Contract terms

MHR Capital Partners LP v Presstek, Inc., 2009 NY Slip Op 05200 (Ct. App., 2009)

Rahman v Park, 2009 NY Slip Op 04882 (App. Div., 2nd, 2009)

P.J.P. Mech. Corp. v Commerce & Indus. Ins. Co., 2009 NY Slip Op 04984 (App. Div., 1st, 2009)

Well established principles governing the interpretation of insurance
contracts provide that the unambiguous provisions of the policy must be
given their plain and ordinary meaning (Greater N.Y. Mut. Ins. Co. v United States Underwriters Ins. Co., 36 AD3d 441, 442 [2007]). This is a question of law for the court to determine (Titlebaum Holdings v Gold, 48 NY2d 51, 56 [1979]; Seaport Park Condominium v Greater N.Y. Mut. Ins. Co., 39 AD3d 51,
54 [2007]). However, a court is not at liberty to "make or vary the
contract of insurance to accomplish its notions of abstract justice or
moral obligation" (Breed v Insurance Co. of N. Am., 46 NY2d 351, 355 [1978]).

…

Significantly, if plaintiff believed that Cauldwell's defense was
truly a counterclaim, the prudent action was to immediately move to
strike the defense and force Cauldwell to
replead the claim as a counterclaim. This would have triggered the
insurer's duty to defend. Had these steps been taken in the instant
action, defendant would have been forced to defend plaintiff at the
beginning of the case, rather than when the counterclaim was
voluntarily asserted by Cauldwell several months later.

There do not appear to be any New York cases addressing the
issue of whether the assertion of a claim such as Cauldwell's offset
claim, when pleaded as an affirmative defense, triggered the insurer's
duty to defend. Plaintiff relies on Construction Protective Servs. v TIG Specialty Ins. Co. (29
Cal 4th 189, 57 P3d 372 [2002]) and argues that we should adopt the
rationale therein. In that case, a security firm sued the insurance
company that provided its comprehensive general liability policy,
claiming the insurer breached its duty to defend and indemnify against
a setoff claim. The setoff was asserted as an affirmative defense in a
lawsuit for unpaid services. The customer alleged that the security
firm was legally responsible for fire damage at its construction site
and thus was entitled to set those damages off against the amounts owed
for security services. The trial court sustained the insurance
company's demurrer without leave to amend, based on its conclusion that
a liability insurer's duty to defend does not extend to affirmative
defenses raised in response to a lawsuit initiated by the insured.
Based solely on its Code of Civil Procedure, the California Supreme
Court held that the trial court had erroneously sustained the demurrer,
but it declined to address the question on the facts where the precise
terms of the insurance policy were not before the court. In an action
on a written contract, a [*6]plaintiff
could, under California procedure, plead "the legal effect of the
contract rather than its precise language," thus enabling the court to
determine whether "a prima facie right to relief" had adequately been
stated, notwithstanding the specific language of the contract (29 Cal
4th at 198-199, 57 P3d at 377).

Despite the omission of a copy of the insurance policy as an
exhibit to the complaint, the court concluded that the allegations in
the complaint were sufficient to allege that the setoff claim fell
within the scope of the contractual obligation to defend against suits
seeking damages, and left open the question whether the duty would
extend to the setoff claim once the precise language of the policy was
known.

We decline to follow this holding. Were we to adopt the reasoning of Construction,
it would represent a dramatic change in long-established New York law,
which mandates that unambiguous contract language controls. It would
essentially eliminate our pleading distinctions between affirmative
defenses and counterclaims by holding that how the setoff is pleaded
does not control. While Construction recognized that a setoff
is limited to defeating a plaintiff's claim in the same manner that an
affirmative defense is so limited, it then went on to hold the effect
of pleading a setoff defense is the same as if it were pleaded as a
counterclaim, and thus, at least for the purposes of whether utilized
defensively (as in an affirmative defense) or offensively (as in a
counterclaim), there is no distinction between the two. In either case,
an insurer would be mandated to assign counsel to defend the insured.
This would impact the long-established business practices of insurers,
and lead to uncertainty in the drafting of insurance contracts.

To ignore the clear language of an insurance policy and order a
carrier to litigate an affirmative action chosen by the policyholder
based on a mere claim in a defendant's answer that the affirmative
action somehow relates, however tenuously, to an occurrence or
allegation of negligence on the part of the insured would run afoul of
the rule enunciated in Breed (46 NY2d at 355). We see no reason to set aside long-standing precedent on this issue.

The bold is mine.