for fraud, had been pending since May 1991.
By letter dated March 6, 1992, an Aetna claims representative, Leo Davin ("Davin"), acknowledged receipt of the third-party complaint. Davin explained that based on the FRIP definition of "insured," Soanes was insured only in his capacity as a Welfare Fund trustee. Soanes was not afforded coverage for his actions while acting in his capacity as an officer of Local 906. The letter reserved Aetna's rights to conduct an investigation and to disclaim coverage at a later date.
By a separate letter dated March 6, 1992, Davin acknowledged receipt of the State Mutual complaint. Davin explained that pursuant to the terms and conditions of the FRIP, including the definition of "insured," it would defend the Welfare Fund, Economos, Rosenfeld and Schwartz, as trustees. The letter reserved Aetna's rights to conduct an investigation and to disclaim coverage at a later date.
By letter dated March 11, 1992, Hershkowitz advised Aetna that G&H's regular billing rate was $ 225.00 per hour.
Thereafter, William Foley ("Foley"), another Aetna claims representative, was assigned to the matter. As reflected in a letter from Foley to G&H dated April 15, 1992, Aetna agreed to a fee of $ 190 per hour for G&H to defend the "insureds" in the Blue Cross action and the State Mutual action.
On or about April 16, 1992, Foley notified G&H that in the Blue Cross action the only third-party defendant which qualified as an "insured" under the FRIP was Soanes in his capacity as administrator and trustee of the Welfare Fund, not as an officer of Local 906.
On or about April 16, 1992, Foley notified G&H that in the State Mutual action, the Welfare Fund, Economos, Rosenfeld and Schwartz qualified as "insureds" under the Policy.
Later in the spring of 1992, Foley went to G&H's office to review documents. While at G&H, no one directed Foley's attention to any specific documents. When Foley requested that Goldweber provide him with an explanation and evaluation of the Blue Cross claim, Goldweber told Foley that the Blue Cross third-party action was merely a "stalling tactic" because Blue Cross was "bankrupt" and was "unable to pay the members' claims."
In the Blue Cross action, G&H represented Soanes, Neblett, and Fuentes (in their capacities as the three employee trustees, and Soanes also as president of Local 906); Schwartz, Rosenfeld, and Economos (in their capacities as the three employer trustees); Morton Nathan, Peter Janis and Lorinda Thomas (three claimant beneficiaries, who were associated members and whose claims were not paid by Blue Cross); and Local 906. Clearly, various of these parties had potential claims against the others. For example, the Welfare Fund's trustees (except Soanes) had potential claims against Local 906 and Soanes as president of Local 906. No such claims were ever asserted. More significantly, Goldweber and G&H had clear conflicts of interest based on potential claims against Goldweber for participating in the associated member scheme.
Goldweber and G&H faced similar conflicts of interest in the State Mutual action, in which they represented both Local 906 and the Welfare Fund, and never asserted potential cross-claims.
Although Goldweber claims he answered all of Foley's questions and did not mislead him in any way, Goldweber and G&H never advised Foley or anyone from Aetna that he and Hershkowitz participated in drafting and negotiating the agreements which implemented the associated member scheme or that this scheme led to the disputes with Blue cross and State Mutual and the eventual Blue Cross and State Mutual actions. In addition, Goldweber and G&H never advised Foley or anyone from Aetna of the possible conflicts of interest in G&H's representation of various parties in the Blue Cross and State Mutual actions.
In the meantime, as the March 23, 1992 renewal date approached, Aetna issued a 60-day notice of nonrenewal, dated March 19, 1992, based upon the Welfare Fund's failure to submit timely and complete renewal underwriting information
At or about that time, the Welfare Fund submitted a renewal application for the FRIP, signed by Soanes and dated "January, 1992" (the "1992 renewal application"). The Welfare Fund's 1990 IRS 5500 form for the fiscal plan year ending January 31, 1991, signed by Soanes and dated August 26, 1991, accompanied the 1992 renewal application. The 1992 renewal application indicated that there were 201 participants in the welfare Fund. The second page of the 1990 IRS 5500 form indicated that the number of participants was 201. Goldweber admits that he wrote this number on the form. As of February 2, 1991, there were over 2,000 associated members and 201 regular members in the Welfare Fund.
On May 20, 1992, Aetna issued another notice of nonrenewal, extending the effective date of the previous nonrenewal notice to July 22, 1992. The notice specifically referred to section X of the FRIP, under which, Aetna, at the option of the Welfare Fund, must extend the reporting period to 12 months after the effective date of termination, cancellation or nonrenewal. On July 7, 1992, the Welfare Fund exercised its option under section X. Aetna issued a "Change Endorsement," effective July 22, 1992, which provided for an additional 12-month reporting period for claims made against the Welfare Fund. The final nonrenewal for the FRIP was July 22, 1992.
G&H submitted its first bills to Aetna on April 1, 1992. Through September 1992, by four checks, Aetna paid G&H a total of $ 63,355.51 in legal fees. In the fall of 1992, Aetna discovered that the Welfare Fund, with the participation of Goldweber, made material misrepresentations in the 1991 renewal application, at which time Foley told Goldweber that Aetna would not pay G&H's bills because of the alleged material misrepresentations. In addition, Goldweber was advised that Aetna had retained counsel to investigate G&H's billing, the alleged material misrepresentations in the 1991 renewal application, and the Blue Cross and State Mutual actions.
CONCLUSIONS OF LAW
I. Aetna's Rescission Claim
The parties agree that New York law governs this diversity action. Under New York law, "an insurance policy issued in reliance on material misrepresentations is void from its inception." Republic Ins. Co. v. Masters, Mates & Pilots Pension Plan, 77 F.3d 48, 1996 U.S. App. LEXIS 2854, *11, 1996 WL 75785, at *1 (2d Cir. 1996) (citing N.Y. Ins. Law. § 3105). To rescind a policy of insurance, the insurer has the burden to prove that the applicant for insurance made a misrepresentation and that had the insurer known the truth it would not have issued the exact same policy it did issue. Vella v. Equitable Life Assurance Soc., 887 F.2d 388, 391 (2d Cir. 1989); Mutual Benefit Life Ins. Co. v. JMR Electronics Corp., 848 F.2d 30, 32-34 (2d Cir. 1988). As the Second Circuit explained in JMR Electronics:
A "misrepresentation" is defined by statute as a false "statement as to past or present fact, made to the insurer . . . at or before the making of the insurance contract as an inducement to the making thereof." N.Y. Ins. Law § 3105(a) (McKinney 1985). A representation is "material" if "knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract." Id. § 3105(b). Case law has somewhat broadened the materiality inquiry: "The question is not whether the company might have issued the policy even if the information had been furnished; the question in each case is whether the company has been induced to accept an application which it might otherwise have refused."
JMR Electronics, 848 F.2d at 32 (emphasis in original) (quoting Geer v. Union Mutual Life Ins. Co., 273 N.Y. 261, 269, 7 N.E.2d 125 (1937)). Thus, the insurer need not prove that it would not have issued any policy at all, but that the policy in question would not have been issued. JMR Electronics, 848 F.2d at 32-33; Mutual Benefit Life Ins. Co. v. Morley, 722 F. Supp. 1048, 1051 (S.D.N.Y. 1989).
Moreover, the "'failure to disclose is as much a misrepresentation as a false affirmative statement.'" Morley, 722 F. Supp. at 1051 (quoting Vander Veer v. Continental Casualty Co., 34 N.Y.2d 50, 356 N.Y.S.2d 13, 14, 312 N.E.2d 156 (N.Y.1974)). Nevertheless, "an applicant is under no duty to volunteer information where no question plainly and directly requires it to be furnished." Vella, 887 F.2d at 392; see also Sebring v. Fidelity-Phenix Fire Ins. Co., 255 N.Y. 382, 386, 174 N.E. 761 (1931) ("If fraud be absent, the assured may remain silent in respect to many matters concerning which the underwriter fails to question him."). However, where the nondisclosure, as to a matter which the insured has not been directly asked, constitutes fraud, the policy may be voided. Sebring, 255 N.Y. at 387. To constitute fraud, the nondisclosure must be "in bad faith with intent to mislead the insurer. " Id. In other words, "if the applicant is aware of the existence of some circumstance which he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked." Id.; see also Lighton v. Madison-Onondaga Mutual Fire Ins. Co., 106 A.D.2d 892, 483 N.Y.S.2d 515, 516 (4th Dep't 1984) ("Fraudulent concealment may void an insurance policy, even if the fact concealed was one not inquired into by the insurer.").
Upon considering the parties' opposing interpretations of the 1991 renewal application, particularly, the significance of the phrase "no change" in Item 6, and the circumstances occurring prior to Aetna's renewal of the FRIP in or about June 1991, this Court concludes that Goldweber's and the Welfare Fund's concealment of the tremendous increase in membership due to the associated member scheme, the change in the status of the plan from a multiemployer-collectively-bargained-for plan, and Blue Cross's purported termination of its policy and the related Blue Cross action (including Blue Cross's counterclaim for fraud), individually and together, constituted a designed and intentional withholding of material facts which the Welfare Fund in honesty and good faith ought to have communicated to Aetna in connection with the 1991 renewal application. See Sebring, 255 N.Y. at 386. Information of this nature clearly was relevant and material to Aetna's decision whether to issue the FRIP it did issue. This Court does not agree with the Welfare Fund that Aetna, by practice, relied only on historic information (i.e., information approximately 14-months old by the renewal application dates) as to the number of Welfare Fund members and the status of the plan, and, therefore, had no interest in current information. The evidence presented at trial leaves little doubt that the Welfare Fund and Goldweber knew that the tremendous increase in membership and change in status of the plan were facts material to Aetna's consideration of the 1991 renewal application. Nondisclosure of current membership information and plan status in connection with the 1991 renewal application, prior to renewal and delivery of the policy in June 1991, constituted material misrepresentations by the insured sufficient to void the FRIP.
Although this Court is troubled by Aetna's questionable diligence in reviewing materials from the Blue Cross and State Mutual actions in or after January 1992, and in determining to retain Goldweber and G&H to defend its insureds in those actions, this Court cannot say that before renewing the FRIP in 1991 and retaining G&H in or about the spring of 1992, Aetna knew, but disregarded, the tremendous increase in membership in Local 906 or the Welfare Fund or the change in collective bargaining status of the Welfare Fund. Goldweber and the Welfare Fund had these facts readily available, but knowingly concealed them from Aetna with the intent and design to defraud Aetna. There was no waiver by Aetna of the right to claim rescission of the FRIP based on these material misrepresentations, which Aetna did not discover until about the fall of 1992.
By concealing, during the pendency of the 1991 renewal application, (1) the tremendous increase in membership and change in collective bargaining status, and (2) the disputes over the Welfare Fund's health insurance policies and the litigation related thereto (including the claims of fraud against the Welfare Fund's trustees), the Welfare Fund, with Goldweber's participation, caused Aetna to issue the FRIP based on material misrepresentations designed and intended to defraud Aetna. Because the FRIP was issued in reliance on material misrepresentations, it is void from its inception. Masters Mates & Pilots Pension Plan, supra, at *1.
Notwithstanding its misrepresentations, the Welfare Fund attempts to assert that Aetna was contractually obligated by the extension clause contained in the 1990-1991 FRIP to renew the FRIP for another year. The argument is without merit. Section X affords an insured, whose policy has been terminated or cancelled, the option to "be insured for an additional period of twelve (12) months after the effective date of termination or cancellation . . . for claims made against the Insured during the said twelve (12) month period by reason of a Wrongful Act committed or alleged to have been committed prior to the effective date of termination or cancellation." Thus, this section allows the insured to extend the period to report claims by 12 months for claims arising out of acts committed prior to the termination or cancellation. Since the 1990-1991 policy was never terminated or cancelled, the extension clause never came into effect. Because the policy issued based on the 1991 renewal application, which covered "claims first made during the policy period [i.e., March 23, 1991 to March 23, 1992]," is void from its inception, the Welfare Fund could not exercise the section X option under that policy.
Because the FRIP is void from its inception, to the extent the Welfare Fund seeks payment from Aetna under the FRIP to cover a purported settlement of the State Mutual action for $ 325,000, such claim fails.
Accordingly, Aetna is directed to return the $ 3,106.50 in premiums paid to it by the Welfare Fund, and G&H is directed to pay back to Aetna, for the benefit of the Welfare Fund, the $ 63,355.51 in legal fees paid by Aetna to G&H.
II. G&H's Legal Fees Claim
Based on this Court's determination that the FRIP was issued in reliance on material misrepresentations and is void from its inception, and considering (1) Goldweber's participation in the material misrepresentations intended and designed to defraud Aetna, and (2) Goldweber's and Hershkowitz's participation in the associated member scheme, G&H's claim for legal fees is rejected. Aetna's obligation to pay for the insureds' defense in the Blue Cross and State Mutual actions depended on the existence of valid fiduciary responsibility coverage provided by the FRIP. See Masters, Mates & Pilots Pension Plan, supra, at *1. Moreover, even if Aetna's retention of G&H to represent the insureds is viewed as independent of the FRIP, G&H still should not recover because of Goldweber's participation in the material misrepresentations intended and designed to defraud Aetna, Goldweber's and Hershkowitz's participation in the associated member scheme, and G&H's acceptance of the matter despite undisclosed conflicts of interest. Under these circumstances, G&H must return to Aetna the legal fees of $ 63,355.51 paid to G&H pursuant to the rescinded FRIP. If G&H were permitted to retain legal fees paid by Aetna under the rescinded policy, the Welfare Fund and trustees would be unjustly enriched, all to the profit of Goldweber and Hershkowitz.
Although, as previously stated, this Court is troubled by Aetna's questionable diligence in (1) reviewing materials from the Blue Cross and State Mutual actions, and in determining to retain Goldweber and G&H to defend its insureds in those actions; and (2) reviewing G&H's bills for services and paying G&H $ 63,355.51 before refusing to pay further, this Court cannot condone Goldweber's and Hershkowitz's conduct in accepting that legal work in face of the undisclosed conflicts of interests and their roles in the material misrepresentations concerning the 1991 renewal application and in the associated member scheme.
For the above reasons, the FRIP is rescinded and Aetna is directed to return to the Welfare Fund the $ 3,106.50 in premiums paid by the Welfare Fund to Aetna, and G&H is directed to return to Aetna, for the benefit of the Welfare Fund, the $ 63,355.51 in legal fees paid by Aetna to G&H. The Clerk of the Court is directed to enter judgment (1) in favor of Aetna and against the Welfare Fund and its trustees, declaring the FRIP rescinded and directing Aetna to return to the Welfare Fund the $ 3,106.50 in premiums paid by the Welfare Fund to Aetna; and (2) in favor of Aetna and against G&H, denying G&H's claims and directing G&H to return to Aetna, for the benefit of the Welfare Fund, the $ 63,355.51 in legal fees paid by Aetna to G&H.
LEONARD D. WEXLER
UNITED STATES DISTRICT JUDGE
Dated: Hauppauge, New York
March 26, 1996