Jordan Haber, Debbie Haber v. St. Paul Guardian Insurance Company , 137 F.3d 691 ( 1998 )

ALTIMARI, Circuit Judge:

Plaintiffs-appellees Dr. Jordan Haber and Debbie Haber (“the Habers”) filed a declaratory-judgment action against defendant-appellant St. Paul Guardian Insurance Company (“St. Paul”) seeking coverage under their homeowner’s policy (the “Policy”) for their liability for workers’ compensation benefits for Florine Netas (“Netus”), who was injured during the course of her employment as the Habers’ live-in housekeeper. The Policy contained a so-ealléd “HO-90 Endorsement” (the “Endorsement”), the meaning of which is the focus of this dispute. The United States District Court for the Southern District of New York (Sotomayor, J.) determined that an ambiguity in the Endorsement to the Policy should be construed against St. Paul, and accordingly ordered St. Paul to provide coverage. For the reasons discussed below, we affirm.

BACKGROUND

Before the Habers moved into their new house, they contacted Mr. Larry Liquori, their insurance broker, to obtain insurance. Liquori was a broker with the Jacka-Liquori Agency, which was an agent of St. Paul. Dr. Haber and Liquori met twice in January 1990 to discuss the Habers’ insurance needs. They first met in Liquori’s office, where Dr. Haber noted his need for extra coverage since his new house would be substantially larger than his old one. This meeting prompted Liquori to visit the Habers’ new house. During that visit, Dr. Haber told Liquori about his live-in housekeeper who would be working five days a week. He testified, “I showed him the house. He walked through the house, he saw where the housekeeper was going to be living, the room. He knew it all____ He saw every room including [Netus’s] room.” According to Dr. Haber, Liquori assured him after inspecting the house that “I’m going to cover you.” On February 6, 1990, St. Paul issued the Policy to the Habers.

On May 25, 1993, a fire broke out in the Habers’ home when Netus was sterilizing baby bottle nipples in a strainer on the stove. While attempting to extinguish the fire, the burning strainer fell on one of Netus’s legs, causing severe burns. Netus received substantial medical treatment for her injuries, and she subsequently filed a workers’ compensation benefits claim against the Habers. Her medical expenses totaled some $150,000.

On August 21,1993, St. Paul filed a Notice of Controversion, denying coverage under the Policy. Facing Netus’s claim and potential liability, the Habers filed this declaratory judgment action against St. Paul in district court, seeking an order requiring St. Paul to provide coverage under the terms of the Endorsement provided for in their Policy.

The Endorsement’s heading reads “Workers’ Compensation, Certain Residence Employees.” The Endorsement defines “residence employees” as those who satisfy the following two conditions: (1) “engaged in regular employment of less than 40 hours per week”; and (2) “defined under New York workers’ compensation law as an employee for whom workers’ compensation benefits must be provided.” Among other things, the Endorsement covers the Habers for “all damages for which [they are] legally hable because of bodily injury sustained by a covered residence. employee.” The key issue facing the district court was whether Netus was a covered “residence employee” under the terms of the Endorsement.

After a bench trial, in an oral opinion dated January 21, 1997, the district court determined that Netus was a “residence employee” under the terms of the Endorsement and that the Habers were therefore entitled to coverage. First, it found that Netus worked less than forty hours a week, which satisfied the first condition. Next, the court found that the terms of the second condition were ambiguous, warranting an examination of the interpretations of the Endorsement offered by the parties. The court concluded that the Habers’ interpretation of the Endorsement—that it constituted a voluntary election of coverage for Netus—was the more reasonable interpretation, and that the second condition in the Endorsement had therefore been satisfied. The court rejected St. Paul’s argument that the Habers’ interpretation of the Endorsement was contrary to New York Ins. Law § 3420(j)(l), because it found that the language of section 3420(j)(l) was difficult to construe and was not as restrictive as St. Paul contended.

On appeal, St. Paul argues that (1) the district court erred in finding a voluntary election of coverage; (2) the district court erred in interpreting the Endorsement contrary to section 3420(j)(l); and (3) the district court’s finding that Netus worked less than forty hours a week was clearly erroneous. We disagree.

DISCUSSION

We must determine whether Netus’s position with the Habers satisfied the two conditions of being a “residence employee” under the terms of the Endorsement. Regarding the second condition, both sides agree that under New York Workers’ Compensation Law domestic employees such as Netus are generally not employees for whom workers’ compensation benefits must be provided. See N.Y. Workers’ Comp. Law § 2(4) (McKinney 1992). The parties also agree, however, that domestic employees can be brought within the class of workers for whom such benefits must be provided if an employer voluntarily elects to cover them. See id. §§ 3(1) (Group 19), 50. The central inquiry is whether, as the Habers maintain, the Endorsement constituted .a voluntary election of coverage for Netus. If it does constitute such coverage, then Netus would be an employee for whom benefits “must be provided” under the workers’ compensation laws, which would satisfy the second condition of “residence employee” in the Endorsement.

St. Paul maintains that the Habers’ interpretation of the Endorsement is contrary to the parties’ intentions and violates New York Insurance Law § 3420(j)(l) (McKinney 1985), which requires homeowner’s policies to contain such endorsements. It also contends that Netus worked more than 40 hours per week and that she therefore fails to meet the first condition of being a residence employee.

A. Ambiguity Within and Meaning of the Endorsement

St. Paul contends that the Endorsement is unambiguous and that the district court’s reading of the Endorsement is contrary to the intentions of the parties.

Whether contract language is ambiguous is a question of law, which we review de novo. See Werbungs Und Commerz Union Austalt v. Collectors’ Guild, Ltd., 930 F.2d 1021, 1026 (2d Cir.1991). Language in an insurance contract will be deemed ambiguous if reasonable minds could differ as to its meaning. Id. “As with contracts generally, a provision in an insurance policy is ambiguous when it is reasonably susceptible to more than one reading.” United States Fire Ins. Co. v. General Reins. Corp., 949 F.2d 569, 572 (2d Cir.1991). Once a contract is found to be ambiguous, a court must examine ambiguous terms “from the vantage point of the ‘reasonable expectations and purposes of the ordinary [person],’ ” In re: Prudential

Lines, Incl, 170 B.R. 222, 233 (S.D.N.Y.1994) (citations omitted), and should consider extrinsic evidence of the parties’ intentions. See, e.g., United States Fire Ins. Co., 949 F.2d at 571. The district court’s findings regarding the meaning of the ambiguous terms may not be disturbed unless they are clearly erroneous. See In Time Prods., Ltd. v. Toy Biz, Inc., 38 F.3d 660, 665 (2d Cir.1994). Moreover, “[w]here there are two permissible views of the evidence, the factfinder’s choice between them cannot be clearly erroneous.” Anderson v. Bessemer City, 470 U.S. 564, 574, 105 S.Ct. 1504, 1511-12, 84 L.Ed.2d 518 (1985).

1. Ambiguity

The second condition of the Endorsement states that a residence employee is someone who is “defined under the New York Workers’ Compensation Law as an employee for whom workers’ compensation benefits must be provided.” Although this condition seems clear on its face, a review of the workers’ compensation laws is required to clarify its meaning. The Habers contend, and we. agree, that the interplay between the Endorsement and New York Workers’ Compensation Law creates a potential ambiguity in the Endorsement.

For example, one section of the workers’ compensation laws requires that benefits be provided for “domestic workers” only if they work at least forty hours per week. See N.Y. Workers’ Comp. Law § 3(1) (Group 12) (McKinney 1992). By inference, an employer is not required to provide benefits to domestic workers who work less than forty hours per week. Although domestic workers who work less than forty hours per week would satisfy the first condition of being a “residence employee” under the terms of the Endorsement, they would not satisfy the second condition, because under section 3(1) (Group 12), they are not employees for whom benefits must be provided.

Alternatively, section 3(1) (Group 19) provides that an employer may bring an employee, who is not otherwise required to be covered, within the coverage of workers’ compensation law by “securing compensation to his employee ... in accordance with section fifty of this chapter.” Section 50 explains that an employer may secure compensation for an employee

2. By insuring and keeping insured the payment of such compensation with any stock corporation, mutual corporation or reciprocal insurer authorized to transact the business of [workers’] compensation insurance in this state.

Id. § 50(2). In other words, a domestic worker who works less than forty hours a week may be categorized as an employee for whom workers’ compensation benefits must be provided if her employer has secured compensation for her pursuant to section 50. See id. § 2(4). Thus, one section of the workers’ compensation laws indicates that a domestic employee who works less than 40 hours a week could not possibly be deemed a “residence employee” under the Endorsement, while another states that such an employee may be • covered if her employer secures compensation for her.

The Habers contend that their purchase of the Policy containing the Endorsement effectively secured compensation for Netus, which made her an employee for whom benefits must be provided and which satisfies the second condition of being a residence employee.

The ambiguity in the Endorsement arises because it is unclear whether the second condition—whether Netus is an employee for whom benefits “must be provided”—is satisfied by the existence of the Endorsement itself. This interpretation of the Endorsement may be criticized as appearing circular. After all, why would an endorsement, which purports to cover only employees for whom benefits must be provided, also, by its very existence, provide a means for bringing other classes of employees within its coverage? However, because a review of the workers’ compensation laws is necessary to define “employees for whom benefits must be provided,” and because those laws define the provision in a way that would allow for an endorsement such as the one at issue here to bring an employee such as Netus within the purview of coverage, the Habers’ interpretation of the Endorsement is reasonable and gives rise to an ambiguity. See United States Fire Ins. Co., 949 F.2d at 572 (“a provision in an insurance policy is ambiguous when it is reasonably susceptible to more than one reading”).

Although St. Paul did not concede this ambiguity, its only expert witness testified that the Endorsement is “very confusing.” When Ms. Sandra Poplowski, a Personal Insurance Marketing Specialist employed by St. Paul, was asked in what instance would a residence employee be covered by the Endorsement, she responded: “[b]ased upon [the Endorsement], the wording of this, I find it very confusing. I think an average layperson wouldn’t really know what is covered here.” She explained that the wording of the Endorsement and its meaning is confusing to “even those who are in the [insurance] industry.” If an insurance expert cannot clearly explain the meaning of “residence employee,” then surely reasonable minds could differ as to the meaning of the term. See Collectors’ Guild, ,930 F.2d at 1026. In sum, our review of the Endorsement and of Ms. Poplowski’s testimony satisfies us that the district court did not err in finding that the Endorsement was ambiguous.

2. Intentions and Reasonable Expectations

We turn now to an examination of the parties’ intentions. St. Paul maintains that it did not intend to provide coverage for workers’ compensation benefits for employees such as Netus. St. Paul points to Dr. Haber’s testimony that he did not consider Netus to be an employee, did not withhold any social security payments, and did not specifically request workers’ compensation insurance for her. Ms. Poplowski explained St. Paul’s intentions. She testified that St. Paul issued the Endorsement with its policies to comply with New York Insurance Law § 3420(])(1), which requires homeowner’s policies to include workers’ compensation coverage to residence employees who work less than forty hours a week and who are statutorily entitled to such benefits. St. Paul’s also points to practice commentaries and insurance industry bulletins regarding section 3420(j)(l), which indicate that endorsements added pursuant to that section do not constitute a voluntary election of coverage.

By contrast, the Habers maintain that they sought full coverage for their home, and that they relied on St. Paul’s agent, Liquori, to provide the coverage they needed. Dr. Haber expressed this intention to Liquori and he showed the housekeeper’s room to Liquori when he visited the Habers’ home.

The district court credited Dr. Haber’s testimony. However, the court determined that Dr. Haber did not specifically seek a policy containing workers’ compensation eov-erage. In short, the district court determined that the Habers did not have the specific intent to obtain a workers’ compensation policy, but that they had a general intent to obtain full coverage for their potential liability. Nothing in the record suggests that these findings are clearly erroneous, and St. Paul does not challenge them as such.

The question becomes whether these findings as to the parties’ intentions resolve the ambiguity in the Endorsement. Although St. Paul or the drafters of its policy may have intended to follow the dictates of New York Insurance Law § 3420(j)(l) and the sentiments reflected in industry literature, this type of evidence of an insurer’s intentions is not conclusive. See, e.g., Michigan Chem. Corp. v. Travelers Indem. Co., 530 F.Supp. 147, 153 (W.D.Mich.1982) (“the court must look more at ... the intent of the parties to the contract than to the intent of the drafters of the standard policy”), rev’d on other grounds, 728 F.2d 374 (6th Cir.1984).

Regarding the Habers’ intentions, there is little doubt that when an individual notifies an insurer of its desire to obtain full coverage and of the existence of a live-in housekeeper, a court may infer an intention on the part of the individual to cover the employee. In Caldwell v. Aetna Casualty and Surety Co., 107 N.J.Super. 456, 258 A.2d 900, 902 (1969), the court held that the trial court erred in dismissing an action in favor of the insurers without considering testimony which would have shed light on the insureds’ intention to have workers’ compensation coverage for their live-in housekeeper. The insurer “was told by the husband-assured that a full-time domestic would be living in the house and that the insurance should include ‘everything (he) needed.’” Id. at 903. The court held that “[i]t is inferable from this, if believed, that when the assureds received the policy they thought they were covered for liability of any kind in respect of accidents to the domestic.” Id. Here, as in Caldwell, Dr. Haber asked for full coverage and noted the existence of his live-in housekeeper.

We find that our review of the parties’ intentions does not conclusively resolve the ambiguity in the Endorsement. Nonetheless, it raises the question of whether the Habers could have reasonably expected their homeowner’s policy to cover their workers’ compensation liability for Netus’s injuries. Like many states, New York recognizes the “reasonable expectations doctrine.” See, e.g., Ace Wire & Cable Co., Inc. v. Aetna Cas. & Sur. Co., 60 N.Y.2d 390, 469 N.Y.S.2d 655, 658, 457 N.E.2d 761, 763-64 (1983). Under this doctrine, if an ambiguity arises that cannot be resolved by examining the parties’ intentions, then the ambiguous language should be construed in accordance with the reasonable expectations of the insured when he entered into the contract. See Fried v. North River Ins. Co., 710 F.2d 1022, 1025 (4th Cir.1983) (applying New York law); Board of Educ. v. CNA Ins. Co., 647 F.Supp. 1495, 1503 (S.D.N.Y.1986).

A review of the language of the Endorsement reveals that the Habers could have reasonably expected the Endorsement to cover them for their liability under the workers’ compensation laws arising from Netus’s injuries. The Endorsement is entitled ‘Workers’ Compensation, Certain Residence Employees.” It provides that the insurer agrees “to pay on behalf,of the insured all damages for which the insured is legally hable because of bodily injury sustained by a covered residence employee.” It defines residence employees as those working less than forty hours per week and defined under New York Workers’ Compensation Law as employees for whom benefits must be provided. When read in its entirety, and when coupled with the Habers’ expectation to obtain full coverage from St. Paul, the Endorsement could certainly lead an average person to reasonably expect that, he has the coverage now sought by the Habers.

The reasonable expectations doctrine is a corollary to the contra-insurer or contra-proferentem rule. That rule states that “where a policy of insurance is so framed as to leave room for two constructions, the words used should be interpreted most strongly against the insurer.” Liverpool & London & Globe Ins. Co. v. Kearney, 180 U.S. 132, 136, 21 S.Ct. 326, 328, 45 L.Ed. 460 (1901). In Matthews v. American Central Insurance Co., 154 N.Y. 449, 456-57, 48 N.E. 751 (1897), the New York Court of Appeals explained that, because insurers generally prepare policies, “when the meaning is doubtful, it should be construed most favorably to the insured, who had nothing to do with the preparation thereof.” Later cases have explained that “[i]t is fundamental that ambiguities in an insurance policy must be construed against the insurer.” Thomas J. Lipton, Inc. v. Liberty Mut. Ins. Co., 34 N.Y.2d 356, 357 N.Y.S.2d 705, 708, 314 N.E.2d 37, 39 (1974). This rule gains added force when ambiguities are found in an exclusionary clause. Id. (citing Sincoff v. Liberty Mut. Fire Ins. Co., 11 N.Y.2d 386, 230 N.Y.S.2d 13, 15-17, 183 N.E.2d 899, 902 (1962)). Indeed, once an ambiguity is found, “the insurer bears the heavy burden of demonstrating that it would be unreasonable for the average man reading the policy to construe it as the insured does and that its interpretation of the insurance policy provisions is the only construction that fairly could be placed on the policy.” Kenevan v. Empire Blue Cross & Blue Shield, 791 F.Supp. 75, 79 (S.D.N.Y.1992) (internal quotations and citations omitted).

Applying these principles to the facts here, we accept the interpretation of the Endorsement offered by the Habers. While we hesitate to agree with the district court that the Haber’s interpretation was the more reasonable one, we have determined-that St. Paul has not met its burden of showing that it would be unreasonable for the average man reading the Endorsement to construe it as the Habers do and that its interpretation is the only one that could be fairly placed on the Endorsement. Id. Moreover, this result comports with the Habers’ reasonable expectations in obtaining their homeowner’s policy.

B. Construction with New York Law

Notwithstanding the fact that the interpretation of the Endorsement accepted above was reached by applying well-established- rules of contract interpretation, St. Paul argues that the interpretation violates or is inconsistent with New York law. Specifically, it contends that the Endorsement was added to their policies pursuant to New York Insurance Law § 3420(j)(l), which requires all comprehensive personal liability policies to provide “for coverage against liability ... which the policyholder may incur pursuant to the workers’ compensation law, to an employee arising out of and in the course of employment of less than forty hours per week.” The thrust of its argument is that this mandatory Endorsement cannot be construed as a voluntary election of coverage pursuant to New York Workers’ Compensation Law sections 3(l)(Group 19) and 50, because section 3420(j)(l) expressly provides that

[n]o one who purchases a policy providing comprehensive personal liability insurance shall be deemed to have elected to cover under the workers’ compensation law any employee who is not required, under the provisions of such law, to be covered.

Relying on this language, St. Paul argues that to interpret the Endorsement in the Habers’ policy as constituting a voluntary election of coverage violates section 3420(j)(l).

This Court will assume for the sake of argument that St. Paul added the Endorsement to its homeowner’s policies to comply with section 3420(j)(l). What must be resolved, however, is whether the “shall not be deemed” language in section 3420(j)(l) limits the terms of the Endorsement or precludes this Court from accepting the interpretation of the Endorsement urged by the Habers and accepted by the district court. .

St. Paul relies on practice commentaries and other materials that interpret workers’ compensation laws to support its position that the district court’s interpretation of. the Endorsement violates section 3420(j)(l). The practice commentaries to section 3 of New York Workers’ Compensation Law explain that section 3420(j)(l) provides coverage “for liability for the payment of any obligation under the Workers’ Compensation Law for a limited group of employees.” Martin Minkowitz, Practice Commentaries, N.Y. Workers’ Comp. § 3 (McKinney 1992). This coverage was designed to “protect the homeowner from unexpected liability when the [Workers’ Compensation] Board determined that a person, who the homeowner did not believe required coverage, is entitled to benefits.” Id. Regarding the issue of elective coverage, the commentaries state that “[t]his coverage does not constitute elective or voluntary coverage as provided in section 3(l)(Group 19)____ Therefore, any person who is not required to be covered for workers’ compensation benefits would not be deemed to be covered solely because of the existence of this comprehensive liability policy.” Id.

St. Paul also cites Jack Piercy, President of the New York Compensation Insurance Policy Board, who interprets the law as not affording “voluntary or elective coverage for those persons or occupations already exempt under New York State Workers’ Compensation Law.” He explains that “part-time domestics and other employees can still be insured voluntarily, ... [and] the only means of providing coverage is by obtaining a standard workers’ compensation policy.”

Although the practice commentaries and Piercy’s interpretation of section 3420(j)(l) suggest that the Endorsement does not constitute a voluntary election of coverage, New York courts have held that it may be inappropriate to consult a statute to clarify an ambiguous policy term, especially if it would contravene the reasonable expectations of an insured. For example, in Insurance Company of North America v. Godwin, 46 A.D.2d 154, 361 N.Y.S.2d 461 (N.Y.App.Div.1974), the court refused to apply the statutory definition of “motor vehicle” to an insurance policy. Id. at 464. The court explained that “we are here interpreting a policy of insurance, and [the insured] is entitled to have it construed as a contract and not necessarily according to the statutory definition.” Id. at 464; cf. Mostow v. State Farm Ins. Co., 88 N.Y.2d 321, 645 N.Y.S.2d 421, 423-24, 668 N.E.2d 392, 394-95 (1996). Rather than using the statute to interpret the ambiguous term, the court relied on the rule of contra-proferentem and construed the ambiguous term against the insurer.

Similarly, in Mostow, the Court of Appeals of New York interpreted an insurance policy containing an ambiguous endorsement. The endorsement provided coverage of $100,000 per person and up to $300,000 if two or more persons were injured. The question on appeal was whether an award of $190,000 to one injured person and $100,000 to another violated the policy’s provision. The insurer urged the court to rely on section 3420(f)(2)(A) of New York Insurance Law, which clearly states that a total of $300,000 may be awarded “subject to” the $100,000 per person limit. However, because the insurance policy lacked the “subject to” language contained in section 3420, the court found that the policy was ambiguous and should be interpreted against the insurer.

The Mostow court determined that the interpretation urged by the insured was “not contrary to law.” Id. at 423, 668 N.E.2d at 394. Even though the interpretation urged by the insured, and untimely accepted by the court, provided $90,000 more to the insured than section 3420 would have provided, the court found that it was lawful because section 3420(a) provides that a construction of the law that is “more favorable to the insured” is lawful. Id.

We need not decide here whether the New York Court of Appeals would similarly read 3420(a) into 3420(j) as it did with 3420(f). However, the rule of construction in 3420(a) is consistent with other rules of construction used by New York courts which seek to protect insureds, such as eontra-proferentem and the reasonable expectations doctrine. Accordingly, the logic of Mostow applies with equal force here, and this Court will not use section 3420(j)(l) to reject an interpretation of an ambiguous Endorsement that was accepted after applying well-established rules of contract law. ■

Finally, the Mostow court admonished that “this dilemma could have been avoided had the insurer simply drafted the policy to include the ‘subject to’ language employed in Insurance Law § 3420(f)(2)(A).” Id. at 424, 668 N.E.2d at 395. St. Paul did not clearly articulate in the Endorsement that the Endorsement itself does not constitute a voluntary election of coverage. St. Paul failed either to state that “the Endorsement is subject to section 3420(j)(l)” or to employ the same limiting language used in section 3420(j)(l). If St. Paul sought to buttress its interpretation of the exclusionary language in the Endorsement with section 3420(j)(l), it should have used unambiguous language in the Endorsement itself. For example, St. Paul could have stated in the Endorsement that it “does not constitute a voluntary election of coverage under New York Workers’ Compensation Law.”

In sum, we are not persuaded that the interpretation of the Endorsement accepted by the district court violates New York law, and we see no reason to depart from the well-established rules of contract interpretation discussed above.

C. First Condition of Endorsement

Finally, St. Paul contends that the district court erred in finding that Netus worked less than forty hours a week and in concluding that she therefore satisfied the first condition of being a residence employee.

The district court heard conflicting testimony regarding how many hours per week Netus worked. On Tuesday mornings, Ne-tus would travel from her apartment in Brooklyn to the Habers’ house and stay with them through 7:45 a.m. on Sunday mornings when she would return to her apartment. Her duties were sporadic, but usually included varying amounts of cooking, cleaning, and childcare. Although some of her chores would begin at 8:00 a.m. and others would require her to work in the evening as late as 7:00 or 8:00 p.m., it is undisputed that she usually had free time during the day to attend church or to watch television. Netus testified that she usually worked more than forty hours per week, whereas Mrs. Haber testified that Netus worked much less than forty hours per week. However, the district court was most persuaded by Dr. Haber’s testimony that Netus usually worked less than forty hours per week and that occasionally she worked more than forty, hours. Based on this finding, the district court concluded that the first condition of the Endorsement had been satisfied.

Under Fed.R.Civ.P. 52(a), findings of fact made during a bench trial “shall not be set aside unless clearly erroneous.” See also Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985). Because there is ample evidence in the record to support the district court’s finding that Netus generally worked less than forty hours per week, we conclude that the district court’s finding that the first condition of the Endorsement was satisfied was not clearly erroneous.

CONCLUSION

For the foregoing reasons, we affirm the decision of the district court.