It’s very common in commercial contracts for one party to agree to obtain insurance coverage for its counter-party. But according to Judge Rakoff, the scope of that coverage may be less than meets the eye.

In The City of New York v. Crothall Healthcare, the City hired Crothall to provide janitorial services to the city’s hospitals. Their contract required Crothall to procure insurance covering Crothall the City for any claims arising from Crothall’s services. The contract provided that Crothall could self-insure for the first $1,000,000 of insurance coverage, so long as it provided to the City “the same defense…as an insurer would be obligated to provide.”

Sure enough, a personal injury claim was filed against the City, and three months later the City tendered the case to Crothall to handle under Crothall’s $1,000,000 self-insured retention.  Crothall declined the tender, claiming that the parties’ contract required the tender to be made within 15 days of notice, not three months.

The City argued that the 15 day notice provision should be excused because under New York insurance law a late tender to an insurance company is not fatal unless the insurance company can show it was prejudiced by the delay—which Crothall was not. According to the City, Crothall committed to provide the “same defense” as an insurance company, and late notice should be excused just as it would be under an insurance policy.

Judge Rakoff did not see it the City’s way. He found that the parties’ contract was not an insurance policy, but an agreement to procure insurance. Therefore, it had to be interpreted according to traditional contract principles, not the regulatory scheme that governs insurance policies. “Crothall’s duty to ‘provide the same defense…as an insurer would be obligated to provide’ does not, by implication, import a raft of New York insurance regulations into the Contract.” Therefore, the 15 day contractual notice provision was strictly enforceable against the City, and the City could not require Crothall to pay for its defense.

The City argued it “never would have permitted Crothall to self-insure a portion of the coverage owned to the City if the City had known that the coverage was illusory.” Judge Rakoff had the answer to that as well: the City should not have dawdled three months to give notice. “The fact that the Contract is not subject to [New York insurance law] does not mean the City is not covered … if there is a gap in coverage, it is simply because the City failed” to give notice within the 15 day contractual notice period.

Lesson to be learned from Judge Rakoff: Even though a contracting party agrees to provide the same defense as an insurance company, if that obligation is contained in a contract to procure insurance, as opposed to an actual contract of insurance, it may not offer all the protection that it seems to offer on its face.