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National Specialty Insurance Co. v. 218 Lafayette St. Corp. LLC

March 7, 2008


The opinion of the court was delivered by: John G. Koeltl, District Judge


The plaintiff, National Specialty Insurance Company ("NSIC") brings this action pursuant to the Federal Declaratory Act, 28 U.S.C. § 2201, and Rule 57 of the Federal Rules of Civil Procedure seeking a declaratory judgment that an insurance policy issued to the defendant, 218 Lafayette St. Corporation LLC t/a The Falls ("The Falls"), is void ab initio. There is diversity of citizenship jurisdiction pursuant to 28 U.S.C. § 1332(a)(1). The plaintiff now moves for summary judgment to avoid the contract ab initio or, alternatively, to have the insurance policy reformed.


The standard for granting summary judgment is well established. Summary judgment may not be granted unless "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that 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." Fed. R. Civ. P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Gallo v. Prudential Residential Servs. Ltd. P'ship, 22 F.3d 1219, 1223 (2d Cir. 1994). The trial court does not resolve issues at this stage, but rather discerns whether material facts are in issue. See Gallo, 22 F.3d at 1224. The moving party bears the initial burden of informing the district court of the basis for its motion and identifying the matter that it believes demonstrates the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323.

Summary judgment is appropriate if it appears that the non-moving party cannot prove an element that is essential to the non-moving party's case. See Cleveland v. Policy Mgmt. Sys. Corp., 526 U.S. 795, 805-06 (1999); Celotex, 477 U.S at 322; Powell v. Nat'l Bd. of Med. Exam'rs, 364 F.3d 79, 84 (2d Cir. 2004). In determining whether summary judgment is appropriate, a court must resolve all ambiguities and draw all reasonable inferences against the moving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)); see also Gallo, 22 F.3d at 1223. If the moving party meets its initial burden of showing a lack of a material issue of fact, the burden shifts to the nonmoving party to come forward with "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). The nonmoving party must produce evidence in the record and "may not rely simply on conclusory statements or on contentions that the affidavits supporting the motion are not credible." Ying Jing Gan v. City of New York, 996 F.2d 522, 532 (2d Cir. 1993).


The following facts are undisputed, unless otherwise noted. NSIC is an insurance company with its principal place of business located in Texas. (Plaintiff's Local Rule 56.1 Statement ("Pl's 56.1 Stmt.") ¶ 1; Defendant's Response to Plaintiff's Local Rule 56.1 Statement ("Def's 56.1 Reply Stmt.")

¶ 1.) Since 2004, RCA Insurance Group ("RCA") has served as an insurance underwriter for NSIC and has issued insurance policies in New York under RCA's food and beverage program. (Pl's 56.1 Stmt. ¶ 1; Def's 56.1 Reply Stmt. ¶ 2). The policies are issued according to underwriting guidelines, which require an insurance policy to contain "a full assault and battery exclusion on both [general liability] and Liquor coverages" when the insured uses "[b]ouncers, door persons, or any other security personnel." (Pl's 56.1 Stmt. Ex. J, at 4.) Such an exclusion removes from the scope of coverage any damage arising out of an assault or battery that occurs at the insured's establishment. RCA has the power to bind NSIC in administering this program. (Pl's 56.1 Stmt. ¶ 4; Def's 56.1 Reply Stmt. ¶ 4.)

The Falls is a restaurant incorporated under the laws of New York State with its principal place of business at 218 Lafayette Street in New York City. (Defendant's Local Rule 56.1 Counter Statement ("Def's 56.1 Counter Stmt.") ¶¶ 1, 3; Plaintiff's Response to Defendant's Local Rule 56.1 Counter Statement ("Pl's 56.1 Reply Stmt.") ¶¶ 1, 3.) In the summer of 2004, Michael Dorrian, the owner of The Falls, hired Durkin Agency ("Durkin"), an insurance broker, to procure insurance for the restaurant. (Def's 56.1 Counter Stmt. ¶¶ 5-8; Pl's 56.1 Reply Stmt. ¶¶ 5-8.) Using information provided by Dorrian, Durkin prepared and submitted an application for insurance to RCA. (Def's 56.1 Counter Stmt. ¶ 9; Pl's 56.1 Reply Stmt. ¶ 9.) The defendant answered "no" to the following questions on the application: "Entertainment"; "Are Any Bouncers, Door Person or Security Used, if yes Describe Type and Purpose"; "Are Any Non-Employee Security Services Hired or Contracted, if Yes Describe Type and Purpose." (Pl's 56.1 Stmt. Ex. F, at 2, 3) On August 6, 2004, RCA issued a one-year insurance policy to The Falls on behalf of Everest National Insurance Company. (Def's 56.1 Counter Stmt. ¶ 16; Pl's 56.1 Reply Stmt. ¶ 16.) The policy did not contain an assault and battery exclusion.

In July of 2005, Durkin again prepared and submitted an insurance application to RCA. (Def's 56.1 Counter Stmt. ¶ 33; Pl's 56.1 Reply Stmt. ¶ 33.) The 2005 application was a photocopy of the 2004 application submitted to RCA, with only the date having been changed. (Def's 56.1 Counter Stmt. ¶¶ 19-27; Pl's 56.1 Reply Stmt. ¶¶ 19-27.) The answers to the entertainment and security questions remained the same. (Def's 56.1 Counter Stmt. ¶ 29; Pl's 56.1 Reply Stmt. ¶ 29; see Pl's 56.1 Stmt. Ex. G, at 2, 3.) RCA issued a one-year insurance policy on behalf of the plaintiff for the policy period beginning August 6, 2005 and ending August 6, 2006, again without an assault and battery exclusion. (Def's 56.1 Counter Stmt. ¶ 34; Pl's 56.1 Reply Stmt. ¶ 34.)

Consistent with its practice, RCA hired Alessio Inspection Services to inspect The Falls on August 12, 2005. (Def's 56.1 Counter Stmt. ¶¶ 37-38; Pl's 56.1 Reply Stmt. ¶¶ 37-38.) The inspection revealed the presence of both live entertainment and security at The Falls. (See Pl's 56.1 Reply Stmt. Ex. A, at 1.) Alessio submitted its report to RCA on August 22, 2005. Because the underwriting guidelines required that an insurance policy contain an assault and battery exclusion when an insured hosted entertainment or used security, RCA cancelled the defendant's contract on December 13, 2005. (See Pl's 56.1 Reply Stmt. Ex. B.) The letter noticing cancellation stated the grounds for cancellation: "Underwriting Reasons: Material Misrepresentation -- Entertainment." (Id.) No cancellation was sent on the grounds that The Falls used security. On December 21, 2005, Michael Dorrian advised RCA that although The Falls had hosted a guitar player on occasion during the summer, no entertainment was currently provided and none would be provided in the future. (Id., Ex. C.) On January 17, 2006, RCA reinstated the defendant's insurance policy, again without an assault and battery exclusion. (Pl's 56.1 Stmt. Ex. L., at 1) Whether RCA was aware of the presence or absence of security at The Falls upon reinstatement is unclear.

NSIC became aware of the presence of security after a security guard, whom the defendant employed, allegedly murdered a patron after she left The Falls on February 25, 2006. On May 11, 2006, NSIC notified the defendant that it would seek a declaration voiding the policy ab initio on the grounds that the defendant had made a material misrepresentation of fact on its 2005 application for insurance with regard to the presence of security. (Id.) On May 18, 2006, NSIC sent a reimbursement check in the amount of $17,960.00 to the defendant, which represents the full premium including fees and taxes paid by the defendant. (Id., Ex. M.)


The plaintiff first seeks to void the contract pursuant to N.Y. Ins. Law § 3105, which provides that if an insurance policy is issued in reliance on a material misrepresentation, an insurer may avoid the policy from its inception. See id. § 3105(b); Republic Ins. Co. v. Masters, Mates & Pilots Pension Plan, 77 F.3d 48, 52 (2d Cir. 1996); Phila. Indem. Ins. Co. v. Horowitz, Greener & Stengel, LLP, 379 F. Supp. 2d 442, 452 (S.D.N.Y. 2005); Wedtech Co. v. Fed. Ins. Co., 740 F. Supp. 214, 218 (S.D.N.Y. 1990).*fn1 The statute defines "misrepresentation" as a false "statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof." N.Y. Ins. Law § 3105(a). A misrepresentation is "material" if "knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such a contract." Id. § 3105(b); see also Vella v. Equitable Life Assurance Soc'y, 887 F.2d 388, 391 (2d Cir. 1989); Mutual Benefit Life Ins. Co. ...

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