Servidone Const. Corp. v. Security Ins. Co. of Hartford

• Court: New York Court of Appeals
• Writing for the Court: KAYE; WACHTLER
• Citation: 64 N.Y.2d 419,477 N.E.2d 441,488 N.Y.S.2d 139
• Decision Date: 26 March 1985
• Parties: , 477 N.E.2d 441 SERVIDONE CONSTRUCTION CORPORATION, Respondent, v. SECURITY INSURANCE COMPANY OF HARTFORD, Appellant, et al., Defendant.

Page 139

488 N.Y.S.2d 139 64 N.Y.2d 419, 477 N.E.2d 441 SERVIDONE CONSTRUCTION CORPORATION, Respondent,
v.
SECURITY INSURANCE COMPANY OF HARTFORD, Appellant, et al., Defendant. Court of Appeals of New York. March 26, 1985.

Page 140

Robert L. Horkitz, New York City, for appellant.

William J. Roberts, Albany, for respondent.

OPINION OF THE COURT

KAYE, Judge.

Where an insurer breaches a contractual duty to defend its insured in a personal injury action, and the insured thereafter concludes a reasonable settlement with the injured party, is the insurer liable to indemnify the insured even if coverage is disputed? While disagreeing with the court below that the insurer must indemnify the insured irrespective of actual coverage, we hold that the burden is on the insurer to establish that the loss was not covered by the policy.

On March 14, 1972, during construction on a Government flood control project in New Jersey, John Cuttino, an employee of plaintiff, Servidone Construction Corporation (the insured), fell from a tower and as a result was paralyzed from the waist down. In addition to receiving workers' compensation benefits through Servidone, which functioned as general contractor for the project, in November 1976 Cuttino brought suit under the Federal Tort Claims Act against the United States, owner of the project, in the New Jersey Federal court contending that he had not been provided a safe place to work. The United States, in turn, commenced a third-party action

Page 141

against Servidone, asserting a right of indemnity both under common law (alleging that its negligence was at most passive or secondary) and under the construction contract (which expressly placed responsibility on the contractor for safety precautions to protect the workers).

For defense of the third-party action, Servidone looked to defendant, Security Insurance Company, its compensation and liability insurance carrier (the insurer). Security responded that, pursuant to an exclusion in the policy, a loss based upon any obligation the insured had assumed by contract was outside coverage, but it nonetheless agreed to defend Servidone as to both claims asserted by the Government, reserving its right to disclaim liability for recovery based on contractual indemnification. The litigation proceeded. On February 21, 1978, a pretrial order was entered, which defined the third-party action as one "in contract for indemnity." Security immediately withdrew, contending that the United States had formally abandoned its claim for common-law indemnification, leaving only its claim under the construction contract, and since the policy excluded losses based on contractual obligations assumed by the insured, the insurer had no further obligation. Servidone engaged new counsel, who prepared for trial and sought a declaratory judgment against Security. When Servidone in 1980 notified Security that it had an opportunity to settle with Cuttino for $50,000, Security made no response. On March 18, 1980, Servidone advised Security that it intended to settle for $50,000, again met by silence.

Before the settlement with Cuttino was concluded, Special Term entered an order in Servidone's action declaring that the insurer had breached its contractual obligation by failing to provide an unqualified defense and directing that Security pay Servidone any damages flowing from the breach, including the reasonable value of legal services incurred in defense of the third-party action, with damages to be determined at trial; the court, however, declined to pass on the question whether Security had a duty to indemnify, finding it premature, 106 Misc.2d 118, 430 N.Y.S.2d 991. That order is not on appeal. What is challenged is Special Term's subsequent order, on a motion to reopen made after payment of the settlement, granting the insured summary judgment in the amount of $50,000, which the Appellate Division affirmed, two Justices dissenting.

Neither Security's breach of its duty to defend nor the reasonableness of the settlement amount is disputed. The difference centers on the effect to be accorded the insurer's contention that the loss is simply not within the policy coverage. Without finding that the loss was covered, the Appellate Division majority imposed a duty to indemnify on the insurer because, based on the claims asserted, it perceived a possibility of coverage and concluded that the settlement constituted "damages it...