Opinion ID: 791124
Heading Depth: 2
Heading Rank: 3

Heading: Lerner's Appeal: Breach of the Duty to Defend and Indemnify and Legal Malpractice

Text: 37 Next, we consider Lerner's challenge to the February 2004 decision granting summary judgment to Allstate and the Attorneys, thereby dismissing her third-party complaint. 38
39 Lerner argues that the district court erred in dismissing her claims against Allstate for breaching its duties to defend and indemnify her against MBCC's and Allianz's indemnification claims. For the reasons that follow, we conclude that while Allstate breached its duty to defend, it did not breach its duty to indemnify Lerner. 40 It is a well-established legal principle that the duty of an insurer to defend is broader than its duty to pay. Ruder & Finn Inc. v. Seaboard Surety Co., 52 N.Y.2d 663, 669, 439 N.Y.S.2d 858, 422 N.E.2d 518 (1981). The duty to defend arises whenever the allegations within the four corners of the underlying complaint potentially give rise to a covered claim, or where the insurer `has actual knowledge of facts establishing a reasonable possibility of coverage.' Frontier Insulation Contractors, Inc. v. Merchs. Mut. Ins., 91 N.Y.2d 169, 175, 667 N.Y.S.2d 982, 690 N.E.2d 866 (1997) (quoting Fitzpatrick v. Am. Honda Motor Co., Inc., 78 N.Y.2d 61, 67, 571 N.Y.S.2d 672, 575 N.E.2d 90 (1991)). An insurer is relieved of the duty to defend only if there is no possible factual or legal basis on which [the insurer] might eventually be held to be obligated to indemnify [the insured] under any provision of the insurance policy. Servidone Constr. Corp. v. Sec. Ins. Co., 64 N.Y.2d 419, 424, 488 N.Y.S.2d 139, 477 N.E.2d 441 (1985) (internal quotation marks omitted) (alterations in original). 41 The narrower duty to indemnify arises only if the claim for which the insured has been judged liable lies within the policy's coverage. Frontier, 91 N.Y.2d at 178, 667 N.Y.S.2d 982, 690 N.E.2d 866. Thus, while the duty to defend is measured against the possibility of a recovery, `the duty to pay is determined by the actual basis for the insured's liability to a third person.' Id. (quoting Servidone, 64 N.Y.2d at 424, 488 N.Y.S.2d 139, 477 N.E.2d 441). 42 Observing that the actual basis for Lerner's liability to Allianz was established in December 2003, two months before the district court considered Allstate's summary judgment motion, the court was misled into analyzing the claim against Lerner under the narrower duty to indemnify standard. In concluding that Allstate's policy did not cover Allianz's claim against Lerner, the court wrote: 43 As a lawsuit involving a breach of a lease agreement, the claim for which Lerner seeks coverage is not a claim of bodily injury or property damage arising out of an accident involving the Vehicle. Instead, it is a claim for contractual money damages sustained by MBCC as a result of Lerner's use of the Vehicle. This is not a claim for which Allstate insured Lerner and as such, the complaint of Allianz is not within the coverage provided to Lerner by Allstate. 44 Allianz II, 305 F.Supp.2d at 196. 45 Lerner maintains that the district court misinterpreted Allstate's policy, which obligates the carrier to defend an insured sued as the result of a covered auto accident. Specifically, Lerner argues that MBCC's liability to the infant plaintiff and, by extension, its cross-claims and Allianz's claims against Lerner, `resulted' from `a covered auto accident,' and do not depend for viability on whether the Allianz lawsuit itself is a claim for `bodily injury and damage.' We agree with Lerner. 46 The central issue in this case is whether Allstate had a duty to defend and indemnify MBCC's and Allianz's claims against Lerner and this requires an interpretation of the Allstate policy. 47 Under New York law, the interpretation of an insurance policy generally presents a question of law. See Hartford Accident & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 172, 350 N.Y.S.2d 895, 305 N.E.2d 907 (1973); see also McGinniss v. Employers Reinsurance Corp., 648 F.Supp. 1263, 1266 (S.D.N.Y.1986). In the interpretation process, an unambiguous provision must be given its plain and ordinary meaning. State of New York v. Am. Mfrs. Mut. Ins. Co., 188 A.D.2d 152, 593 N.Y.S.2d 885, 886 (3d Dep't 1993). An insurance policy must be liberally construed in favor of the insured. Stainless, Inc. v. Employers Fire Ins. Co., 69 A.D.2d 27, 418 N.Y.S.2d 76, 79 (1st Dep't 1979). 48 With these principles in mind, we focus on the terms of the policy. The policy provides that Allstate will defend a person insured if sued as the result of a covered auto accident (emphasis added). The district court did not discuss this provision. We find this language determinative. 49 The parties do not dispute, nor could they, that Lerner's car accident was a covered auto accident. The issue thus becomes whether Lerner was sued by MBCC and Allianz as the result of this accident. In the absence of a definition in the policy, we afford the plain meaning to the term result. See Am. Mfrs. Mut. Ins. Co., 593 N.Y.S.2d at 886. In this context, Webster defines result to mean consequence. Webster's Dictionary (3d ed.1988). 50 Applying this term to the facts, we conclude that MBCC's and Allianz's claims against Lerner were a consequence, or result, of the covered auto accident. Indeed, but for the accident and the resulting bodily injury claims asserted by Andrew Baron, MBCC and Allianz would not have any claims against Lerner. 51 Notably, neither MBCC nor Allianz asserted claims against Lerner for items unrelated to the accident, such as unpaid lease payments. Instead, the claims against Lerner seek reimbursement for MBCC's settlement payments to Andrew Baron. MBCC made these payments solely because of its vicarious liability as the owner of the Vehicle involved in the accident. Thus, we are led to the conclusion that the indemnification claims against Lerner were the result of a covered auto accident. 52 We recognize that our construction of Allstate's policy imposes a broad duty to defend that theoretically extends beyond the standard range of possibly covered claims to reach any claims against an insured so long as they are the result of a covered auto accident. See Hugo Boss Fashions, Inc. v. Fed. Ins. Co., 252 F.3d 608, 620 (2d Cir.2001) (observing the general principle gleaned from insurance cases that the duty to defend perdures until it is determined with certainty that the policy does not provide coverage (emphasis omitted)). But we do not find that this literal reading thwart[s] the obvious and clearly expressed purpose which the parties intended to accomplish or lead[s] to an obvious absurdity. McGrail v. Equitable Life Assur. Soc. of United States, 292 N.Y. 419, 424, 55 N.E.2d 483 (1944). Because MBCC's and Allianz's claims against Lerner arose directly out of the same car accident, it was reasonable for Lerner to expect that Allstate would defend, and perhaps even indemnify her against, these claims. This expectation is bolstered by the fact that the amount of indemnification sought by MBCC and Allianz, $340,000, represents the exact bodily injury damages paid to the injured plaintiff in the State Court Action. 53 Our construction of Allstate's defense obligations also accords well with the dual role of automobile insurance as both liability insurance and, as evident in this case, litigation insurance. See Cont'l Cas. Co. v. Rapid-Am. Corp., 80 N.Y.2d 640, 648, 593 N.Y.S.2d 966, 609 N.E.2d 506 (1993). 54 We emphasize again that the duty to defend is distinctly different from the duty to indemnify. See Servidone, 64 N.Y.2d at 424, 488 N.Y.S.2d 139, 477 N.E.2d 441. The district court blurred this distinction by focusing purely on the duty to indemnify and its examination of coverage based on MBCC's claim for contractual indemnification rather than the classic inquiry associated with the duty to defend: whether the claims [asserted against the insured] may rationally be said to fall within policy coverage, whatever may later prove to be the limits of the insurer's responsibility to pay.  Hugo Boss, 252 F.3d at 620 (internal quotation marks omitted) (alteration and emphasis in original) (affirming conclusion that insurer was obligated to defend, but not indemnify, insured where there was legal uncertainty as to insurance coverage). 55 The duty to defend is a contractual obligation. See New Hampshire Ins. Co. v. Jefferson Ins. Co. of New York, 213 A.D.2d 325, 624 N.Y.S.2d 392, 394 (1st Dep't 1995). Had Allstate wished to restrict its duty to defend to the standard range of covered, or possibly covered, claims, it could have done so with plainer language. See Sirignano v. Chicago Ins. Co., 192 F.Supp.2d 199, 204-05 (S.D.N.Y.2002) ([I]t is hornbook law that an insurance policy cannot be construed so as to render its terms meaningless or of no effect.); see also Dairy Road Partners v. Island Ins. Co., Ltd., 92 Hawai`i 398, 992 P.2d 93, 99 (Haw.2000) (illustrating a classic phrasing of the duty to defend obligation in a business automobile policy). As the policy in issue reads, however, there is no limitation implicit in the phrase as the result of. 56 Our conclusion that MBCC's and Allianz's claims against Lerner were the result of a covered auto accident ends our inquiry into whether Allstate breached its duty to defend Lerner because it is undisputed that Allstate withdrew from representing Lerner in defending against these claims. Allstate's payment of its $100,000 policy limit, while discharging its duty to indemnify, did not discharge its duty to defend. 11 N.Y.C.R.R. 60-1.1(b) (requiring automobile insurers to defend after exhaustion of the policy limits); Haight v. ELRAC, Inc., 5 A.D.3d 547, 772 N.Y.S.2d 833, 834 (2d Dep't 2004) (observing that an automobile insurer must pay all defense costs until a case ends, and is not excused from providing a full defense by tendering the policy amount). 57 We thus reverse, in part, the district court's award of summary judgment to Allstate and remand to the district court with instructions to enter partial summary judgment in favor of Lerner on her claim for breach of the duty to defend. On remand, the district court should also conduct further proceedings, including a determination of damages, in conformity with this opinion. 58
59 Lerner contends that the district court erred in granting summary judgment to the Attorneys, thereby dismissing her legal malpractice claim. Specifically, she argues that: (1) the Attorneys failed to support their motion properly with admissible evidence; and (2) on the merits, there is a genuine issue of material fact as to the element of proximate cause. We disagree. 60
61 Under Federal Rule of Civil Procedure 56(c), summary judgment shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c). 62 In granting summary judgment to the Attorneys, the district court relied heavily on the affidavit of Alfredo Alvarado, the attorney who represented MBCC in the underlying State Court Action. On appeal, Lerner mischaracterizes Alvarado's affidavit as an affirmation and urges this Court to find Alvarado's statement insufficient to support the Attorneys' motion. 63 Lerner's argument is wholly without merit. In support of her claim, she cites Wester v. Sussman, 304 A.D.2d 656, 757 N.Y.S.2d 500 (2d Dep't 2003), and Lauer v. Rapp, 190 A.D.2d 778, 593 N.Y.S.2d 843 (2d Dep't 1993). These cases hold that a party attorney moving to dismiss a legal malpractice claim must submit an affidavit based on personal knowledge, not an affirmation. See Wester, 757 N.Y.S.2d at 501; Lauer, 593 N.Y.S.2d at 843. Initially, we observe that these New York state procedural rules do not apply here to a federal court sitting in diversity. See, e.g., Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996) (Under the Erie doctrine, federal courts sitting in diversity apply state substantive law and federal procedural law.). 64 In any event, these cases are inapposite because the record shows clearly that Alvarado submitted an affidavit based upon his personal knowledge of the circumstances surrounding the settlement of the State Court Action. Moreover, Alvarado was the attorney for MBCC in the underlying State Court Action and is not a party to this action. Thus, the Attorneys properly supported their motion for summary judgment.
65 A legal malpractice claim under New York law contains three elements: (1) the negligence of the attorney; (2) proximate cause; and (3) damages. Reibman v. Senie, 302 A.D.2d 290, 756 N.Y.S.2d 164 (1st Dep't 2003). To establish the elements of proximate cause and damages, a plaintiff must show that but for the defendant's negligence, he or she would have prevailed in the underlying action or would not have sustained any damages. Aversa v. Safran, 303 A.D.2d 700, 757 N.Y.S.2d 573, 574 (2d Dep't 2003). For defendants in a legal malpractice action to succeed on a motion for summary judgment, evidence must be presented establishing that the plaintiff is unable to prove at least one of these essential elements of a malpractice cause of action. Wester, 757 N.Y.S.2d at 501. 66 Applying this standard, the district court held that Lerner could not prove negligence or proximate cause. This decision is sound. On appeal, Lerner does not dispute that she failed to submit any admissible evidence in opposition to the Attorneys' motion. Indeed, Lerner's contention—that the Attorneys' settlement of the State Court Action for the policy limit of $100,000 was purely in Allstate's interest and prevented a more favorable apportionment of liability between herself and Robert Baron—is pure speculation. It is insufficient to raise an issue of fact as to negligence. Even if the Attorneys were negligent in settling the State Court Action, this negligence was not the proximate cause of Lerner's damages. Rather, Lerner's contractual liability to MBCC, and now Allianz, was the direct consequence of her executing the Lease with MBCC prior to the Attorneys' retention. 67 Lerner's only potentially persuasive allegation is that the Attorneys were negligent in settling the State Court Action without obtaining a release from MBCC as to its indemnification cross-claims against her. But even assuming that this failure to seek a release from MBCC was negligent, Lerner has not shown how this alleged negligence proximately caused her damages. As the district court properly noted, the affidavit of MBCC's attorney Alvarado conclusively proves that even if the Attorneys had acted non-negligently ( i.e., sought a release from MBCC), MBCC would not have granted a release. In Alvarado's own words, he states that [a]t no time did we nor would we ever have agreed to drop the cross claims. Thus, no act or omission by the Attorneys subjected Lerner to liability in favor of MBCC (and now Allianz). In the absence of any evidence to the contrary, the Attorneys were properly entitled to summary judgment. See Aversa, 757 N.Y.S.2d at 574 (summary judgment granted to attorney who demonstrated that plaintiff would be unable to prove proximate cause and plaintiff failed to produce evidence sufficient to raise a triable issue of fact). 68 Finally, Lerner asks this Court to grant a fairness hearing to review the settlement of the State Court Action. We reject this belated request because Lerner failed to move for such relief below. Cohen v. Flushing Hosp. & Med. Ctr., Local 1199, 68 F.3d 64, 69 (2d Cir.1995) (Under the law of this circuit, a party may not seek on appeal relief that he failed to seek below.).