Insurer’s Duty to Defend Construed Broadly in Favor of Insured

WTC Captive Ins. Co. v. Liberty Mut. Fire Ins. Co., 549 F. Supp. 2d 555 (S.D.N.Y. 2008)

After the World Trade Center disaster in September 2001, the City of New York created a captive insurance company, funded by a grant from the Federal Emergency Management Agency, to insure the costs of lawsuits arising from the WTC clean-up efforts.  Liberty Mutual was the primary insurer and had agreed to defend and indemnify the city against claims including, but not limited to, bodily and personal injury.  A group of secondary insurers agreed to provide the same coverage if the Liberty Mutual policy became exhausted.  All of the policies were retroactive to September 11, 2001.

Over 10,000 suits have now been filed by clean-up workers alleging that the city was aware that the air around the site was contaminated, failed to provide adequate training or supervision of personal protective equipment, allowed damaged protective equipment to be used, and deliberately concealed air testing results which documented the dangers.  The secondary insurers claimed that their policies with the captive insurance company did not provide coverage for these suits.

The Liberty Mutual policy provided $4 million of coverage to defend and indemnify the city and its contractors from claims arising from the clean-up effort.  The policy was secured after September 11, 2001 and covered the city retroactively from September 11, 2001 to December 31, 2002.  An additional $75 million was secured from the secondary insurers.  The policies contained exclusions for injuries resulting from the discharge, dispersal, or escape of pollutants anywhere in the world.

Beginning in 2002, the city notified the secondary insurers, via their broker, of the pending lawsuits.  By June 5, 2006, the Liberty Mutual policy had been exhausted.  The secondary insurers claimed to have never received notice of the exhaustion.  During oral argument, however, the insurers acknowledged receipt of some notice in January 2005.  The court held that there were no triable issues of fact on the issue of notice, recognizing that the press coverage of these claims was extensive enough that the insurers should have been on notice even if the notice sent to the insurance broker was inadequate.  The court also found that notice to the insurance broker served as notice to the insurers, despite provisions in the policies requiring that notice be provided to both the broker and the insurers’ attorneys.

The secondary insurers further argued that the pollution clause in the insurance policy exempted them from defending the city against these claims.  The court disagreed, noting that the duty to defend is broader than the duty to indemnify and is triggered when the allegations in the complaint could potentially give rise to a covered claim.  While the duty to defend is construed broadly, policy exclusions are construed strictly and narrowly and ambiguities are resolved in favor of the insured.  The court found that the secondary insurers did not meet the heavy burden of showing that all the claims against the city fell within the policy exclusion, noting that the claims against the city stemmed from its concealment of test results and failures to provide adequate training and equipment.

The court ordered the parties to try to settle the dispute by determining a fixed sum which the secondary insurers would pay to the captive insurance company or, in the alternative, determine whether further proceedings should be held.

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