Opinion
No. 03 Civ. 4739 (HB).
August 29, 2004
OPINION ORDER
Fire Casualty Insurance Company of Connecticut ("FCICC") brought a declaratory judgment action against defendants 2207 7th Avenue Restaurant Corp. d/b/a Jimmy's Uptown ("Jimmy's") and Craig White ("White"), seeking to void ab initio the insurance policy issued to Jimmy's, as a result of Jimmy's alleged material misrepresentation in its insurance application, and consequently seeking a declaration that FCICC is not obligated to defend Jimmy's or to indemnify any judgment entered against Jimmy's. This decision follows a one-day bench trial held on May 20, 2004.
I. FINDINGS OF FACT
FCICC disclaims liability for the $10,000,000 default judgment entered against Jimmy's on October 15, 2003. The underlying personal injury action filed by White, in Bronx County Supreme Court, alleged a fall down some stairs, while at Jimmy's, which resulted in severe injuries to his leg. Although FCICC undertook to represent Jimmy's in the underlying personal injury action, it is undisputed that counsel assigned by FCICC, Maloof, Lebowitz, Connahan Oleske ("Maloof firm"), failed to answer in a timely fashion, leading to a default. On May 14, 2004, the court denied FCICC's motion to re-open the default, but noted that FCICC was embroiled in a conflict of interest, due to the simultaneous filing of this suit. Jimmy's is now subject to a weighty default judgment. (Def. Exh. A.) FCICC seeks a disclaimer of liability in this Court, which would, if successful, saddle Jimmy's with the full responsibility for the $10,000,000 default judgment. How can that be, one might ask, well, let's look at the facts.
Jimmy's asserts that FCICC neglected to send White's summons and complaint to the Maloof firm until after the date the Answer was due. Whomever turns out to be at fault, the possibility of a legal malpractice claim is a real one.
FCICC utilizes RCA Insurance Group ("RCA") as its general managing agent and program administrator, "to underwrite, bind, issue policies and handle all policies as [FCICC] would." (Transcript ("Tr.") at 107:21-22; 119:16-17.) On February 18, 2003, Kenneth Rota ("Rota"), an insurance broker with Capacity Coverage Company ("CCC"), submitted an application ("Application") to RCA, with whom it had a brokerage agreement, for coverage of Jimmy's. ( Id. at 91:6; 108:22-24; 114:17-20.) RCA assigned Thomas Hartmann ("Hartmann"), its Vice President of Underwriting, to underwrite the Application. ( Id. at 107:18; 108:6; 127:22-24.) After Hartmann authorized the Application, FCICC issued Jimmy's an insurance policy, effective February 18, 2003, which extended coverage over Jimmy's premises for one year, at a cost of $21,276.00. (Pl. Exh. 4.)
While it is undisputed that the application bears the signature of Jimmy Rodriguez ("Rodriguez"), the president and owner of Jimmy's, Rodriguez asserts that he never signed the Application, and hence that his signature is a forgery. (Tr. at 78:23-79:1.) Although the parties failed to flesh out this contention at trial, Rota explained that while CCC "never dealt directly with Jimmy Rodriguez ( id. at 39:19), he "has no reason to believe that [the Application] was not signed by a representative of [Jimmy's]," ( id. at 99:9), whereby intimating that someone else at Jimmy's may have signed the Application on Jimmy's behalf. Notably, in brokering the policy, CCC dealt predominantly with an individual other than Rodriguez — Jose Aguilar ("Aguilar"). ( Id. at 91:14.) Because of the scant testimony on this topic, and the failure of either side to probe into who at Jimmy's signed the Application, and whether such individual's signature was with authority, Jimmy's allegation of forgery is immaterial.
The Application inquired as to whether Jimmy's provided entertainment to its patrons, and if so, requested information regarding the classification and frequency of such entertainment. In response, Jimmy's wrote that it offered "Lite [sic] Jazz-Piano or Guitar Soloist," on "Saturdays." (Tr. at 79:10-24.) FCICC argues that this representation was materially flawed, as Jimmy's provided a variety of additional entertainment on days other than Saturdays. Leon Smith ("Smith"), a sound engineer at Jimmy's at the relevant time ( id. at 22:24; 23:9-12), who "did sound engineering for a couple of the events, played background music in the main bar area for the restaurant" ( id. at 24:22-24.), and worked for Jimmy's as a disc jockey ("DJ") on the weekends, and during after work parties, playing "just background music" ( id. at 27:23), testified that Jimmy's had the following entertainment events: (1) Gospel Sundays, which was held "for the most part, every Sunday," (2) a Chapelle Show, (3) "a comedy sketch," and (4) a weekly "dinner theater performance" called "Let Me Off in Harlem," which ran for four to seven weeks ( id. at 53:9-13), and consisted of three musicians, "[p]retty much the same group" as in Gospel Sundays ( id. at 51:1-2), playing various instruments including a "key board, bass, [and] drums." ( Id. at 25:9-19; 28:12-13; 29:25.) Smith also witnessed live KISS FM radio broadcasts from Jimmy's on Wednesday nights, at which times "on-air personalit[ies] [did] interviews with a couple of performers that were there [that evening]. Basically it was mostly a person singing to a track[,] one or two songs . . . no band or anything." ( Id. at 26: 16-24.) Rodriguez confirmed Smith's testimony that Jimmy's provided entertainment, of various forms, on days other than Saturdays. ( Id. at 79:12-14.)
Gospel Sundays had "the same set-up as `Let Me Off in Harlem,' three piece[s] and a couple of vocals." (Tr. at 28:18-21.)
The Application also requested information as to whether "A dance floor or stage exists?" (Tr. at 79:6.) Jimmy's answered in the negative. ( Id. at 79:9.) However, Smith testified and Rodriguez confirmed that Jimmy's had a portable twenty-by-eight foot stage that was "only put up when they needed it for events." ( Id. at 30:9-21; 79:4-5.) While Jimmy's failed to answer the question on the Application regarding whether dancing was permitted, Smith testified that "[no one] dance[d] at all on the stage" at any of the events at which he was present. ( Id. at 31:3-8.) FCICC presented no evidence to the contrary.
The Application also questioned whether "there are any bouncers, door persons or security used?" Jimmy's also answered this question in the negative. (Tr. at 80:2-5.) Smith testified, however, that for as long as he has worked at Jimmy's, "as far as when we're open to the public, either [customers] are ID'd at the door, or if it's the restaurant situation, the servers ID people if they ask for alcoholic beverages." ( Id. at 32:16-18; 33:6-8.) Smith also explained that on weekends, Jimmy's checked identification twice — once outside and once inside. ( Id. at 32:19-33:3.) "[S]tate licensed" "security officer[s]" checked identification inside and outside." ( Id. at 33:2-3; 11-12; 23 — 23:9.) Smith explained that it was necessary to check identification inside "to make sure . . . the customers don't pass ID's between them." ( Id. at 33:13-15.) Rodriguez believed that "whoever is sitting the people down would check ID before they sit them down as well, or if they sat at the bar. The host would do this. Answer the phone, take reservations." ( Id. at 82:12-14) (emphasis added.)
Whether or not these security officers are employees or independent contractors is immaterial as the Application asked separately whether there were any "Bouncers, Door Person or Security Used" and whether there were any "Non-Employee Security Services Hired or Contracted?" (Pl. Exh. 4.)
Finally, under the "Liquor Legal Liability Section" of the Application, Jimmy's stated that it did not provide reduced-price drinks. (Pl. Exh. 4.) During the trial, however, Rodriguez explained that companies such as "Alize, Johnny Walker, Moet Chandon, Dom Perignon, [and] Johnny Walker" "occasionally" sponsored "50 rounds of drinks" for the patrons. ( Id. at 59:11-12, 23; 60:25; 61:10.) The alcohol companies paid Jimmy's in-full for the alcohol, and then offered the drinks for free to the patrons — whereby promoting their products. Therefore, through the hospitality of these companies — not through Jimmy's benevolence — patrons at Jimmy's "occasionally" received free drinks.
II. CONCLUSIONS OF LAW
A. Material Misrepresentation
Under New York insurance law, a misrepresentation is a false "statement as to past or present fact, made to the insurer. . . . at or before the making of the insurance contract as an inducement to the making thereof." N.Y. Ins. Law § 3105(a) (2000). A misrepresentation becomes "material" if "knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract." Id. § 3105(b). See, e.g., John Sharon Courtney v. Nationwide Mut. Fire Ins. Co., 179 F. Supp. 2d 8 (N.D.N.Y. 2001) (material misrepresentations found and policy voided in a case where the insured, in procuring property insurance, answered in the negative two questions regarding whether "the insured or family member [had] been sued, filed bankruptcy, had repossession/judgment within the last seven years" or had "prior losses," when, in fact, six judgments had been entered against the insured in the seven years preceding the completion of the application and the insured had two prior losses.).
"There must be a preponderance of clear and convincing evidence, in order to establish fraud, concealment, or misrepresentation on the part of the insured in procuring the insurance . . . Such fraud or misrepresentation will not be assumed on doubtful evidence or circumstances of mere suspicion." Brayer v. John Hancock Mut. Life Ins. Co., 179 F.2d 925, 928 (2d Cir. 1950) (citations omitted). If the questions are ambiguous, where, for example, the language was proposed by the insurer, the ambiguity must be resolved against the insurer. Id. Here, the ambiguity issue is significant, as several "terms of [the] insurance contract could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire agreement and who is cognizant of the entire integrated agreement." Int'l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 85 (2d Cir. 2002).
FCICC asserts that Jimmy's made four material misrepresentations on its Application: (1) that the only entertainment that it provided was in the form of "lite [sic] jazz-piano or guitar soloist" on Saturdays; (2) that it did not utilize a stage; (3) that it did not offer drink specials; and (4) that it did not employ "bouncers, door person[s], or security." In order for this Court to order the policy void, ab initio, I would have to find that (1) FCICC's Application questions are unambiguous, and (2) that had FCICC known the "truth" about Jimmy's entertainment, staging, security, or drink offerings, it's Guidelines would have prohibited it from extending coverage to Jimmy's.
1. Degree of Entertainment
FCICC claims that Jimmy's made a material misrepresentation on its Application with respect to the enumeration of its entertainment as "lite [sic]-jazz-piano or guitar soloist," since, in actuality, it had bands "consisting of as many as four pieces." FCICC alleges that it would not have insured Jimmy's had it known of the type and extent of entertainment that the restaurant provided.
FCICC moved in limine, pursuant to Federal Rule of Civil Procedure ("Fed.R.Civ.P.") 37, for a negative inference that Jimmy's maintained extensive entertainment and for sanctions, stemming from Jimmy's alleged failure to make complete productions of its booking calendar, contracts, and advertisements. However, FCICC failed to establish that Jimmy's had these documents, yet failed to produce them. (Tr. at 41:9-16; 42:11-19.) Testimony revealed that for several recurring events, Jimmy's only had verbal agreements. ( Id. at 42:11-19; 43:7-9.) And, Rodriguez testified that reservations were placed on a "calendar behind the wall," which would be "wipe[d]" off every month. ( Id. at 69:7-11.) He was unaware of whether there was also a calendar book. ( Id. at 69:12-25.) While Jimmy's may have been negligent in its productions, it is equally possible that Jimmy's produced everything that it had in its possession. Further, the evidence sought by FCICC would only have served to establish that Jimmy's provided various entertainment — a fact that FCICC successfully established through testimony at trial. Therefore, the in limine motion seeking a negative inference and sanctions is denied.
RCA's Insurance Guidelines for Food and Beverage establishments ("Guidelines"), when read as a whole, do not prohibit the issuance of liability insurance for venues that have entertainment, but rather, disallow coverage where the entertainment would provoke dancing or is "other than incidental." (Pl. Exh. 20) (RCA Food and Beverage Guidelines). According to the Guidelines, "if incidental entertainment is present then it should be of the type that involves no dancing and is provided for listening purposes only." ( Id.) "Questions as to the acceptability of the entertainment should be referred to the RCA VP of Underwriting," who in this case was Hartmann. ( Id.) While Jimmy's provided several types of entertainment, including DJ's, dinner theater shows, and comedians — arguably beyond the category it disclosed — these types of entertainment were for "listening purposes only," and "involve[d] no dancing" — and were therefore permissible under the Guidelines. In fact, Smith's testimony was to the effect that in the two years that he "consistently" worked at Jimmy's as a sound engineer and DJ, he never witnessed dancing. (Tr. at 23:12; 31:5-8.) Therefore, even if the entertainment provided by Jimmy's exceeded "lite [sic] jazz-piano or guitar soloist," it did not exceed the limits permitted by the Guidelines. Consequently, this alleged misrepresentation was immaterial.
FCICC and Artis, one of FCICC's branches, developed the underwriting Guidelines. Due to RCA's role as FCICC's general managing agent, FCICC is subject to the Guidelines. (Tr. at 107:19-22; 119:3-20.)
See Pl. Exh. 20 ("Ineligible Risks: Entertainment other than incidental, i.e. piano or other musical instruments, folk group, singer, karaoke, etc. (Subject to approval by the RCA V.P. of underwriting) * * * * * * * * General Liability: If incidental entertainment is present then it should be of the type that involves no dancing and is provided for listening purposes only. No bands or dance groups are permitted.")
FCICC also contends that Jimmy's made a material misrepresentation in its Application because it entertained with bands "consisting of as many as four pieces," which by FCICC's interpretation, exceeds "lite [sic]-jazz-piano or guitar soloist." Since ambiguities are to be resolved against the insurer, and the classification of "lite [sic]-jazz-piano or guitar soloist" is subject to various interpretations and does not denote a maximum number of musicians, the fact that Jimmy's entertained with four-piece bands is of no moment. Additionally, the Guidelines themselves permit "incidental entertainment," defined as "piano or other musical instruments, folk group, singer, karaoke, etc." (Pl. Exh. 20) (emphasis added.) Clearly, a folk group may consist of four members, with, in Rota's opinion, "up to ten instruments." (Tr. at 104:17-21.) Further, when Rota discussed with Hartmann the entertainment that Jimmy's planned to have, Hartmann never requested further elaboration as to what "lite [sic] jazz" was. ( Id. at 105:6-11.) Instead, Hartmann, as per the mandate provided in the Guidelines, approved Jimmy's application, but did so without doing "any investigation to determine what light jazz meant" or the number of musicians involved. ( Id. at 126:12-19.) Hartmann also conceded that the Guidelines did not define "light jazz." ( Id. at 129:20-22.) Therefore, were it FCICC's intent to deny insurance to all restaurants and bars that provided entertainment consisting of groups with more than three members, FCICC had a duty to make this condition clear, and failed to do so. Because this ambiguity must be resolved against FCICC, Jimmy's responses with regard to entertainment were not material misrepresentations.
2. Stage
FCICC argues that Jimmy's use of a removable stage constitutes a material diversion from its Application. (Pl. Exh. 4.) While Jimmy's representation on the Application that it did not have a "Dance Floor or Stage," when it admittedly had a portable stage, was less than complete, it was not a material misrepresentation. First, in the same question, the Application asks whether the establishment has a "Dance floor or Stage," and then, as a follow-up question, asks whether "Dancing [is] Permitted"? The wording and presentation of the question stresses that the insurer is concerned more about dancing than about the underlying ownership of a physical stage. In this regard, the Application is misleading at best, and ambiguous at worst. And, because no one "dance[d] at all on the stage," as it was "only set up for people to perform on . . . when [Jimmy's] needed it for events" ( id. at 31:3; 30:9; 30:20), Jimmy's Application response is arguably accurate.
Further, FCICC has no policy against insuring establishments that own stages, but rather, declines to insure venues where dancing frequently occurs. (Pl. Exh. 20.) Since Jimmy's never had dancing (Tr. At 31:3-8), its arguably deficient response to the "stage" question was immaterial. Armed with the knowledge that Jimmy's had a portable stage, used only for entertainment — never for dancing — FCICC would have still insured Jimmy's. Therefore, Jimmy's did not make a material misrepresentation in denying that it had a "Dance floor or Stage."
Rota testified, with the assistance of his salesman's, Ron Bergstein's ("Bergstein") notes from a conversation with Aguilar, that Jimmy's conveyed to RCA that there was a "raised floor not [a] stage," and that there would be "[r]oom to move your feet" because "there is no dance floor." (Tr. At 94:3-97:23.) Clearly, FCICC was concerned more about dancing than about allowing entertainers to perform on a stage.
3. Reduced Price Drinks
FCICC alleges that Jimmy's made a material misrepresentation by asserting in its Application that it did not provide reduced price drinks, when free drinks were provided on occasion. The only testimony, even arguably on point, was Rodriguez's explanation that companies such as "Alize, Johnny Walker, Moet Chandon, Dom Perignon, [and] Johnny Walker . . . occasionally . . . promote[d] Jimmy's Uptown" by sponsoring "50 rounds of drinks" for the patrons. ( Id. at 59:11-12, 23; 60:25; 61:10.) (emphasis added.) The fact that vendors themselves chose, on occasion, to promote their products by distributing beverages to some of Jimmy's patrons, does not transform Jimmy's into a venue that itself regularly offers reduced price drinks. And, neither the "Liquor Liability" section nor the "Ineligible Risks" section of the Guidelines (nor any other part of the Guidelines) dictate that FCICC would have refused Jimmy's, or any other's application, if, on occasion, the business allowed such vendors to offer free drinks. (Pl. Exh. 20) Since there was no testimony at trial to establish that Jimmy's itself provided reduced price drinks, or that the Guidelines disallow coverage to establishments that did what Jimmy's did here, FCICC's presentation fails the material misrepresentation test.
4. Bouncers, Door Person or Security Personnel
Finally, FCICC argues that Jimmy's made a material misrepresentation in its Application because it stated that it did not employ any "bouncers, door person, or security" when in fact it employed a person to check identification at the door. FCICC asserted that it would not have issued insurance to Jimmy's had it known that Jimmy's checked identification at the door. "No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract." N.Y. Ins. § 3105(b) (emphasis added). "In determining the question of materiality, evidence of the practice of the insurer which made such contract with respect to the acceptance or rejection of similar risks shall be admissible." Id. § 3105(c) (emphasis added); see also Wood v. Ontario Ins. Co., 769 N.Y.S.2d 430 (4th Dep't 2003). While FCICC presented evidence to establish that Jimmy's utilized some form of security or door person — contrary to its representation in its Application — FCICC failed to offer any evidence that it would have, rather than could have, denied coverage to Jimmy's had it known of Jimmy's security arrangement.
Smith testified that for as long as has worked at Jimmy's, "as far as when we're open to the public, either [customers] are ID'd at the door, or if it's the restaurant situation, the servers ID people if they ask for alcoholic beverages." (Tr. at 32:16-18; 33:6-8.) Smith also explained that on weekends, Jimmy's checked identification twice — once outside and once inside. ( Id. at 32:19-33:3.) "[S]tate licensed" "security officer[s]" checked identification inside and outside." ( Id. at 33:2-3; 11-12; 23 — 23:9.) Smith explained that, at least in his view, i.e., that of a sound engineer, it was necessary to check identification inside "to make sure . . . the customers don't pass ID's between them." ( Id. at 33:13-15.) Although Smith was unsure whether security personnel were employees or independent contractors, this distinction is immaterial as the Application asked separately whether Jimmy's employed any "Non-Employee Security Services." (Pl. Exh. 4.)
Rodriguez, on the other hand, believed that Jimmy's never utilized security because the people checking identification were unarmed. (Tr. at 81:21-23.) Instead, Rodriguez classified the identification checkers as "host[s]" or "door person[s], whose role it was to check identification, show patrons to their tables, "answer the phone, [and] take reservations." ( Id. at 82:12-14.) Rodriguez, however, admitted that he had only been present at Jimmy's on a Saturday night in 2004 approximately twice, and was there even more infrequently in 2003 because he "was opening up another restaurant" ( id. at 82:23-83:1). Hence, his testimony on this point cannot be credited.
Rather than categorically denying coverage to bars and restaurants that have "[b]ouncers, door persons, or any other security personnel," the Guidelines list these occurrences, among others, as "Ineligible Risks," but "[s]ubject to approval by the RCA V.P. of Underwriting." Therefore, in order to establish that it would not have extended coverage to Jimmy's had it known there were doorpersons, FCICC would have had to show that "the RCA V.P. of Underwriting," in this case Hartmann, would not have provided the requisite approval. No such testimony was elicited. Other evidence, such as applications submitted by bars and restaurants, where RCA declined to approve, on the basis of similar security, would have been persuasive, but nothing of the sort was submitted. Similarly, testimony that RCA never approved applications that posed analogous "security risks" would have supported the proposition that FCICC would have denied Jimmy's Application if it knew the "truth" about Jimmy's security precautions. However, the plaintiff merely presented testimony from Hartmann, without documentation, asserting that FCICC did not insure restaurants and bars that checked identification at the door. Hartmann explained that "[w]e're looking to write the mom and pop type restaurant and the establishments that you would go to with your family without being carded or checked at the door." (Tr. at 118:8-10). "We want to know if there is at all any persons, are there people there for security reasons, especially at the door, checking IDs or accepting cover charges to get into the place . . . It's not the type of risk that we're looking for." ( Id. at 117:24-118:7.) While Hartmann's testimony was credible, and, in conjunction with the Guidelines, goes far to prove that Jimmy's did not regularly insure locations with hired security, this showing is insufficient to establish, keeping in mind the plaintiff's burden of clear and convincing evidence, that FCICC never insured venues that checked identification at the door. In other words, FCICC failed to negate the possibility, or even to prove that the possibility was so minimal as to be negligible, that RCA's Vice President of Underwriting may have departed from RCA's typical policy, in order to extend coverage to Jimmy's, despite Jimmy's utilization of security. Since it is impossible from the evidence presented to conclude that Jimmy's misrepresentation concerning security was material, the Policy is not void ab initio.
The form of coverage extended to Jimmy's insured "Restaurants, Bars, Taverns/Saloons, Caterers, Banquet Facilities, Civic or Social Clubs, Bars/Package Stores, [and] Package Stores" (Pl. Exh. 20.)
Hartmann testified that RCA denied approximately 40 to 45 percent of all requests for insurance on the basis of the "[n]umbers of years in business, construction type, entertainment, of course." (Tr. at 122:14-20.). Out of these denials, Hartmann explained that 35 to 40 percent were declined as a result of entertainment. ( Id. at 123:2-6.) Notably, Hartmann did not even mention security as one of the typical grounds for denial. When specifically asked as a follow-up, "what percentage is declined for say that there are doormen, bouncers, etc.," Hartmann answered that "I lump those [entertainment and security]."
While it is illegal to serve alcohol to minors, the law does not require bars and restaurants to check identification. Still, by hiring doorpersons, Jimmy's, it would appear, was merely attempting to ensure compliance with the law.
Notably, the Application similarly required approval from the Vice President of Underwriting for establishments that provided entertainment, and Jimmy's sought and received such approval despite the fact that 35 to 40 percent of the applications rejected by RCA were denied on the basis of entertainment. Therefore, the testimony showed that with regard to Jimmy's Application, RCA was willing to make an exception.
Since this Court does not find grounds to void the Policy, Jimmy's claim of equitable estoppel is denied as moot.