Steadfast Ins. Co. v Casden Props., Inc.

[*1] Steadfast Ins. Co. v Casden Props., Inc. 2006 NY Slip Op 50906(U) [12 Misc 3d 1155(A)] Decided on May 18, 2006 Supreme Court, New York County Lehner, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on May 18, 2006
Supreme Court, New York County

Steadfast Insurance Company, Plaintiff,

against

Casden Properties, Inc., LAC PROPERTIES QRS III, INC., HAPI MANAGEMENT, INC., WILKES TOWERS, LTD, WILKES TOWERS, INC. and WT, INC., Defendants.



602048/03

Edward H. Lehner, J.

The prime legal issues before me on the present motions are whether i) California law mandating that an insurer demonstrate prejudice in order to disclaim for untimely notice, or ii) New York law which does not require such a showing, is applicable to the underlying wrongful death action commenced in North Carolina; and if California law is applicable, whether the policy provision eliminating the need for the insurer to show prejudice is enforceable.

Before me are motions by defendants to dismiss the first cause of action of the complaint pursuant to CPLR 3211(a)7, and by plaintiff for summary judgment for a declaration that it is not obligated to indemnify defendants in the aforesaid wrongful death action which was settled for $400,000. While the answer asserts the defense of forum non-conveniens, it is agreed that such issue is not before me on the pending motions (Tr. p. 9).

The complaint alleges that: plaintiff issued a commercial general liability policy covering defendant Casden Properties, Inc. ("Casden") and other defendants for a one-year period commencing November 5, 2001 (the "Policy"); as a result of a fire on December 26, 2001 in a [*2]building owned and managed by defendants in North Wilkesboro, North Carolina, a tenant thereof, Lessie Cardwell, died due to the alleged failure of a smoke detector in his apartment to properly operate; in April 2002 the administrator of the Cardwell estate filed a law suit in North Carolina against defendants who were served in May 2002; defendants promptly notified their New York insurance broker, third-party defendant The Rubin Group ("Rubin"), who promptly notified the claim service provider, third-party defendant Specialty Risk Services; the first notice received by plaintiff of the Cardwell matter was on February 14, 2003, almost 14 months after the fire and 9 months after service upon defendants in the Cardwell action; and plaintiff disclaimed due to late notice by letter dated March 18, 2003. While Rubin asserts that the 32-day delay in disclaiming is untimely, that issue is not before me as it was not raised in defendants' motion.

It is not disputed by defendants that if New York law were applicable the plaintiff would be entitled to summary judgment as defendants clearly failed to give plaintiff timely notice of the claim and of the law suit. However, defendants assert that California law should apply and that under the law of that state plaintiff in order to disclaim would be required to show that it was prejudiced by the untimely notice. It is acknowledged that New York is one of the very few states that does not require a showing of prejudice in order for an insurer to disclaim for late notice. See, Argo v. Greater New York Mutual Insurance Company, 4 NY3d 322, 339 (2005), which states the rule that "the absence of a timely notice of an occurrence is a failure to comply with a condition precedent which vitiates the contract ... (and) [n]o showing of prejudice is required." As the policy considerations for this rule, the court wrote: "Strict compliance with the contract protects the carrier against fraud or collusion; gives the carrier an opportunity to investigate claims while evidence is fresh; allows the carrier to make an early estimate of potential exposure and establish adequate reserves and gives the carrier an opportunity to exercise early control of claims, which aids settlement ...."

Plaintiff, in addition to asserting that New York law should apply, maintains that even if California law were applicable, the Policy provision contained in Endorsement 4 that it "shall not be required to establish prejudice resulting from the non-compliance" with the timely notice provisions thereof is binding on defendants, and thus summary judgment in its favor is warranted. Casden contends that such clause is contrary to California public policy and is therefore unenforceable.

Plaintiff states that it is a Delaware corporation with an office in New York City, but with its "administrative office" in Illinois. It is a subsidiary of Zurich American Insurance Company, a New York corporation. Endorsement 19 to the Policy provides that service of process upon it may be made at the office of its General Counsel in Schaumburg, Illinois, and Endorsement 18 mandates that all notices be sent to it at its Illinois address.

Casden is a California corporation having its principal office in that state. It owns real property in 28 states, asserting in an affidavit of Andrew Starrels, its former general counsel, that "3/4 of the total value of all insured properties" are located in California and of the 230-250 properties it owns, only four are located in New York State and two in North Carolina, and that in the year 2000, 72% of its total income was derived from California properties. It is qualified to do business in New York.

The Policy provided liability coverage for Casden's properties located throughout the [*3]country. It had sought the coverage from Rubin, a New York broker. Rubin in turn solicited coverage from a New York producer, non-party Preferred Concepts. However, the Policy itself shows the producer to be Zurich E&S Insurance Brokerage, Inc., having an office in Glendale, California, and Endorsement 19 authorizes any public official served with process intended for plaintiff to mail it to a San Francisco address.

While the Policy contains no choice of law provision, the "Notice" set forth therein following Endorsement 19 states that plaintiff "is not licensed in the State of California," being a "surplus line" insurer; that it "is not subject to the financial solvency and enforcement which applies to California licensed insurers"; that it "does not participate in any of the insurance guarantee funds created by California law"; and directs that "for additional information about the insurer you (may) ... contact the California Department of Insurance," listing a telephone number. The general principles to be applied in resolving conflicts of law issues were stated in Auten v. Auten, 308 NY 155, 160 (1954) to be based on the "center of gravity" or "grouping of contacts" theory, the court writing that (p. 161): "the merit of its approach is that it gives to the place having the most interest in the problem' paramount control over the legal issues arising out of a particular factual context, thus allowing the forum to apply the policy of the jurisdiction most intimately concerned with the outcome of (the) particular litigation'. 3 Utah L.Rev., pp. 498-499. Moreover, by stressing the significant contacts, it enables the court, not only to reflect the relative interests of the several jurisdictions involved ..., but also to give effect to the probable intention of the parties and consideration to whether one rule or the other produces the best practical result."

In summarizing New York law, the Second Circuit in Maryland Casualty Company v. Continental Casualty Co., 332 F.3d 145 (2003), citing Zurich Insurance Company v. Shearson Lehman Hutton, Inc., 84 NY2d 309 (1994), wrote that (pp. 151-152): "the New York Court of Appeals has identified five factors relevant in determining which state has the most significant relationship' to a contract dispute: (1) the place of contracting, (2) the place of negotiation of the contract, (3) the place of performance, (4) the location of the subject matter of the contract, and (5) the domicile or place of business of the contracting parties."

In the Zurich Insurance Company case, the Court of Appeals quoted with approval from section 193 of the Restatement (Second) of Conflicts of Laws, which provides that the "validity of a contract of ... casualty insurance and the rights created thereby are determined by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship ...." Comment b to that section states in part: "The location of the insured risk will be given greater weight than any other single contact in determining the state of the applicable law provided that the risk can be located, at least principally, in a single state. Situations where this cannot be done, and where the location of the risk has less significance, include ... (2) where the policy covers a group of risks that are scattered throughout two or more states. The importance of the risk's principal location will also vary somewhat from case to case. It enjoys greatest significance when an immovable is involved, such as when the risk insured against is [*4]damage by fire to a particular building."

In the Maryland Casualty Company case, where the subject policy insured real property located in twelve states, the insured argued that the court should interpret the policy, with respect to the insurer's obligation to defend and indemnify, according to the law of the particular state in which the property subject to the litigation is located. Finding that "the drafters of the Restatement did not intend for courts to apply the laws of more than one state to a single insurance policy," the court concluded, based on the wording of §193 and the above-quoted comment, that the Restatement intended that "where the insured risk is located in more than one state, courts should apply the law of the one state in which the parties understood the risk to be principally located" (pp. 152-153)(emphasis in original). The court stated that the "dearth of New York cases applying the laws of more than one state to an insurance policy or any contract is a significant factor in our decision" to follow the rule of the Restatement and apply the law of only state to the policy. Here, no argument is made that the law of North Carolina should govern the controversy, the sole conflicts issue being whether it should be New York or California.

In a case involving the same insurer as herein, which had issued a policy to its insured covering properties located throughout the country, one of the issues raised was, similar to here, whether New York or California law should apply on the question of the need to show prejudice in order to disclaim for late notice. In that case, Steadfast Insurance Company v. Sentinel Real Estate Corporation, 283 AD2d 44 (2001), the First Department held that New York law should apply "given that the policy was issued to a New York named insured," concluding on that issue (p. 50): "Given the nationwide scope of Sentinel's operations, the principal location of the insured risk should be deemed to be the State where Sentinel is incorporated and has its principal place of business, from which it negotiated the special terms of the Policy, and where the Policy presumably was delivered to it (thus constituting the state where the contract was made)."

In Regional Import & Export Trucking Company, 149 AD2d 361 (1st Dept. 1989), where the subject policy "was placed through a New York insurance broker which negotiated its terms," it was ruled that the "policy delivered to a New Jersey corporation to insure against a loss occurring anywhere' should be subject to the law of that State, irrespective of the presence of the insured's agent in the State of New York."

In Autern v. Autern, supra, the court in adopting the "grouping of contacts" theory recognized that this concept would "afford less certainty and predictability than the general rigid rules" (p. 161). As a consequence, each case is sui generis with precedent having limited value.

Here, significantly, the insured was a California corporation with its principal office and approximately 44% of its apartment units located in that state, and with almost 3/4 of its income nationwide derived from its California properties. While Casden does own real estate in 28 states, by far the most predominant portion of its operation is in California, and thus that state has the most significant relationship to the risks insured. Further, the various references to California in the Policy and the attachments thereto demonstrate an intention of the parties as to the applicability of the law of that jurisdiction. In view of the foregoing, upon weighing the various factors and applying the center of gravity theory, I find that California has the greatest interest [*5]with respect to the Policy, and therefore its law should be applied herein.

That the Policy was obtained from a broker and producer in New York does not warrant a contrary result. To make New York law applicable would mean that the law of a state in which is located only four of the approximately 230-250 properties covered by the Policy would govern coverage and other issues relating to all of the other properties, and thus the tail would be wagging the dog. Such a result is not consonant with the grouping of contacts theory governing conflicts issues.

Having determined that California law is applicable, the issue thus presented is whether the Policy provision that plaintiff need not demonstrate prejudice in order to disclaim for untimely notice is enforceable in light of California law requiring a showing of prejudice for such a disclaimer. On this issue neither party has cited any precedent nor have I located any authority discussing this specific issue. California has for decades required an insurer to establish that it was prejudiced in order to disclaim for late notice. See, Clemmer v. Hartford Insurance Company, 22 Cal. 3d 865, 587 P.2d 1098 (1978); Campbell v. Allstate Insurance Company, 60 Cal. 2d 303, 384 P.2d 155 (1963); Fireman's Fund Insurance Co., Inc. v. Schuster Films, Inc., 811 F. Supp. 978, 985 (S.D.NY 1993). Such requirement must be satisfied even if "the notice provision is made a condition of the policy or specified as a condition precedent to the liability of the insurer" [Hanover Insurance Company v. Carroll, 241 Cal. App. 2d 558, 565 (1966)]. See also, Insurance Company of the State of Pennsylvania v. Associated International Insurance Company, 922 F.2d 516, 524 (9th Cir. 1991). In Pacific Employers Insurance Co. v. The Superior Court of Los Angeles County, 221 Cal. App. 3d 1348, 1359 (1990), it was stated that "[a]ny provision contained within an insurance contract which is violative of public policy is not enforceable."

While it would be desirable to have the power exercisable by federal circuit courts of appeal to certify a question to a state court where the "applicable state law is unclear or nonexistent" [Olin Corporation v. Insurance Company of North America, 922 F.2d 62, 64 (2nd Cir. 1991)], I find based upon the foregoing precedent that the subject clause eliminating plaintiff's necessity to demonstrate prejudice in order to disclaim for late notice is violative of California public policy and therefore is void and unenforceable. This determination is without prejudice to renewal should there be a subsequent contrary judicial or administrative ruling on the question.

In light of the foregoing, plaintiff's motion for summary judgment is denied, but its application for leave to replead to assert allegations of prejudice under California law is granted [see, CPLR 3211(e)]. Such amended complaint shall be served within 20 days of service of a copy of this order. Defendants' motion to dismiss is denied in the event plaintiff serves an amended complaint as authorized herein. Should plaintiff not timely serve such amended pleading, defendants may settle an order dismissing the first cause of action for failure to allege and demonstrate prejudice as required by California law as held applicable herein.

This decision constitutes the order of the court.

Dated: May 18, 2006________________

J.S.C.