Union Mutual Fire Insurance Company v. OHR Makif LLC

Background

Union Mutual Fire Insurance Company (UMFI) brought a declaratory judgment action against OHR Makif LLC (OHR), its insured, and Ramon Roman, who was seeking recovery against the policy in connection with a separate New York state-court premises-liability lawsuit against OHR. UMFI had been funding OHR’s defense in that lawsuit.

OHR applied for and renewed a commercial insurance policy for premises at 888 Home Street in the Bronx. The applications asked whether the property had outstanding New York City Department of Housing Preservation and Development (HPD) Class C violations. OHR answered “No” both times and electronically certified that the application information was true. The policy stated that the application statements were accurate and complete and that UMFI issued the policy in reliance on them.

During a deposition, OHR’s sole member, Isaac Nazar, testified that he knew when OHR applied for the policy that the premises had outstanding Class C violations. UMFI later investigated, found evidence of outstanding HPD violations, returned the premium, and notified OHR that it was rescinding the policy. UMFI then sought declarations that the policies were void from the beginning and that it had no duty to defend or indemnify OHR or continue funding its defense.

Summary-Judgment Standard

The court applied Federal Rule of Civil Procedure 56. Summary judgment is proper when the evidence shows that there is no genuine dispute over a fact that could affect the result and the moving party is entitled to judgment under the law.

Under New York Insurance Law § 3105, an insurer may rescind a policy if the policy was issued based on a material misrepresentation in the application. A misrepresentation is material when the insurer would not have issued the same policy had it known the truth.

Material Misrepresentation

The court held that UMFI met its initial burden. UMFI submitted its Underwriting Guidelines and an affidavit from James Lambert, president of Roundhill Express LLC, the claims administrator that operated the web-based application system for UMFI in New York. The evidence showed that the system would not issue the policy if an applicant answered “Yes” to the HPD Class C violations question. The court found this uncontradicted evidence established that UMFI could not have issued OHR the same policy if OHR had answered truthfully.

The court rejected OHR’s argument that the phrase “outstanding Class C violations” was ambiguous. OHR did not identify another reasonable meaning for the phrase or explain how its conduct could reasonably fall outside it. The court held that the policy unambiguously treated the outstanding Class C violations as an “unacceptable risk.” It also concluded that the phrase was a customary term in New York City’s commercial real-estate industry.

The court rejected OHR’s challenge to Lambert’s affidavit and the underwriting documents. It concluded that Lambert’s uncontested affidavit could establish his authorized agency relationship and support the documents. The court also ruled that UMFI did not need to prove that OHR specifically intended to defraud it. Finally, the court explained that ambiguity and materiality are separate issues and that the lack of a policy definition did not, by itself, make the language ambiguous.

Waiver

OHR argued that UMFI had waived its right to rescind because the violations were matters of public record and UMFI allegedly learned about them before bringing the action. The court rejected that argument. It stated that an insurer generally is not required to investigate information supplied by an insured and that negligence or failure to make further inquiries is not equivalent to actual knowledge.

The court found no evidence that UMFI had actual knowledge of the violations before Nazar’s deposition. It concluded that UMFI acted after learning of Nazar’s testimony by retaining investigators and determining the facts. Based on the undisputed record, the court held that UMFI had not waived its right to rescind.

Disposition

The court granted UMFI’s motion for summary judgment. It held that the policy was void from the beginning because of OHR’s material misrepresentations, and it directed the clerk to close the motion and the case.