Background
Louis Shattuck was injured while performing construction work using equipment belonging to Cory Lisinski, doing business as CNL Construction and Maintenance. Lisinski’s general liability policy was issued by Dryden Mutual Insurance Company. After the accident, Lisinski notified Dryden Mutual, which disclaimed coverage on the ground that Shattuck was an employee and therefore any liability would be subject to a workers’ compensation exclusion. The underlying complaint, however, alleged both that Shattuck was an employee and, in the alternative, that he was an independent contractor.
Shattuck commenced a personal injury action against Lisinski. Because Dryden Mutual had disclaimed and Lisinski did not forward the suit papers, the case proceeded to a damages inquest and resulted in a default judgment of $2,841,782. Lisinski then assigned to Shattuck all rights and claims against Dryden Mutual. Shattuck brought a direct action under Insurance Law § 3420(a)(2) and (b)(1), New York’s statute allowing an injured person or judgment creditor to sue a tortfeasor’s insurer directly once a judgment has gone unsatisfied for 30 days.
Shattuck moved for summary judgment; Dryden Mutual cross-moved to dismiss. Supreme Court found Dryden Mutual liable under § 3420 but ordered a new damages inquest and dismissed the bad faith claims. Both sides appealed.
The Court’s Holding
The Fourth Department modified the order in Shattuck’s favor on both cross-appeal issues. First, the court held that Dryden Mutual’s disclaimer constituted an anticipatory repudiation — an anticipatory breach of contract occurring before the time fixed for performance — that excused Lisinski from the policy’s obligation to forward suit papers. The court quoted Audthan LLC v Nick & Duke, LLC (42 NY3d 292, 303 [2024]) for the proposition that repudiation requires “some express and absolute refusal to perform . . . that is positive and unequivocal,” and found that Dryden Mutual’s letter “denying all liability and refusing to pay the loss” satisfied that standard.
Second, the court held that Dryden Mutual — having disclaimed and declined to defend without seeking a declaratory judgment — could not challenge the damages in the default judgment. Under Lang v Hanover Ins. Co. (3 NY3d 350, 356 [2004]), an insurer that disclaims and sits out the underlying lawsuit “takes the risk that the injured party will obtain a judgment” and may litigate only the validity of its disclaimer. The court granted summary judgment to Shattuck on damages up to the policy limit. Third, the court reinstated Shattuck’s bad faith claims, finding Dryden Mutual failed to meet its initial summary judgment burden on bad faith under the Pavia v State Farm Mut. Auto. Ins. Co. (82 NY2d 445, 453 [1993]) “gross disregard” standard.
Key Takeaways
- An insurer’s wrongful disclaimer of coverage — when “positive and unequivocal” — constitutes an anticipatory repudiation that excuses the insured’s obligation to forward suit papers, removing a standard defense to § 3420 direct actions.
- Under Lang v Hanover, an insurer that disclaims and does not participate in the underlying action forfeits the right to relitigate liability or damages in the subsequent § 3420 direct action; the insurer is bound by the default judgment up to the policy limit.
- To survive summary judgment on bad faith under the Pavia “gross disregard” standard, the insurer bears the initial burden of demonstrating no material issue of fact; failing to carry that burden means the bad faith claims proceed to trial.
Why It Matters
This decision sharpens two of the sharpest edges in New York’s Insurance Law § 3420 litigation toolkit. For plaintiffs and injured parties, it confirms that an insurer who disclaims early and stays out of the underlying case cannot later obtain a second bite at the damages apple through a new inquest. For insurers, the decision is a strong reminder that an insufficiently hedged coverage disclaimer can constitute an anticipatory repudiation that waives policy conditions and exposes the carrier to the full consequences of a default judgment.
The reinstatement of the Pavia bad faith claims also matters. Those claims, if successful at trial, could expose Dryden Mutual to damages exceeding policy limits. Coverage specialists should note that failing to carry the initial summary judgment burden on bad faith leaves a carrier facing a potentially uncapped trial.