Section 3420 of the New York Insurance Law provides for a limited direct right of action by an underlying plaintiff against an insurance company where a judgment has been obtained against the insured by the plaintiff and has not been paid after 30 days after service of the judgment with notice of its entry. This provision provides to policies providing coverage for personal injuries and injury or destruction of property.
In a recent case, a New York motion court was asked to determine whether a pure economic loss–investment losses in a brokerage account allegedly due to improper handling of investments–is property damage under Section 3420 so that a direct right of action is permitted.
In Tuls v. N.Y. Marine & Gen. Ins. Co., No. 652106/2014 (N.Y. Sup. Ct. N.Y. Cty. Nov. 15, 2016), an action was brought by an investor seeking payment of a FINRA arbitration award against the insurer of a defunct investment brokerage company. The insurer had issued a broker-dealer professional liability policy, which was declared void ab initio by the court in a separate declaratory judgment proceeding, because the application for insurance did not provide truthful responses and the policy did not provide coverage for the claims by investors as these claims did not arise from professional services.
The insurer moved for summary judgment against the complaint on the basis that section 3420 precluded the lawsuit by the judgment creditor/investor. In granting the summary judgment motion, the court held that the economic investment account loss was not damages to property as defined by section 3420.
The court reviewed the history of section 3420 and some recent cases where courts held that section 3420 did not apply to investors’ claims because the nature of the injury was not personal injury or property damage loss. The court noted that this statute is strictly construed and has never been expanded to cover losses under professional liability insurance policies.
The court had other bases for rejecting the claim (the policy had an express exclusion for the insured acting as a market maker and the earlier declaratory judgment action voiding the policy), but the damage discussion is the most interesting aspect. The court applied the holding of other cases noting that section 3420 was not intended by the legislature to serve “as a type of safety net for sophisticated investors to recoup their losses on speculative business ventures once the business fails.”
While section 3420 does not define property damage, it appears from this court’s analysis, and that of the cases it cited, that investment losses under broker liability policies are not personal injury or property damage losses that allow for the narrow right of a judgment creditor to claim directly against an insurance company.