March 2025 New York Insurance Coverage Law Update

Southern District Holds Named Insured’s Late Notice Prejudice Relieves Its Insurer Of Obligations Under Policy; Other Insurer Estopped From Denying Additional Insured Coverage; And Vertical Exhaustion Applies Because Of Contractual Indemnification Pass-Through

The owners of a warehouse leased it to a commercial tenant to operate a photography studio. The lease required the tenant to procure insurance for the owners and to indemnify them for the negligent acts of the tenant’s “agents, contractors, invitees.” The lease stated that the owners’ rights under the lease extended to their “successors.” The tenant’s affiliated company hired a contractor to renovate the leased space. While the work was ongoing, the owners transferred ownership of the premises to their limited liability company, 2939 LLC. The contractor’s employee was gravely injured while working at the leased premises and filed a labor law action against the owners, the tenant, and its affiliate. Hanover issued a $1 million primary policy and $15 million excess policy to the tenant and its affiliate. Hanover jointly defended the tenant, its affiliate, and 2939 LLC as an additional insured for four years without reservation and then filed a declaratory judgment action seeking a declaration of no coverage for 2939 LLC. In the alternative, Hanover argued that 2939 LLC’s own primary policy issued by Seneca Insurance Company must pay after Hanover’s primary policy exhausted and before Hanover’s excess policy pays anything. The United States District Court for the Southern District of New York found that the tenant and its affiliate were contractually obligated under the lease to indemnify 2939 LLC, a “successor-in-interest” to the original owners, and Hanover was obligated to pay for its insureds’ contractual liability to 2939 LLC. Accordingly, the court found that Hanover must vertically exhaust its primary and excess policies before Seneca is obligated to pay anything. As to Seneca, the court held that it was not obligated to defend or to indemnify 2939 LLC because 2939 LLC delayed three and a half years before giving Seneca notice of  the accident and action, and Seneca was prejudiced by the delay. The court explained that, because notice was more than two years late, prejudice is presumed, and found that Hanover failed to rebut this presumption. The court further found that Seneca had sustained actual prejudice, including because Seneca was unable to (i) assert indemnity claims on behalf of 2939 LLC against the tenant and its affiliate; (ii) move for summary judgment; (iii) explore settlement opportunities; and (iv) assign independent counsel. Although it was  not necessary for the court to address whether 2939 LLC is an additional insured under the Hanover policies because of the contractual indemnification pass-through, the court nevertheless found that Hanover was estopped from denying additional insured coverage to 2939 LLC because it had assumed 2939 LLC’s defense without reservation for more than four years before disclaiming coverage, after the course of the defense could not be changed. [Mass. Bay Ins. Co. v. Seneca Ins. Co., No. 21 cv 9184 (CM), 2025 U.S. Dist. LEXIS 34794 (S.D.N.Y. Feb. 26, 2025).]

First Department Finds Insured’s More Than Three Year Delay In Providing Notice Did Not Prejudice Insurer And
The Owner’s Additional Insured Coverage Under Tenant’s Policy Was Excess Over Its Own Coverage

Wesco Insurance Company issued a liability policy to the owner of a building, and Kookmin Best Insurance Company, Ltd., issued a liability policy to the tenant. Wesco tendered in the owner’s defense and indemnification in an underlying personal injury action to Kookmin more than three years after the owner was served with a summons and complaint in the action. Kookmin denied additional insured coverage to the owner based upon late notice prejudice and Wesco filed a declaratory judgment action. The Appellate Division, First Department, reversing the court below, granted Wesco’s motion for summary judgment to the extent of declaring that Kookmin has a duty to indemnify the owner excess over the Wesco policy; granted Kookmin’s cross-motion to the extent of declaring that it has no duty to defend the owner; and remanded the matter for further proceedings. The court found that Wesco’s notice was late, but that Kookmin was not prejudiced by the late notice “because Wesco promptly began investigating and defending the owner and a codefendant commercial tenant from the onset of the underlying personal injury litigation and was fully prepared to share its information relating to its investigation and defense.” In addition, the court explained that Kookmin “failed to point out ‘how Wesco’s defense of the [underlying] matter materially prejudiced it.’” The court noted, however, that because Kookmin is only required under its policy to provide excess coverage after the Wesco coverage has been exhausted, it has no duty to defend or to reimburse past defense costs. [Wesco Ins. Co., Inc. v. Kookmin Best Ins. Co., Ltd., 2025 NY Slip Op 00935, 2025 N.Y. App. Div. LEXIS 899 (1st Dep’t Feb. 18, 2025).]