In its recent decision in Admiral Ins. Co. v Joy Contractors, Inc., 2012 NY Slip Op 4670 (N.Y. June 12, 2012), the New York Court of Appeals, New York’s highest court, considered whether a general liability policy can be rescinded to the detriment of an innocent additional insured.
Admiral Insurance involved coverage for liabilities associated with the collapse of a tower crane in Manhattan in March 2008. The collapse resulted in numerous deaths and injuries, and caused significant property damage as well as the destruction of an entire building. The policy’s named insured, Joy Contractors, had been operating the crane at the time of the collapse. It was insured under a primary general liability policy issued by Lincoln, and a $9 million follow-form excess liability policy issued by Admiral. Immediately following the incident, Joy gave notice to both Lincoln and to Admiral. Several entities, including the project’s general contractor and the building’s owner, qualified as additional insureds under Joy’s policies.
Admiral initially issued a reservation of rights with respect to several grounds. Included among these grounds was the right to rescind its policy on the basis that Joy had represented in its application that it specialized in drywall installation, that it did not perform building exterior work. Admiral later denied coverage to Joy, and the additional insureds, on the basis of a residential construction exclusion in its policy. It also took action to rescind the policy on the basis of the misrepresentation.
As it related to rescission, the intermediate appellate court held that a policy could not be rescinded to the detriment of innocent additional insureds. The appellate court relied primarily on the decisions in Lufthansa Cargo, AG v New York Mar. & Gen. Ins. Co., 834 N.Y.S.2d 659 (1st Dep’t 2007) and BMW Fin. Servs. v Hassan, 710 N.Y.S.2d 607 (2nd Dep’t 2000), lv denied 717 N.Y.S.2d 547 (2000), both of which addressed rescission to the detriment of an additional insured. In BMW, the named insureds under an auto liability policy represented that they would be the primary drivers of a vehicle and that their children would be additional drivers, when in fact, the children were the primary drivers. The court held that this misrepresentation should not operate to the detriment of BMW, named as an additional insured under the policy. Likewise, in Lufthansa, the named insured represented that a certain employee would not be operating an insured truck, but it was that very same excluded driver that was operating the insured truck at the time of an accident. The court held that Lufthansa, as an innocent additional insured, should not be affected by the named insured’s misrepresentation.
The New York Court of Appeals found BMW and Lufthansa distinguishable from the facts before it. In both instances, the misrepresentations did not go to the fundamental nature of the risk being insured. More specifically, the misrepresentations in those cases did not “deprive the insurer of knowledge of or the opportunity to evaluate the risks for which it was later asked to provide coverage — i.e., the risk of damages arising from automobile theft (BMW) and accident (Lufthansa).” Such misrepresentations were materially different than the named insured misrepresenting the entire nature of the risk to be insured, i.e., drywall installation as opposed to exterior building work employing the use of tower cranes. As the court observed, “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.”
Ultimately, the Court of Appeals held that the innocent “additional insured” decisions in BMW and Lufthansa, and the decisions on which those two cases were based, cannot have the effect of allowing coverage for an additional insured on a policy that is deemed never to have existed as a result of rescission.