Opinion
Index No. 655821/2021 Motion Seq. No. 002 003 004 006
06-22-2022
FLORENCE CAPITAL ADVISORS, LLC, GREGORY HERSCH, Plaintiffs, v. AXIS INSURANCE COMPANY, THOMPSON FLANAGAN & CO., LLC, WORLD INSURANCE ASSOCIATES LLC, Defendants.
Unpublished Opinion
DECISION + ORDER ON MOTIONS
HON. JENNIFER SCHECTER, JUDGE
The following e-filed documents, listed by NYSCEF document number (Motion 002) 20, 21, 22, 23, 24, 25, 38, 55, 56, 57, 58, 59, 60, 68, 77 were read on this motion to/for DISMISS.
The following e-filed documents, listed by NYSCEF document number (Motion 003) 29, 30, 31, 32, 33, 34, 35, 36, 37, 69, 70, 78 were read on this motion to/for DISMISSAL.
The following e-filed documents, listed by NYSCEF document number (Motion 004) 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 71, 72, 73, 74 were read on this motion to/for DISMISS.
The following e-filed documents, listed by NYSCEF document number (Motion 006) 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 114, 115, 116, 117, 118, 119, 120, 122, 123, 124 were read on this motion to/for DISMISS.
The Insurer's Motion
Assuming that AXIS failed to provide the requisite Insurance Law § 3426 notice of inclusion of the Hedge Fund Exclusion in the 2018 policy, that exclusion nonetheless is enforceable as part of the 2019 and 2020 policies. The Appellate Division has rejected the notion that violation of § 3426 can potentially result in perpetual coverage and has instead recognized a more bright-line rule: that a notice violation results in the same scope of coverage under the expiring policy being "extended to the end of the policy term and for no longer than one additional renewal term" (House v Hartford Cas. Ins. Co., 189 A.D.3d 1556, 1557 [2d Dept 2020] [emphasis added], citing Zeman v Zack Agency, Inc., 75 A.D.2d 261, 267 [2d Dept 1980], and Canora Family, Inc., v Universal Underwriters Ins. Co., 2007 WL 1789017, at *4 [SDNY June 20, 2007] ["the Court would not find successive automatic renewals providing perpetual coverage, such that the policy remained in effect for at least two subsequent policy periods"], qffd 303 Fed.Appx 914 [2d Cir 2008]). Essex Ins. Co. v Vickers (103 A.D.3d 684 [2d Dept 2013]), which involved a claim for reformation based on the parties' mutual mistake, does not compel a different result particularly given the more recent pronouncement in House. Plaintiffs have not cited any New York case endorsing their theory of perpetual coverage or disagreeing with the Appellate Division, Second Department's analysis (see D'Alessandro v Carro, 123 A.D.3d 1, 6 [1st Dept 2014]). To the contrary, all of the cases point in the same direction and there is no public policy reason to deviate from that rule here. Sophisticated commercial policyholders are perfectly capable of being informed of any change in coverage by their sophisticated brokers (see American Bldg. Supply Corp. v Petrocelli Group, Inc., 19 N.Y.3d 730, 736 [2012] ["While it is certainly the better practice for an insured to read its policy, an insured should have a right to look to the expertise of its broker with respect to insurance matters"]). Indeed, despite its alleged failure to comply with Insurance Law § 3426, AXIS explicitly provided plaintiffs with notice that its 2018 policy included the addition of the Hedge Fund Exclusion by informing its broker (see Dkt. 109 at 2).
Plaintiffs' proposed rule-coverage until there has been strict compliance with § 3426 whenever that may be-would foment significant uncertainty since, for instance, 30 years could go by without AXIS realizing that it had mailed the notice to the wrong address. The better, clearer and easier-to-apply rule is the one suggested by the Second Department, which gives a policyholder safe-harbor protection for an additional policy period based on strict application of the statute, but thereafter the insured is bound by the policy terms for which it has paid (see 159 MP Corp. v Redbridge Bedford, LLC, 33 N.Y.3d 353, 360 [2019] ["our public policy in favor of freedom of contract both promotes certainty and predictability and respects the autonomy of commercial parties in ordering their own business arrangements"]). Insurers who fail to give proper Insurance-Law notice are required to bear the substantial risk of liability for a full policy period. A rule that distinguishes the potential for perpetual coverage based on particular circumstances, such as whether there has been non-payment of any premiums or payment of some premiums, "would be entirely dependent on the subjective equitable variations of different Judges and courts instead of the objective, reliable, predictable and relatively definitive rules" (ACE Sees. Corp. v DB Structured Prods., Inc., 25 N.Y.3d 581, 594 [2015]).
Here, moreover, it is implausible that AXIS was trying to deceive its insured as it clearly notified plaintiffs' broker of the exclusion.
In sum, regardless of whether plaintiffs provided notice of the Hughes claim under the 2019 or 2020 policy, there is no question that coverage under either policy is barred by the Hedge Fund Exclusion.
The Brokers' Motions
At this early pleadings stage, there is no basis to dismiss the action against the brokers allegedly responsible for making plaintiffs believe that the Hedge Fund Exclusion would either not be part of the policy or would not change the scope of coverage. The argument Thompson Flanigan focused on in its moving brief-that it was not the broker of record-does not dispositively compel dismissal particularly while there are questions about who actually secured the 2019 policy and whether any claim was made thereunder (see Dkt. 36 at 7, citing Twin Tiers Eye Care Assocs., P.C. v First Unum Life Ins. Co., 270 A.D.2d 918 [4th Dept 2000] ["The record establishes that Sellers did not procure the disability policies that are the subject of this action, was not asked to procure them, and had no dealings with plaintiff or Dr. Salsburg at or near the time that the policies were issued"] [emphasis added]). While Thompson Flanigan may well have a meritorious causation-of-damages defense-that World's advice regarding the 2019 and 2020 policies breaks the causal chain--that argument was only amplified in reply without any citation to authority on how causation should be analyzed in this context (Dkt. 69 at 4). Thompson Flanigan may plead this defense in its answer, take discovery on causation and revisit the issue on a summary judgment motion supported by citation to applicable case law.
As World conceded at oral argument, there is no basis to dismiss the action against it if the Hughes claim was made under the 2020 policy. There are serious reasons to doubt whether the notice of circumstance satisfied the 2019 policy's notice requirements, which are a condition precedent to coverage (compare Dkt. 107 at 17, with Dkt. 112 at 8; see also Steadfast Ins. Co. v Sentinel Real Estate Corp., 283 A.D.2d 44, 52-53 [1st Dept 2001]).
The court has not considered testimony in defendants' witness affidavits (see Dkts. 23, 31), which were improperly submitted on a motion to dismiss (25 Ave. C New Realty, LLC v Law Offices of Jeffrey Samel & Partners, 144 A.D.3d 502, 503 [1st Dept 2016]; see Basis Yield Alpha Fund (Master) v Goldman Sachs Group, Inc., 115 A.D.3d 128, 134 n 4 [1st Dept 2014]).
Finally, while the Hedge Fund Exclusion may preclude coverage for portions of the Investigation, plaintiffs indicated at oral argument that the scope of the Investigation may encompass matters beyond the scope of that exclusion. Plaintiffs, however, do not plead the scope of the Investigation or even claim that under their view of the applicable retention that more than $50,000 in costs were incurred (see Dkt. 76 at 7-8). Thus, plaintiffs may move for leave to amend or file a new claim if they can plead both that there are portions of the Investigation not barred by the Hedge Fund Exclusion and that they have actually incurred costs beyond the applicable retention.
Accordingly, it is ORDERED that the motion by defendant AXIS Insurance Company (AXIS) to dismiss the original complaint is DENIED as moot, its motion to dismiss the amended complaint is GRANTED, it is ADJUDGED and DECLARED that (1) AXIS has no contractual obligation to indemnify plaintiffs Florence Capital Advisors, LLC and Gregory A. Hersch for defense costs and damages in connection with the action filed in California Superior Court, Los Angeles County, captioned Hughes v Florence Capital Advisors, LLC, No. 20STCV32965; and (2) AXIS is not precluded from relying on the Hedge Fund Exclusion in the 2019 and 2020 policies; and the Clerk is directed to enter judgment dismissing the third and fifth causes of action in the amended complaint with prejudice and dismissing the fourth cause of action without prejudice; and it is further
ORDERED that plaintiffs' claims against defendants Thompson Flanagan & Co., LLC (Thompson Flanagan) and World Insurance Associates LLC (World) are hereby severed and shall continue; and it is further
ORDERED that the motions to dismiss by Thompson Flanagan and World are GRANTED IN PART to the extent that the sixth, seventh and ninth causes of action in the amended complaint are dismissed and the motions are otherwise DENIED; and it is further
ORDERED that a preliminary conference on Teams (audio only) will be held on July 8, 2022 at 1:00, and the parties joint letter is due on July 6, 2022.