The New York State Court of Appeals has ruled that additional insureds are not entitled to coverage under a general liability policy if that policy is rescinded due to the named insured’s material misrepresentations.
The coverage dispute, captioned Admiral Insurance Co. v. Joy Contractors Inc., 2012 NY Slip Op. 4670 (June 12, 2012), arose from a 2008 construction accident in which a tower crane operated by Joy Contractors (“Joy”) collapsed, killing and injuring multiple people and damaging adjacent buildings. At the time, Joy carried a CGL policy issued by Lincoln General Insurance and a follow-form excess policy issued by Admiral Insurance (“Admiral”).
Admiral, after initially reserving rights, ultimately denied coverage to Joy and to the “additional insureds” under the Joy policy, including the project’s general contractor and its owner/developer. Admiral also filed an action for declaratory relief, seeking a judicial determination that it owed no coverage obligations.
Among Admiral’s coverage defenses was an argument that Joy made misrepresentations during the underwriting process. Specifically, prior to the policy’s issuance, Joy informed Admiral that it specialized in drywall installation and performed no exterior work, when in fact Joy was a structural concrete contractor and undertook exterior work with tower cranes. Admiral thus sought, inter alia, rescission of its policy and a declaration that the policy was void ab initio.
The lower courts dismissed Admiral’s rescission arguments insofar as they related to the additional insureds. The Court of Appeals, however, disagreed, holding that the project’s general contractor and the project’s owner/developer did not enjoy coverage under the Admiral policy because of Joy’s misrepresentations. The court said:
Admiral evaluated the risk of, and collected a premium for, providing excess insurance for interior drywall installation, not the obviously much greater risk presented by exterior construction work with a tower crane at a height many stories above grade. And as Admiral puts it, the only additional insureds it could have contemplated would [have been] entities associated with projects on which [Joy] was performing interior drywall work and…the risk associated with them would [have been] limited to liability caused by acts or omissions of [Joy] in performing drywall work.
The Court went on to observe that the effect of the lower courts’ rulings would have been to leave Admiral’s policy in force with respect to the purported additional insureds, even when it had been rescinded vis-à-vis the named insured. The Court found it “illogical” to assume that those purported additional insureds could seek coverage under the terms of a policy that, as a matter of law, never existed.
The Court of Appeals distinguished Joy from earlier New York cases which held that “even though [a] policy was void as to [the named insured] on account of its misrepresentation, ‘each individual additional insured…must be treated as if separately covered by the policy and indeed as if he…had a separate policy of his own.’” The court reasoned that, in the earlier cases, the named insureds’ misrepresentations “did not deprive the insurer of knowledge of or the opportunity to evaluate the risks for which it was later asked to provide coverage.”
Joy is an important decision for insurers seeking to make rescission arguments as against additional insureds and should be examined carefully by insurers and their counsel.
A copy of the decision is available here.