Insurance Coverage for Wrongful Incarceration Cases in New York

Over a decade has gone by since we first reported on an uptick in post-conviction exonerations due to advances in DNA testing, data preservation and electronic record-keeping that led to the discovery of exculpatory evidence. Today, insurance coverage lawsuits for wrongful incarceration cases are becoming more and more frequent. Typically, such cases involve a scenario in which the underlying claimant is arrested, tried and sentenced for a crime and then subsequently, the underlying claimant is either acquitted or released due to new evidence, lack of evidence or procedural mishaps in the initial trial. While more and more states are instituting statutory remedies for wrongful incarceration, the municipality and its law enforcement and prosecutorial entities are still sued for state tort claims and federal civil rights violations. The insured defendants, in turn, tender the matters to their carriers under general liability policies, errors and omissions policies and law enforcement liability policies.

This series of blog posts with discuss the law in various jurisdictions that have addressed coverage issues related to wrongful incarceration under different types of policies. The first jurisdiction we address is New York.

There are two pertinent New York cases that address coverage issues for claims of false arrest, false imprisonment and malicious prosecution. The first is National Cas. Ins. Co. v. City of Mount Vernon, 128 A.D.2d 332 (1987). In City of Mount Vernon, the underlying claimant was arrested in June 1981 and incarcerated until January 7, 1983. Thereafter, the underlying claimant commenced a lawsuit against the City of Mount Vernon (“City”) and the Mount Vernon Police Department to recover damages for, among other things, false arrest and false imprisonment.

National Casualty issued a policy to the City from January 1, 1983 to January 1, 1984, that provided coverage for all sums that the insured becomes legally obligated to pay as damages because of “wrongful acts” which result in “personal injury” caused by an “occurrence.” The term “occurrence” was defined as an event, including continuous or repeated exposure to conditions, which results in “personal injury” during the policy period. The term “personal injury” was defined to include false arrest, detention or imprisonment, or malicious prosecution. Based on the above definitions, the National Casualty policy would be triggered by false arrest, detention or imprisonment during the policy period.

Upon tender, National Casualty denied coverage because the underlying claimant’s arrest in June 1981 occurred prior to the policy’s inception date of January 1, 1983. The Appellate Division disagreed:

Contrary to National’s contentions, the language of the occurrence clause herein ascribes no temporal relevance to the causative event preceding the covered injury, but rather premises coverage exclusively upon the sustaining of specified injuries during the policy period. Thus, the pertinent policy provision provides coverage for an “occurrence”, and thereafter, states that an occurrence “means an event … which results in PERSONAL INJURY … sustained, during the policy period” (emphasis supplied). Indeed, as one commentator has stated in discussing a similar provision, “[t]he policy will not depend upon the causative event of occurrence but will be based upon injuries or damages which result from such an event and which happened during the policy period. It will not be material whether the causative event happened during or before the policy period.” … Accordingly, the operative event triggering exposure, and thus resulting in coverage under the policy, is the sustaining of a specified injury during the policy period. 336-337. The Appellate Division held that damage resulting from false imprisonment represented a category of covered personal injury, and that such damage was allegedly sustained, at least in part, when the policy was in force, i.e. from January 1, 1983 to January 7, 1983. As a result, the City was entitled to coverage under the National Casualty policy.

The second case is Town of Newfane v. General Star National Ins. Co., 14 A.D.3d 72, 784 N.Y.S.2d 787 (2004). Selective Insurance (“Selective”) issued a policy, effective April 26, 2000, that provided coverage for claims for damages because of “personal injury” caused by an offense arising out of the Town of Newfane’s business, but only if the offense was committed during the policy period. The term “personal injury” was defined, in part, as “injury, other than ‘bodily injury’ arising out of one or more of the following offenses: a. [f]alse arrest, detention or imprisonment; [or] b. [m]alicious prosecution.”

The underlying claimant alleged that he was “charged, arrested and jailed under a warrant” on June 7, 1989. He was again jailed for several hours on April 9, 1990. On June 6, 1990, he was convicted of 36 counts of violating Town Law and zoning ordinance. He was sentenced and remanded to jail on July 23, 1990. He was then discharged from custody later that day and the judgment of conviction was reversed on appeal on July 2, 1991, at which time all but one count was dismissed. The criminal prosecution on that one remaining count remained dormant until November 28, 2000, when his motion to dismiss for lack of speedy trial was granted.

The underlying claimant sued the Town of Newfane for malicious prosecution, false arrest, and false imprisonment, among other claims. Initially, the Appellate Division noted that the “offenses” of false imprisonment and false arrest were “committed” outside the Selective policy’s effective date of April 26, 2000. The only issue before the court was whether there was coverage for the malicious prosecution claim “where the criminal prosecution was initiated before the effective date of the policy but terminated in favor of the accused during the policy period.” The Appellate Division concluded, based on the language of the policy, that as a matter of law, there was no coverage for an underlying malicious prosecution cause of action because the date of the commencement of the underlying criminal prosecution was the controlling date for purposes of insurance coverage. The Appellate Division explained that

… the “offense” of malicious prosecution was “committed”, for purposes of determining the issue of insurance coverage, in 1989, more than a decade before the effective date of the Selective policy. That “offense was committed” when the prosecution was instituted, allegedly without probable cause. Such initiation of the criminal prosecution is the essence or gist of the tort of malicious prosecution. Moreover, the legal injury or “offense” incurred by the plaintiff in the underlying action (albeit not necessarily the damages incurred as a result of that “offense”) is the same irrespective of whether the criminal prosecution was known to be baseless when it was initiated or only subsequently demonstrated to be lacking in merit. Therefore, the injury to the accused was contemporaneous with the initiation of the criminal proceeding against him and hence complete long before the inception of coverage and the incidental termination of the criminal prosecution. We thus conclude that, for purposes of determining insurance coverage, malicious prosecution is not a continuing tort. We further conclude that the policy is to be construed as “fixing the point of coverage for malicious prosecution at one readily ascertainable date; the date on which the acts [we]re committed that [might] result in ultimate liability” or “when the alleged tortfeasor t[ook the] action resulting in the application of the [s]tate’s criminal process to the [plaintiff in the underlying action]”.….

Id. at 75-80 (internal citations omitted).

The Appellate Division acknowledged that a malicious prosecution claim may be premised on the initiation or continuation of a criminal proceeding without probable cause, and such claim does not accrue for purposes of the statute of limitations until the ultimate dismissal or favorable termination of the criminal charges. The Appellate Division further recognized that the damages incurred by reason of the continuation of a criminal prosecution might continue. Nevertheless, the court held that none of these considerations were determinative as the policy language focused on when the offense was committed, not when an action could have been brought or damages fully ascertained.

The New York courts emphasize construing and applying the policy language and considering whether false imprisonment, false arrest and malicious prosecution are deemed as “personal injury” or “offense” and whether the injury or the offense is required to happen during the policy period.

The next installment will review the law in California. In the meantime, if there are any questions about another jurisdiction, please contact us and we can address your questions directly.

California Supreme Court Overrules Henkel and Holds Insurer Consent Is Not Required For Policy Assignment After Coverage-Triggering Event Has Occurred

The California Supreme Court held that, regardless of a policy’s consent-to-assignment provision, an insurer’s consent is not required for a valid assignment of a liability insurance policy after a loss has happened. Its holding is based on rarely-cited Insurance Code section 520 (“Section 520”) which states: “[a]n agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss.” Further, the Court concluded a loss “happens” when an event giving rise to potentially covered liability takes place, not when a claim is reduced to a fixed sum due. In so holding, the Court overruled Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934, which reached a contrary conclusion but did not consider the effect of Section 520.

Hartford issued a series of liability policies to Fluor Corporation, an engineering and construction company. The policies, in effect from 1971 to 1986, contained a consent-to-assignment clause that stated an “[a]ssignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.” Beginning in the mid-1980s, various Fluor entities were sued in numerous lawsuits alleging injuries caused by exposure to asbestos. Hartford defended and settled lawsuits against Fluor over a 25-year period.

In the 1980s, Fluor acquired a mining business, A.T. Massey. But in 2000, Fluor chose to refocus on its core businesses and underwent a corporate restructuring known as a “reverse spinoff.” Fluor created a new subsidiary (“Fluor-2”), with the original Fluor becoming Massey Energy. Under a Distribution Agreement, Fluor transferred its rights and obligations to Fluor-2. Those “rights” encompassed all of Fluor’s assets, including the Hartford policies. Fluor-2 notified Hartford of the restructuring. Hartford did not object and continued to defend Fluor-2 against asbestos lawsuits for another seven years.

In 2006, Fluor-2 filed a coverage action against Hartford regarding issues unrelated to Fluor’s assignment. In a 2009 cross-complaint, Hartford for the first time alleged the purported assignment of its policies to Fluor-2 was invalid without Hartford’s consent. Hartford sought reimbursement of defense and indemnity paid on Fluor-2’s behalf.

Fluor-2 moved for summary adjudication that Section 520 bars enforcement of Hartford’s consent-to-assignment clause “after a loss has happened.” Fluor-2 asserted the underlying asbestos suits alleged exposure while Hartford’s policies were in effect. Thus, the “loss” triggering its duty to defend and indemnify already happened, so claims under the policy were assignable without Hartford’s consent. Hartford argued the Court was duty-bound to follow Henkel, which held an assignment is valid only after a loss has been reduced to a “chose in action” – that is, a fixed sum of money due or to become due.

The trial court agreed with Hartford. Fluor-2 filed a writ which the Court of Appeal denied, concluding Henkel controls. The Court of Appeal also concluded Section 520 only applies to first-party insurance policies, since liability insurance “did not even exist” when the predecessor to Section 520 was enacted in 1872. The Supreme Court granted review to consider the effect of Section 520 on the purported assignment.

The Supreme Court first recounted the history of Section 520 in detail. In 1935, when the Insurance Code was created, third-party liability policies were becoming more common, and Section 520 was included in a “General Rules” section of the Code with other sections defining and applying to liability insurance. Section 520 was modified in 1947 to exclude two specific classes of insurance (life and disability, not liability). The Supreme Court disagreed with the Court of Appeal and concluded Section 520 applies to both first-party and third-party insurance policies.

The Court then considered how Section 520 applies in the liability insurance context. The issue turns on the meaning of the phrase “after a loss has happened,” which the Court concluded is ambiguous. Fluor-2 asserted a loss “happened” when a claimant was exposed to asbestos while the Hartford policies were in effect, so Fluor’s assignment of its rights under the policies to Fluor-2 in 2000 was valid. In contrast, Hartford asserted a loss happens when the insured incurs a direct loss by judgment or settlement fixing a sum of money due. The Court concluded that both interpretations are reasonable.

However, the Court reasoned that the legislative history of Section 520, as well as early cases addressing assignment of policies, favor Fluor-2’s view. Early cases distinguish an insured’s inability to assign a policy as to future events (substituting another insured for the risk the insurer evaluated) from an insured’s right to assign a claim after a loss. Regarding the timing of loss, the Court concluded an insurer’s contingent liability to its insured becomes “fixed” when an accident or event takes place for which the insured may be responsible. A claim need not be reduced to a discrete sum for a loss to have occurred.

The Court stated this is the majority view across the country and was expressed in case law decided before the 1947 amendment of Section 520, so the rule was part of the “legal landscape” at that time. The Court also reasoned the notion that loss “happens” at the time of the injury during the policy period is consistent with its holdings in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 and State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, in which the Court equated “loss” with bodily injury and property damage, rather than a money judgment or settlement.

The Court rejected various arguments by Hartford, including that the Court is bound to follow Henkel and that its reliance on a relatively obscure statute is misplaced. The Court overruled Henkel to the extent it is inconsistent.

Click here for the opinion.

This opinion is not final. It may be modified on rehearing or review may be granted by the United States Supreme Court. These events would render the opinion unavailable for use as legal authority.

General Liability Insurer Entitled to Subrogate Against its Insured’s Indemnitor

In Valley Crest Landscape Development, Inc. v. Mission Pools of Escondido, Inc., the California Court of Appeal for the Fourth Appellate District held that an insurer was entitled to equitably subrogate a breach of express indemnity claim against its insured’s indemnitor.

Valley Crest was a general contractor for exterior improvements at the St. Regis resort and subcontracted with Mission Pools to install a swimming pool. The subcontract provided that Mission Pools would defend and indemnify Valley Crest. Jeffrey Epp suffered a severe spinal cord injury diving into the pool and he subsequently sued Valley Crest and Mission Pools. The Epps alleged that Mission Pools was liable because the vertical tile depth markers were illegible and the use of “French gray” plaster in the pool made it difficult to determine depth.

Valley Crest’s general liability insurer, National Union, defended and indemnified Valley Crest, but Mission Pools did not. Valley Crest cross complained against Mission Pools for breach of the subcontract’s indemnity provision. National Union subsequently intervened as a cross-complainant asserting an equitable subrogation claim against Mission Pools.

The trial court found that Missions Pools was liable to National Union for all amounts it incurred on Valley Crest’s behalf. The court of appeal affirmed, rejecting Mission Pools’ argument that National Union was not entitled to be equitably subrogated to Valley Crest’s claims because National Union’s equitable position was, on balance, inferior to that of Mission Pools. In considering this argument, the court recognized that in order to succeed on an equitable subrogation claim, the plaintiff must establish that justice requires the loss be borne by the party with the inferior equitable position.

The court considered a number of equitable factors. It ultimately found that the factor which tipped the scale in favor of National Union was compliance with contractual obligations. It determined that because National Union had honored its contractual obligations to Valley Crest by agreeing to provide a defense, while Mission Pools had not, National Union was entitled to equitably subrogate.