New York Appellate Court Permits Use of Extrinsic Facts to “Clarify Ambiguous Pleadings” and Establish the Applicability of a Policy’s Auto Exclusion

On October 23, 2018, our Global Insurance Services group hosted an interactive webinar discussing statesaEUR(TM) varying interpretations of what is considered aEURoeloading and unloadingaEUR? in the context of a liability policyaEUR(TM)s aEURoeAircraft, Auto or WatercraftaEUR? exclusion. During that presentation, we identified inconsistencies in the courtsaEUR(TM) application of this provision when assessing an insureraEUR(TM)s duty to defend, particularly in New York. Ironically, that same day, a New York Appellate Court analyzing the application of a the aEURoeAircraft, Auto or WatercraftaEUR? exclusion relied on facts extrinsic to the allegations in the underlying complaint to permit a liability insurer to avoid its duty to defend, which is something New York courts typically do not permit. In Zurich American Ins. Co. v. ACE American Ins. Co., 2018 N.Y. Slip. Op. 07074 (1st Dept. 2018), the New York State Supreme Court, Appellate Division, First Department, was tasked with determining a commercial general liability (CGL) insureraEUR(TM)s obligations to its insured in connection with an accident involving the unloading of a truck. The underlying accident occurred when the underlying claimants were untying straps that secured rebar cages being unloaded from the truck. The CGL insurer disclaimed coverage in connection with the accident based on the policyaEUR(TM)s aEURoeAircraft, Auto or WatercraftaEUR? exclusion, which bars coverage for aEURoeaEUR~[b]odily injuryaEUR(TM)aEUR?arising out of the ownership, maintenance, use or entrustment to others of anyaEUR?aEUR~autoaEUR(TM)aEUR?owned or operated by or rented or loaned to any insured.aEUR? The exclusion explicitly states aEURoe[u]se includes operation and aEUR~loading or unloading.aEUR(TM)aEUR? The underlying claimants, in their suit against the insured, only alleged that the accident occurred due to cages that were improperly constructed, improperly placed, improperly operated, improperly maintained, and not properly secured. The insuredaEUR(TM)s automobile liability insurer commenced a coverage action against the CGL insurer seeking, among other things, a declaration that the CGL insurer owed their mutual insured a duty to defend in the underlying action based on the allegations in the underlying complaint. The trial court in the coverage action found that the CGL insurer in fact owed the insured a duty to defend. However, the First Department reversed this decision, finding that the allegations in the underlying complaint sufficiently arose out of the unloading of the truck, rendering the exclusion applicable. In rendering this decision, the First Department relied on accident reports and the underlying claimantsaEUR(TM) signed statements to aEURoeclarify ambiguous pleadingsaEUR? and find that the CGL insurer met its burden of establishing the exclusion applied and that it therefore owed no duty to defend. The First Department cited to Striker Sheet Metal II Corp. v Harleysville Ins. Co. of New York, 2018 WL 654445 (E.D.N.Y. 2018) as justification for its reliance on facts extrinsic to the complaint when assessing the insureraEUR(TM)s defense obligation. The court in Striker relied on a narrow exception some New York courts recognize with respect to the duty to defend, which permits an insurer to disclaim a defense prior to litigation based on evidence extrinsic to the complaint if such evidence is aEURoeunrelated to the merits of the plaintiffaEUR(TM)s action [and] plainly take[s] the case outside the policy coverage.aEUR? In Zurich, the Court used facts pertaining to the cause of the accident, which were extrinsic to the complaint, to determine that the alleged bodily injury arose out of the aEURoeuseaEUR? of an auto. While the cause of the accident would seem to pertain entirely to the merits of the underlying plaintiffsaEUR(TM) action (i.e., improperly constructed rebar cages vs. negligent unloading of the truck), which would render the use of extrinsic facts impermissible, the First Department appears to rule otherwise. This result is interesting, particularly when compared to the First DepartmentaEUR(TM)s prior precedent in ABC, Inc. v. Countrywide Ins. Co., 308 A.D.2d 309 (1st Dept. 2003), where it found, without analyzing extrinsic facts, that aEURoeallegations of negligence in the design, construction and maintenanceaEUR? of a crate that came apart while being unloaded from a truck did not constitute allegations as to the negligent aEURoeuseaEUR? of the vehicle. The decision in Zurich is an indication that the courtsaEUR(TM) application of the traditional standards governing an insureraEUR(TM)s duty to defend is a moving target insurers should be cognizant of when taking a coverage position.

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