Court of Appeals Determines Impact Of Policy Rescission on Additional Insured Status

In Admiral Ins. Co. v. Joy Contracting, Inc., Admiral, Joy Contracting’s excess insurer, argued that coverage was not available to its proposed additional insureds because the policy it had issued to Joy Contracting should be rescinded, reformed or declared void based upon Joy’s misrepresentations during the application process.  Joy Contracting had held itself out to Admiral as merely being a drywall contractor, when Joy was, in fact, involved in the exterior construction of the condominium.  It was Joy Contracting that had rented a crane that ultimately collapsed, killing 7 people and injuring many others. 

Relying on its earlier decision in Lufthansa Cargo, AG v. New York Mar. & Gen. Ins. Co. (40 A.D.3d 444 [1^st Dept. 2007]) and of the Second Department in BMW Fin. Servs. v. Hassan (273 A.D.2d 428 [2^nd Dept. 2000], lv. denied 95 N.Y.2d 767 [2000]), the First Department held, however, that the innocent additional insureds were unaffected by Joy Contracting’s misrepresentation.  

The First Department granted leave to appeal to the Court of Appeals, and on appeal the Court of Appeals reversed the First Department and reinstated Admiral’s causes of action for rescission, reformation and a declaration voiding the Joy Contracting policy.

Initially, the Court of Appeals distinguished BMW Fin. Servs. and Lufthansa, AG on the basis that, in each of those cases the insurer was specifically made aware of the additional insured when it undertook to provide coverage. The Court of Appeals observed that “the named insureds’ misrepresentations did not deprive the insurer of knowledge of or the opportunity to evaluate the risks for which it was later asked to provide coverage.” In short, since both BMW and Lufthansa were named additional insureds, they were considered “separate parties” whose interests were known to the insurers, whereas, by contrast, in Admiral v. Joy, Admiral underwrote the risk as though Joy Contracting was a drywall contractor, “not the obviously much greater risk presented by exterior construction work with a tower crane at a height many stories above grade.”

The Court of Appeals also distinguished its prior decisions in Morgan v. Greater N.Y. Taxpayers Mut. Ins. Assn. (305 N.Y. 243 [1953]) and Greaves v. Public Ser. Mut. Ins. Co. (5 N.Y.2d 120 [1959]), upon which BMW Fin. Servs. and Lufthansa, AG were based. Unlike the matter before the Court, neither Morgan nor Greaves involved rescission of the named insured’s policy. As such, the Court of Appeals went a step farther and declined to support BMW Fin. Servs. and Lufthansa, AG to the extent that those decisions could be read to expand the holdings of Morgan and Greaves. Simply stated, the Court found that rescission of the policy to the named insured would leave nothing for which the additional insured could be considered “additional,” because “by definition [the additional insured] must exist in addition to something” (emphasis in original).