The opinion of the court was delivered by: Sweet, D.J.
Underwriters shall not be liable for loss . . .
Section 3 of the Primary Policy provides Directors and Officers and
Company Reimbursement coverage ("D&O"). Insuring Clauses A and B provide:
"Wrongful Act" is defined as "any actual or alleged error, omission,
misstatement, misleading statement, neglect, breach of duty or negligent
act by any of the directors or officers, while acting solely in their
capacity as a director or officer of the Company."
The Primary Policy was placed in the London insurance market pursuant
to a "line slip." A line slip is an application made by an insurance
broker to insurance underwriters. The broker was Marsh and the lead
underwriter for various Lloyd's syndicates was D.P. Mann. Lance
Dalzell-Piper was the individual at D.P. Mann who was the line-slip
leader and acted as the lead underwriter. In this case, the line slip was
a contract between various
Lloyd's syndicates and Marsh, pursuant to
which Marsh agreed to bring the subscribing syndicates a certain volume
of a particular type of business and to administer claims under those
policies on the syndicates' behalf. The Primary and First Excess Crime
Policies were subscribed to by the Lloyd's syndicates on the Marsh line
slip and Gulf Insurance Company of the United States.
2. The First Excess Crime Policy
The First Excess Crime Policy, 509/QA474097, also sold to CBL by
Lloyd's and Gulf, provides $40 million in coverage excess of Section 1 of
the Primary Policy (the "First Excess Crime Policy") and covers the
period from November 1, 1997 to April 1, 2001. It is a "follow form"
policy which incorporates the terms and conditions of Section 1 of the
Primary Policy and provides exactly the same coverage as the primary
comprehensive crime coverage. Like the Primary Policy, this policy
contains a clause which renders the policy void if a "false or
fraudulent" claim is filed. The Gulf Insurance Company policy is
subject to the same terms and conditions and follows form as to the
The underwriting of the First Excess Crime Policy was accomplished in
conjunction with the underwriting of the Primary Policy and Lance
Dalzell-Piper was the individual underwriter at D.P. Mann who acted as
the lead underwriter. The syndicates on the Marsh line slip that
subscribed to the Primary Policy also bound themselves, along with Gulf
(US), to the First Excess Crime Policy.
3. The Second Excess Crime Policy
The Second Excess Comprehensive Crime Policy, 509/QA539299, provides
$150 million in insurance excess of the $40 million First Excess Crime,
which in turn is excess of Section 1 of the Primary Policy (the "Second
Excess Crime Policy") and covers the period from April 22, 1999 to April
1, 2001. It is also a "follow form" policy, incorporating the terms and
conditions of Section 1 of the Primary Policy "as far as applicable."
The Second Excess Crime Policy incorporates certain terms and
conditions of Section One of the Primary Policy. Section One of the
Primary Policy contains the following language:
(a) General Condition 1(a) provides:
This policy should immediately cease to afford any cover
of any kind in the event of the liquidation (voluntary or
compulsory) of the Assured, or the appointment of a
Receiver or Manager, or the entering into any Scheme of
arrangement or compensation with creditors.
(b) General Condition 2 provides):
In the event of a takeover/merger, all premiums and brokerage is
deemed fully earned and coverage hereunder should continue until
expiry hereof, but only in respect to any loss(es)
sustained prior to the effective date of any such
takeover or merger.
There are no provisions contained, either directly or by
incorporation, in the Second Excess Crime and Excess E&O Policies which
provide that the second premium payment must be paid after the policy has
been terminated as a result of the appointment of a receiver.
The draft slips explicitly allocate the first premium payment to the
period April 22, 1999 to March 31, 2000; and the second premium payment to
the period April 1, 2000 to March 2, 2001.
The first premium payments for the Second Excess Crime and Excess
E&O policies were paid. The second premium payments on those policies were
due to be
made to the London defendants on July 1, 2000, but were not made.
The lead syndicate on the Second Excess Crime Policy was the D.J.
Marshall syndicate, and the lead underwriter was William Knapman.
4. The Excess E&O Policy
CBL also bought additional errors and omissions coverage in the form of
an Excess Bankers Professional Indemnity Insurance, 509/QA539399 (the
"Excess E&O Policy") which provided coverage from April 22, 1999 to April
1, 2001. The policy provides $15 million of insurance excess of Section 2
of the Primary Policy (for claims arising out of wrongful acts in the
performance of professional services).
The Excess E&O Policy incorporates certain terms and conditions
of Section Two of the Primary Policy. Section Two of the Primary Policy
contains the following condition:
In the event of a takeover/merger, all premium and
brokerage is deemed fully earned and coverage hereunder
shall continue until expiry hereof, but only in respect
to any loss(es) sustained, or claim made prior to the
effective date of any such takeover or merger.
Section Two of the Primary Policy does not contain a provision equivalent
to General Condition 1 of the Section One of the Primary Policy.
The lead syndicate on the Excess E&O Policy was the Marshall syndicate
and the lead underwriter was William Knapman.
5. The Electronic All Risk Policy
CBL purchased an Electronic Securities and Physical Property Excess
Policy, 509/QR029198 (the "Electronic All Risk Policy"), which provided
$300 million in insurance excess of $200 million. Although generally in
excess of Section 1 of the Primary Policy, as well as the First and
Second Excess Crime Policies, the Electronic All Risk Policy does not
"follow form" to those policies. Section A (Electronic Securities)
insures against the loss or damage to Electronic Securities "held by the
Insured in any capacity or for which the Insured is legally liable" from
the fraudulent input of data into CBL's computer system and other similar
acts. Section B insures against:
physical Loss of or Physical Damage to Property owned
by or in the custody of the Insured whilst upon any
premises of the Insured or at any other recognized
place of safe deposit or whilst in transit.
Section B provides the traditional "All Risk" coverage that was sold to
financial institutions to provide protection for physical loss of or damage
to customers' property and securities.
The lead underwriter on this policy was Angus Roberts, from Janson Green,
Ltd., underwriting agents for Syndicate 79 at Lloyd's London. Michael Moss
was the second lead underwriter.
Conduct of the Parties
In January of 1998, representatives of three syndicates (Jane Bennett
and Chriss Warrior of D.P. Mann, Simon Allport of Ashley Palmer, and
David Foster of Janson Green) met with Virginia "Susie" Allen, the
director of marketing and administration of CBL, in San Diego, California
during an annual meeting of bank risk managers.
In May 1998, Credit Bancorp provided written notice of two separate
claims against the Primary and First Excess Crime Policies for the
disappearance of Fortune Financial Systems, Inc. ("Fortune Financial")
and Colorado Casino Resorts, Inc. ("Colorado Casino") stock certificates
from the premises of Citibank, N.A., New
York ("Citibank").*fn2 In
support of each claim, Richard Blech executed and notarized the Proof of
Loss filed by CBL. In both instances, Insurers reimbursed CBL for the
premiums paid to obtain the sole obligor lost instrument bonds ("LIBs")
required by the transfer agents to issue new certificates. Insurers also
authorized the issuance of "backup letters of indemnity," whereby
Insurers agreed to indemnify and hold CBL harmless, subject to the
terms, conditions and limitations of the Primary Policy, against loss
which CBL might sustain by reason of the issuance of the LIBs.
Each claim was submitted under Section 1(A), the "Bankers Policy"
section, of the Primary Policy and the First Excess Crime Policy. The
First Excess Crime Policy follows form to the Primary Policy. General
Condition 12, "Fraud," of the Primary Policy provides:
If the Assured shall make any claim knowing the same to
be false or fraudulent, as regards amount or otherwise,
this Policy shall be void and all claims hereunder
shall be forfeited.
These Claims were investigated by the law firm of Pattison & Flannery
(London Insurer's defense counsel in this case) and paid under the Primary
On June 9 and 10, 1998, two of the principal underwriters on the Primary
and First Excess Crime Policies (Lance Dalzell-Piper of D.P. Mann and Simon
Allport of Ashley Palmer) flew to Geneva and met with Richard Blech, the
chairman and CEO of CBL, at the Geneva office of CBL, the purpose of which
was to help the underwriters learn more about CBL's business.
On July 9, 1998, Richard Blech and Thomas Rittweger, the managing
director of North American operations of CBL, flew to London and met
with the underwriters who were considering whether to subscribe to the
Electronic All Risk Policy. At the London meeting, Richard Blech told
Michael Moss that CBL made money by engaging in "risk free" arbitrage
using funds "that they could raise against the stock to trade on behalf
The Underwriters reviewed the agreements between Douglas Brandon,
as Trustee, and the CBL customers related to the credit facility and
they represented that Mr. Brandon would be the sole signatory on the
account holding the customers' securities and that the customer-deposited
securities would be held in trust. Marsh also provided the Insurers with
examples of the actual agreements between CBL and the institutions that
held CBL's customers' securities as part of the credit facility; those
agreements were inconsistent with CBL's representations to customers about
the credit facility, and showed that Richard Blech, not trustee Brandon,
was the sole signatory on the accounts.
Many of the institutions that acted as depositories were separately
insured by Insurers. Though it is not the general practice to do so,
Insurers testified that they could have checked with those institutions
about CBL but did not.
The underwriters commissioned an investigation by CBL by Robert
Bishop, an investigator retained by Lloyd's underwriters to investigate
policyholders who drafted a report on CBL (the "Bishop Report") dated July
Michael Moss and Angus Roberts received the Bishop Report on CBL, and
the other Lloyd's underwriters who were considering whether to subscribe
to the Electronic All Risk Policy had access to the Bishop Report. Angus
Roberts, the Janson Green syndicate's underwriter who was considering
whether to subscribe to the Electronic All Risk Policy, also was an
underwriter on the Primary and First Excess Crime Policies.
The Bishop Report stated that the insurance policies were being
purchased to solve a "marketing problem for CBL" and noted that "the CBL
Insured Credit Facility Agreement is silent on whether CBL may use
collateral [customers securities] for a corresponding loan arrangement
with a foreign bank and how the bank's collateral interest would be
established in the securities held by the insured trustee."
In September of 1998, Malcolm Woolgar of the investigative unit
of the Corporation of Lloyd's received a report on CBL prepared by an
investigator named Michael Lloyd. Woolgar received the report from one
of his superiors, Andrew Wragg, whom in turn had received the report from
Great Britain's Financial Services Authority (the "FSA"), which was
investigating CBL; Andrew Wragg concluded that: "[CBL's insurance] is
probably being mis-stated, and being dressed up to look like FG [a
The Lloyd Report provided a brief overview of CBL and stated that the
information available "poses more questions that it answers," and stated
that "we have severe doubts as to the viability of this organization."
On September 2, 1998, another of Malcolm Woolgar's superiors at the
Corporation of Lloyd's, John Baker, spoke to a former director of CBL
named Anthony Baron and concluded that "the Company [CBL] was believed
to be operating a fraudulent scheme." Baron told John Baker that he
had reported CBL to both the Bank of England and to the Irish Banking
Authorities. Mr. Woolgar provided the Lloyd Report to Angus Reports
and suggested that the underwriters who had subscribed to the CBL
Policies should consider investigating CBL further.
The Lloyd's underwriters then hired Dan McCarthy ("McCarthy") of Bowman
Investigations to investigate and report on CBL. McCarthy had worked for
the managing agent of the Marshall syndicate, a syndicate that had
subscribed to the Primary and First Excess Crime Policies, and that later
led the Second Excess Crime and Excess E&O Policies. Archer Underwriting
owned Bowman Investigations. McCarthy prepared three reports about CBL
(the "Bowman Reports") dated: September 15, 1998; October 8, 1998; and
October 28, 1998. In the Bowman Reports, McCarthy reported that "CREDIT
BANCORP LTD. and its accomplished international financiers are more of a
risk than you were led to believe."
In the Bowman Reports, McCarthy reported to the underwriters who
retained him that he had found no evidence that CBL was licensed to
conduct business in any jurisdiction. He also noted that CBL claims "to
be a leading financial services firm of accomplished international
financiers. They do not have them and we have not found them." In
addition, McCarthy detailed prior litigation with Mr. Blech's father,
Arthur Blech. McCarthy also noted that "we have not yet seen any
documentation that leads us to conclude that CBL is a viable, potentially
profitable, investment vehicle." McCarthy described his unsuccessful
efforts to locate past directors of CBL, and to locate their offices, as
well as the offices of CBL affiliates. Dan McCarthy also noted that the
Company Fraud Department of the City of London
Policy currently was
Michael Moss, an underwriter for the E.E. Patrick syndicate, was
concerned about the information contained in the Bowman Reports and
considered rescinding the policies in October 1998. Throughout the fall
of 1998 and early 1999, Michael Moss and his deputy Graham Hawkins
demanded the right to review and make changes to certain CBL business
documents, including the following documents:
1) CBL Advertising and Marketing Material,
2) Evidences or Certificates of Insurance,
3) Various CBL Credit Facility Agreements,
4) The CBL Credit Facility Agreement Application,
5) A Form Opinion Letter from CBL trustee Brandon to potential
customers, and 6) the CBL Master Securities and Stock Loan
On January 6, 1999, Angus Roberts told Malcolm Woolgar, the Corporation
of Lloyd's regulator, that "Items of interest did come out of the [Dan
McCarthy/Bowman] review. Whilst the items were not indictable on their
own [Angus Roberts] and the broker concerned have elected to invite CBL
over to give them a presentation on its operations." Angus Roberts told
Malcolm Woolgar that the underwriters intended to have an expert on
banking regulations present at the meeting with CBL to ask CBL the proper
On February 10, 1999, Richard Blech traveled to London and met with
representatives of the Lloyd's syndicates that had subscribed to the CBL
policies. On March 16, 1999, Michael Moss' deputy, Graham Hawkins, wrote
to Philip Turner of Marsh expressing his concern about CBL and stated:
Philip, I feel Underwriters have made every effort to
understand our assureds needs however I feel we have
reached a point where I can no longer allow the
insurance coverage we provided to be misrepresented in
this manner, unless CBL can come up with the
satisfactory responses by the 31st March 1999,
Underwriters may have no alternative but to issue
notice of cancellation on the policy.
On May 27, 1999, Mr. Moss gave notice that he intended to cancel his
syndicate's participation in the Electronic All Risk Policy as of August
1, 1999. Two other syndicates also cancelled their participation at that
time. However, the share of the risk that had been borne by the departed
syndicates was subscribed to by new syndicates.
The Primary and First Excess Crime Policies required annual
resignings, and were resigned in April of 1999. The Insurers also
negotiated endorsements to the existing policies during the fall of 1998
and spring of 1999, such as adding coverage for losses arising out of the
acts of the trustee, Douglas Brandon. The Insurers also made premium
adjustments to reflect changes to the policy limits. The Second
Excess Crime and Excess E&O policies were sold to CBL during the
spring of 1999. On June 14, 1999, Marsh obtained the actual Primary
Policy and First Excess Policies from Insurers and delivered those to
CBL, along with cover notes and slips evidencing the other policies.
The SEC Enforcement Proceeding and Notice Under the Policy
Marsh is designated in the Policies as the entity that is to receive
notice on behalf of the Insurers and the Primary Policy states that
notice to Marsh "shall be
accepted by the underwriters as notice to the
On November 16, 1999, the SEC filed its complaint (the "SEC Complaint")
against CBL, Blech, Thomas Rittweger ("Rittweger") and Douglas Brandon
("Brandon"), and sought a temporary restraining order, asset freeze, and
appointment of a receiver. The SEC complaint alleges, among other things,
that Richard Blech, the former chairman and CEO of CBL, and others,
committed fraud which resulted in significant loss of CBL customers'
property. The next day, a copy of the SEC complaint was faxed to Marsh &
McLellan ("Marsh"), the agent designated by the Insurers to receive
notice on their behalf.
On November 18, 1999, a letter was sent by fax from Marsh's New York
City office to its London office enclosing a copy of the SEC complaint
and stating "[e]nclosed please find correspondence describing a situation
which may give rise to a claim under the captioned policy." The Insurers'
claim records indicate that the date of loss, as well as notice of loss,
took place on November 18, 1999. The SEC Action also was disclosed in an
article in the Wall Street Journal on November 18, 1999.
On November 23, 1999, this Court appointed Carl H. Loewenson, Jr. as
Fiscal Agent for CBL, Blech and Rittweger. November 23, 1999 Order.
On January 6, 2000, the Court appointed Mr. Loewenson as the
Receiver, finding that, as Fiscal Agent, Mr. Loewenson did not have:
a) . . . the power to marshall and take control of
funds, assets, securities and property owned, held or
in accounts in the name or under the control of Credit
Bancorp and did not have the other power or authority
of a Receiver as set forth in this Order; and
b) . . . the power or authority to take custody and
possession of the books, records and client information
or Credit bancorp . . . or the power or authority to
enter into transactions or other business dealings on
behalf of Credit Bancorp with third parties; and
c) . . . the authority to compel production of
documents or other information from third parties who
have had communications or business dealings with
Credit Bancorp; and
d) . . . the power or authority to command or direct
employees or agents of Credit Bancorp to perform any
acts to assist the Fiscal Agent in the performance of
January 21, 2000 Order Appointing Receiver at 2-3. The Court also found
that more than a month after his appointment as Fiscal Agent, Mr.
Loewenson had been unable to obtain all the books and records of CBL
relating to the existence and location of assets deposited by customers.
On January 21, 2000 the equity receivership was ordered and the
Fiscal Agent was appointed Receiver.
CONCLUSIONS OF LAW
At issue in the instant motion are the following six items:
1) Whether the Receiver is entitled to summary judgment as to the
Insurers' Second and Third Affirmative Defenses, which allege:
All of the Policies contain provisions that terminate
coverage in the event of the appointment of a Receiver
or Manager. On November 23, 1999 [the Court] appointed
Carl H. Loewenson, Jr., Esq. the Fiscal Agent of the
Credit Bancorp entities. Accordingly, upon information
and belief, all of the Policies were
terminated/cancelled on that date.
Second Affirmative Defense
All of the Policies contain provisions that terminate coverage in the
event of the
appointment of a Receiver or Manager. On January 21, 2000
[the Court] appointed Carl H. Loewenson, Jr., Esq. the Receiver of the
Credit Bancorp entities. Accordingly, upon information and belief, all of
the Policies were terminated/cancelled on that date.
Third Affirmative Defense (together, the "Appointment Defenses");
2) Whether either party is entitled to summary judgment as to the
Insurers' Seventh and Ninth Affirmative Defenses, which allege:
Upon information and belief, the application for the Policies
contained misrepresentations and/or omissions material to the
underwriting of the Policies. The Policies are
therefore rescinded and void ab initio.
Seventh Affirmative Defense
Upon information and belief, Blech incorporated, established and
founded Credit Bancorp intending to use that company as a
vehicle to defraud its customers; the true nature of
[CBL] was misrepresented and concealed by Blech and
Credit Bancorp in applying for the Policies, and a fraud
was thereby perpetrated upon the [Insurers]. The Policies
are therefore void and [the Receiver] is barred from
obtaining coverage thereunder.
Ninth Affirmative Defense (together, the "Misrepresentation Defenses");
3) Whether either party is entitled to summary judgment as to the
Insurers' Eighth Affirmative defense, which alleges:
Upon information and belief, . . . Blech, the sole
shareholder, president and chief executive officer of
Credit Bancorp, N.V., d/b/a/ Credit Bancorp Ltd., so
dominated and controlled Credit Bancorp, its
subsidiaries and related companies that he was the
"alter ego" of those entities. Therefore there is no
coverage under the Policies for losses arising out of
any fraudulent, dishonest or wrongful act, omission or
conduct of Blech.
(the "Alter Ego Defense");
4) Whether either party is entitled to summary judgment as to the
Insurers' Sixth Affirmative defense,*fn3 which alleges that the earlier
submission of two claims under the Policies were fraudulent and therefore
voided the Policies (The "Fraudulent Claims Defense");
5) Whether the Insurers are entitled to summary judgment on the issue
of whether coverage is provided under the Financial Institutions and
Professional Indemnity ("E&O") and the Director Officers Reimbursement
("D&O") Sections of the Primary Policy (the "E&O and D&O Coverage
6) Whether either party is entitled to summary judgment on
the issue of whether the Receiver was obligated to pay premiums on the
Excess Crime and Excess D&O Policies after the appointment of the
Receiver (the "Premiums Issue").*fn4
General Condition 7 of the Fidelity Portion of the Primary Policy provides
that, "[t]he construction, interpretation and
meaning of the terms,
exclusions, limitations and conditions of this Policy shall be determined
in accordance with the laws of the United Kingdom." Both U.K. and New
York authorities are relied upon, and since there is no conflict in
controlling law, a determination need not be, and is not, made as to
which law applies. See, e.g. In re Allstate Ins. Co., 613 N.E.2d 936, 937
(N.Y. 1993); Fruitico, S.A. de C.V. v. Bankers Trust Co., 833 F. Supp. 288,
296 (S.D.N.Y. 1993).
However as to "formation" issues such as fraud and, in particular, the
Insurers' 7th and 9th Affirmative Defenses, Condition 7 does not apply.
By its terms, Condition 7 does not apply to non-contractual
misrepresentation claim. Courts have held that contractual choice of law
provisions do not bind the parties with respect to noncontractual claims.
Plymack v. Copley Pharm., Inc., No. 93 Civ. 2655, 1995 WL 606272, at *5
(S.D.N Y Oct. 12, 1995) (Wood, J.); see also Krock v. Lipsay, 97 F.3d 640,
645 (2d Cir. 1996) ("Under New York law, a choice-of-law provision
indicating that the contract will be governed by a certain body of law
does not dispositively determine the law which will govern a claim of
fraud arising incident to the contract."
The Standard for Summary Judgment
Rule 56(c) of the Federal Rules of Civil Procedure provides that a
motion for summary judgment may be granted when "there is no genuine
issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law." The Second Circuit has repeatedly noted
that "as a general rule, all ambiguities and inferences to be drawn from
the underlying facts should be resolved in favor of the party opposing
the motion, and all doubts as to the existence of a genuine issue for
trial should be resolved against the moving party." Brady v. Town of
Colchester, 863 F.2d 205, 210 (2d Cir. 1988) (citing Celotex Corp. v.
Catrett, 477 U.S. 317, 330 n. 2 (1986) (Brennan, J., dissenting)); see
Tomka v. Seiler Corp., 66 F.3d 1295, 1304 (2d Cir. 1995); Burrell v. City
Univ., 894 F. Supp. 750, 757 (S.D.N Y 1995). If, when viewing the
evidence produced in the light most favorable to the non-movant, there is
no genuine issue of material fact, then the entry of summary judgment is
appropriate. See Burrell, 894 F. Supp. at 758 (citing Binder v. Long
Island Lighting Co., 933 F.2d 187, 191 (2d Cir. 1991)).
Materiality is defined by the governing substantive law.
"Only disputes over facts that might affect the outcome of the suit
under the governing law will properly preclude the entry of summary
judgment. Factual disputes that are irrelevant or unnecessary will not be
counted." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
"[T]he mere existence of factual issues — where those issues are
not material to the claims before the court — will not suffice to
defeat a motion for summary judgment." Quarles v. General Motors Corp.,
758 F.2d 839, 840 (2d Cir. 1985).
For a dispute to be genuine, there must be more than "metaphysical
doubt." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
586 (1986). "If the evidence is merely colorable, or is not significantly
probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50
I. The Appointment Defense is Dismissed
The termination provision in the fidelity section of the Primary Policy
provides, "This policy shall immediately cease to afford any coverage of
any kind in the
event of . . . the Appointment of a Receiver or Manager."
Equating appointment of the Fiscal Agent to appointment of a "Receiver or
Manager" under the Policy, the Insurers claim that any claims noticed
after November 23, 1999 are not covered because coverage terminated upon
the appointment of the Fiscal Agent. It is the Insurers' position that
the policies terminated upon the appointment of the Fiscal Agent pursuant
to the provisions cited above.
There is no dispute that the Insurers received notice of the SEC
complaint against CBL on November 18, 1999, five days prior to the
appointment of the Fiscal Agent on November 23, 1999.
Further, there is no dispute that the SEC complaint constituted notice
of four potential customer claims that were mentioned in the SEC
Even if the Insurers were correct in their assertion with respect to
the appointment of the Fiscal Agent, the defense cannot survive the
Receiver's motion for summary judgment because under the terms of the
fidelity section of the Primary Policy, notice of the SEC complaint,
which contained a description of the circumstances that could give rise
to future claims, constitutes notice of all claims based on the same
facts. This Court has already held that all of the actual claims for
which the Receiver seeks coverage relate to the factual allegations in
the SEC complaint. SEC v. Credit Bancorp, Ltd., 93 F. Supp.2d 475, 476
(S.D.N.Y. 2000). Thus, the Insurers received proper notice of all claims
in issue prior to the appointment of the Fiscal Agent.
The notice provision of the fidelity section of the Primary Policy
First advise of a loss or claim (or of circumstances
which could give rise to a loss or claim) being made by
the Assured to their representatives . . . shall be
accepted by Underwriters as notice to Underwriters.
Notice of each separate claim is not necessary under this provision.
Indeed, the existence of a claim is not necessary.
Notice of the discovery of a loss, or of circumstances which could give
rise to a loss or claim, is sufficient. The fidelity coverage sold to CBL
was not written on a "claims-made" basis. Rather, it ties coverage to
discovery of a loss, or a potential loss, during the policy period, not
the filing of a claim against the policyholder.
Two attorneys who regularly represent insurers in commercial crime
insurance cases have written with respect to a very similar insurance
Because modern fidelity coverages define when a loss is
"discovered" as the triggering event which determines the
applicable period of coverage and the insured's
obligation to provide timely notice to the insurers, the
date of discovery is a central question which must be
answered in every fidelity claim investigation.
[T]he discovery provision in the Commercial Crime Policy
clearly tie[s] coverage to discovery of possible loss,
and do[es] not require actual loss, or knowledge of all
the particulars of the loss, in order for discovery to occur.
Duncan L. Clore & John Tomaine, Discovery of Loss, in Handling Fidelity
Bond Claims, at 385, 390 (Michael Keeley & Timothy M. Sukel eds., 1990).
There is no factual dispute that CBL discovered, and then immediately
provided notice of, the SEC complaint and its factual allegations prior to
the appointment of the Fiscal Agent. The discovery was discovery of a
loss or of circumstances that could give rise to a loss or claim.
Subsequently filed claims related to that loss or those circumstances are
unaffected by the automatic termination-of-coverage provision.
For the reasons stated, there is no genuine issue of material fact as
to the appointment defenses. Summary judgment is granted in favor of the
Receiver as to the Insurers' second and third affirmative defenses.*fn7
II. The Misrepresentation Defenses Are
Dismissed on the Grounds of Ratification
The Insurers' seventh and ninth affirmative defenses allege that the
Insurers were induced to sell the Policies by CBL's misrepresentations in
the underwriting process.
For the following reasons, the Receiver's motion for summary judgment
is granted with respect to the seventh and ninth affirmative defenses.
While there may be a factual dispute as to the moment when Blech caused
CBL to become primarily fraudulent, any misrepresentations were in effect
ratified by the Insurers.
The Insurers contend they are entitled to rescind coverage if the
policyholder withholds any fact that would have effected either their
decision to underwrite the coverage, or the wording of any of the policy
provisions. A misrepresentation or material omission can form the basis of
rescission if the prudent underwriter would have wished to take the fact
into consideration in deciding whether to accept the risk and, if
applicable, how to rate the risk.
An insurance policy will be void where it is proven that the insured
fraudulently concealed a material fact in applying for coverage. See
Sebring v. Fidelity-Phoenix Fire Ins. Co., 255 N.Y. 382, 385(N.Y. 1931);
see also, Sun Ins. Co. v. Hercules Secs. Unlimited, Inc., 605 N.Y.S.2d 767,
770 (2d Dep't 1993). The burden of proof on the affirmative defense of
misrepresentation is on the insurance company. Home Ins. Co. v. Spectrum
Info Techs, Inc., 930 F. Supp. 825, 835 (E.D.N.Y. 1996); Keck v. Metro
Life Ins. Co., 264 N YS. 892, 893 (4th Dep't 1993), aff'd, 191 N.E. 495
(N.Y. 1934). The Second Circuit has noted:
There must be a preponderance of clear and convincing
evidence, in order to establish
fraud, concealment, or
misrepresentation on the part of the insured in
procuring the insurance . . . Such fraud or
misrepresentation will not be assumed on doubtful
evidence or circumstances of mere suspicion.
Brayer v. John Hancock Mut. Life Ins. Co.,
, 928 (2d Cir.
1950) (citation and quotation marks omitted.) Therefore, on a motion for
summary judgment, insurers must provide evidence that could lead to such
a determination. The Insurers must also show that the misrepresentations
or omissions were made prior to inception of the policy (N.Y. Ins. Law
The only affirmative representation by CBL that is identified by the
Insurers in their Answer is the unsigned Bankers Blanket Bond
"Application". The Declaration Clause of the Application provided that
the applicant, CBL, should sign the following:
No one from CBL signed the application, and the Insurers never
asked CBL to complete or sign that document.
The Insurers rely principally on two statements in the 1997 CBL
application in which it was written that CBL was a "privately held
financial services company" and its activities included "lending and
project management." The Receiver contends that the insurers have not
shown that these statements were false. He cites a number of facts
from discovery in this case that purport to show that the activities
of CBL were fully consistent with these statements. However, as the
Insurers correctly point out, on a motion for summary judgment, the
Insurers do not need to prove their case, they must merely provide
some evidence as to which there is a genuine issue of material fact.
The other alleged misrepresentations made in connection with the 1997
underwriting are alleged by Simon Allport, one of the underwriters,
who testified that CBL represented to him as "an emerging banking
organization which had global aspirations" and testimony by William
Knapman. In connection with the 1999 underwriting of the Second
Excess Crime and Excess E&O Policies, Knapman testified that it had
been represented falsely that there had been no claims under the
Other alleged misrepresentations cited by the Insurers, for instance
that, in Marsh's opinion, CBL was "impeccable", are merely expressions of
an imprecise opinion on the part of Marsh and are legally insufficient to
support a claim of rescission. Bronx Savings Bank, 136 N.E.2d at 850.
The Insurers' principal argument is that CBL was a fraud from its
inception and that CBL did not disclose that fact in the 1997
application. The Receiver argues that the Insurers have submitted no
evidence establishing that CBL was involved in a fraudulent scheme since
its inception or that the fraud was in place at the time that CBL
purchased the coverage in 1997.
Based on these facts, one of the underwriters, Michael Moss, considered
recision in the Fall of 1998 and, along with two other syndicates,
withdrew his syndicate from the three-year All Risk Securities Policy
after less than a year.
Despite the fact that each section of the Policy at issue contained a
non-cancellation clause, there is no dispute that the Policies could have
been rescinded based on a revelation that there was fraud in the
underwriting. The Insurers point out that they could not rescind the
Policies and, effectively, close CBL's operations, barring compelling
reasons. See Jack C. Stern, Post-Loss Rescission of Insurance Coverage,
N.Y.L.J., April 18, 1994 at A1. However, evidence of fraud as existed
here is sufficient. The Insurers were entitled to rescind their
policies in 1998, when they learned that CBL was not regulated and
was not a viable entity, and were explicitly warned that there was
evidence of fraud. Since they chose not to, they are deemed to have
ratified the Policy.
The Insurers assert that defenses relating to the existence of coverage
are not waivable because a court cannot create coverage where none
exists. For this principle, Insurers rely on Powers Chemco, Inc. v.
Federal Ins. Co., 504 N.Y.S.2d 738, 739 (2d Dep't 1986). As pointed out
by the Insurers, that case holds that "any defenses which relate to the
issues of coverage or non coverage are not waivable, because the courts
will not create coverage where none otherwise exists." Id., at 739
(citing, Albert J. Schiff Associates, Inc. v. Flack, 51 N.Y.2d 692). The
Insurers insist that this holding applies explicitly to the facts of this
In New Hampshire, the FDIC, in its capacity as a receiver for a failed
savings and loan institution, sued New Hampshire Insurance Company, which
had sold a fidelity bond to the savings and loan, in order to recover
losses that had been sustained due to the fraudulent or dishonest acts
committed by the savings and loan's former president, director and sole
shareholder. 953 F.2d at 380. The fidelity bond's definition of
"employee" in New Hampshire (like that in CBL's) did not include "govern
and direct" language. Id., at 482. The Ninth Circuit held that the
savings and loan's former president, director and sole shareholder was a
covered employee and distinguished cases where "the courts were concerned
with a special limitation on the definition of the term `employee' not
present in this matter." Id., at 482.*fn13
The Insurers' contend that any claims of negligent, non-fraudulent
conduct on the part of any CBL employee other than Blech would
necessarily arise form that person's failure to uncover or prevent
Blech's fraud. Even if that is true, it is irrelevant.
The Receiver and Messrs. Rittweger and Brandon do not challenge this
"but for" analysis. There can be no dispute that but for the alleged
fraud by Blech, there could be no negligent failure to discover it.
However, the last sentence of the specific exclusion for dishonesty and
fraud (Exclusion E in the E&O Coverage and Exclusion G in the D&O
Coverage) expressly states that the exclusion does not apply to persons
other than the dishonest actor. Under the Insurers' reasoning, if
there has been an instance of dishonesty or fraud, Exclusion E bars
coverage for all losses arising out of related negligent,
non-dishonest conduct. That would render the non-imputation clause of
Exclusion E meaningless. The language in the Policy contemplates a
different causation analysis. If another director, officer or
employee was negligent, his negligence was independent of Blech's
fraud. In other words, such negligence or recklessness was not
"brought about by or contributed to by" the fraudulent conduct.
In 1960, an Australian appellate court, applying the law of the United
Kingdom, addressed a similar issue. The Court rejected the Insurers
argument that the alleged wilful and deliberate conduct of the employee
should be imputed to the employer. The court held:
Simon Warrender Proprietary, Ltd. v. Swain 111, 116.
Section 2 of the Primary Policy, to which the Excess E&O Policy follows
form, contains only one relevant clause. Section VII.C, General
Conditions — Cancellation Clause provides that:
Section 2 of the Primary Policy also includes a definition of
Corporate Take-Over which includes "appointment . . . of a
receiver." That definition is not included in Section 1 and the
structure of the Primary Policy, which is divided in three distinct
sections, providing different types of coverage, does not indicate or
suggest that such definition should apply in a section in which it
does not appear.
The Insurers rely on the definition contained in Section 2 of the to
argue that the "takeover/merger" clauses in both sections of the Primary
Policy control the premium payments issue for both of the Excess
Policies. This contention requires that two separate provisions,
General Conditions 1 and 2 of Section 1(A) of the Primary Policy, be
rewritten into a single provision that equates the appointment of a
Receiver with a takeover/merger.
Insurers argue that even though the Primary Policy was terminated upon
the appointment of a Receiver, the Receiver should pay the second premium
payments for the Excess Policies because such policies follow form to the
"takeover/merger" clauses quoted above. However, the Excess Policies only
follow form to the terms and conditions of the Primary Policy "as far as
applicable". The Primary Policy requires the payment of a single premium
for a three year period at the inception of
the policy. The Insurers have
made no showing that the premium provision of the Primary Policy is
"applicable" to the Excess Policies each providing for two premium
payments to cover different time periods.
The Insurers' reliance on Home Insurance Co. v. American Home Products
Corp., 902 F.2d 1111, 1113 (2d Cir. 1990), for the proposition that the
obligations of a following form excess insurance policy are defined by
the language of the underlying policy is misplaced. In Home Insurance,
the excess policy followed form to the underlying policy "except as
otherwise provided" in the excess policy. Id. at 1113. The Second Circuit
found that the excess policy did not follow form, because both the
underlying and excess policies contained their own provisions regarding
the dispute. Id. at 1114. More importantly, the follow form language in
Home Insurance differs from that found in the Excess Policies in this
case which provides that they follow form "as far as applicable." Thus
Home Insurance does not support the proposition that the
premiums provision in the CBL Primary Policy must be read into
the Excess Policies.
Here, the provisions of the Primary Policy are not "applicable"
because they do not account for the premium payment arrangement set
up in the Excess Policies. The Excess Policies do not follow form to
the Primary Policy with respect to the payment of premiums.
Since the standard practice as well as the practice employed in
the Primary Policy provide for a single payment for a multi-year
policy, and in the Excess Policies the first premium payment is
calculated to correspond to 343 days of coverage and the second
corresponds to an entire 365 day annual period, the premiums apply
to two separate policy periods. The use of the word "installment"
does not indicate otherwise because it is consistent with the notion
of separate payment periods.
Where a policy or contract of insurance is lawfully terminated
by wither party, the liability of the policyholder for further
premiums ceases. Massachusetts Bonding & Ins. Co. v. Harrisonburg
Trust Co., 24 F. Supp. 269, 270-71 (M.D.Pa. 1938);
5 Eric Mills Holmes, Appleman on Insurance 2d § 24.4 (1999)
("Once a policy has expired or is cancelled, no premiums are due for
any period thereafter"); 2 Lee R. Russ, Couch on Insurance 3d
§ 30:23 (1997) ("[W]hen a policy is effectively cancelled, the
insured is not liable for further premiums which would become due
thereafter"); 45 Lawrence J. Culligan, Corpus Juris Secundum
Insurance § 450(b) (1993). As the New York courts have held:
A premium is paid the surety as compensation for
assuming liability, but where the liability no longer
exists there can be no reason for thinking the parties
contemplated a continuation of its payment.
National Surety Co. v. Stallo, 156 N.Y.S. 988, 990, 171 A.D. 206,
210 (1st Dep't 1915).
Therefore, no payment is due with respect to the second policy
period since the coverage was terminated by the appointment of the
Receiver prior to the date the payment would have been due.
For the reasons stated, the Receiver's motion for partial summary
judgment is granted with respect to the Appointment Defenses, the
Misrepresentation Defenses, the Alter Ego Defense and the Premiums
Payment Issue. The Insurers' cross-motion for partial summary judgment is
It is so ordered.