Balaban-Krauss et al v. Executive Risk Indemnity Inc.

Filing 39

MEMORANDUM-DECISION and ORDER - That ERII's 27 Motion for Summary Judgment is DENIED. That plaintiffs' 28 Motion for Summary Judgment is GRANTED, and ERII is obligated to provide coverage for plaintiffs' defense expenses in connection with the underlying WCB and Trust actions. Signed by Chief Judge Gary L. Sharpe on 6/23/2015. (jel, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
________________________________
JUDY BALABAN-KRAUSS et
al.,
Plaintiffs,

1:13-cv-282
(GLS/CFH)

v.
EXECUTIVE RISK INDEMNITY,
INC.,
Defendant.
________________________________
APPEARANCES:
OF COUNSEL:
FOR THE PLAINTIFFS:
Office of David R. Sheridan
33 Grantwood Road
Delmar, NY 12054
FOR THE DEFENDANT:
Cozen, O’Connor Law Firm
45 Broadway Atrium
16th Floor
New York, NY 10006

DAVID R. SHERIDAN, ESQ.

MELISSA F. BRILL, ESQ.

Gary L. Sharpe
Chief Judge
MEMORANDUM-DECISION AND ORDER
I. Introduction
Plaintiffs Judy Balaban-Krauss, Robert Callaghan, Ronald Field, and
Laura Donaldson, the insured, commenced this diversity action against

defendant Executive Risk Indemnity, Inc. (ERII), the insurer, seeking a
declaratory judgment that ERII must pay plaintiffs’ expenses incurred to
defend underlying lawsuits against them, pursuant to an insurance policy
issued by ERII. (See generally Compl., Dkt. No. 1, Attach. 1 at 3-8.)
Pending are motions for summary judgment filed by both ERII, (Dkt. No.
27), and plaintiffs, (Dkt. No. 28). For the reasons that follow, ERII’s motion
is denied, and plaintiffs’ motion is granted.
II. Background1
ERII issued a Directors and Officers Liability policy to the New York
State Association of Health Care Providers, Inc., for a policy period of
January 1, 2011 to January 1, 2012. (Def.’s Statement of Material Facts
(SMF) ¶¶ 1-2, Dkt. No. 27, Attach. 2; Dkt. No. 29, Attach. 13 at 10.) The
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Unless otherwise noted, the facts are not in dispute. Additionally, the court notes that,
in response to the Statement of Material Facts submitted by plaintiffs in support of their
motion, (Dkt. No. 29, Attach. 6), ERII submitted a “statement of material facts in opposition to
plaintiffs’ motion for summary judgment,” (Dkt. No. 30, Attach. 3), which appears to be
identical to the Statement of Material Facts already submitted by ERII in support of its own
motion, (Dkt. No. 27, Attach. 2), except that it contains three additional paragraphs. Notably,
ERII did not, as is required by the Local Rules of this District, “file a response to [plaintiffs’]
Statement of Material Facts . . . [that] mirror[s] the movant’s Statement of Material Facts by
admitting and/or denying each of the movant’s assertions in matching numbered paragraphs.”
N.D.N.Y. L.R. 7.1(a)(3). The failure to comply with this rule is not without consequence, as the
Local Rules explicitly state that “[t]he Court shall deem admitted any properly supported facts
set forth in the Statement of Material Facts that the opposing party does not specifically
controvert.” Id. As ERII has not specifically controverted, in matching numbered paragraphs,
any of the factual assertions made in plaintiffs’ Statement of Material Facts, (Dkt. No. 29,
Attach. 6), those facts which are properly supported by a citation to the record are deemed
admitted.

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policy covers “any past, present or future director, officer, [or] trustee . . . of
the Insured Entity,” namely, the Association, and the policy was
subsequently amended to add the Health Care Providers Self-Insurance
Trust (the “Trust”), for which plaintiffs served as trustees, as an additional
insured under the policy. (Dkt. No. 29, Attach. 13 at 13, 46.) Pursuant to
the policy, ERII is obligated to “pay on behalf of the Insured Persons Loss
from Claims first made against them during the Policy Period.” (Id. at 12.)
As these terms are further defined within the policy, ERII is responsible for
paying “Defense Expenses,” which include “reasonable legal fees and
expenses incurred by an Insured in defense of” an underlying claim in
which one seeks to “hold any Insured responsible for a Wrongful Act, or
. . . a legal . . . proceeding against an Insured Person.” (Id. at 12-13.)
Wrongful acts are specifically defined to include “any actual or alleged
error, omission, misstatement, misleading statement or breach of duty . . .
by an Insured Person solely in his or her capacity as such.” (Id. at 13.)
As relevant here, the policy also contains certain exclusions, and
notes that ERII “shall not pay Loss, including Defense Expenses, for
Claims” that are “based upon, arising out of, directly or indirectly resulting
from, in consequence of, or in any way involving . . . any commingling or
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mishandling of funds with respect to any . . . Insurance Contract.” (Id. at
14, 53.) While “mishandling of funds” is not further defined, for purposes of
this exclusion clause, “Insurance Contract” is defined as “any policy or
agreement of insurance, reinsurance, or indemnity, including . . . risk
management self-insurance programs.” (Id. at 54.)
On July 8, 2011, an action was commenced in New York State
Supreme Court by the New York State Workers’ Compensation Board (the
“WCB action”) against Balaban-Krauss, Callaghan, Field, and Donaldson,
among others. (Def.’s SMF ¶ 3.) An amended complaint was filed in that
action on January 23, 2012, (id. ¶ 5), which alleges that the defendants
acted improperly in the administration and maintenance of the Trust, which
the defendants had established in order to comply with their obligations
under New York law to provide workers’ compensation benefits to their
employees, (id. ¶ 6). (See generally Dkt. No. 29, Attachs. 9, 10.) A
separate but similar action (the “Trust action”) was commenced by
numerous plaintiffs, including the Trust and several of its members, against
Field, among others, with an amended complaint filed in that action on
January 6, 2012. (Def.’s SMF ¶¶ 14-16; Pls.’ SMF ¶ 6, Dkt. No. 29, Attach.
6; see generally Dkt. No, 29, Attach. 12.) In general, both actions allege
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that plaintiffs here, who are named as defendants in the underlying actions
as trustees of the Trust, acted improperly and failed to satisfy their duties
as trustees, resulting in the Trust being underfunded by several million
dollars.2 (See generally Dkt. No, 29, Attachs. 9, 10, 12.)
Following commencement of the underlying actions, plaintiffs notified
ERII and sought coverage for their defense expenses in connection with
these underlying actions, pursuant to the policy. (Pls.’ SMF ¶¶ 4, 9; Def.’s
SMF ¶ 18; Dkt. No. 29, Attach. 14 at 2-3.) By letters dated January 9 and
January 17, 2013, ERII disclaimed coverage, citing the exclusion provision,
and refused to provide coverage based on ERII’s assessment that the
underlying actions involved “mishandling of funds.” (Defs.’ SMF ¶¶ 20, 22;
Dkt. No. 29, Attach. 15 at 5; Dkt. No. 29, Attach. 17 at 3.) Plaintiffs then
commenced this action in New York State Supreme Court, Albany County,
seeking a declaration that ERII is obligated to pay plaintiffs’ past and future
defense expenses in the underlying actions. (See generally Compl.) ERII
removed the action to this court, (Dkt. No. 1), and the parties subsequently
filed their now-pending motions for summary judgment, (Dkt. Nos. 27, 28).
III. Standard of Review
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Both underlying actions appear to remain pending in state court. (Dkt. No. 37.)

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The standard of review pursuant to Fed. R. Civ. P. 56 is well
established and will not be repeated here. For a full discussion of the
standard, the court refers the parties to its decision in Wagner v. Swarts,
827 F. Supp. 2d 85, 92 (N.D.N.Y. 2011), aff’d sub nom. Wagner v.
Sprague, 489 F. App’x 500 (2d Cir. 2012).
IV. Discussion3
ERII contends that it has no duty to provide coverage for plaintiffs’
defense expenses in the underlying actions because the underlying
complaints fit within the Errors and Omission Exclusion of the insurance
policy issued by ERII. (Dkt. No. 27, Attach. 1 at 6-8; Dkt. No. 30 at 2-6.) In
response, plaintiffs argue that the underlying allegations do not clearly and
entirely fall within the policy’s exclusion provision, and that they are thus
entitled to summary judgment pursuant to the terms of the policy. (Dkt. No.
29 at 16-23; Dkt. No. 31 at 4-11.) The court agrees with plaintiffs.
Under New York law, an insurer has an “exceedingly broad” duty to
defend4 the insured, Auto. Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131, 137
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The parties appear to agree, and the court concurs, that New York law applies to this
diversity action.
4

Although, technically, the duty at issue in this case is not the duty to defend, but
rather the duty to pay defense expenses, courts have found “no relevant difference” between
the two, and have therefore applied the same legal standards and principles to both. Bodewes

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(2006) (internal quotation marks and citation omitted), and the duty to
defend is even broader than the duty to indemnify, see Seaboard Sur. Co.
v. Gillette Co., 64 N.Y.2d 304, 310 (1984). An insurer’s obligation to
provide a defense is triggered “whenever the allegations of the complaint
suggest . . . a reasonable possibility of coverage.” Cook, 7 N.Y.3d at 137
(internal quotation marks and citation omitted).
This duty to defend on the insurer’s part remains, unless the insurer
can “establish, as a matter of law, that there is no possible factual or legal
basis on which the insurer might eventually be obligated to indemnify [the
insured] under any provision contained in the policy.” Villa Charlotte
Bronte, Inc. v. Commercial Union Ins. Co., 64 N.Y.2d 846, 848 (1985). For
this reason, an insurer who seeks to be relieved of the duty to defend
based on a policy exclusion
bears the heavy burden of demonstrating that the
allegations of the complaint cast the pleadings wholly
within that exclusion, that the exclusion is subject to no
other reasonable interpretation, and that there is no
possible factual or legal basis upon which the insurer
may eventually be held obligated to indemnify the
insured under any policy provision.

v. Ulico Cas. Co., 336 F. Supp. 2d 263, 271 (W.D.N.Y. 2004) (quoting Lowy v. Travelers Prop.
& Cas. Co., No. 99 Civ. 2727, 2000 WL 526702, at *2 n.1 (S.D.N.Y. May 2, 2000)).

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Frontier Insulation Contractors, Inc. v. Merchs. Mut. Ins. Co., 91 N.Y.2d
169, 175 (1997). Further, “[i]f any of the claims against the insured
arguably arise from covered events, the insurer is required to defend the
entire action.” Id.; see Int’l Paper Co. v. Cont’l Cas. Co., 35 N.Y.2d 322,
325 (1974) (noting that, when an insurer relies on an exclusion provision in
order to avoid its obligations under the policy, it is the insurer’s burden to
demonstrate that the “allegations of the complaint cast that pleading solely
and entirely within the policy exclusions, and, further, that the allegations,
in toto, are subject to no other interpretation”).
Moreover, a court reviewing an insurance policy must remain mindful
that it is a “contract[ ] to which the ordinary rules of contractual
interpretation apply.” Accessories Biz, Inc. v. Linda & Jay Keane, Inc., 533
F. Supp. 2d 381, 386 (S.D.N.Y. 2008). New York insurance contracts are
construed in light of “common speech.” Ace Wire & Cable Co. v. Aetna
Cas. & Sur. Co., 60 N.Y.2d 390, 398 (1983). Insurance contracts also
must be interpreted “according to the reasonable expectation and purpose
of the ordinary businessman when making an ordinary business contract.”
Gen. Motors Acceptance Corp. v. Nationwide Ins. Co., 4 N.Y.3d 451, 457
(2005) (internal quotation marks and citation omitted). Where there are
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ambiguous terms in a policy, these “must be construed in favor of the
insured and against the insurer.” White v. Cont’l Cas. Co., 9 N.Y.3d 264,
267 (2007); see Breed v. Ins. Co. of N. Am., 46 N.Y.2d 351, 353 (1978)
(“Well recognized is the general rule that ambiguities in an insurance policy
are to be construed against the insurer, particularly when found in an
exclusionary clause.”).
Here, ERII contends that it is entitled to summary judgment—and
thus a declaration that it is not obligated to cover plaintiffs’ defense costs in
the underlying actions—because the underlying lawsuits “clearly involve
claims for the mishandling of funds,” such that “coverage is precluded, as a
matter of law,” by the policy’s exclusion clause. (Dkt. No. 27, Attach. 1 at
6-8.) To the contrary, the court finds that plaintiffs are entitled to summary
judgment here. As noted above, the policy clearly provides that ERII “will
pay on behalf of the Insured . . . Loss from Claims,” which includes
responsibility “for a Wrongful Act.” (Dkt. No. 29, Attach. 13 at 12.)
“Wrongful Act” is further defined by the policy to include “any actual or
alleged error, omission, misstatement, misleading statement or breach of
duty . . . by an Insured Person solely in his or her capacity as such, or
while serving as a director or trustee.” (Id. at 13.)
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Although ERII argues that the gravamen of the underlying actions
stems from plaintiffs’—defendants in the state court actions—“mishandling
of funds,” such that defense for the underlying actions would fall within the
policy’s exclusion clause, (id. at 53), that argument is unavailing. (Dkt. No.
27, Attach. 1 at 6-8.) ERII fails to acknowledge the well-settled principle
that, in order to rely on an exclusionary clause as a basis to disclaim
coverage, an insurer must demonstrate that the “allegations of the
[underlying] complaint[s] cast the pleadings wholly within that exclusion.”
Frontier, 91 N.Y.2d at 175 (emphasis added). As the New York Court of
Appeals has stated, “[i]f any of the claims against the insured arguably
arise from covered events, the insurer is required to defend the entire
action.” Id.; see Fieldston Prop. Owners Ass’n, Inc. v. Hermitage Ins. Co.,
16 N.Y.3d 257, 264-65 (2011); BP Air Conditioning Corp. v. One Beacon
Ins. Grp., 8 N.Y.3d 708, 714 (2007); Town of Massena v. Healthcare
Underwriters Mut. Ins. Co., 98 N.Y.2d 435, 443-44 (2002) (noting that “[t]he
duty to defend arises whenever the allegations in a complaint against the
insured fall within the scope of the risks undertaken by the insurer,” and
specifying that “[it is immaterial] that the complaint against the insured
asserts additional claims which fall outside the policy’s general coverage or
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within its exclusory provisions” (internal quotation marks and citation
omitted)).
Here, as set forth by plaintiffs, (Dkt. No. 29 at 18-21; Dkt. No. 31 at 511; Dkt. No. 34 at 6-7, 9), many of the allegations in the underlying
complaints would appear to be plainly encompassed by the policy. For
example, the underlying WCB action alleges, among other things, that the
trustees, which include plaintiffs here: “failed to take sufficient or timely
corrective actions to establish the financial viability of the Trust”; “failed to
properly and timely inform the members of the Trust of the true financial
status of the Trust”; “caused the Trust to enter into contracts and
agreements that were detrimental to the Trust,” (Dkt. No. 29, Attach. 9 at
68); “fail[ed] to properly administer the affairs of the Trust”; “violated their
fiduciary duty by failing to perform, or negligently and improperly
performing, the Trust Services,” (Dkt. No. 29, Attach. 10 at 15); and
“fail[ed] to exercise reasonable care and skill in administering the affairs of
the Trust, [and thus] were negligent and breached their duties to the Trust,”
(id. at 37). The Trust action, in which Field was named as a defendant,
alleges that the trustees, including Field: “contributed to the Trust’s deficit”
because of their “acts, conduct and/or omissions”; “breached [their
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fiduciary duties] through various acts and/or omissions”; “failed to ensure
that the Trust was at all times properly capitalized”; and “unreasonably,
negligently and in violation of their duties as trustees of the Trust failed to
properly administer the business and affairs of the Trust[,] including . . .
failing to take actions to monitor and correct the actions and deficiencies
of” other entities affiliated with the Trust. (Dkt. No. 29, Attach. 12 at 60, 71,
89-91.) These allegations fall squarely within the policy’s terms requiring
coverage for “Wrongful Act[s],” which, as defined by the policy, include
“any actual or alleged error, omission, misstatement, misleading statement
or breach of duty . . . by an Insured Person solely in his or her capacity as
such, or while serving as a director or trustee,” (Dkt. No. 29, Attach. 13 at
13), and, on their face, do not involve the “mishandling of funds.”
In sum, while some of the allegations and causes of action in the
underlying actions may potentially constitute “mishandling of funds,” it is
clear that other allegations and causes of action plainly fall within the
purview of the policy’s coverage of liability for “wrongful acts.” Accordingly,
given that certain allegations are encompassed by the policy, “[it is
immaterial] that the [underlying] complaint[s] against [plaintiffs] assert[]
additional claims which fall outside the policy’s general coverage or within
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its exclusory provisions,” and ERII is therefore obligated to provide
coverage. Town of Massena, 98 N.Y.2d at 443-44 (internal quotation
marks and citation omitted); compare Fieldston Prop. Owners Ass’n, 16
N.Y.3d at 265 (holding that, where there was a “possibility that [the] policy
covers at least one cause of action in each of the two underlying
complaints, [the insurer] has a duty to provide a defense to the entirety of
both complaints”), with Cent. Mut. Ins. Co. v. Willig, 29 F. Supp. 3d 112,
120 (N.D.N.Y. 2014) (holding that insurer had no duty to defend or
indemnify where “the entirety of the Underlying Complaint fit[] within the
Exclusion” (emphasis added)).
V. Conclusion
ACCORDINGLY, it is hereby
ORDERED that ERII’s motion for summary judgment (Dkt. No. 27) is
DENIED; and it is further
ORDERED that plaintiffs’ motion for summary judgment (Dkt. No.
28) is GRANTED, and ERII is obligated to provide coverage for plaintiffs’
defense expenses in connection with the underlying WCB and Trust
actions; and it is further
ORDERED that the Clerk close this case; and it is further
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ORDERED that the Clerk provide a copy of this MemorandumDecision and Order to the parties.
IT IS SO ORDERED
June 23, 2015
Albany, New York

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