Evanston Ins. Co. v. GAB Business Services, Inc.

• Decision Date: 10 December 1987
• Citation: 132 A.D.2d 180,521 N.Y.S.2d 692
• Parties: EVANSTON INSURANCE COMPANY, Plaintiff-Appellant-Respondent v. GAB BUSINESS SERVICES, INC. and American Home Assurance Company, Defendants- Respondents-Appellants and Southern California Rapid Transit District, Nominal Defendant.
• Court: New York Supreme Court — Appellate Division

Page 692

521 N.Y.S.2d 692

132 A.D.2d 180

EVANSTON INSURANCE COMPANY, Plaintiff-Appellant-Respondent v. GAB BUSINESS SERVICES, INC. and American Home Assurance

Company, Defendants- Respondents-Appellants

and

Southern California Rapid Transit District, Nominal Defendant.

Supreme Court, Appellate Division,

First Department.

Dec. 10, 1987.

James L. Fischer, of counsel (Frank J. Fields with him on the brief; Wilson, Elser, Moskowitz, Edelman & Dicker, attorneys), for plaintiff-appellant-respondent.

Thomas M. Geisler, Jr., of counsel (Lawrence J. Slattery with him on the brief; Shearman & Sterling, attorneys), for defendant-respondent-appellant GAB.

Howard R. Cohen, of counsel (Barry G. Saretsky, with him on the brief; Bower & Gardner, attorneys), for defendant-respondent-appellant, American Home Assur. Co.

Before MURPHY, P.J., and SANDLER, CARRO, KASSAL and ELLERIN, JJ.

SANDLER, Justice.

The action giving rise to these cross appeals seeks a declaratory judgment primarily as to the rights and obligations of the parties under a contract of Claims Adjusters Errors and Omissions Liability Insurance issued by plaintiff Evanston Insurance Company (Evanston) on a "claims made" basis, i.e., for claims first made against the insured, defendant GAB Business Services, Inc. (GAB), during the policy period October 15, 1979 to October 15, 1980. The policy defined a claim as "a demand received by the Insured [GAB] for money or services, including the service of suit or institution of arbitration proceedings against the Insured." Defendant American Home Assurance Company (American Home) had been GAB's insurer, also on a claims made basis, for a period prior to that covered by the Evanston policy. The central question presented on this appeal is the date that a particular claim was first made against GAB.

GAB, one of this country's largest insurance adjusting companies, provides general investigative and claims adjusting services for insurance companies and self-insureds. On July 20, 1978, GAB entered into a three-year contract effective August 1, 1978 with the Southern California Rapid Transit District (RTD) whereby GAB was to provide administrative, investigative and claims adjusting services relative to personal injury and property damage claims filed against RTD in the course of providing public transportation. (Under prior contracts GAB had been providing such services to RTD since 1974). As here pertinent, the contract obligated GAB to provide sufficient staff to handle and maintain all RTD claim files, to provide adequate supervisory personnel to oversee the processing of claims against RTD, to establish and adjust adequate reserves for each claim, to regularly review those reserves and maintain adequate reserve levels at all times, and to provide a monthly computer analysis of all claims against RTD.

The GAB-RTD contract included a cancellation clause which allowed either party to terminate the contract for cause, which was defined, as here pertinent, as "Failure of GAB to maintain quality of its services called for by this contract at a level meeting general industry standards." The cancellation procedure required the complaining party to issue a 30-day notice to the other party to cure performance problems. If those problems were not corrected within 30 days, a 60-day notice of termination could be issued.

On December 22, 1978, while GAB was insured by American Home, RTD sent to GAB a 30-day notice demanding that a broad spectrum of performance deficiencies be corrected, including adjusters carrying excessive caseloads, insufficient supervisory personnel, inadequate establishment and adjustment of reserve levels, and failure to include relevant data on monthly computer printouts. RTD demanded that specified steps be taken to correct the deficiencies within 30 days, and warned that if that were not accomplished, RTD would consider exercising its option to cancel the contract. This letter did not assert that GAB had caused financial or other damages to RTD, it did not assert or refer to the existence of a claim for damages, and it did not include a reservation of rights to claim damages. GAB, perceiving the letter as simply a demand for improved future service in order to comply with its contract, did not notify American Home that a claim had been made against it by RTD. GAB instead formulated a plan to correct the deficiencies, and outlined the plan in a January 11, 1979 letter to RTD, which plan RTD later approved.

Effective October 15, 1979, GAB changed its professional errors and omissions insurer from American Home to Evanston. On December 4, 1979, RTD's insurance manager telephoned GAB to advise that RTD had received, several days previously, a draft of an audit prepared by Ebasco Risk Management Consultants, Inc. (Ebasco) which was highly critical of GAB's performance under its claims adjustment services contract, and that RTD had concluded from this audit that GAB had caused financial damage to RTD. It is undisputed that prior to the December 4 telephone conversation RTD had never informed GAB orally or in writing that RTD had suffered any financial damage attributable to GAB, or that it intended to hold GAB liable for any damage.

On December 19, 1979, RTD notified GAB in a new 30-day notice letter that GAB's performance had not improved since its initial letter dated December 22, 1978, complaining of essentially the same deficiencies, but rather had deteriorated. The letter set forth in far greater detail RTD's complaints that GAB's claim files lacked integrity and organization, and that basic investigative materials were often missing or not obtained until two or three years after the incident. In files containing medical reports, there was allegedly no analysis of the claimant's alleged injuries or evaluation of the treatment for those injuries to determine whether the extent of treatment received was justified. These and other described deficiencies in maintaining proper claims files were said to have resulted in "much greater expense" to RTD. Deficiencies in maintaining adequate updated reserves allegedly resulted in great difficulty to RTD because funds were not always readily available to meet required increases which were belatedly discovered. It was further asserted that GAB had continually failed to employ a sufficiently large and competent staff to supervise and adjust RTD's claims, resulting in default judgments and many complaints.

Significantly, this letter closed by stating that RTD "reserves all rights and remedies against GAB, including, but not limited to, the substantial damages sustained by the District as a result of GAB's failure of performance under the contract." Subsequently,...