51 F. Supp. 3d 379
S.D.N.Y.2014Background
- Paraco seeks coverage under a Travelers D&O policy obtained with the help of FCBIS, and asserts reformation and misrepresentation claims related to an Ownership Percentage Exclusion.
- The policy contains an Ownership Percentage Exclusion that bars coverage for claims brought by or on behalf of persons owning more than 5% of Paraco, which includes Armentano who filed the Armentano Action on behalf of other shareholders.
- Paraco alleges the Exclusion was known to Travelers and FCBIS but not disclosed to Paraco; Paraco claims the policy should have matched its expiring Chubb policy without the Exclusion.
- Armentano Action involves a 5%+ owner; Paraco argues it should be covered, while Travelers argues the Exclusion applies by its plain language.
- Paraco and FCBIS also seek reformation based on mutual mistake or fraud, and Paraco claims negligence/misrepresentation in Travelers’s handling of the policy.
- The court applies New York law, with cognizable questions about whether the Armentano Action is covered, whether reformation claims are viable, and the viability of related cross-claims by FCBIS.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does Ownership Percentage Exclusion bar Armentano Action coverage? | Paraco: exclusion should be construed narrowly to exclude only those >5% owners; Trust may be <5%; Armentano Action should be covered. | Travelers: Exclusion plainly bars any claim by or with participation of a 5%+ owner; Armentano Action fits. | Exclusion bars coverage for Armentano Action. |
| Are reformation claims viable (mutual mistake/fraud)? | Mutual mistake or fraud could reform to delete Exclusion; misrepresentation occurred; reliance alleged. | No clear meeting of minds; misrepresentation/fraud not adequately pleaded; mutual mistake not proven. | Reformation claims dismissed; fraud/mutual mistake not sufficiently pleaded at this stage. |
| Are negligent misrepresentation claims viable against Travelers? | Travelers provided incorrect information; duty and reliance alleged; privity-like relationship exists via broker. | No fiduciary duty in arm’s-length insurance transaction; reliance not reasonable; broker role disputed. | Negligent misrepresentation claims dismissed for lack of fiduciary duty and reasonable reliance. |
| Do FCBIS cross-claims for indemnification and breach of implied covenant survive? | Indemnification provision requires Travelers to indemnify for Travelers’s error; implied covenant claim distinct from contract. | Claims overlap with indemnification; implied covenant duplicative; defenses depend on extent of Travelers’s error. | Indemnification claim survives; implied covenant claim dismissed as duplicative, with leave to amend. |
| Do Connecticut/New York unfair trade or deceptive practices claims survive? | Travelers engaged in deceptive practices in obtaining/issuing policy. | No broader consumer impact; isolated conduct against Paraco; statute not applicable here. | State-law unfair and deceptive practices claims dismissed. |
Key Cases Cited
- Barbagallo v. Marcum LLP, 820 F. Supp. 2d 429 (E.D.N.Y. 2011) (clear and convincing evidence required for mutual mistake reform)
- Simkin v. Blank, 19 N.Y.3d 46 (N.Y. 2012) (mutual mistake requires precise meeting of minds)
- American Building Supply Corp. v. Petrocelli Grp., Inc., 955 N.Y.S.2d 854 (N.Y. App. Div. 2012) (insured may look to broker for coverage; signing party presumed to know policy terms)
- Murphy v. Kuhn, 660 N.E.2d 972 (N.Y. 1997) (exceptional circumstances may create fiduciary duties in insurance matters)
- DDJ Mgmt., LLC v. Rhone Group LLC, 905 N.Y.S.2d 118, 931 N.E.2d 87 (N.Y. 2010) (reasonable reliance and duties in misrepresentation claims)
- Guggenheim Capital, LLC v. Birnbaum, 722 F.3d 444 (2d Cir. 2013) (elements of fraud under New York law)
- Woori Bank v. Citigroup Inc., 2013 WL 1235648 (S.D.N.Y. 2013) (negligent misrepresentation requires fiduciary duty; 9(b) particularity)
- Jones v. Nextel Communications, Inc., 660 F.3d 131 (2d Cir. 2011) (fraud elements and reliance considerations)
- Barfago v. Marcum LLP, 820 F. Supp. 2d 429 (E.D.N.Y. 2011) (as above)