Falls Lake National Insurance Company v. Nexus Builders Corp.

Background

Falls Lake National Insurance Company brought a declaratory judgment action concerning liability insurance policies issued to Nexus Builders Corp. The action followed an injury suffered by Tho Binh Phan near a construction site in 2020. The opinion identifies Hip Wah Hing Realty Corp. and Pancare Pharmacy, Inc. as defendants that appeared; Pancare Pharmacy was later voluntarily dismissed. Nexus Builders Corp., Tho Binh Phan, United King Construction Corp., and Huan Da Xian Taoist Temple, Inc. did not answer.

Nexus obtained two general liability policies from Falls Lake. The first covered August 12, 2019, through August 12, 2020, and the second extended coverage for another year. In its insurance application, Nexus stated that it did not perform exterior work involving more than three stories, among other representations. Shortly after applying for insurance, Nexus obtained a permit for work on Floors 1 through 4 and the roof of the Bowery Project Site, including stucco work on the building’s façade. Its construction contract also described work involving the entire façade and a new roof.

Prior proceedings and motions

Falls Lake sought a declaration that the policies were rescinded ab initio, meaning from the beginning. In an earlier ruling, the court allowed the rescission claim to proceed but did not allow Falls Lake’s requested declarations concerning duties to defend and indemnify because Tho Binh Phan had not filed a lawsuit. The court also denied Falls Lake’s initial default-judgment motion without prejudice because granting it could prejudice Hip Wah Hing.

Falls Lake later moved for summary judgment and renewed its motion for default judgment. The court initially denied both motions without prejudice and allowed Hip Wah Hing time to obtain discovery. Hip Wah Hing did not obtain additional discovery, and Falls Lake renewed the motions.

Summary-judgment standard and governing law

Under Federal Rule of Civil Procedure 56, summary judgment is required when there is no genuine dispute about a material fact and the moving party is entitled to judgment under the law. A fact is material if it could affect the outcome, and a dispute is genuine if a reasonable jury could decide the issue for the opposing party.

The court applied New York law because the parties who appeared assumed that New York law governed. Under that law, an insurer may rescind an insurance policy when it issued the policy in reliance on a material misrepresentation. A misrepresentation is material when the insurer’s knowledge of the true facts would have led it to refuse to issue the policy. Although materiality is ordinarily a fact question for a jury, the court may decide it as a matter of law when the evidence is clear and substantially uncontradicted. An insurer generally must support materiality with evidence of its underwriting practices, such as underwriting guidelines for similar risks, rather than relying only on an employee’s statement.

Court’s analysis

The court concluded that Falls Lake established at least one false representation without a genuine dispute. Nexus represented that it did not perform exterior work involving more than three stories. Its work permit and construction contract showed planned work on Floors 1 through 4 and the roof, including façade stucco work.

The court also concluded that the misrepresentation was material. Falls Lake submitted underwriting guidelines stating that contractors were eligible for coverage only for exterior work on a maximum of three stories. Vivalde Couto, Falls Lake’s vice president and head of underwriting for American European Insurance Group, stated in an affidavit that Falls Lake would not have issued the policies had it known that Nexus performed exterior work exceeding three stories. The court found that the guidelines and affidavit left no genuine dispute on that point.

The court did not find that every alleged misrepresentation was established as a matter of law. In particular, it stated that there was not enough evidence to resolve whether Nexus misrepresented its subcontractor costs or number of employees, and the underwriting guidelines did not show that Falls Lake would have refused coverage based on subcontracting costs exceeding twenty percent of receipts. The court nevertheless held that the established misrepresentation concerning exterior work was sufficient to rescind the policies.

Default judgment and disposition

Because the court granted summary judgment on the merits of Falls Lake’s rescission claim, Falls Lake no longer needed a separate default judgment against Nexus Builders Corp., Tho Binh Phan, United King Construction Corp., and Huan Da Xian Taoist Temple, Inc. The court therefore denied Falls Lake’s motion for default judgment as moot.

The court granted Falls Lake’s motion for summary judgment and declared that insurance Policy Numbers SKP 2007005 10 and SKP 2007005 11 were rescinded ab initio. It denied Falls Lake’s motion for default judgment as moot, directed the Clerk of Court to terminate the pending motion, and closed the case.