On November 10, 2020, a New York federal judge dismissed an insurer’s counterclaims seeking to cap its exposure under a $15 million sublimit and an order estopping the policyholder from pursuing any additional amounts.

In February 2017, Plaintiff Pilkington North America, Inc. (Pilkington), suffered between $60 and $100 million in damage from a tornado that struck its glass manufacturing factory in Illinois. Pilkington sought coverage for its loss under a commercial property and business interruption policy issued by Defendant Mitsui Sumitomo Insurance Company (MSI). Pilkington also claimed its insurance broker, Aon Risk Services Central, Inc. (Aon), is liable for faulty advice provided while brokering the policy. Aon’s negligence allegedly gave way to MSI’s fraudulent revision of the insurance policy, which caused the losses from the tornado to not be fully compensable.

Pilkington’s fraud and faulty brokering claims stem from MSI’s revision of an endorsement contained in the policy. The revision changed the wording of a windstorm sublimit. Allegedly, Aon was informed by MSI of the changes and failed to inform Pilkington that the revision would substantially reduce coverage for windstorms, including tornados.

In June 2020, MSI filed two counterclaims against Pilkington arguing that it owes no more than the $15 million sublimit. Pilkington argued that MSI’s claims should be dismissed with prejudice because (1) MSI failed “to plausibly allege an equitable right to relief, and even if it did, the doctrine of unclean hands precludes such relief by MSI” and (2) MSI’s declaratory claim is redundant in light of Pilkington’s claim, which also seeks an order regarding the enforceability of the sublimit. The court agreed with Pilkington and dismissed both counterclaims with prejudice.

The court summarized that “[t]he gravamen of Pilkington’s claims center on its allegations that MSI represented to Aon that the Endorsement would only change currency valuations when in fact it also reduced the types of losses that MSI was obligated to indemnify; and on Aon’s negligence in carelessly helping to trick Pilkington into agreeing to the Endorsement and incorporating the same fraudulent revised terms into the following year’s insurance policy, which was in effect when the Tornado struck.”

After framing the nature of the coverage dispute, the court granted Pilkington’s motion to dismiss. In doing so, the court noted the unique nature of insurance contracts, including the element of trust from a policyholder to its insurer. “MSI offers no facts to support an inference that a sophisticated insurance company such as itself, which repeatedly sought to materially change the terms of its policyholder’s insurance contract, somehow innocently misled that policyholder into agreeing to something that MSI did not intend.” The judge also stated that MSI will have a chance to argue that it has satisfied its coverage obligations while he considers whether Pilkington is entitled to additional payout under the policy.

While the case is far from over, this decision represents another small victory for policyholders who often rely on the representations made by insurers and brokers. Here, the court properly ignored the insurer’s creative attempt to prematurely limit coverage, focusing instead on the policyholder’s complaint and well-pled allegations of fraud and faulty brokering in connection with the sublimit at issue. The court correctly refused to summarily accept the insurer’s argument that the sublimit caps coverage and precludes the plaintiff from seeking coverage in excess of that cap.

An insurance policy is a contract and, implicit in such contract, is the insurer’s obligation to deal fairly with its insured. Insurance brokers who procure insurance coverage for their clients are likewise obligated to act in good faith and with reasonable diligence in procuring the requested coverage on the best possible terms. Claims of broker liability arise where the broker fails to obtain the appropriate policy which covers the type of risk the client sought to be protected against or where a broker misrepresents the terms or coverage of a policy. The decision here serves as a reminder of the duties owed to policyholders, including the duty of good faith and fair dealing. An insurer is within its rights to expressly limit or exclude coverage, however, an insurer and a broker must act fairly and disclose significant facts. A policy revision that substantially limits coverage is a significant fact that should be fully disclosed to the insured.

This decision also serves as a reminder to policyholders to carefully review any policy revisions proposed by an insurer or broker. Competent counsel can help in analyzing policy changes and ensuring the policyholder remains adequately protected under the policy.