In its recent decision in Commonwealth Land Title Ins Co. v. American Signature Services, Inc., 2014 U.S. Dist. LEXIS 22172 (E.D.N.Y. Feb. 20, 2014), the United States District Court for the Eastern District of New York had occasion to consider when and under what circumstances a claimant can bring a direct action against an insurer.
Alterra insured American Signature, a title insurance agency, under a professional liability policy. While the policy was in effect, American Signature was named as a defendant in a lawsuit brought by two title insurance companies for whom American Signature had been an agent. Plaintiffs named Alterra as a direct defendant in their suit on the theory that they were third-party beneficiaries of the policy, and that as such, they were entitled to seek indemnification from Alterra directly. In the alternative, plaintiffs sought a ruling that Alterra had a duty to defend and indemnify American Safety in connection with their lawsuit, as Alterra had denied any such obligation to American Signature, and in fact, had commenced its own coverage action against American Signature seeking a rescission of the policy or, in the alternative, a declaration that it had no coverage obligations in connection with the underlying suit.
Citing to Lang v. Hanover, 3 N.Y.3d 350 (N.Y. 2004), Alterra argued that under New York common law, an injured party has no direct cause of action against the insurer of a tortfeasor. The Lang decision acknowledged that New York Insurance Law §3420(a) creates a limited exception to this rule by allowing claimants to bring a direct action against a tortfeasor’s insurer only after obtaining a judgment against the tortfeasor, and only then when the judgment “remains unsatisfied at the expiration of thirty days from the serving of notice of entry of judgment upon the attorney for the insured, or upon the insured, and upon the insurer … .” In summarizing the Lang decision, the Eastern District explained that the New York Court of Appeals “determined that compliance with the requirements of Section 3420(a)(2) is a condition precedent to any direct action against the insurance company,” and that as such, “an injured third party has no cause of action against an insurer at common law, but may bring such an action under Section 3420 so long as the plaintiff has met the conditions set forth in Section 3420(a)(2).”
While plaintiffs conceded that they did not yet have a judgment against American Signature, they nevertheless argued that a direct action was permissible because the Alterra policy was not governed by New York Insurance Law §3420, which by its terms applies to policies “insuring against liability for injury to person … or against liability for injury to, or destruction of, property.” Plaintiffs argued that as a professional liability policy, the Alterra policy was not one insuring bodily injury or property damage, and that as such, a direct action should be permitted. The court rejected this argument, explaining that §3420 is not a limitation on direct actions, but rather an exception to the common law rule prohibiting such an action. As the court explained:
… the New York Court of Appeals in Lang rejected this ap-proach, observing that New York common law does not recognize a third party's claim against an insurer because of the lack of privity between them, and that Section 3420 grants a limited statutory cause of action where one does not exist under the common law.
This common law rule, explained the court, is not limited to claims for bodily injury or property damage, but instead applies to any direct actions by claimants against the insurer of a tortfeasor, regardless of the nature of the underlying claim. As such, the court concluded that it need not reach the issue of whether §3420 applied to the Alterra policy, since even if it did, a direct action could only proceed after a judgment. In passing, the court noted that if §3420 did not govern the Alterra policy, then plaintiffs could never have a direct cause of action against Alterra under New York common law. In passing, however, the court pointed to several New York decisions holding that the statute applies broadly to any policy issued or delivered in New York, not just ones insuring against bodily injury or property damage.