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Ocean Walk, Ltd. v. Those Certain Underwriters at Lloyd's of London

September 19, 2006

OCEAN WALK, LTD., PATRICK MCEVOY AND JOANNE MCEVOY, PLAINTIFFS,
v.
THOSE CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON SUBSCRIBING TO POLICY NO. 595/NO313790R, DEFENDANTS.



The opinion of the court was delivered by: Hurley, Senior District Judge

MEMORANDUM OF DECISION AND ORDER

This case arises from the ashes of a fire, so to speak. Plaintiffs owned property that the Defendants insured. After a fire at the property, Plaintiffs made an insurance claim, but Defendants denied the claim on the basis that the Plaintiffs breached the insurance contract. This action followed.

Plaintiffs Patrick McEvoy, Joanne McEvoy, and Ocean Walk, Ltd. (collectively, "Plaintiffs") brought suit against Defendants Those Certain Underwriters at Lloyd's of London subscribing to Policy NO. 595/NO313790R ("Defendants") claiming breach of an insurance contract based on Defendants' failure to reimburse Plaintiffs for loses allegedly covered by an insurance policy issued by Defendants. Defendants raised several affirmative defenses, arguing they are not liable to Plaintiffs under the subject insurance policy because of Plaintiffs' misrepresentations in procuring the subject insurance and because of Plaintiffs' breaches of conditions and warranties made under the contract. Presently, Defendants have moved for summary judgment on Plaintiffs' entire breach of contract claim and Plaintiffs have moved for partial summary judgment on selected affirmative defenses raised by Defendants. Plaintiffs have also requested the Court direct the parties to mediate their dispute. Defendants ask that the motions for summary judgment be resolved first before any mediation commences. For the reasons stated below, Defendants' Motions for Summary Judgment is DENIED and Plaintiffs' Motion for Partial Summary Judgment is DENIED. Plaintiffs' request for mediation is GRANTED.

MATERIAL FACTS

In compliance with the Local Rule 56.1, Plaintiffs and Defendants have each filed a Local Rule 56.1 Statement of Facts in support of their respective Motions for Summary Judgment; each has also filed a responding Counter-Statement of Facts. (See Pls.' Statement of Facts Pursuant to Local Rule 56.1 ("Pls.' Facts"); Defs.' Counter-Statement of Material Facts in Opp'n. to Pls.' Mot. Summ. J. "Defs.' Opp'n")) Additionally, the parties have filed voluminous exhibits in support of their respective positions. The following summary of facts is undisputed, except where otherwise noted.

Plaintiffs Patrick and Joanne McEvoy are in the business of real estate development. They were also the principal owners of Plaintiff Ocean Walk, Ltd., a seasonal bar and restaurant located on Fire Island, New York. In addition to owning the bar and restaurant, Plaintiffs owned the property on which the establishment sits, i.e., 177 Ocean Walk, Cherry Grove, Fire Island, New York (the Property"), having purchased it in January 1999. After buying the Property, the Plaintiffs renovated it, spending approximately $1.7 to $1.8 million on the renovations. (See Pls.' Facts at ¶ 3.)

Defendants are a consortium of Lloyd's underwriters that provided the subject insurance coverage on the Property. Defendants contend that the value of the Property post-renovation was "only in the range of $1.4 - $1.5 million." (Defs.' Opp'n at ¶ 3). When the renovations were complete, Plaintiffs sought to sell the Property, but operated the bar and restaurant while the Property was being marketed.

Once they purchased the Property, Plaintiffs secured insurance on the Property through their insurance broker, Maran Associates ("Maran"), and Maran employee Thomas Crowley. The insurance coverage was: (1) underwritten by Lloyd's of London; (2) was for a one-year period; (3) had a liability limit of $750,000; and (4) contained no warranties. The policy was renewed yearly until 2002.

In early January 2002, through their insurance broker, Plaintiffs sought to renew their insurance with a much higher liability limit for the Property, to wit, $3.13 million (hereinafter, the "2002 Policy"). There is a dispute as to whether, since acquiring the Property, the Plaintiffs have always purchased their property insurance from Defendants. (See Pls.' Facts ¶¶ 8-10; Defs.' Opp'n ¶¶ 8-10.) Defendants claim that "a different group of Lloyd's syndicates" issued the 2000 and 2001 policies. (See Defs.' Opp'n ¶¶ 8-10.) Furthermore, Defendants dispute whether the approving underwriter, if aware of the Property's true market value--claiming Plaintiffs substantially overstated the Property's value--would have agreed to bind coverage. (See Defs.' Opp'n ¶ 13; see also id. at ¶ 16 (disputing Plaintiffs' assertion that fair market value of Property was $3.1 million just prior to fire). Moreover, Defendants dispute whether the requested increase in coverage was based on the Plaintiffs seeking refinancing of an existing mortgage. (See Pls.' Facts ¶ 14; Defs.' Opp'n ¶ 14.) The 2002 Policy was issued for a period commencing on January 13, 2002, through January 13, 2003.

Regarding the Plaintiffs' 2002 application for insurance: Plaintiffs state that the application they submitted to Defendants "did not contain any misrepresentations," (Pls.' Facts ¶ 17), but that if there were any misrepresentations, they were not material because "they did not cause Defendant [(sic)] to change or delete any coverage," (id. at ¶ 18.) There was no inquiry in the application "as to why Plaintiffs wanted to increase their policy limits." (Id. at ¶ 19.) Defendants counter that, indeed, Plaintiffs' application did contained material misrepresentations of fact. (See Defs.' Opp'n at ¶¶ 17-18 (citing, inter alia, Affidavit of Jonathan Marshall at ¶¶ 3-5)). Moreover, the application asks for "information as to building coverage limits requests and it is implicit in this application and understood that Plaintiffs would provide true and accurate answers," (id. at ¶ 19), but that Plaintiffs gave a false reason for requesting the increased coverage, (see id.).

The 2002 Policy was bound by Defendants by a "Cover Note issued by Besso, Ltd. ("Besso") on or about January 13, 2002." (Pls.' Facts ¶ 21; see Defs.' Opp'n ¶ 21.) However, Defendants dispute Plaintiffs' claim that they (Plaintiffs) immediately requested a copy of the 2002 Policy after receiving the Binder. (Cf. Pls.' Facts ¶ 22, with Defs.' Opp'n ¶22). And, while Defendants "do not dispute the contention that the policy was mailed to Plaintiffs or their agent on May 20, 2002," (Defs.' Opp'n ¶ 23), they contest the implication that mailing of the Policy was late or outside the ordinary course of business. (See Defs.' Opp'n ¶23.) Relatedly, Plaintiffs assert that they learned of the specific warranty language only after the fire occurred, when they received a copy of the 2002 Policy. (See Pls.' Facts ¶¶ 24, 33.) Yet, Defendants controvert this fact, stating that Plaintiffs and Thomas Crowley "were in possession of the Cover Note, Binder, and/or Confirmation of Coverages which specifically advised that the 'Sprinkler Maintenance Warranty' and 'Central Station Alarm Warranty' were included in the Policy, and that Plaintiffs are required to comply with those warranties or no coverage is provided." (Defs.' Opp'n ¶¶ 24, 33; see also id. at 52 (refuting Plaintiffs' assertion that warranties not in full force and effect on date of fire because Plaintiffs did not have knowledge of them)).

There is dispute whether Plaintiffs performed spring maintenance and clean-up in anticipation of the Summer 2002 season; Defendants claim Plaintiffs failed to perform maintenance on the Property's sprinkler system and did not repair broken windows on the Property. (See Pls.' Facts ¶ 4; Defs.' Opp'n ¶ 4.) Along those lines, Plaintiffs contend that they sought to have the alarm system regularly inspected to ensure functionality, but that the alarm company "declined to inspect" the Property until the spring, when the ferry was regularly servicing Fire Island. (See Pls.' Facts ¶¶ 31, 32.) Defendants challenge this alleged fact, asserting that it was Plaintiffs who refused to enter into an annual inspection contract with the alarm company; the alarm company "did not refuse to inspect the premises." Rather, limited ferry service hindered the alarm company's access to the Property. (See Defs.' Opp'n ¶¶ 31, 32.)

Regarding the 2002 Policy's "caretaker provision": Plaintiffs allege that on March 7, 2002, through their agent, Defendants became aware that there was no caretaker at the Property, but that Defendants continued to insure the Property. (See Pls.' Facts ¶¶ 35-36.) Since this provision is not a warranty, it imposes no obligations on Plaintiffs. (See id. at ¶ 37.) Defendants counter that its agents--Besso and NIF Services ("NIF")--were agents only as to issuance of the Policy, not as to compliance therewith. (See Defs.' Opp'n ¶¶ 35-36.) In any event, Plaintiffs were required to comply with the "caretaker provision" since Defendants would not have issued the subject Policy "if Plaintiffs had not made the representation that the premises would be occupied year round by a caretaker." (Id. at ¶ 37.) Plaintiffs dispute whether Besso and NIF (and certain of their employees) had authority to underwrite insurance policies or bind Defendants to coverage. (See Pls.' Facts ¶¶ 38-40.)

On March 24, 2005, Plaintiff Patrick McEvoy showed the Property to James Jansen, a person to whom McEvoy leased the Property for the Summer 2002 season. A week prior to this showing, the Property was vandalized, with several windows and a glass door being broken. The parties dispute whether Plaintiffs exercised due diligence in immediately boarding up the broken glass. (See Pls.' Facts ¶ 44; Defs.' Opp'n ¶ 44.) Likewise, Defendants dispute Plaintiffs claims that, because of difficulties getting to the Property, "it proved difficult to get proper contractors to the premises to repair the windows and door." (Pls.' Facts ¶ 45; see Defs.' Opp'n ¶ 45.) Further, Defendants contest Plaintiffs' asserted fact that, because proper repairs could not be made, the burglar alarm system could not be set, as wind coming through the windows and doors would trigger the alarm. (See Pls.' Facts ¶¶ 46, 49; Defs.' Opp'n ¶¶ 46, 49.) Similarly, while not disputing that Property's sprinkler system was properly installed, Defendants do dispute Plaintiffs' contention that the Property's sprinkler system was in full working order on March 24, 2002, (see Pls.' Facts ¶ 51), since "all the available evidence in the record establishes that the sprinkler system was not in working order at the time of the fire." (Defs.' Opp'n ¶ 51.)

On March 24, 2002, at approximately 11:50 P.M., a fire occurred at the Property. "[T]he central station was notified of the fire via an alarm." (Pls.' Facts ¶ 56.) Thereafter, the Arson Squad of the Suffolk County Police Department conducted an investigation into the cause and origin of the fire. Among other things, the investigation uncovered that the water supply to the Property's sprinkler system was turned off at the curb.

Defendants dispute Plaintiffs' claimed damages caused by the fire. (See Defs.' Opp'n at ¶¶ 54-55.) They further dispute Plaintiffs' assertion that the Arson Squad detective did not identify any suspect, stating "Plaintiff Patrick McEvoy has been considered a possible suspect in the arson investigation and has never been ruled out as a suspect." (Id. at ¶ 60.)

Plaintiffs gave timely notice of the loss caused by the fire, but Defendants dispute that proof of loss was adequate or timely. (See id. at ¶ 66.)

PROCEDURAL BACKGROUND

In July 2003, Plaintiffs made an insurance claim to Defendants, submitting a proof of loss statement. Receiving no response to their insurance claim, in October 2003, Plaintiffs commenced an action for breach of the insurance contract in New York State Supreme Court.

On the basis of diversity jurisdiction, Defendants removed the action to federal court on October 20, 2003. There is no dispute that New York State law is applicable here.

In their Answer, Defendants allege that they are not the same group of underwriters that previously insured Plaintiffs. Moreover, Defendants assert that the 2002 Policy was not a renewal policy; it was a new policy, including new conditions and requirements, such as the alarm warranty, the sprinkler maintenance warranty, and the caretaker provision. Defendants also posit that Plaintiffs made material misrepresentations in their insurance application and, but for those misrepresentations, Defendants would not have issued the policy it did. Furthermore, Defendants contend that Plaintiffs did not strictly comply with the new requirements of the 2002 Policy. Therefore, because of Plaintiffs' alleged breaches, Defendants were justified in denying coverage for the damage caused by the March 2002 fire.

Prior to the parties moving for summary judgment, Defendants moved for judgment on the pleadings (doc. #15) as to Plaintiffs' allegations of: (1) violation of New York State's Code of Rules and Regulations § 216.6, entitled "Standards for prompt, fair and equitable settlements;" and (2) violation of good faith and fair dealing under the insurance contract. Plaintiffs also sought a total of $3.5 million in consequential damages for loss of a buyer or rental income, together with interest, costs and disbursements. The Court granted Defendants' motion (doc. #46) because there is no private cause of action under 11 N.Y.C.R.R. § 216.6 and because New York State does not recognize a cause of action for bad faith denial of insurance coverage. Further, finding the 2002 Policy did not contemplate recovery for such losses, the Court also found Plaintiffs were precluded from recovering consequential damages and attorney's fees. All that remains of Plaintiffs' complaint is their breach of contract claim.

Defendants now seek summary judgment dismissing Plaintiffs' complaint in its entirety. (See Defs.' Mem. Of Law in Support of Mot. Summ. J. at 1 ("Defs.' S.J. Mem.").) Defendants put forth three main arguments in support of their summary judgment motion: (1) Plaintiffs breached the alarm and sprinkler maintenance warranties contained in the 2002 Policy and the law requires strict compliance of those warranties; (2) Plaintiffs made material misrepresentations in their application for the subject Policy and, therefore, the Policy is void; and (3) Plaintiffs' failure to have a caretaker at the Property and failure to have daily security patrol of the Property was in breach of the Policy's provisions and Plaintiffs' claim that they would have both a caretaker and daily security patrol was a misrepresentation made in procuring coverage.

Conversely, Plaintiffs seek partial summary judgment dismissing three categories of Defendants' affirmative defenses: (1) those affirmative defenses (i.e., the second, third, fourth, fifth, and sixth) claiming that Plaintiffs made material misrepresentations in applying for insurance when they sought to raise the liability limit in January 2002; (2) the affirmative defense asserting that Plaintiffs breached the alarm and sprinkler maintenance warranties, as well as failed to abide by a "caretaker provision", all captioned in the Policy's Cover Note (i.e., Defendants' tenth affirmative defense); and (3) the affirmative defense contending that Plaintiffs directly or indirectly caused the subject fire to take place (i.e., Defendants' first affirmative defense). (See Pls.' Notice of Motion for Summ. J. at 1-2.) In support of their motion, Plaintiffs raise five main points: (1) others with whom Plaintiffs interacted, to wit, Besso and NIF were agents of the Defendant; thus, information known to the agents must be imputed to Defendants; (2) there is no evidence suggesting Plaintiffs made any material misrepresentations in their application for insurance; (3) Plaintiffs did not breach any warranties in the policy; (4) the "caretaker" condition is not a viable defense to avoid coverage; and (5) there is no evidence of arson, so Defendants cannot use that as a defense.

The Plaintiff fine-tune their arguments in response to Defendants' motion for summary judgment: (1) since they were not aware of the specific language of the 2002 Policy--specifically, the alarm and sprinkler maintenance warranties--until after the fire, Plaintiffs cannot be held to have breached conditions of the Policy; (2) assuming a warranty was breached; Plaintiffs did not materially breach such warranty; and (3) Plaintiffs did not make any material ...


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