In Admiral Ins. Co. v Joy Contractors, Inc., 2012 NY Slip Op 4670 (N.Y. June 12, 2012), the New York Court of Appeals, New York’s highest court, held that an insurer may seek rescission against an additional insured for the named insured’s misrepresentations during the underwriting process. 

The coverage dispute arose from the deadly collapse of a tower crane operated by Joy Contractors, Inc. during construction of a luxury high-rise condominium in Manhattan.  Admiral Insurance Company, which issued an excess commercial general liability policy to Joy, denied coverage to Joy and other entities claiming additional insured status under the policy on the basis of a residential construction exclusion.  Admiral also advised Joy that there might be no coverage because of Joy’s misrepresentations in its underwriting submission.  Specifically, Joy had represented that it specialized in drywall installation, did not carry out exterior work and performed no work at a level above two stories from grade; Admiral’s investigation, however, revealed that Joy was actually the structural concrete contractor, performing work on the building’s entire exterior with the tower crane.

Admiral subsequently filed suit against Joy and the additional insureds, seeking a declaration of no coverage and asserting causes of action for rescission of the policy.  Relying primarily on Lufthansa Cargo, AG v New York Mar. & Gen. Ins. Co., 40 A.D.3d 444 (1st Dep’t 2007) and BMW Fin. Servs. v Hassan, 273 A.D.2d 428 (2nd Dep’t 2000), lv denied 95 N.Y.2d 767 (2000), the intermediate appellate court upheld the dismissals of the rescission causes of action against the additional insureds.  The appellate courts in Lufthansa and BMW had reasoned that the misrepresentations of the named insured were irrelevant as to coverage for the innocent additional insured because each individual additional insured must be treated as if separately covered by the policy and as if he had a separate policy of his own. 

The Court of Appeals, however, found Lufthansa and BMW unpersuasive on the basis that the misrepresentations in those cases did not deprive the insurer of knowledge of the central insured risk.  In contrast, Joy's representation that it performed interior drywall installation deprived Admiral of knowledge of the "obviously much greater risk presented by exterior construction work with a tower crane at a height many stories above grade."

The Court of Appeals also noted that to dismiss the causes of action for rescission against all defendants except Joy would illogically permit the additional insureds to rely on the terms of a policy that may be deemed to never have existed to create coverage in the first place.  That is, “‘additional’ insureds, by definition, must exist in addition to something; namely, the named insureds in a valid existing policy.”  Accordingly, the Court of Appeals held that Admiral’s causes of action for rescission and reformation, as well as its other claims related to Joy’s alleged misrepresentations in its underwriting submission, were properly interposed against the additional insureds.