Opinion
602635/08.
Decided June 7, 2011.
Tibbetts, Keating Butler, LLC, New York, NY, Mario D. Cometti, Esq., For Plaintiff.
Sidley Austin LLP, New York, NY, Andrew W. Stern, Esq., Nicholas P. Crowell, Esq., Andrew D. Hart, Esq., For Defendants.
Motion sequence numbers 002 and 004 are consolidated for disposition.
In this action, plaintiff seeks: (1) to recover monetary damages for defendants' American International Group (AIG) and Lexington Insurance Company (Lexington) breach of contract and breach of fiduciary duty, and (2) to enjoin all defendants from drawing down a Letter of Credit provided to Lexington by plaintiff.
In motion sequence 002, defendants AIG and Lexington move for summary judgment dismissing the amended complaint and granting Lexington judgment on its counterclaim of $8,250,000. Plaintiff cross-moves to amend its complaint to include a cause of action against AIG and Lexington for fraud and against AIG for tortious interference with contract.
In motion sequence 004, AIG and Lexington move to strike exhibit UU of plaintiff's Supplemental Affirmation in Further Opposition to Defendant's Motion for Summary Judgment, as well as to preclude plaintiff from relying on any actuarial reports not produced during the course of discovery in this action.
For the reasons stated below, AIG and Lexington's motion for summary judgment dismissing the complaint is granted, only to the extent of dismissing the fourth cause of action, and dismissing the first and second causes of action against AIG, and is otherwise denied. Plaintiff's cross motion to amend its complaint is granted to the extent of adding a fraud claim against AIG, and is otherwise denied. AIG and Lexington's motion to strike and preclude is denied.
Lexington issued two consecutive excess healthcare professional liability insurance policies (both policies were denominated as No. xxxxxxx) with plaintiff as the first named insured. The first policy commenced on February 1, 2004 (the 2004 policy), with a term of 11 months. The second policy, which had a one-year term, commenced on January 1, 2005 (the 2005 policy).
Under each policy, the limit of insurance was $6,000,000 per occurrence and an $8,000,000 aggregate limit for the term of the policy (each policy also had a per occurrence retained limit of $1,000,000). See Affidavit of Andrew D. Hart (Hart), Exhs. 1 2.
The declarations page of each policy set the standard premium and stated that the policy was to be retrospectively rated. Each policy also contained an Incurred Loss Retrospective Rating Premium Agreement (the Retrospective Rating Endorsement), which addressed how and when the adjustment to the standard premium was to be made.
The Retrospective Rating Endorsement set forth the premium computation process and the premium adjustments, the loss conversion factor, as well as the minimum and maximum premiums under the policy.
The Retrospective Rating Endorsement states that the retrospective premium was set as "the Incurred Losses times the Loss Conversion Factor, subject to the Maximum Premium and subject to the Minimum Premium." Both policies contain a loss conversion factor of 1.05.
In the 2004 policy, the Retrospective Rating Endorsement set a standard premium of $4,000,000, with a maximum premium of 150% of the standard premium and a minimum premium of 50% of the $4,000,000. This was amended in Endorsement #6 attached to the 2004 policy, such that the maximum premium was set as 200% of the $4,000,000 standard premium.
In the Retrospective Rating Endorsement attached to the 2005 policy, the standard premium was set at $3,750,000 and the maximum and minimum premiums were set at $8,000,000 and $2,000,000, respectively.
In addition to the maximum and minimum premiums, the retrospective premium computation portion of each Retrospective Rating Endorsement stated as follows:
[a] calculation of the Retrospective Premium will be made annually by [Lexington], beginning with Incurred Losses valued as of eighteen (18) months after the expiration of this policy, and then subsequently with Incurred Losses valued every twelve (12) months thereafter. The Retrospective Premium will be calculated by the Company within thirty (30) days of each loss valuation date.
Thus, the Retrospective Rating Endorsement set forth an annual loss valuation date upon which the retrospective premium adjustments would be calculated, the first to be made 18 months after the expiration of each policy.
According to Lexington, as respects the 2004 policy, in July 2006, it calculated its first retrospective premium adjustment (memorialized in Endorsement # 7). Pursuant to Lexington's calculations, the first retrospective premium adjustment resulted in incurred losses of $33,695, which, after including the loss conversion factor, resulted in a retrospectively rated premium of $35,380, subject to the minimum premium of $2 million. According to Virginia Schultz, [Schultz] Regional Manager of the New York Healthcare Division of Risk Specialists Company of New York, a subsidiary of AIG, Lexington maintains that its reserves on most of the open claims under the 2004 policy were "low statistical' reserves — basically placeholders necessary to open a claim file for monitoring purposes, rather than a full evaluation of the ultimate exposure presented by the claim." See Schultz Affidavit, Hart Affidavit, Exh. 16, ¶ 5),
There is no proffered evidence that plaintiff was aware of this practice of evaluating the claims, however, given that plaintiff had paid a standard premium of $4,000,000 and the minimum premium was $2,000,000, plaintiff was informed by Lexington that plaintiff was entitled to a return premium (RP). See Hart Affidavit, Exh. 17.
Pursuant to Section III of the Retrospective Rating Endorsement, "[p]rior to the payment [of any RP due to plaintiff] as the result of any Retrospective Premium Adjustment, [plaintiff] will provide [Lexington] a clean, irrevocable, automatically renewable Letter of Credit . . . in the amount of the difference between the Retrospective Premium and the Standard Premium."
It is uncontested that the irrevocable Letter of Credit, dated October 31, 2006, was established at defendant Commerce Bank, N.A. in favor of Lexington, and at some point thereafter, Lexington returned the $2,000,000 RP to plaintiff. Between the year 2005 and January 2008, AIG's loss statements showed reported loss reserves for the 2004 policy at between $35,000 through $90,000.
With regard to the 2005 policy, the original first retrospective adjustment, in July 2007, resulted in an additional premium of $602,250. See Hart Affidavit, Exh. 2 at Endorsement 7. However, the adjustment was recalculated, which resulted instead in an RP of $463,132. See Timothy F. Butler's (Butler) Affirmation in Opposition, Exhs. A F.
According to Lexington, beginning in February 2008, AIG's claims department engaged in a thorough review of the open claims under both the 2004 and 2005 policies, which resulted in loss runs provided to plaintiff's insurance broker in April of that year. It is uncontested that those loss runs contain entries labeled "various file" bulk reserves and did not provide a breakdown of individual claims.
In June 2008, the broker requested a detailed loss run in which the open reserves were broken out per claimant. As the result of that request, a June 25, 2008 e-mail was sent by Schultz to plaintiff's broker giving details on eight open claims that had large loss reserves. See Butler's Affirmation in Opposition, Exh. V.
As the result of the 2008 retrospective rating adjustment, an additional premium of $6,000,000 was due on the 2004 policy and $4,250,000 was due on the 2005 policy. See Hart Affidavit, Exh. 16. It is those additional premium billings that are at the heart of this action.
In September 2008, plaintiff filed an amended complaint, which alleged four causes of action against the defendants. In the first and second causes of action, plaintiff alleged that AIG and Lexington breached the 2004 and 2005 policies. In the third cause of action, plaintiff sought an injunction against AIG, Lexington and defendant Commerce Bank, N.A. (Commerce) barring AIG and Lexington from drawing against the Letter of Credit issued by Commerce. Plaintiff previously moved by Order to Show Cause for a preliminary injunction and temporary restraining order barring AIG, Lexington, and Commerce from, among other things, drawing down the Letter of Credit issued by Commerce. On October 20, 2008, I denied plaintiff's motion and effectively dismissed the third cause of action in the amended complaint. Finally, in its fourth cause of action, plaintiff seeks relief for AIG and Lexington's breach of fiduciary duty.
In AIG and Lexington's answer, Lexington asserts a counterclaim for breach of contract in the amount of $10,275,000. As part of the instant summary judgment motion, Lexington seeks $8,250,000, and avers that the discrepancy is the result of my October 20, 2008 Decision and Order which I denied plaintiff's motion seeking to enjoin Lexington from drawing down the Letter of Credit.
A simple mathematical computation reveals, however, a $25,000 discrepancy sought in its counterclaim, what it drew down, and what is moved for in the instant motion. Given that the discrepancy would be owed to Lexington, and any $25,000 difference would cause no harm to plaintiff, I will use the number Lexington seeks in its motion papers as the amount sought.
To obtain summary judgment dismissing a complaint, a movant must make a prima facie showing of entitlement to a judgment in its favor as a matter of law. See Alvarez v Prospect Hosp., 68 NY2d 320 (1986). "Once this showing has been made, the burden shifts to the nonmoving party to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact that require a trial for resolution." Giuffrida v Citibank Corp., 100 NY2d 72, 81 (2003). The motion may only be granted where it "clearly appear[s] that no material and triable issue of fact is presented" ( Glick Dolleck v Tri-Pac Export Corp., 22 NY2d 439, 441), because summary judgment is a drastic remedy that should not be invoked where there is any doubt as to the existence of a triable issue or when an issue is even arguable. E.g. Zuckerman v City of New York, 49 NY2d 557, 562 (1980).
Plaintiff contends that Lexington and AIG arbitrarily changed the retrospective premium adjustment procedures under the 2004 and 2005 policies to seek $10,250,000 in additional premiums, without sufficient analysis of Lexington's exposure to the claims that allegedly formed their basis. Plaintiff alleges that, by doing so, the defendants in this action breached both the 2004 and 2005 policies and breached their fiduciary duty to plaintiff.
In its fourth cause of action, plaintiff alleges that a fiduciary duty arose out of the relationship between itself and Lexington and AIG, and that Lexington and AIG breached that duty. A fiduciary relationship is one that "is unique or differs from that of a reasonable consumer." Batas v Prudential Ins. Co. of America, 281 AD2d 260, 264 (1st Dept 2001). "An insurance contract does not give rise to a special relationship of trust or confidences unless special circumstances exist that might give rise to a fiduciary relationship" ( Trustees of Princeton University v National Union Fire Ins. Co. of Pittsburgh, Pa., 15 Misc 3d 1118[A], 1118, 2007 NY Slip Op 50753[U], *7 [Sup Ct, NY County 2007], affd 52 AD3d 247 [1st Dept 2008]), which requires "utmost good faith by the carrier in its dealings with its insured." Hartford Acc. and Indem. Co. v Michigan Mut. Ins. Co., 93 AD2d 337, 340-41 (1st Dept 1983), affd 61 NY2d 569 (1984).
Courts have generally limited such fiduciary relationships between property/casualty carriers and their insureds to the undivided loyalty requirements that occur when an insurer is representing an insured in litigation. See id. None of the parties has proffered, nor has authority been found, holding that a fiduciary relationship exists where an insurer seeks to enforce the terms of a retrospective rating endorsement and collect premiums under the resulting adjustments. Rather, quite the opposite is the case. See Atlantic Mut. Ins. Co v Joyce Intl., Inc., 2005 WL 6237372, 2005 NY App Div LEXIS 9380 (Sup Ct, NY County 2005), affd as mod 31 AD3d 352 (1st Dept 2006). Because the plaintiff has failed to establish the existence of a fiduciary relationship between it and Lexington or AIG, plaintiff's fourth cause of action is dismissed.
Plaintiff also alleges that Lexington and AIG have breached the 2004 and 2005 policies, both by fabricating incurred loss runs and by charging additional premiums without any good faith basis for them.
The elements of a cause of action for breach of contract are the existence of a contact, the performance of one party under that contract, a breach by the other party, and resulting damages. See JP Morgan Chase v J.H. Elec. of New York, Inc. , 69 AD3d 802 (2d Dept 2010); see also Noise In The Attic Productions, Inc. v London Records , 10 AD3d 303 (1st Dept 2004).
There is no question that plaintiff and Lexington entered into two contracts, i.e., the 2004 and 2005 policies, and that plaintiff paid the standard premiums for each contract. Nor is there any question that a Letter of Credit was issued prior to plaintiff's receipt of the RP after the first retrospective rating adjustment.
What both plaintiff and Lexington contend is that the other party breached the contracts: Lexington and AIG by making retrospective rating adjustments outside of what was agreed upon between the parties and memorialized in the contract; and plaintiff by failing to pay the additional premium that Lexington determined and thereafter billed to plaintiff.
Plaintiff asserts that it entered into the 2004 and 2005 policies with the understanding that retrospective premiums adjustments would be made to both policies to reimburse for either claims already paid or those payments that had to be made for open settlements or judgments. Plaintiff avers that this understanding was then memorialized in the Retrospective Rating Endorsement in each policy.
Plaintiff supports this assertion by pointing out that the first and second retrospective rating adjustments to the 2004 policy and the first retrospective rating adjustment to the 2005 policy were made in compliance with this mutual understanding — that it was only paid or settled claims that were included in the retrospective rating adjustments during this time.
According to plaintiff, it was only in 2008, when the insurance company was having financial issues, that Lexington and AIG switched the method used to make the retrospective rating adjustments, including other "various files" in the calculation. Plaintiff contends that, when Lexington and AIG changed the method of calculation of the retrospective rating adjustment, it breached the contract between the parties.
Lexington, however, asserts that it had assigned a statistical placeholder amount to claims in 2006 and 2007 and, it was only when it became clear that significant claims were being made against plaintiff that would touch the 2004 and 2005 policies that it assigned more realistic reserves to those claims. AIG asserts that it had no contractual relationship with plaintiff and there was no contract for AIG to breach as to plaintiff.
As to AIG, although plaintiff has referred to AIG and Lexington interchangeably in its papers in opposition to the instant motions, as well as in previous papers in this action, they are, in fact, not the same entity. It is uncontested that AIG is a holding company that owns defendant Lexington's parent. Plaintiff has not proffered any evidence that it had a contractual relationship with AIG. That other AIG subsidiaries or AIG affiliates allegedly performed some of the work for Lexington is unpersuasive. AIG was not a party to the contract and had no contractual obligations to Lexington. See Dember Constr. Corp. v Staten Island Mall, 56 AD2d 768 (1st Dept 1977). Therefore, the first and second causes of action in plaintiff's complaint as against AIG are dismissed.
Concerning Lexington, it is uncontested that the additional premiums that resulted from the retrospective premium adjustments to the 2004 and 2005 policies were for the most part caused by claims that had been submitted but not either paid or settled at the time of the 2008 adjustment. It is also uncontested that, although the claims that were paid on the 2004 and 2005 policies, at the time of the retrospective rating adjustments had not reached the policy limits, and at some later time, such policy limits were exhausted.
In determining whether Lexington is entitled to the dismissal of plaintiff's claims as a matter of law, I must first look to the contract between the parties. As stated above, the Retrospective Rating Endorsement sets the retrospective premium as "the Incurred Losses times the Loss Conversion Factor, subject to the Maximum Premium and subject to the Minimum Premium." Pursuant to section IV of that endorsement, "Incurred Losses" includes all of:
1. All paid losses, plus
2. Open reserves as determined by the Company on all open losses, plus
3. Interest accruing after the entry of a judgment against the insured, plus
4. Allocated loss adjustment expenses on each loss, plus
5. Expenses incurred in seeking recovery against a third party.
Incurred losses does not mean that portion of any loss either paid or reserved which is contained within the Self Insured Retention as stated in this policy.
What is pertinent here is the portion of the definition contained in paragraph 2., which states that "open reserves" on "open losses," as determined by Lexington, are to be included in "Incurred Losses". At issue, therefore, is the meaning of the phrases "open reserves" and "open losses." Plaintiff's former Director of Risk Management, Maureen McGovern (McGovern), who was involved in obtaining the 2004 and 2005 policies testified that she believed that the term "open loss" "means a settlement that hasn't been paid yet or a judgment that hasn't been paid yet." See McGovern Examination Before Trial (EBT) at 112. According to plaintiff's former Chief Financial Officer, Thomas E. Poccia (Poccia), it was also his understanding that "premiums were going to be made based upon paid claims." See Poccia EBT, at 88-89. McGovern testified that plaintiff "would pay Lexington a set amount of money. . . . Any losses, meaning any amount of money that were paid on cases . . . would be paid up front by Lexington, and then after 18 months, they would come back to [plaintiff] to reimburse them for any amounts over and above what they already had [and] that process would be repeated each year until all of the claims were paid out." See McGovern EBT at 121. Finally, McGovern attested to the fact that she believed that the retrospective rating adjustments were to be based upon actual payments, and based those beliefs upon discussions she had with plaintiff's insurance broker and Jack I. Lewkowitz (Lewkowitz), who underwrote insurance business with the brokers and issued policies for Lexington. Id.
Lexington, however, asserts that numbers assigned to the claims in the first and second retrospective rating adjustments were just "statistical" placeholder amounts. See Schultz Affidavit, supra. Stephen Ruocco (Ruocco), the Divisional Vice President in the Healthcare Malpractice Claims department of AIG Domestic Claims, Inc., who participated in the comprehensive review of all claims under the 2004 and 2005 policies, agreed with Schultz that the previous retrospective rating adjustments contained just statistical reserves, and that, it was only when it became clear that significant claims were being made against plaintiff that would touch the 2004 and 2005 policies, that Lexington assigned more realistic reserves to those claims. See Hart Affidavit, Exh. 19, ¶ 10-13.
I conclude that it cannot be determined as a matter of law, the intentions of the parties concerning the meaning of the undefined terms within the Retrospective Rating Endorsement, or the methods used to generate the retrospective rating adjustments in 2006, 2007, and 2008.
Further, given the material questions of fact that exist as to the intentions of the parties, the meaning of the undefined terms within the Retrospective Rating Endorsement, or the methods used to generate the retrospective rating adjustments, it is impossible at this point in the litigation to determine whether, as alleged, Lexington acted in bad faith in its dealings with plaintiff.(complt. ¶ 32) Therefore, summary judgment on both plaintiff's first and second causes of action, as well as on Lexington's counterclaim, is denied.
In its cross motion, pursuant to CPLR 3025 (b), plaintiff seeks leave to serve a second amended complaint. Leave to amend a complaint is freely given absent prejudice or surprise ( see Pefanis v Long, 114 AD2d 806 [1st Dept 1985]), but will only be granted where the proposed amendments state valid grounds for relief. See Probst v Albert Einstein Medical Center, 82 AD2d 739 (1st Dept 1981). "The determination of whether to allow such an amendment is reserved for the court's discretion." Eighth Ave. Garage Corp. v H.K.L. Realty Corp. , 60 AD3d 404 , 405 (1st Dept 2009).
With its proposed amended complaint, plaintiff seeks to add causes of action for fraud against both AIG and Lexington and tortious interference with contract against AIG. Lexington opposes the addition of the two proposed causes of action for failure to state a cause of action, and because plaintiff has failed to offer a reasonable excuse for its delay, which has caused prejudice to the defendants.
In considering plaintiff's delay until the motion for summary judgment, delay alone is insufficient to deny an amendment to a complaint unless such delay is accompanied by significant prejudice ( see Hanchett v Graphic Techniques, Inc., 243 AD2d 942 [3rd Dept 1997]), which has been held to mean "the party opposing the amendment has been hindered in the preparation of its case or has been prevented from taking some measure in support of its position." Tampa v Delacruz, 24 Misc 3d 1220(A), 1220, 2009 NY Slip Op. 51532(U) (Sup Ct Kings County 2009), affd 77 AD3d 910 (2d Dept 2010); see also Loomis v Civetta Corinno Corp., 54 NY2d 18 (1981).
There is no question that plaintiff has been aware of the factual bases underlying all of the proposed claims since the time of its amended complaint in September 2008. Despite the fact that plaintiff has waited until this summary judgment motion was made, almost two years later, to seek a second amendment to its complaint, a "delay in seeking to amend the complaint to add new theories of recovery is not sufficient to warrant denial . . . where [defendant was given] notice of the occurrence giving rise to the proposed new causes of action." Rogers v South Slope Holding Corp., 255 AD2d 898, 898 (4th Dept 1998); see also Edenwald Contracting Co., Inc. v City of New York, 60 NY2d 957 (1983).
A show of prejudice by AIG and Lexington is required to deny plaintiff's cross motion. See Laham v Chambi, 299 AD2d 151 (1st Dept 2002). Since the filing of the amended complaint in September 2008, EBTs and other discovery has been taken that plaintiff asserts has clarified its claims. The basis of the proposed additional causes of action for fraud and tortious interference with contract have been known to Lexington and AIG and arise out of the retrospective rating adjustment and subsequent additional premium requests in 2008. Although this proposed amendment is delayed, there is no prejudice to the defendants.
Prior to granting leave, however, "in order to conserve judicial resources, an examination of the underlying merits of the proposed causes of action is warranted[, for l]eave to amend will be denied where the proposed pleading fails to state a cause of action." Megaris Furs, Inc. v Gimbel Bros., Inc., 172 AD2d 209, 209 (1st Dept 1991).
Plaintiff first seeks to add a cause of action for fraud, which must be stated with particularity ( see H.P.P. Ice Rink, Inc. v New York Islanders, 251 AD2d 249 [1st Dept 1998]) and must not be duplicative of its breach of contract claims. See Richbell Information Services, Inc. v Jupiter Partners, L.P., 309 AD2d 288 (1st Dept 2003).
Although plaintiff's fraud claim is pleaded with particularity, as to Lexington it is duplicative of the breach of contract claims in the amended complaint. However, "a fraud claim may be dismissed as duplicative only as against a defendant against whom the related contract claim is viable." Id. at 305. In addition to the fact that I have dismissed AIG from the contract claim supra, several of the allegations lodged against AIG in the proposed fraud cause of action are independent of actions allegedly taken by Lexington. Therefore, plaintiff may amend its complaint to add a fraud cause of action as against AIG.
Plaintiff finally seeks to amend its complaint to assert a claim of tortious interference with contract against AIG. The elements of a tortious interference with contract claim include: (1) the existence of a valid contract; (2) knowledge of that contract; (3) the intentional procurement of a breach of that contract; and (4) damages. See Burrowes v Combs , 25 AD3d 370 (1st Dept), lv denied 7 NY3d 704 (2006). To sustain this cause of action, "the plaintiff must allege that the contract would not have been breached but for' the defendant's conduct." Washington Ave. Associates, Inc. v Euclid Equipment, Inc., 229 AD2d 486, 487 (2d Dept 1996). Plaintiff has not alleged this in its proposed tortious interference with contract cause of action. Therefore, that portion of plaintiff's cross motion that seeks to add a cause of action for tortious interference with contract against AIG is denied.
Pursuant to CPLR 3126, AIG and Lexington move to strike exhibit UU of plaintiff's Supplemental Affirmation in Further Opposition to Defendant's Motion for Summary Judgment, as well as to preclude plaintiff from relying on any actuarial reports not produced during the course of discovery in this action.
Under CPLR 3126 (2), a disobedient party may be prohibited "from supporting or opposing designated claims or defenses, from producing in evidence designated things or items of testimony." AIG and Lexington seek to sanction plaintiff in this manner by striking an exhibit that contains an affidavit of plaintiff's independent actuary, E. James Stergiou (Stergiou) of SGRisk, LLC., regarding the use by Lexington of Stergiou's actuarial reports.
Lexington asserts that exhibit UU indicates that plaintiff has not complied with document requests/discovery. However, there is no proffered evidence that plaintiff has failed to disclose requested documents, and therefore, defendants' motion to strike and preclude is denied.
Accordingly, it is hereby
ORDERED that defendants American International Group, Inc., and Lexington Insurance Company's motion for summary judgment to dismiss plaintiff's complaint is granted, only to the extent of dismissing plaintiff's fourth cause of action in its entirety, as well as the plaintiff's first and second causes of action as against American International Group, Inc., and is otherwise denied; and it is further
ORDERED that plaintiff's cross motion for leave to amend its complaint is granted, only to the extent of adding an additional cause of action for fraud only as against American International Group, Inc.; and it is further
ORDERED that a second amended complaint in conformity with this Decision and Order be served upon all defendants within 30 days of service of a copy of this Order with notice of entry; and it is further
ORDERED that defendants American International Group, Inc., and Lexington Insurance Company's motion to strike and preclude is denied; and it is further
ORDERED that a status conference will be held on