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October 23, 2009

Settlement Schemes, Confidentiality Agreements and Legal Ethics

The Appellate Division First Department recently decided a case involving the rights of parties covered by an Owner Controlled Insurance Program (OCIP). The case was Osowski v. AMEC Construction Management, Inc.
The opinion was written by Justice James M. Catterson.

An OCIP requires the owner, general contractor and all subcontractors to obtain all necessary insurance, including excess coverage through the same insurance companies. As part of the program all entities that are enrolled in the program waive all rights of subrogation that they may have against each other so long as the claims are covered by the OCIP. The subrogation rights survive if there are liabilities that are not covered by the OCIP.

In this case the plaintiff sustained multiple injuries including the loss of his left leg and multiple toes on his right foot while working on the new headquarters for the New York Times.. The defendants in the underlying personal injury action sought to bring in AIG as the excess carrier because of the potential size of the liability they were facing. AIG disclaimed. That caused the main defendants to impleaded the employer and sought contribution from them. This is known as Dole v. Dow Chemical action. The defendants also brought as well as bring a declaratory judgment action against AIG to challenge their disclaiming liability. The employer was allowed to intervene in the declaratory judgment action. The impleader claim would have been barred by the OCIP if AIG had accepted their responsibility to defend the claim as the excess carrier.

The plaintiff won a summary judgment motion for liability under §240(1) and §241(6) of the Labor Law. During the damages trail the plaintiff settled with the main defendants. The settlement was paid with a $2 million payment by Travelers (the initial liability carrier for the limits of their policy). An additional $10 million was paid to the plaintiff on behalf of the main defendants by an irrevocable and unconditional letter of credit paid for by AIG for the benefit of the plaintiff. The settlement was to be confidential between the parties to the settlement. Part of the agreement was that although AIG was to fund the letter of credit they were in no way accepting any liability in the case and were still maintaining that they had properly disclaimed liability in the case.

The employer in the case was advised that the main defendants in the personal injury case were to give the plaintiff the letter of credit without any information concerning the funding of the letter of credit. As far as the employer knew the defendants were funding the letter of credit. Eventually the employer was advised of the funding method of the letter of credit and made an oral motion to dismiss the third party case against itself as well as the declaratory judgment action against AIG.

At a later appearance in court the third party complaint against the employer was dismissed because the defendants had no out of pocket loss and therefore the employer was insulated from a subrogation or contribution action because of the OCIP.

The defendants and AIG appealed the decision of Justice Jane Solomon because they maintained that AIG was still maintaining that they properly disclaimed liability. On appeal the Appellate Division ruled that the decision to order full disclosure of the “confidential” settlement agreement was require by CPLR §3101(a) because it was relevant to a defense available to the employer. It was deemed relevant because it impacted on the claim for indemnification. If AIG paid for the letter of credit the defendants did not pay any money out of their pockets and the employer had the right to benefit from the OCIP which barred any claim for indemnification.

The Appellate Division also affirmed the fact that for all intents and purposes that AIG had paid on the policy it declaimed by funding the $10 million letter of credit. By doing it so it wiped out any claim the defendants may have had against the employer.

The Appellate Division was less than pleased with the actions of the attorneys for AIG. The court believed that the continued prosecution of the third party complaint against the employer and their lack of forthrightness and candor to the court raised substantial issues of whether or not their actions were in compliance with the Code of Professional responsibility. The Justices directed that the Clerk of the Court refer this matter to the Departmental Disciplinary Committee.

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