Trans-Packers Servs. Corp. v National Union Fire Ins. Co. of Pittsburgh, PA

[*1] Trans-Packers Servs. Corp. v National Union Fire Ins. Co. of Pittsburgh, PA 2012 NY Slip Op 50290(U) Decided on February 17, 2012 Supreme Court, New York County Fried, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 February 17, 2012
Supreme Court, New York County

Trans-Packers Services Corp., Plaintiff,

against

National Union Fire Insurance Company of Pittsburgh, PA and STERLING & STERLING, INC., Defendants.



651711-2010



APPEARANCES:

For Plaintiff:

Lebensfeld, Borker, Sussman

& Sharon LLP

31 South St., Suite 2s

Mount Vernon, NY 10550

For Defendants:

(Sterling & Sterling)

Keidel, Weldon & Cuningham, LLP

925 Westchester Ave., Suite 400

White Plains, NY 10604

(Debra M. Krebs) (Stephen Sussman)

(National Union)

Mound, Cotton, Wollan & Greengrass

One Battery Park Plaza

New York, NY 10004

(Sara F. Lilling)

Bernard J. Fried, J.

Defendant Sterling & Sterling, Inc. (Sterling) moves to dismiss the amended complaint in its entirety, as against it, both for failure to state a cause of action (CPLR 3211 [a] [7]), and on the ground of a defense founded upon documentary evidence (CPLR 3211 [a] [1]), or, in the alternative, Sterling moves to convert the motion to one for summary judgment (CPLR 3211 [c]). The motion is denied in its entirety, including the motion to convert.

The facts stated below are from the complaint and supporting affidavits. Plaintiff's factual allegations are deemed to be true for the purposes of this motion (see Cron v Hargro Fabrics, Inc., [*2]91 NY2d 362, 366 [1998]).

Sterling is a full-service insurance broker. Transpackers Services Corp. (Transpackers) is in the business of blending and packaging ready-to-eat dry food for ultimate retail sale, much of which is used by military and institutional customers.

Since 1990, Sterling has exclusively handled all of Transpackers' insurance needs, recommending and procuring insurance appropriate to Transpackers's business needs, and handling all aspects of claims processing.

In 1997, Transpackers purchased a $1 million product contamination policy from National Union Fire Insurance Company of Pittsburgh, PA (National Union). That policy was renewed annually through March 1, 2010, with no change in policy limits.In 2002, Transpackers purchased an umbrella policy from American Guaranty & Liability Insurance Company (American Guaranty), with limits of $10 million. That policy has also been renewed annually, without any change in policy limits, but the umbrella policy has never listed the National Union policy as one of its underlying policies. Sterling procured the umbrella policy at Transpackers's request after an affiliate of Transpackers suffered a substantial loss from a product recall, that was not covered by insurance.

Sterling acted as the broker for Transpackers, in connection with both the initial purchase and the renewals, for both the National Union and umbrella policies.

This action involves two separate insurance claims under the National Union policy, involving losses from positive Salmonella tests. The first resulted from positive tests in December 2007, and again in March and April 2008 (the 2008 claims), in one product, Dairy Shake Blend. As a result of the 2008 contamination, Transpackers suffered lost inventory costs, as well as $1.6 million in lost income.

The second set of claims resulted from a positive Salmonella test on May 13, 2009 (the 2009 claim) on its Dairy Shake Blend product, resulting in suspension of production while Transpackers's facilities were exhaustively tested for Salmonella. Transpackers was required to undertake a product recall. Transpackers states that it has incurred $5 million in liability to third parties as a result of the recall, as well as other related losses.

As relevant to this motion, this action presents overlapping claims both in tort and contract, alleging that Sterling breached its contractually assumed duty to procure appropriate insurance for Transpackers's business needs, specifically, that Sterling failed to properly process a claim for business interruption and lost profits under the product contamination policy for the 2008 claims; that Sterling failed to procure a $10 million umbrella policy that would cover product contamination claims, misrepresented to Transpackers that it had procured such a policy; and failed to advise Transpackers of the availability of umbrella coverage for product contamination claims.

Under applicable law,

[a]n insurance agent or broker may be held liable under theories of breach of contract or negligence for failing to procure insurance. An insured must show that the agent or broker failed to discharge the duties imposed by the agreement to obtain insurance, either by proof that it breached the agreement or because it failed to exercise due care in the transaction [citation omitted]

(Jual Constr. Ltd. v A.C. Edwards, Inc., 74 AD3d 1150, 1150 [2d Dept 2010]).

From the inception of the relationship between Sterling and Transpackers, David Epstein [*3](Epstein), a Sterling broker, has met annually with representatives of Transpackers, to review the insurance portfolio. Sterling held itself out as being "able to identify and procure all coverage necessary for Transpackers' business, and [to] provide ongoing advice and consultation with Transpackers on its insurance requirements ..."(Complaint, ¶ 6). Sterling assumed the responsibility for notifying insurers and processing all claims made by Transpackers (id., ¶ 17).

Sterling handled all aspects of the submission to National Union of the 2008 claims, and did not initially submit a claim for lost profits as a result of business interruption, a category of loss that was covered under the National Union policy.

Transpackers and National Union entered into a March 11, 2009 settlement agreement (the settlement agreement) for the 2008 claims, upon the recommendation of Sterling, pursuant to which National Union paid Transpackers $19,125, and Transpackers executed a release of all claims related to the 2008 contamination.

On March 3, 2010, nearly a full year after the release, Sterling made a formal claim for business interruption losses on behalf of Transpackers, for the 2008 losses. Prior to the execution of the release, Sterling had received a January 20, 2009 e-mail (ex. 18 to Sussman aff.) from Chartis, National Union's claims manager, seeking information and documentation, including, "[d]amage information, recall costs, rehabilitation costs, business interruption and supporting documentation" (id.). No copy of that e-mail was furnished to Transpackers by Sterling. Sterling had previously received an October 22, 2008 e-mail from Chartis, enclosing National Union's July 31, 2008 acknowledgment letter, and advising Sterling that it had not heard anything further. Sterling did pass along to National Union documents that Sterling had received from Transpackers that contained a letter stating that Transpackers had lost 145 days of production as a result of the 2008 contamination, but did not make a claim for lost profits resulting from business interruption in its initial submission.By letter dated March 22, 2010, Chartis denied Transpackers's claim for business interruption losses with respect to the 2008 claims, on the grounds that it was both untimely as well as barred by the release contained in the settlement agreement. Chartis also cited non-disclosure by Transpackers in its application of prior product recalls as an additional fact that came to its attention in investigating the business interruption claim.

Transpackers has not made any claim in this action based on Sterling's handling of the 2009 claims with National Union. Sterling submitted a claim under the umbrella policy for the 2009 claims, which American Guaranty denied, although the date of that disclaimer is not in the record. On June 26, 2009, Epstein advised Transpackers that the umbrella policy did not cover the 2009 claim. Transpackers has made a claim in this action against Sterling for failure to procure insurance coverage with respect to the 2009 claims, under the umbrella policy, although this coverage issue is being litigated in a related declaratory judgment action.

Epstein repeatedly advised Transpackers at quarterly meetings that the umbrella policy covered product contamination claims up to its $10 million policy limits (Complaint, ¶ 14).

The allegations of the third and fourth causes of action are substantially identical, except that the third sounds in contract, while the fourth sounds in tort. The third alleges that Sterling entered into an oral agreement in February 2009 with Transpackers to act as Transpackers's insurance broker in procuring insurance coverage with proper and adequate insurance for Transpackers's business needs, with aggregate limits up to $10 million. This insurance was intended to cover product contamination claims as well as liability to third parties. This alleged oral agreement was consistent [*4]with agreements made annually since 1997 between the parties. The third cause of action alleges that Sterling materially breached this agreement by failing to procure proper and adequate coverage, and by failing to advise Transpackers that the umbrella policy did not cover product contamination claims, or that such coverage was available. It alleges that Transpackers paid all premiums, and was proximately damaged by that breach. There is no dispute that Sterling received commissions from both National Union and American Guaranty.

The fourth cause of action contains the same allegations as the third, except that it bases Sterling's liability on tort rather than contract, based on the allegation that Sterling undertook the duty, rather than agreed, to act as Transpackers's insurance broker and advisor, holding itself out to be skilled and competent in procuring insurance.

The fifth and sixth causes of action, sounding respectively in contract and negligence, each alleges that Sterling failed to exercise reasonable care in processing Transpackers's 2008 business interruption claim. The fifth cause of action cites an oral agreement in 1988 for Sterling to process all insurance claims in consideration of Transpackers's payment of all premiums. The sixth cause of action alleges that Sterling also assumed the duty to process the business interruption claim as a result of communications with National Union.

Thus, the third and fourth causes of action, sounding respectively in contract and tort, relate to the failure to procure an umbrella policy with limits up to $10 million for product contamination claims. The fifth and sixth causes of action, again sounding respectively in contract and tort, charge Sterling with failing to properly process the 2008 claims.

In support of its motion to dismiss, Sterling argues that the third and fifth causes of action, which sound in contract, are time-barred, applying the six-year statute of limitations, and that the fourth and sixth causes of action, which sound in tort, are time-barred, applying the three-year statute of limitations. Sterling argues that accrual must be measured from September 1, 1997, when Sterling first procured the National Union policy, or March 1, 2002, when Sterling first procured the umbrella policy.

With respect to the accrual date for the negligence claims, Sterling argues that the loss occurred on the initial policy procurement date for the National Union and umbrella policies, when Sterling failed to perform its undertaking to procure appropriate insurance for Transpackers's business needs, citing Mauro v Niemann Agency, Inc. (303 AD2d 468 ]2d Dept 2003]). Sterling argues that the injury was the loss of a right to greater insurance protection, which must be measured from the procurement date of each initial policy, whether sounding in tort or contract.

In Bonded Waterproofing Services, Inc. v Anderson-Bernard Agency, Inc. (86 AD3d 527, 530 [2d Dept 2011]), the Appellate Division, Second Department, expressly overruled Mauro, holding that, for claims against insurance brokers sounding in negligence for failure to procure insurance, the cause of action accrues for timeliness purposes when the insured's "request for coverage and a defense was denied" (id.), not on the date of procurement of the original policy (see also Bond v Progressive Ins. Co., 82 AD3d 1318 [3d Dept 2011]; Lavandier v Landmark Ins. Co., 26 AD3d 264 [1st Dept 2006]). Sterling correctly argues that Bonded did not change the accrual analysis for contract claims.

Although the actual date on which American Guaranty denied coverage is not in the record, Transpackers commenced this action by filing on October 12, 2010, and was informed by Sterling, on June 26, 2009, that the umbrella policy did not cover product contamination claims. Thus, [*5]Sterling has failed to meet its burden of demonstrating that the affirmative defense of untimeliness is a complete defense as a matter of law to the negligence causes of action (see Bonded, 86 AD3d at 264]).

Sterling argues that accrual of the contract causes of action must be measured from the initial policy commencement dates of September 1, 1997, for the National Union policy, and March 1, 2002, for the umbrella policy. This argument fails in the face of Transpackers's presumed-true allegation that Sterling orally agreed in February 2009 to act as Transpackers's broker in procuring proper and adequate coverage for the renewal of both the National Union and umbrella policies.

The oral contract by which Sterling allegedly agreed to annually assess Transpackers's insurance needs constitutes an assumption of duty to advise upon the appropriateness of policy limits beyond the initial policy. Absent such an explicit agreement, the duty of a broker under New York common law is limited to obtaining the coverage that their clients request, but does not include a "continuing duty to advise, guide or direct a client to obtain additional coverage" (Murphy v Kuhn, 90 NY2d 266, 270 [1997]), and a broker is not in a special relationship with an insured (see id. at 269-270).

Sterling relies upon settled principles regarding accrual of contract action for timeliness purposes, that in cases not involving fraud, the action accrues "from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury" (Ely-Cruikshank Co., Inc. v Bank of Montreal, 81 NY2d 399, 403 [1993]), and that the availability of nominal damages in a contract action suffices to make the complaining party's right to relief complete for accrual purposes (see id. at 402).

As a result of the oral agreement, and the alleged representations and undertakings by Sterling, Transpackers sufficiently alleges that Sterling owed it "a professional-like duty to advise it of its insurance coverage needs" annually (Hudson Envelope Corp. v Klausner, 249 AD2d 31, 32 [1st Dept 1998]), and that Sterling rendered "specific advice after procurement of the original policy ..." (id.). Thus, for pleading purposes, the contractual causes of action accrued upon each renewal, rather than upon the date of the initial policies, and "the action therefore was timely commenced" (see Tucker v M & T Ins. Agency, Inc., 35 AD3d 1156, 1156 [4th Dept 2006]).

It would be incongruous to hold that an oral agreement such as that alleged, which obligates the broker to meet annually and advise as to the continuing appropriateness of the policy limits, might be breached in the procurement of the initial policy, and that the initial breach would insulate the broker from liability for subsequent breaches.

Sterling also argues that the alleged oral contract in 1988 violates the statute of frauds, and that the alleged contracts are not supported by consideration. Sterling argues further that, by accepting the policies and paying the premiums, Transpackers has waived its right to enforce any obligation on the part of Sterling to purchase additional insurance on its behalf. Finally, Sterling argues that Transpackers had a duty to read the umbrella policy, which does not list the National Union policy as an underlying policy, and that, therefore, Transpackers was on notice that the umbrella policy did not cover product contamination claims.

Sterling's argument that the alleged oral agreement lacked consideration is unavailing on this motion. Transpackers alleges that it paid all premiums on the policies procured by Sterling, and that it placed its entire insurance portfolio in Sterling's hands. Sterling acknowledges that it received commissions for placing both the National Union and the umbrella policies. Sterling also would [*6]have collected commissions on any additional premium that might have been charged to include product contamination coverage within the umbrella policy. In any event, the mutual promises alone provide sufficient consideration to support the contract to obtain the coverage that Transpackers directed Sterling to obtain. "[T]he consideration for a bilateral contract such as this one, in which promises are exchanged, consists of the acts mutually promised" (see Kowalchuk v Stroup, 61 AD3d 118, 125 [1st Dept 2009]).

Sterling contends that the statute of frauds bars the oral agreement allegedly made in 1990, because it could not by its terms be performed in one year under General Obligations Law § 5—393, which requires that an agreement be in writing if, by its terms, it is not to be performed within one year from its making.

However, [t]he statute [of frauds] is narrowly construed and applied only to contracts which, by their terms, have absolutely no possibility of full performance within one year

(Marini v D'Apolito, 162 AD2d 391, 393 [1st Dept 1990]).

It is easy to postulate any number of scenarios in which the alleged oral contract could have been performed in one year, most obviously that Transpackers might have chosen to change brokers in the first year of the contract.

With respect to Sterling's remaining arguments of waiver and duty to read, Sterling has not demonstrated that either is a complete defense as a matter of law on these facts. Waiver generally is an issue of fact (see Amrep Corp. v American Home Assur. Co., 81 AD2d 325, 329 [1st Dept 1981]), and, on this record, it is intertwined with the duty-to-read argument, which is unavailing against a broker as opposed to an insurance carrier. As the Appellate Division, First Department states: [a]n insured has a right to look to the expertise of its broker with respect to insurance matters. And, it is no answer for the broker to argue, as an insurer might, that the insured has an obligation to read the policy. It is precisely to perform this service as well as others that the insured pays a commission to the broker. While an insured's failure to read or understand the policy or to comply with its requirements may give rise to a defense of comparative negligence in a malpractice suit against the broker, the insured's conduct does not, as the motion court held, bar such an action [citations omitted]

(Baseball Office of Commr. v. Marsh & McLennan, Inc., 295 AD2d 73, 82 [1st Dept 2002]).

Therefore, on this motion addressed to the sufficiency of the complaint, Sterling's waiver and duty to read arguments are insufficient.

Accordingly, it is

ORDERED that the motion of defendant Sterling & Sterling, Inc. to dismiss the amended complaint, pursuant to CPLR 3211 (a) (1) and (7), or, alternatively, to convert the motion to one for summary judgment, pursuant to CPLR 3211 (c), is denied. [*7]

DATED:

E N T E R:

____________________________

J. S. C.