Upon the foregoing papers, it is ordered that this motion is denied and plaintiffs' cross motion for summary judgment is granted, to the extent set forth herein.

Background

Plaintiffs Yoda, LLC (Yoda), Riverhead Pooh, LLC (Riverhead Pooh) and United National

Insurance Company (United National) bring this declaratory judgment action against defendants National Union Fire Insurance Company of Pittsburgh, Pa. (National Union), Han Soo Lee (Lee) and Soo Ok Jang. Plaintiffs seek, among other things, a declaratory judgment that National Union is obligated to indemnify Yoda and Riverhead Pooh pursuant to National Union's Commercial Umbrella Liability Policy for damages awarded to defendants Lee and Soo Ok Jang in an underlying action they commenced in the Supreme Court, New York County, captioned Han Soo Lee and Soo Ok Jang v Riverhead Bay Motors, Riverhead Pooh, LLC, Yoda, LLC, Manhattan Skyline Management Corp. and Queens Ironworks & Storefront, Inc., Index No. 113585/03 (the Underlying Action).

In the Underlying Action, Lee alleges that he suffered severe personal injuries on December 2, 2002, when he fell at the premises located at 1521 Old Country Road in Riverhead, New York (the Premises), while Lee was working for Queens Stainless Steel, Inc. (Queens [*2]Stainless). On or about August 6, 2002, Yoda, as general contractor, entered into a General Contractor - Subcontractor Agreement with Queens Stainless, as subcontractor, for work to be performed at the Premises. This agreement contained a defense and indemnification provision in favor of Yoda and Riverhead Pooh, the owner of the Premises, whereby Queens Stainless agreed to "indemnify and save harmless" Yoda and Riverhead Pooh "from any liability and cost (including but not limited to attorneys' fees and disbursements) incurred in connection with any claim for ... any injury, including death at any time resulting therefrom, sustained by any person in connection with the Work [performed by Queens Stainless on the Premises], or caused by the Subcontractor, its employees or agents ..." (the Insured Contract, Affirmation of Michael A. Miranda, Esq. in Support of Cross Motion [Miranda Aff.], Ex. H [parenthetical supplied]).

First Specialty Insurance Corp. (First Specialty) issued a General Liability Policy to Queens Stainless, policy number PGL88277 for the policy period of August 30, 2002 to August 30. 2003, with a general aggregate limit of $2,000,000 and a per occurrence limit of $1,000,000 (the First Specialty Policy, Miranda Aff., Ex. E). United National issued a General Liability Policy to Yoda, policy number L 7158104 for the policy period of January 27, 2002 to January 27, 2003, with a general aggregate limit of $2,000,000 and a per occurrence limit of $1,000,000 (the United National Policy, Miranda Aff., Ex. G). National Union issued a Commercial Umbrella Liability Policy to Queens Stainless, policy number EBU 2129527 for the policy period of August 30, 2002 to August 30, 2003 with a general aggregate and per occurrence limit of $2,000,000 (the National Union Policy, Miranda Aff., Ex. F). The National Union Policy provides excess follow form coverage, in relation to the coverage under the First Specialty Policy. AIG Domestic Claims, Inc. (AIG) is the claims administrator for National Union.

United National tendered the defense and indemnification of Yoda to First Specialty by letter dated October 30, 2003 (Miranda Aff., Ex. I). By letter dated February 27, 2004, First Specialty confirmed the acceptance of the defense in the Underlying Action and requested the law firm that was defending Yoda in that action to defend Riverhead Pooh, as well (id.). After First Specialty accepted the tender of the defense in the Underlying Action, counsel for Yoda and Riverhead Pooh have been communicating with AIG. In a letter to AIG dated November 15, 2004, counsel for Yoda and Riverhead Pooh confirmed that National Union had issued an excess policy, with limits of $2,000,000, to Queens Stainless, and that the National Union Policy follows the form of the First Specialty Policy "and is the next level of coverage to be applied above First Specialty's primary policy of $1,000,000". Counsel for Yoda and Riverhead Pooh requested AIG to send a copy of the National Union Policy (Miranda Aff., Ex. K).

National Union and AIG have been involved in settlement negotiations and mediation proceedings related to the Underlying Action. For example, plaintiffs assert that, in or about August 2005, First Specialty tendered its $1,000,000 policy limits to AIG, and then AIG extended a formal offer of these policy limits to the plaintiffs in the Underlying Action, without conferring with First Specialty's defense counsel. In addition, plaintiffs assert that, prior to a mediation session on April 4, 2006, AIG and their counsel advised First Specialty's defense counsel that AIG would negotiate the monetary aspects of the settlement at the mediation. Plaintiffs further assert that counsel for AIG appeared at the April 4, 2006 mediation session and demanded that plaintiff, himself, appear at the next mediation session to hear their offer [*3]personally.

Although National Union denies that it misled plaintiffs into believing that it would provide coverage to them in the Underlying Action, National Union admits that it appeared at a mediation session earlier in 2006 and "offered funds of First Specialty to settle that action" (Affidavit of Yara Mouded in Support of Motion, at ¶ 12). National Union further asserts that it was ordered by the court to appear at the mediation session in question and that the "$1,000,000 offer only consisted of First Specialty's funds that First Specialty had authorized National Union to offer to the Claimant" (id.). National Union further asserts that it never advised plaintiffs that it would offer any money to settle the Underlying Action from its excess policy and that, at all times up to and including the present, First Specialty has funded and controlled the defense of Yoda and Riverhead Pooh (id., at ¶ ¶ 4 and 12).

In a letter dated June 20, 2006, AIG's claims specialist advised First Specialty, United National, plaintiffs and the other parties to the Underlying Action that it was reserving its rights under the National Union Policy, asserting that Yoda and Riverhead Pooh were not insureds under either the National Union Policy or the First Specialty Policy (Miranda Aff., Ex. M). In a decision dated August 17, 2006, this Court granted summary judgment in favor of the plaintiffs in the Underlying Action and against Yoda and Riverhead Pooh on the issue of liability, based upon their violations of Labor Law § 240 (1) (Miranda Aff., Ex. B). In a letter dated August 25, 2006, AIG advised Queens Stainless, Yoda and Riverhead Pooh that it was disclaiming coverage under the National Union Policy, based upon the Employers Liability Exclusion in the National Union Policy. AIG cited this exclusion for the first time as the grounds for denying coverage with respect to the Underlying Action, which involves an injury to an employee of Queens Stainless (Miranda Aff., Ex. N).

On or about October 16, 2006, Yoda, Riverhead Pooh and United National commenced the instant declaratory judgment action against National Union, Lee and Soon Ok Jang. The complaint asserts four causes of action (Affirmation of Benjamin R. Minard, Esq. in Support of Motion [Minard Aff.], Ex. A [Declaratory Judgment Complaint]). The first cause of action alleges that Yoda and Riverhead Pooh are covered under the contractual liability provision of the First Specialty Policy, covering liability for damages for bodily injury "(a)ssumed in a contract or agreement that is an insured contract'" (id., at ¶ 36). The term, "insured contract" is defined, in pertinent part to mean "(t)hat part of any other contract or agreement pertaining to your business ... under which you assume the tort liability of another party to pay for bodily injury' or property damage' to a third person or organization" (id.). The Insured Contract between Queens Stainless and Yoda comes within the above definition of an "insured contract". The contractual liability provision in the First Specialty Policy is incorporated into the "Coverage A: Excess Follow Form Insurance" in the National Union Policy, which provides, as follows, in pertinent part:

"B. Coverage A shall follow the terms, definitions , conditions and exclusions of Scheduled Underlying Insurance (referring to the First Specialty Policy), subject to the Policy Period, Limits of insurance, premium and all other terms, definitions, conditions and exclusions of this policy. If any provisions of Scheduled Underlying Insurance conflict with any provisions of this policy, the provisions of this policy will apply."

The second cause of action seeks a declaration that National Union is obligated to indemnify Yoda and Riverhead Pooh for damages in excess of the First Specialty Policy limits, as the "Employers Liability Exclusion in the National Union Policy, cited by AIG in its declination letter, does not apply to Yoda and Riverhead Pooh (Declaratory Judgment Complaint, at ¶ ¶ 43 - 46). The endorsement to the National Union Policy containing the "Employers Liability Exclusion Applicable to Coverages A and B" provides as follows, in pertinent part:

"Under Coverages A and B, this insurance does not apply to Bodily Injury to any employee of the Insured arising out of and in the course of his or her employment by the Insured, or performance of duties related to the conduct of the Insured's business ^[FN1]."

The third cause of action seeks a declaration that National Union's disclaimer of coverage to Yoda and Riverhead Pooh is ineffective under Insurance Law § 3420. The complaint asserts that National Union was actively involved in the litigation of the Underlying Action since in or about October 2003, when First Specialty undertook the defense of Yoda and Riverhead, and, thus, knew, or should have known, that these entities were not "insureds" under either the First Specialty Policy or the National Union Policy and that the Underlying Action involved an employee of the insured, Queens Stainless (Declaratory Judgment Complaint, at ¶ ¶ 48 - 54). The fourth cause of action asserts that National Union is equitably estopped from disclaiming coverage to Yoda and Riverhead Pooh, by virtue of its active involvement in the defense of the Underlying Action for nearly three years and its participation in a mediation session in March 2006 (Declaratory Judgment Action, at ¶ ¶ 56 - 60).

In or about November 17, 2006, on the eve of the scheduled trial for damages in the Underlying Action, National Union has moved, pursuant to CPLR 3211 (a) (1) - (3) and (7), to dismiss the complaint in the declaration judgment action. Plaintiffs have cross-moved, pursuant [*5]to CPLR 3212, for an order granting summary judgment in their favor and declaring that National Union is obligated to indemnify Yoda and Riverhead for damages in the Underlying Action, as the next layer of coverage following the First Specialty Policy's limits. National Union does not object to treating plaintiffs' cross motion, as well as its own motion, as motions for summary judgment pursuant to 3211 ( c ). In fact, National Union has submitted extrinsic evidence, in the form of affidavits, in opposition to plaintiffs' cross motion and in further support of its motion.

Discussion

Section 3420 (d) of the Insurance Law provides, as follows:

"If under a liability policy delivered and issued for delivery in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant."

The Court of Appeals further stated the " timeliness of an insurer's disclaimer is measured from the point in time when the insurer first learns of the grounds for disclaimer'" (First Fin. Ins. Co. v Jetco, 1 NY3d at 68-69; quoting Matter of Allcity Ins. Co. [Jimenez], 78 NY2d 1054, 1056 [1991]; see also Hartford Ins. Co. v County of Nassau, 46 NY2d 1028, 1029 [1979]). In First Fin. Ins. Co. v Jetco, the Court of Appeals concluded that an insurer's delay of 48 days in disclaiming coverage, which was not sufficiently explained, was unreasonable as a matter of law (1 NY3d at 69-70). Other decisions have held that insurers' unexplained delays of between one and two months were unreasonable as a matter of law pursuant to Insurance Law § 3420 (d) (see, e.g., Hartford Ins. Co. v County of Nassau, 46 NY2d at 1030 [insurer's unexplained delay of two months in disclaiming coverage is unreasonable as a matter of law]; West 16th St. Tenants' Corp. v Public Serv. Mut. Ins. Co., 290 AD2d 278 [1st Dept 2002], lv denied 98 NY2d 605 [2002] [insurer's unexplained 30-day delay in disclaiming coverage on the grounds of late notice is unreasonable as a matter of law]).

In this matter, National Union knew or should have known that the Underlying Action involved an employee of Queens Stainless, the named insured under both the First Specialty Policy and the National Union Policy, when it first began to monitor the Underlying Action, beginning in or about October 2003. Significantly, in a letter to AIG dated November 15, 2004, counsel for Yoda and Riverhead Pooh confirmed that National Union had issued a follow form excess policy, with limits of $2,000,000 to Queens Stainless, which is the next level of coverage to be applied above the $1,000,000 limits of the First Specialty primary policy (Miranda Aff., Ex. K). Nevettheless, neither AIG nor National Union advised Yoda and Riverhead Pooh at that time that it was disclaiming coverage or even reserving its rights, based upon the Employers Liability [*6]Exclusion. Indeed, AIG continued to monitor the Underlying Action and even participated in mediation proceedings earlier in 2006. It was not until June 20, 2006, that AIG first issued a reservation of rights letter to Yoda and Riverhead Pooh, based solely upon the fact that these entities were not "insureds" under either the National Union Policy or the First Specialty Policy (Miranda Aff., Ex. M). The Court of Appeals has held, however, that a reservation of rights letter is not the equivalent of a disclaimer of coverage (see Hartford Ins. Co. v County of Nassau, 46 NY2d at 1029).

More than two months later, on August 25, 2006, AIG first advised Yoda and Riverhead Pooh that it was disclaiming coverage with respect to the Underlying Action, based upon the Employers Liability Exclusion in the National Union Policy (Miranda Aff., Ex. N). Neither AIG nor National Union has provided any explanation for the delay of more than two months between the reservation of rights letter and the disclaimer letter, let alone for the delay of several years in disclaiming coverage. Accordingly, National Union's unexplained delay in disclaiming coverage is unreasonable as a matter of law pursuant to Insurance Law § 3420 (d) (see First Fin. Ins. Co. v Jetco, 1 NY3d 64; Hartford Ins. Co. v County of Nassau, 46 NY2d 1028; West 16th St. Tenants' Corp. v. Public Serv. Mut. Ins. Co., 290 AD2d 278).

National Union cites case law holding that a delay in disclaiming coverage does not create coverage, where no coverage exists under the terms of the insurance policy (see, e.g., Alfred J. Schiff Assocs., Inc. v Flack, 51 NY2d 692, 698-699 [1980] [errors and omissions insurance policy issued to insurance agent and employee benefit plan consultant did not cover underlying action brought by a competitor for willful and malicious usurpation of a trade or commercial secret]). Nevertheless, controlling decisions have concluded that an insurer's failure to timely disclaim coverage in accordance with Insurance Law § 3420 (d) precludes an insurer from asserting that a claim, like the Underlying Action at bar, which comes within the coverage afforded by a policy, is subject to a policy exclusion, in this case the Employers Liability Exclusion in the National Union Policy (see Matter of Worcester Ins. Co. v Bettenhauser, 95 NY2d 185, 188-189 [2000]; Zappone v Home Ins. Co., 55 NY2d 131, 138 [1982]; Siagha v National Fire Ins. Co. of Pittsburgh, Pa., 306 AD2d 60, 61 [1st Dept 2003], lv denied 2 NY3d 703 [2003]; Columbia Cas. Co. v National Emergency Servs., Inc., 282 AD2d 346, 347 [1st Dept 2001]).

National Union also cites decisions concluding that the prompt disclaimer requirements of Insurance Law § 3420 (d) do not apply to an insurer seeking contribution or indemnification from co-insurers for defense costs and damages previously paid to insureds or other claimants (see, e.g., Sixty Sutton Corp. v Illinois Union Ins. Co., __ AD2d __, 2006 NY Slip Op. 08883 [1st Dept Nov. 30, 2006], Bovis Lend Lease LMB, Inc. v Royal Surplus Lines Ins. Co., 27 AD3d 84, 91-92 [1st Dept 2005] [prompt disclaimer requirement of Insurance Law § 3420 [d] does not apply to co-insurer seeking contribution from another insurer; describing purpose of this requirement to "protect the insured and the injured person or other claimant against the risk posed by a delay in learning the insurer's position, of expending energy and resources in an ultimately futile attempt to recover damages from an insurer or foregoing alternative methods for recovering damages until it is too late to pursue them successfully"]; AIU Ins. Co. v Investors Ins. Co., 17 AD3d 259 [1st Dept 2005]).

The instant matter is, however, distinguishable from the above decisions, as the relief [*7]sought in the declaratory judgment action is for National Union to fulfill its obligation to indemnify Yoda and Riverhead Pooh, entities that are "claimants" within the meaning of Insurance Law § 3420 (d), for damages incurred in connection with the Underlying Action. No claim is asserted by a co-insurer for contribution from National Union for defense costs or damages already paid by that insurer on behalf of Yoda and Riverhead Pooh. This matter represents the precise situation that the prompt notice of disclaimer requirement of Insurance Law § 3420 (d) was enacted to prevent; precluding an insurer from waiting until the eve of the trial of an underlying action to notify the insured or another claimant that it is disclaiming coverage. Accordingly, National Union's untimely disclaimer based upon the Employers Liability Exclusion in its policy is ineffective pursuant to Insurance Law § 3420 (d)^[FN2] and, thus, National Union is obligated to indemnify Yoda and Riverhead Pooh for damages in connection with the Underlying Action, in excess of the $1,000,000 limit of the First Specialty Policy.

Accordingly, it is

ORDERED that National Union's motion to dismiss the complaint in this declaratory judgment action is denied; and it is further

ORDERED AND ADJUDGED that plaintiffs' motion for summary judgment is granted, to the extent of declaring that National Union's untimely disclaimer of coverage, based upon the Employers Liability Exclusion in its policy, is ineffective pursuant to Insurance Law § 3420 (d) and, thus, National Union is obligated to indemnify Yoda, LLC and Riverhead Pooh, LLC for all damages they incur in connection with the Underlying Action, entitled Han Soo Lee, et al. v Riverhead Bay Motors, et al., Index No. 113585/03, which exceed the $1,000,000 limit of the insurance policy issued by First Specialty Insurance Company to Queens Stainless Steel, Inc.; and it is further

ORDERED that, within 30 days of entry, plaintiffs shall serve upon defendants, copy of this decision, order and judgment, together with notice of entry.

This constitutes the Decision and Order of the Court.

Dated: December 12, 2006

ENTER:,

Doris Ling-Cohan, JSC

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