its toll
      on the insurer as well. In such a case, the insurer would lose
      control of the defense, a vital component of its policy protections,
      that is, the right to control its ultimate liability in any case."

      "At the time Twin City accepted the tender of Federated's defense, it
      did not know, nor could it have known, that Federated was not an
      additional insured under its policy. It had no reason to know that
      Lester Schwab's assertion - that the Jones/Federated contract called
      for additional insured coverage for Federated/Macy's - was incorrect,
      and it was entitled to rely on the representations as to the
      existence of such a contract. The undocumented assertions contained
      in correspondence from a purported insured are sufficient to trigger
      the duty to defend without a corollary duty to investigate."

      "The duty of good faith and fair dealing implied in every contract is
      an integral part of an insurance contract. A policy's cooperation
      clause creates an obligation on the insured to provide correct
      information. Twin City did not have knowledge of facts justifying a
      disclaimer until Lester Schwab, for the second time, provided, as
      evidence of the contract, the patently insufficient August 18, 1998
      letter from Polo Jeans to Macy's. Thus, Twin City learned that no
      contract existed between Federated/Macy's and Jones on or about
      October 2, 2000, after the second failed attempt by Federated/Macy's
      to provide the relevant contract, and promptly disclaimed coverage on
      October l8, 2002."

      "Even were we to accept the argument that Twin City had an obligation
      to reserve its rights when it assumed the defense of the underlying
      action, Federated/Macy's, contrary to Supreme Court's finding, is
      unable to establish a key element of common-law estoppel: prejudice
      caused by Twin City's allegedly belated disclaimer. The purpose of a
      reservation of rights is to prevent an insured's detrimental reliance
      on the defense provided by the insurer. The reservation is a
      sufficient preventative to reliance even if the insurer later
      disclaims on a basis different from the ground originally asserted in
      the reservation of rights."

      "Here, even though no reservation of rights notice was given, SRS
      requested Federated/Macy's to provide a copy of the contract
      requiring Jones to procure insurance coverage for it, prompting
      Federated/Macy's to attempt, unsuccessfully on at least two
      occasions, to provide the purported contract. In fact,
      Federated/Macy's acknowledges on appeal that it has failed to provide
      the relevant contract. Thus, Federated/Macy's was always aware that
      Twin City required, and requested, formal documentation of its
      additional insured status under Twin City's policy, a status wholly
      dependent on the requested contract. Given such a background,
      Federated/Macy's could not have detrimentally relied on Twin City's

      "Moreover, as a general rule, estoppel cannot be used to create
      coverage where none exists."

      "Supreme Court based its finding of estoppel on the erroneous premise
      that because Twin City controlled Federated's defense in the
      underlying action, prejudice is presumed.... Prejudice, however, is
      not uniformly presumed in such circumstances, and estoppel will lie
      only if the insured has demonstrated prejudice by the insurer's
      actions. Prejudice is established only where the insurer's control of
      the defense is such that the character and strategy of the lawsuit
      can no longer be altered."

      "Here, Lester Schwab represented Federated/Macy's before Twin City
      assumed responsibility for the defense. Lester Schwab continued the
      defense under Twin City and remained in control of the defense after
      its disclaimer. Indeed, as noted, even as Lester Schwab prosecutes
      the instant action on Federated/Macy's behalf, it continues the
      defense of the underlying action. Federated/Macy's shows no more than
      Twin City's requesting status reports, paying for a portion of its
      defense and authorizing the commencement of third-party claims to
      attempt to obtain indemnity from other parties - an effort that would
      benefit, not prejudice, Federated/Macy's. There is no showing of Twin
      City's control of the defense to the detriment of Federated/Macy's."

      "Contrary to Federated/Macy's claim, Twin City did not use
      confidential information acquired in its defense of the underlying
      action. Twin City discovered that there was no contract requiring
      Jones to procure liability insurance coverage through correspondence
      with Federated/Macy's, not through its defense of the underlying
      lawsuit. The non-existence of that contract was not a confidential
      matter but, rather, a factual matter Federated/Macy's was bound to
      disclose in order to establish its right to coverage, as well as its
      claim for indemnity against Jones."

      "Nor did Twin City's assumption of Federated/Macy's defense in any
      way prejudice the latter's claim against Jones. Federated/Macy's
      argues that Twin City's defense impeded the assertion of a cross
      claim because of the bar of the antisubrogation rule. That argument
      is meritless. Federated/Macy's contractual indemnification claim
      against Jones was fully litigated with the instant motions and
      dismissed based on the lack of a showing of a contract. There can be
      no claim of prejudice when Federated/Macy's had an opportunity to
      litigate the issue fully and fairly. Moreover, the claim is
      exaggerated. The antisubrogation rule applies only to the policy
      limit of the common policy. Thus, Federated/Macy's could have brought
      a cross claim for a defense and indemnification against Jones for any
      amount over the Twin City policy limit or for any amount covered by a
      separate policy."

      "For all of the foregoing reasons, the Federated/Macy's claim of
      equitable estoppel is without merit."

      Larry Rogak
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