Albert J. Schiff Associates, Inc. v. Flack

• Decision Date: 22 December 1980
• Docket Number: Nos. LC,s. LC
• Citation: 417 N.E.2d 84,435 N.Y.S.2d 972,51 N.Y.2d 692
• Parties: , 417 N.E.2d 84 ALBERT J. SCHIFF ASSOCIATES, INC., Appellant, v. Alan B. FLACK, as Lead Underwriter under Lloyd's Policy65458 and LC 65457, et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 972

435 N.Y.S.2d 972

51 N.Y.2d 692, 417 N.E.2d 84

ALBERT J. SCHIFF ASSOCIATES, INC., Appellant, v. Alan B. FLACK, as Lead Underwriter under Lloyd's Policy Nos LC 65458 and LC 65457, et al., Respondents.

Court of Appeals of New York.

Dec. 22, 1980.

Burton I. Monasch, Arnold C. Stream and Gerry E. Feinberg, New York City, for appellant

Roy E. Pomerantz and Sol Kroll, New York City, for respondents.

OPINION OF THE COURT

FUCHSBERG, Judge.

The issue is whether a disclaimer of liability, based on specified exclusions in two professional "errors and omissions" indemnity insurance policies, waived the insurers' defense that the claim was outside the scope of the insuring clause of the policy.

The plaintiff, Albert J. Schiff Associates, Inc., life insurance agents and employee benefit consultants, purchased two such insurance contracts from the defendants, who are Lloyd's insurers. ¹ The "insuring agreement" clause of each policy provides that the insurer will pay "all sums which the Assured shall become legally obligated to pay by reason of liability for any error, omission or negligent act committed, or alleged to have been committed by the Assured * * * while in the performance of services in the professional capacity of the Assured as: (a) Actuaries, (b) Employee Benefit Plan Consultants, and (c) Life Insurance Agents or Brokers." Under the rubric "exclusions", for which the policy states it would not indemnify the assured, are listed policyholder conduct (1) "(which is) Brought about by or contributed to by the dishonest (or) fraudulent * * * Act", (2) "(which) involves any inability or failure to pay * * * a) premium claim or tax", or (3) "(from which) the Assured gained in fact any personal profit or advantage to which the Assured was not legally entitled".

It was a letter of disclaimer based on these three exclusions that precipitated the dispute between the insured and its insurers. The disclaimer disavowed any obligation to defend or indemnify against a suit brought against the insured in a Massachusetts court. The complaint in that action, brought by a competitor of the insured, one Backman, charged the insured with what is reasonably to be construed, as it was by the majority at the Appellate Division, 73 A.D.2d 329, 425 N.Y.S.2d 612, as a "willful and malicious usurpation of a trade or commercial secret". Specifically, it alleged that Backman, the developer of a novel insurance program (the Double Dollar Plan), revealed it to Albert J. Schiff, concededly agent plenipotentiary for the corporation which bears his name. It goes on to describe how Schiff, despite the injunction of a written agreement which proscribed his disclosing the plan to others, except under conditions not relevant here, once privy to this information, converted it lock, stock and barrel for the benefit of his corporation, albeit under another name (the Executive Salary Protection Plan). So insistent was the pleader in his assertion that Schiff's conduct was "willful" that only once in a 10-count complaint did any form of the qualitatively lesser word "neglected" appear, and then only to be preceded by the adjective "willfully".

These facts are before us in the following procedural context. After the insured received the insurers' disclaimer of liability, it commenced this action. Juxtaposing the Massachusetts complaint and the language of the insurance contracts (see Shapiro v. Glens Falls Ins. Co., 39 N.Y.2d 204, 383 N.Y.S.2d 263, 347 N.E.2d 624), defendants moved under CPLR 3211 (subd. a, pars. 1, 7) to dismiss the complaint in our case primarily on the ground that the policy language brought the claim they were being asked to defend squarely within the exclusions recited in their letter of disclaimer. Focusing on the exclusions, but finding that they and the Backman complaint did not dovetail, Special Term denied the motion and, on the authority of Goldberg v. Lumber Mut. Cas. Ins. Co., 297 N.Y. 148, 77 N.E.2d 131 and other cases that hold that the duty to defend is broader than the duty to pay, granted plaintiff's cross motion only to the extent that it ordered defendants to undertake the defense of the suit in Massachusetts.

On appeal to the Appellate Division, that court sharply divided, Justice SULLIVAN, writing for a majority of three, declined to reach the merits of the disclaimer, but, of the view that the Massachusetts claim did "not in any way suggest a negligent act, error or omission in the performance of any professional services", held that the claim therefore was not within the policy coverage. Concordantly, the court reversed on the law. Of the two dissenters, Justice KUPFERMAN, characterizing the Massachusetts claim as one based on "idea piracy" would have made no determination with respect to indemnity, but would have affirmed Special Term in providing a defense. For his part, Justice BIRNS, who also would have affirmed, expressed the opinion that since the disclaimer relied solely on particular exclusions, it constituted "a waiver" of any unspecified grounds, including the insuring clause itself; since he though the applicability of the named exclusions unclear, he too would have had the disposition of that issue await the resolution of the underlying Massachusetts action. For the reasons which follow, we believe the result reached by the Appellate Division should be upheld.

We start our analysis by noting that the coverage under the policies in this case is not merely what is found under the heading "insuring agreement". Just as this clause affirmatively indicates the coverage which is included, so does the "exclusion" clause tell us expressly what is not. In policies so drawn, the protection the insured has purchased is the sum total, or net balance, however one labels it, of a coming together of the two. For it is not either alone, but the combination of both, which defines the scope of the protection afforded no more and no less.

Now, failure to appreciate the relationship between the two clauses that they are each part of a whole has often led not only to misdescription of what is coverage and what is not, but also to consequent contextual misapplication of the concepts of waiver and estoppel as well (e. g., S & E Motor Hire Corp. v. New York Ind. Co., 255 N.Y. 69, 174 N.E. 65; Beckley v. Otsego County Farmers Coop. Fire Ins. Co., 3 A.D.2d 190, 159 N.Y.S.2d 270; Shichman v. Commercial Travelers Mut. Acc. Assn., 267 App.Div. 389, 46 N.Y.S.2d 32; see, generally, 16A Appleman, Insurance Law and Practice, § 9081).

Thus, for the insured to extend its coverage to more than it originally bargained it would have had to enter into a supplemental contract expanding the insuring clause or contracting the exceptions. However, this...