In the recently decided Appellate Division decision, 206-208 Main Street Associates, Inc. v. Arch Insurance Co., 106 A.D.3d 403, 965 N.Y.S.2d 31 (1st Dept. May 2013), the First Department revisited the issue of whether an insurance carrier should be equitably estopped from issuing a disclaimer if, at the time it disclaims, it had already assumed control of the defense of its insured. The First Department held the property owner (“Sutphin”) and construction manager (“H&H”) failed to establish as a matter of law that they were prejudiced by the carrier’s assumption of defense and over two year delay in providing a reservation of rights. The lower court decision granting summary judgment was reversed and the issue of whether the carrier should be equitably estopped left to the trier of fact for a determination as to whether there was any prejudice.
Sutphin had hired H&H Builders to act as Construction Manager for a project involving a three story building with an underground parking garage. H&H Builders agreed to procure a commercial general liability insurance policy with Sutphin named as an additional insured. The policy issued by Arch Insurance included an Earth Movement or Subsidence Exclusion Endorsement which specified the policy would not apply to property damage or bodily injury claims arising out of subsidence, falling away, caving in, or other movement of earth. During excavation at the job site, the foundation of an adjacent building began to crack and eventually collapsed.
H&H informed its insurance agent that the claim was based on the collapse of a neighboring building in September 2007. Arch acknowledged the claim with a reservation of rights letter pending investigation. At least four actions arose out of the incident. Arch provided defense counsel in each of those actions in or about October 2007.
In January 2010, over two years after providing defense counsel, Arch informed Sutphin and H&H that the incident might fall within the earth movement exclusion in the policy and reserved its right to disclaim coverage while continuing to provide a defense. Arch restated its reservation of rights in March 2010. A declaratory judgment action was commenced by Sutphin to determine whether the exclusion applied and whether Arch was equitably estopped from denying coverage
The Appellate Division agreed with the lower court that Arch failed to offer a reasonable excuse for late disclaimer as the facts were available to Arch at the time it provided defense counsel in 2007, but held that was insufficient proof of prejudice. The Court noted the cases cited by Sutphin and H&H involved situations where the delay and assumption of defense did result in prejudice. See e.g., Daimler Chrysler Ins. Co. v. Zurich Ins. Co., 72 A.D.3d 730, 899 N.Y.S.2d 310 (2d Dept. 2010)[equitable estoppel appropriate where litigation on the trial calendar at time disclaimer was issued]; Fireman’s Fund Ins. Co. v. Zurich American Ins. Co., 37 A.D.3d 521, 830 N.Y.S.2d 274 (2d Dept. 2007)[information communicated by insured to defense counsel formed basis for disclaimer]. The Court went on to state that as the underlying litigation against Sutphin and H&H was still in its early phase, there was no evidence of prejudice as a result of the assumption of defense and lack of timely notice. The Appellate Division was careful to note that should Sutphin and H&H establish prejudice at trial “by some factor other than the posture of the litigation at the time Arch issued its reservation of rights,” Arch may be equitably estopped.