Opinion
600674/06.
Decided January 12, 2009.
Francis Landrey, Esq., John Gross, Esq., Steven Obus, Esq., Michelle Migdon Esq., Lisa Bauer, Esq. of Proskauer Rose LLP, Appearing for plaintiffs.
Howard Kaplan, Esq., Michelle Rice, Esq., Michael McLaughlin, Esq., Elizabeth Fitzwater, Esq. of Arkin Kaplan Rice LLP, Appearing for defendants.
Plaintiffs JPMorgan Chase Co., JPMorgan Chase Bank, and J.P. Morgan Securities Inc. (together, JPMC) commenced three related actions against defendant Twin City Fire Insurance Company (Twin City) arising out of its refusal to indemnify JPMC in connection with professional services that JPMC provided to Enron Corporation, Inc. (Enron), bearing the index number 600674/06 (the Enron Action), professional services that JPMC provided to WorldCom Inc. (WorldCom), bearing the index number 601904/06 (the WorldCom Action), and professional services that JPMC provided to National Century Financial Enterprises, Inc., bearing the index number 602223/06.
Twin City interposed counterclaims and affirmative defenses in all three actions seeking damages and rescission of its participation in the insurance programs applicable to the claims. On August 6, 2007, this Court consolidated discovery in the three actions.
In the Enron Action, JPMC moves for summary judgment to dismiss certain of Twin City's affirmative defenses and counterclaims that challenge the legal sufficiency of JPMC's notice of circumstances of a potential claim made in connection with the policy covering the time period from 1997-2001 (the "97-01" Insurance Program), for which Twin City provided an excess layer of coverage. Twin City cross-moves for summary judgment pursuant to CPLR 3212 (f).
JPMC additionally attempts to submit a supplemental affirmation erroneously denominated as a cross-motion. The supplemental affirmation contains no new legal arguments, and seeks to enlarge the factual record before the Court, including testimony from witnesses who were only recently deposed, and documents that were, until recently, withheld by Twin City on the basis of privilege (Supp. Aff. of Francis Landrey, Esq.).
The filing of a cross-motion to a cross-motion is an improper vehicle to submit supplemental papers. Nonetheless, in the absence of prejudice to Twin City who had notice of JPMC's cross-motion and submitted its own opposition, the Court will consider the merits of the cross-motion, supplemental affirmations and opposition ( Walker v Metro-North Commuter R.R. , 11 AD3d 339 , 364 [1st Dept 2004]).
Background
For a full recitation of the factual background in this action, see this Court's decision in motion sequence 001, entered on March 23, 2007.
In the fall of 2001, shortly before the expiration of the 97-01 Insurance Program, news reports concerning Enron's rapidly deteriorating financial condition and fraudulent "off the balance sheet" transactions began surfacing. In November of 2001, insurers considering participating in a renewal insurance program covering the periods 2001-2002 ("01-02" Insurance Program), were concerned about the probability of claims being asserted against JPMC as a result of services that it provided to Enron. Consequently, some of these insurers required that JPMC notice potential Enron-related claims under the 97-01 Insurance Program as a condition of extending binding coverage on the subsequent 01-02 Insurance Program. The parties dispute whether Twin City actually extended coverage to JPMC under the 01-02 Insurance Program, which is at issue in the WorldCom Action (Plaintiffs' Response and Counter-Statement of Material Facts, ¶¶ 8-9; Twin City's Responses).
On November 29, 2001, JPMC purported to give written notice under the 97-01 Insurance Program of "circumstances which may give rise to a claim" (the Notice) (Exhibit 2, annexed to the Migdon Aff.). JPMC described its extensive financial and lending relationship with Enron and identified certain causes of action that it anticipated would be asserted against it arising out of this relationship.
Thereafter, JPMC was named as a party in numerous actions arising out of Enron's financial collapse, including a series of class action lawsuits that investors in Enron securities brought against JPMC, that were consolidated in an action in the Southern District of Texas. In 2005, JPMC reached a settlement in the Texas action and agreed to pay $2.2 billion, an amount well in excess of the $200 million primary coverage limits under the 97-01 Insurance Program. Twin City refused to indemnify JPMC for its losses incurred in connection with its settlement of the Enron actions, resulting in the commencement of this action.
In its answer, Twin City asserted affirmative defenses, and alleged that JPMC failed to satisfy a condition precedent to coverage by failing to sufficiently notice potential claims under the 97-01 Insurance Program policy, which are at issue in these motions. Additionally, Twin City interposed counterclaims seeking damages, and to rescind its participation in the 01-02 Insurance Program premised upon allegations that it was induced to renew coverage to JPMC as the result of fraudulent misrepresentations contained in the Notice concerning the extent of JPMC's role in the Enron fraud and the scope of JPMC's knowledge of its own wrongdoing.
Previously, this Court denied Twin City's motion to dismiss the complaint. The Court determined that JPMC's breach of contract cause of action arising out of Twin City's refusal to indemnify it was viable, because the Notice sufficiently triggered coverage under the 97-01 Insurance Program. Twin City withdrew its appeal of that decision.
Discussion
In support of its motion for summary judgment, JPMC asserts that the Notice is legally sufficient as a matter of law under the unambiguous policy language contained in the 97-01 Insurance Program, that does not require actual knowledge of an act of wrongdoing on the part of the insured, as Twin City asserts. Further, JPMC contends that irrespective of whether the Notice sufficiently triggered coverage within the meaning of the 97-01 Insurance Program, Twin City has waived any defense that the Notice is insufficient by its conduct.
Twin City cross-moves for summary judgment on the ground that discovery establishes that JPMC cannot demonstrate that it sufficiently noticed potential claims under the 97-01 Insurance Program. Twin City relies upon the deposition testimony of the JPMC employee who drafted the Notice, Richard Straub, who purportedly admits that he had no actual knowledge of "Wrongful Acts," as it is defined under the policy, at the time that the Notice was drafted. Additionally, Twin City asserts that there is no evidence that it waived any of its rights with respect to the sufficiency of the Notice. In order to trigger coverage under the extended claims-made 97-01 Insurance Program, JPMC was required to give notice of claims during the policy period. Additionally, § IV. D. of the 97-01 Insurance Program permitted JPMC to preserve coverage for potential claims that may arise after the policy's expiration by providing written notice of "Wrongful Acts" that it believed may give rise to a claim. This provision states:
"If during the policy period . . . the Risk and Insurance Management Department shall become aware of any [Wrongful Act] which may subsequently give rise to a claim being made against an Insured and shall during the Policy Period . . . give written notice of such [Wrongful Act], then any claim which is subsequently made against the Insured arising out of such act, error or omission [Wrongful Act] shall for the purpose of this policy be treated as a claim made during the policy period" (97-01 Insurance Program, § IV. D. [2]).
In an addendum to the policy, all references to "acts, errors or omissions" were replaced with the words "Wrongful Act," that is defined as: an "act, error or omission by the Insured or any person or entity for whom the Insured is legally responsible, or dishonest or fraudulent act or omission by any officer or employee of the named Corporation or any Subsidiary Company" (Addendum to the 97-01 Insurance Program).
Failure to comply with a policy's notice provision violates a condition precedent to coverage, and relieves an insurer of an obligation to indemnify an insured ( Great Canal Realty Corp. v Seneca Ins. Co. , 5 NY3d 742 , 743).
As to the content of the required notice, section IV. D. does not specify the information that must be provided to the insurer, other than written notice of a Wrongful Act. The definition of a "Claim" contained in the Definitions section of the 97-01 Insurance Program is expanded to include written notice to the insurer "describing circumstances that may reasonably be expected to give rise to a Claim" (97-01 Insurance Program, § 2 [a] [5]).
The Notice at issue was transmitted by Straub, an executive in JPMC's risk and insurance management department (now known as corporate insurance services department) shortly before the expiration of the 97-01 Insurance Program, on November 29, 2001, for the purpose of "giv[ing] notice of facts or circumstances that may subsequently give rise to a claim against an insured" (Exhibit 2, annexed to the Migdon Aff.). It describes the following: the downgrading of Enron debt to junk status, that JPMC has $500 million of unsecured exposure to various Enron entities, including loans, letters of credit and derivatives, in addition to $400 million exposure secured by certain pipelines ( Id.). Further, the Notice describes JPMC's "extensive relationship with Enron," and identifies specific transactions and lending practices that JPMC engaged in with Enron, including "lending, merger acquisition advisory services, restructuring advisory services, various SWAPS transactions, purchaser of gas/energy and serving as indenture for Enron's public debt" ( Id.).
Additionally, the Notice specifies potential causes of action that JPMC anticipated would be asserted against it in litigation as the result of its relationship with and the services it provided to Enron, including "breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, errors and omissions, securities fraud, negligence (including gross negligence), fraudulent conveyance, equitable subordination and misrepresentation" ( Id.). JPMC concluded the Notice by stating that it would vigorously contest the validity of such claims and "has no actual knowledge of such acts," but nonetheless believed that "all of the foregoing constitute Wrongful Acts that could give rise to a claim under the policy" ( Id.).
The Notice provided Twin City with all of the information required by the notice provision of the 97-01 Insurance Program, by alerting Twin City that JPMC became aware of acts, errors or omissions that it believed constituted Wrongful Acts under the policy that would likely to lead to a claim, and describing the circumstances surrounding the Wrongful Acts.
Twin City urges an interpretation of the notice provision that improperly implies a requirement into the 97-01 Insurance Program's language that the insured must have actual knowledge of wrongdoing and admit to such wrongdoing in order to satisfy the policy's notice requirement.
However, a plain and ordinary reading of the unambiguous notice provision contains no mention of any requirement of actual knowledge of wrongdoing and an admission thereof to be noticed to the insurer. Consequently, JPMC's disclaimer in the Notice that it would not admit to liability and would contest any claims, in addition to Straub's deposition testimony in this litigation that he was unaware of specific wrongful acts when he drafted the Notice does not undermine the sufficiency of the Notice to trigger coverage.
Twin City additionally relies upon FDIC v Cont. Cas. Co. ( 796 F Supp 1344, 1351-1354 [DOR 1991]). There, the court determined that constructive notice to the insurer, comprised of standard financial information coupled with denials by the insured of any occurrence that could give rise to a claim submitted on a renewal application did not constitute sufficient notice of a potential claim, despite the fact the some of the information provided suggested that the bank was experiencing financial difficulties and regulatory problems ( Id., 1353).
Specifically, the renewal application contained the question, "Does any Director or Officer have knowledge or information of any act, error or omission which might give rise to a claim under the proposed policy?" To which the insured responded, "no" ( Id., 1352). Additionally, the insured represented to the insurer that it "was not in danger" ( Id., 1353).
However, whereas the constructive notice in FDIC ( Id.) contained denials by the insured in a renewal application of knowledge of any act that could lead to a claim, the Notice here explicitly states that its purpose is to give actual notice of a potential claim (emphasis added). Further, the Notice affirmatively seeks to alert Twin City that certain transactions, loans, and lending practices coupled with its extensive financial relationship with Enron and Enron's financial difficulties, constituted Wrongful Acts that would potentially lead to claims under the policy. The Notice additionally specified a laundry list of causes of action that JPMC anticipated would be asserted against its directors and officers arising out of the transactions, lending practices, and extensive relationship identified.
Furthermore, Twin City is unpersuasive to the extent that it seeks to characterize Straub's deposition testimony as analogous to the deposition testimony given by the directors and officers in FDIC ( 796 F Supp 1344). There, each of the individual directors and officers testified at deposition that during the renewal period, they did not believe that there was a significant likelihood of claims being asserted against them ( Id., 1352). The court noted that this testimony was significant insofar as it demonstrated that the insured disclosed its regulatory problems on the renewal application, not because it was attempting to give notice of a potential claim, but simply because the application requested any information on regulatory action. On this basis, the court concluded that the deposition testimony cast further doubt on the insured's argument that its representations made on the renewal application were designed to give notice of a potential claim ( Id.).
In contrast, the deposition testimony of Richard Straub who drafted the Notice (Straub Deposition: 547:3-10, 548:7-10, 15-21, 693:6-9) does not undermine or otherwise detract from the purpose of the Notice, that was clearly designed to give the insurers actual notice of a potential claim arising out of acts, circumstances and situations that JPMC believed constituted Wrongful Acts within the meaning of the policy ( Id.).
Notwithstanding that JPMC has demonstrated that the Notice was clearly designed to give the insurers notice of Wrongful Acts that might give rise to a claim under section IV.D. of the 97-01 Insurance Program, Twin City fails to raise a triable issue of fact that the Notice did not actually serve to notify it of a potential claim. ( See, FDIC, 796 F Supp at 1353). Subsequent to JPMC's transmittal of the Notice, Lloyd's of London, the primary insurer, in addition to several other excess insurers, represented to JPMC that they accepted the Notice as notice of a potential claim under section IV. D. of the 97-01 Insurance Program (Exhibits 4-7, annexed to the Supp. Aff. of Michelle Migdon, Esq.).
Despite acknowledging that Lloyd's accepted the Notice as notice of a potential claim under the policy (Exhibits 8-9, Id.), Twin City did not object to the Notice's content, quality, purported lack of specificity, or otherwise give any indication that required information was missing, until this action was commenced in 2006. Upon receiving the Notice, Twin City merely communicated a boilerplate reservation of rights and requested coverage correspondence with respect to Enron claims (Exhibits 3, 8-9, Id.).
An insurer's rejection of an insured's purported notice must indicate the notice's deficiencies in order to be operative ( see F.D.I.C. v Interdonato, 988 F Supp 1, 10-11 [DDC 1997], affirmed 172 F 3d 919 [DC Cir 1998]). Twin City's boilerplate reservation failed to give any indication to JPMC that Twin City believed that there was a deficiency in the Notice.
For this reason, Twin City has waived any defense that JPMC failed to satisfy a condition precedent to coverage on the ground that the Notice is insufficient. If an insurer is aware that the insured is attempting to put it on notice of a potential future claim, but the insurer fails to advise the insured that the notice is deficient because the requisite specifics have not been provided, the insurer will not be permitted to subsequently deny coverage based upon the absence of such specifics ( F.D.I.C., 988 F Supp at 11; St. Paul Fire Marine Ins. Co. v Tinney, 920 F 2d 861, 863, rehearing denied 933 F 2d 1023 [11th Cir 1991]; Federal Sav. and Loan Ins. Corp. v. Burdette, 718 F Supp 649, 653-54 [ED Tenn 1989]; U.S. Fire Ins. Co. V Fleekop, 682 So. 2d 620, 628-29 [Fl App, 3rd Dis 1996], review denied [Sup Ct, FL 1997]).
Consequently, even if the Notice had been insufficient, Twin City waived any objection to it by its conduct in failing to indicate the Notice's purported deficiencies and otherwise behaving as if it was sufficient.
For these reasons, Twin City has failed to raise a triable issue of fact that JPMC did not satisfy a condition precedent to coverage and that the Notice failed to alert Twin City's attention to essential facts upon which its coverage under the 97-01 Insurance Program would be involved. Therefore, JPMC's motion for summary judgment dismissing certain of Twin City's defenses and counterclaims that challenge the sufficiency of the Notice is granted, and Twin City's cross-motion is denied.
Accordingly, it is
ORDERED that the motion by plaintiffs JPMorgan Chase Co., JPMorgan Chase Bank, and J.P. Morgan Securities Inc. for partial summary judgment dismissing certain defenses and counterclaims of defendant Twin City Fire Insurance Company is granted; and it is further
ORDERED that the cross-motion by defendant Twin City Fire Insurance Company for summary judgment is denied, and it is further
ORDERED that the remainder of the action shall continue.