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Appellate Court Unanimously Upholds Exemption for Municipal Insurance Contracts

Wilson Elser received a unanimous decision from the Appellate Division, Second Department, in Hanz Andre v. City of New York, the Metropolitan Transportation Authority (“MTA”) and AIG Claim Services, Inc. (“AIG”), 2008 Slip Op. 00080 and 00081 (A.D. 2d. Dept.  January 8, 2008) reversing a trial court’s decision that a claim services agreement incorporated in an insurance policy procured by a government entity must be competitively bid.  Of significance, for the first time in more than fifty years a New York appellate court addressing competitive bidding requirements for municipal insurance contracts held that such insurance polices were exempt.




Arising out of an action by more than 100 non-union employees of various private bus companies serving Queens and Bronx counties, the plaintiffs sought to enjoin the transfer of the bus routes to the MTA by the City of New York, which had been providing operating subsidies under the Federal Mass Transit Act.   They also brought two critical claims against AIG Claim Service.  First, if under the Federal Mass Transit Act, AIG could be deemed a successor employer required to provided all employees involved in claims administration for the bus companies with new employment; and (2) if a claim services agreement incorporated in various insurance polices obtained by the City for the benefit of the bus companies had been awarded in violation of statutory public bidding requirements.  If the contracts had been found void, AIG could have been required to refund all payments it had received.


At the trial level, and in the face of extensive media coverage, Justice Duane A. Hart in Queens County had initially publicly declared he would keep the buses operating and issued a preliminary injunction barring the city from transferring the operating rights for the bus companies to the MTA.  In so doing, he also declared the claim services agreement void as having been awarded to AIG in complete disregard of public bidding regimens, and ordered that AIG return the several thousand claim files involved.  Wilson Elser immediately then obtained a full stay of that order by the Appellate Department pending resolution of an appeal.


After the appeal had been perfected, Justice Hart, despite the stay being in effect, advised that he intended to consolidate this action with two others involving union employees and would move it to trial shortly.  At that juncture, Wilson Elser obtained a stay of all proceedings.


Decision and Comments


By its decision, the Appellate Court reversed the trial court in all respects.  It held AIG’s motion for summary judgment should have been granted.  Notably, in so doing it made clear that a claim services agreement under an insurance contract was exempt from public contract bidding requirements.  It also held that under the doctrine of primary jurisdiction, any dispute concerning successor employer liability was subject to the jurisdiction of the U.S. Department of Labor.  In a companion case, the court had also held that as a matter of contract law, if a party had not specifically assumed successor obligations, it could not be held liable as a successor to the primary contracting party.  Overall, the Appellate Court granted judgment in favor of the defendant in all respects.


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