New York First Department’s Message to Insureds: An Equitable Defense Concerning A Policy Exclusion Cannot Be Decided By Motion Practice

206-208 Main St. Assocs. d/b/a/ Sutphin Blvd., LLC v. Arch Ins. Co.
(N.Y. App. Ct., 1st Dept. May 2, 2013)
A New York appellate court recently held that the issue of whether an insurer was equitably estopped from raising an earth movement exclusion as a defense to coverage two years after it had assumed the purported additional insured’s defense was an issue for the trier of fact.

The plaintiff, 206-208 Main Street Associates, Inc. d/b/a 8930 Sutphin Blvd., LLC hired defendant H & H Builders, Inc. (H & H) to act as construction manager on a project to construct an office and retail building, with an underground parking garage. H & H agreed to procure a commercial general insurance policy and to name Sutphin as an additional insured. H & H procured such a policy from defendant Arch Specialty Insurance Company (Arch). The policy contained an “Earth Movement or Subsidence Exclusion Endorsement.”

As excavation was ongoing, the foundation of an adjacent building began to crack, and it eventually collapsed. Surrounding buildings allegedly sustained damage. Through its insurance agent, H & H notified Arch of the incident within several days of its occurrence. H & H informed its agent that the claim was based on the collapse of a neighboring building, which another contractor had undertaken to underpin. In a letter dated September 14, 2007, Arch acknowledged receipt of “the claim and advised H & H that it would review the information provided to determine what rights or coverage, if any, you may be entitled to pursuant to the terms of the above referenced policy.” Arch informed H & H that it reserved its rights to assert “any and all defenses to coverage, including those that may be developed or discovered in the course of our further coverage investigation.”

By letter dated January 6, 2010, Arch first informed H & H that the incident might fall within the earth movement exclusion in the policy. Arch reserved its right to disclaim coverage with respect to the lawsuits based on the cited exclusion, but confirmed that it would continue to provide H & H with a defense. Arch further advised H & H that H & H had the right to reject Arch’s defense and retain its own counsel.

In the ensuing declaratory judgment action, H & H argued that Arch was equitably estopped from raising the earth movement exclusion because it had assumed H & H’s defense for two years before raising it. The trial court agreed and granted H & H’s motion for summary judgment. The appellate court reversed, noting that equitable estoppel will not be found unless “the insurer’s control of the defense is such that the character and strategy of the lawsuit can no longer be altered.” The court found that when Arch issued its reservation of rights based on the earth movement exclusion, the underlying litigation was, by Sutphin’s own admission, still in its “early phase.” As a result, the court held that H & H did not shift its burden on the motion for summary judgment. The issue of whether H & H and Sutphin were prejudiced was one for the trier of fact.