A Named Insured’s Misrepresentations Could Jeopardize Additional Insured’s Coverage

A recent decision from New York’s highest court raises serious concerns about an “innocent” additional insured’s right to insurance protection in the face of its named insured’s misrepresentations. See Admiral Insurance Company v. Joy Contractors, Inc., 2012 NY Slip Op 4670 (N.Y. June 12, 2012).

By way of background, on March 15, 2008, a tower crane collapsed during the construction of a luxury high-rise condominium building in Manhattan. Seven people were killed, dozens injured and significant property damage resulted. The tower crane was operated by Joy Contractors (Joy) which, among other insurance, carried an excess policy with limits of $9M each loss and in the aggregate issued by Admiral Insurance Company (Admiral).

Admiral denied coverage as to Joy, and various additional insureds (e.g., New York Crane (the crane lessor) and East 51st Street (the building owner/developer)) on the basis of the policy’s “residential construction activities” exclusion which excluded coverage for “any work or operations related to the construction of single-family dwellings, multi-family dwellings, condominiums, townhomes, townhouses, cooperatives and/or apartments.” Additionally, Admiral further warned that it might deny coverage for all parties based on underwriting inaccuracies - specifically because Joy had allegedly represented that it specialized in drywall installation and did not perform exterior work. Joy also allegedly represented that it did not perform work at a level above two stories in height other than interior drywall. Admiral contended that Joy was in fact the structural concrete contractor on the project and performed work on the entire building’s exterior with the tower crane.

Admiral commenced an action against Joy and the additional insureds seeking a declaration of no coverage. On June 25, 2009, the lower court (New York Supreme Court) denied Admiral’s motion for summary judgment on the basis of the policy’s “residential construction activities” exclusion finding there was conflicting evidence as to whether the building was intended to be strictly residential or was “mixed use” and as such, there remained material questions of fact to be examined at trial. The court granted summary judgment on Admiral’s motion that New York Crane did not qualify as an additional insured, but dismissed Admiral’s causes of action (i.e., rescission of the excess policy because of Joy’s material misrepresentation, reformation of the contract, or a declaration that the policy was void) against the other additional insureds related to false statements made by Joy in the underwriting opining that “[w]hatever the outcome is to Joy”, with respect to these causes of action, “any of Joy’s alleged misrepresentations would have no affect on their [the additional insureds’] coverage.” In arriving at this decision, the lower court had relied upon Lufthansa Cargo, AG v. New York Mar. & Gen. Ins. Co. (40 AD3d 444 (1st Dept 2007) and BMW Fin. Servs. v Hassan, 273 AD2d 428 (2nd Dept 2000) – two decisions where, despite misrepresentations by their respective named insureds, the Appellate Division had found coverage for the specifically named additional insureds.

On February 17, 2011, the Appellate Division modified the lower court’s decision by declaring that the residential construction did not apply and otherwise affirming the order. Regarding the residential construction exclusion, the Appellate Division concluded that the record had established that the building was intended to be a mixed use structure based upon evidence from Joy and the additional insureds that referenced “storefronts”. The court specifically rejected evidence presented by Admiral’s expert on the ground that “he lacked personal knowledge of the project, and his speculative conclusions were insufficient to overcome the evidence of mixed-use intent.”

Thereafter, the Appellate Division granted leave to appeal to the Court of Appeals. On the issue of the residential construction exclusion, the Court determined that the Appellate Division had erred in rejecting the credibility of Admiral’s expert simply due to a lack of personal knowledge. The Court held that the Appellate Division should not have made a credibility determination as between the parties’ conflicting evidence of whether “storefront” meant entrances to commercial establishments, or merely a construction style as asserted by Admiral’s expert. As such the Appeals Court found there were material issues of fact which could only be resolved with reference to what was defendants were actually building.

The Court then turned its attention to the trial court’s dismissal of the causes of action regarding coverage for the additional insureds in the face of Joy’s misrepresentations. The Court found the Lufthansa and BMW cases upon which the trial court had relied to be unpersuasive. In each of those cases, despite misrepresentations by the named insured, those insurers had knowledge of and the opportunity to evaluate the risk for which they were later called upon to provide coverage - in Lufthansa, an accident; and BMW an automobile theft. In addition, in each of those cases, the additional insureds were specifically named as separate parties so their interests were known to the insurers. Conversely, in the crane case, accepting Admiral’s allegations regarding Joy’s misrepresentations as true, the Court found the risk from Joy’s exterior construction activities was much greater than the risk of interior drywall installation that was paid for by Joy and assumed by Admiral. As such, the only additional insureds Admiral could have contemplated when it issued the excess policy would have been those entities associated with Joy’s work performing interior drywall. Following this line of thinking, the Court noted that if there were a valid basis for rescission as to Joy then it would be illogical to permit the additional insureds to rely on the terms of a policy that could be deemed to never have existed to create coverage in the first place. “In short, ‘additional’ insureds, by definition, must exist in addition to something; namely, the named insured in a valid existing policy.”

This case presents a logistical problem for additional insureds. They are typically not engaged in the underwriting process and often rely upon a certificate of insurance or broad additional insured provisions (where they are not specifically named) in a policy for protection. Admiral suggests that a more conservative course of action might require that the additional insured be specifically named in the policy. As a practical matter, particularly in the construction context, this might present insurmountable administrative burdens on both the broker and carrier. But it does suggest that at least in New York, where the misrepresentation goes to the heart of the insured risk, there is a greater likelihood for an unnamed additional insured to lose its coverage as well.

M. Claire Juliana
Director - Environmental Claims
Aon Risk Solutions’ Environmental Practice