On June 12, 2012, the New York Court of Appeals in Admiral Ins. Co. v. Joy Contractors, Inc., 2012 WL 2092863 (NY June 12, 2012) held that an insurer can rescind coverage to an additional insured where the named insured has made a misrepresentation in an underwriting submission that deprives the insurer of the opportunity to evaluate the risks associated with the coverage. This decision is a radical departure from prior New York decisions regarding the rescission of coverage as to additional insureds.
Prior to this decision, courts in New York universally held that a named insured’s misrepresentation could not be imputed to the additional insured (thereby divesting it of coverage) on the grounds that each insured must be treated separately. In this decision, the Court of Appeals changed that rule and for the first time held that a named insured’s alleged misrepresentation may result in a rescission of the policy for all insureds. Gallo Vitucci Klar LLP represented the additional insured construction manager in this litigation and argued that the Court of Appeals should have followed the long-standing precedent in New York – i.e., that the named insured’s alleged misrepresentation in an underwriting submission cannot serve as a basis to rescind coverage to an additional insured.
By way of background, on March 15, 2008, Joy Contractors, Inc. (“Joy”) operated a tower crane that collapsed during the construction of a high-rise condominium at 303 East 51st Street in Manhattan, killing seven people and damaging several buildings. During the applicable policy period, Joy had primary and excess comprehensive general liability (CGL) coverage in place. The policies issued to Joy had named Reliance Construction Ltd. d/b/a RCG Group Ltd. (“RCG”), the construction manager on the project, as an additional insured. On March 27, 2008, Admiral Insurance Company (“Admiral”), Joy’s excess CGL carrier, issued a reservation of rights of letter to Joy warning that there might be no coverage based on inaccuracies in Joy’s underwriting submission that could render the excess policy void. Specifically, Admiral contended that: (i) Joy had represented that it was an interior drywall contractor that did not conduct exterior work; and (ii) Joy, in actuality, was the structural concrete contractor, performing work on the building’s entire exterior with a tower crane.
On June 8, 2008, Admiral filed an action against Joy, RCG and others seeking a declaration of no coverage. On June 25, 2009, the New York Supreme Court dismissed the rescission cause of action against RCG and opined that Joy’s alleged misrepresentations would have no effect on the additional insureds’ coverage. On February 17, 2011, the First Department affirmed the lower court’s holding. The Court of Appeals reversed the First Department’s ruling on the rescission issue and found that RCG may not be entitled to excess coverage from Admiral as an additional insured as a result of Joy’s purported misrepresentation. The Court of Appeals in its analysis accepted Admiral’s allegations about Joy’s misrepresentations to be true (as it must on motions for summary judgment). In reaching its holding, the Court of Appeals reasoned that Admiral evaluated a risk and collected a premium for providing excess coverage to a company and additional insureds that it thought were respectively an interior drywall contractor and other contractors associated with performing interior drywall work when in actuality it was issuing a policy for an entirely different risk – i.e., an exterior construction contractor that used a tower crane at a height many stories above street level and other insureds that assisted in the performance of same. The Court of Appeals concluded that dismissing the rescission cause of action against all the additional insureds would mean that the additional insureds would be allowed to rely on the terms of an insurance contract that may be deemed never to have existed.
This decision is generally a mixed bag for insurers. On the one hand, it permits carriers to rescind coverage to all insureds based on the misrepresentation of the named insured in an underwriting submission. On the other hand, it is a caveat to the insurers of building owners, general contractors and others that are routinely additional insureds on a subcontractor’s policy. Based on the Court of Appeals’ ruling, in the event a named insured subcontractor makes a misrepresentation in an underwriting submission, additional insureds may have their additional insured coverage vitiated, which means that the policies issued to the owners and general contractors may be exposed or reached earlier on the risk. We will monitor the effects that this decision will have on the lower courts in New York.