Continental Ins. Co. v. Atlantic Cas. Ins. Co.

• Decision Date: 29 April 2010
• Docket Number: Docket No. 09-2882-cv.
• Citation: 603 F.3d 169
• Parties: CONTINENTAL INSURANCE COMPANY, Plaintiff-Appellant, v. ATLANTIC CASUALTY INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

603 F.3d 169

CONTINENTAL INSURANCE COMPANY, Plaintiff-Appellant, v.ATLANTIC CASUALTY INSURANCE COMPANY, Defendant-Appellee.

Docket No. 09-2882-cv.

United States Court of Appeals, Second Circuit.

Argued: March 5, 2010.

Decided: April 29, 2010.

COPYRIGHT MATERIAL OMITTED

Erick Kirker, Cozen O'Connor, Philadelphia, PA, for Plaintiff-Appellant.

Aidan McCormack(Cyril Smith, on the brief), Nixon Peabody LLP, New York, NY, for Defendant-Appellee.

Before: LIVINGSTON and LYNCH, Circuit Judges.^*

GERARD E. LYNCH, Circuit Judge:

In 2004, employees of Wodraska Brothers, Inc.("Wodraska"), a roofing contractor, inadvertently started a fire while installing a new roof on a house.A week later, Continental Insurance Co.("Continental"), which insured the residence, paid the homeowners approximately $640,000 for the damage.Five months after the fire, Wodraska sent a claim to its liability insurer, Atlantic Casualty Insurance Co.("Atlantic"), and two days later, Continental sent Atlantic a separate notice of claim.Atlantic denied both claims.

In 2006, Continental sued Wodraska to recover the amount Continental had paid the homeowners.Continental obtained a default judgment, but Wodraska did not pay.So Continental, as a judgment creditor standing in Wodraska's shoes, sued Atlantic under New York Insurance Law Section 3420(a)("Section 3420(a)") for satisfaction of the default judgment.The United States District Court for the Southern District of New York(the Honorable Denny Chin) awarded Atlantic summary judgment, holding that Wodraska's untimely notice of its claim to Atlantic had extinguished Continental's ability to give Atlantic subsequent notice and to bring a direct action against Atlantic.

On appeal, Continental argues, inter alia, that Section 3420(a) entitled it to provide Atlantic independent notice of its claim and to sue Atlantic, despite the fact that Wodraska had already given Atlantic notice.We agree.But we affirm the district court's judgment on the separate ground that Atlantic's liability insurance policy with Wodraska (the "policy") excluded coverage of the fire.

BACKGROUND

I.The Fire

In March 2004, Donald and Cecile Swallow("Swallows" or "homeowners") hired Wodraska to "apply a new EPDM membrane roof" to their house in Pelham Manor, New York.¹On June 1, 2004, a Wodraska employee was using a torch on the Swallows' roof when a nearby co-worker opened a can of roofing adhesive.The adhesive fumes ignited and lit the roof on fire.The Pelham Manor Fire Department extinguished the fire, and subsequently investigated its cause.The fire department chief reported: "Employees of the roofing contractor on the premises were using a portable, small propane torch to dry the roof in close proximity to highly flammable roofing cement which ignited and spread fire quickly to the upper roof and attic area."

II.The Liability Insurance Policies

Continental insured the Swallows' house, and acknowledges that their policy covered the fire.Atlantic insured Wodraska, but argues that Wodraska cannot recover under its policy for three reasons.First, the policy required Wodraska to provide notice of an "`occurrence'" and potential claim "as soon as practicable."Second, the policy contained an exclusionary provision, the Roofing Limitation Endorsement ("RLE"), which provided: "We do not cover claims, loss, costs or expense arising out of... property damage as a result of any operations involving any hot tar, wand, torch or heat applications or membrane roofing."Finally, Wodraska failed to comply with its obligation under the policy to "cooperate with Atlantic in the investigation" of Continental's claim against Wodraska.

III.Notice to Atlantic and Atlantic's Disclaimers

A week after the fire, Continental paid the Swallows approximately $640,000 for the damage.At that time, Continental did not know the identity of Wodraska's insurer, its efforts to find that information having failed.On November 16, 2004, five months after the fire, Wodraska sent Atlantic its notice of claim.The next day, Continental first learned that Atlantic insured Wodraska when Atlantic's representative called Continental's counsel.Continental sent Atlantic its notice of claim the following day.

Atlantic denied both claims.By a letter dated November 23, 2004, Atlantic denied Wodraska's claim, because Wodraska had failed to report the fire "as soon as practicable," and because the RLE barred "coverage for costs associated with damage to the building or contents arising out of operations involving any hot tar, wand, torch or heat application or membrane roofing."By a separate letter of the same date, Atlantic notified Continental that it had declined Wodraska's claim "due to an exclusionary endorsement in the policy."

IV.Prior Proceedings

A.Continental's Suit Against Wodraska

On January 27, 2006, Continental, as subrogee of the Swallows, sued Wodraska to recover the $640,000 it had paid, alleging that Wodraska had negligently started the fire.Wodraska received the complaint, but failed to answer.In May, Continental notified Atlantic that a default judgment would enter if Wodraska did not respond to the complaint by June 30.The following week, Atlantic's representative sent another letter to Wodraska (and a copy to Continental) denying coverage and any duty to defend Wodraska.Wodraska never entered an appearance, and on July 17the district court entered a default judgment for $763,695.85—the amount Continental had paid the Swallows, plus interest and costs.

On July 24, 2006, Continental sent Atlantic notice of the default judgment.Atlantic maintained that it owed Wodraska no duty to indemnify or defend, but it provided Wodraska a "courtesy interim defense"counsel who unsuccessfully moved to reopen the default.Wodraska never satisfied the default judgment.

B.Continental's Suit Against Atlantic

On May 8, 2007, Continental, as a judgment creditor, sued Atlantic for a declaratory judgment that Atlantic was obligated to indemnify Wodraska and, therefore, to satisfy Continental's default judgment.Continental sued under Section 3420(a)(2), which allows an injured party, in its capacity as a judgment creditor, to sue the insurer of the defaulted party in some circumstances.

After discovery, Continental and Atlantic cross-moved for summary judgment.In a June 4, 2009 memorandum decision, the district court awarded summary judgment to Atlantic because

Continental's action is barred by Wodraska's failure to timely notify Atlantic of the claim.Continental, the injured party, relied on Wodraska, the insured, to provide notice to Atlantic, the insurer.Because Wodraska was the only party to notify Atlantic of the claim ... Continental's rights are derivative of Wodraska's.Wodraska's notice was untimely under the Policy as a matter of law, and Continental therefore cannot recover in this action.

Continental Ins. Co. v. Atlantic Cas. Ins. Co.,No. 07 Civ. 3635 (DC), 2009 WL 1564144, *6(S.D.N.Y.June 4, 2009).

The district court acknowledged that Section 3420(a)"authorizes an injured party who has obtained a judgment against the party responsible for the injury ... to institute a direct action against the insurer of the party against whom the judgment was obtained."Id. at *4(internal quotation marks omitted).The court also agreed that "in some circumstances the injured party may have greater rights than the insured.For example, even where the insured fails to give notice to the insurer of a claim as required by a policy, courts may still permit the injured party to recover."Id. at *5.However,

where the insured is the first to give notice of a claim to the insurer, ... then the injured party's rights are considered to be "derivative" of the insured's vis-a-vis the insurer.In such a scenario, where the insured's notice is untimely and the insurer disclaims coverage based on untimely notice, an injured party will be unable to recover under Section 3420 against the insurer because of the insured's untimely notice.Thus it is critical, in assessing a claim brought under Section 3420, to determine which party—the injured party or the insured—first notified the insurer of the claim.

Id.(citations and footnote omitted).The court noted, "It is an anomaly of the Section 3420 caselaw, then, that an injured party is better off if the insured gives no notice than late notice."Id. at *5 n. 3.

On June 15, 2009, Continental moved for reconsideration, arguing that the summary judgment decision overlooked the fact that Continental had provided independent notice of its claim to Atlantic on November 18, 2004.In an August 13 memorandum decision, the court conceded that error, but did not change its previous decision.It said that its previous decision

was based entirely on the fact that Wodraska, the insured, was the first to provide notice of the claim to Atlantic....Because Wodraska was the first to provide notice, any notice Continental provided after Wodraska provided notice was superfluous....It is, therefore, wholly irrelevant that Continental provided notice to Atlantic after Wodraska.

Continental Ins. Co. v. Atlantic Cas. Ins. Co.,No. 07 Civ. 3635 (DC), 2009 WL 2476538, *1-2(S.D.N.Y.Aug.13, 2009)(citations omitted).

DISCUSSION

Continental argues on appeal that Section 3420(a) permitted it to give Atlantic independent notice of its claim, despite the fact that Wodraska had already given Atlantic untimely notice of its own claim.We agree.But we affirm the district court's judgment on the separate ground that the RLE barred coverage of the fire.

I.New York Insurance Law Section 3420(a)

Section 3420(a) requires all New York insurance contracts to "contain in substance the following provisions or provisions that are equally or more favorable to the insured and to judgment creditors so far as such provisions relate to judgment creditors":

(2) A provision that in case judgment against the insured

...