Scottsdale Insurance has been ordered by a New York appeals court to keep defending New York City in a negligence lawsuit and to cover the city’s legal fees. This comes after the insurer tried to back out of its coverage responsibilities nearly three years into the case.
The dispute revolves around a contractor who needed a permit from the city’s Department of Transportation to carry out work. As usual, the city required the contractor to name it as an additional insured on their liability insurance policy before handing over the permit. The contractor agreed, got the permit, and a certificate of insurance was issued showing the city as an additional insured. When a negligence claim arose, Scottsdale initially took up the city’s defense.
However, just as the case was heading toward trial, Scottsdale changed its stance. The insurer filed a declaratory judgment action arguing it was never responsible for covering the city because there was no written contract between the contractor and the city requiring the additional insured status. Scottsdale claimed this lack of a formal written agreement meant it didn’t have to defend or indemnify the city.
The Appellate Division, First Department rejected this argument in a decision on January 6. The judges explained that an agreement doesn’t have to be in a single document. Since the contractor applied for the permit, the city issued it with insurance requirements, and the contractor accepted those by beginning work and providing a certificate of insurance, this created a binding agreement.
Even if a formal written contract didn’t exist, the court said Scottsdale was still on the hook because of a legal principle called equitable estoppel. The city had relied on Scottsdale’s defense for years, controlled by the insurer, and participated in settlement talks assuming insurance coverage was in place. Letting Scottsdale back out at this late stage would unfairly harm the city.
The timing of Scottsdale’s attempt to disclaim responsibility was also crucial. The court pointed out that waiting nearly three years, up until near trial, to try and escape obligations meant the city had lost control over its own defense early on.
Scottsdale also argued coverage limits should be capped at $1 million. The court dismissed this, noting the insurer never raised it earlier. The insurance policy’s guidelines require the city, as an additional insured, to have the same $6 million coverage limit as the contractor’s policy.
Adding to Scottsdale’s losses, the court ordered the insurer to pay the city’s attorneys’ fees. The judges noted that when an insured wins a fight against an insurer trying to avoid coverage, they can recover legal costs.
This ruling sends a clear signal to insurers. Once you start defending an insured and they rely on your defense, it’s very tough to pull back later without consequences. Stepping aside after the fact can lead to added costs and legal trouble.