Summary
In Federal Ins. Co. v Americas Ins. Co. (258 AD2d 39, 44), we noted that "the parties' course of performance under the contract is considered to be the `most persuasive evidence of the agreed intention of the parties'" (quoting Webster's Red Seal Publs., 67 AD2d at 341).
Summary of this case from Brad H. v. City of New YorkOpinion
June 15, 1999
APPEAL from the Supreme Court (Beatrice Shainswit, J.).
Judith F. Goodman of counsel, New York City ( Lester Chanin on the brief; Goodman Jacobs, attorneys), for appellant.
Vivian B. Drohan of counsel, New York City ( Drohan Drohan, L. L. P., attorneys), for Westchester Fire Insurance Company, respondent.
In this controversy between insurance companies as to their respective obligations concerning an underlying personal injury claim, plaintiff Federal Insurance Company appeals from Supreme Court's declaration, in resolving competing cross motions for summary judgment, that the defendant insurers, Americas Insurance Company and Westchester Fire Insurance Company, are not obligated to reimburse Federal for the $1,650,825 it contributed to the $2,475,000 settlement of the underlying claim. That claim arose out of a March 15, 1992 automobile accident that occurred in Texas when an employee of Pyramid Energy, Inc., a Texas-based oil exploration and development company no longer in existence, operating a Toyota pickup truck owned by Pyramid, lost control of the vehicle, causing it to roll over and cause serious personal injuries to James Neal Smith, a passenger. As part of the settlement, all three insurers expressly reserved their right to litigate the coverage issues at a later date.
Pyramid, acquired by Bankers Trust through foreclosure as a result of loan default, was one of its nonbanking subsidiaries. In compliance with Bankers Trust's requirements, Pyramid had procured from Westchester primary coverage with a $1,000,000 limit for the 24 automobiles listed in endorsement No. 1, 22 of which, including the Toyota pickup involved in the Smith accident, were garaged in Texas. Pyramid had an umbrella policy with Americas, written as excess over the Westchester policy only, providing a $10,000,000 limit. Pyramid paid yearly premiums of $22,212 and $17,000, respectively, for the two policies. Westchester contributed $824,175 to the settlement of Smith's claim, rather than its $1,000,000 policy limit, on the ground that it was only required to contribute on a pro rata basis with Federal's Business Auto Policy (BAP), which, it argues, also provided primary coverage for Pyramid for the accident in question. Americas made no contribution to the settlement and maintains that Federal's BAP must be exhausted before it is required to contribute to the settlement.
The companies acquired through foreclosure were often referred to as "OREOs", which, in the banking industry, stands for "Other Real Estate Owned."
After the argument of this appeal, Federal and Americas settled their dispute and have stipulated that Federal's appeal against Americas be dismissed with prejudice.
Federal, just a few months before the Smith accident, had begun to insure Bankers Trust under a complex program, which included the BAP, two commercial general liability policies — one for the State of Texas, exclusively — and several layers of excess and umbrella coverage. Federal's BAP had a liability limit of $2,000,000 for each accident and listed 31 automobiles as covered. None of the Pyramid automobiles were listed as covered. In fact, the BAP did not list any automobiles located in Texas.
While Bankers Trust procured coverage for itself and its banking subsidiaries, it required its OREOs, such as Pyramid, to procure their own insurance to avoid the "intermix" of risks common to banking institutions with those of nonbanking institutions. Pyramid complied with Bankers Trust's requirements and, as noted, purchased its own insurance. According to Russell P. Opferkuch, Bankers Trust's Vice President and Risk Manager, the BAP was intended "to provide coverage for Bankers Trust and for its banking related subsidiaries in the event that a particular subsidiary did not have its own more specific insurance."
In opposing Federal's motion for summary judgment and cross-moving for similar relief in their favor, Westchester and Americas relied exclusively on the "Subsidiary Endorsement" of the BAP, drafted two months after the policy's inception, amending the listing of the named insured to read: "[Bankers Trust] and each and every owned and/or actively managed and/or financially controlled subsidiary, organization, company, corporation, joint venture, partnership, or other entity now existing or hereinafter constituted or acquired, whether directly or indirectly owned." It is Federal's position that Bankers Trust and Federal never intended that Pyramid be covered under the BAP.
In an affidavit supporting the motion and in his deposition testimony, Federal's underwriter, Charles Szvetecz, stated that the BAP was never intended to cover Pyramid because Pyramid had its own primary automobile coverage from Westchester. According to Szvetecz, had Bankers Trust not agreed to this limitation on the scope of coverage, Federal would never have issued the BAP, since it would have subjected Federal to virtually limitless liability at a relatively modest premium, $27,931, based solely on the 31 listed automobiles, at a cost of $901 per vehicle. While Federal was informed of each change as Bankers Trust replaced old automobiles with new ones, Bankers Trust never advised Federal that Pyramid's vehicles were being added to the BAP.
Moreover, it was pointed out that just two weeks before the underlying accident, an endorsement was added to the BAP, specifically broadening coverage to the drivers of the 31 listed automobiles, but not the drivers of any Pyramid automobiles or automobiles located in Texas. Although the BAP had endorsements for each of the five States in which the 31 listed automobiles were located — New York, Georgia, Florida, California and Illinois — there was no endorsement for Texas. Nor did the BAP contain the Texas form, which, according to the affidavit of John J. Zanzalari, who is the Commercial Loans Division Manager responsible for filing commercial forms on behalf of Federal in all 50 States, are required under Texas's insurance regulations and Federal's own underwriting policies for insuring automobiles located in Texas. Well aware of the State's requirements, Federal, as noted, issued one commercial liability policy for Texas and another for the other 49 States.
In applying to Federal for umbrella coverage, Bankers Trust listed the Westchester and Americas policies in the "Schedule of Primary Policies"; the premium for the excess umbrella policy was calculated on the basis of Pyramid's $11,000,000 combined coverage from Westchester and Americas. Furthermore, when Bankers Trust learned of the Smith accident, it gave notice to Federal under the excess umbrella policy "in the event a claim is submitted, and exceeds all Pyramid Energy, Inc.'s primary insurance." As its notice letter stated, "Federal's coverage would be excess over and above all of the primary coverages, which are scheduled under [the Federal excess umbrella policy]." No mention was made of Federal's BAP.
After Federal was advised of the Smith accident on March 31, 1992, Szvetecz realized that the BAP did not clearly reflect the parties' intent not to cover Pyramid, a nonbanking subsidiary having its own insurance, and, on or about May 13, 1992, began drafting an endorsement to reflect the parties' original intent. After a lengthy revision process, made even lengthier by the departure of a key participant in the process, the final version of the endorsement was signed by Bankers Trust on December 17, 1992. As with all of the endorsements, including the Subsidiary Endorsement relied upon by Westchester and Americas, it was retroactively effective to January 1, 1992, the BAP's inception date. The endorsement read, "it is agreed that this policy does not apply to any Auto covered, or intended for coverage by, Westchester * * * (Policy No. 133598571-3), or any renewal or replacement thereof, issued to [Pyramid]."
In denying summary judgment to Federal and granting the cross motions, the motion court rejected the extrinsic evidence of the parties' intent in negotiating and issuing the Federal BAP and concluded, "The fact that it took several months for Federal and Bankers Trust to agree upon language reflecting what their understanding had been originally negates any argument that such a confluence of understanding ever existed." We find, on this record, that the extrinsic evidence conclusively shows that the parties did not intend to cover Pyramid under the BAP and that summary judgment should have been granted to Federal declaring in its favor.
The motion court implicitly recognized that the BAP was ambiguous insofar as it reflected the parties' intent with respect to providing automobile liability coverage for Pyramid's vehicles. Where, as here, there are internal inconsistencies in a contract pointing to ambiguity, extrinsic evidence is admissible to determine the parties' intent. ( Bianculli v. Bianculli, 242 A.D.2d 647; Friedman v. Smithfield, Inc., 146 A.D.2d 567.) Here; the Subsidiary Endorsement, providing that Bankers Trust's subsidiaries; presumably including Pyramid, are named insureds, is inconsistent and in conflict with numerous other provisions in the BAP. For example, in its schedule of covered vehicles, the BAP did not list any of Pyramid's vehicles or any vehicles principally garaged in Texas. No premium was charged for any of Pyramid's 24 automobiles or adjusted to reflect the addition of such vehicles. The BAP is not a Texas policy, as required by Texas law, nor does it contain an endorsement for Texas as it did for all of the States in which the scheduled vehicles were located and, significantly, the schedule of covered vehicles was never updated to include Pyramid's vehicles, even though Bankers Trust fulfilled its obligations under the BAP to inform Federal, in writing, of all additions and deletions of covered vehicles.
The entire body of evidence, extensive and uncontradicted, submitted by Federal conclusively shows that the BAP was never intended to cover Pyramid's automobiles. The motion court disregarded this unrebutted evidence and, instead, based its decision on a single factual finding that the delay in issuing the Pyramid Endorsement negated any possibility that the parties had understood that Pyramid was not being covered under the BAP. In its motion to renew, the denial of which is also on appeal, Federal submitted an additional affidavit from Szvetecz stating that, while the pace may have been deliberate, "[Bankers] never asked Federal for coverage under the BAP, so there was no emergency." Thus, the delay factor, insignificant at the outset because the parties were in agreement that the BAP did not cover Pyramid, should have been laid to rest.
In construing the terms of a contract, the judicial function is to give effect to the parties' intentions. ( Greenwich Vil. Assocs. v. Salle, 110 A.D.2d 111.) "Since the intent of the parties in entering an agreement is a paramount consideration when construing a contract, even the actual words provided therein may be transplanted, supplied or entirely rejected to clarify the meaning of the contract." ( Reape v. New York News, 122 A.D.2d 29, 30, lv denied 68 N.Y.2d 610.)
Furthermore, the parties' course of performance under the contract is considered to be the "most persuasive evidence of the agreed intention of the parties." ( Webster's Red Seal Publs. v. Gilberton World-Wide Publs., 67 A.D.2d 339, 341, affd 53 N.Y.2d 643.) "Generally speaking, the practical interpretation of a contract by the parties to it for any considerable period of time before it comes to be the subject of controversy is deemed of great, if not controlling, influence." ( Old Colony Trust Co. v. City of Omaha, 230 U.S. 100, 118; see, IBJ Schroder Bank Trust Co. v. Resolution Trust Corp., 26 F.3d 370, 374 [2d Cir], cert denied 514 U.S. 1014.) As Restatement (Second) of Contracts § 202, comment g has expressed it, "The parties to an agreement know best what they meant, and their action under it is often the strongest evidence of their meaning."
Viewed in such light, there could be no more compelling evidence of intent than the sworn testimony and affidavits of both parties to the contract. As noted, neither Westchester nor Americas submitted conflicting evidence. Federal's evidence unequivocally shows that, both during the underwriting process and after the underlying accident, the parties acted consistently with their understanding that Pyramid's automobiles were not covered under the BAP. Moreover, when an insured lists an automobile under one policy (here the Westchester and Americas excess policy) but not under a second policy (the BAP), it is assumed that the insured did not intend to cover the automobile under the latter since the coverage would be duplicative. ( Dairy Maid Food Corp. v. Home Indem Co., 135 A.D.2d 774, 775, appeal denied 72 N.Y.2d 802.) Even policies like the BAP, which afford "blanket" or "fleet" coverage, do not cover unlisted vehicles unless acquired after the inception of the policy. ( Supra, at 774.)
Pyramid submitted an affidavit stating that it never believed that it was covered by the BAP.
Moreover; where, as here, the parties themselves agreed to clarify the policy by issuing the Pyramid Endorsement, their agreement will be enforced even if the rights of a third party are affected, unless the third party can show that it changed its position in reliance upon the agreement as originally written. ( Coakley v. State of New York, 20 Misc.2d 831 [Ct Cl].) Here, as the evidence shows, Westchester and Americas did not rely on Federal's BAP, or even know of it, at the time they issued their policies to Pyramid. Westchester attempts to create an issue on this point by arguing that it was not advised of the Pyramid Endorsement prior to the settlement of the Smith claim. How this prejudiced Westchester is unfathomable since it contributed to the settlement on the basis, favorable to it, that Federal, which, without prejudice, paid its pro rata share, also covered the accident. In any event, at the time, Westchester was well aware that Federal vigorously contested coverage under its BAP. Thus, Bankers Trust's and Federal's voluntary retroactive amendment of the BAP, by issuance of the Pyramid Endorsement, should have been enforced.
Accordingly, the order and judgment (one paper) of the Supreme Court, New York County (Beatrice Shainswit, J.), entered April 10, 1998, which to the extent it denied plaintiff Federal Insurance Company's motion for summary judgment and granted the cross motion of defendant, Westchester Fire Insurance Company, for summary judgment, should be reversed, on the law, with costs and disbursements payable by Westchester to Federal, the motion granted, the cross motion denied and a declaration made in plaintiff's favor. The appeal as against Westchester from the order of the same court and Justice, entered April 23, 1998, denying renewal, should be dismissed as academic, without costs or disbursements. Federal's appeal from said orders as against Americas should be dismissed pursuant to the stipulation of those parties, without costs or disbursements.
ELLERIN, P. J., WILLIAMS and WALLACH, JJ., concur.
Order and judgment (one paper), Supreme Court, New York County, entered April 10, 1998, reversed, on the law, with costs and disbursements payable by defendant Westchester to Federal, plaintiff's motion for summary judgment granted, the cross motion of defendant Westchester for summary judgment denied, and a declaration made in plaintiff's favor. Appeal from order as against defendant Westchester, same court, entered April 23, 1998, dismissed, without costs or disbursements, as academic. Appeal from orders as against defendant Americas Insurance Company dismissed, without costs or disbursements, in accordance with the stipulation of the parties.
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