The Appellate Court of New York, First Department, affirmed the trial court’s order which required plaintiff to post an undertaking of five hundred thousand dollars until the arbitration dispute is resolved. By way of background, in 2007, Founders was required to post an undertaking in the amount of more than one million dollars as part of a preliminary injunction motion. Great American Insurance Company was the surety on the undertaking and received the one million dollars in cash collateral. Several months later, the Appellate Division reversed the decision and the preliminary injunction. Eventually, the undertaking was reduced to approximately five hundred thousand dollars.

Everest Insurance Company requested that Great American Insurance Company issue a surety bond, the amount of damages for lost income that they incurred as a result of the prior preliminary injunction. The Appellate Court rejected that argument stating that “Great American was not a party to the action between Founders and Everest [as such] … it lacked the knowledge of the nuances of the case; and it was not represented in court when the court directed the undertaking to be vacated.”

IMPACT (REINSURANCE): This is not a surprising decision by the First Department. Courts rarely alter their position especially when dealing with discretionary issues such as an undertaking. Furthermore, absent specific facts regarding the third-party, a third-party is usually not liable for lost income involving an undertaking.

STATE OF NEW YORK
FOUNDERS V. EVEREST NATIONAL INSURANCE CO.
(INDEX NO. 08-2721 MAY 4, 2010)