Hotel Des Artistes, Inc. v. Gaic

• Decision Date: 15 April 2004
• Docket Number: 2137.,2138.
• Citation: 775 N.Y.S.2d 262,2004 NY Slip Op 02848,9 A.D.3d 181
• Parties: HOTEL DES ARTISTES, INC., Appellant, v. GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, Respondent.
• Court: New York Supreme Court — Appellate Division

9 A.D.3d 181

775 N.Y.S.2d 262

2004 NY Slip Op 02848

HOTEL DES ARTISTES, INC., Appellant, v. GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, Respondent.

2137.

2138.

Appellate Division of the Supreme Court of the State of New York, First Department.

April 15, 2004.

APPEAL from two orders of the Supreme Court, New York County (Barbara R. Kapnick, J.), entered April 17, 2002X and January 6, 2003, respectively. The first order, to the extent appealed from, declared that plaintiff insured was not entitled to recover the full amount of any reasonable settlement it entered into with respect to the underlying action, and that defendant insurer was not under a duty to defend plaintiff with respect to every cause of action in the underlying complaint. The second order granted defendant's cross motion for reargument of the earlier order, and upon reargument, declared that defendant had no duty to defend or indemnify plaintiff with respect to any of the causes of action in the underlying complaint, and dismissed the instant complaint.

Heller Ehrman White & McAuliffe LLP (Edward M. Joyce, Lisa M. Cirando and E. Joshua Rosenkranz of counsel), for appellant.

Joseph C. Scibilia & Associates (Joseph C. Scibilia of counsel), for respondent.

OPINION OF THE COURT

GONZALEZ, J.

The primary issue on this appeal is whether an insurer has a duty to defend its insured against claims in an underlying action that fall within the embrace of a commercial general liability (CGL) policy issued by the insurer, notwithstanding the fact that the insured's legal liability arises in contract, not tort. In addition, we must decide whether an insured is entitled to recover the entire amount paid in settlement as a consequence of the insurer's alleged breach of its duty to defend, and whether the insurer in this case waived its late-notice defense due to its failure to timely raise it.

We find that the insurer breached its duty to defend in this instance, but that the insured may only recover that portion of the settlement amount relating to covered losses. We also hold that the insurer waived its late-notice defense by failing to raise it within a reasonable time. Accordingly, we reverse and remand for further proceedings.

On December 23, 1997, a fire erupted at 1 West 67th Street in Manhattan in a building owned by plaintiff Hotel des Artistes, Inc. The fire severely damaged the ground-floor restaurant known as Café des Artistes, a tenant in the building. The leased premises were rendered wholly unusable due to the fire and ensuing water damage, which required the restaurant to suspend its operations for a period of more than four months. After several conversations with the hotel over the scope of the repairs, the restaurant eventually obtained the hotel's approval to do the repair work. The work was completed by May 1, 1998 and the restaurant reopened on that day.

In January 1999, the restaurant commenced a lawsuit against the hotel (underlying action) seeking to recover damages for the cost of repairs to the leased premises and for business interruption losses. Specifically, the restaurant's first cause of action alleged that the hotel breached its duty under the lease to repair the leased premises after the fire, and sought reimbursement of $628,810 for the cost of repairs. The second cause of action alleged a $600,000 loss of business interruption insurance due to the hotel's unreasonable delay in approving the restaurant's architectural and mechanical plans. In this regard, the restaurant's business interruption insurer denied coverage for business interruption losses for the period between February 15, 1998 and April 30, 1998 on the ground that the repairs should have been completed by February 15, 1998.

The third cause of action sought recovery of $32,000 representing the cost paid by the restaurant for repairs to certain structural and building systems that allegedly were the responsibility of the hotel under the lease. The fourth cause of action sought recovery of attorneys' fees pursuant to the lease provision authorizing such recovery by the tenant where it is successful in enforcing its rights under the lease.

Prior to the fire, defendant General Accident Insurance Company of America (GAIC) had issued a CGL policy (the policy) to nonparty Douglas Elliman Purchasing Group, with the hotel named as an additional insured. The policy covered the period between December 17, 1997 and December 19, 1998, which encompasses the date of the fire and all subsequent acts and omissions relevant to the underlying action.

Part A of the subject policy provided coverage for "Bodily Injury and Property Damage" and states:

"We will pay those sums that the insured becomes legally obligated to pay as damages because of `bodily injury' or `property damage' to which this insurance applies.

"We will have the right and duty to defend the insured against any `suit' seeking those damages even if the allegations of the "suit" are groundless, false or fraudulent. However, we will have no duty to defend the insured against any `suit' seeking damages for `bodily injury' or `property damage' to which this insurance does not apply . . . ."

Part A further states that "[t]his insurance applies to `bodily injury' and `property damage' only if: (1) [t]he `bodily injury' or `property damage' is caused by an `occurrence' that takes place in the `coverage territory'; and (2) [t]he `bodily injury' or `property damage' occurs during the policy period." The policy defines "property damage" as "[p]hysical injury to tangible property, including all resulting loss of use of that property." The policy further states that an "occurrence" means "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

The policy also includes a contractual liability exclusion, which provided that "[t]his insurance does not apply to `[b]odily injury' or `property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." However, the exclusion was inapplicable to liability for damages (1) that the insured would have in the absence of the contract or agreement, or (2) assumed in a contract or agreement that is an "insured contract." The policy definition of "insured contract" includes "a contract for a lease of premises."

In a January 25, 1999 letter, the hotel asked its insurance broker to notify its fire and liability carriers of the restaurant's lawsuit. On January 29, 1999, the broker forwarded a copy of the summons and complaint in the underlying action to defendant GAIC. By letter dated February 2, 1999, GAIC disclaimed coverage as follows:

"Upon review of your policy and the allegations in the complaint, we must advise you that there is no coverage for this lawsuit. Your policy does not cover a claim for `Breach of Contract.' We do not cover the liability for failure to perform or comply with the terms contained in a contract. It is alleged that the Hotel[] failed to restore the structure of the premises back to its pre-accident state in a timely manner based on the [parties] lease. There is no damage alleged that would qualify under the definition of `bodily injury,' `property damage' . . . which are the only damages your policy covers."

GAIC did not cite any specific exclusion in its disclaimer letter. However, GAIC did state that it was not waiving any rights or defenses under the policy not mentioned in the disclaimer letter.

Based on GAIC's disclaimer, the hotel hired its own counsel to defend it against the restaurant's lawsuit. By letter dated October 17, 2000, the hotel notified GAIC that it had negotiated a potential settlement of the restaurant's lawsuit, and further requested that GAIC review the terms of the proposed settlement and advise whether it would reconsider its disclaimer. GAIC did not respond, and the hotel settled the matter with the restaurant for approximately $150,000.

In April 2001, the hotel commenced the instant action for a declaratory judgment and breach of the insurance policy. In July 2001, the hotel moved for summary judgment declaring that GAIC breached its duty to defend under the policy and, therefore, it was liable for the costs incurred in defending the restaurant's suit as well as the sum paid in settlement of the action. The hotel argued that the restaurant's claims in the underlying action fell potentially within the scope of coverage since the claims arose from the fire and sought damages that fell within the policy's definition of "property damage." The hotel further asserted that under the policy, it was irrelevant that the hotel's legal obligation to pay arose from a contract, as opposed to a tort duty.

GAIC cross-moved for summary judgment, arguing that the claims in the underlying action were clearly outside the policy's coverage since the policy did not provide coverage "to companies or individuals when they are sued because they failed to live up to their claimed contractual obligations." According to GAIC, since the restaurant's complaint did not allege any tortious conduct by the hotel in causing the fire, the policy clearly did not cover these contract-based losses and no duty to defend existed. Alternatively, GAIC argued that any coverage was vitiated by the hotel's failure to comply with the policy provision requiring notice of occurrence that might result in a claim "as soon as practicable."

In its April 17, 2002 order, Supreme Court granted the hotel's motion to the extent of declaring that GAIC had a duty to defend the hotel in the underlying action. Although the court found no duty to defend on the second cause of action since "the gravamen is not that Hotel is liable to the [restaurant] for the damage done by the fire, but, rather, that Hotel breached a contractual duty owed to its tenant," it held that the duty to defend was triggered by the restaurant's first cause of action which sought...