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

• Decision Date: 31 May 1984
• Citation: 477 N.Y.S.2d 725,102 A.D.2d 59
• Parties: SERVIDONE CONSTRUCTION CORPORATION, Respondent, v. SECURITY INSURANCE COMPANY OF HARTFORD, Appellant, et al., Defendant.
• Court: New York Supreme Court — Appellate Division

Page 725

477 N.Y.S.2d 725

102 A.D.2d 59

SERVIDONE CONSTRUCTION CORPORATION, Respondent, v. SECURITY INSURANCE COMPANY OF HARTFORD, Appellant, et al., Defendant.

Supreme Court, Appellate Division Third Department.

May 31, 1984.

Rein, Mound & Cotton, New York City (Robert L. Horkitz, New York City, of counsel), for Sec. Ins. Co. of Hartford, appellant.

Maney, McConville & Liccardi, East Greenbush (William J. Roberts, Albany, of counsel), for respondent.

Before KANE, J.P., and MAIN, MIKOLL, YESAWICH and HARVEY, JJ.

YESAWICH, Justice.

On March 14, 1972, Servidone Construction Corporation (Servidone), as general contractor, was engaged in the performance of a construction contract in New Jersey with the United States Army Corps of Engineers when John Cuttino, a Servidone employee, fell from a tower on the project, sustaining injuries ultimately resulting in paraplegia. His workers' compensation benefits, which now exceed $500,000, were paid by Security Insurance Company of Hartford (Security), the compensation and liability insurance carrier for Servidone.

Cuttino commenced a negligence action against the United States pursuant to the Federal Tort Claims Act (US Code, tit. 28, § 1346, subd. b; § 2671 et seq.) in the United States District Court for the District of New Jersey. The United States impleaded Servidone as a third-party defendant, and Servidone delivered the pleadings to Security, its insurer. Security read the third-party complaint as alleging two causes of action: the first for common-law negligence indemnification and the second for contractual indemnification pursuant to certain provisions of Servidone's government contract. Security concluded that, although covered under the policy, common-law indemnification was not a viable cause of action and further that, by virtue of a specific exclusion in the policy, it had no duty to defend the claim for contractual indemnification. As for this latter conclusion, it is worth noting that, with respect to Servidone's liability as an employer, the insuring agreement, under "Coverage B--Employers' Liability", binds Security to:

* * * pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury by accident or disease, including death at any time resulting therefrom, (a) sustained * * * by any employee of the insured arising out of and in the course of his employment * * * (emphasis added).

Elsewhere in the policy this clause is directly interpreted to apply to third-party indemnity actions for it is declared that:

The words "damages because of bodily injury by accident or disease, including death at any time resulting therefrom," in coverage B * * * include damages for which the insured is liable by reason of suits * * * brought against the insured by others to recover the damages obtained from such others because of such bodily injury sustained by employees of the insured arising out of and in the course of their employment * * *.

Bearing in mind that ambiguities in an insurance policy must be construed against the insurer (Lipton, Inc. v. Liberty Mut. Ins. Co., 34 N.Y.2d 356, 361, 357 N.Y.S.2d 705, 314 N.E.2d 37; Atlantic Cement Co. v. Fidelity & Cas. Co. of N.Y., 91 A.D.2d 412, 418-420, 459 N.Y.S.2d 425, app. dsmd. 59 N.Y.2d 761) and that it is the insurer's burden, not clearly met here, to prove that the event giving rise to the claim being made patently comes within an exclusion of the policy (International Paper Co. v. Continental Cas. Co., 35 N.Y.2d 322, 327, 361 N.Y.S.2d 873, 320 N.E.2d 619), the policy at hand undeniably covered the third-party action brought by the United States against Servidone. Nevertheless, following discussions between Servidone and Security, it was agreed that, with full reservations of rights by each, Security would defend Servidone as to both causes of action, characterizing its defense of the contractual cause of action as "gratuitous". Thereafter, Security appeared through counsel in the Federal action on behalf of Servidone and answered the complaint. However, on April 4, 1978, Security notified Servidone that it was totally withdrawing its defense, asserting that the United States had decided at a pretrial conference not to pursue the common-law negligence cause of action because the law of the State of New Jersey prohibited the government from recovering on that theory.

After unsuccessfully protesting Security's decision to withdraw its defense, Servidone engaged its own counsel who appeared in the Federal action, prepared for trial and commenced this declaratory judgment action on Servidone's behalf. By order entered August 18, 1980, Special Term granted Servidone partial summary judgment decreeing that Security had breached its obligation to furnish an unqualified defense and that Security would be liable for all damages flowing from that breach, 106 Misc.2d 118, 430 N.Y.S.2d 991. Special Term declined to pass on the question of the insurer's obligation to indemnify, declaring that issue to be premature.

On September 25, 1980, after Security's failure to respond to two written notices that the opportunity to settle existed, Cuttino, the United States and Servidone settled the Federal action. The settlement consisted of a $50,000 payment by Servidone to Cuttino.

Servidone then moved to reopen its original motion for summary judgment in order to obtain a determination of Security's obligation to indemnify. By judgment entered September 10, 1981, Special Term declared that the Cuttino settlement in the Federal action was reasonable and that Servidone was entitled to recover the same from Security. This determination is the focal point of this appeal.

We affirm. The insurer's obligation to defend extends to any action in which facts are alleged within the coverage afforded by the policy (International Paper Co. v. Continental Cas. Co., supra, 35 N.Y.2d p. 326, 361 N.Y.S.2d 873, 320 N.E.2d 619). This includes defending those actions where alternative grounds are advanced, some of which are within the others without the coverage (Freedman, Inc. v. Glens Falls Ins. Co., 27 N.Y.2d 364, 368, 318 N.Y.S.2d 303, 267 N.E.2d 93). Since even groundless suits against the insured must be defended, Security's truncated defense of Servidone unquestionably constituted a breach of its contract. Moreover, its responsibility to defend was undiminished following the pretrial conference in the Federal action, for the record indicates that Servidone remained exposed to damage based on common-law indemnification, a theory for which policy coverage existed.

It is now urged that because the duty to defend and the duty to indemnify are discrete, Security cannot be liable for the $50,000 settlement paid to Cuttino. There is, however, commanding authority for the proposition that where an insurer unjustifiably refuses to defend, the insured may effect a reasonable settlement of the injured party's claim, after which the insured may then secure reimbursement from the insurer (Rosen & Sons v. Security Mut. Ins. Co. of N.Y., 31 N.Y.2d 342, 339 N.Y.S.2d 97, 291 N.E.2d 380; Cardinal v. State of New York, 304 N.Y. 400, 107 N.E.2d 569). As we perceive application of this principle, if a possibility of a duty to indemnify exists, as in this instance, where Servidone has put forward alternative causes of action, one of which on the face of the complaint is plainly within the policy and the other of which is arguably covered, a refusal by the insurer to defend is unreasonable. In that circumstance, the mere fact that a settlement occurred does not, as Security suggests, invest the insurer with an untrammeled right to challenge whether the insured would have been liable, and under what theory, if a trial had taken place ( Cardinal v. State of New York, supra, p. 418, 107 N.E.2d 569). Applying this view does not create insurance coverage where none existed, but simply dictates that where a claim for coverage exists and the insurer breaches its duty to defend, it must indemnify the insured for a reasonably arrived-at settlement because it is impossible to determine on what theory of liability plaintiff might have prevailed.

Here, the damages which Servidone incurred, including the settlement (the reasonableness of which is supported in the record and not seriously challenged on appeal), are a direct consequence of Security's failure to carry out its duty to defend. Though that duty is distinct from the duty to indemnify, Servidone is not thereby prohibited from recovering at least those damages it necessarily suffered by reason of Security's failure to meet its contractual burden of protecting Servidone from attack.

Left to be resolved is the appropriateness of...