The following papers and the attachments and exhibits thereto have been read on this motion:

Notice of Motion1

Memorandum of Law in Opposition2

Affidavit in Support of Memorandum of

Law in Opposition3

Memorandum of Law in Support of Motion4

Reply Memorandum of Law in Support of Motion5

In this action by Plaintiff B & R Consolidated, L.L.C. ("B & R"), to recover on a judgment obtained against an insured of Defendant American Guarantee and Liability Insurance [*2]Company ("the Insurer"),^[FN1] the Insurer moves for an order pursuant to CPLR 3211(a)(1) and (a)(7) dismissing the complaint. For the reasons that follow, the Insurer's motion must be denied.

The Underlying Action

In an action filed on November 6, 2008, encaptioned B & R Consolidated, L.L.C. v Frederic A. Powell, Esq. and Robin Powell, Index No. 020049/08 (the "underlying action"), B & R asserted, inter alia, causes of action in fraud, unjust enrichment, conversion, breach of contract, and breach of fiduciary duty based upon an admission by attorney Frederick A. Powell ("Powell") that he "stole four hundred and fifty thousand ($450,000.00) dollars of B & R's money from his escrow account for other personal projects'" and did this "without any authorization from B & R" (Ex. "1" to Plaintiff's Opposition). Specifically, it was alleged in the complaint that:

Unbeknownst to B & R, [Powell] received the money from the repayment of a mortgage owned by B & R in June of 2007. [Powell] neglected to inform B & R that the money had been received until September 2008, more than an entire year later! Instead, [Powell] made periodic payments to B & R under the guise of interest payments being made by a third party on the mortgage held by B & R.

(Ex. "1" to Plaintiff's Opposition). By these actions, according to B & R, Powell "engaged in misappropriation that directly harmed his client, B & R" (Ex. "1" to Plaintiff's Opposition).

On January 2, 2009, Powell contacted the Insurer which had issued a professional liability insurance policy (the "policy") to him and informed it of the facts surrounding the complaint filed against him (Ex. "3" to Plaintiff's Opposition at ¶ 6). On January 20, 2009, the Insurer sent Powell a reservation of rights letter stating that since the complaint asserted claims of fraud, conversion and conspiracy and that because such allegations may fall within a policy exclusion, to the extent an exclusion applies based upon such conduct, the Insurer may be able to deny coverage and, thus, was reserving its right to do so (Ex. "E" to Defendants' Motion). The Insurer also reserved its right to disclaim coverage for, inter alia, late notice by Powell given that "a grievance complaint was filed against the Insured in October, 2008 and the Complaint was served on the Insured on or about December 2008" (Ex. "E" to Defendants' Motion).

On February 2, 2009, Powell consented to service of an amended complaint by B & R (Ex. "5" to Plaintiff's Opposition). The amended complaint asserted the following causes of [*3]action: negligence, legal malpractice, breach of fiduciary duty,^[FN2] constructive trust, accounting, conspiracy to breach of fiduciary duty and aiding and abetting breach of fiduciary duty (Ex. "4" to Plaintiff's Opposition). Causes of action for fraud and misappropriation were not asserted in the amended complaint.

By letter dated June 1, 1009, the Insurer informed Powell that it was denying coverage. According to the Insurer, "[b]ecause you failed to immediately provide notice of the suit and forward the suit papers which were served on November 12, 2008, [the Insurer] hereby denies coverage . . . . Accordingly, [the Insurer] will not pay for or indemnify you against any judgment, settlement or award in this action, and it is withdrawing from paying for your defense" (Ex. "6" to Plaintiff's Opposition). In that letter, the Insurer also continued to "reserve its rights to deny coverage for all of the reasons set forth in its prior correspondence" of January 20, 2009 (Ex. "6" to Plaintiff's Opposition).

B & R thereafter moved for summary judgment against Powell. In an order dated May 10, 2009, the court (Palmieri, J.) granted B & R's motion, in part, stating:

Notwithstanding the presence of eight separate causes of action against defendant [Powell], sounding in negligence, legal malpractice, constructive trust, accounting, and several species of breach of fiduciary duty, this case is built on a rather simple key allegation: the misappropriation of loan repayment proceeds by Powell.

* * * *

As indicated above, the amended complaint is framed in terms of negligence, malpractice, and breach of fiduciary duty to Powell. This in turn is premised on bad advice from Powell as attorney and a failure to keep B & R informed of the true status of its loan to Lyons. However, it is clearly the alleged misappropriation of funds that caused the damages alleged, and the Court finds that of all of these theories the one that best fits the circumstances is simple breach of fiduciary duty.

* * * *

All were committed in the service of hiding the loss caused by the misappropriation, or, at best, constituted an excuse for the loss - an excuse that would not relieve Powell of liability in any event.

* * * *

Accordingly, the Court finds unrebutted plaintiff's proof that Powell took possession of funds belonging to the plaintiff, hid that fact from it, and then lost or misappropriated those funds for his own use. This constitutes an established breach of fiduciary duty owed to B & R by Powell as its attorney. Further, damages resulting from that breach have been shown as a result of the [*4]misappropriation of the clients' funds, which is distinct from any claim for negligence or legal malpractice. Summary judgment therefore is granted to the plaintiff on its third and fifth causes of action, breach of "the fiduciary duty of care", and "of loyalty", as they most closely comport with the foregoing authority regarding breach of fiduciary duty generally. The Court notes that such a breach would also allow for a recovery for any attorney's fees that were improperly charged as being incident the to [sic] breach rendering the continued pursuit of the negligence and malpractice causes of action unnecessary. Summary judgment is therefore denied as to these claims.

(Ex. "7" to Plaintiff's Opposition at pps 1, 5, 6, and 8) (citations omitted).

A damages trial followed, after which judgment in the amount of $592,031.74 was entered against Powell and his wife (Ex. "8" to Plaintiff's Opposition).

The Instant Action & Motion

After the Insurer denied Powell's demand for indemnification, B & R commenced the instant action against it. In its complaint, B & R asserts that it has obtained a judgment against Powell for damages incurred during the term of the policy, that the judgment remains unsatisfied, and that the Insurer is liable to B & R for the amount of the judgment (Ex. "9" to Plaintiff's Opposition).

The Insurer now moves for an order dismissing the complaint pursuant to CPLR 3211(a)(1) and (a) (7). According to the Insurer, Powell was denied coverage because he failed to give immediate notice of the underlying claim and because judgment in the underlying action was based upon the "misappropriation" of B & R's funds. Thus, the Insurer argues that it has no obligation to indemnify Powell for the judgment in the underlying action, B & R having no greater rights under the policy than Powell (Affidavit in Support at ¶¶ 18-24).

In opposition, B & R argues that the " gravamen' of Plaintiff's Amended Complaint was not that Powell misappropriated' $450,000, but that he failed to exercise due care as an attorney" resulting in the loss of B & R's funds (Brown Affidavit in Opposition at ¶ 11).

Section V. B.2 of the policy sets forth the notice requirements of a claim against the insured. Specifically, that section provides:

The Insured, as a condition precedent to this policy, shall immediately provide Notice to the Company of any Claim made against an Insured. In the event suit is brought against the Insured, the Insured shall immediately forward to the Company every demand, notice, summons or other process [*5]received directly or by any Insured's representative.

(Ex. "A" to Defendants' Motion) (emphasis added).

The Insurer argues that Powell failed to comply with a condition of coverage by delaying notification that a complaint was filed against him (Defendants' Motion at ¶ 20). "An insured's failure to satisfy the notice requirements under a policy constitutes a failure to comply with a condition precedent which, as a matter of law, vitiates the contract'" (McGovern-Barbash Assoc., LLC v Everest National Insurance Co., 79 AD3d 981, 983 [2d Dept 2010]). Here, the Insurer demonstrated that Powell had knowledge of the lawsuit at least by November 12, 2008, at the time he was served with summons and complaint in the underlying action. However, Powell did not notify the Insurer of that lawsuit until January 2, 2009. Notice of a lawsuit 51 days after having been served with the complaint is not "immediate" as required under the policy and, thus, Powell failed to comply with a condition precedent to coverage.

In opposition to the Insurer's argument that Powell's notice was not timely, counsel for B & R asserts that [u]pon further investigation and discussions with Powell, it became clear that Powell had a good faith belief that he did not commit intentional fraud, misconduct, or any act of dishonesty in the events underlying the B & R Consolidated LLC v Powell matter" (Affidavit in Opposition at ¶ 8). B & R further argues in its memorandum of law that Powell "had a good faith belief of nonliability under the original complaint, and of noncoverage under the original complaint as well" (Plaintiff's Memorandum of Law at p. 13).

However, in his affidavit submitted in opposition to the Insurer's motion, Powell fails to explain why he believed that he was not liable in the underlying action and, accordingly, the reasonableness of any basis for nonliability has not been demonstrated (25th Avenue, LLC v Delos Insurance Company, 2011 NY Slip Op 03833, ___ AD3d ___ [2d Dept 2011]; Courduff's Oakwood Road Gardens & Landscaping Company, Inc. v Merchants Mutual Insurance Company, 2011 NY Slip Op 03795, ___ AD3d ___ [2d Dept 2011]). Moreover, while the "existence of a good faith belief that the injured party would not seek to hold the insured liable, and the reasonableness of such belief" are generally questions for the fact finder, this court concludes, as a matter of law, that Powell's belief in this regard, if any, was unreasonable in view of the fact that a lawsuit had already been commenced against him (see Courduff's Oakwood Road Gardens & Landscaping Company, Inc. v Merchants Mutual Insurance Company, 2011 NY Slip Op 03795, ___ AD3d ___ supra; McGovern-Barbash Assoc., LLC v Everest National Insurance Co., 79 AD3d at 983-84, supra). Under the circumstances, the 51-day delay in notifying the Insurer provided it with a basis to disclaim (see Only Natural, Inc. v Realm National Insurance Co., 37 AD3d 436 [2d Dept 2007]; see also, Briggs Ave, LLC v Insurance Corp of Hannover, 11 NY3d 377 [2008] [insurer that does not receive timely notice in accordance with a policy provision may disclaim coverage regardless of whether it was prejudiced by the delay]).

Notwithstanding the foregoing, the validity of the disclaimer on the ground of late notice [*6]is in question. Significantly, the Insurer received notice of the underlying action on January 2, 2009, sent a reservation of rights letter on January 20, 2009 and disclaimed on June 2, 2009. Given that the Insurer was aware of the basis to disclaim, to wit, late notice, as early as January 2009 and waited approximately five months to disclaim, the five-month delay is unreasonable as a matter of law (Guzman v Nationwide Mutual Fire Insurance Co., 62 AD3d 946 [2d Dept 2009]; Uptown Whole Foods, Inc. v Liberty Mutual Fire Insurance Co., 302 AD2d 592 [2d Dept 2003]). However, the failure of an insurer to promptly disclaim on the ground of untimely notification does not automatically estop an insurer from relying upon that disclaimer where the insured is not prejudiced as a result of the insurer's delay (Only Natural, Inc. v Realm National Insurance Co., 37 AD3d at 439, supra; Esseks, Hefter & Angel v Government Employees Ins. Co., 215 AD2d 430 [2d Dept 1995]).

Here, B & R asserts in its affidavit as follows: "Acting in reliance on Defendants' coverage of Plaintiff's injury, Plaintiffs failed to move expeditiously to attach, sell, and distribute the proceeds of real estate belonging to Powell and his co-Defendant Robin Powell, prior to said properties declining in value in 2009" and that B & R believes "these properties to be without value due to Powells's other creditors securing interests and having priority, thus Defendants late disclaimer of coverage has prejudiced [B & R's] recovery" (Affidavit in Opposition at ¶¶ 18-19).

Affording the non-moving party the benefit of every possible inference, dismissal is not warranted inasmuch as the Insurer has failed to conclusively establish that B & R was not prejudiced by it's late disclaimer.

Disclaimer Based Upon the Intentional, Criminal,

Fraudulent, Malicious or Dishonest Exclusion

Exclusion A of the policy provides as follows:

This policy shall not apply to any Claim based upon or arising out of, in whole or in part:

A. Any intentional, criminal, fraudulent, malicious or dishonest act or omission by an Insured; except that this exclusion shall not apply in the absence of a final adjudication or admission by an Insured that the act or omission was intentional, criminal, fraudulent, malicious or dishonest.

The Insurer argues that Powell's liability in the underlying action was based on a finding that Powell's "misappropriation" of funds was intentional, criminal, fraudulent, malicious and/or dishonest and, thus, the Insurer has no obligation to indemnify. However, while the word "misappropriation" was mentioned in the May 10, 2009 order, Powell was not "adjudicated" to have misappropriated funds. Rather, the court wrote that "of all of these theories the one that best fits the circumstances is simple breach of fiduciary duty" and that Powells' actions constitute "an established breach of fiduciary duty" and that summary judgment was granted with respect to the breach of duty causes of action (Ex. "7" to Plaintiff's Opposition). Moreover, the court also stated that Powell "lost or misappropriated" the funds. In the absence of a "final adjudication" [*7]that Powell's acts were "intentional, criminal, fraudulent, malicious or dishonest", therefore, the branch of the Insurer's motion to dismiss on this ground must be denied.

Coverage Under the Policy is Only Provided

for the Rendering of Legal Services

With respect to coverage, the policy provides,

The Company will pay on behalf of an Insured . . . all amounts . . . that an Insured becomes legally obligated to pay as damages and Claim Expenses because of a Claim . . . based on an act or omission in the Insured's rendering or failing to render Legal Services for others.

The Insurer argues that liability in the underlying action was not based upon Powell's rendition of legal services but, rather, on his misappropriation of B & R's funds and, thus, the Insurer has no obligation to indemnify. In the underlying action, Justice Palmieri stated in his decision that "the amended complaint is framed in terms of negligence, malpractice, and breach of fiduciary duty to Powell. This in turn is premised on bad advice from Powell as attorney and a failure to keep B & R informed of the true status of its loan to Lyons" (Ex. "7" to Plaintiff's Opposition at p. 5).

Under the circumstances, and considering that the causes of action asserting breach of fiduciary duty are based upon the same facts constituting the causes of action alleging negligence and legal malpractice, it cannot be said as a matter of law that Powell's conduct falls outside the scope of risk covered by the policy (Ex. "7" to Plaintiff's Opposition at p 8; see Ulico Casualty Co., v Wilson, Elser, Moskowitz, Edelman & Dicker, 56 AD3d 1 [1st Dept 2008]; Burkhart, Wexler & Hirschberg, LLP v Liberty Insurance Underwriters, Inc., 60 AD3d 884 [2d Dept 2009]).^[FN3]

Accordingly, it is hereby ordered that the Defendants' motion to dismiss the complaint is denied.

This constitutes the decision and order of the court.

Dated: June 22, 2011

_____________________________

Hon. Vito M. DeStefano, J.S.C.