282 Mountainview Drive LLC v. Norguard Insurance Company

Background

Norguard Insurance Company and Skyscraper Insurance Services, Inc., formerly known as Infinity Insurance Brokerage Inc., filed cross-motions for summary judgment in Norguard’s third-party action against Skyscraper. The remaining dispute concerned Skyscraper’s alleged breach of an agency agreement and its obligation to indemnify Norguard. 282 Mountainview Drive LLC’s original claims against Norguard had already been settled and discontinued with prejudice.

The agency agreement required Skyscraper to provide Norguard with facts relevant to insuring a risk, avoid withholding material underwriting information, report losses or claims promptly, and defend and indemnify Norguard for costs arising from Skyscraper’s negligence, errors, omissions, or intentional acts.

Skyscraper helped obtain replacement insurance for 282 Mountainview’s property. Based on the information submitted by Skyscraper, the policy included a protective safeguard endorsement requiring an automatic sprinkler system. The property did not have sprinklers. Skyscraper also forwarded a portion of Norguard’s proposal to 282 Mountainview but removed the pages identifying the sprinkler endorsement and explaining its requirements.

On May 29, 2018, the property suffered a fire. After learning of the fire, Skyscraper repeatedly asked Norguard to remove the sprinkler endorsement retroactively to the policy’s start date, without telling Norguard about the fire. Skyscraper stated that it had learned about the absence of sprinklers while reviewing a personal policy, but the opinion states that this statement was false. Norguard later reinstated the endorsement, investigated the claim, denied coverage, and settled 282 Mountainview’s lawsuit.

Rule 19 Argument

Skyscraper argued that 282 Mountainview was a necessary party whose absence required dismissal. The court rejected that argument. It held that the remaining case could be decided by examining whether Skyscraper breached its agreement with Norguard, without determining 282 Mountainview’s rights under the insurance policy. The court also found no realistic risk of double payment or inconsistent obligations because the federal and Orange County cases concerned different alleged breaches and different agreements.

Reformation of the Insurance Policy

Skyscraper argued that the policy should have been reformed to remove the sprinkler endorsement because of mutual mistake. The court held that it did not need to decide whether reformation would have been appropriate. The remaining claims were governed by the agency agreement between Norguard and Skyscraper, not by the insurance policy between Norguard and 282 Mountainview.

The court nevertheless stated that Skyscraper’s claim that reformation would inevitably have occurred was not clear. The opinion explains that the parties may not have shared the same mistaken understanding, and that the inaccurate information came from the insured and its agent. The court also noted that the insurer’s willingness to insure the property for a higher premium did not necessarily resolve whether reformation was proper.

Breach of the Agency Agreement

Applying New York law, the court explained that a breach-of-contract claim requires a contract, the plaintiff’s performance, the defendant’s breach, and resulting damages. The court found that Skyscraper breached the agency agreement by seeking retroactive removal of the sprinkler endorsement while withholding the material fact that the property had already suffered a fire.

The court rejected Skyscraper’s argument that it was excused because it thought a public adjuster would notify Norguard. Skyscraper had its own contractual duty to report losses and did not ensure that anyone else made the notification. The court also rejected the argument that the omission was immaterial because Norguard might have insured the property without sprinklers for a higher premium. The issue was whether Norguard would have retroactively removed the endorsement after learning that the property had already burned. The court found that the fire was material as a matter of law and that Norguard would not have backdated the change had it known the true facts.

The court further held that Norguard did not need to rescind the insurance policy in order to sue Skyscraper under the separate agency agreement. Norguard’s decision to disclaim coverage rather than rescind the policy did not eliminate Skyscraper’s breach.

Damages and Indemnification

The court rejected Skyscraper’s argument that Norguard’s damages were limited to the $313 premium difference. The court distinguished cases involving different types of insurance-broker errors and held that this case involved contractual indemnification for the consequences of Skyscraper’s intentional breach.

The court concluded that Skyscraper’s omission caused Norguard to remove the endorsement retroactively, then investigate the claim, reinstate the endorsement, disclaim coverage, and defend and settle the resulting lawsuit. The agency agreement’s broad indemnification provision covered costs and expenses arising from Skyscraper’s negligence, error, omission, or intentional act.

The court also rejected the argument that Norguard’s settlement was a voluntary payment that Skyscraper did not have to reimburse. The court held that the contractual indemnification provision was broad, Norguard had a legitimate reason to settle, and Skyscraper could have assumed its contractual defense obligations but did not do so. Accordingly, Skyscraper had to reimburse Norguard for the settlement payment and all reasonable legal fees, costs, and expenses resulting from Skyscraper’s breach.

Disposition

Judge Seibel granted Norguard’s motion for summary judgment and denied Skyscraper’s motion for summary judgment. The court directed the parties to confer about the amount of the judgment and report their positions and proposed next steps.