XL Specialty Insurance Company v. Prestige Fragrances Inc.

Background

XL Specialty Insurance Company insured Prestige Fragrances Inc. under successive policies issued in 2014, 2015, and 2016. The policies provided marine cargo coverage, including coverage for goods stored at Prestige’s warehouse. In July 2017, thieves entered the warehouse and stole goods. Prestige’s claim ultimately amounted to $1,271,740.

XL Specialty denied coverage and rescinded the policies, asserting that Prestige had failed to disclose earlier losses, including a 2010 warehouse burglary and two cargo losses. XL Specialty argued that it would not have issued the policies, or would have issued them on different terms, if Prestige’s loss history had been fully disclosed. Prestige counterclaimed for a declaration that the policies were valid and that XL Specialty had to cover the theft, and it also asserted breach of contract.

Summary-Judgment Motion

XL Specialty moved for summary judgment on its claims and on Prestige’s counterclaims. Summary judgment is a ruling without a trial when the evidence shows that no material fact is genuinely disputed and the moving party is entitled to judgment under the law.

XL Specialty argued that the policies were maritime contracts governed by federal admiralty law. It also relied on the maritime doctrine of uberrimae fidei, or the duty of utmost good faith, which requires an insured to disclose known facts that materially affect the insurer’s risk. XL Specialty contended that Prestige violated that duty by failing to disclose its prior losses.

Prestige disputed whether the policies were maritime contracts and argued that the duty of utmost good faith did not apply. Prestige also argued that its broker, Frenkel & Company, had received information about the earlier losses and that Frenkel’s knowledge should be attributed to XL Specialty. Prestige further argued that a 2016 warehouse survey report disclosed the earlier burglary to XL Specialty before the 2016 policy was issued.

Maritime Contracts

The court ruled that the 2014, 2015, and 2016 policies were maritime contracts governed by federal admiralty law. The policies were labeled “Ocean Marine Cargo” policies, covered goods shipped from ports around the world, and used maritime insurance terminology. The court also relied on Prestige’s business, noting that more than half of its goods were imported and that nearly all of those goods were shipped to the United States by ocean-going vessels.

The court rejected Prestige’s argument that the warehouse coverage made the policies primarily land-based. It reasoned that storing goods shipped from overseas could not be separated from the maritime transportation of those goods. The court therefore granted XL Specialty’s motion to the extent it sought a ruling that the policies were maritime contracts.

Duty of Utmost Good Faith

The court rejected Prestige’s argument that the policies eliminated or changed the duty of utmost good faith. The language Prestige cited appeared in a state-by-state fraud notice and could not reasonably be read as part of the marine cargo policies or as eliminating the maritime duty. The court did not need to decide whether parties may eliminate that duty by contract because the language did not do so here.

Frenkel’s Agency Status

The court declined to decide as a matter of law whether Frenkel was XL Specialty’s agent. The Producer Agreement described Frenkel as an agent of the insured and said that Frenkel could not bind XL Specialty without specific authorization. But the agreement also required Frenkel to perform duties for XL Specialty, including collecting and transmitting premiums, reporting claims and losses, issuing approved insurance certificates, keeping records, and holding premiums in a fiduciary capacity.

The court concluded that this conflicting evidence created a genuine factual dispute. If Frenkel was acting as XL Specialty’s agent, information about Prestige’s prior losses given to Frenkel might be attributed to XL Specialty. The court therefore denied summary judgment on this issue.

2016 Survey Report and Materiality

The court also found factual disputes about whether the 2016 warehouse survey report gave XL Specialty enough information about Prestige’s prior loss history. The report stated that Prestige had suffered a loss of about $200,000 when someone broke through a wall from an adjacent vacant unit. Evidence showed that XL Specialty employees accessed the report and that the report was prepared to help XL Specialty underwrite the risk.

The court stated that this disclosure might have been sufficient to draw an underwriter’s attention to the loss and permit the underwriter to seek more information. XL Specialty nevertheless issued the 2016 policy. That raised questions about whether the smaller losses that XL Specialty claimed Prestige failed to disclose were material and whether XL Specialty relied on the alleged nondisclosures. The court held that XL Specialty had not shown as a matter of law that the report was too incomplete or misleading to count as a disclosure.

Disposition

The court granted XL Specialty’s summary-judgment motion only to the extent that it ruled the three policies were maritime contracts. The court otherwise denied the motion. It did not grant XL Specialty’s request to rescind the policies or resolve the coverage and breach-of-contract issues in XL Specialty’s favor. The court stated that the case would proceed to trial on November 12, 2019.