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Frontier Insulation Contractors, Inc. v. Merchants Mutual Insurance

91 N.Y.2d 169 Court N.Y. Decision date 1997-12-22 English

Delivered by Titone, J.

Contents

Majority

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[690 NE2d 866, 667 NYS2d 982]
Frontier Insulation Contractors, Inc., Appellant, v Merchants Mutual Insurance Company et al., Respondents, et al., Defendants.
Argued November 19, 1997;
decided December 22, 1997
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POINTS OF COUNSEL
Kavinoky & Cook, L. L. P., Buffalo (Randolph C. Oppenheimer, Joseph J. Welter and Marilyn A. Hochfield of counsel), for appellant.
I. Frontier is entitled to coverage unless the insurers meet their heavy burden of establishing that all claims fall
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entirely within an exclusion. (Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640 ; International Paper Co. v Continental Cas. Co., 35 NY2d 322 ; Fitzpatrick v American Honda Motor Co., 78 NY2d 61 ; Allstate Ins. Co. v Zuk, 78 NY2d 41 ; Suburban Bindery Equip. Corp. v Boston Old Colony Ins. Co., 150 AD2d 767 ; Seaboard Sur. Co. v Gillette Co., 64 NY2d 304 ; Johnson v National Union Fire Ins. Co., 56 Misc 2d 983 , 33 AD2d 924 ; Lieberman v New Amsterdam Cas. Co., 284 App Div 1051 ; Thomas J. Lipton, Inc. v Liberty Mut. Ins. Co., 34 NY2d 356 ; Cohen v Jacoby, 27 Misc 2d 396 .) II. The insurers’ failure to disclaim as soon as reasonably possible precludes reliance on the products-hazard exclusion. (Hartford Ins. Co. v County of Nassau, 46 NY2d 1028 , 47 NY2d 951 .) III. The insurers have a duty to indemnify Frontier in the underlying cases. (Travelers Indem. Co. v LLJV Dev. Corp., 227 AD2d 151 ; Shark Information Servs. Corp. v Crum & Forster Commercial Ins., 222 AD2d 251 ; Allstate Ins. Co. v Noorhassan, 158 AD2d 638 ; Insurance Co. v Forty-Eight Insulations, 633 F2d 1212 .)
Jaeckle Fleischmann & Mugel, L. L. P., Buffalo (Howard S. Rosenhoch and Charles J. Scibetta, Jr., of counsel), for Merchants Mutual Insurance Company, respondent.
I. This Court does not have jurisdiction over this appeal. (Burke v Crosson, 85 NY2d 10 .) II. Merchants has no duty to defend or indemnify Frontier because the underlying complaints allege claims that fall squarely within the definition of "products hazard”, a hazard for which Frontier did not purchase coverage. (Johnson v National Fire Ins. Co., 56 Misc 2d 983 , 33 AD2d 924 ; Sears Oil Co. v Merchants Ins. Group, 88 AD2d 753 ; Pennsylvania Gen. Ins. Co. v Kielon, 112 AD2d 709 ; New York Cas. Ins. Co. v Halley Elec. Co., 148 AD2d 967 ; National Screen Serv. Corp. v United States Fid. & Guar. Co., 364 F2d 275 , 385 US 958 .) III. Even if appellant’s interpretation of the Merchants’ policies was correct, Merchants still would have no duty to defend or indemnify Frontier. (Fitzpatrick v American Honda Motor Co., 78 NY2d 61 ; Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640 ; Meyers & Sons Corp. v Zurich Am. Ins. Group, 74 NY2d 298 ; Ruder & Finn v Seaboard Sur. Co., 52 NY2d 663 ; Brooklyn Law School v Aetna Cas. & Sur. Co., 661 F Supp 445 , 849 F2d 788 ; Lionel Freedman, Inc. v Glens Falls Ins. Co., 27 NY2d 364 , 28 NY2d 859 ; Village of Newark v Pepco Contrs., 99 AD2d 661 , 62 NY2d 772 ; Town of Moreau v Orkin Exterminating Co., 165 AD2d 415 ; Avondale Indus. v Travelers Indem. Co., 774 F Supp 1416 ; Insurance Co. v Forty-Eight Insulations, 633 F2d 1212 .) IV. The "late
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disclaimer” argument should be rejected. (Schiff Assocs. v Flack, 51 NY2d 692 ; Zappone v Home Ins. Co., 55 NY2d 131 ; Hartford Ins. Co. v County of Nassau, 46 NY2d 1028 , 47 NY2d 951 ; American Home Assur. Co. v Aprigliano, 161 AD2d 357 ; Rhinebeck Bicycle Shop v Sterling Ins. Co., 151 AD2d 122 .) V. Because Frontier failed to comply with the notice condition, the insurance policies are vitiated. (American Home Assur. Co. v International Ins. Co., 90 NY2d 433 ; Unigard Sec. Ins. Co. v North Riv. Ins. Co., 79 NY2d 576 ; Security Mut. Ins. Co. v Acker-Fitzsimons Corp., 31 NY2d 436 ; Commercial Union Ins. Co. v International Flavors & Fragrances, 822 F2d 267 ; Matter of Allcity Ins. Co. [Jimenez], 78 NY2d 1054 , 79 NY2d 823 ; American Home Assur. Co. v Republic Ins. Co., 984 F2d 76 , 508 US 973 ; Deso v London & Lancashire Indem. Co., 3 NY2d 127 ; Allstate Ins. Co. v Moon, 89 AD2d 804 ; Manordale Estates v Commercial Union Ins. Group, 36 AD2d 896 , 29 NY2d 936 ; Olin Corp. v Insurance Co., 966 F2d 718 .) VI. Even if this Court accepts Frontier’s arguments discussed and refuted above, the Court nonetheless should reverse Special Term’s order insofar as it dismisses Merchants’ affirmative defenses with respect to the duty to indemnify. (Seaboard Sur. Co. v Gillette Co., 64 NY2d 304 ; Chesapeake & Ohio Ry. Co. v Certain Underwriters at Lloyd’s, 834 F Supp 456 , revd in part on other grounds sub nom. CSX Transp. v Commercial Union Ins. Co., 82 F3d 478 .)
Saperston & Day, P. C, Buffalo (Richard J. Cohen of counsel), for Utica Mutual Insurance Company, respondent.
I. This Court does not have jurisdiction over this appeal. II. The Court below correctly found that Utica has no duty to defend or indemnify Frontier in the underlying actions. (International Paper Co. v Continental Cas. Co., 35 NY2d 322 ; Kincaid v Simmons, 66 AD2d 428 ; Touchette Corp. v Merchants Mut. Ins. Co., 76 AD2d 7 ; Seaboard Sur. Co. v Gillette Co., 64 NY2d 304 ; Ruder & Finn v Seaboard Sur. Co., 52 NY2d 663 , 54 NY2d 753 ; Fitzpatrick v American Honda Motor Co., 78 NY2d 61 ; Baron v Home Ins. Co., 112 AD2d 391 ; Logan’s Silo Sales & Serv. v Nationwide Mut. Fire Ins. Co., 185 AD2d 651 ; New York Cas. Ins. Co. v Halley Elec. Co., 148 AD2d 967 ; Sears Oil Co. v Merchants Ins. Group, 88 AD2d 753 .) III. Utica timely disclaimed coverage and waived nothing. (Hartford Ins. Co. v County of Nassau, 46 NY2d 1028 ; Allstate Ins. Co. v Moon, 89 AD2d 804 ; Mirza v Allstate Ins. Co., 185 AD2d 303 .) IV. Even to the extent this Court determines that the Court below’s application of the products-hazard exclusion was overbroad, the case should be remanded to the Court below for consideration
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of the additional issues which that Court found it unnecessary to address. (Commercial Union Ins. Co. v International Flavors & Fragrances, 822 F2d 267 ; Security Mut. Ins. Co. v Acker-Fitzsimons Corp., 31 NY2d 436 ; Deso v London & Lancashire Indem. Co., 3 NY2d 127 ; Young Health Ctr. v New York State Dept. of Ins., 152 AD2d 835 .) V. Any order affirmatively declaring that Utica has an obligation to indemnify would be improper. (Servidone Constr. Corp. v Security Ins. Co., 64 NY2d 419 ; Apache Foam Prods. v Continental Ins. Co., 139 AD2d 933 ; Grace & Co. v Continental Cas. Co., 896 F2d 865 .)
Covington & Burling (Mitchell F. Dolin, Richard D. Shore, Jay T. Smith, Eric G. Lasker, Catherine E. Long and Jonathan B. Mirsky, of the District of Columbia Bar, admitted pro hac vice, of counsel), for Armstrong World Industries, Inc., and others, amici curiae. I.
The insurers bear a heavy burden in seeking to avoid their duty to defend Frontier based on the products-hazard exclusion. (Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640 ; Seaboard Sur. Co. v Gillette Co., 64 NY2d 304 ; United States Fid. & Guar. Co. v U.S. Underwriters Co., 194 AD2d 1028 ; Curtis v Nutmeg Ins. Co., 204 AD2d 833 ; Fitzpatrick v American Honda Motor Co., 78 NY2d 61 ; International Paper Co. v Continental Cas. Co., 35 NY2d 322 ; National Screen Serv. Corp. v United States Fid. & Guar. Co., 364 F2d 275 .) II. The insurers cannot show that Frontier’s asbestos liabilities fall solely and exclusively within the terms of the products-hazard exclusion. (Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640 ; Berger Bros. Elec. Motors v New Amsterdam Cas. Co., 293 NY 523 ; National Screen Serv. Corp. v United States Fid. & Guar. Co., 364 F2d 275 , 385 US 958 ; Rhinebeck Bicycle Shop v Sterling Ins. Co., 151 AD2d 122 ; Pennsylvania Gen. Ins. Co. v Kielon, 112 AD2d 709 .) III. Having failed to satisfy their heavy burden, the insurers have a duty to defend Frontier. (Johnson v National Union Fire Ins. Co., 56 Misc 2d 983 , 33 AD2d 924 .) IV. The insurers have a duty to indemnify Frontier, unless they can establish that the underlying claims in fact arose solely and exclusively within the products-hazard exclusion.

OPINION OF THE COURT

The narrow issue before us in this declaratory judgment action is whether the "product hazards” exclusions in the insurance policies at issue relieve defendant insurers of the duty

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defend their insured, an asbestos insulation contractor, in 21 underlying personal injury suits. We resolve this question in favor of the insured because defendant insurers have failed to establish that the personal injury claims fall entirely within the product-hazards exclusions.

Plaintiff Frontier Insulation Contractors, a Buffalo-based industrial and commercial insulation contractor, engaged in the business of installing and applying asbestos insulation on plumbing, fittings, ductwork, boilers and other equipment from 1929 through the 1970’s. Frontier purchased comprehensive general liability insurance policies from defendants Merchants Mutual Insurance Company, Utica Mutual Insurance Company and Travelers Insurance Company, to cover its asbestos installation operations. This appeal concerns only one policy issued by defendant Utica and five policies issued by defendant Merchants in which the insurers agreed to pay on Frontier’s behalf "all sums” which the insured shall become legally obligated to pay as damages because of bodily injury due to an accident or occurrence, including the continued exposure to conditions.

Between 1993 and 1994, Frontier was named as a defendant in 21 lawsuits alleging bodily injury and resulting damages caused by asbestos exposure at various locations. Both insurers disclaimed coverage pursuant to "product hazards” exclusions contained in their respective policies.

Frontier brought this action, seeking a declaration that defendant insurers have a duty to defend and indemnify it in the underlying personal injury suits. Supreme Court granted Frontier’s motion for partial summary judgment, and, with relevance to this appeal, declared that Merchants had a duty to defend Frontier in 18 of the 21 actions, and Utica in 15 of the 21 actions. The court rejected the insurers’ claims that their product-hazards exclusions relieved them of their duties to defend and indemnify Frontier, and did not accept defendants’ late-notice defenses.

The Appellate Division disagreed. The Court ruled that "[bjecause none of the underlying complaints alleges any cause of action sufficiently removed from the allegedly defective and injurious nature of the asbestos to warrant classifying Frontier’s liability as something other than a 'products hazard’ * * * defendants have no obligation to defend or indemnify Frontier.” ( 238 AD2d 894 , 896.) Given its conclusion that the product-hazards exclusions relieved the insurers of their duty to defend, the Court declined to address the parties’ remaining contentions.

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Two Justices in dissent noted that the products-hazard exclusion "does not apply * * * if the plaintiffs were exposed to asbestos during the course of Frontier’s installation operations” (supra, 238 AD2d, at 897 ). Thus, the dissenters concluded that "[b]ecause the plaintiffs’ exposure could have occurred in a variety of ways, only some of which are potentially excluded from coverage, the insurers may not be relieved of their obligation to provide a defense to Frontier by virtue of the 'products hazard’ provisions in their policies” (id., at 897). This two-Justice dissent on a question of law provides the jurisdictional predicate for the appeal to this Court (CPLR 5601 [a]). We now modify the Appellate Division’s order, and remit for further proceedings.

The duty of an insurer to defend its insured 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” (Fitzpatrick v American Honda Motor Co., 78 NY2d 61 , 65-67). To be relieved of its duty to defend on the basis of a policy exclusion, the insurer 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 (Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640 , 652; Allstate Ins. Co. v Zuk, 78 NY2d 41 , 45). If any of the claims against the insured arguably arise from covered events, the insurer is required to defend the entire action (Seaboard Sur. Co. v Gillette Co., 64 NY2d 304 , 311).

Defendant insurers contend that all of the claims in the underlying complaints fall wholly within the policies’ exclusions for product hazards because they all allege that bodily injuries resulted from exposure to Frontier’s asbestos products. This claim misses the mark, however, because the focus in determining whether a product-hazard exclusion applies is not simply whether an insured’s product caused the loss at issue, but rather "is dependent on the location of the accident and the possession of the product” (Henderson, Insurance Protection for Products Liability and Completed Operations — What Every Lawyer Should Know, 50 Neb L Rev 415 , 420). Defen

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dants’ argument fails to appreciate that an exclusion for product hazards governs only one subset of product liability claims.

The insurance industry has segregated product-liability hazards and the premiums charged therefor by categorizing them as either risks arising while work is in progress, or as those arising from the defective nature of a completed product that has been placed in the stream of commerce (7A Appleman, Insurance Law and Practice § 4508, at 340 [Berdal ed]). An insured may cover the first risk by purchasing coverage for "premises-operations” (7A Appleman, op. cit., § 4508, at 340; § 4508.03, at 388-389). Historically, this category of coverage was designed to protect a manufacturer from injuries to third persons on the business premises, or from those that occur during operations away from the normal business premises while the insured retains control of the jobsite (Henderson, op. cit., at 417; see also, Friestad v Travelers Indem. Co., 260 Pa Super 178 , 182, n 2, 393 A2d 1212 , 1213, n 2). Frontier purchased premises-operations coverage from both defendants.

The distinct risk of loss occasioned by a defect in the insured’s product, which manifests itself only after the insured has relinquished control of the product and at a location away from the insured’s normal business premises, is covered by the purchase of separate "products hazard” coverage (7A Appleman, op. cit., at 341).[1] This class of coverage generally protects a manufacturer or seller against claims of injury due to a product defect, breach of warranty and misrepresentation (Henderson, op. cit., at 426). Insurance clauses that exclude coverage for product hazards — such as those at issue here — are thus designed to preclude the insurer’s liability for events that occur after its insured’s product is placed in the stream of commerce.

The product-hazards exclusions here accomplished that goal by exempting from coverage only those bodily injuries arising out of the "named insured’s products” that occur "away from premises owned by or rented to the named insured and after

* To be distinguished from "product hazards” insurance is "completed-operations” insurance, which provides coverage for injuries arising from the insured’s service "operations which do not involve goods or products manufactured, sold, handled or distributed by the insured” (Henderson, op. cit., at 434). Completed-operations insurance covers the risk of loss for bodily injury or property damage that arises out of the insured’s operations, if those losses occur after the operations have been completed and away from the insured’s premises (Berger Bros. Elec. Motors v New Amsterdam Cas. Co., 293 NY 523 , 527).

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physical possession of such products has been relinquished to others” (emphasis supplied). The term "named insured’s products” is defined in the insurance contracts as "goods or products manufactured, sold, handled or distributed by the named insured or by others trading under his name.”

As an initial matter, defendants contend that the asbestos was Frontier’s "product” even if it did not manufacture or sell the insulation it installed because it necessarily "handled” the asbestos during its operations as that term is broadly understood. To be sure, the term "handled”, standing alone, could be construed to refer to any touching of a product in connection with the provision of a service, as defendants contend. However, we conclude that the term’s association with the words "manufacturer” and "seller” in the same clause indicates that it should be given its commercial connotation, and construed to refer to products in which the insured trades or deals (Todd Shipyards Corp. v Turbine Serv., 674 F2d 401 , 420 [5th Cir 1982]). That narrower construction makes practical sense, given that the goal of product-hazards coverage is to insure the party who is responsible for sending goods into the stream of commerce (Henderson, op. cit., at 429-430).

Whether the offending asbestos here was Frontier’s "product” is a question of fact that cannot be resolved on this record in this summary judgment posture. Assuming that fact to be established, however, defendants will only be relieved of their duty to defend on the basis of these product-hazards exclusions if they can show that all of the underlying claims fall squarely within those clauses and are susceptible of no other interpretation.

Defendants have failed to establish that all of the underlying bodily injury claims satisfy the time and place prerequisites of the product-hazards exclusion. The exclusions, by definition, cannot apply to accidents or occurrences that allegedly took place while Frontier’s installation work was in progress because the offending product — the asbestos insulation — was not relinquished from Frontier’s control until installation was complete. In fact, a number of the plaintiffs in the underlying lawsuits expressly allege that Frontier’s "negligent installation” of the asbestos insulation caused their personal injuries. More importantly, none of the underlying complaints specify that the plaintiffs’ personal injuries occurred only after Frontier had completed installation and departed from the covered premises. Since asbestos fibers may be readily released into the air and inhaled while a contractor is cutting and sawing the

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product during installation, there is a reasonable possibility that any liability attributed to Frontier would stem from injuries that occurred during ongoing operations — covered events. Accordingly, defendants have failed to establish as a matter of law that the product-hazards exclusions provide shelter from their duty to defend Frontier (Seaboard Sur. Co. v Gillette Co., 64 NY2d 304 , 311, supra).

Frontier also asks this Court to declare that defendant insurers have a duty to indemnify it in all of the underlying actions. In essence, Frontier contends that the duty to indemnify is coextensive with the duty to defend here because the insurers failed to establish that the underlying complaints fall entirely within a policy exclusion. However, an unbroken line of cases establishes that an insurer’s duty to defend is broader than its duty to indemnify (Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640 , 648, supra; Servidone Constr. Corp. v Security Ins. Co., 64 NY2d 419 , 424; Ruder & Finn v Seaboard Sur. Co., 52 NY2d 663 , 669). As this Court has explained, "an insurer may be contractually bound to defend even though it may not ultimately be bound to pay, either because its insured is not factually or legally liable or because the occurrence is later proven to be outside the policy’s coverage” (Fitzpatrick v American Honda Motor Co., 78 NY2d, at 65, supra). 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” (Servidone Constr. Corp. v Security Ins. Co., 64 NY2d 419 , 424, supra). Thus, we decline to pass on the question of defendants’ duty to indemnify at this early juncture, which predates any ultimate determination of the insurers’ liability.

As a final matter, in light of its conclusion that defendants had no duty to provide Frontier with a defense because all of the underlying complaints fell within the policy exclusion for products hazards, the Appellate Division failed to consider the parties’ remaining contentions, including the insurers’ claims that they were entitled to a declaration that they have no duty to defend or indemnify Frontier in certain actions because the accidents or occurrences constituted noncovered events or did not fall within the periods of coverage under the six policies at issue. An affirmative declaration that defendants must defend Frontier in any of the underlying actions must await a determination of these claims.

Accordingly, the order of the Appellate Division should be modified in accordance with the opinion herein, with costs to

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appellant, and the case remitted to the Appellate Division for consideration of issues raised but not determined on appeal to that Court, and, as so modified, affirmed.

Chief Judge Kaye and Judges Bellacosa, Smith, Levine, Ciparick and Wesley concur.

Order modified, etc.

Cases cited

Statutes and regulations cited