Court of Appeals Grows Less Fond of ‘Kinney’

By Frederick B. Simpson and Glenn A. Kaminska

Contractual disputes continue to plague tort litigation despite a laudable effort by the Court of Appeals to clarify some of the more troublesome issues. It addressed one recently; others remain on the horizon. The Court in Inchaustegui v. 666 5^th Ave. Partnership, et al.[i], waded into one of the murkier and contentious areas dominating defense practice by revisiting Kinney v Lisk[ii]. In doing so it adopted a trend from the Appellate Divisions[iii] and eviscerated Kinney, which had been the cause of considerable tumult and confusion.

To understand the significance of Inchaustegui, one must understand Kinney. Kinney held, or so many thought, that if you were required to purchase insurance for another and failed to do so, you became an insurer for that entity. The breaching party was responsible for all resulting damages including the proportional share the affected party owed to the plaintiff

This often led to harsh results for clients and ethical quandaries for counsel. According to the Court of Appeals in Inchaustegui, this need not have been. It seems that the bench and bar collectively misunderstood and misapplied Kinney for over a decade. Inchaustegui revealed the error of our ways and in the process established an evenhanded bright line rule.

The following example might assist in understanding the importance of Kinney’s timely demise: A tenant is required by lease to purchase insurance naming the landlord as an additional insured on the tenant’s policy. The tenant fails to do so. The plaintiff is injured at the demised premises and commences suit against the landlord. The landlord then impleads the tenant with causes of action for contribution and breach of contract for failure to procure it insurance. This breach of contract cause of action was called a “Kinney claim”.

Since the tenant failed to purchase insurance protecting the landlord, judgment would be entered against it for breach of contract. The measure of damages owed by the tenant on this cause of action would be the amount the landlord owed to the plaintiff. Or so many thought.

The mischief of Kinney was that the judgment against the tenant was not covered by the tenant’s insurance. The tenant was forced to reach into its own pocket to satisfy the landlord’s proportional share. To avoid this result, counsel for the tenant (whose fees were paid by the tenant’s insurer) was placed in the awkward position of having to minimize the landlord’s exposure and maximize the tenant’s exposure so that the claims against the tenant would be covered by insurance.

What oftentimes ensued was perverse litigation where the tenant would not oppose a landlord’s motion for summary judgment against the tenant on covered common law and contractual indemnity theories in exchange for the landlord’s discontinuance of its Kinney claim.

The Third Department put its imprimatur on such a practice to the considerable dismay of the tenant’s insurance carrier.[iv] Inchaustegui should put an end to this perversion.

The Court of Appeals in Inchaustegui taught us that we have all been laboring under a misconception about Kinney. According to the Court, Kinney addressed the “well recognized” distinction between insurance procurement and indemnity clauses in a contract but not the measure of damages for breach of a provision to procure insurance.

The Court in Inchaustegui explained Kinney as follows: “the question of whether resulting damages could be minimized by any insurance the [additional insured] general contractor had obtained was not raised…or considered by the Court.”[v] Implicit in this finding is that if the general contractor’s policy had been brought to the attention of the Court, an alternate measure of damages would have been employed, thus making all the difference.

The holding in Inchaustegui is that where there is a breach of the insurance procurement clause (by the tenant in our example), the landlord’s measure of damages is not its proportional share of the judgment due the plaintiff, but the cost of premiums for the unpurchased insurance and out-of-pocket expenses, including any additional cost of enhanced premiums it might incur in the future. In reaching its decision, the Court rejected the application of the common law collateral source rule to these facts. This ruling takes the sting out of Kinney.

The measure of damages may be the subject of confusion down the line as trial Courts and attorneys grapple with how to prove them, but it has severely minimized the impact of what we thought Kinney stood for. And while it is possible that damages’ hearings with expert testimony may become prevalent, with a cottage industry developing to litigate these matters, it is more likely that the bulk of these claims will simply whither on the vine as it will not be cost effective to pursue them.

Inchaustegui has limitations. It only applies where, in our example, the landlord has procured its own insurance covering the plaintiff’s claim. Where the landlord is self-insured, it appears that Kinney, as we thought we knew it, lives on.

‘KILFEATHER APPROACHES’

Another contractual theory that frequently rears its head in tort litigation is the anomalous Kilfeather v. Astoria[vi] exception to contractual indemnity in construction site settings. Kilfeather is a Second Department case. The First Department has just rejected its application in Padro v. Bertelsman Music Group, et al[vii].

General Obligation Law §5-322.1 prohibits enforcement of indemnity agreements in construction site settings where the agreement purports to hold the indemnitee harmless (usually the general contractor) for its own negligence[viii]. The Second Department in Kilfeather held that this statutory bar did not apply to “incidental indemnitees” (typically owners) who are parties that the indemnitor (usually the subcontractor) is to hold harmless but are not actually signators to the contract. In other words, although the subcontractor cannot be compelled to indemnify an actively negligent general contractor with whom it has contracted, it can be compelled to indemnify the incidental indemnitee (such as the owner) for its active negligence. The Second Department held:

General Obligations Law §5-322.1 prohibits and renders unenforceable any promise to hold harmless and indemnify a promisee which is a construction contractor or a landowner against its own negligence (Cases cited). The language of the statute makes clear, however, that it was not intended to “preclude a promisee [from] requiring indemnification for damages . . . caused by or resulting from the negligence of a party other than the promisee” (General Obligations Law §5-322.1[1]) and there is nothing which suggests that indemnification for the negligence of another party is prohibited because the indemnification runs to that party rather than to the promisee.

The First Department in Padro, declined an invitation to adopt the Kilfeather doctrine. Without citing Kilfeather, the First Department held:

The construction manager’s argument that it should have been granted contractual indemnification is unpreserved… Even if the argument were preserved, the indemnification provision of the contract between the employer and the site owner is unenforceable to the extent it purports to entitle the construction manager to indemni[t]y for liability for plaintiff’s injuries, for which the jury determined that the construction manager was 10 percent culpable (General Obligations Law § 5-322.1). Given the statute’s purpose “to prevent a prevalent practice in the construction industry of requiring subcontractors to assume liability by contract for the negligence of others” (Itri Brick & Concrete Corp. v Aetna Cas. & Sur. Co., 89 NY2d 786, 794), it is of no moment that the construction manager is a third-party beneficiary of the relevant contract, rather than a party thereto.

In those few sentences, the First Department took the unusual step of finding that the issue was not preserved but nevertheless reached the merits to explicitly reject the holding of another Department. The Third and Fourth Departments have not yet weighed in on this topic, but there is now a rather obvious split between the First and Second. Since it arises frequently and usually involves significant stakes it may have to be resolved in Albany.

CONCLUSION

The Court of Appeals has made great strides over the past few years to clear up some of the contentious and financially significant contractual offshoots of tort litigation. Since these issues often shift the entire loss regardless of fault, they are a hotbed of litigation. Its work is not yet done.

This article is reprinted from the May 29, 2001 of the New York Law Journal. © 2003 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.