In Merchants Mutual v. Travelers Insurance, 2005 N.Y. Slip Op. 09816, the Fourth Department considered the issue of whether the defendant insurance company was obligated to defend and indemnify the plaintiff insurance company.
In this case an employee of Finnefrock Excavating and Paving (hereinafter "F") was injured during the course of his employment while working on land owned by Springcreek Associates and Home Properties of New York, Inc. (hereinafter "S"). F was insured by the plaintiff in this action, Merchants Mutual Insurance Group (hereinafter "Company F") and S was insured by the defendant, Automobile Insurance Company of Hartford (hereinafter "Company S"), which was incorrectly sued as Travelers Insurance Company.
The employee commenced a lawsuit in June 1997 against S, and in November 1997, Company S tendered the defense and indemnification of the action to Company F, which assumed the defense and indemnification in January 1998. Four years later, in January 2002, Company F attempted to retender the defense and indemnification to Company S by alleging mistakes of fact and law. Company S refused and Company F then commenced this declaratory judgment action and moved for summary judgment.
The Fourth Department first considered whether the voluntary payment doctrine applied with respect to Company F's defense of the action prior to January 18, 2002. The Court noted that pursuant to the voluntary payment doctrine, if an insurer that assumes the defense and indemnification of an insured when there is no obligation to do so and is not acting under mistake of fact or law, said insurer is a volunteer with no right to recover monies paid on behalf of the insured. The Court applied that doctrine to this case and concluded that Company F acted as a volunteer for the time period in question.
The Court then considered the issue of whether the doctrine of estoppel precluded Company F from disclaiming coverage when it attempted to retender defense to Company S. The Court stated that:
Once an insurance company that has voluntarily assumed the defense in an action attempts to retender the defense to the appropriate party, the insurance company is no longer a volunteer, unless that insurance company is estopped from denying or disclaiming coverage. Although Merchants is correct that estoppel will not apply to create coverage "[w]here there is no coverage ... because the policy was not in existence at the time of the accident" , estoppel may apply if an insurance company seeks to deny or disclaim coverage based on a defense or an exclusion. (Internal citations omitted).
The Court noted that the doctrine of estoppel precludes disclaimer if the proper defending party relied to its detriment on the coverage and was prejudiced by the delay based on the loss of the right to control its own defense. The Court held that the defendant, Company S, had failed to establish that it lost its right to control its defense beginning on January 18, 2002, when Company F attempted to retender defense to Company S, and thus estoppel did not apply from that point on. Accordingly, the Court concluded that Company S was not obligated to contribute toward the defense on behalf of S prior to January 18, 2002, but that there were issues of fact that precluded entitlement to judgment as a matter of law regarding the time frame following January 18, 2002.
All in all, this is an interesting and fairly in depth case, if you're inclined to wade through it. I think that the lesson to be learned from this case is that if you are an insurer and have any doubt as to whether coverage is applicable in a given case, don't think twice about calling your lawyer prior to undertaking defense and indemnification. It might cost a small amount of money up front, but could save a lot of money in the long run. In this case, the monies paid by Company F in the mistaken defense of S from January 1998 through January 2002 will likely never be recovered.