First Fin. Ins. v. Allstate Interior Demolition

• Decision Date: 19 May 1999
• Docket Number: Docket Nos. 98-7660
• Citation: 193 F.3d 109
• Parties: (2nd Cir. 1999) First Financial Insurance Company, Plaintiff-Counter Defendant-Appellee v. Allstate Interior Demolition Corp., Defendant-Cross Defendant-Counter Claimant-Appellant, HRH Construction Interiors, Inc., Defendant-Cross Claimant-Counter Claimant-Appellant, The Plaza Hotel; Plaza Operating Partners, Ltd; Fairmont Hotel Management, L.P. and New Plaza Associates, L.L.C., Defendants. (L); 98-7689 (CON) August Term 1998 Argued:
• Court: U.S. Court of Appeals — Second Circuit

Page 109

193 F.3d 109 (2nd Cir. 1999)

First Financial Insurance Company, Plaintiff-Counter Defendant-Appellee v. Allstate Interior Demolition Corp., Defendant-Cross Defendant-Counter Claimant-Appellant, HRH Construction Interiors, Inc., Defendant-Cross Claimant-Counter Claimant-Appellant, The Plaza Hotel; Plaza Operating Partners, Ltd; Fairmont Hotel Management, L.P. and New Plaza Associates, L.L.C., Defendants.

Docket Nos. 98-7660 (L); 98-7689 (CON)

August Term 1998

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: May 19, 1999

Decided: September 17, 1999

Appeal from the decisions of the United States District Court for the Southern District of New York (Robert L. Carter, Judge) granting summary judgment sua sponte for the plaintiff on its claim for a declaratory judgment and denying defendants' motions for reconsideration.

Vacated and remanded.

MARIANNE STECICH, of counsel, Ponzini, Spencer & Geis, L.L.P., Tarrytown, NY, for Defendant-Cross Defendant-Counter Claimant-Appellant Allstate Interior Demolition Corporation.

JOHN C. LANE, Law Offices of John C. Lane, Glen Rock, NJ, for Plaintiff-Counter Defendant-Appellee First Financial Insurance Company.

STEVEN H. KAPLAN, Jones Hirsch Connors & Bull P.C, New York, NY, for Defendant-Cross Claimant-Counter Claimant-Appellant HRH Construction Interiors, Inc.

Before: MCLAUGHLIN and JACOBS, Circuit Judges, and MCMAHON,^* District Judge.

MCMAHON, District Judge:

Defendant-Appellants Allstate Interior Demolition Corporation and HRH Construction Interiors, Inc. appeal from a decision of Judge Robert L. Carter, dated April 2, 1998, that sua sponte granted summary judgment for plaintiff-appellee First Financial Insurance Company on its claim for declaratory judgment. They also appeal from a second decision, dated September 3, 1998, denying their motions for reconsideration of the April 2nd decision. We conclude that the district court's sua sponte grant of summary judgment for First Financial was both procedurally and substantively erroneous, and accordingly we vacate the judgment and remand for further appropriate proceedings.

BACKGROUND

Defendant-Appellant Allstate Interior Demolition Corporation is a New York corporation with its principal place of business in Maspeth, New York. Allstate, as its name suggests, engages in the demolition of building interiors and the removal of debris therefrom. It does this work, often as a subcontractor, in Manhattan and the surrounding metropolitan area.

Plaintiff-Appellee First Financial Insurance Company (FFIC) is an insurance company incorporated in Illinois and licensed by the state of New York to do business there.

FFIC issued Commercial Lines Policy Number F 0227 G 410187 to Allstate Interior Demolition Corporation for a one-year period beginning March 14, 1996, for an annual premium of $10,122. The policy covered all of Allstate's operations as an "Interior Demolition and Debris Removal Contractor." The policy was not taken out in contemplation of any specific demolition job.

The application for insurance included several questions related to the nature of the applicant's work. One section asked the applicant for its "Nature of Business/Description of Operations," which Allstate described as "Interior Demolition & Debris Removal Contractor." Another section, entitled "Schedule of Hazards," asked the applicant to designate classifications and corresponding classification codes, presumably from an insurance underwriters' manual. Allstate's application listed the hazard classifications and classification codes for "Carpentry - Interior" and "Garbage & Refuse Collection." The last section of the insurance application asked specific questions pertaining to specific risks, such as: "Any exposure to radioactive materials?," "Machinery or equipment loaned or rented to others?," and "Any watercraft, docks, floats owned, hired or leased?" Two of the questions are pertinent to the present controversy: "Any structural alterations contemplated?," and "Any demolition exposure contemplated?" Allstate answered "Yes" to both.

FFIC approved the application and issued the policy under the risk classification codes Allstate had designated.

Approximately two months after taking out the insurance policy, Allstate entered into a contract with HRH Construction Interiors, which was under contract to do extensive renovation work at the Plaza Hotel. HRH subcontracted with Allstate to remove and dispose of two freight elevator cars, pulleys, cable weights, machines and motors, beams, doors and frames. Allstate began its work under the subcontract in June 1996.

On June 28, 1996, while Allstate employees were removing the elevator cars from the Plaza, the cable weights fell approximately sixteen floors, causing damage to the floors and walls of the first floor, basement and sub-basement, as well as to electrical wires and water pipes in the hotel. As a result of the accident, HRH and the Plaza Hotel asserted claims against Allstate for repair costs, lost revenues and other damages, in the amount of $402,981 plus interest. Allstate in turn filed an insurance claim with FFIC to cover the costs associated with the accident.

On October 16, 1996, FFIC disclaimed coverage for the claims resulting from the accident. It also notified Allstate - and HRH and the Plaza - that it was rescinding Allstate's insurance policy, and returned its check for payment of the policy premium. FFIC claimed that Allstate had made material misrepresentations in its application for insurance by describing its business as "interior carpentry" and "refuse removal" and by failing to state explicitly that its work included elevator removal.

On November 1, 1996, FFIC commenced this action for a declaratory judgment that it was entitled to rescind its insurance policy with Allstate on the ground of material misrepresentation. FFIC asserted that the insurance policy it had issued to Allstate, under which HRH was an additional insured, was void ab initio because Allstate had misrepresented the nature of its business in two ways: first, by failing to give a complete and accurate description of its work, and second, by failing to disclose affirmatively to First Financial that it sometimes engaged in elevator removal. FFIC asserted that it did not issue insurance policies for the removal of elevators, or for any other work involving elevators, and claimed that it would not have issued the policy to Allstate if it had known that Allstate would be removing elevators as part of its demolition work.¹ In addition to Allstate, FFIC's Complaint named HRH Construction Interiors and various Plaza Hotel entities as defendants. HRH is a New York corporation. The Plaza Hotel, Plaza Operating Partners Ltd., Fairmont Hotel Management, L.P. and New Plaza Associates, L.L.C. are all business entities organized and existing under the laws of the State of New York.

Allstate responded to the Complaint with eight counterclaims, including breach of contract, breach of covenant of good faith and fair dealing, libel, misrepresentation, tortious interference with contract, tortious interference with business relations and deceptive acts or practices in violation of New York General Business Law § 349. For its libel claim, Allstate asserted the following:

37. "On October 16, 1996, plaintiff [FFIC] maliciously published the following statements about ALLSTATE:

PLEASE BE ADVISED THAT FIRST FINANCIAL INSURANCE COMPANY HEREBY DISCLAIMS COVERAGE FOR THE ABOVE CAPTIONED CASUALTY AND, FURTHER, HEREBY DECLARES THE POLICY NUMBER F 0227 G 410187 TO BE VOID AB INITIO, BASED UPON MATERIAL MISREPRESENTATIONS MADE BY ALLSTATE INTERIOR DEMOLITION CORP. IN ITS APPLICATION FOR THE ISSUANCE OF THE POLICY, AS MORE FULLY ADDRESSED BELOW.

* * * *

NOWHERE IN THE APPLICATION DID ALLSTATE DISCLOSE THAT IT WOULD BE ENGAGED IN ELEVATOR DEMOLITION OR, INDEED, WORK IN ANY WAY RELATED TO ELEVATORS. TO THE CONTRARY, ALLSTATE REPRESENTED THAT ITS WORK RELATED TO INTERIOR CARPENTRY AND TO GARBAGE AND REFUSE COLLECTION.

THIS IS A MATERIAL MISREPRESENTATION OF THE NATURE OF ALLSTATE'S WORK. . . .

THE COMPANY ALSO BELIEVES THAT ALLSTATE MISREPRESENTED ITS PAYROLL, FOR PREMIUM BASIS PURPOSES.

* * * *

FIRST FINANCIAL INSURANCE COMPANY HAS DETERMINED THAT MATERIAL MISREPRESENTATIONS WERE KNOWINGLY MADE IN THE APPLICATION OF ALLSTATE INTERIOR DEMOLITION CORP. FOR ISSUANCE OF POLICY NUMBER F 0227 G 410187, AS SPECIFIED ABOVE.

Allstate contended that this statement was sent to HRH and to the Plaza Hotel, that the accusation about misrepresentation was false and that FFIC knew at the time it published the statement that it was false. It claimed damages for injury to its good business name and reputation.

HRH asserted one counterclaim against FFIC, seeking a declaration that it was insured under the policy and that, as an innocent insured, FFIC was obligated to defend and indemnify it with respect to any claim or action arising out of the accident at the Plaza. HRH also cross-claimed against Allstate for breach of contract to procure insurance, and for a declaration that Allstate was obligated to indemnify and hold HRH harmless with respect to any liability arising out of the work at the Plaza. The various Plaza Hotel entities named as defendants did not appear.

On February 10, 1997, FFIC made a motion, pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss four of Allstate's counterclaims. FFIC argued that each of the challenged counterclaims failed to state a cause of action. With regard to the counterclaim for libel, FFIC argued that Allstate had admitted in its Answer the truth of the very statement alleged to be defamatory - namely, that Allstate did elevator removal work from time to time and that it did not disclose that work when it applied for insurance.

In response to FFIC's motion to dismiss its libel counterclaim, Allstate contended that it had accurately described the nature of its business (...