Collateral Estoppel Effect Not Given to Virginia Policy Rescission

NO-FAULT – POLICY RESCISSION – COLLATERAL ESTOPPEL – FOUNDED BELIEF OF NON-ACCIDENT
Mid Atl. Med., P.C. a/a/o Reginald Smalls v. Victoria Select Ins. Co.
(App. Term, 2nd Dept., decided 8/19/2008)

Plaintiff medical provider moved for summary judgment, and Victoria Select Insurance Company cross-moved to dismiss the complaint based on the doctrine of collateral estoppel. Victoria premised its collateral estoppel argument on an order from a Virginia state court declaring that the Virginia auto policy at issue was "rescinded, void ab initio, and of no effect" based on the named insured's material misrepresentations on his application for insurance including that he resided in, and his car was to be garaged in, Virginia. Neither of plaintiff's two assignors was Victoria's named insured. Kings Civil denied plaintiff's motion and granted Victoria's cross motion.

In MODIFYING the order to deny Victoria's cross motion for dismissal of the complaint while affirming the denial of plaintiff's summary judgment motion, the Appellate Term held:

(1) Victoria failed to raise its collateral estoppel in a timely fashion in either a pre-answer motion or as an affirmative defense in its answer, as required by CPLR Rule 3211(a)(5);

(2) collateral estoppel effect could not be given to the Virginia order because plaintiff, who had been assigned the claims at issue prior to Victoria's commencement of the Virginia DJ action, was not a party to that action and "was therefore not 'afforded a full and fair opportunity to contest' the Virginia order, nor was it in privity with one who was"; but

(3) Victoria's submission of the petition and order from the Virginia DJ action was "sufficient to demonstrate a defense based upon a 'founded belief that the alleged injur[ies] do[ ] not arise out of an insured accident' (Central Gen. Hosp. v Chubb Group of Ins. Cos., 90 NY2d 195, 199 [1997]). Thus, defendant has raised a triable issue of fact as to whether there was coverage under the subject insurance policy[.]"

Food for thought: if Victoria knew about these assignors and claims prior to commencing the Virginia action, might it have been better off commencing the DJ/rescission action in New York state court, naming all interested persons and parties and seeking relief under Virginia law (which, unlike New York, presumably allows rescission ab initio of personal auto policies)? Not sure what opportunities and options existed for gaining personal jurisdiction over the named insured, but presumably they found him to serve him in the Virginia action.

Collateral estoppel, although a potent defense, is applied conservatively by the courts, which will insist on being convinced that the party against whom the doctrine is to be applied had a full and fair opportunity to contest the relevant issue in a prior proceeding.