19-2661
U.S. Liability Insurance Co. v. WW Trading Co.
                            UNITED STATES COURT OF APPEALS
                                FOR THE SECOND CIRCUIT

                                         SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT.
CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS
PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A
SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE
(WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A
SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT
REPRESENTED BY COUNSEL.

      At a stated term of the United States Court of Appeals for the Second Circuit,
held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the
City of New York, on the 15th day of May, two thousand twenty.

        PRESENT: JOHN M. WALKER, JR.,
                         GERARD E. LYNCH,
                         RICHARD J. SULLIVAN,
                                 Circuit Judges.
        ------------------------------------------------------------------
        UNITED STATES LIABILITY INSURANCE
        COMPANY,

                         Plaintiff-Counter-Defendant-Appellant,

                  v.                                                         No. 19-2661-cv

        WW TRADING CO., INC.,

                         Defendant-Counter-Claimant-Appellee,

        W&T SEAFOOD CORP., WONG TUNG, LLC,

                         Defendants-Appellees,
          YOUYONG LIN,

                           Defendant. ∗
          ------------------------------------------------------------------

          FOR PLAINTIFF-COUNTER-                           STEVEN VERVENIOTIS, Miranda,
          DEFENDANT-APPELLANT:                             Slone Sklarin Verveniotis LLP,
                                                           Mineola, NY.

          FOR DEFENDANT-COUNTER-                           Tom M. Fini, Catafago Fini LLP,
          CLAIMANT-APPELLEE:                               New York, NY.

          FOR DEFENDANTS-APPELLEES:                        ALAN C. EAGLE, Rivkin Radler LLP,
                                                           Uniondale, NY.

          Appeal from a judgment of the United States District Court for the Eastern

District of New York (Carol Bagley Amon, J.).

          UPON        DUE       CONSIDERATION,                  IT     IS      HEREBY   ORDERED,

ADJUDGED, AND DECREED that the judgment of the district court is

AFFIRMED.

          Plaintiff-Counter-Defendant-Appellant United States Liability Insurance

Co. (“USLI”) brought suit against Defendant-Counter-Claimant-Appellee WW

Trading Co., Inc. (“WW Trading”), Defendants-Appellees W&T Seafood Corp.

(“W&T Seafood”) and Wong Tung, LLC (“Wong Tung”) (all appellees collectively,


∗
    The Clerk of Court is respectfully requested to amend the caption as set forth above.

                                                      2
the “WW Trading Appellees”), and Defendant Youyong Lin, seeking a declaratory

judgment that the insurance policy it issued to WW Trading was rescinded or that

it was not obligated to defend or indemnify WW Trading in connection with

Youyong Lin’s New York state lawsuit (the “Underlying Action”) for an injury he

sustained in a building where WW Trading operates. The district court (Amon, J.)

denied USLI’s request for a declaration that it had no duty to indemnify WW

Trading, determining on summary judgment that USLI’s rescission claim failed,

that the insurance policy’s “Employee Exclusion” did not bar coverage for the

Underlying Action claims, and that WW Trading was entitled to attorneys’ fees

arising from this case; after a bench trial, the district court also concluded that the

insurance policy’s “Construction Operations Exclusion” did not bar coverage for

the incident.

      USLI appeals, contending that it was entitled to rescind the policy based on

WW Trading’s misrepresentations, that both the Employee Exclusion and the

Construction Operations Exclusion bar coverage for the Underlying Action claims,

and that the district court erred in granting attorneys’ fees to WW Trading.

Because USLI identifies no error in the district court’s judgment, we affirm. We

assume the parties’ familiarity with the underlying facts, procedural history, and


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issues on appeal, to which we refer only as necessary to explain our decision.

              I. USLI Failed to Promptly Assert Its Rescission Claim

      The district court properly granted summary judgment to the WW Trading

Appellees on USLI’s rescission claim because USLI unreasonably delayed its

request for rescission.

      “We review a district court’s granting of summary judgment de novo.”

Ballow Brasted O’Brien & Rusin P.C. v. Logan, 

, 238 (2d Cir. 2006).

“Under New York law, an insurer may rescind an insurance policy if it was issued

in reliance on material misrepresentations.” Fid. & Guar. Ins. Underwriters, Inc. v.

Jasam Realty Corp., 

, 139 (2d Cir. 2008) (footnote omitted).

Nevertheless, a party seeking rescission must act promptly upon learning of the

grounds for rescission, Ballow 

–40, and must announce its

rescission claim “without unreasonable delay,” Schenck v. State Line Tel. Co., 

, 313 (1924). Promptness is a “fairly stringent requirement” that the party

seeking rescission has the burden of proving, Ballow 

(internal quotation marks omitted), and we must determine the reasonableness of

any delay by considering the specific “facts of th[e] case,”

Actual or

constructive knowledge of the grounds for rescission places an insurer on notice


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to promptly seek rescission. See, e.g., Luria Bros. & Co. v. All. Assurance Co., 

, 1091 (2d Cir. 1986).      Constructive knowledge exists where “the

circumstances were . . . adequate to put [a party] on notice” of a material

misrepresentation.

had constructive knowledge of WW Trading’s potential

misrepresentations – that WW Trading did not use forklifts and did not engage in

operations involving the warehousing of goods of others – no later than November

7, 2014, the day on which it sent WW Trading a nonrenewal notice accusing WW

Trading of violating the exact provisions of the insurance application that form the

basis for USLI’s rescission claim. Yet it did not notify the WW Trading Appellees

about the rescission claim until April 12, 2017. Knowledge of the fact that WW

Trading was operating forklifts in a warehouse less than a year after the insurance

policy was issued “would impel a reasonable [insurer] in [USLI’s] position to make

inquiry” into whether WW Trading had been taking those actions all along. See

Johns Hopkins Univ. v. Hutton, 

, 917 (4th Cir. 1973) (internal quotation

marks omitted). But USLI failed to do so until discovery in this case. Thus, USLI’s

two-and-a-half-year delay between when it first acquired constructive knowledge

of WW Trading’s potential misrepresentations and when USLI asserted its


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rescission claim was unreasonable as a matter of law. See, e.g., 88 Blue Corp. v. Reiss

Plaza Assocs., 

, 16–17 (1st Dep’t 1992) (finding an eleven-month

delay unreasonable).

       II. The Employee Exclusion and Construction Operations Exclusion
                  Do Not Bar Coverage for Youyong Lin’s Claims

      USLI next maintains that the district court “failed to give effect to the plain

meaning of the two policy exclusions[,] which clearly manifested the intent to

remove the claims asserted in the [Underlying Action] from coverage under the

policy.” USLI’s Br. at 38. USLI contends that the Employee Exclusion does not

apply “only to contractors and employees of contractors hired by the insured,”

(emphasis omitted), but instead applies to “injured contractors who are

performing services for which the insured . . . ‘may become liable in any

capacity,’”

USLI further asserts that the rust scraping and painting that

Youyong Lin performed fell within the scope of the Construction Operations

Exclusion. We disagree with both contentions.

      “Because interpretation of an insurance agreement is a question of law, we

review the district court’s construction of [an insurance] [p]olicy de novo.” VAM

Check Cashing Corp. v. Fed. Ins. Co., 

, 729 (2d Cir. 2012). “On appeal

from a bench trial, the district court’s findings of fact are reviewed for clear error

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and its conclusions of law are reviewed de novo.” Beck Chevrolet Co. v. Gen. Motors

LLC, 

, 672 (2d Cir. 2015) (internal quotation marks omitted).

      “[T]here can be no duty to indemnify unless there is first a covered loss.”

Servidone Constr. Corp. v. Sec. Ins. Co. of Hartford, 

, 423 (1985). The

burden of proof “will rest with the insurer to demonstrate that the loss

compromised by the insured was not within policy coverage,”

and it is

a “heavy” burden, Parks Real Estate Purchasing Grp. v. St. Paul Fire & Marine Ins.

Co., 

, 42 (2d Cir. 2006) (internal quotation marks omitted).

      “In determining a dispute over insurance coverage, [New York state courts]

first look to the language of the policy.” Selective Ins. Co. of Am. v. County of

Rensselaer, 

, 655 (2016) (internal quotation marks omitted). The first

question is whether the insurance policy is ambiguous, which is a matter of law

for the court to decide. Law Debenture Tr. Co. of N.Y. v. Maverick Tube Corp., 

, 465–66 (2d Cir. 2010). Insurance coverage exclusions are subject to a

“strict and narrow construction.” Seaboard Sur. Co. v. Gillette Co., 

,

311 (1984). If “there is a reasonable basis for a difference of opinion as to the

meaning” of the relevant insurance provision, then it is ambiguous, and we must

construe it “in favor of the insured.” Selective 

–56 (internal


                                         7
quotation marks omitted). When interpreting an insurance policy, New York

courts look to “common speech and the reasonable expectation and purpose of the

ordinary” insured. Ace Wire & Cable Co. v. Aetna Cas. & Sur. Co., 

, 398

(1983) (internal citation omitted).

               A. The Employee Exclusion Does Not Bar Coverage

      Reduced to only its relevant language, the Employee Exclusion bars from

coverage “[b]odily injury to any . . . employee . . . of any contractor . . . arising out

of . . . performing services of any kind . . . whatsoever by such . . . employee . . . of

such contractor . . . for which any insured may become liable in any capacity.” J.

App’x at 678 (internal quotation marks omitted).

      USLI asserts that this exclusion applies to injuries of an employee of “any

contractor,” not just a contractor in privity with the insured. USLI’s Br. at 45–48.

But New York’s Appellate Division has rejected this argument, determining that

an exclusion substantively identical to the Employee Exclusion does not apply to

bodily injury sustained by an employee of a different party’s contractor because

the phrase “for which any insured may become liable” may “reasonably be

interpreted” to refer to either the “services [the injured party] was rendering at the

time of the accident” or to the “bodily injury [the injured party] allegedly


                                           8
sustained.” Merchants Mut. Ins. Co. v. Rutgers Cas. Ins. Co., 

, 202

(2d Dep’t 2011) (internal quotation marks omitted). Because the exclusion was

“not susceptible of only one meaning” and therefore was “ambiguous as a matter

of law” it had to be “construed against the insurer.”

Employee Exclusion applies to bodily injuries sustained by only contractors who

are in privity with the insured.

      USLI resists this conclusion, relying on cases that examined “similar

exclusions” and found them to be “unambiguous.” USLI’s Br. at 45. However,

the cases cited by USLI are inapposite because they involved different exclusions,

see, e.g., Essex Ins. Co. v. Mondone, 

, 618 (2d Dep’t 2013)

(interpreting provision that excluded “damages . . . arising out of, caused or

contributed to by . . . any injury sustained by any contractor, self-employed

contractor, and/or subcontractor, or any employee, leased worker, temporary

worker or volunteer help of same” (alterations in original)), or applied the

exclusion in situations where the injured party was an employee of a contractor

hired by the insured or performing services on the insured’s behalf, see, e.g., U.S.

Underwriters Ins. Co. v. Beckford, No. 93-cv-4272 (FB), 

, at *1, *3

(E.D.N.Y. Jan. 20, 1998).


                                         9
      As the district court concluded, Youyong Lin was not a contractor of WW

Trading, and the evidence overwhelmingly supports the conclusion that Sheng

Qiang Lin and Youyong Lin were hired by and responsible to W&T Seafood, not

WW Trading. Consequently, since Youyong Lin was not in privity with WW

Trading, Youyong Lin’s injuries do not fall within the Employee Exclusion.

       B. The Construction Operations Exclusion Does Not Bar Coverage

      USLI next asserts that the Construction Operations Exclusion bars coverage

for the Underlying Action because Youyong Lin’s rust scraping and painting were

part of a larger project that also included the installation of sheetrock and

insulation, and thus constituted “construction” under the policy; alternatively,

USLI argues that rust scraping and painting qualify as “renovation.”

      First, the district court’s finding – that the rust scraping and painting were

separate from the sheetrock insulation installation project, and thus were not

“construction” within the exclusion’s scope – was based on a reasonable

interpretation of the evidence presented at trial, which demonstrated that the rust

scraping and painting took place in a different area from the sheetrock insulation

work, was done for a different purpose, and occurred at a different time. Second,

the district court properly determined that the rust scraping and painting did not


                                        10
constitute excluded “renovations.” Although the term renovation is not defined

in the insurance policy, its meaning must be considered in relation to the other

words with which it is grouped. See Harris v. Allstate Ins. Co., 

, 76 (1955).

“Renovation” is grouped together with “construction,” “construction services,”

and “site preparations” in the Construction Operations Exclusion. Consequently,

the district court reasonably determined that “renovation” did not encompass

mere rust scraping and painting because it referred to “more structural changes.”

Special App’x at 46.

    III. The District Court Properly Awarded Attorneys’ Fees to WW Trading

      Finally, USLI contests the district court’s granting of attorneys’ fees to WW

Trading. “[A]n insurer’s duty to defend an insured extends to the defense of any

action arising out of the occurrence, including a defense against an insurer’s

declaratory judgment action,” so long as the insured “prevails on the merits.” U.S.

Underwriters Ins. Co. v. City Club Hotel, LLC, 

, 597–98 (2004).

Consequently, “an insured who prevails in an action brought by an insurance

company seeking a declaratory judgment that it has no duty to defend or

indemnify the insured may recover attorneys’ fees regardless of whether the

insurer provided a defense to the insured.”

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      Here, USLI filed this action against WW Trading, placing WW Trading in a

defensive posture with respect to USLI’s attempts to free itself of its policy

obligations. See

WW Trading prevailed on its contention that USLI owed

a duty to defend in the Underlying Action. Accordingly, under New York law,

WW Trading is entitled to its attorneys’ fees and expenses incurred in this

declaratory judgment action.

                                  *      *     *

      We have considered USLI’s remaining contentions and conclude that they

are without merit. For the foregoing reasons, the judgment of the district court is

AFFIRMED.

                                      FOR THE COURT:
                                      Catherine O’Hagan Wolfe, Clerk of Court




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