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June 18, 2012

The Court of Appeals Construes "Arising out of" Exclusion in Liability Policy

The New York Court of Appeals recently reversed a decision of the Appellate Division, Fourth Department, in a declaratory judgment action in which an injured party sought coverage under a liability policy issued to a nightclub. Dzielski v. Essex Insurance Company, 90 A.D.3d 1493 (4th Dep't. 2011), rev'd 2012 N.Y. Lexis 1282 (June 5, 2012).

Mark Dzielski was injured when he fell from a loading dock at the rear door of a nightclub. That evening he had provided sound equipment for a band that performed at the nightclub. The accident occurred while he was removing equipment and carrying it from the nightclub to his truck after the concert had concluded. Allegedly, the accident was caused by defects in the loading dock. Dzielski sued the nightclub, which defaulted, and a default judgment in the sum of $950,000 was entered. Plaintiff then brought suit directly against Essex Insurance Company, which insured the nightclub, seeking to enforce the judgment.

Essex Insurance Company disclaimed coverage to its insured based on a "stagehand" exclusion contained in the policy's "restaurant, bar, tavern, nightclubs, fraternal and social clubs endorsement."

The exclusion provides, in relevant part:
[T]he coverage under this policy, does not apply to 'bodily injury' ***or any injury, loss or damage arising out of***[i]njury to any entertainer, stagehand, crew, independent contractor or spectator, patron or customer who participates in or which is a part of any athletic event, demonstration, show, competition or contest***.

Supreme Court granted the plaintiff's motion for summary judgment, and denied defendant insurer's cross-motion for summary judgment.

On appeal to the Appellate Division, Fourth Department, that court held that the policy language was ambiguous, and could reasonably be construed narrowly to encompass only those persons who actually performed in the show or who were injured as a result of activities during the show, rather than any individuals who had anything to do with the performance.

The majority of the Appellate Division found that the phrase "arising out of" in the exclusion did not mandate a broader interpretation of covered individuals, noting, "[h]ere, it cannot be said that there is no ambiguity concerning whether the accident arose out of plaintiff's participation in a show, which, in fact, had ended before the accident occurred."

Two Justices dissented in an opinion in which they pointed out that the plaintiff was an independent contractor, which was specifically named in the policy exclusion, and the injury "arises out of" his participation in the event. The dissent rejected the majority's conclusion that the language "participates in or is a part of any***show" was ambiguous. They argued that there was "no question that [plaintiff] participate[d] in or [wa]s a part of the show on the night of his accident." The dissenters cited the Court of Appeals decision in Maroney v. New York Central Mutual Fire Insurance Company, 5 N.Y.3d 467, 473 (2005), in which the term "arising out of" was broadly interpreted by the Court of Appeals to mean "originating from, incident to or having connection with***[and]***requires only that there be some causal relationship between the injury and the risk for which coverage is provided***."

On appeal to the Court of Appeals, the Court unanimously adopted the decision of the Fourth Department dissenters, and reversed, holding that there was no obligation on the part of Essex Insurance Company to indemnify its insured in the underlying action.

This is an expansive interpretation of the phrase "arising out of" which is used in connection with many exclusions in liability policies.


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