New York's highest court recently held that additional insureds may be precluded from obtaining insurance coverage if the named insured misrepresented its business operations during the underwriting process.
In Admiral Insurance Co. v. Joy Contractors, Inc., __ N.Y.3d __, 2012 NY Slip Op 4670 (June 12, 2012), the Court of Appeals considered whether additional insured coverage extends to other parties when the policyholder, Joy Contractors, Inc. ("Joy"), allegedly indicated in its underwriting submission that it specialized in drywall installation and did not perform work above two stories in height other than drywall interior work. However, at the time of the loss, Joy was acting as the structural concrete contractor performing work on a high-rise building's entire exterior with the use of a tower crane. The crane collapsed and killed seven people, injured dozens, damaged several buildings, and destroyed one.
Admiral Insurance Company ("Admiral") was the excess insurer for Joy and brought a declaratory judgment action against Joy, as well as the building's owners and developers, the general contractor and the crane's lessor, all of whom were seeking additional insured coverage under the Admiral policy. Admiral had denied coverage for the loss based upon an exclusion for "residential construction activities" and also because of alleged misrepresentations made by Joy in its underwriting submission. In addition to arguing that the "residential construction activities" exclusion was ambiguous, the purported additional insureds claimed that they could not be bound by the named insured's alleged misrepresentations because their claim for additional insured coverage was separate and distinct from the named insured's claim.
In reviewing whether the additional insureds were bound by the named insured's alleged misrepresentations, the Court distinguished several lower court decisions which held that additional insureds are not bound by such misrepresentations. For example, in BMW Fin. Servs. NA, Inc. v. Hassan, 273 A.D.2d 428 (2d Dep't 2000) and Lufthansa Cargo, AG v. New York Mar. & Gen. Ins. Co., 40 A.D.3d 444 (1st Dep't 2007), the courts held that the additional insureds were not bound by the named insured's wrongdoing. Significantly, however, the Court of Appeals noted that in those cases, the additional insureds were specifically named on the policy along with the policyholder, which provided the insurers with the opportunity to evaluate the risks for which coverage was being sought. However, the purported additional insureds were not listed on the Admiral policy.
The Court of Appeals also distinguished the decisions in Morgan v. Greater New York Taxpayers Mut. Ins. Ass'n, 305 N.Y. 243 (1953) and Greaves v. Public Service Mut. Ins. Co., 5 N.Y.2d 120 (1959), where the Court held that exclusions in a policy must be applied separately for the named insureds and for the additional insureds. As the Court of Appeals explained, in both of those decisions, there was no dispute that the policies were valid and effective, and the insurers were not seeking to rescind the policy based upon an alleged misrepresentation by the insured.
In light of the named insured's alleged misrepresentations, the Court held that it was improper to dismiss Admiral's causes of action for rescission and reformation against the purported additional insureds. The Court of Appeals' decision in this case is significant because additional insureds may be bound by any misrepresentations made by the named insured during the underwriting process, especially where, as here, the insurer had no opportunity to evaluate the significant additional exposure that the named insured was undertaking.
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