Parker v. Agricultural Ins. Co.

• Decision Date: 17 June 1981
• Citation: 440 N.Y.S.2d 964,109 Misc.2d 678
• Parties: Jack PARKER, doing business as Parman Co., Plaintiff, v. AGRICULTURAL INSURANCE COMPANY, First State Insurance Company, The Mission Insurance Company and Alpar Realty Associates, Defendants.
• Court: New York Supreme Court

Page 964

440 N.Y.S.2d 964

109 Misc.2d 678

Jack PARKER, doing business as Parman Co., Plaintiff, v. AGRICULTURAL INSURANCE COMPANY, First State Insurance

Company, The Mission Insurance Company and Alpar

Realty Associates, Defendants.

Supreme Court, Special Term,

New York County, Part I.

June 17, 1981.

Rosenman, Colin, Freund, Lewis & Cohen, New York City, for petitioner.

Siff & Newman, P.C., New York City, for defendants Agricultural Insurance Co., and The Mission Insurance Co.

Rivkin, Leff & Sherman, Garden City, for defendant First State Insurance Co.

ARTHUR E. BLYN, Justice:

Motions numbered 99 and 100 of March 13, 1981 and 132 of February 24, 1981 are consolidated and disposed of as follows.

In this declaratory judgment action, plaintiff moves for summary judgment (pursuant to CPLR 3212 and 3211(c)) declaring that it has the right on account of the existence of a conflict of interest to select and substitute its own counsel in the underlying tort actions, said counsel to be paid for by plaintiff's insurers. Defendant Agricultural Insurance Co. ("Agricultural"), plaintiff's primary insurer, cross-moves for summary judgment (also pursuant to CPLR 3212 and 3211(c)) on the grounds that it has never disclaimed its duty to defend plaintiff in the underlying actions, that it intends to defend and control all litigation, that furthermore there is no conflict between the interest of the insurers and plaintiff insured and that the insurer has no duty to pay for plaintiff's separate counsel. A similar cross-motion for summary judgment has been made by defendant The Mission Insurance Co. ("Mission"), one of plaintiff's two excess insurers, with the added ground that Mission, as maker of plaintiff's second excess liability policy, has no present duty to defend plaintiff. Defendant First State Insurance Company ("First State"), plaintiff's first excess insurer, moves to dismiss plaintiff's complaint pursuant to CPLR 3211(a)(7) for failure to state a cause of action. Defendant First State's arguments reiterate those of the other two insurance companies.

There are at least seven underlying lawsuits against plaintiff which relate to the instant declaratory action. These arise out of an explosion and fire from an apparent gas leak at 325 East 36th Street, a premises managed by plaintiff management firm (the owner of the building, defendant Alpar Realty Associates ("Alpar") is in default in the action and on these motions). In five out of these seven lawsuits, plaintiff is charged with "willful and wanton misconduct" and, is sued for punitive as well as compensatory damages. In the five actions, punitive damages are sought in the total sum of $169,000,000.00; compensatory damages in the sum of $26,000,000.00. In all these lawsuits, plaintiff is defended by counsel chosen by Agricultural, its primary insurer.

At the time of the explosion and fire, plaintiff had in force three comprehensive general liability policies which provide for personal injury and property damage indemnity in the total amount of twenty-one million dollars. Agricultural's primary policy provides coverage of one million dollars. The first excess policy of First State provides coverage of ten million dollars, the second excess policy of Mission provides coverage of an additional ten million dollars.

Plaintiff contends that defendants Agricultural and First State have disclaimed liability for punitive damages. This disclaimer gives rise, in plaintiff's view, to a conflict of interest on the part of the insurance companies on the issue of punitive damages. Plaintiff reasons that the insurers have no interest in minimizing the amount of punitive damages for which they bear no liability, but rather may have a contrary interest at settlement and trial in inflating punitive damages at the expense of compensatory damages for which they are liable and would wish to minimize.

The parties do not dispute the fact that by the terms of the three policies Agricultural carries the chief burden of defending plaintiff. By the terms of its policy (page 13, top) Agricultural

"... shall have the right and duty to defend any suit against the Insured seeking damages on account of such bodily injury and property damage, even if any of the allegations of the suit are groundless, false or fraudulent and may make such investigation and settlement of any claim or suit as it deems expedient. But the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company's liability has been exhausted by payment of judgments or settlements".

Agricultural admits it is under a duty to defend against all claims in the lawsuits arising from the occurrence and claims that its interest in defeating claims for punitive damages coincides with that of plaintiff so that there is no conflict of interest. Furthermore, defendants claim that no conflict of interest exists because they have not disclaimed coverage, but only liability for punitive damages which state law has determined is not a risk which may be insured against. Defendant First State, however, has made a reservation of rights to disclaim coverage in case willful, wanton negligence is found against plaintiff which this court interprets, for the purposes of this motion, as a punitive damage disclaimer.

The issue thus presented is whether in the circumstances of this case a sufficient conflict exists between the interest of the insurers and that of the insured to warrant independent, controlling counsel selected by plaintiff and paid for by defendants.

New York law holds that where punitive damages are awarded for willful or reckless negligence over and above compensatory damages, it is against public policy to require the insurance company to be liable for the punitive damages intended to punish the defendant and not to compensate the plaintiff. (Hartford v. Village of Hempstead, 48 N.Y.2d 218, 422 N.Y.S.2d 47, 397 N.E.2d 737; Padavan v. Clemente, 43 A.D.2d 729, 350 N.Y.S.2d 694; Teska v. Atlantic National Insurance Co., 59 Misc.2d 615, 300 N.Y.S.2d 375.) Coverage of punitive damages is barred by the fundamental principle that no one should be allowed to take advantage of his own wrong. (Hartford, supra, 48 N.Y.2d at 226, 422 N.Y.S.2d 47, 397 N.E.2d 737 citing Messersmith v. American Fidelity Co., 232 N.Y. 161, 133 N.E. 432.) In this respect letters to plaintiff from First State and Agricultural which deny coverage for punitive damages correctly state the law.

Nevertheless, the insurer is obligated to defend the insured against lawsuits where compensatory and punitive claims are commingled on the theory that the insurer's duty to defend its insured is broader than its duty to pay. (Utica Mutual Insurance Co. v. Cherry, 45 A.D.2d 350, 358 N.Y.S.2d 519, aff'd 38 N.Y.2d 735, 381 N.Y.S.2d 40, 343 N.E.2d 758.) Most liability policies contain, as does Agricultural's, a provision obligating the insurer to defendant against all actions alleging facts and circumstances covered by the policy even though such suits are groundless, false or fraudulent (see Annot. 60 A.L.R.2d 463). The insurer's duty to defend includes those actions in which alternative grounds are asserted, some within and others without the coverage. (Freedman Inc. v. Glens Falls Insurance Co., 27 N.Y.2d 364, 368, 318 N.Y.S.2d 303, 267 N.E.2d 93.)

Normally, an insurer's duty to defend is coupled with the right to control the defense of the litigation (7C Appleman, Insurance Law and Practice, Section 4681, pp. 2-5; Podolsky v. Devinney, 281 F.Supp. 488). The purpose of such right is to allow insurers to protect their financial interest in the outcome of litigation and to minimize unwarranted liability claims. Giving the insurer exclusive control over litigation against the insured safeguards the orderly and proper disbursement of the large sums of money involved in the insurance business. (Appleman, supra.) Of course, the insured, at his own expense, may choose to hire independent counsel.

However, in situations where conflict of interest and loyalties are apparent, "The insurer's desire to control the defense must yield to its obligations to defend the insured". (Penn Aluminum v. Aetna...