Communications Between Outside Coverage Counsel and His Insurer Client Regarding "the Investigation and Potential Rescission of a Claim" Ordered Disclosed

HOMEOWNERS -- APPLICATION MISREPRESENTATION -- RESCISSION -- ATTORNEY-CLIENT PRIVILEGE -- DISCOVERY

Prorokovic v. United Property & Casualty Ins. Co.

(S.D.N.Y. 02/02/2022)

From time to time I remind my insurer clients that before a first-party insurance claim has been investigated and coverage denied, not everything they or their adjusters write to me or I write to them is protected from discovery by the doctrine of attorney-client privilege.  I also remind them that my role is not to assist them in the investigation of a claim, but to provide a legal advice and opinion to them regarding whether a particular loss and its related claim are covered under the particular policy at issue.  

Why do I remind my insurer clients of this?  Because some New York courts consider outside counsel who assist their insurer clients in investigating first-party property losses and claims to be performing "claim handling activities" that are subject to discovery.  And because of cases like this one.  

On November 5, 2020 the plaintiffs suffered a total fire loss of their recently purchased New City, New York home and initiated a claim with defendant UPCIC under their homeowners insurance policy.  They had applied for and obtained their homeowners policy in August 2020, stating , among other things, on the policy's application that the home's "roof age" was 18 years and that "the dwelling both has a Certificate of Occupancy and is not an incomplete newly constructed home. If under additional construction or renovation, will be completed within the next 90 days."

On October 13, 2020 UPCIC issued a notice of cancellation, citing the policyholder's failure to send requested self-inspection photos to confirm the property's condition.  On October 16, 2020, UPCIC emailed the insured's agent to advise that home inspection photos showed the roof to be in very poor condition, but that UPCIC would rescind the policy cancellation if the roof was fully replaced before the cancellation date of November 17, 2020.  

In investigating the fire, UPCIC learned that:

• the roof was approximately 27 years old; 
• construction of a substantial addition to the home had begun after the September 17, 2020 closing date, was underway at the time of the fire, and was not expected to be complete until January 2021; and
•  the plaintiffs were not occupying the home at the time of the policy's application, but had moved into the house on October 1, 2020.

UPCIC's investigation of the loss and claim included retaining outside counsel on November 17, 2020 to conduct an examination under oath of the policyholder, which was done on December 11, 2020.  

On January 19 2021, UPCIC rescinded the policy and denied coverage, stating, in part: 

UPC has determined that you made material misrepresentations and/or false statements on the Application for Insurance. The misrepresentations identified include, but are not limited to, false statements and/or concealment of the age of the roof, condition of the roof, concealment of renovations and/or construction efforts, questionable habitability of the subject premise, occupancy, etc. Had UPC known the true facts, the policy would not have been issued or would have been written under different terms, conditions, and premiums. As a result, the policy issued by UPC, policy number *****, will be rescinded and any policy premiums paid to date will be refunded. Therefore, there is no coverage available for the above-referenced loss. UPC denies any and all coverage.

According to UPCIC's counterclaim in this action, on January 20, 2021, a UPCIC underwriter signed an affidavit stating that "if the Insured had provided the correct information regarding the roof update year, the occupancy prior to September 17, 2020, the fact that construction on the property would not be completed in ninety (90) days, or answered 'no' in response to a question on the Application regarding the occupancy and roof, then United would either not have written the policy or have written it under different terms."

On January 22, 2021, UPCIC sent the plaintiffs a "Policy Voidance" letter based on “[m]isrepresentation of material facts in obtaining a homeowners insurance policy with UPC Insurance Company for the property located at [address], by falsely providing the incorrect roof age, incorrect occupancy type and number of months the risk is occupied or rented. In addition, there is existing damage to premises which was not disclosed on application."  A week later UPCIC refunded plaintiffs the $1,366.35 they had paid in premiums up to that point by direct deposit into their bank account. 

On March 8, 2021, plaintiffs commenced this action, seeking $600,000 in compensatory damages and $1,000,000 in punitive damages based on UPCIC allegedly having acted "intentionally, maliciously, wrongfully, and in bad faith" in disclaiming coverage.

In the course of discovery plaintiffs sought production of communications between retained outside counsel and UPCIC from when counsel was retained on November 17, 2020  through the date of UPCIC's January 19, 2021 declination.  When UPCIC refused to disclose those communications, plaintiffs' counsel wrote to the court on December 15, 2021 to request a conference, claiming 

Defendant has asserted the frivolous position that virtually its entire claim file, underwriting guidelines and communications with attorneys and non-attorneys pre-dating its declination decision, are protected from disclosure under the attorney-client and work product privileges. The parties have met and conferred in good faith on multiple occasions but have reached an impasse.

This decision is the result of that conference.  

In opposing plaintiffs' demand for production of outside counsel communications in this case, UPCIC argued that these communications were protected by attorney-client privilege because 

they relate to the retention of outside counsel for legal advice relating to the investigation and potential rescission of a claim. This is fundamentally different than advice relating to the processing of a claim, or the denial of a claim, in the ordinary course of business. UPC is in the business of processing claims, but is not in the business of rescinded policies.

Aside from the fact that claims aren't rescinded (policies are), the judge rejected UPCIC's attempted "fine line" distinction, and ordered UPCIC to produce all responsive communications with outside counsel between November 17, 2020 and January 19, 2021: 

"New York law governs the applicability of the attorney-client privilege in this diversity case." Roc Nation LLC v. HCC Int'l Ins. Co., PLC, No. 19 Civ. 554, 2020 WL 1970697, at *2 (Apr. 24, 2020). "[U]nder New York law, an insurance company's claim handling activities are generally subject to discovery even if they were performed by an attorney. Id. This rule is grounded in an obvious principle: "The payment or rejection of claims is part of the regular business of an insurance company." Advanced Chimney, Inc. v. Graziano, 153 A.D.3d 478, 480, 60 N.Y.S.3d 210 (2d Dep't 2017). Thus, "[t]he key question is whether the attorney is predominantly investigating an insurance claim or providing legal advice." Roc Nation, 2020 WL 1970697, at *2 (quotation marks and citations omitted). This approach extends to evaluations of assertions of attorney-client privilege in the context of an insurance company's decision to rescind a policy based upon alleged material misrepresentations made by the insured in the procurement of the policy. See Advanced Chimney, 153 A.D.3d at 479-80. 

Here, defendant attempts to draw a fine line between its handling of plaintiffs' claim and its evaluation of the rescission option. In the first place, defendant's proposition that it is "not in the business of rescinded policies" defies logic. Defendant is in the business of providing insurance coverage; it assesses risk (and determines whether or not to provide insurance) based (at least in part) on a potential insured's application. That is precisely why policy rescissions are often based upon misrepresentations or false statements in insurance applications. Defendant's point — that it makes no money from rescinded policies — is facially true, but ignores situations (like the one at bar) where defendant rescinds a policy and avoids paying a substantial claim. In any event, in this case, defendant's decision to rescind plaintiffs' policy was inexorably intertwined with its denial of plaintiffs' claim. In other words, any advice from outside counsel related to rescission of plaintiffs' policy cannot be parsed from defendant's denial of plaintiffs' claim. Thus, defendant's communications with outside counsel were not predominantly of a legal nature and, therefore, are not protected by attorney-client privilege.[2]

I'm not fond of UPCIC's argument that there's an important difference between claim investigations and potential policy rescission investigations.  The better argument IMO would have been on the nature of each of outside counsel's communications.  

Nevertheless, this decision is another reminder to insurers in New York that not all communications with their outside counsel made prior to a declination of coverage are protected from discovery by attorney-client privilege.  If your outside counsel is not aware of this, PLEASE pass this post along to them.

Bottom line: each of outside counsel's pre-declination communications with insurers should be one of only two, distinct kinds: 

1. routine communications (requesting file materials, scheduling, etc.);
2. communications rendering legal advice that are --key words/concept -- predominantly of a legal nature.  

Not a blend of both.  One or the other. Keeping the communications separate will support  the more forceful and likely convincing argument that outside counsel communications which render only legal advice (are predominantly of a legal nature), even if made prior to the insurer-client's coverage declination, are protected from discovery by the doctrine of attorney-client privilege.  

NYSSIU Legal Update 2019-2020 Edition

 LEGAL UPDATE

I have been privileged since incorporating the New York State Chapter of Special Investigation Units (NYSSIU) in 1997 to serve as its Counsel.  Many times I have prepared and presented the NYSSIU Legal Update to members and guests at NYSSIU meetings.  Some of those updates even made it to NYSSIU's website.  

On May 6, 2020, my son Ryan Mura prepared and virtually presented the 2019-2020 edition of the NYSSIU Legal Update.  That edition digests eight no-fault, six property and two criminal law case decisions, as well as providing updates on New York legislative and regulatory developments affecting New York property and casualty insurers. 

You can read that Legal Update here.  Case decisions are hyperlinked within.  Questions can/should be directed to Ryan.

You Mean You Don't Write Homeowners Policies for Pediatric Offices? But It's In a House, With Lots of Kids...

HOMEOWNERS – POLICY RESCISSION – APPLICATION MISREPRESENTATION – USE OF SIGNED STATEMENT OF INSURED
Tower Ins. Co. v. Rajaram
(Sup. Ct., New York Co., decided 8/19/2008)

Tower issued a homeowners insurance policy to Dr. Madhu Rajaram for a residential private house located at 138 Brighton 11th Street, in Brooklyn, New York for the period January 5, 2006-2007. In her policy application, Dr. Rajaram represented that the house would be "owner occupied" and that it would be for “primary usage.” Here's a street view of the property. Note the green awning with the multi-colored lettering and white sign with the caduceus. Those are called clues.


Erna Karpilovskaya allegedly tripped and fell on the sidewalk outside the insured premises on January 15, 2006. She commenced a personal injury action in Kings County Supreme Court against the City of New York and various persons, including Dr. Rajaram.

Tower received first notice of that occurrence and Ms. Karpilovskaya's claim on November 14, 2006. It sent a representative to investigate, who found Advanced Pediatric Practice, PC, operating on the first and second floors of the building. Tower's representative took a signed statement from Dr. Rajaram, which began:

My name is Dr. Madhu Rajaram. My date of birth is (redacted). My home address is 7 Telegraph Hill Road, Homdel, NJ 07733. My contact telephone number is (redacted). I have been the Property Owner of a residential private house located at 138 Brighton 11th Street, Brooklyn, NY 11235, since January 5, 2006. I have leased the property to the former owner (I will provide their name at a later date) since January 5, 2006 until November 2006. I have never resided at the property since I purchased it on January 5,2006. I visit the premises a few times a month or whenever necessary. I do not believe I visited the premises on January 15, 2006, however ... (redacted).

By letter dated December 13, 2006, Tower disclaimed coverage for various reasons, including Dr. Rajaram's policy application misrepresentations, late notice, and the policy's business pursuits exclusion. Tower then commenced this this action in New York County Supreme Court to “confirm the propriety of its disclaimer” and moved for default judgment against certain defendants and summary judgment against the remaining defendants.

In denying Tower's motion for a default judgment against certain defendants, New York County Supreme Court Justice Eileen Rakower noted that each such defendant had answered after the prescribed time period but before September 16, 2007, the date given in Tower's letter to those defendants, which advised them: "This letter is to inform you that Tower Insurance Company of New York will move for a default judgment against you, if you fail to respond to the Complaint by September 16, 2007."

The court granted Tower's motion for summary judgment, however, adjudging and declaring that the policy was void ab initio and that Tower had no duty to defend or indemnify any party in the related Kings County Supreme Court personal injury action.

Justice Rakower rejected the defendants' argument that Tower's disclaimer was untimely under Insurance Law § 3420(d) because "the issue of a timely disclaimer is irrelevant if the policy, from its inception, never provided coverage for the particular claim at issue." The court then addressed Tower's rescission argument:

In order to establish that a fact is material so as to void ab initio an insurance contract, an insurer must show that it would not have issued the policy had that fact been revealed at the time that the policy was issued. (Interested Underwriters at Lloyd‘s v. H.D.I. III Assoc., 213 AD2d 246 [1st Dept. 1995]). “A court, in finding a material misrepresentation as a matter of law, generally relies upon two categories of evidence, an affidavit from the insurer’s underwriter and the insurer’s underwriting manual.” (Kroski v. Long Island Sav. Bank FSB, 261 AD2d 136 [1st Dept. 1999]). Tower supports its claim that it would not have issued the policy if it had known that Rajaram was not living at the residence by submitting the affidavit of Mr. Blomquist, Supervising Underwriter. Mr. Blomquist affirms that if Rajaram had indicated on her application that she did not intend to occupy the premises it would have presented an unacceptable risk and Tower would not have issued the “homeowner’s policy.” Mr. Blomquist refers to the Tower Group Homeowner’s Selection Rules (“the Rules”) which are annexed to his affidavit. Indeed, those rules state that the insured premises must be “owner occupied.’’

Rajaram represented on the “Homeowner Application” that the building would be "owner occupied” and that it would be for “primary usage.” However, in her statement to Mr. Williams, Rajaram gives her home address as “7 Telegraph Hill Road, Homdel, NJ and she states unequivocally that she “leased the property to the former owner... I have never resided at the property since I purchased it on January 5, 2006.”’ The defendant owners do not contradict the statement made by Ms. Rajaram. Where “the evidence of the materiality of the misrepresentation is clear and substantially uncontradicted, the matter is one of law for the court to determine.” (Interested Underwriters at Lloyd’s v. H.D.I. III Assoc., 213 AD2d 246 [1st Dept. 1995]).

The Rules also state that: “any risks with the following factors may not be written: Any business conducted on the premises . . .” Rajaram indicated on her application that no business was to be conducted on the premises. Contrary to this declaration, Mr. Williams affirms that he "observed a pediatrician’s office being operated from the first and second floors of the premises.”

Tower has shown that it would not have issued a homeowner’s policy had it known that Rajaram would not be residing at the subject premises and that she would be running a business at the location. It is incumbent upon the party opposing summary judgment to come forward with proof in admissible form demonstrating that there exists an issue of fact for the trier of fact to determine. Here, the defendant owners have not contradicted Tower’s showings. Indeed, they submit no evidence controverting Tower’s showing.

The defendants argued that Tower did not support its summary judgment motion with proof in admissible form because Dr. Rajaram's statement, although signed by her, "contain[ed] no jurat, no notary public or commissioner of deeds, and is neither an affidavit nor affirmed under penalties of law.” In rejecting this argument Justice Rakower noted:

While generally, unsworn statements should not be considered in a motion for summary judgment, the statement by Rajaram here is annnexed to an affidavit by Mr. Williams which attests that the statement was taken by him and that Ms. Rajaram read and signed the statement at the bottom of each page to attest to its accuracy. While hearsay, admissions by a party of any fact material to the issue are always competent evidence against that party. (Reed v. McCord, 160 NY 330, 341). Of course, the party-declarant has the right to explain it.

In policy rescission cases, it's not that the insurer would not have insured the risk at all, but that it would not have issued the particular policy on the particular terms it did. This case is a good example of that principle.

So is this how it went?

Dr. Rajaram to Broker/Agent: "I just bought a house in Brooklyn. There will be lots of kids and toys there."

Broker/Agent to Dr. Rajaram: "Okay, fill out this homeowners policy application."

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.

Policy Rescission Granted for Material Misrepresentations in Application

COMMERCIAL PROPERTY – FIRE LOSS – MATERIAL MISREPRESENTATION IN APPLICATION – RESCISSION – WAIVER – ESTOPPEL – TIMELINESS OF DENIAL
Precision Auto Accessories, Inc. v. Utica First Ins. Co.
(4th Dept., decided 6/6/2008)

Plaintiff's business was destroyed by fire. After an investigation, Utica First notified plaintiff that it was denying coverage and rescinding the policy based on material misrepresentations made in plaintiff's insurance application with respect to plaintiff's prior loss and claims history. Plaintiff sued for coverage, and the parties moved and cross-moved for summary judgment. Supreme Court denied both motions.

The Fourth Department MODIFIED and granted summary judgment to Utica First, holding that it was entitled to rescind the policy because it established as a matter of law that plaintiff had made material misrepresentations such that Utica First would not have issued the policy had it known the true facts. "To establish materiality of misrepresentations as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins or rules pertaining to similar risks, to establish that it would not have issued the same policy if the correct information had been disclosed in the application[.]"

In support of its motion, Utica First submitted the affidavit of its president, who set forth Utica First's minimum underwriting guidelines for prior losses for a risk such as plaintiff's business. Attached to the affidavit was a copy of defendant's underwriting guidelines "for the relevant period," which corroborated the applicable minimum underwriting requirements set forth by Utica First's president concerning prior losses for risks such as plaintiff's business. Utica First's president further stated in his affidavit that, "if [defendant] had been aware of plaintiff's true loss history . . . [defendant] would not have issued a policy of insurance to plaintiff."

The Fourth Department agreed with Utica First that the misrepresentations did not need to be willful in order to rescind the contract.

Insurance Law § 3105 (b) does not specify that a misrepresentation must be willful, and '[w]hether or not plaintiff intended to provide inaccurate statements or misrepresentations at the time [it] filled out the application is irrelevant" (Curanovic, 307 AD2d at 437). Rather, a "material misrepresentation, even if innocent or unintentional, is sufficient to warrant a rescission of the policy" (citations omitted). Although plaintiff contends that, pursuant to the terms of the policy, defendant is required to establish that plaintiff's misrepresentations were willful, when an insurance policy is void ab initio based on material misrepresentations in the application, it is as if the policy never came into existence, and an insured cannot create coverage by relying on the terms of a policy that never existed[.]

Plaintiff argued that Utica First could not rely on any misrepresentations in the application because they were the result of the negligence of Utica First's alleged agents. In rejecting that argument, the appellate court noted:

Plaintiff is bound by the misrepresentations in the application, inasmuch as "[t]he signer of a contract is conclusively bound by it regardless of whether he or she actually read it" (citation omitted). Further, an insured "ha[s] a duty to review the entire application and to correct any incorrect or incomplete answers". Additionally, "an insurance broker is generally considered to be an agent of the insured" (citation omitted). "To establish that the broker was acting as the insurer's agent, [t]here must be evidence of some action on the insurer's part, or facts from which a general authority to represent the insurer may be inferred" (citation omitted). Although the insurance agency that bound the coverage may have been an agent of defendant, the broker who completed the application was hired by plaintiff as its agent and was an independent contractor with no connection to defendant.

Plaintiff next argued that Utica First waived its right to rescind the policy because it knew of plaintiff's misrepresentations concerning plaintiff's loss history before the fire. The court rejected that argument, finding deposition testimony of the plaintiff's insurance broker that she heard within two hours of the fire that Utica First was going to rescind the policy based on the plaintiff's prior losses to be both speculative and inadmissible hearsay. "Moreover, even assuming that defendant acquired knowledge of plaintiff's actual loss history before the fire, we conclude that such knowledge, by itself, is insufficient to constitute a waiver because plaintiff has failed to establish that it paid a premium to defendant after defendant allegedly acquired that knowledge."

Plaintiff's final argument was that Utica First was estopped from disclaiming coverage because it took eight months to do so. In opposition to that argument, Utica First contended that its investigation into plaintiff's loss history was ongoing and was delayed based on the lack of cooperation by plaintiff in providing an adequate authorization for its previous insurer's records. In rejecting the plaintiff's untimely disclaimer argument, the Fourth Department held:

Here, even assuming, arguendo, that defendant's notice of disclaimer was untimely, we conclude that defendant is not estopped from rescinding the policy as void ab initio inasmuch as, contrary to plaintiff's contention, plaintiff failed to demonstrate any prejudice based on defendant's alleged delay in disclaiming coverage (citations omitted). Although plaintiff contends that it was prejudiced because, without the insurance proceeds, it was unable to pay its suppliers and otherwise to re-start its business, it failed to identify any triable issue of fact whether it was prejudiced by the delay with respect to the asserted ground for rescission, i.e., the purported misrepresentations made in the insurance application.

With respect to the plaintiff's untimely disclaimer argument, it is important to bear in mind that Insurance Law § 3420(d) applies only to liability coverage disclaimers and denials for bodily injury or death claims arising from accidents that occur in New York. It does not apply to first-party property coverage denials. Only the equitable doctrines of waiver or estoppel can apply to preclude an insurer from denying first-party property coverage.

Default Judgment for Declaratory Relief Denied

PROFESSIONAL LIABILITY – RESCISSION – DECLARATORY JUDGMENT RELIEF – DEFAULT JUDGMENT
Certain Underwriters at Lloyd's of London v. Bellettieri, Fonte & Laudonio, P.C.
(Sup. Ct., Westchester Co., decided 4/28/2008)

We have a new contender for longest plaintiff's name in a caption. Someone call Guiness (the record book people, not the brewers). The plaintiffs' name designation in this case is:

Certain Underwriters at Lloyd's of London Subscribing to Lawyers Professional Liability Policies of Insurance Designated by Policy No. Rpg0001841, and Covering the Periods October 19, 2003 to October 19, 2004, October 19, 2004 to November 18, 2005, November 18, 2005 to November 18, 2006 and November 18, 2006 to November 18, 2007, Plaintiffs

Nice. What's the official NY Style Manual abbreviation for that run-on?

In any event, the long-monikered plaintiffs brought this action for a declaratory relief against the defendant law firm and its three named partners, Bellettieri, Fonte and Laudonio, alleging that four professional liability (lawyer malpractice) policies issued to the law firm from 2003 through 2007 were void ab initio and should be rescinded due to misrepresentations or non-disclosures of material fact in each of the policies' applications. In 2007, Bellettieri pled guilty to bank fraud and mail fraud arising from a "check-kiting" scheme and other fraudulent conduct, admitting to massive thefts of some $20 million, a significant part of which resulted from the siphoning off of monies from bank accounts maintained by the law firm from 2003 through November, 2006. At least three actions had been commenced against Bellettieri, the law firm, Fonte, and Laudonio, and numerous other claims had been made and grievances filed.

The court noted that plaintiffs may have brought this action "in order to short-cut the need to litigate over the 'innocent co-insured' provision" of the policies, defendants Fonte and Laudonio having contended that they were unaware of their partner's crimes, did not complete or sign any of the applications, and were "innocent co-insureds" as to whom the policy could not be rescinded.

Plaintiffs moved for a default judgment against Bellettieri and the law firm, contending that each had been properly served with the complaint. The court found that service had not been properly made on Bellettieri (because although Bellettieri's attorney advised that he had been authorized to accept service of the complaint on behalf of Bellettieri, there was no evidence submitted that Bellettieri knew about his lawyer's representations to that effect), but had been properly made on the law firm.

In denying plaintiffs' motion for a default judgment against the law firm, however, the court cited to established New York case law holding:

[D]eclaratory relief should rarely, if ever, be granted solely upon default and without inquiry by the court into the merits * * * and may not be granted where the judgment would affect the rights of other parties not in default or would affect the rights of non-parties. * * * Plaintiffs have not explained how it is plausible to enter a default judgment declaring that the policies are void as against the Law Firm though litigation must continue as to whether the policies provide coverage as to Fonte and Laudonio. Nor have Plaintiffs explained what effect, if any, a declaratory judgment voiding the policies as to the Law Firm would have if such a judgment has no impact on the rights, if any, of Fonte and Laudonio. A declaratory judgment should not be issued unless it would serve some useful purpose and it not has not been established that a default judgment against the Law Firm only would serve any useful, practical purpose in the absence of an adjudication as to Fonte and Laudonio.

* * * * *

Should Fonte and Laudonio prevail in this action, and a declaratory judgment issue that they are entitled to the protection of the policies issued by Plaintiffs, such a determination would be fundamentally inconsistent with the declaration that Plaintiffs would have the Court issue now as against the defaulting Law Firm that the policies are void. Thus, the granting of a default and severance could lead to fundamentally inconsistent judgments.

* * * * *

The granting of a default and severance could potentially lead to fundamentally inconsistent judgments a result that could impact upon the rights of non-parties. To the extent that a default declaratory judgment as to the Law Firm would have no impact on Fonte and Laudonio or any one else, it would be a meaningless exercise until the balance of this case is heard. On the other hand, to the extent that such a default judgment would impact the rights of Fonte, Laudonio, or the persons suing to recover because of Bellettieri's misconduct, it would not quiet or stabilize the disputed jural relations but only serve to engender further litigation and controversy. Thus, the granting of Plaintiffs' motion would not "serve some practical end".

Default judgments are difficult to obtain in affirmative declaratory judgment actions especially where, as here, not all of the named defendants have defaulted and the interests of the defendants in the policy(ies) at issue are joint.

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

CGL – APPLICATION MISREPRESENTATION – RESCISSION – MATERIALITY – PROOF OF PAST UNDERWRITING PRACTICES
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.