POINT O'WOODS ASSOCIATION v. THOSE UNDERWRITERS AT LLOYD'S LONDON New York Law Journal March 4, 1999 SUPREME COURT ----------------------------------------------------------------------------- IA PART 47 Justice Omansky POINT O'WOODS ASSOCIATION v. THOSE UNDERWRITERS AT LLOYD'S LONDON subscribing to Certificate No. 6771-- QDS:22700828 -- Motion sequence nos. 008 and 009 have been consolidated for disposition in this action for declaratory relief and breach of an excess insurance policy. Defendant Those Underwriters at Lloyd's London, subscribing to Certificate No. 6771 ("Lloyd's"), cross-moves1 in motion sequence no. 008 for summary judgment against plaintiff Point of Woods Association, or, in the alternative, cross-moves for summary judgment against the broker, co- defendant Hall Agency of Bayshore d/b/a Terry Gibson & Hall ("TG&H"). In motion sequence no. 008, plaintiff cross-moves, pursuant to CPLR 3212(e), for partial summary judgment against defendant Lloyd's on the issue of liability upon its claims. In the event that this Court should grant Lloyd's cross motion for summary judgment against plaintiff, plaintiff cross-moves, in motion sequence no. 008 for partial summary judgment against defendant TG&H on the negligence and breach of contract claims against it. Defendant TG&H moves in motion sequence no. 009 for a declaration that Lloyd's must demonstrate a wilful or fraudulent misrepresentation to void coverage under the Lloyd's policy.2 Facts The facts of this action have been more fully outlined in this Court's prior order dated September 17, 1996, and shall not be repeated here ("September 1996 order"). Briefly, plaintiff owned an ocean-front hotel which was built on pilings, and covered 29,000 square feet. Plaintiff's members commonly referred to the structure as the "Clubhouse." Plaintiff alleges that it purchased $1,250,000 worth of excess flood insurance through Lloyd's, which was in excess of a $2,250,000 primary insurance policy with American Bankers Insurance Company of Florida ("American Bankers"). Plaintiff first considered obtaining excess flood insurance in February 1993 when Robert Ferguson, a representative from TG&H, contacted John P. Bent, plaintiff's treasurer, to inform him about the availability of appropriate excess coverage. On February 10, 1993, Lisa Eastwood, a customer representative for TG&H, initiated an application on behalf of plaintiff to Adirondack Excess Inc. ("Adirondack"), the entity responsible for marketing Lloyd's excess flood program. Adirondack issued a premium quote, and on April 26, 1993, Ms. Eastwood forwarded the copy of the application along with a letter to Steve Caroll, plaintiff's controller. The application was eventually reviewed by Mr. Bent. Question number 3 of the application asked if any prior claims were filed within the last three years and the "no" box was checked off. Mr. Bent, believing the answer to be incorrect, telephoned TG&H to remind Mr. Ferguson that there were prior losses suffered by plaintiff. In response to Mr. Bent's concerns, Mr. Ferguson allegedly replied, "Don't worry about it. Sign the application, send it back and we will take care of completing that information." Shortly after this conversation, Mr. Bent avers that he crossed out the box marked "no" in response to question number 3 and placed a check in the box indicting the answer "yes," and added the words "Club House." Mr. Bent maintains that he left the spaces below blank in reliance upon Mr. Ferguson's promise to complete the information. Mr. Bent admits that he then signed and dated the application, returning it to Mr. Ferguson. After receiving the signed application for insurance, TG&H's representative, Ms. Eastwood, consulted her computer to check the loss history. The computer indicated that plaintiff had suffered a flood loss on October 31, 1991, for which it received $98,118.00 in compensation. Ms. Eastwood noted the loss and returned the application directly to Adirondack for processing. Plaintiff's excess policy with Lloyd's took effect on May 10, 1993, and was effective to May 10, 1994 when it was renewed. No other prior loss was listed on the original application. Mr. Bent states that he never reviewed the application after Ms. Eastwood made the correction, and was unaware that the carrier received incomplete information. However, Ms. Eastwood now states that she misread the computer screen and that there were actually three prior losses on the Clubhouse. Along with the October 1991 loss, plaintiff suffered a second loss on December 11, 1992, which resulted in a claim for $103,579.00. These first two storms destroyed the dune and much of the beach protecting plaintiff's Clubhouse property. The third loss occurred on March 13, 1993, and cost plaintiff's carrier $42,899.00. Eventually, the damaged Clubhouse was swept away by flooding from winter storms which occurred between December 21, 1993 and March 30, 1994, causing damages in excess of $3,000,000.00. Notices of claims were sent to plaintiff's primary carrier, American Bankers, which paid its policy limits. At some point, plaintiff notified its excess carrier, Lloyd's, of the loss. Lloyd's, in turn, requested that its American agent, WNC Insurance Services ("WNC"), investigate the loss. During the investigation, WNC learned about the prior losses from America Bankers. Sometime between January 26, 1994 and February 23, 1994, WNC notified Lloyd's that the risk was unacceptable and that the carrier should void the policy. Further investigation ensued. In a letter dated September 14, 1994, Lloyd's denied coverage on the ground of misrepresentation, stating that plaintiff's application for excess flood insurance listed only one prior loss and omitted the fact that plaintiff has actually sustained three prior flood losses. The present record indicated that plaintiff's Clubhouse had a long history of water problems. Robert Kingsbury, plaintiff's president from June 1992 until the present, testified that an Ad Hoc Club Committee was formed on May 30, 1993, following the disastrous storms of December 1992 and March 1993. Mr. Brent stated that he was aware that there was a potential that the ocean could wash away the Clubhouse and he acknowledged that high tide regularly brought water five or ten feet under the Clubhouse. Plaintiff also admits that it hired an outside engineering firm, CMC Design Group, to study the possibility of physically moving the Clubhouse to a new location further away from the shore line. In a report dated September 2, 1993, CMC Design Group concluded that the recent storms had placed the Clubhouse "at very substantial risk." In particular, the engineering report noted that "the exiting single story wood frame kitchen area is substantially compromised." The question of plaintiff's intent when it took out excess insurance is further complicated by the fact that plaintiff made an application on September 23, 1993 to the Federal Emergency Management Agency ("FEMA"), pursuant to a statute known as the "Upton Jones Act" which provided funding for relocation of flood-risk building. According to plaintiff, it wished to move the Clubhouse and cottages away from the shore, with the express purpose of preventing its destruction. James McCain, a Clubhouse shareholder and a member of plaintiff's Beachfront and Planning Committee, wrote James Shortly, an FEMA claims Director, in September 1993, to outline the costs and to transmit the work estimates he received to relocate the property. Mr. McCain also informed Mr. Shortly that a portion of the plaintiff's property was "red-lined" by the 1982 Coastal Barrier Resources Act, amended 1990. The initial application was rejected by FEMA for want of a condemnation letter from the local authority, the Township of Brookhaven. Mr. McCain stated that he first contacted the Township of Brookhaven regarding the condemnation in April or May 1993. Discussion Materiality In the September 1996 order, this Court noted that in New York an insurance policy may be voided if the insured made a material misrepresentation (Insurance Law §3105[b]). This Court also held that a material misrepresentation is any statement which " 'substantially thwarts the purpose for which the information is demanded and induces action which the insurance company might otherwise not have taken' " (September 1996 order, at 9, quoting Aguilar v. United States Life Ins. Co. in the City of New York, 162 AD2d 209, 210-211 [emphasis in original], quoting Geer v. Union Mut. Life Ins. Co., 273 NY 261, 271, rearg denied 274 NY 569). Hence, the "net effect of the misrepresentation must be that the carrier was deprived of 'freedom of choice in determining whether to accept or reject the risk' " (September 1996 order, at 9, quoting Leamy v. Berkshire Life Ins. Co., 39 NY2d 271, 274). To meet its burden of establishing the materiality of the misrepresentation, Lloyd's is required "to adduce proof concerning its underwriting practices with respect to applicants with similar conditions, establishing that it would have rejected the application if the information had been truthful" (Cutrone v. American General Life Ins. Co. of New York, 199 AD2d 1032, 1033 [citations omitted]). In the September 1996 order, this Court found that the Lloyd's Excess Flood Insurance Rates & Underwriting Guidelines ("Underwriter's Guidelines") provided that properties that have experienced a loss of more than $150,000 due to floods within the past three years would not be accepted for coverage. Plaintiff and TG&H assert that the Underwriter's Guidelines are not dispositive since they became effective on June 1, 1994, subsequent to plaintiff's purchase of the policy and the destruction of the Clubhouse. In further support of its assertion that it would not have written this policy had it known of the actual loss history, Lloyd's presented the testimony of Ofelia Chuate of WNC. Ms. Chuate stated on July 19, 1995 that she has never written a policy for applicants which suffered three losses within five years. Ms. Chuate also stated that sometimes the insured's broker would plead to have an application reconsidered and WNC would review the application to determine whether the risk was likely to reoccur "[b]y obtaining the details of the prior losses from the broker (Chuate, 7/19/95 EBT, at 143, lines 18-19). She also testified that she would not submit an application to Lloyd's for consideration if the details of the prior losses indicted that the water was under or near the building at high tides and that there was no bulwark or other barrier to the water (id., at 144, lines 20-25, to 145, line 1). Plaintiff and TG&H have not presented any evidence which refutes Ms. Chuate's testimony or which raises a question as to whether Lloyd's ever accepted risks similar to the one in this action. Therefore, the Court finds no reason to modify its prior holding that Lloyd's "has shown that the issue of prior loss is one of a number of factors it takes into account when determining whether to accept an application for excess flood insurance (September 1996 order, at 9, citing Alaz Sportswear v. Public Serv. Mut. Ins. Co., 195 AD2d 357, 358 and Shapiro v. Allstate Life Ins. Co. of New York, 202 AD2d 659, 660; Insurance Law §3105[c]). Furthermore, there is no dispute that the history of prior losses was clearly asked in the Lloyd's insurance application and hence was relevant to the carrier's analysis (Aguilar v. United States Life Ins. Co. in the City of New York, supra, 162 AD2d, at 210). Therefore, Lloyd's has established that the issue of prior loss was material to issuance of the excess insurance policy (id.). Intentional Misrepresentation and the Voidance Provision This Court also noted in the September 1996 order that the question of whether the applicant understood the significance of the alleged misrepresentation is irrelevant to this issue of materiality (Leamy v. Berkshire Life Ins. Co., supra, 39 NY2d, at 274). The Court further observed that even an innocently-made factual misrepresentation could serve to void an insurance contract if the carrier would have refused to issue the policy if the true circumstances were known (Tennenbaum v. Insurance Corp. of Ireland, Ltd., 179 AD2d 589, 592). However, when issuing the findings in the September 1996 order, this Court was stating a general principle of State law and did not have before it the specific question of whether Condition 10 in the Lloyd's policy limited the carrier's right, under section 3105(c) of the Insurance Law, to cancel plaintiff's excess policy. Plaintiff and TG&H contend that Condition 10 only permits Lloyd's to cancel the policy only in instances of willful or fraudulent misrepresentation. Condition 10 of Lloyd's policy states as follows: "Voidance." In the event you or your agent have (i) sworn falsely or (ii) fraudulently or willfully concealed or misrepresented any material fact (including facts relevant to the rating of this policy) in the application of coverage, this entire policy shall be void as of the inception date of this policy. As a general principle, "stipulations in a contract of insurance in conflict with, or repugnant to, statutory provisions which are applicable to the contract, are invalid, since contracts cannot change existing statutory laws" (2 Couch on Insurance 3d §19:2, at 19-5). An exception to this rule is made, however, when "the terms of the contract where the provisions of the policy which conflicts with the statute is more favorable to the insured" (id., at 19-8). "In such cases the policy provision prevails and is enforced" (id.). New York follows both the general rule and the exception with respect to the relationship between policies and governing statutes. This State does not limit a carrier from granting to the insurer the privilege of being more favorable towards its policy holder, and a carrier may contract for more extensive protection for the policy holder on any condition not prohibited by statute or public policy (Davies v. Nationwide Mut. Ins. Co., 99 Misc. 2d 899, 901; see, 2 Couch On Insurance 3d, §19:2). For example, New York requires a carrier to prove that an insured's misrepresentations were wilful and intentional in instances when the policy provides that it is rendered void if the "insured has 'willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof' " or where the insured has " 'willfully and fraudulently placed in the proofs of loss a statement of property lost which he did not possess, or has placed a false and fraudulent value upon the articles which he did own' " (Chang v. General Acc. Ins. Co. of America, 193 AD2d 521, quoting Saks & Co. v. Continental Ins. Co., 23 NY2d 161, 165 [remaining citation omitted]). In contrast, a contract provision which permits policy cancellations for either "fraud or a material misrepresentation in obtaining the policies or in the presentation of a claim thereunder" gives the carrier the right to cancel a policy for innocent mistakes if " 'knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract' " (Tennenbaum v. Insurance Corp. of Ireland, Ltd., supra, 179 AD2d, at 591, 592, quoting Insurance Law §3105[b] [emphasis supplied]). Here, Condition 10, unlike the policy provision in Tennenbaum, does not list the term "misrepresentation" as a separate category from fraud. Hence, Condition 10 cannot be read to permit Lloyd's to void the policy for ordinary misrepresentations, which include innocent, inadvertent, or negligent mistakes. Rather, Condition 10 provides that Lloyd's may void the policy if either plaintiff or its broker, TG&H, "fraudulently or willfully concealed or misrepresented any material fact." In this instance, innocent misrepresentations are not implicated, since the adverbs "fraudulently" and "willfully" qualify both the verbs "concealed" and "misrepresented." Condition 10 clarifies that the definition of "material" includes "facts relevant to the rating of this policy." Furthermore, out-of-state Courts interpreting provisions which are similarly- worded to Condition 10 in the Lloyd's policy have found that once a carrier "sets its own contractual standard for assessing misrepresentations and concealment, it could not thereafter rely on the statute which imposed more stringent requirements on insureds" (Strickland Imports, Inc. v. Underwriters at Lloyds, London, 668 So.2d 251 [FL], citing State Farm Fire & Cas. Co. v. Oliver, 854 F2d 416, reh denied 861 F2d 1281). Therefore, plaintiff's cross motion in motion sequence no. 008 and TG&H's motion in motion sequence no. 009, are granted to the extent that Lloyd's may only void the policy if either plaintiff or TG&H fraudulently or willfully concealed or misrepresented the prior losses in their insurance application (cf., Yorkville of Broadway Inc. v. Allianz Ins. Co., 160 AD2d 194 [concealment/fraud provision only applicable to losses caused by fire, lightning]). As for assigning liability, this Court held in the prior decision that "the question of whether Eastwood's omission was an honest mistake rather than an act of deliberate concealment is an issue of credibility which is not to be determined in a motion of summary judgment" (September 1996 order, at 18, citing S.J. Capelin Assocs., Inc. v. Globe Mfg. Corp., 34 NY2d 338). The present submissions, including the various depositions, do not conclusively determine whether plaintiff or its broker wilfully or fraudulently concealed the three prior losses from the carrier. Hence, Lloyd's cross motion for summary judgment in motion sequence no. 008 is denied. Waiver In the September 1996 order, this Court rejected TG&H's argument that Lloyd's is barred by the doctrine of waiver and estoppel from raising the defense of misrepresentation. The Court found that the broker has not presented any proof or stated any persuasive argument that the insurer voluntarily and intentionally relinquished a known right (September 1996 order, at 10). This Court also held that "[t]he mere fact that Lloyd's has not yet returned any premiums is not dispositive of whether the underlying contract was void ab initio since the validity of the policy at issue has yet to be decided by this Court" (id., citing Albert J. Schiff Assocs., Inc. v. Flack, 51 NY2d 692, 697). The parties have had an opportunity to engage in further discovery and have again raised questions concerning Lloyd's ability to enforce Condition 10 in the policy. In support of their waiver and estoppel claims, plaintiff and TG&H present evidence that plaintiff's coverage with Lloyd's was effective from May 19, 1993 to May 19, 1994, and that the policy was renewed by the carrier in May 1994. However, despite renewal, Lloyd's waited to deny coverage until September 1994. Although plaintiff and TG&H have not made either a motion to renew or to reargue their prior applications, they are correct that in this State a carrier waives the right to cancel or rescind a "contract of insurance when it knowingly accepted premium payments for several months following discovery of the alleged misrepresentations upon which it claimed to have relied when it issued the policies" (Continental Ins. Co. v. Helmsley Enters., Inc., 211 AD2d 589). However, as this Court has ruled previously, waiver is limited to those circumstances where the insurer's conduct clearly demonstrates an intent to abandon its defenses (September 1996 order, at 10, citing Albert J. Schiff Assocs., Inc. v. Flack, supra, 51 NY2d, at 697). Moreover, waiver should not be lightly presumed (Gilbert Frank Corp. v. Federal Ins. Co., 70 NY2d 966, 968). Here, the record indicates that Lloyd's waited to deny coverage until it had an opportunity to investigate WNC's assertion that plaintiff or its agent misrepresented the prior loss history on the application. The fact that a carrier proceeded with its investigation cannot be construed as a waiver of rights under the policy (Standard Acc. Ins. Co. v. Cochardo, 1 Misc 2d 1029, 1031, affd 2 AD2d 631, citing Schaller v. Aetna Cas. & Sur. Co., 280 App Div 988, affd 306 NY 725; see also, Howard Fuel v. Lloyd's Underwriters, 588 F Supp 1103; cf., Anthony Marino Const. Corp. v. INA Underwriters Ins. Co., 69 NY2d 798, 800 [conducting an examination under oath does not waive the policy's proof of loss condition]). More importantly, the First Department has held that "as a matter of public policy, an insured should not be permitted to recover as a result of fraudulent conduct," especially when "said conduct may also constitute a crime" (Astoria Quality Drugs, Inc. v. United Pacific Ins. Co. of New York, 163 AD2d 82, 83, citing Penal Law art 176 [fraud] and art 210 [perjury]). Therefore, given the serious allegations presented in this action, this Court finds no basis to modify its prior ruling in the September 1996 order. Fortuitous Event Lloyd's argues in motion sequence no. 008 that plaintiff's claim is also barred because the destruction of the Clubhouse was not fortuitous. According to Lloyd's, plaintiff's knowledge and effort to move the Clubhouse indicated that plaintiff did not believe any damage to the property would be fortuitous. A fortuitous event, in New York, is " 'any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party' " (David Danzeisen Realty Corp. v. Continental Ins. Co., 170 AD2d 432, quoting Insurance Law §1101[a][2]). Since Lloyd's was asked to insure the property in its shore-front location and not in a position further away, the Court must consider whether the type of injury actually suffered was a fortuitous event. Despite the fact that plaintiff's members discussed physically moving the Clubhouse, there is no evidence in the record that plaintiff could have prevented the action of the wind or water on the former Clubhouse in its sea- side location. Lloyd's has failed to present any expert testimony which shows that the loss was inevitable or inherent in the nature of the location of the former Clubhouse (cf., Vasile v. Hartford Acc. & Indem. Co., 213 AD2d 541). Therefore, Lloyd's has failed to sustain its assertion and that branch of defendant's cross motion in motion sequence no. 008 is denied. However, any claim that plaintiff was aware, or had scientific evidence, of the precarious nature of a sea-side location prior to entering into the insurance policy is still relevant since it goes to the question of fraudulent intent. Negligent Misrepresentation In the September 1996 order, this Court denied Lloyd's application to recover on its cross claim for negligent misrepresentation against plaintiff's broker TG&H, on the ground that Lloyd's failed to establish "actual privity of contract" or "a relationship so close as to approach that of privity" with its codefendant (September 1996 order, at 13-14, citing Ossining Union Free School Dist. v. Anderson La Rocca Anderson, 73 NY2d 417, 424). As the Court held previously, the relationship between a broker and the carrier is clearly defined in New York by statute. In New York, insurance brokers or agents have a statutory duty to their respective principals (Insurance Law §2121 [a] and [b]). Insurance brokers, such as TG&H, act for the insured plaintiff and not for the carrier (September 1996 order, at 11, citing Drysdale v. Meritplan Ins. Co., 94 AD2d 970). Hence, based on the present record, TG&H is not an agent for the carrier and there is no privity between Lloyd's and plaintiff's broker. This Court also held that the "Near Privity Rule" was not applicable to this situation, since Lloyd's failed to demonstrate that it had " 'multiple, direct and substantive communications and personal meetings' " with TG&H during the entire course of the insuring relationship (September 1996 order, at 15, quoting Security Pacific Business Credit, Inc. v. Peat Marwick Main & Co., 79 NY2d 695, 705, rearg denied 80 NY2d 918). Lloyd's now argues that this Court should apply the standards set out recently by the Court of Appeals in Kimmell v. Schaefer (89 NY2d 257, 264). In Kimmell, the Court of Appeals held that in order to impose tort liability where there is an absence of obligations arising from the speaker's professional status, the claimant must show "some identifiable source of a special duty of care" and a "justifiable reliance on such speech" (id.). Generally, the question of whether an inured party's reliance on such special relationship gives rise to an exceptional duty of care raises an issue of fact (id.). "In determining whether justifiable reliance exists in a practical case, a fact finder should consider whether the person making the representation held or appeared to hold unique or special expertise; whether a special relationship of trust or confidence existed between the parties; and whether the speaker was aware of the use to which the information would be put and supplied it for that purpose" (id.). Although TG&H understood the use to which the information would have been put, Lloyd has failed to show the remaining elements of the test under Kimmell. In particular, the present record does not indicate that TG&H did not have a special or unique expertise in the area of flooding. There is also no proof that a confidential relationship existed between Lloyd's and TG&H. Hence, Lloyd's has failed to sustain its claim that TG&H owed it a special duty of care. Constructive Fraud and Remaining Claims As for Lloyd's claim of constructive fraud, the First Department has held that "[c]onstructive, or legal, fraud is an act done or omitted which amounts to positive fraud, or is construed by the court because of its detrimental effect upon public interests and public or private confidence. * * * [C]onstructive fraud arises from a rule of public policy, or the confidential or fiduciary relationship sustained by one of the parties affected by the fraud toward the other" (Merrill Lynch, Pierce Fenner & Smith, Inc. v. Chipetine, 221 AD2d 284, 285-286 quoting 60 NY Jur 2d, Fraud and Deceit, §2 [remaining citation omitted]). Although insurance fraud is a crime and is clearly against public policy, the wording of Condition 10 requires Lloyd's to prove that any misrepresentation or omission was willful (Chang v. General Acc. Ins. Co. of America, supra, 193 AD2d, at 521; cf., Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Chipetine, supra, at 286 [client's concealment of mistaken transfer of funds into his account by stock brokerage firm constitutes constructive fraud]). Plaintiff's cross motion in motion sequence no. 008 for summary judgment on its negligence and breach of contract claims against its broker, TG&H, is held in abeyance pending a determination of the validity of the underlying excess insurance policy. Accordingly, it is OFDERED that Lloyd's cross motion, in motion sequence no. 008, for summary judgment against plaintiff and TG&H is denied in its entirety for the reasons stated herein; and it is further OPDERED that plaintiff's cross motion, in motion sequence no. 008, and TG&H's motion, in motion sequence no. 009, for partial summary judgment and declaratory relief against Lloyd's are granted to the extent that Lloyd's must demonstrate willful or fraudulent misrepresentation to void coverage under the policy; and it is further ORDERED and ADJUDGED that Condition 10 of plaintiff's excess insurance policy, requires that Lloyd's demonstrate that either plaintiff or its broker, TG&H, fraudulently or willfully, concealed or misrepresented the prior losses in their insurance application; and it is further ORDERED that the remainder of plaintiff's cross motion, in motion sequence no. 008, for partial summary judgment against defendant TG&H on the negligence and breach of contract claims, is held in abeyance pending a determination of the validity of Lloyd's excess policy; and it is further ORDERED that the action shall continue as to all remaining claims; and it is further ORDERED that the Clerk is to enter judgment accordingly. This constitutes the decision and order of the court. ---------------------------------- Notes (1) All the applications in motion sequence no. 008 have been designated cross motions by the parties. (2) The remaining branches of motion sequence no. 009 and the related applications in motion sequence no. 010 concerning discovery and the Note of Issue have been settled by stipulations, as noted in this Court's prior orders dated October 23 and 31, 1998.