Sunday, May 11, 2008

Interior Painting or General Contracting? -- Question of Fact Found on Insurer's CGL Policy Rescission Defense

Kiss Construction NY, Inc. v. Rutgers Cas. Ins. Co.
(Sup.Ct., NY Co., decided 4/16/2008)

There are plenty of reported New York cases addressing the legal consequences of an insured's policy application misrepresentations on first-party property coverage claims. Ones involving third-party claims and coverages are much rarer.

In May 2002, Kiss Construction applied for a new CGL policy covering its business. Kiss Construction’s application for coverage stated that the nature of its business was “Painting-100% - 100% Interior”. Rutgers Casualty issued the new CGL policy for the inception period of May 30, 2002-2003. The Declarations page of the inception policy identified Kiss Construction’s business solely as a “painting contactor”.

Prior to the policy’s first renewal, Rutgers’ underwriting department required Kiss Construction to submit a Policyholder’s Report, which asked for certain information regarding the number of employees, annual payroll, and gross annual receipts in order to determine the premium’s basis. Rutgers did not require Kiss Construction to complete and submit any renewal applications. The policy was renewed for 2003-2004 and again for 2004-2005.

On August 9, 2004, during the second renewal period, Kiss Construction entered into a contract to build a three-family home in Bronx, New York. On November 11, 2004, a passerby allegedly was injured in a slip and fall on the sidewalk/roadway bordering the project. In early 2005, that person commenced a personal injury action against Kiss Construction and the property’s owner.

Kiss Construction notified Rutgers of the lawsuit promptly and requested defense and indemnification coverage. By letter dated March 2, 2005, Rutgers reserved its rights and assigned counsel. The ROR letter stated that Rutgers was reserving its right to disclaim coverage based on a possible violation of the following policy language:
[b]y accepting this policy, you agree:

a. The statements in the Declarations are accurate and complete;
b. Those statements are based upon representations you made to us; and
c. We have issued this policy in reliance upon your representations[.]
Two weeks later, Rutgers disclaimed coverage based on what Rutgers asserted was the insured’s policy application misrepresentation regarding the nature of its business. The D&D letter stated that:

[i]t was in reliance of this statement that a Commercial Insurance Policy was issued to you. Had we known that your company was actually engaged in the building of homes, this policy would never have been issued. Therefore this constitutes a material misrepresentation and as such we are at this time disclaiming coverage.
The disclaimer letter also advised Kiss Construction that Rutgers would no long be affording defense and indemnification coverage in relation to the underlying personal injury action. [Query: I thought it was the "rule" in New York that retained defense counsel once appointed cannot be withdrawn without a judicial declaration of non-coverage.]

Kiss Construction then commenced this action, seeking a declaratory judgment against Rutgers. In its answer, Rutgers asserted several affirmative defenses, including that “[a]s a result of Plaintiffs material misrepresentation the Rutgers’ policy is void ab initio”. Rutgers eventually made a motion to dismiss the complaint on this ground.

In denying Rutger’s initial motion to dismiss, the court found that Rutgers: (1) had not established that the insured’s application representation – that it only did interior painting – was false at the time of the policy’s application in May 2002; and (2) had failed to meet its burden of establishing the materiality of the alleged misrepresentation by “clear and substantially uncontradicted evidence”, as it had failed to proffer evidence sufficient to show that its underwriting guidelines would have prohibited it from issuing the policy to Kiss Construction, or that it previously had denied coverage to other businesses under similar circumstances.

Following the completion of discovery, both Kiss Construction and Rutgers moved for summary judgment. In again denying Rutgers' motion, Justice Herman Cahn held that although Rutgers

has proffered adequate documentation to establish that contractors engaged in demolition, foundation work, roofing work, or general contracting were ineligible for coverage under its underwriting guidelines, it has offered only unauthenticated emails and correspondence as proof that it refused to underwrite coverage for such activities in the past; these unauthenticated submissions are insufficient to prove Rutgers’s [sic] underwriting practices with respect to similar applicants under similar circumstances. Moreover, although Rutgers has produced evidence sufficient to establish that Kiss Construction was engaged, as a general contractor, in the construction of a multi-family dwelling on the date of the occurrence, the parties have presented conflicting accounts as to when Kiss Construction first became involved in home construction or general contracting activities, and thus, whether it had been involved in such activities at the time it first applied for the commercial general liability policy at issue.
The court granted partial summary judgment to Kiss Construction and ordered Rutgers to provide a defense in the underlying action until a judicial determination was made on Rutgers' rescission defense. The court rejected plaintiff's argument, however, that Rutgers' failure to rebate the policy premium estopped or precluded Rutgers from seeking to rescind the policy in this litigation, holding:

Where, as here, Rutgers must await a judicial determination in order to rescind the policy retroactively, it is, at best, arguable, whether Rutgers’s [sic] failure to tender the return of Kiss Construction’s premium, or its subsequent issuance of a letter of non-renewal, should be deemed an estoppel on its right to seek such rescission. Nevertheless, in the event that Rutgers does establish a right to rescind, and the policy is declared void ab initio, Kiss Construction will then be entitled to the return of all premiums and other payments made to Rutgers.

In the end, after two rounds of dispositive motions, Rutgers was found obligated to defend Kiss Construction while its rescission defense proceeded to trial.


Heidi said...

What should Rutgers have done?
If Rutgers is successful in its rescission defense trial, will there be a judgment rendered against Kiss for defense costs in the underlying action? It is possible that the underlying action could settle before the trial although the plaintiff's attorney in underlying action probably will not allow that to happen.
I realize at the time the policy was written, Kiss was doing interior painting so there is no real material misrepresentation on the policy. But was there any language in the policy that required Kiss to notify its carrier when it changed crafts?

Roy A. Mura said...

Take a look at Footnote #5, Heidi, in which the court stated: "Should Rutgers prevail in this action, its obligation to defend will be vitiated, and it
may be entitled to the return of all legal fees and other moneys expended under the rescinded policy[.]"

It's unclear whether there was material misrep at inception. I think the decision highlights conflicting testimony and evidence on when Kiss Construction began doing construction work, hence the court's finding of a question of fact requiring a trial of that issue. I doubt there was any stronger language in the policy other than the quoted language from Section IV(6) (see pages 3-4). Most CGL do NOT have any language requiring the insureds to notify the insurer of changes in craft. Some insurers use renewal applications that ask for this information, but most do not, in my experience.