The District Court for the Southern District of New York determined that an insurer is not owed summary judgment in the absence of documentary evidence of its underwriting guidelines. The case is Travelers Cas. Ins. Co. of Am. v. BRB Constr. Corp., 2024 U.S. Dist. LEXIS 154102 (S.D.N.Y. 2024).
The Application
BRB Construction submitted an application to Travelers for businessowners coverage. Part of the application included a list of “Ineligible Operations,” which listed certain categories of business operations that were not eligible for coverage under the plan for which BRB had submitted the application. Among the operations on that list were “(1) ‘elevator or escalator inspections, installations, servicing or repair,’ (2) ‘drywall and plastering,’ (3) ‘debris removal,’ (4) ‘general contractors,’ and (5) ‘metal erection — any type other than purely decorative.’” BRB’s application showed the company was not conducting any of the “Ineligible Operations,” and that it was “a contractor for ‘driveways, sidewalks, or parking areas.’” The company president signed all of the necessary documents, and Travelers ultimately issued a businessowners policy to BRB, which was subsequently renewed three times.
BRB, however, had previously engaged in the installation of drywall and plaster and been responsible for debris removal. The company had also overseen the installation of multiple elevators as a general contractor. The company president later admitted that he had known the application submitted to Travelers claimed a narrower scope of operations than that the company actually conducted and that BRB’s work exceeded the scope of driveways, sidewalks, and parking areas.
The Injury
During BRB’s third policy period, the company served as the general contractor on an elevator installing project for the Town of Mount Kisco (Mount Kisco). A BRB employee was named as the project manager. That employee suffered physical injury during construction and filed suit against BRB.
Travelers became aware of the claim when Mount Kisco submitted a request to be named as an additional insured on BRB’s businessowners policy. As Travelers conducted its investigation into the claim, the true nature and scope of BRB’s operations came to light. Travelers notified BRB that it was rescinding the policy midway through the fourth and final policy period. Travelers subsequently filed suit against BRB and sought summary judgment allowing for rescission of the policy and reimbursement of defense costs.
The court noted that New York insurance law allowed for rescission of a policy that was issued based on material misrepresentations, and the dual burden of proving both misrepresentation and materiality rested on the insurer.
Was There a Misrepresentation?
Travelers argued BRB had misrepresented its status as a contractor for sidewalks, driveways, and parking areas in addition to misrepresenting it did not conduct any of the business on the “Ineligible Operations” list. BRB admitted to its previous engagement in work on the “Ineligible Operations” list. BRB also admitted its company president had signed the individual pages of the “Ineligible Operations” list.
BRB argued that, despite any misrepresentations on the application, many of the listed ineligible operations were ambiguous. In GuideOne Specialty Mut. Ins. Co. v. Congregation Bais Yisroel, 381 F. Supp. 2d 267 (S.D.N.Y. 2000), the judges for the Southern District of New York determined it was inappropriate for a claim of misrepresentation to rest on an insured’s response to an ambiguous question when the insured’s misinterpretation of the question was reasonable. This argument did not sway the court. Some of the “ineligible operations” on the list simply had a broader scope than others, and a provision could not be called “ambiguous” simply because it was broad.
The court likewise rejected BRB’s argument that the policy referred to operations engaged in at the time of application. The company provided no reasoning for why such an interpretation was reasonable. Rather, BRB should have known it would engage in at least some of the “ineligible operations” based on similar operations the company had performed in the past.
Was It Material?
Having determined BRB had made a misrepresentation, the court turned to whether the misrepresentation had been material. It would only be considered “material” if the insurer would not have issued the policy in question had the insured disclosed the truth. The insurer would be required to show how a misrepresentation was material based on “underwriting manuals, bulletins, or rules pertaining to similar risks” to support the contention that the policy would not have been issued without the misrepresentation.
Travelers submitted a statement by one of its national underwriters that BRB would not have received a policy in the absence of the misrepresentations. As documentary support, Travelers submitted the list of “Ineligible Operations,” a copy of BRB’s insurance application, and company records showing how it had handled risks similar to BRB’s in the past.
The court pointed to a previous case where, unfortunately for Travelers, the court ruled that “conclusory statements by insurance company employees, unsupported by documentary evidence, are insufficient” to support a legal finding of materiality (Cont'l Cas. Co. v. Marshall Granger & Co., LLP, 6 F. Supp. 3d 380 (S.D.N.Y. 2014)). The other documents Travelers had submitted contained no underwriting rules or other guidelines showing the basis for an underwriter’s decision to accept or reject an insurance application.
Without the underwriting guidelines, the court could not actually say whether BRB’s misrepresentations had been “material” for the purposes of rescission. Travelers’s motion for summary judgment was denied.
Editor’s Note: Insurers may not apply their underwriting guidelines in an arbitrary or discriminatory manner based on the identity of the potential insured. The court needed to examine the underwriting guidelines so the judges could be sure Travelers wasn’t misusing them.
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