text:
    Allstate Insurance Company, Respondent, v William R. Zuk et al., Appellants.
    Argued April 25, 1991;
    decided June 6, 1991

      POINTS OF COUNSEL

      Joel Martin Aurnou for William R. Zuk and others, appellants.
    I. The granting of Allstate’s motion for summary judgment was error. (Miller v Continental Ins. Co., 40 NY2d 675; Messersmith v American Fid. Co., 232 NY 161; Sperling v Great Am. Indem. Co., 7 NY2d 442; Public Serv. Mut. Ins. Co. v Goldfarb, 53 NY2d 392; Barry v Romanosky, 147 AD2d 605; Matter of Town of Huntington v Hartford Ins. Group, 69 AD2d 906; Burr v Commercial Travelers Mut. Acc. Assn., 295 NY 294; Continental Ins. Co. v Colangione, 107 AD2d 978; State Farm Fire & Cas. Co. v Shapiro, 118 AD2d 556; Allstate Ins. Co. v Chia-I Lung, 131 Misc 2d 586.) II. Appellants are entitled to summary judgment. (Freidus v Todem Homes, 80 AD2d 575, 56 NY2d 526; Loral Realty Co. v Beauty Dev. Corp., 114 Misc 2d 541; Merritt Hill Vineyards v Windy Hgts. Vineyard, 61 NY2d 106; Garson v Garson, 105 AD2d 726, affd sub nom. Garson v Rapping, 66 NY2d 928; Grimaldi v Pagan, 135 AD2d 496; Barry v Romanosky, 147 AD2d 605.)

      Michael E. Tockman for Patricia Smith, appellant.
    I. The court below improperly awarded Allstate summary judgment and a declaratory judgment declaring that Allstate Insurance Company has no duty to defend or indemnify defendant William R. Zuk in the underlying action brought by Patricia Smith. (Schwartz v Public Adm’r of County of Bronx, 24 NY2d 65; Ryan v New York Tel. Co., 62 NY2d 494; Gilberg v Barbieri, 53 NY2d 285; Dier v City of New York, 79 AD2d 596; Brereton v McEvoy, 44 AD2d 594; General Acc. Ins. Co. v Manchester, 116 AD2d 790; Bershaw v Altman, 100 AD2d 642; Barry v Romanosky, 147 AD2d 605; Matter of Town of Huntington v Hartford Ins. Group, 69 AD2d 906; Burr v Commercial Travelers Mut. Acc. Assn., 295 NY 294.) II. Appellants are entitled to summary judgment as a matter of law. (Freidus v Todem Homes, 80 AD2d 575, 56 NY2d 526; Merritt Hill Vineyards v Windy Hgts. Vineyard, 61 NY2d 106; Barry v Romanosky, 147 AD2d 605.)

      Gail M. Lolis and Richard J. Inzerillo for respondent.
    I. Allstate Insurance Company is not obligated to defend and/or indemnify its insured, William R. Zuk, for injuries resulting from the commission of the criminal act of manslaughter. (Gramatan Home Investors Corp. v Lopez, 46 NY2d 481; Kaufman v Lilly & Co., 65 NY2d 449; D’Arata v New York Cent Mut. Fire Ins. Co., 76 NY2d 659; S. T. Grand, Inc. v City of New York, 32 NY2d 300; Chism v New York City Tr. Auth., 145 AD2d 400; Schwartz v Public Adm’r of County of Bronx, 24 NY2d 65; Gilberg v Barbieri, 53 NY2d 285; Matter of Halyalkar v Board of Regents, 72 NY2d 261; Merchants Mut. Ins. Co. v Arzillo, 98 AD2d 495; Hooks v Middlebrooks, 99 AD2d 663.) II. Appellants are not entitled to summary judgment. (Matter of Town of Huntington v Hartford Ins. Group, 69 AD2d 906.)
   OPINION OF THE COURT

Bellacosa, J.

Allstate Insurance Company seeks a declaratory judgment that it has no duty to defend or indemnify its insured, William Zuk, in a wrongful death action arising out of the death of Zuk’s friend, Michael Smith, whom Zuk shot and killed. On November 2, 1985, Zuk was cleaning and loading a shotgun in a hunting lodge owned by his parents, Benedict and Margaret Zuk. The gun accidentally discharged and Smith, who was sitting a few feet away from Zuk, was shot in the thigh, severing his femoral artery. He subsequently bled to death. Zuk was charged with second degree manslaughter and was convicted on his guilty plea of recklessly causing Smith’s death (Penal Law § 125.15 [1]). Allstate argues that Smith’s death is not covered under the homeowner’s liability policy at issue because the policy excludes injuries that could "reasonably be expected to result” from criminal acts. Allstate contends that Zuk’s conviction conclusively establishes this exclusionary element.

We hold that Zuk’s criminal conviction does not collaterally block the civil litigation of the issue whether Smith’s death could "reasonably be expected to result” from Zuk’s acts. Under this policy provision, in the factual context of this dispute and its procedural framework, that issue cannot be resolved as a matter of law. We therefore reverse the order of the Appellate Division granting summary judgment to Allstate.

Respondent Patricia Smith, individually and as administratrix of the estate of Michael Smith, commenced a wrongful death action against Zuk alleging that he "carelessly, recklessly and negligently operate[d] [a] shotgun” causing Michael Smith’s death. Zuk sought defense and indemnification from Allstate under a homeowners’ liability policy issued to his parents, the owners of the premises where the accident occurred. The policy covered Zuk as a resident of his parents’ household. Under the policy, Allstate agreed to "pay all sums arising from an accidental loss which an insured person becomes legally obligated to pay as damages because of bodily injury [or resulting death] or property damage covered by this part of the policy” (emphasis supplied). Excluded from coverage was "bodily injury or property damage which may reasonably be expected to result from the intentional or criminal acts of an insured person or which are in fact intended by an insured person” (emphasis supplied).

Allstate initially agreed to defend but not indemnify Zuk, based on the interplay of the policy exclusion and Zuk’s criminal conviction. Allstate then commenced this action seeking a judgment against Zuk, his parents, and Patricia Smith, relieving it of its defense and indemnification obligations and declaring the rights, duties and obligations of the parties. Supreme Court denied Allstate’s motion for summary judgment, concluding that a material issue of fact existed— namely, whether Smith’s death could, as referenced to the insurance policy clause, "reasonably be expected to result” from Zuk’s mishandling of the shotgun. The Appellate Division reversed and granted Allstate summary judgment. That court held that Zuk’s guilty plea in the criminal proceeding established as a matter of law that Smith’s death was caused by a criminal act and therefore Zuk was collaterally estopped from contesting that conclusively determined issue in this civil action. This Court granted leave to appeal and we now reverse.

An insurer has a duty to defend its insured in a pending lawsuit when the complaint alleges a covered loss or when the insurer has actual knowledge of facts establishing the reasonable possibility of coverage (see, Fitzpatrick v American Honda Motor Co., 78 NY2d 61; Technicon Elecs. Corp. v American Home Assur. Co., 74 NY2d 66, rearg denied 74 NY2d 893; Meyers & Sons Corp. v Zurich Am. Ins. Group., 74 NY2d 298). The complaint in the underlying wrongful death action in this case asserts a cause of action based in part on negligence. Under the policy at issue, Allstate agreed to defend suits brought against its insured for "covered damages”, i.e., arising from an accidental loss. Thus, the complaint alleges a potential basis for coverage and, consequently, gives rise to a duty to defend.

However, an insurer can be relieved of its duty to defend if it establishes as a matter of law that there is no possible factual or legal basis on which it might eventually be obligated to indemnify its insured under any policy provision (see, Villa Charlotte Bronte v Commercial Union Ins. Co., 64 NY2d 846, 848; Spoor-Lasher Co. v Aetna Cas. & Sur. Co., 39 NY2d 875, 876). The policy clause germane to the resolution of this case covered accidental losses unless they could "reasonably be expected to result” from a criminal act. Therefore, Allstate would be entitled to summary judgment declaring that it has no duty to indemnify Zuk, and consequently no duty to defend him in the pending wrongful death action, only if it established as a matter of law that Smith’s death was, in the legal sense intended by the policy clause, reasonably expected to result from Zuk’s actions which eventuated into a criminal charge and conviction.

Allstate argues that Zuk’s second degree manslaughter conviction establishes as a matter of law that Zuk reasonably expected that his acts would cause Smith’s death. In limited circumstances, a particular issue expressly or necessarily decided in a criminal proceeding may be given preclusive effect in a subsequent affected civil action (see, Matter of Nassau Ins. Co. [Bergen — Superintendent of Ins.], 78 NY2d 888 [decided today]; D’Arata v New York Cent. Mut. Fire Ins. Co., 76 NY2d 659, 664; Vavolizza v Krieger, 33 NY2d 351; S. T. Grand, Inc. v City of New York, 32 NY2d 300, rearg denied 33 NY2d 658). Parties may avail themselves of collateral estoppel if the issue is identical in both actions, necessarily decided in the prior criminal action and decisive in the civil action, provided, however, that the party ousted from a day in court by application of collateral estoppel had a full and fair opportunity in the prior action to litigate the now-foreclosed issue (see, D’Arata v New York Cent. Mut. Fire Ins. Co., 76 NY2d 659, supra).

As the Appellate Division recognized, Zuk’s criminal conviction established that Smith’s death was caused by a criminal act. Under the terms of Allstate’s exclusionary clause, however, the inquiry does not stop with the determination that the loss resulted from a criminal act. In order for the exclusion to contradict coverage, the loss must be one that could "reasonably be expected to result” from the criminal act, a phrase subject to a variety of different meanings in a civil versus criminal elision.

Zuk’s conviction of second degree manslaughter was necessarily based on a finding that he recklessly caused Smith’s death (Penal Law § 125.15 [1]). A person acts recklessly, in a criminal context, when that person is aware of and consciously disregards a substantial and unjustifiable risk of a result, where the risk is of such a nature and degree that to disregard it constitutes a gross deviation from the standard of conduct of a reasonable person (Penal Law § 15.05 [3]).

While an almost metaphysical argument can be mounted that disregarding a known risk of death — the criminal standard — is equivalent to reasonably expecting that death will occur as a result of the action taken — the standard expressed in the policy — the particular matrix of this policy clause and factual context allow at least one other reasonable, and therefore disqualifying, syllogism. A person may engage in behavior that involves a calculated risk without expecting — no less reasonably — that an accident will occur. Such behavior, which may be reckless for criminal responsibility purposes, does not necessarily mean that the actor reasonably expected the accident to result (see, McGroarty v Great Am. Ins. Co., 36 NY2d 358, 363, rearg denied 36 NY2d 874; General Acc. Ins. Co. v Manchester, 116 AD2d 790, 792; Continental Ins. Co. v Colangione, 107 AD2d 978, 979). People classically seek insurance coverage for just such circumstances. That the accidental discharge of the shotgun Zuk was cleaning actually resulted in Smith’s death, and that his conviction for manslaughter by statutory definition requires the result of death as an element of the crime, do not establish as a matter of law that Zuk reasonably expected Smith’s death to result from his actions. Under the terms of this exclusion clause, whether a result is reasonably expected should be gouged as of the time and circumstances of the conduct engaged in by the particular actors, not attributed in hindsight based on an eventual criminal conviction, if any.

In sum, the issue whether Smith’s death could "reasonably be expected to result” from Zuk’s acts was not necessarily determined in the criminal proceeding and was not identical to the issues that were determined there. Thus, Allstate should not be permitted to use collateral estoppel to deprive the Zuks of their only opportunity to determine the effect, if any, of the conviction with its distinctively defined elements on the applicability of the exclusion clause.

Under these facts, this policy and this analysis, the issues in the criminal and civil actions are not identical, a core feature which distinguishes this case from the cases in which we held that an insured, or a subrogee, was collaterally estopped by the insured’s conviction of an intent crime from relitigating the identical issue of intent in an insurance coverage dispute where the policy at issue excluded coverage for intentional acts (see, D’Arata v New York Cent Mut. Fire Ins. Co., 76 NY2d 659, supra; Matter of Nassau Ins. Co. [Bergen — Superintendent of Ins.], 78 NY2d 888, supra). The policies at issue in those cases, with differently expressed exclusion clauses, excluded intentional acts, mirroring the culpable mental state of a criminal intentional act. Thus, the issue of intent was identical in the criminal and insurance coverage actions and necessarily decided in the criminal proceeding. Here, in contrast, Allstate chose to incorporate into its exclusion policy clause a standard not found in the Penal Law — reasonably expected to result — without further defining those terms. It is not possible or appropriate to decide, as a matter of law, the issue whether Smith’s death could "reasonably be expected to result” from Zuk’s actions.

Accordingly, the order of the Appellate Division should be reversed, with costs, and the plaintiff’s motion for summary judgment denied.

Chief Judge Wachtler and Judges Simons, Kaye, Alexander, Titone, and Hancock, Jr., concur.

Order reversed, etc.


source: Caselaw Access Project

author: Titone, J.

license: Public Domain

text:
    The People of the State of New York, Appellant, v Isaiah Clemons, Respondent.
    Argued May 1, 1991;
    decided June 11, 1991

      POINTS OF COUNSEL

      Robert E. Wildridge, District Attorney (James P. Maxwell of counsel), for appellant.
    The trial court properly exercised its discretion in closing the courtroom during the victim’s testimony. (People v Jelke, 308 NY 56; People v Jones, 82 AD2d 674, 55 NY2d 751; People v Jones, 47 NY2d 409, 444 US 946; People v Glover, 60 NY2d 783, 466 US 975; People v Joseph, 59 NY2d 496; People v Mateo, 73 NY2d 928; People v Labenski, 156 AD2d 924, 75 NY2d 967; People v Roberts, 151 AD2d 1028, 74 NY2d 817; People v Jenkins, 75 NY2d 550.)

      Vivian Aquilina and Gerald T. Barth for respondent.
    The trial court erred in failing to hold a hearing or make adequate inquiry to determine whether the courtroom should be closed. (People v Williams, 56 NY2d 236; People v Cronin, 60 NY2d 430; People v Joseph, 59 NY2d 496; People v Jones, 47 NY2d 409; People v Cordero, 75 NY2d 757; People v Hinton, 31 NY2d 71; People v Jones, 82 AD2d 674; People v Grubbs, 112 AD2d 104; People v Cuevas, 50 NY2d 1022; People v Mateo, 73 NY2d 928.)
   OPINION OF THE COURT

Titone, J.

The right to a public trial (US Const 6th Amend; Civil Rights Law § 12; Judiciary Law § 4), although firmly rooted in our law, is neither inflexible nor absolute, and at times must be balanced against other competing interests which are essential to the fair administration of justice. The present appeal requires us to consider whether, in context of this rape prosecution, that balance was properly struck when the trial court, after conducting no more than a perfunctory inquiry of counsel and without articulating any basis for its ruling on the record, ordered that the public be excluded from the courtroom during the complainant’s testimony. For the reasons that follow, we conclude that it was not.

I

In May of 1988, an Onondaga County Grand Jury returned a five-count indictment against defendant, charging him with, among other crimes, rape in the first degree (Penal Law § 130.35 [1]), sexual abuse in the first degree (Penal Law § 130.65 [1]) and kidnapping in the second degree (Penal Law § 135.20). Each of these charges arose out of defendant’s alleged rape and abduction of a young woman from the Syracuse area.

At defendant’s trial, prior to the complainant testifying, the following colloquy took place between the presiding Judge and counsel:

"the court: Ms. Dougherty [prosecutor], it’s my understanding you’re going to make application to close the Court Room to the public during the testimony of the victim in this case, is that correct, ma’am?
"ms. dougherty: Yes, Your Honor.
"the court: And that’s as a result of her request to have that done?
"ms. dougherty: Yes, Your Honor, she has made that request, that she would ask the Court to keep the Court Room closed because of the nature of her testimony.
"the court: Mr. Cognetti [defense counsel]?
"mr cognetti: I would oppose that, Judge. * * *
"the court: I’m going to close the Court Room down.”

Defendant was subsequently convicted of each of the charges noted above.

On appeal, however, the Appellate Division, with one Justice dissenting, reversed and ordered a new trial. The majority concluded that defendant’s Sixth Amendment right to a public trial had been violated, since, in its view, the trial court had neither made a careful enough inquiry to determine if closure of the courtroom was actually warranted under the circumstances, nor articulated any basis for its decision on the record. A Justice of the Appellate Division subsequently granted the People leave to appeal to this Court. We now affirm.

II

Although of uncertain origin, "the right to a public trial has long been regarded as a fundamental privilege of the defendant in a criminal prosecution.” (People v Jelke, 308 NY 56, 61; see generally, Richmond Newspapers v Virginia, 448 US 555, 564-569.) Its significance has been attributed to a number of factors, foremost of which is the need to ensure that an accused is dealt with fairly and not unjustly condemned (see, Estes v Texas, 381 US 532, 538-539; People v Hinton, 31 NY2d 71, 73, cert denied 410 US 911; 1 Cooley, Constitutional Limitations, at 647 [8th ed 1927]). In this regard, it has been said that: "The knowledge that every criminal trial is subject to contemporaneous review in the forum of public opinion is an effective restraint on possible abuse of judicial power.” (In re Oliver, 333 US 257, 270.) Similarly, it has been recognized that open trials tend to promote "testimonial trustworthiness” by inducing a fear that perjured testimony might be detected (People v Jones, 82 AD2d 674, 677, lv denied 55 NY2d 751, citing People v Jelke, 308 NY, at 62-63, supra), and may even lead previously unknown persons to come forward with relevant evidence (see, Richmond Newspapers v Virginia, 448 US, at 570 n 8, supra, citing 6 Wigmore, Evidence § 1834, at 436 [Chadbourn rev 1976]).

The presumption of openness, however, is not absolute and must in certain circumstances give way to other competing societal concerns (see, Waller v Georgia, 467 US 39, 45, 48; People v Jones, 47 NY2d 409, 413, cert denied 444 US 946; People v Hinton, 31 NY2d, at 73-74, supra; People v Jelke, 308 NY, at 63, supra; see also, People v Kin Kan, 78 NY2d 54 [decided today]). Accordingly, we have upheld temporary closures of the courtroom in a number of instances, including where necessary to shield the identity of a police officer involved in an ongoing undercover operation (see, e.g., People v Hinton, 31 NY2d 71, supra), or where needed to protect a witness from an "incapacitating embarrassment” (see, People v Mateo, 73 NY2d 928, 930).

In doing so, however, we have always emphasized that no closure "can be tolerated that is not preceded by an inquiry careful enough to assure the court that the defendant’s right to a public trial is not being sacrificed for less than compelling reasons” (People v Jones, 47 NY2d, at 414-415, supra). Indeed, the Supreme Court has made it quite clear that closure determinations must depend on a close examination of the competing interests at stake in the specific context of the individual case (see, Globe Newspaper Co. v Superior Ct., 457 US 596, 607-608). That Court has likewise held that a trial court must articulate its reasons for ordering closure on the record, and those reasons should be expressed in " 'findings specific enough [so] that a reviewing court can determine whether [that] order was properly entered.’ ” (Waller v Georgia, 467 US, at 45, supra, quoting Press-Enterprise Co. v Superior Ct., 464 US 501, 510; see, Rovinsky v McKaskle, 722 F2d 197, 200, and n 10 [5th Cir]; State v Klem, 438 NW2d 798, 801 [Sup Ct ND]; accord, Globe Newspaper Co. v Superior Ct., 457 US, at 608, n 20, supra; Richmond Newspapers v Virginia, 448 US, at 580-581, supra [plurality opn].)

III

Applying these principles to the case at bar, we conclude that defendant’s Sixth Amendment right to a public trial was clearly violated. Although a trial court is not "without discretion to choose among alternative means for determining whether an application to close a courtroom” should be granted (People v Jones, 47 NY2d, at 414, supra), here the record discloses that closure was ordered solely on the basis of a brief colloquy between the presiding Judge and counsel during which the prosecutor merely informed the court that the complainant desired that the courtroom be closed while she testified because of the subject matter of her testimony. Inexplicably, the court did not conduct any further inquiry concerning the nature and degree of any psychological or emotional impact testifying in open court would have on the witness (cf., People v Joseph, 59 NY2d 496 [Trial Judge conferred with complainant and counsel in robing room]). Nor does the record indicate that the Judge had any other basis for adequately assessing what that effect would be (cf., People v Glover, 60 NY2d 783, 785 [Trial Judge had presided over defendant’s previous trial on the same charges and thus knew of the highly embarrassing nature of the complainant’s testimony]; People v Jones, 82 AD2d, at 680, supra [Trial Judge, prior to ordering closure, had observed the witness testify in a very distressed and upset manner about the events leading up to the actual sexual assault]). Instead, closure was ordered "almost casually on little more than the bare application” of counsel (People v Cordero, 150 AD2d 258, 259, affd 75 NY2d 757), and without the trial court articulating any reasons for its decision.

While the Sixth Amendment does not require a judicial insensitivity to the very real problems that rape victims may face in having to testify in open court (see, People v Jones, 82 AD2d 674, supra; see also, People v Glover, 60 NY2d 783, supra; People v Joseph, 59 NY2d 496, supra; United States ex rel Latimore v Sielaff, 561 F2d 691, 694-695 [7th Cir], cert denied 434 US 1076), it nonetheless does demand a more careful balancing and weighing of the competing interests than that conducted by the trial court here (see, Waller v Georgia, 467 US, at 45, supra; People v Mateo, 73 NY2d 928, affg 138 AD2d 412, supra; People v Jones, 47 NY2d, at 414-415, supra; see also, Globe Newspaper Co. v Superior Ct., 457 US, at 607-608, supra).

Accordingly, the order of the Appellate Division should be affirmed.

Chief Judge Wachtler and Judges Simons, Kaye, Alexander, Hancock, Jr., and Bellacosa concur.

Order affirmed.

      . The Sixth Amendment’s public trial guarantee has been made applicable to the States through the Due Process Clause of the Fourteenth Amendment (see, Duncan v Louisiana, 391 US 145, 148; In re Oliver, 333 US 257, 266-273; People v Jones, 47 NY2d 409, 411, n 1, cert denied 444 US 946).

      . The Supreme Court has essentially adopted a four-part test for determining whether the public may be excluded from part of an accused’s trial: (1) the party seeking to close the courtroom must advance an overriding interest that is likely to be prejudiced; (2) the closure must be no broader than is necessary to protect that interest; (3) reasonable alternatives to closing the courtroom must be considered; and (4) the trial court must make findings adequate to support the closure (Waller v Georgia, 467 US 39, 48).

      . See also, State v Klem, 438 NW2d 798, 801-802 (Sup Ct ND).

      . While Globe Newspaper Co. v Superior Ct. (457 US 596), Press-Enterprise Co. v Superior Ct. (464 US 501) and Richmond Newspapers v Virginia (448 US 555) were all decided under the First Amendment, the Supreme Court has expressly acknowledged that the holdings of these cases are equally relevant in the Sixth Amendment context (Waller v Georgia, 467 US 39, 46).

      . See generally, Berger, Man’s Trial, Woman’s Tribulation: Rape Cases in the Courtroom, 77 Colum L Rev 1 (1977); Bohmer & Blumberg, Twice Traumatized: The Rape Victim and the Court, 58 Judicature 390 (1975).


author: Bellacosa, J.

text:
    The People of the State of New York, Appellant, v Kin Kan, Respondent.
    Argued May 1, 1991;
    decided June 11, 1991

      POINTS OF COUNSEL

      Robert M. Morgenthau, District Attorney (James M. McGuire, Mark Dwyer and Hilary Hassler of counsel), for appellant.
    I. New York State courts are not bound by decisions of the lower Federal courts on questions of Federal law. (New York R. T. Corp. v City of New York, 275 NY 258, 303 US 573, 304 US 588; Flanagan v Prudential-Bache Sec., 67 NY2d 500, 479 US 931; People v Maerling, 64 NY2d 134; United States v Thomas, 757 F2d 1359, cert denied sub nom. Wheelings v United States, 474 US 819.) II. The trial court properly declined to hazard the life of Wing Tsang, an accomplice of Kin Kan in the heroin trade and an informant into Chinatown organized crime activities. (People v Hinton, 31 NY2d 71, 410 US 911; In re Oliver, 333 US 257; People v Jelke, 308 NY 56; People v Jones, 47 NY2d 409; Waller v Georgia, 467 US 39; Press-Enterprise Co. v Supreme Ct., 464 US 501; People v Wharton, 143 AD2d 958, 74 NY2d 921; People v Davis, 72 AD2d 798; People v Garcia, 51 AD2d 329, 41 NY2d 861; People v Cordero, 150 AD2d 258, 75 NY2d 757.)

      Stanley Neustadter for respondent.
    I. The People’s appeal is barred by res judicata and must be dismissed; all the arguments raised by the People in this forum were raised by the People at, and rejected on their merits by, the United States Court of Appeals when it affirmed the granting of habeas corpus relief to codefendant Ip for the violation of the identical Sixth Amendment right litigated on the identical record. (Wilkins v American Export Isbrandtsen Lines, 38 NY2d 758; B. R. De Witt Inc. v Hall, 19 NY2d 141; People v Di Raffaele, 55 NY2d 234; Brown v Allen, 344 US 443.) II. Defendant was deprived of her constitutional right to a public trial when the courtroom was closed during the testimony of a cooperating codefendant whose identity was known, and whose claims to being afraid of public testimony were baseless, remote and unrealistic. (People v Colon, 71 NY2d 410; People v Jones, 48 NY2d 409; Waller v Georgia, 467 US 39; People v Cordero, 150 AD2d 258, 75 NY2d 757; People v Castro, 63 AD2d 891; People v Goggins, 34 NY2d 163.) III. Defendant was denied her State and Federal constitutional rights to due process of law and to present a coherent defense when, despite a prima facie showing that the interpreter assigned to translate her testimony was incompetent, the court refused to conduct a hearing to determine the competency of the interpreter. (United States v Carrion, 488 F2d 12; People v De Armas, 106 AD2d 659; People

      v Pavao, 59 NY2d 282; People v Ramos, 26 NY2d 272; People v Pizzali, 159 AD2d 652; United States ex rel. Negron v State of New York, 434 F2d 386; People v Rosa, 153 AD2d 257; People v Hudy, 73 NY2d 40; Augustin v Sava, 735 F2d 32; United States v Maniego, 710 F2d 24.)

      Stanley Mark, Margaret Fung and Denny Chin for Asian American Legal Defense and Education Fund, amicus curiae.

    Defendant’s constitutional right to a competent interpreter was violated. (People v Ramos, 26 NY2d 272; People v Duenas, 120 AD2d 978; People v De Armas, 106 AD2d 659; United States ex rel. Negron v State of New York, 434 F2d 386; Augustin v Sava, 735 F2d 32; People v Pavao, 59 NY2d 282.)
   OPINION OF THE COURT

Bellacosa, J.

This appeal by the People involves gang-related, large-scale drug trafficking in the Chinatown section of New York City. The case pits defendant Kin Kan’s constitutional right to a public trial against the trial court’s closure of the courtroom to all spectators, including her family, over her objection, during the testimony of the key cooperating witness-accomplice to her crime. The closure as it pertains to Kan, involving the exclusion of her family from the courtroom, violated her constitutional right to a public trial and, for that reason alone, we affirm the order of the Appellate Division reversing Kan’s conviction and ordering a new trial.

Kan, codefendant Harry Ip and the accomplice were charged primarily with first degree criminal sale and possession of approximately two pounds of heroin for their roles in the sale of the drugs to undercover police officers in a Manhattan apartment. The accomplice pleaded guilty to the top count pursuant to a cooperation agreement but, after testifying against Kan and Ip, was allowed to withdraw that plea and to plead down to criminal sale in the second degree, with the District Attorney’s permission.

Preliminary to the joint jury trial of Kan and Ip, the trial court conducted a Hinton hearing (People v Hinton, 31 NY2d 71) and, over defendants’ objections, ruled that the courtroom would be closed to all spectators during the testimony of the cooperating accomplice and of the two undercover police officers. Kan and Ip were convicted of the criminal drug sale in the first degree. After Ip’s conviction was affirmed (People v Ip, 137 AD2d 968, lv denied 71 NY2d 969), he petitioned in Federal court for a writ of habeas corpus, which was granted. A new trial was ordered by the United States District Court on the ground that Ip had been deprived of his Sixth Amendment right to a public trial as a result of the closure of the courtroom during the accomplice’s testimony. The Second Circuit affirmed in an unpublished writing (Ip v Henderson, 710 F Supp 915 [SD NY 1989] [Sand, J.], affd without opn 888 F2d 1376 [2d Cir 1989]).

Kan’s separate appeal to the Appellate Division was then heard and it, too, resulted in a reversal of her conviction and a remand for a new trial (164 AD2d 771). The Appellate Division determined that, because Kan and Ip raised the same challenge to the closure at their joint trial, that court was bound, on Kan’s State court appeal, by the Federal court conclusion that Ip had been denied his Sixth Amendment right to a public trial. The Appellate Division concluded that the issue of the constitutionality of the closure was “no longer open” to determination by State courts, and that the People’s recourse “would lie only by way of reargument before the Second Circuit or by application for certiorari to the United States Supreme Court.” (164 AD2d, at 772.) A Justice of the Appellate Division dissented, urging that the Appellate Division was bound only by the United States Supreme Court and the State Court of Appeals, and was not bound by lower Federal courts’ determinations on questions of Federal constitutional law, relying on Flanagan v Prudential-Bache Sec. (67 NY2d 500, 506, cert denied 479 US 931). That Justice granted leave to the People to appeal to our Court. Only defendant Kan is before us and only the closure during the accomplice’s testimony is now challenged. We affirm, for different reasons, based on our independent direct appeal review of Kan’s case.

The right to a public trial under the Sixth Amendment to the United States Constitution (US Const 6th Amend; In re Oliver, 333 US 257, 266) is fundamental but not absolute. The carefully calibrated discretionary trial court power to exclude the public for demonstrated and documented reasons (People v Hinton, 31 NY2d 71, supra) is an exceptional authority that must be "sparingly exercised” only when necessitated by “unusual circumstances” (id., at 76); "the balance of interests must be struck with special care.” (Waller v Georgia, 467 US 39, 45.) Closure remains only an exception to the mandatory postulate of open trials.

The United States Supreme Court has articulated a four-prong test by which to assess the propriety of closure: (1) the party seeking to close the hearing must advance an overriding interest that is likely to be prejudiced; (2) the closure must be no broader than necessary to protect that interest; (3) the trial court must consider reasonable alternatives to closing the proceeding; and (4) the trial court must make findings adequate to support the closure (Waller v Georgia, supra, at 48; Press-Enterprise Co. v Superior Ct., 464 US 501).

At Kan’s trial, during the hearing on the People’s application for closure, the trial court perspicaciously explored this sensitive issue. The accomplice witness-to-be testified at the hearing to the circumstances of his guilty plea and cooperation agreement. He noted that he would be testifying in this and other cases, and was at that time still involved as a confidential informant in an ongoing investigation concerning past, completed criminal activities. He feared retaliation by Kan’s "people”, but did not fear Kan’s family. He also expressed fear of retaliation from persons connected with his continuing informant activity and from their friends and did not want to show his face in public. His fear related to his time in jail and after his release, although he had not been harmed or threatened while in the general population at Rikers Island with codefendant Ip for several months and he had not requested to be placed in protective custody. Defendants Ip and Kan knew him; he had appeared in court with them several times in the presence of Kan’s family members. He believed his fear would affect his ability to testify in a calm and truthful manner if the courtroom were not closed. Kan’s attorney strenuously objected, complaining particularly that closure during the accomplice’s testimony was not warranted and that Kan was entitled to have her family present to assist in her defense. The Trial Judge ordered everyone excluded during the accomplice’s testimony, determining that the prejudice to defendants from the closure was outweighed by the harm that might come to the accomplice.

We conclude, as a matter of law under the governing legal principles and criteria, that the delicate balancing of Kan’s individualized right to a public trial against the accomplice witness’s expressed fears of retaliation tips in favor of respondent Kan. All four of the Waller prerequisites are deficient with respect to the exclusion of Kan’s family. The expulsion of everyone during this accomplice’s testimony was "broader” than constitutionally tolerable and constituted a violation of Kan’s "overriding” right to a public trial (see, Waller v Geor gia, 467 US 39, 48, supra; Douglas v Wainwright, 739 F2d 531, cert denied 469 US 1208). The trial court did not specify or justify closure with respect to Kan’s family on the record, despite her counsel’s specific objection in that regard, and we discern no record basis for doing so (see, People v Clemons, 78 NY2d 48 [decided today]; cf., United States v Sherlock, 865 F2d 1069; Nieto v Sullivan, 879 F2d 743, cert denied 493 US 957).

Indeed, all the hearing evidence that was adduced in this respect supported allowing Kan’s family to remain in the courtroom at this critical juncture of her trial. The accomplice had on several previous occasions appeared in court with Kan in the presence of Kan’s family, specifically testifying that he did not fear Kan’s family. There was no evidence that Kan’s family had attempted to intimidate or harass the accomplice (cf., United States ex rel. Orlando v Fay, 350 F2d 967 [2d Cir], cert denied 384 US 1008) or that the accomplice was unable to testify in the presence of Kan’s family (see, People v Mateo, 73 NY2d 928, 929-930). Kan’s interest in having her family present, on the other hand, was particularly compelling, as emphasized by defense counsel at the hearing, because Kan did not speak English and had to rely on a variety of interpreters to comprehend the testimony and proceedings in this first degree drug sale prosecution (cf., People v Joseph, 59 NY2d 496, 498-499). Thus, the closure was not "narrowly tailored” in this respect as is also required (Press-Enterprise Co. v Superior Ct., 464 US, supra, at 510).

This ruling to close the courtroom under these circumstances and in these respects, for these reasons alone, necessitates the affirmance of the order of the Appellate Division reversing and ordering a new trial. Because Kan was deprived of her constitutional right to a public trial, reversal and a new trial are required irrespective of prejudice (People v Jones, 47 NY2d 409, 415-417, cert denied 444 US 946).

While the parties advance competing arguments addressed to the United States District Court opinion and decision in the codefendant Ip’s Federal habeas corpus proceeding and concerning its effect on review of Kan’s direct State court appeal, we perceive no reason to consider that aspect inasmuch as Kan was never a party to the collateral Federal review of Ip’s conviction. All courts are, of course, bound by the United States Supreme Court’s interpretations of Federal statutes and the Federal Constitution (see, Flanagan v Prudential- Bache Sec., 67 NY2d 500, 506, cert denied 479 US 931, supra; People ex rel. Ray v Martin, 294 NY 61, 73, affd 326 US 496; Alvez v American Export Lines, 46 NY2d 634, 638, affd 446 US 274). On the other hand, the interpretation of a Federal constitutional question by the lower Federal courts may serve as useful and persuasive authority for our Court while not binding us (New York R. T. Corp. v City of New York, 275 NY 258, 265, affd 303 US 573). This Court in its long-standing tradition and independent responsibility has exercised its correlative adjudicative power on questions of Federal law (compare, People v Dunn, 77 NY2d 19, 23, [petition for certiorari pending], with United States v Thomas, 757 F2d 1359 [2d Cir], cert denied sub nom. Wheelings v United States, 474 US 819). Therefore, for different reasons, on direct appellate review of Kan’s closure claim, we reach the same result on the dispositive issue as was reached by the District Court and Second Circuit in the codefendant Ip’s collateral Federal proceeding.

We have examined the other issues raised by the parties and conclude that inasmuch as they are unnecessary to the disposition of this appeal, we need not address them.

Accordingly, the order of the Appellate Division should be affirmed.

Chief Judge Wachtler and Judges Simons, Kaye, Alexander, Titone and Hancock, Jr., concur.

Order affirmed.


author: Titone, J. Alexander, J.

text:
    Linda A. Fitzpatrick, Individually and as Administratrix of the Estate of John J. Fitzpatrick, Jr., Deceased, Plaintiff, v American Honda Motor Co., Inc., et al., Defendants, and Frank Moramarco, Defendant and Third-Party Plaintiff-Appellant. National Casualty Company, Third-Party Defendant-Respondent.
    Argued February 13, 1991;
    decided May 7, 1991

      POINTS OF COUNSEL

      Charles G. Mills, Daren A. Rathkopf and Philip C. Kilian for third-party plaintiff-appellant.
    I. Under the facts of this case respondent may be required to indemnify appellant. (Murray v City of New York, 43 NY2d 400; Demas v 325 W. End Ave. Corp., 127 AD2d 476.) II. Under the facts before the Court on respondent’s motion to dismiss, respondent was required to defend appellant. (Seaboard Sur. Co. v Gillette Co., 64 NY2d 304; Ruder & Finn v Seaboard Sur. Co., 52 NY2d 663, 54 NY2d 753; Colon v Aetna Life & Cas. Ins. Co., 66 NY2d 6; Spoor-Lasher Co. v Aetna Cas. & Sur. Co., 39 NY2d 875; McGroarty v Great Am. Ins. Co., 36 NY2d 358; International Paper Co. v Continental Cas. Co., 35 NY2d 322; Goldberg v Lumber Mut. Cas. Ins. Co., 297 NY 148; Zurich-American Ins. Cos. v Atlantic Mut. Ins. Cos., 139 AD2d 379; Villa Charlotte Bronte v Commercial Union Ins. Co., 64 NY2d 846; Caporino v Travelers Ins. Co., 62 NY2d 234.)

      Anthony J. McNulty for third-party defendant-respondent.
    I. There is no decisional law controlling in this State on which to extend the liability insurer’s time to decide to defend the claim beyond the time when an unamended complaint containing all the governing allegations to be defended is first presented to the carrier and it finds no coverage under pleaded theories. (Gold v City of New York, 80 AD2d 138; Ober v Rye Town Hilton, 159 AD2d 16; Marku v City of New York, 86 AD2d 601; Bender v New York City Health & Hosps. Corp., 38 NY2d 662; Bashor v Excess Ins. Co., 86 AD2d 882; Niesig v Team I, 76 NY2d 363; Villa Charlotte Bronte v Commercial Union Ins. Co., 64 NY2d 846; Ruder & Finn v Seaboard Sur. Co., 52 NY2d 663; Spoor-Lasher Co. v Aetna Cas. & Sur. Co.,
      39 NY2d 875.) II. Decisional law in other jurisdictions cited by appellant may not control New York’s jurisdictional and procedural rules as to parties actually sued in the underlying litigation but not, based on those allegations, covered by a policy. (Sloan Steel Erectors & Equip. Rental v Illinois Union Ins. Co., 158 AD2d 984; Smith Jean, Inc. v Royal Globe Ins. Cos., 139 AD2d 503; National Union Fire Ins. Co. v Ambassador Group, 157 AD2d 293.)
   OPINION OF THE COURT

Titone, J.

It is well established that a liability insurer has a duty to defend its insured in a pending lawsuit if the pleadings allege a covered occurrence, even though facts outside the four corners of those pleadings indicate that the claim may be meritless or not covered (see, e.g., Ruder & Finn v Seaboard Sur. Co., 52 NY2d 663, 669-670). The issue in this appeal is whether the insurer has a duty to defend in the opposite circumstance, i.e., where the pleadings do not allege a covered occurrence but the insurer has actual knowledge of facts demonstrating that the lawsuit does involve such an occurrence. Under these facts, we hold that the insurer cannot use a third party’s pleadings as a shield to avoid its contractual duty to defend its insured.

The plaintiff in the main action, Linda Fitzpatrick, sought recovery for the wrongful death of her husband, John Fitzpatrick, who died on October 31, 1985 while operating a three-wheel all-terrain vehicle. The complaint alleged that the vehicle in question was owned by defendant Frank Moramarco and that Moramarco had given Fitzpatrick permission to use it in connection with the performance of certain yardwork and household chores. According to the complaint, codefendant Cherrywood Property Owners Association (CPOA), the owner of the property on which the accident occurred, had retained Moramarco, and Moramarco, acting as CPOA’s agent, had in turn hired Fitzpatrick as an "independent contractor.”

In fact, Moramarco was an officer, shareholder and director of an independent concern called Cherrywood Landscaping, Inc. (CLI), which had been retained by CPOA to do landscaping work on CPOA’s property. The vehicle involved in Fitzpatrick’s accident had been purchased by Moramarco on behalf of CLI for use in its landscaping and gardening business. CLI had also purchased a liability insurance policy from National Casualty Co. (National), which indemnified the corporation against having to pay damages for bodily injury and property damage arising out of its business. While the policy was not an "owner’s policy” and Moramarco was not a specifically named insured, the terms of the policy included as "insured persons” "any executive officer, director or stockholder [of the named insured (i.e., CLI)] while acting within the scope of his duties as such.”

Shortly after Moramarco was served with papers in the main action, he notified National and requested that the insurer provide him with a defense. National, however, refused, stating that the policy it had issued to CLI did not appear to cover the claim against Moramarco. In subsequent correspondence, Moramarco advised the insurer that the vehicle involved in the Fitzpatrick accident was "owned for and * * * used exclusively for landscaping operations” and that the claims asserted against him in the main action all arose out of activities he undertook for CLI, the named insured. The same circumstances were brought to the insurer’s attention in a letter from its own agent in which the company was urged to reconsider its prior decision. Nonetheless, National maintained that it was not required to provide a defense because the complaint did not name CLI, and Moramarco, the named defendant, was not insured as an individual.

Moramarco thereafter commenced a third-party action against National seeking payment of his legal fees in the main action, as well as "judgment over” for any judgment entered against him in the main action. National promptly moved, pursuant to CPLR 3211 (a) (1) and (7), to dismiss the third-party complaint. Relying wholly on the absence of allegations in the Fitzpatrick complaint suggesting that the claim against Moramarco arose in connection with his activities as an officer, shareholder or director of the insured CLI, National argued that it had no duty to defend or indemnify Moramarco under the terms of the policy. In response, Moramarco submitted proof to show that, despite the complaint’s inaccuracies, the Fitzpatrick claim actually did involve a covered event.

The Supreme Court denied National’s dismissal motion, holding that the question of whether its policy covered the Fitzpatrick accident "must await a plenary trial.” The Appellate Division, however, reversed and dismissed the third-party complaint. The court held that the allegations in the complaint are the determinative factor in resolving whether the provisions of an insurance policy have been "activated” in a particular action. Since the Fitzpatrick complaint named Moramarco only in his individual capacity and the insured, CLI, was never even mentioned, the Appellate Division concluded that the existing documentary evidence, i.e., the Fitzpatrick complaint and the National policy, was sufficient to warrant dismissal of Moramarco’s third-party claim (see, CPLR 3211 [a] [1]). This Court granted Moramarco leave to appeal from the Appellate Division order. We now reverse.

This Court has repeatedly held that an insurer’s duty to defend its insured arises whenever the allegations in a complaint state a cause of action that gives rise to the reasonable possibility of recovery under the policy (see, e.g., Technicon Elecs. Corp. v American Home Assur. Co., 74 NY2d 66, 73; Meyers & Sons Corp. v Zurich Am. Ins. Group, 74 NY2d 298, 302; see, Servidone Constr. Corp. v Security Ins. Co., 64 NY2d 419, 424). In the present appeal, National asks this Court to hold that the converse is also true. According to National, the complaint allegations are, in all cases, the sole determining consideration and, consequently, an insurer is relieved of the duty to defend whenever the complaint allegations do not on their face set forth a covered cause of action. However, the position National advocates is neither compelled by our prior case law nor consistent with sound legal principles and policies. Accordingly, we reject it.

The rationale underlying the cases in which the "four corners of the complaint” rule was delineated and applied (see, e.g., Meyers & Sons Corp. v Zurich Am. Ins. Group, supra; International Paper Co. v Continental Cas. Co., 35 NY2d 322; Goldberg v Lumber Mut. Cas. Ins. Co., 297 NY 148), is based on the oft-stated principle that the duty to defend is broader than the duty to indemnify (see, e.g., Ruder & Finn v Seaboard Sur. Co., 52 NY2d 663, 669-670, supra). In other words, as the rule has developed, an insurer may be contractually bound to defend even though it may not ultimately be bound to pay, either because its insured is not factually or legally liable or because the occurrence is later proven to be outside the policy’s coverage.

It follows logically from this principle that an insurer’s duty to defend is called into play whenever the pleadings allege an act or omission within the policy’s coverage. Even where there exist extrinsic facts suggesting that the claim may ultimately prove meritless or outside the policy’s coverage, the insurer cannot avoid its commitment to provide a defense, since "[a] complaint subject to defeat because of debatable theories * * * must [nevertheless] be defended by the insured.” (International Paper Co. v Continental Cas. Co., supra, at 326.) Accordingly, the courts of this State have refused to permit insurers to look beyond the complaint’s allegations to avoid their obligation to defend and have held that the duty to defend exists "[i]f the complaint contains any facts or allegations which bring the claim even potentially within the protection purchased” (Technicon Elecs. Corp. v American Home Assur. Co., supra, at 73). The holdings thus clearly establish that an insurer’s duty to defend is at least broad enough to apply when the "four corners of the complaint” suggest the reasonable possibility of coverage.

However, to say that the duty to defend is at least broad enough to apply to actions in which the complaint alleges a covered occurrence is a far cry from saying that the complaint allegations are the sole criteria for measuring the scope of that duty. Indeed, in these circumstances, where the insurer is attempting to shield itself from the responsibility to defend despite its actual knowledge that the lawsuit involves a covered event, wooden application of the "four corners of the complaint” rule would render the duty to defend narrower than the duty to indemnify — clearly an unacceptable result. For that reason, courts and commentators have indicated that the insurer must provide a defense if it has knowledge of facts which potentially bring the claim within the policy’s indemnity coverage (see, e.g., Lowenstein Dyes & Cosmetics v Aetna Life & Cos. Co., 524 F Supp 574, 576, affd 742 F2d 1437; Tennessee Corp. v Hartford Acc. & Indem. Co., 326 F Supp 520, 524, affd 463 F2d 548; Evan v Employers Mut. Liab. Ins. Co., 391 F Supp 1230, 1231-1232; National Indem. Co. v Flesher, 469 P2d 360, 366 [Alaska]; Fresno Economy Import Used Cars v United States Fid. & Guar. Co., 76 Cal App 3d 272, 278-279, 142 Cal Rptr 681; Mullen v Glens Falls Ins. Co., 73 Cal App 3d 163, 169-170, 140 Cal Rptr 605; Loftin v United States Fire Ins. Co., 106 Ga App 287, 127 SE2d 53; LaRotunda v Royal Globe Ins. Co., 87 Ill App 3d 446, 408 NE2d 928; New Hampshire Ins. Co. v Christy, 200 NW2d 834, 838-839 [Iowa]; Patrons Mut. Ins. Assn. v Harmon, 240 Kan 707, 732 P2d 741; Shepard Mar. Constr. Co. v Maryland Cas. Co., 73 Mich App 62, 250 NW2d 541; Lanoue v Fireman’s Fund Am. Ins. Cos., 278 NW2d 49, 53 [Minn]; Iowa Natl. Mut. Ins. Co. v Universal Underwriters Ins. Co., 276 Minn 362, 150 NW2d 233; Marshall’s U.S. Auto Supply v Maryland Cas. Co., 354 Mo 455, 189 SW2d 529; Commercial Pipe & Supply Corp. v Allstate Ins. Co., 36 AD2d 412, affd 30 NY2d 619; Sucrest Corp. v Fisher Governor Co., 83 Misc 2d 394, 402-403; Ostrager & Newman, Insurance Coverage Disputes § 5.02 [a], at 122-123 [3d ed]; 7C Appleman, Insurance Law and Practice § 4683, at 56 [Berdal ed]; id., § 4684.01, at 96-97; at 17 [1990 Pocket Part]; but see, Sussman v American Sur. Co., 345 F2d 679; Massachusetts Turnpike Auth. v Perini Corp., 349 Mass 448, 208 NE2d 807; Allstate Ins. Co. v Coriell, 30 Ohio Misc 67, 284 NE2d 202 [criticized in 7C Appleman, op. cit., § 4684.01, at 92, n 13]).

We agree with these authorities and hold that, rather than mechanically applying only the "four corners of the complaint” rule in these circumstances, the sounder approach is to require the insurer to provide a defense when it has actual knowledge of facts establishing a reasonable possibility of coverage (see generally, 7C Appleman, op. cit., § 4684.01, at 95). This holding fits easily and appropriately within the existing rules governing coverage disputes (see, Commercial Pipe & Supply Corp. v Allstate Ins. Co., supra; Sucrest Corp. v Fisher Governor Co., supra), which certainly do not require us to extend the "four corners of the complaint” rule to a situation such as this one, where it has not been applied before and, in fact, has no apparent value. Although it has been argued that the "four corners of the complaint” rule has the advantage of certainty (see, dissenting opn, at 73), there is no reason to believe that the rule we adopt here will engender any more litigation.

The conclusion we reach here flows naturally from the fact that the duty to defend derives, in the first instance, not from the complaint drafted by a third party, but rather from the insurer’s own contract with the insured (see, e.g., 7C Appleman, op. cit., § 4682, at 27 [and authorities cited therein]). While the allegations in the complaint may provide the significant and usual touchstone for determining whether the insurer is contractually bound to provide a defense, the contract itself must always remain a primary point of reference (see also, Technicon Elecs. Corp. v American Home Assur. Co., supra, at 73 [duty to defend arises from complaint and insurance contract]). Indeed, a contrary rule making the terms of the complaint controlling "would allow the insurer to construct a formal fortress of the third party’s pleadings * * * thereby successfully ignoring true but unpleaded facts within its knowledge that require it * * * to conduct the * * * insured’s defense” (Associated Indem. Co. v Insurance Co., 68 Ill App 3d 807, 816-817, 386 NE2d 529, 536). Further, an insured’s right to a defense should not depend solely on the allegations a third party chooses to put in the complaint. This is particularly so because the drafter of the pleading may be unaware of the true underlying facts or the nuances that may affect the defendant’s coverage and it might not be in the insured’s (or the insurer’s) interest to reveal them.

The principle that an insurer may not rely on the pleadings to narrow the scope of its duty to defend also finds support in the practical realities that prevail under modern pleading rules. As one commentator has observed, "considering the plasticity of modern pleadings, in many cases no one can determine whether the third party suit does or does not fall within the indemnification coverage of the policy until the suit itself is resolved” (7C Appleman, op. cit., § 4684, at 83). This observation is particularly apt in the context of New York’s liberal pleading rules, which permit the pleadings to be amended to conform to the proof at any time, provided that no prejudice is shown (see, CPLR 3025 [a]).

The facts in this case — where the complaint on its face did not state a covered claim but the underlying facts made known to the insurer by its insured unquestionably involved a covered event — present a clear example. The insurer here refused to defend Frank Moramarco because he was sued, albeit mistakenly, as an employee of CPOA and the owner of the injury-causing vehicle. Had the complaint correctly identified Moramarco as an officer and/or shareholder of the insured CLI, he would have unquestionably been covered for this lawsuit, since the policy provided that "any executive officer, director or stockholder [of CLI] while acting within the scope of his duties as such” was an additional "insured person” under the policy. Further, the insurer promised to "defend any suit against the insured seeking damages on account of * * * bodily injury or property damage” arising out of CLI’s landscaping and gardening business — a condition plainly satisfied here. To deny Moramarco an insurance-company sponsored defense under these circumstances merely because the attorney for the plaintiff in the main action accidentally mischaracterized Moramarco’s role would be to afford the insurer an undeserved windfall at the expense of its insured.

Indeed, relieving the insurer of its duty to defend is particularly imprudent and counterproductive where, as here, the inaccuracies in the plaintiff’s pleadings are likely to become apparent when the true facts are developed on the record and the role of the insured in the incident is fully exposed. At that point, the trial court could well grant a request by the plaintiff to conform the pleadings to the proof (see, CPLR 3025 [c]), in which event the insurer’s core policy obligation to defend Frank Moramarco as an additional insured would unquestionably be triggered. Moramarco should not be required to wait until that point is reached before obtaining an insurance-company sponsored defense, since a "provision for defense of suits is useless and meaningless unless it is offered when the suit arises” (7C Appleman, op. cit., § 4684, at 83).

In sum, application of the "four corners of the complaint” rule in these circumstances is not required by our prior cases and is not even supported by the rationale usually offered in support of the rule. Further, invocation of the rule here and in analogous cases leads to an unjust result, since it exalts form over substance and denies an insured party the benefit of the "litigation insurance” for which it has paid. These factors militate in favor of a rule requiring the insurer to provide a defense where, notwithstanding the complaint allegations, underlying facts made known to the insurer create a "reasonable possibility that the insured may be held liable for some act or omission covered by the policy” (Meyers & Sons Corp. v Zurich Am. Ins. Group, supra, at 302). We therefore hold that National cannot ignore the facts made known to it by its insured and rely instead on the Fitzpatrick complaint alone to assess its duty to defend Moramarco. The third-party complaint by Moramarco seeking payment of his attorney’s fees and indemnification in the event that a judgment was entered against him should not have been dismissed.

Accordingly, the order of the Appellate Division should be reversed, with costs, and the motion to dismiss the third-party complaint denied.

Alexander, J.

(dissenting). Because the majority today discards a rule of long standing and, in my view, does so without justification and under circumstances not warranting such a drastic departure from settled precedent, I respectfully dissent.

It is axiomatic that the obligations of a liability insurance carrier to its insured are governed by the terms of the contract of insurance between them and it is only by examining the terms and conditions of that policy that those obligations can be determined with certainty. Obviously, where an insured has been found liable to a third party in respect to a risk covered by the policy, the carrier is obligated to indemnify its insured. Additionally, where the policy so provides, the carrier is obligated to defend its insured against claims asserting risks covered by the policy. Indeed the rule is firmly established that the duty to defend is broader than the duty to indemnify (Ruder & Finn v Seaboard Sur. Co., 52 NY2d 663, 669-670; Servidone Constr. Corp. v Security Ins. Co., 64 NY2d 419, 424). When the policy contains the insurer’s promise to defend the insured, the "liability insurance” is in fact "litigation insurance” as well (Seaboard Sur. Co. v Gillette Co., 64 NY2d 304; International Paper Co. v Continental Cas. Co., 35 NY2d 322, 326).

However, this Court has repeatedly held, in a long line of cases, unbroken until now, that the duty of a liability insurer to defend an action brought against an insured is determined by the allegations in the complaint pursuant to which the insured’s liability is asserted (see, Meyers & Sons Corp. v Zurich Am. Ins. Group, 74 NY2d 298; Technicon Elecs. Corp. v American Home Assur. Co., 74 NY2d 66; Servidone Constr. Corp. v Security Ins. Co., 64 NY2d 419, supra; Seaboard Sur. Co. v Gillette Co., 64 NY2d 304, supra; International Paper Co. v Continental Cas. Co., 35 NY2d 322, supra; Goldberg v Lumber Mut. Cas. Ins. Co., 297 NY 148). "If the facts alleged [in the complaint] raise a reasonable possibility that the insured may be held liable for some act or omission covered by the policy, then the insurer must defend” (Meyers & Sons Corp. v Zurich Am. Ins. Group, 74 NY2d 298, 302, supra).

In determining whether there is a duty to defend however, the Court must compare the allegations of the complaint with the terms of the policy (see, Lionel Freedman, Inc. v Glens Falls Ins. Co., 27 NY2d 364, 367). If those allegations, on their face, are within the compass of the risk covered by the insurance policy, the insurer is obligated to assume the defense of the action (Goldberg v Lumber Mut. Cas. Ins. Co., supra; International Paper Co. v Continental Cas. Co., 35 NY2d 322, supra). Conversely, it logically follows, that if that comparison demonstrates that those allegations are not within the coverage of the policy, the insurance company’s duty to defend does not arise (see, Goldberg v Lumber Mut. Cas. Ins. Co., 297 NY 148). Indeed where it can be determined "that no basis for recovery within the coverage of the policy is stated in the complaint * * * defendant’s refusal to defend [may be sustained].” (Lionel Freedman, Inc. v Glens Falls Ins. Co., 27 NY2d 364, 368, rearg denied 28 NY2d 859, supra; Sucrest Corp. v Fisher Governor Co., 83 Misc 2d 394, 400.)

The underlying negligence complaint of Linda A. Fitzpatrick seeks to recover damages for the wrongful death of her husband John Fitzpatrick which allegedly occurred while he was operating a 1985 Honda ATV all-terrain vehicle. The complaint alleges that Cherrywood Property Owners Association owned the premises where the accident occurred, that the codefendant Frank Moramarco is an employee, agent and/or servant of Cherrywood Property Owners Association, that the offending vehicle was owned by Moramarco and was being operated with the permission and consent of Moramarco and Cherrywood Property Owners Association. The complaint alleges further that Moramarco and "Cherrywood” were negligent and careless in the ownership, operation, maintenance of the premises owned by "Cherrywood” and the ownership, maintenance, use, supervision and control of the 1985 Honda ATV.

The National Casualty policy at issue here, was issued to Cherrywood Landscaping, Inc. and names that entity as the insured. The policy also provides that "any executive officer, director or stockholder (of the named insured) while acting within the scope of his duties as such”, is also insured.

A comparison of the allegations of the Fitzpatrick complaint with the provisions of the National Casualty policy demonstrates that the named defendant, Cherrywood Property Owners Association is not an insured under the policy. The insured is Cherrywood Landscaping, Inc. — a completely different corporation. Frank Moramarco is a covered person under this policy only insofar as he is acting within the scope of his activities as an "executive officer, director or stockholder” of Cherrywood Landscaping. The Fitzpatrick complaint alleges Moramarco’s liability individually and as an officer, director, agent and/or employee of Cherrywood Property Owners Association. Under settled principles of law therefore since the insured under the policy is not a party to this lawsuit, the event alleged in the complaint is not a covered event under the policy and the carrier’s duty to defend does not arise.

Deviating from these settled rules, the majority concludes that notwithstanding that the Fitzpatrick complaint, when compared to the terms of the policy, fails to demonstrate the existence of a covered event, "the insurer must provide a defense if it has knowledge of facts which potentially bring the claim within the policy’s indemnity coverage” (majority opn, at 66). It should be noted that to support this proposition the majority relies upon cases from other jurisdictions which impose an obligation upon the insurance company to investigate the claim before declining to defend — a requirement that this Court has never before imposed.

The rule which until now has prevailed in this jurisdiction provides certainty in this area of law and is easily applied. By changing the rule, the majority has supplanted certainty with uncertainty; an insurer now will be less clear as to what, if any, investigation it must make into a demand to defend and when it is permissible to decline representation. Concomitantly, the new rule presumably will increase collateral proceedings such as this, to determine whether an insurer in fact has a duty to defend. These collateral proceedings will be made more complicated because courts now will be obligated to look beyond the allegations in the complaint to discover the "actual” facts, or at a minimum whether the insurer "knew” or perhaps even "should have known” of such "actual facts”. The rule could also place the insured in the position of dictating the theory of the action, conceivably requiring the carrier to defend a claim the plaintiff has no intention of asserting merely because allegedly there are "facts” which support such a claim.

The majority posits this new rule as being corollary to the established rule that where the allegations of the complaint state a claim within the coverage of the policy, the "insurers [may not] look beyond the complaint’s allegations to avoid their obligation to defend” (majority opn, at 66). The fact is, however, that under the rule cited by the majority, "the insurance company’s duty to defend came into being when it appeared from the allegations in the negligence action that the injury was within the coverage of the policy, and it persisted despite the advice [from the insured] pointing [to] a contrary conclusion” (Goldberg v Lumber Mut. Cas. Ins. Co., 297 NY 148, 154, supra [emphasis added]).

Thus it is clear that under that established rule it is the allegations of the complaint, compared to the policy provisions, that trigger the duty to defend, a duty which persists notwithstanding that liability may ultimately be shown not to exist. This rule gives certainty to the inception of the carrier’s duty to defend and is entirely consistent with its obligations under its policy. No satisfactory reason for altering this rule is shown to exist here; thus the order granting summary judgment to the third-party defendant National Casualty Co. should be affirmed.

Chief Judge Wachtler and Judges Kaye and Bellacosa concur with Judge Titone; Judge Alexander dissents and votes to affirm in a separate opinion in which Judges Simons and Hancock, Jr., concur.

Order reversed, etc.

      . Although Moramarco was a named defendant from the outset, the first papers he received were those of codefendant Honda of Mineóla, which interposed a cross claim against him. He was not actually served by plaintiff until some 2Yz months later.

      . Contrary to the dissenters’ assertion (dissenting opn, at 73), the above-cited authorities do not uniformly impose on the insurer an obligation to investigate; rather, their holdings on this point are mixed (compare, Tennessee Corp. v Hartford Acc. & Indem. Co., supra; Evan v Employers Mut. Liab. Ins. Co., supra; National Indem. Co. v Flesher, supra; Fresno Economy Import Used Cars v United States Fid. & Guar. Co., supra; Mullen v Glens Falls Ins. Co., supra; Loftin v United States Fire Ins. Co., supra; Patrons Mut. Ins. Assn. v Harmon, supra; Marshall’s U.S. Auto Supply v Maryland Cas. Co., supra [imposing some duty to discover "reasonably ascertainable” facts], with Lowenstein Dyes & Cosmetics v Aetna Life & Cas. Co., supra [construing New York law]; LaRotunda v Royal Globe Ins. Co., supra; New Hampshire Ins. Co. v Christy, supra; Shepard Mar. Constr. Co. v Maryland Cas. Co., supra; Lanoue v Fireman’s Fund Am. Ins. Cos., supra; Commercial Pipe & Supply Corp. v Allstate Ins. Co., supra; Sucrest Corp. v Fisher Governor Co., supra [insurer’s duty to defend depends on insurer’s actual knowledge]). In any event, the duty we recognize here, i.e., the duty to defend when the facts known to the insurer indicate coverage, does not depend upon, or even imply, a corollary duty to investigate. Indeed, there is nothing in this case, where the insurer was actually notified of the salient facts by both its insured and its own agent, that requires us to create a duty to investigate where none previously existed.

      . The dissenters’ suggestion that, as a result of our ruling, the insured defendant may now be "in the position of dictating the theory of the action” is perplexing (see, dissenting opn, at 73-74). Certainly, it is unlikely that a plaintiff would voluntarily choose an uncovered theory of liability over one that is supported by the facts and could lead to a judgment that is covered by insurance. Accordingly, it is difficult to foresee when a carrier might be called upon "to defend a claim the plaintiff has no intention of asserting.”

      . Indeed, the parties’ submissions to this Court indicate that after the trial court’s order denying National’s dismissal motion was entered, CLI was added as a party defendant on the complaint and the insurer has undertaken to defend that entity. However, we have neither seen nor been advised of the contents of the amended complaint. Thus, the dissenters’ assertion that the complaint in the main action now "include[s] the 'actual facts’ regarding ownership and control of the [subject vehicle]” (see, dissenting opn, at 74, n 4) rests on nothing more than sheer speculation. Further, there is no basis for inferring that the "four corners of the complaint” rule has "worked well” in this case. Although CLI is now represented, Moramarco has been forced to retain and pay his own attorney and, as far as may be determined from the present submissions, has yet to be offered relief by the insurer. Manifestly, that result was not within Moramarco’s reasonable expectation when he purchased a policy which included CLI’s officers and directors as "additional insureds” under precisely these circumstances.

      . When National moved to dismiss the third-party complaint, Moramarco opposed the motion but did not cross-move for an order granting him relief on his claim for an insurance-company sponsored defense. Accordingly, in this appeal we are limited to determining whether the "documentary evidence” submitted by National, Le., the Fitzpatrick complaint and CLI’s insurance policy, is alone sufficient to defeat that claim.

      . Thus far from being a woodenly applied " 'four corners of the complaint rule’ ” (majority opn, at 66) this comparison requirement serves to give certainty and definiteness to the insurer’s duty to defend. Indeed the proposition advanced by the majority that the "allegations in the complaint may provide the significant and usual touchstone for determining whether the insurer is contractually bound to provide a defense” (majority opn, at 66) abandons any truly objective standard by which to determine whether a duty to defend arises under the contract of insurance, and expresses the majority’s intent to substitute an uncertain subjective standard.

      . Notably, the only two New York cases cited by the majority (Commercial Pipe & Supply Corp. v Allstate Ins. Co., 36 AD2d 412, affd 30 NY2d 619; and Sucrest Corp. v Fisher, 83 Misc 2d 394) reaffirm and rely upon the rule now rejected by the majority. Indeed in Sucrest, the court relied upon the allegations of the main complaint, in conjunction with those of the supplemental complaint in determining the existence of a duty to defend (83 Misc 2d, at 403; see also, Chatham Corp. v Argonaut Ins. Co., 70 Misc 2d 1028). In Commercial Pipe & Supply Corp. (supra), unlike here, the insured was a properly served defendant and the allegations of the complaint potentially brought the case within the coverage of the policy.

      . Notwithstanding the majority’s "perplexity” (majority opn, at 68, n 3) it is clear that although apparently aware of the "true facts”, rather than promptly amending the complaint in the underlying action, the attorney for Linda Fitzpatrick submitted an affidavit to Supreme Court opposing National Casualty’s motion to dismiss, thus evincing no apparent interest in asserting a claim against Cherrywood Landscaping.

      . Indeed the majority’s new rule makes little sense in this area of the law where the court has continually sought certainty. The settled rule has worked well as illustrated by this very case. As the majority acknowledges (see, at 69, n 4), it appears that the plaintiff in the underlying personal injury action belatedly has amended the complaint to include the insured Cherrywood Landscaping, Inc., as a party defendant and to include the "actual facts” regarding ownership and control of the ATV. If the majority’s suggestion that there is no basis for so concluding that the "actual facts” have now been alleged, is accepted, one can only wonder why the complaint was amended, a cross claim asserted by Cherrywood Property Owners Association and a defense assumed by National Casualty. These developments demonstrate beyond peradventure the complete lack of any necessity to revise our long-standing rule in order to resolve this case.


author: Chief Judge Wachtler.

text:
    Michael C. Singer, Respondent, v Jefferies & Company, Inc., et al., Appellants.
    Argued April 23, 1991;
    decided June 4, 1991

      POINTS OF COUNSEL

      Andrew J. Schaffran for Jefferies & Company, Inc., appellant.
    I. The parties’ dispute is required to be arbitrated even though it involves conduct alleged to have been fraudulent, scandalous and violative of the Federal securities laws. (Flanagan v Prudential-Bache Sec., 67 NY2d 500; Shearson/American Express v McMahon, 482 US 220; Pearce v E. F. Hutton Group, 828 F2d 826; McGinnis v E. F. Hutton & Co., 812 F2d 1011; Genesco, Inc. v Kakiuchi & Co., 815 F2d 840; Saucy Susan Prods. v Allied Old English, 200 F Supp 724; Mendelsohn v A & D Catering Corp., 100 AD2d 209; First Investors Corp. v American Capital Fin. Servs., 823 F2d 307; Feinberg v Oppenheimer & Co., 658 F Supp 892; DeSapio v Josephthal & Co., 143 Misc 2d 611.) II. The court below exceeded the proper scope of judicial inquiry. (Matter of Nationwide Gen. Ins. Co. v Investors Ins. Co., 37 NY2d 91; Matter of Franklin Cent. School [Franklin Teachers Assn.], 51 NY2d 348; Steelworkers v American Mfg. Co., 363 US 564; Flanagan v Prudential-Bache Sec., 67 NY2d 500; Cone Mem. Hosp. v Mercury Constr. Corp., 460 US 1; Brown v Merrill Lynch, Pierce, Fenner & Smith, 664 F Supp 969.)

      Ronald L. Ripley, of the Oklahoma Bar, admitted pro hac vice, for Boyd L. Jefferies, appellant.
    I. The court below erred in refusing to issue an order compelling arbitration and staying judicial proceedings and discovery. (Creative Sec. Corp. v Bear Stearns & Co., 671 F Supp 961, 847 F2d 834.) II. The parties’ dispute is arbitrable even though it involves conduct alleged to have been fraudulent, scandalous and violative of the Federal securities laws. III. The court below exceeded the proper scope of judicial inquiry.

      Nathan Z. Dershowitz, Victoria B. Eiger, Gerald D. Fischer and Amy Adelson for respondent.
    I. Defendants waived arbitration by affirmatively and aggressively participating in this lawsuit. (Matter of Nationwide Gen. Ins. Co. v Investors Ins. Co., 37 NY2d 91; De Sapio v Kohlmeyer, 35 NY2d 402; Sherrill v Grayco Bldrs., 64 NY2d 261; Bucci v McDermott, 156 AD2d 328; Sullivan v Kisly, 93 AD2d 783; Reali v Danklefsen, 88 AD2d 929; Gabor v Spicyn, 99 AD2d 1000; Matter of Wilaka Constr. Co. [New York City Hous. Auth.], 17 NY2d 195; Matter of Wappingers Cent. School Dist. v Wappingers Congress of Teachers, 51 AD2d 766; Lentine v Fundaro, 29 NY2d 382.) II. Singer’s claim is not subject to arbitration under NASD rules because it arises out of the criminal acts of Boyd Jefferies, and not "out of or in connection with” the business of Jefferies & Co. (Dean Witter Reynolds v Byrd, 470 US 213; Flanagan v Prudential-Bache Sec., 67 NY2d 500; Pearce v E. F. Hutton Group, 828 F2d 826; Morgan v Smith Barney, Harris Upham & Co., 729 F2d 1163; Fleck v E. F. Hutton Group, 891 F2d 1047; Aspero v Shearson Am. Express, 768 F2d 106, 474 US 1026; Zolezzi v Dean Witter Reynolds 789 F2d 1447; Dean Witter Reynolds v Ness, 677 F Supp 866.) III. There is no agreement to arbitrate between Singer and Boyd Jefferies because neither one is a member of the NASD. (Goldberg v Bear, Stearns & Co., 912 F2d 1418; Recold v Monfort of Col., 893 F2d 195; Matter of Waldron [Goddess], 61 NY2d 181; Crimmins Contr. Co. v City of New York, 74 NY2d 166; Continental Group v NPS Communications, 873 F2d 613; Ballay v Legg Mason Wood Walker, 878 F2d 729; Leonard v Stuart-James Co., 742 F Supp 653.)
   OPINION OF THE COURT

Chief Judge Wachtler.

Plaintiff commenced an action to recover damages from his former employer and its former chief executive officer, claiming that they caused injury to his reputation and career when they used him as an unwitting pawn in an illegal stock trading scheme. The defendants claim the dispute should be resolved by arbitration pursuant to the rules of the National Association of Securities Dealers (NASD), to which all the parties subscribe, and which provide for arbitration of any dispute "arising out of or in connection with the business” of the employer. The trial court granted the defendants’ motion to stay the suit and compel arbitration but the Appellate Division reversed, concluding that the parties did not intend to arbitrate this type of controversy. The defendants appeal by leave of this Court and we reverse.

Defendants contend that the Appellate Division erred in holding that the agreement to arbitrate all disputes arising out of the business of the employer applies only to the employer’s lawful activities. Plaintiff, on the other hand, argues that the Appellate Division properly defined the scope of the agreement and, as an alternative ground for affirmance, urges that defendants waived their right to arbitration by participating in the litigation. He also argues, more narrowly, that his claim against defendant Boyd Jefferies is not arbitrable under the rules of the NASD because neither of these two parties is a member of the Association. These two additional points were rejected by the trial court and not reached by the Appellate Division.

Plaintiff was employed by Jefferies & Co. from 1983 to 1986. The firm is a member of the NASD, and after being hired by the firm, plaintiff applied for registration with the Association. On the uniform application (form U-4), he stated that he agreed to arbitrate "any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the organizations with which I register.” The NASD has a Code of Arbitration Procedure (NASD Code) which provides for arbitration of "any dispute, claim or controversy arising out of or in connection with the business of any member of the Association * * * between or among members and public customers, or others” (part I, § 1).

The dispute here focuses on an invoice which the firm sent to Ivan F. Boesky Corp. in March of 1985, seeking payment in the amount of $3 million for "investment, advisory and corporate finance services.” The invoice was prepared and signed by the plaintiff, a senior vice-president and manager of the firm’s corporate finance department, at the direction of Boyd Jefferies, who was then the firm’s chief executive officer.

The plaintiff left Jefferies in the fall of 1986, to take a position with another firm, Salomon Brothers. On November 14 of that year, the Securities and Exchange Commission and the United States Attorney’s office announced to the media that Ivan Boesky had pleaded guilty to illegal stock market activities and that an investigation was under way to determine who participated in the schemes. That same day plaintiff received a summons from the Securities and Exchange Commission, which was investigating Boesky’s financial dealings with Jefferies & Co., including the invoice signed by the plaintiff in March of 1985. Several days after receiving that subpoena, plaintiff left the employ of Salomon Brothers.

No criminal action was taken against plaintiff as a result of the Federal investigation. However, defendant Boyd Jefferies was charged with violating the Federal securities laws and pleaded guilty to two felony counts. On March 19, 1987, Jefferies & Co. issued a press release stating that the criminal charges against Boyd Jefferies related to a transaction in which he agreed on behalf of the firm to purchase certain stock from Boesky entities and later resell the stock to those entities. Under the agreement Boesky was obligated to reimburse the defendant firm for any loss. When the stock declined in value, the defendant Boyd Jefferies ordered that Boesky be sent a bill for $3 million, ostensively for investment services, but actually intended and used to cover the loss. This enabled the Boesky entities to make false entries on their books for which defendant Boyd Jefferies was charged with aiding and abetting. The release states that Boyd Jefferies accepts sole responsibility for the transactions.

On November 13, 1987, plaintiff commenced this action, alleging that he had been ordered to prepare the fraudulent invoice without knowledge of the true facts, that he was thereby made to appear a party to the crime, and that this caused him to suffer damage to his finances and professional reputation. Defendants moved to dismiss on the ground, among others, that the complaint failed to state a cause of action and that the suit was barred by the Statute of Limitations. They also claimed that the dispute was subject to arbitration, and asserted arbitration as an affirmative defense in their answer. The motion to dismiss was denied, defendants filed an appeal and then moved to compel arbitration. The trial court granted that motion and plaintiff appealed. On the appeals the Appellate Division agreed with the trial court that the complaint should not be dismissed, but disagreed with the trial court’s holding that the dispute was arbitrable and concluded that it was not within the scope of the arbitration agreement. Defendants have appealed, claiming that the Appellate Division’s interpretation of the arbitration agreement is inconsistent with Federal law.

The arbitration agreement at issue here is governed by the Federal Arbitration Act. The Act applies to any written agreement to arbitrate "a contract evidencing a transaction involving commerce” (9 USC § 2), which has been held to include agreements to arbitrate disputes arising out of employment in the securities market (Flanagan v Prudential-Bache Sec., 67 NY2d 500). Congress adopted the Act to insure that the courts would rigorously enforce private agreements to arbitrate (Dean Witter Reynolds v Byrd, 470 US 213, 219, 221) and it establishes an "emphatic” national policy favoring arbitration which is binding on all courts, State and Federal (Cone Mem. Hosp. v Mercury Constr. Corp., 460 US 1; Southland Corp. v Keating, 465 US 1, 10; Mitsubishi Motors v Soler Chrysler-Plymouth, 473 US 614, 624, 631). Pursuant to the Arbitration Act, "questions of arbitrability must be addressed with a healthy regard for the federal policy * * * [and] any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration” (Cone Mem. Hosp. v Mercury Constr. Corp., supra, at 24-25; see also, Flanagan v Prudential-Bache Sec., supra). As is the case with any contract, the intention of the parties is controlling, "but [under the Arbitration Act] those intentions are generously construed as to issues of arbitrability.” (Mitsubishi Motors v Soler Chrysler-Plymouth, supra, at 626.)

Here, plaintiff contends that the dispute is not arbitrable because it arose out of illegal activity and not out of the lawful business of the firm. Although the arbitration agreement broadly applies to any controversy arising out of the business of the employer, without such limitation, the Appellate Division accepted plaintiff’s interpretation, noting that "the business of Jefferies & Company, and of the individual defendant, was stocks, not fraud.” (164 AD2d, at 764.) A similar argument was rejected by this Court in Flanagan v Prudential-Bache Sec. (supra).

In Flanagan we held that a suit brought against a stock brokerage firm for making allegedly defamatory statements to customers regarding the professional conduct of former employees was arbitrable under the NASD Code. We stated (at 509): "that defendant’s business is securities, not defamation, is beside the point, for the only question is whether the dispute between plaintiffs and defendant arose out of defendant’s business. That defendant’s resident manager may have acted improperly in making the statements does not detract from the fact that the manager was acting on defendant’s business when he made them * * * and that, therefore, they arose out of defendant’s business.” In Flanagan the employer’s conduct did not violate a statute or constitute a crime. However, these additional factors do not affect the arbitrability of plaintiff’s civil complaint in the case now before us.

A court’s obligation under the Federal Arbitration Act to liberally interpret and enforce arbitration agreements is not diminished when the underlying controversy involves a violation of a Federal statute (Shearson/American Express v McMahon, 482 US 220, 226). The parties, of course, are free to exclude such controversies from their agreement to arbitrate (Mitsubishi Motors v Soler Chrysler-Plymouth, supra, at 628). But if a civil complaint presenting a statutory violation comes within the scope of a broad arbitration agreement, the court must enforce the agreement, unless Congress has clearly manifested an intention to preclude waiver of judicial remedies (Shearson/American Express v McMahon, supra, at 227; Mitsubishi Motors v Soler Chrysler-Plymouth, supra, at 627). Consistent with the Federal policy favoring arbitration, the Supreme Court has enforced broad agreements to arbitrate where the underlying claims involved violations of the Sherman Antitrust Act (Mitsubishi Motors v Soler Chrysler-Plymouth, supra), the Racketeer Influenced and Corrupt Organizations Act and the Securities Exchange Act of 1934, "even though such conduct may also give rise to claims of criminal liability.” (Shearson/American Express v McMahon, supra, at 240.)

In this case there is no contention that Congress has foreclosed arbitration of this type of dispute, and the NASD Code, to which the parties subscribed, broadly provides for arbitration of any dispute arising out of the employer’s business which, on its face, is broad enough to include disputes arising from illegal or criminal acts. Nevertheless, plaintiff contends that his complaint in this case falls outside the scope of the arbitration agreement because the particular "criminal conduct engaged in by Boyd Jefferies on behalf of Jefferies & Co., was outside any conceivable definition of Jefferies & Co.’s 'business’.”

Concededly, not every wrong committed at the workplace can be said to arise out of the employer’s business, and therefore be subject to arbitration if the injured party brings a civil suit (see, e.g., Pearce v E. F. Hutton Group, 828 F2d 826, 832; Morgan v Smith Barney, Harris Upham & Co., 729 F2d 1163 [telling co-workers plaintiff stole from desks]; Fleck v E. F. Hutton Group, 891 F2d 1047 [informing brokerage customers plaintiff a disbarred lawyer]). Under prevailing Federal law the wrongful conduct must involve "significant aspects” of the employment or the employer’s business activities (see, e.g., Morgan v Smith Barney, Harris Upham & Co., supra [claim that employer damaged reputation by telling customers plaintiff’s broker’s license suspended]; Aspero v Shearson/American Express, 768 F2d 106 [claim that employer damaged plaintiff’s reputation by stating he was fired for violating trading rules]; Fleck v E. F. Hutton Group, supra; Pearce v E. F. Hutton Group, supra).

Plaintiff’s contention is that this standard is not met here because Boyd Jefferies’ criminal dealings with Boesky are so far removed from the normal course of the firm’s business, and what plaintiff was hired to do, that they are analogous to selling drugs to a client and using the plaintiff to facilitate the transaction or conceal the illegality without his knowledge of its true character. But in this case we are dealing with a complaint involving a violation of the securities laws, by a firm dealing in securities, which allegedly caused injury to an innocent employee of the firm who was required to participate in the transaction during the course of his employment. To hold that such a dispute does not arise out of the firm’s business is unrealistic and inconsistent with the Federal policy requiring liberal, indeed generous, interpretation of arbitration agreements (cf., Pearce v E. F. Hutton Group, supra [claim that employer’s criminal acts damaged employee’s reputation because of implication in public reports that he participated presents arbitrable controversy]). Such a narrow approach to arbitrability could only diminish the value of arbitration agreements in highly regulated industries where civil wrongs caused by improper business practices are often criminal offenses as well.

Plaintiff raises two additional points which were rejected by the trial court but were not reached by the Appellate Division in light of its determination in the plaintiff’s favor on the primary issue.

Plaintiff contends that defendants waived their right to arbitration because they actively participated in the litigation. He refers specifically to their motion to dismiss the complaint and the appeal from the order denying the motion.

There is a threshold question as to whether Federal or State law applies. Plaintiff urges that the waiver issue is governed by State law because the Federal Arbitration Act creates only substantive rights and this is a procedural question (compare, Matter of Vigo S. S. Corp. [Marship Corp.], 26 NY2d 157 [consolidation of arbitration proceedings governed by State law], with Matter of Rederi [Dow Chem. Co.] 25 NY2d 576, 581 [claim that arbitration is barred by Statute of Limitations governed by Federal law]). He then relies on several recent decisions in which this Court found a waiver under other circumstances, but ignores an earlier case directly on point in which the Court held that a motion to dismiss does not amount to a waiver (Matter of Haupt v Rose, 265 NY 108). In any event, it appears that Federal law is controlling. As the Supreme Court noted in Cone Mem. Hosp. v Mercury Constr. Corp., (supra, at 24-25): "[t]he Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” (See also, Rush v Oppenheimer & Co., 779 F2d 885; Brener v Becker Paribas, 628 F Supp 442.)

The United States Supreme Court has never considered under what circumstances a party may be be said to have waived the right to have an arbitration agreement enforced pursuant to the Federal Arbitration Act. The Federal courts that have considered the point seem to be in agreement that substantial resort to the judicial process, such as moving for summary judgment after extensive discovery, reflects an intention to relinquish the right to arbitrate (see, e.g., Peterson v Shearson/American Express, 849 F2d 464; National Found, for Cancer Research v Edwards & Sons, 821 F2d 772), but that making a motion to dismiss the complaint before moving to compel arbitration should not be considered a waiver unless the opposing party demonstrates prejudice (see, e.g., Rush v Oppenheimer & Co., supra; Sweater Bee by Banff v Manhattan Indus., 754 F2d 457; cf., Allied Bldg. Inspectors v Office of Labor Relations, 45 NY2d 735).

Here, defendants asserted their right to arbitrate in their answer and in the motion to dismiss the complaint. If that motion had succeeded, the controversy could have been resolved with no need to enforce the right to arbitrate. Defendants’ motion to compel arbitration was made a few weeks after the motion to dismiss was denied. Their appeal from the order denying the motion to dismiss paralleled plaintiff’s appeal from the order compelling arbitration. Plaintiff has not demonstrated that he was prejudiced by defendants’ motion to dismiss, and asserts only the type of generalized complaints that may be assumed whenever any type of judicial relief is sought before the defendant, named in the suit, moves to have the dispute heard by arbitrators. Bearing in mind that a waiver should not be lightly inferred in light of the liberal Federal policy favoring arbitration (Mitsubishi Motors v Soler Chrysler-Plymouth, supra, at 24-25; Rush v Oppenheimer & Co., supra, at 887), we have concluded, as did the trial court, that defendants timely asserted their right to arbitrate and that their preliminary and minimal resort to court for relief should not be viewed as an abandonment of their right to enforce the arbitration agreement.

Plaintiffs final point is that he should not be required to submit his claim against Boyd Jefferies to arbitration because neither of them is a member of the NASD and thus there is no agreement to arbitrate between them.

The argument requires consideration of two sections of the NASD Code. Section 1 of part I provides in relevant part: "for the arbitration of any dispute, claim or controversy arising out of or in connection with the business of any member of the Association * * * (1) between or among members; (2) between or among members and public customers, or others.” On its face this section does not appear to cover disputes between persons associated with members. However, the Code further provides in section 8 of part II: "Any dispute, claim or controversy eligible for submission under Part 1 of this Code between or among members and/or associated persons, and/or certain others, arising in connection with the business of such member(s) or in connection with the activities of such associated person(s), shall be arbitrated under this Code, at the instance of * * * (3) a person associated with a member against a person associated with a member.”

The trial court held that plaintiffs suit against Boyd Jefferies was arbitrable under this latter section, but plaintiff contends this was error. He states: "The only disputes that 'shall be arbitrated,’ even under Section 8, are those 'eligible for submission under Part I of the Code,’ and those do not include disputes between associates of members.”

In our view, a distinction must be drawn between a dispute eligible for arbitration under the section and the parties bound to arbitrate the dispute. In other words, section 1 of part I contains two components. First, it defines the substantive type of controversy which is within the scope of arbitration. Second, it defines the class of persons who may seek or be required to arbitrate such a controversy. Section 8 extends this class to include persons associated with a member who have an eligible dispute with other such associates. Plaintiffs suit against Boyd Jefferies is subject to arbitration under this latter section. Although neither of these parties is a member of the NASD, each is a person associated with a member, their former employer Jefferies & Co., and the substantive dispute is the type arbitrable under part I since it arises out of or in connection with the business of the employer.

Accordingly, the order of the Appellate Division should be reversed, with costs, and the order of the Supreme Court reinstated.

Judges Simons, Kaye, Alexander, Titone, Hancock, Jr., and Bellacosa concur.

Order reversed, etc.