Insurer Waived Right to Assert Policy Exclusion First Raised in Answer to Declaratory Judgment Complaint

The U.S. District Court for the Southern District of New York, applying New York law, has concluded that an insurer waived the right to assert a policy exclusion as a coverage defense in a declaratory judgment action after incorrectly denying coverage based on a similar, but broader, exclusion contained in an inapplicable policy.  City of New York v. Philadelphia Indem. Ins. Co., 2020 WL 5441347 (S.D.N.Y. Sept. 10, 2020).

The insured, a municipality, sought coverage under a general commercial and professional liability policy for a wrongful death lawsuit in connection with the death of a child who had received social services.  The operative policy (the 2013 Policy”) contained an exclusion barring coverage for “bodily injury” arising out of “[t]he actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured.”  The insurer, however, denied coverage for the lawsuit based on a broader exclusion contained in a subsequent, inapplicable “2017 Policy.”  The insurer raised the exclusion contained in the 2013 Policy as a coverage defense for the first time in its answer to the city’s declaratory judgment complaint.

The court granted the city’s motion for summary judgment, concluding that the insurer had a duty to defend.  As a preliminary matter, the court concluded that, absent a policy exclusion, the allegations in the complaint triggered a duty to defend.  The court then concluded that the insurer had waived the right to assert the 2013 Policy exclusion as a defense to coverage by waiting seven months to raise the exclusion in its answer to the insured’s complaint.  The court rejected the insurer’s argument that it had adequately put the insured on notice of the exclusion by denying coverage based on a similar exclusion, given that the exclusion contained in the 2017 Policy was broader.