Knowing that a company could not buy insurance for its business personal property because of a serious and extensive loss history, its fiscal agent (appointed by a court at the request of a lender after the owners defaulted on loans) lied on an insurance application and claimed no losses on an application. In Grande Leather and Fur LLC, New Wave Leather Products LLC v. Edward P. Bond, CPA, As Fiscal Agent, No. A-3854-08T3 (N.J.Super.App.Div. 05/04/2011), the trial court and the appellate division agreed with the insurers and affirmed the voidance of the contract. This teaches that false statements on an application will allow an insurer to void coverage if the misrepresentations are material.
Grande Leather and Fur, New Wave Leather Products, Grande Industries, Vincent Grande and Kim Grande (insureds) appealed orders of summary judgment entered against them and in favor of defendants Edward P. Bond, CPA, and underwriters at Lloyd’s and Pacific Insurance.
Since 1997, Vincent and Kim Grande have been the owners of the corporate plaintiffs, businesses initially selling leather and fur. During the operation of the businesses, a number of losses occurred as the result of theft. In 1999, the plaintiffs submitted to insurer CNA a claim for a loss of between $16,000 and $18,000 arising from a theft at the Union, N.J., location. In 2000, a theft occurred at the Linden, N.J., location, resulting in a claim for losses in the amount of $50,000 that was submitted to CNA; in 2002, a further loss of $110,000. Thereafter, plaintiffs were unable to obtain theft insurance and remained uninsured for a period of approximately 1.5 years.
During that time, the plaintiffs suffered business reversals. In 2005, following a default in loan payments, creditor bank PNC filed a verified complaint and order to show cause in the chancery division, seeking the appointment of a receiver to bring to a close the day-to-day operations of the three companies and liquidate the inventory and other assets. On June 9, 2005, a consent order was entered, instead appointing Edward P. Bond, CPA, a principal in the accounting firm of Bederson & Co., as a fiscal agent over the assets of the companies. The order directed that he take enumerated actions, including obtaining possession of all inventory, opening new bank accounts, collecting amounts owed to the companies, paying normal operating expenses, and monitoring the sales of existing inventory. The order also contained provisions concerning actions that Bond was not authorized to take without notice and further court order and a provision requiring that Bond report to the court on the status of the businesses within 14 days.
In accordance with the court’s order, Bond submitted a June 16, 2005, certification that recommended that a receivership be established. In cataloguing the status of the businesses, Bond stated, in paragraph 3(d):
There is no theft insurance on the inventory located at the [Linden] location and, upon information and belief, there has not been any such insurance for several months due to a prior burglary at the [Linden] location.
As stated, on June 16, 2005, in addition to reporting to the court, Bond contacted an insurance broker, who had not previously been used by plaintiffs, Joseph Lobosco of Lobosco Insurance Group, to procure commercial insurance. According to a certification by Bond submitted in support of his motion for summary judgment, the commercial insurance application, executed by Bond and certified by him as containing "true, correct and complete" answers, listed under "APPLICANT INFORMATION" as "Named Insureds" and "Other Named Insureds," the three existing businesses, Grande Industries, New Wave Leather, and Grande Leather and Fur, as well as "Edward P. Bond, Fiscal Agent." The application contained significant material misrepresentations, not the least of which was the denial of prior claims.
The completed application was sent by the Lobosco Agency to Continental Marmorstein & Malone, which acted as agent for Lloyd’s and Pacific. Following an underwriting review by an assistant vice president employed by Continental, Ellen Sopko, coverage was bound, effective June 16, 2005, to Dec. 16, 2005, with Lloyd’s assuming 70 percent of the risk and Pacific assuming 30 percent. The policies of the two companies, which were identical, contained the following language:
A. CONCEALMENT, MISREPRE-SENTATION OR FRAUD
The Coverage Part is void in any case of fraud by you as it relates to this Coverage Part at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning:
1. This Coverage Part
2. The Covered Property
3. Your interest in the Covered Property, or
4. A claim under this Coverage Part.
Sopko certified to the court that if the true loss history of the three Grande companies had been correctly reported on the application, including the September 2002 loss paid by Kemper of approximately $110,000, she would have had no binding authority with respect to either Lloyd’s or Pacific and would have had to refer the underwriting decision to the insurers. The record additionally contains certifications on behalf of both insurers that coverage would not have been issued if the true facts of the companies’ prior losses and denial of coverage had been disclosed.
On Aug. 29, 2005, a theft occurred at the Linden store, resulting in a claim to Lloyd’s and Pacific in the amount of $166,560. Following investigation, the claim was denied by the insurers. After setting forth the policy provision regarding concealment, misrepresentation or fraud, Harbin stated:
Pacific Insurance Co. and Certain Underwriters at Lloyd’s, London have advised that, in their view, Grande Industries, New Wave Leather, Grande Leather & Fur, and Edward P. Bond, Fiscal Agent, have violated that provision, in that the policy of insurance was secured by misinformation as to loss history and prior cancellation and in that representatives of the insureds provided false testimony at Examination Under Oath proceedings.
For the above-mentioned reasons, the above-mentioned insurers will not be making any voluntary payments in this matter.
Following the denial of coverage, on April 19, 2007, Lobosco wrote to Continental seeking a refund of the premiums paid for coverage. The carriers agreed and cancelled the policy effective as of the date of issuance, June 16, 2005. On April 25, 2007, Bond executed a policy release statement, which provided:
The undersigned agrees that the above-referenced policy is lost, destroyed or being retained. No claims of any type will be made against the Insurance Company, its agents or its representatives under this policy for losses which occur after the date of cancellation shown above[.]
The form indicated that the reason for cancellation was that coverage had been voided. On April 11, 2007, plaintiffs filed suit against defendants asserting causes of action against the insurers for breach of the insuring agreements, consumer fraud, breach of the duty of good faith and fair dealing, and for "total disregard of the rights of the plaintiffs."
With respect to the insurance coverage issue, the trial judge held it is undisputed that Bond was identified as the fiscal agent, but that also the plaintiffs were listed as insureds under the application and under the policy, and so clearly all representations that were made with respect to them applied here. It’s not just what Bond’s status was, whether he had suffered any losses, but the representations also had to include accurate statements with respect to the plaintiffs as well. Further, the judge stated that "the facts strongly support a conclusion that the carriers were correct in terms of determining that there had been a material misrepresentation with respect to the loss history and so as a result the claims against them cannot survive summary judgment here."
The appellate court noted that to be material the false statement must have naturally and reasonably influenced the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premium. Demonstration of an intent to defraud is not required. The law is well settled in New Jersey that equitable fraud provides a basis for a party to rescind a contract.
Equitable fraud requires proof of:
- A material misrepresentation of a presently existing or past fact
- The maker’s intent that the other party rely on it
- Detrimental reliance by the other party.
Because it was uncontroverted that the statements that the application signed by Bond were false, that Continental’s underwriter relied upon them in binding coverage, and that neither insurer would have accepted the risk if the true facts had been known, the policy was void and summary judgment was properly granted to the insurers.
The appellate court also concluded that because plaintiffs failed to offer expert testimony or other evidence that coverage would have been offered to them by an insurer if the businesses’ true loss and policy history had been disclosed, plaintiffs have failed to demonstrate a causal connection between Bond’s breach of duty and damages and, although caught in a lie that defeated coverage, the plaintiffs had no case against Bond.