Scottsdale Insurance defended a claim for three years, then tried to walk away. A court said no and stuck it with legal fees.
In a decision handed down January 6, the Appellate Division, First Department told Scottsdale it must continue defending New York City in an underlying negligence case and pay the city's legal fees after the insurer tried to back out of coverage well into the litigation.
The dispute centered on a contractor who needed a permit from the city's Department of Transportation to do some work. Like most municipalities, New York City wasn't about to hand over a permit without some insurance protection. The DOT told the contractor that naming the city as an additional insured on its liability policy was part of the deal.
The contractor agreed, got the permit, started work, and a certificate of insurance was issued showing the city as an additional insured on the contractor's policy. When an underlying negligence action arose, Scottsdale initially stepped up and defended the city.
But as the case headed toward trial after roughly three years, the insurer had a change of heart. It filed a declaratory judgment action arguing it never actually owed the city any coverage in the first place.
The insurer's reasoning? There was no written contract between the contractor and the city requiring the additional insured designation, so the policy didn't require Scottsdale to defend or indemnify the city.
The court wasn't buying it. Writing for a unanimous panel, the judges found that a binding agreement doesn't have to be contained in a single document. Here, the contractor applied for a permit, the city issued one with insurance requirements attached, the contractor accepted those terms by taking the permit and starting work, and a certificate of insurance followed. That was enough to create an enforceable agreement.
But even if there wasn't a proper written agreement, the court said, Scottsdale was stuck anyway. The judges applied what's known as equitable estoppel, a legal doctrine that essentially prevents someone from changing their position when another party has relied on the original stance to their detriment.
In this case, the city had been operating for three years under the assumption it had coverage. It had let Scottsdale control the defense and had approached settlement talks believing insurance money was available. Allowing the insurer to walk away at that point would leave the city seriously prejudiced, the court found.
The timing of the disclaimer proved critical. The court noted that Scottsdale waited until the case was closer to trial before trying to escape its obligations. By then, the city had lost its ability to control its own defense from the start.
Scottsdale also tried to argue that even if it had to provide coverage, the amount should be capped at $1 million. The court rejected that too, pointing out the insurer never even raised this issue in its original complaint. More importantly, the Highway Rules incorporated into the policy required the city, as an additional insured, to have the same coverage limits as the contractor. Since the contractor's policy had a $6 million cap, that same amount applied to the city.
The final blow came when the court upheld an award of attorneys' fees to the city. The judges applied a straightforward principle: when an insured has to defend itself against an insurer's attempt to avoid its policy obligations and wins, it can recover the legal costs of that fight.
For insurers, the case offers a clear warning about the dangers of providing a defense while reserving the right to disclaim later. Once you've stepped into the arena and the insured has relied on your presence there, getting back out becomes exponentially harder.
