Outside Inhouse Lawyer Blog : New York & Seattle Corporate Dispute Lawyer & Attorney : Grace M. Healy : Outside counsel : King County, Tacoma, Bellevue

This week, in Sorbara Construction Corp. v. AIU Ins. Co., the New York Court of Appeals confirmed the importance of giving notice to every insurance carrier for each and every policy that may cover a claim if a policy requires that notice of an occurrence be given “as soon as practicable.” If the notice isn’t given in a “reasonable” period of time, there will be no coverage.  The carrier doesn’t have to show prejudice. 

This is the rule even if the insured gave notice to the same carrier under a different policy, such as workers’ compensation, or an additional insured gave notice to the carrier under another policy.  This applies to primary and excess policies. (The Appellate Division opinion in this matter states that AIU is an excess carrier.) 

The Sorbara carrier didn't receive notice for five-and-a-half years.  Given the circumstances, there was no coverage as a matter of law.

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The New York Court of Appeals handed down two rulings this week relating to employees’ job injury claims against third parties. One of the cases, Brooks v. Judlau Contracting, Inc., potentially expands an employer’s liability because it allows a third party to enforce a contractual indemnity to the extent that the employer was negligent.

    The second, Brothers v. New York State Electric & Gas Corp., discusses the exceptions to the rule that a person hiring an independent contractor is not liable for the contractor’s negligence. (The double negative – exceptions to not being negligent -- in that last sentence is intentional since it often seems that the rule really describes a rule of liability.)  Here, however, the court refuses to find a state permit holder vicariously liable for the failure of an independent contractor to comply with safety requirements that were contained in the permit. 

Brooks -- Employer/Sub-Contractor Required to Partially Indemnify Contractor

Brooks v. Judlau Contracting, Inc., involved a serious on the job construction injury – a situation which implicated General Obligations Law section 5-322.1, which limits indemnity in construction, maintenance and repair contexts. 

Plaintiff, Brooks, sued the general contractor who, in turn, made a third-party claim for contractual indemnity against the sub-contractor, Brooks’ employer.  The Appellate Division held that General Obligations Law section 5-322.1 barred indemnity and, therefore, the indemnity was not enforceable. 

The Court of Appeals disagreed on the grounds that:

•    the purpose of General Obligations Law section is to prohibit indemnity for a party’s own negligence, and
•    If the statute is read as a blanket prohibition, it would have the opposite effect  -- it would require a contractor to pay for, or, in effect, insure its sub-contractor’s negligence. 

The court went on to read the contract, which required the sub-contractor to indemnify the contractor “to the fullest extent permitted by law,” as an agreement contemplating partial indemnification, rather than an agreement requiring full indemnity. 

The bottom line is that a contractor has a right of indemnity to the extent that the sub-contractor/employer was negligent.  I suspect that a lot will be written about this decision, which on its face seems reasonable but seems to open up a lot of questions about this section of the General Obligations law, vicarious liability/non-delegable duty, and your ongoing business relationships.  It seems a lot easier to require insurance.

Brothers – Vicarious Liability Not Present Although Sub-Contractor Did Not Comply with Safety Regulations Required by Contractor's Permit

Brothers v. New York State Electric & Gas Corp. also involved an on the job serious injury.  Here, indemnity was not the issue; rather, plaintiff sought to hold defendant New York State Electric & Gas vicariously liable for his employer’s failure to comply with federal and state safety regulations.  The basis of the claimed vicarious liability was a work permit, which NYSE&G had obtained from the state and which required that all work be done in accordance with safety regulations.  NYSE&G contracted with plaintiff’s employer to do the work.  If the safety obligations were delegable, NYSE&G would not be vicariously responsible for the employer’s failures.  If they were not, NYSE&G would have breached a duty to plaintiff and be responsible for his injuries.

The opinion discusses the rule that a person who hires an independent contractor is not liable for the contractor’s acts and the various exceptions to the rule.  The opinion makes clear that there is no bright line for making a determination that the "rule" does not apply and a party will be responsible for the negligence of its independent contractor.  The court repeatedly points out that this determination requires a “sui generis” inquiry.  In reaching its determination that the duty of complying with safety regulations could be delegated in this situation, and, accordingly, NYSE&G is not vicariously liable, the court relies on the nature of the permit – not really a bargained for contract – and various policy reasons.  One policy reason rejected by the court was the argument that plaintiff would be left with only workers' compensation if NYSE&G  were dismissed.
 

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Historically, and I stress “historically,” New York State Court orders compelling discovery were not received with great concern.  In fact, it usually took three of them before there were serious consequences.  Things have been changing, and, if you doubt it, read Wilson v. Galicia Construction & Restoration Corp.,  which was decided by the Court of Appeals in April.   The court has spoken: discovery orders must be obeyed. The decision upholds a judgment of $700,000 against a defendant whose answer was stricken as a sanction for resisting discovery, even though the defendant had what appeared to be a strong fraud defense against the claim.  

Wilson was a personal injury claim.  Plaintiff alleged that he was injured by an object that fell from a scaffold into his eye.  The company that erected the scaffold and multiple others were named as defendants.  The scaffold company resisted discovery, and the trial court issued an order directing that discovery requests were due by a date certain or the scaffold company’s answer would be automatically stricken.  The answer was stricken.  

One month later, in response to a discovery request from another party, plaintiff produced the object that injured his eye.  It was an air-gun pellet that, apparently, had been fired into plaintiff's eye, rather than falling from the scaffold.  In other words, the facts supporting liability in the complaint were incorrect.  All of the defendants, except for the scaffold company, were dismissed. 

Over the next few years, the scaffold company tried to vacate the order striking its answer for several reasons.  It argued “justifiable excuse” without success.  It argued that the underlying claim should be dismissed because it was fraudulent.  This failed on the grounds that the sanction was a result of the scaffold company’s own behavior, not the plaintiff’s.

In the Court of Appeals, the scaffold company also argued that plaintiff had not satisfied the statutory requirements for proof after a default.  The court ruled that the argument was not preserved and did not reach it – and noted the unfairness to plaintiff if the court did rule in the scaffold company's favor. Two judges dissented on the grounds that evidence of fraud by plaintiff was compelling and it was an abuse of discretion for the trial court not to address it in order to preserve the integrity of the judicial system.

Seven hundred thousand dollars is a huge sanction. One might be tempted to argue that the court of appeals thought that resisting discovery was a strategic decision that should be punished.  Or, that the court might have ruled otherwise if the argument was preserved.  Or, that the dissent is correct.  No matter.  Powerful message delivered by the court.  The days of delay are over, and ignoring the message can be very expensive.  The $700,000 judgment represents a reduction of the trial court's award of  more than $1,000,000.

 

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