Opinion
0105130/2006.
February 27, 2008.
In this action arising out of defendant's potential recovery of benefits under two separate disability policies issued by each of the plaintiffs, plaintiffs move pursuant to CPLR 3025(b) to amend their complaint to add a sixth cause of action. Defendant opposes the motion and cross moves for reargument of this court's decision and order dated January 12, 2007, to the extent that it denied defendant's motion to dismiss plaintiffs' second, third and fourth causes of action or, alternatively, for summary judgment dismissing these claims. For the reasons below, the motion is granted, and the cross motion is denied.
Background
Plaintiffs each issued separate disability insurance policies to defendant, who is a lawyer. Plaintiff Provident Life and Casualty Insurance Company ("Provident"), issued its policy to defendant in November 1997 (hereinafter "the Provident Policy"). In 1999, plaintiff First Unum Life Insurance Company ("First Unum") issued a disability insurance policy to defendant seeking the same monthly disability amount available under the Provident Policy, based on a statement in defendant's application that he was seeking to "permanently replace" the Provident Policy.
Based on defendant's application, First Unum's underwriters approved defendant for a maximum monthly disability of $7,880 a month, the exact amount needed to replace coverage under the Provident Policy. First Unum maintains that it would not have issued the policy but for defendant's representation that he would permanently replace the Provident Policy, since, inter alia, in accordance with First Unum's underwriting guidelines, the total monthly disability benefit in the event of disability under the two policies was substantially higher than defendant's after-tax income.
On or about October 11, 1999, defendant wrote a letter to Provident, directing Provident to "cancel my above reference policy effective October 1, 1999, and refund the difference in premium paid." Provident contends that it has no record that it received this cancellation letter, and asserts that defendant never sought a refund for the premiums requested in the letter and continued to send premium payments to Provident.
In or about October 2000, defendant submitted claims for disability benefits to both Provident and First Unum, based on his representation that he became disabled on or about December 15, 1999, as a result of a car accident. In response, Provident paid monthly benefits under the policy for the period from March 14, 2000 to January 1, 2004, totaling $329,117.65. During this period, defendant did not notify Provident that he had cancelled the policy. On January 1, 2004, Provident ceased paying benefits to defendant on the ground that defendant was not disabled from performing his occupation.
In the meantime, when First Unum began investigating defendant's claim, it learned that he had not "permanently replaced" the Provident Policy as was represented in his application. Thus, First Unum notified defendant by letter dated January 26, 2001, that it was denying his claim for disability benefits, and rescinding its policy.
The letter is part of the record in First Unum Life Ins. Co. v. Gravante; Index No. 112370/01, which is described below.
First Unum then commenced an action against defendant entitled First Unum Life Ins. Co. v. Gravante; Index No. 112370/01, in which First Unum asserted that the policy it issued was void and should be rescinded based on defendant's failure to cancel the Provident Policy (hereinafter the "the First Action"). Defendant asserted counterclaims seeking disability benefits under the First Unum policy, including for the period that Provident had already paid him benefits. Defendant moved for summary judgment dismissing the complaint and declaring that there is no basis for rescinding the First Unum Policy, and First Unum cross moved for summary judgment for the declaratory relief sought in the complaint.
By decision and order dated October 5, 2005, Justice Marilyn Diamond held that there was no basis for rescinding the disability policy issued by First Unum and declared that the policy remains in effect in accordance with its terms and conditions. She also wrote that "it is true, as [First Unum] points out, that defendant filed a claim for benefits under the Provident Policy in 2000 after discovering that the policy was in effect. While plaintiff may certainly be justified in refusing to honor any claim filed under the Provident policy, there is no justification for voiding the Unum policy on the ground of misrepresentation." Defendant's counterclaims for disability benefits under the First Unum policy are on this court's trial calendar.
By orders dated June 20, 2006, Justice Diamond recused herself from the First Action and the instant action, both of which were subsequently reassigned to this court.
This action, which was commenced on April 13, 2006, asserted four causes of action by Provident and a fifth cause of action by First Unum. Defendants moved to dismiss the complaint. By decision and order dated January 12, 2007, this court granted defendant's motion to the extent of dismissing as untimely the first cause of action, which sought a declaration that the Provident Policy be cancelled, and the fifth cause of action as barred by the doctrines of collateral estoppel and res judicata based on Justice Diamond's determination that the First Unum policy cannot be rescinded and remains in full force and effect. The court, however, found that the second and third causes of action for money had and received and unjust enrichment, were timely to the extent that the claims seek to recover disability benefits paid within six years of commencement of the action, and that the fourth cause of action, for equitable subrogation, was also timely.
After this court issued its decision, defendant answered and asserted counterclaims seeking benefits under the Provident Policy from January 1, 2004 to date. Plaintiffs subsequently served their reply, and the parties are now conducting discovery.
On August 23, 2007, the Appellate Division, First Department affirmed Justice Diamond's decision in the First Action, finding that defendant made no "false statement of past or present fact" in his application of insurance (See Insurance Law § 3105), and therefore there was no basis to rescind the First Unum policy. The First Department explained that:
Defendant simply stated the fact that he had an existing disability policy with Provident at the time he applied for the Unum policy, and that he intended to cancel the Provident policy in the event [First Unum] issued one to him. Subsequently, defendant wrote to Provident and directed that it cancel the existing policy. The sending of the letter is conclusive proof that defendant did not misrepresent his intentions on the application. Provident's failure to cancel the policy does not otherwise evidence a misrepresentation by defendant.
Provident now moves to amend the complaint to add a sixth cause of action seeking to recover benefits it paid to defendant between July 1, 2001 through January 1, 2004 on the grounds that defendant obtained these benefits under false pretenses. Specifically, the proposed claim alleges that in 2001, defendant changed his law firm from a general partnership to a limited liability company and transferred most of his ownership interest in the firm to his wife, so that his loss of income during the period for which he received payments was not due "solely to an injury or sickness" as required by the terms of the Provident Policy. It is also alleged that defendant did not disclose the transfer of ownership to Provident until June 2003.
In support of their motion, Provident submits a July 30, 2003 letter from one of its customer care specialists to defendant requesting information regarding the transfer of ownership and explaining that to be entitled to disability benefits under the terms of the Provident Policy, the loss of earnings must be caused solely by the injuries or sickness for the which a claim for disability payments is made.
Defendant opposes the motion, arguing that Provident was aware of the transfer of ownership in June 2003, but waited until more than four years later to assert a claim based on the transfer, and that he will be prejudiced by the delay since note of issue has been filed with respect his counterclaims seeking disability benefits under the First Unum policy in the First Action. Defendant also argues that Provident has not submitted sufficient proof to establish the merit of proposed cause of action, that the proposed claim should be barred under the doctrines of res judicata and collateral estoppel since it could have been asserted in the First Action, and that Provident has waived any right to assert the proposed claim.
Defendants also move for reargument of this court's January 12, 2007 decision and order to the extent it did not dismiss the claims for money had and received, unjust enrichment, and equitable subordination or for summary judgment dismissing the claims, arguing, inter alia, that the First Department's decision affirming Justice Diamond's decision in the First Action demonstrates that defendant engaged in no wrongdoing, and that this court's dismissal of the first cause of action seeking a declaration cancelling the policy demonstrates that the remaining claims are also without merit.
In reply, Provident submits an affidavit from Catherine Morrissette (Morrissette), who is a senior consultant with the company which owns both of the plaintiffs, and a copy of the Provident Policy. Morrissette states that "Provident paid benefits under a formula contained in Provident's policy. Under the terms of the policy, defendant, if entitled to benefits at all, was entitled to benefits only to the extent his loss of earnings resulted from an injury or sickness [and that] Provident learned that defendant's loss of earnings from July 1, 2001 through January 1, 2004 was not attributable to injury or sickness to the extent he claimed. Rather defendant transferred most of his ownership in his practice (and the income that came with that ownership) to his wife."
Provident also argues that contrary to defendant's cross-motion, the dismissal of the first cause of action on statute of limitations grounds and the Appellate Division decision in the First Action have no bearing on the merits of remaining claims.
Discussion
It is well-settled that "leave to amend should be freely granted in the absence of prejudice or surprise, upon a showing that the proposed amendment has merit." Centrifugal Associates, Inc, v Highland Metal Industries, Inc., 193 AD2d 385 (1st Dept. 1993); Murray v City of New York, 43 NY2d 400, 404-405, reargument dismissed, 45 NY2d 966 (1977). "[D]elay alone does not provide a sufficient ground for denying leave to amend." Greenburgh Eleven Union Free School District v. National Union Fire Insur. Co., 298 AD2d 180, 181 (1st Dept 2002). Instead, the delay must be accompanied by prejudice as well. Edenwald Contracting Co. Inc. v. City of New York, 60 N.Y.2d 957, 959 (1983). In this context, the courts define prejudice as a "some special right lost in the interim, some change of position, or some significant trouble or expense which could have been avoided had the original pleading contained what the amended one wants to add." Barbour v. Hospital for Special Surgery, 169 A.D.2d 385, 386 (1st Dept. 1991) (citations omitted).
Under this standard, the motion to amend should be granted. First, although Provident delayed in seeking leave to amend despite its knowledge of the potential claim since 2003, as defendant received a letter in July 2003 setting forth the facts underlying the claim, defendant cannot claim surprise or the kind of prejudice warranting the denial of the motion. Greenburgh Eleven Union Free School District v. National Union Fire Insur. Co., 298 AD2d at 181 (trial court properly rejected claim of prejudice even though plaintiff was or should have been aware of the facts providing the basis for proposed amendment where defendant knew of the factual basis for the proposed claim since the lawsuit's inception). Moreover, although defendant's counterclaims in the First Action are trial ready, discovery is still proceeding in this action, including with respect to defendant's counterclaims seeking to recover disability payments from July 1, 2004 to the present. Indeed, courts have permitted parties to amend their pleadings during or even after trial. Lanpont v. Savvas Cab Corp., Inc., 244 AD2d 208 (1st Dept 1997).
To demonstrate merit of a proposed amendment the "proponent must allege legally sufficient facts to establish a prima facie cause of action or defense in the proposed amended pleading. If the facts alleged are incongruent with the legal theory relied on by the proponent the proposed amendment must fail as matter of law." Daniels v. Empire-Orr. Inc., 151 AD2d 370, 371 (1st Dept. 1989) (citations omitted). When the proponent meets this initial burden, "the merit of the alleged pleading must be sustained . . . unless the alleged insufficiency or lack of merit is clear and free from doubt." Id. Here, the allegations in the complaint regarding the sixth cause of action, including that the transfer of defendant's interest in the law firm to his wife provide a basis for defendant's loss of income for reasons other any injury or illness as required under the Provident Policy, are sufficient to establish a prima facie cause of action to recover at least some of the benefits paid. Furthermore, the July 2003 letter to defendant, together with Morrissette's affidavit and a copy of the Provident Policy submitted in reply, provide a sufficient evidentiary basis to support the proposed claim.
Defendant's argument that the doctrines of res judicata and collateral estoppel bar the assertion of the sixth cause of action is also unavailing. The doctrine of res judicata or "claim preclusion" provides that "'as to parties in a litigation . . . a judgment on the merits by a court of competent jurisdiction is conclusive of the issues of fact and questions of law necessarily decided therein in any subsequent action.'" Singleton Management, Inc. v Compere, 243 AD2d 213, 215 (1st Dept 1998) (citation omitted). The related doctrine of collateral estoppel or "issue preclusion" prevents a party from relitigating an identical issue which has previously been decided against it in a prior action in which it had a fair opportunity to fully litigate the issue. See Allied Chemical v Niagara Mohawk Power Corp., 72 NY2d 271 (1988), cert denied, 488 US 1005 (1989). Here, since the proposed claim and the issues relating to it were not litigated or necessarily decided in the First Action, the doctrines are inapplicable here. In fact, Provident was not a party to the First Action and neither the proposed claim nor the remaining claims in this action relating to defendant's ability to recover benefits under the Provident Policy were raised or determined in the First Action, which solely concerned defendant's purported rights under the First Unum policy.
Defendant also asserts that Provident waived its right to assert the proposed claim based on the representation in their brief submitted to the Appellate Division in the First Action that "if this court declares First Unum's policy rescinded and void ab initio then First Unum and Provident . . . will discontinue the Provident action." However, since the First Department did not declare the First Unum policy rescinded but found that there were no grounds for rescission, this argument is patently without merit. Accordingly, the motion to amend is granted.
Defendant's cross-motion for reargument or, alternatively, for summary judgment is denied. Contrary to the defendant's argument, the Appellate Division decision in the First Action is not dispositive of the merits of the plaintiffs' remaining claims. Although the Appellate Division held that defendant did not make a misrepresentation on his application with First Unum, this holding does not preclude a finding in this action that Provident wrongfully paid the disability benefits and/or that defendant wrongfully accepted these benefits in light of his asserted intent to cancel the Provident Policy, such as to provide a basis for claims of money had and received and unjust enrichment. Moreover, the Appellate Division decision denying rescission of the First Unum policy is consistent with the equitable subrogation claim which alleges that "only First Unum, if anyone should have been obligated to pay the defendant" and that "defendant would have a windfall if he was permitted to obtain benefits for the same period under the First Unum Policy having already received those benefits from Provident."
Indeed, as noted above, in her decision that was affirmed by the Appellate Division, Justice Diamond wrote that "it is true, as [First Unum] points out, that defendant filed a claim for benefits under the Provident Policy in 2000 after discovering that the policy was in effect. While plaintiff may certainly be justified in refusing to honor any claim filed under the Provident policy, there is no justification for voiding the Unum policy on the ground of misrepresentation." (emphasis supplied).
Finally, since the court dismissed the first cause of action seeking a declaration that the Provident Policy was cancelled on statute of limitations grounds, such dismissal has no bearing on the merits of plaintiffs' remaining claims for money had and received, unjust enrichment and equitable subrogation.
Conclusion
In view of the above, it is
ORDERED that Provident's motion for leave to amend the complaint is granted, and the proposed amended complaint in the form annexed to the moving papers shall be deemed served within five days of the date of this decision and order a copy of which is being mailed by my chambers to counsel for the parties; and it is further
ORDERED that the defendant shall serve an answer to the amended complaint on or before March 14, 2008; and it is further
ORDERED that the status conference originally scheduled for March 6, 2008 in Part 11, room 351, 60 Centre Street is hereby adjourned to March 20, 2008 at noon.