Golden Insurance Company v. PCF State Restorations, Inc.

Background

Golden Insurance Company sought a default judgment under Federal Rule of Civil Procedure 55(b)(2) against PCF State Restoration, Inc. Golden’s claims arose from alleged misrepresentations PCF made when applying for a liability insurance policy covering construction work. The court stated that it had jurisdiction under 28 U.S.C. § 1332.

PCF’s application represented that its work would be limited to exterior masonry, that PCF would operate only as a subcontractor, and that it would not erect scaffolding. The court found that the evidence showed PCF had contracted to replace a roof, was acting as the general contractor for that project, and erected scaffolding and a sidewalk bridge. Golden issued policy number GIC1300683 for coverage from September 3, 2013, through September 4, 2014. Golden stated that the policy was underpriced because of the misrepresentations, and the premium later increased from $46,000 to $55,000 and then to $58,000 after Golden learned more about PCF’s work.

An employee of PCF, Angel Yamba, was injured after falling from scaffolding at the project site. After Mr. Yamba sued the property owner, the owner brought PCF into that action. Golden provided for PCF’s and the owner’s defense and had incurred $146,963.21 in legal fees and expenses in that action as of June 5, 2019.

Default Judgment Analysis

PCF’s lawyers were allowed to withdraw on March 13, 2019. Magistrate Judge Moses directed PCF, a corporation, to promptly retain new counsel and file a notice of appearance by April 12, 2019. PCF did not appear through new counsel. The Clerk issued a certificate of default on May 14, 2019, and Golden moved for default judgment on July 3, 2019.

The court applied a three-factor test addressing whether PCF’s default was willful, whether PCF had a potentially valid defense, and whether Golden would be prejudiced if default judgment were denied. The court found willfulness because PCF did not appear despite having ample opportunity and clear instructions from the court. Although PCF had answered the amended complaint, it offered only conclusory denials and limited affirmative defenses, introduced no evidence supporting a complete defense, had lost relevant documents, and refused to produce witnesses for depositions. The court also found that Golden would be prejudiced because it would otherwise continue incurring costs in the insurance-related litigation.

Merits of Rescission

Rescission is the cancellation of a contract. Under New York law, an insurer seeking to rescind an insurance policy must show that the insured made a material misrepresentation. A misrepresentation is material if knowing the truth would have led the insurer to refuse to issue the policy. The court explained that an insurer may establish materiality through underwriting materials and evidence showing that it would not have issued the same policy if the application had contained accurate information.

The court treated the well-pleaded allegations in Golden’s amended complaint as admitted because of the default and considered Golden’s undisputed evidence. Golden’s corporate representative testified that the type of construction work and the insured’s role in overseeing the project affected underwriting and pricing. The court also noted that PCF’s premium increased after Golden learned that PCF was acting as a general contractor on a roofing project and had erected scaffolding. The court concluded that PCF had made material misrepresentations and that Golden was entitled to rescission.

Disposition

Judge Laura Taylor Swain granted Golden’s motion for default judgment against PCF. The court declared that the Golden Policy was rescinded and void from the beginning; that Golden had no further duty to defend or indemnify any person, company, or other entity claiming coverage under the policy in the Yamba Action or future actions; and that Golden was entitled to recover $146,963.21 in legal fees and expenses from PCF. Instead of returning the $46,000 in premiums paid under the policy, Golden could deduct that amount from the defense costs, producing a net recovery of $100,963.21 in Golden’s favor against PCF. The case remained referred to Magistrate Judge Moses for general pretrial management.