General Star Indemnity v. Duffy

Decision Date11 June 1999
Docket NumberNo. 98-2244,98-2244
Citation191 F.3d 55
Parties(1st Cir. 1999) GENERAL STAR INDEMNITY COMPANY, Plaintiff, Appellee, v. JAMES J. DUFFY and MARK K. DUFFY, Defendants, Appellants. . Heard
CourtU.S. Court of Appeals — First Circuit

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

[Copyrighted Material Omitted]

Raymond J. Reed for appellants.

Daniel P. Sullivan for appellee.

Before Selya, Boudin, and Lipez, Circuit Judges.

LIPEZ, Circuit Judge.

James and Mark Duffy own a 48-room lodging house with two retail stores on the first floor (the Premises), located at 257 Pleasant Street, Worcester, Massachusetts. After the Premises sustained over $100,000 in fire damage in July 1995, the Duffys' insurer rescinded the policy based on misrepresentations in the Duffys' application for insurance about the presence of sprinklers on the Premises. The insurer thereafter filed suit in the district court seeking a declaratory judgment validating its rescission. The district court obliged, ruling that the insurer was justified in relying on the misrepresentation by the Duffys in their application for insurance that the Premises was protected by sprinklers, despite an earlier report in the insurer's file indicating the absence of sprinklers. We affirm.

I.

On June 1, 1994, the Virzi Insurance Agency, Inc. (Virzi), on behalf of the Duffys, requested a quote from E.A. Kelly for the cost of insuring the Premises. E. A. Kelly has authority to issue policies on behalf of General Star Indemnity Company (General Star). In order to facilitate the process, Virzi, on behalf of the Duffys, forwarded an unsigned application to E.A. Kelly. That application indicated that: (a) all building improvements had been updated within the last five years; and (b) the Premises was sprinklered. The notation that the Premises was sprinklered was handwritten.

Having received a quote from E. A. Kelly on June 3, 1994, Virzi, on behalf of the Duffys, submitted a signed application for insurance on June 9, 1994. E. A. Kelly issued an insurance policy for the Premises effective June 9, 1994. The policy contained an endorsement for "Protective Safeguards" which required smoke alarms, an ansul [fire protection] system and an automatic sprinkler system. On June 18, 1994, E. A. Kelly, on behalf of General Star, ordered an inspection of the Premises for the purpose of verifying its condition. On July 25, 1994, E. A. Kelly received the inspection report. The inspection form included a list of safety systems and devices, some of which had check marks next to them and some of which had no markings. The inspector's report contained a hyphen after the word "sprinkler"; the district court assumed for the purpose of its summary judgment ruling that the report indicated that the Premises was not sprinklered at the time of the inspection. Neither E. A. Kelly nor General Star further investigated whether or not the Premises had an automatic sprinkler system.

In May 1995, the Duffys requested a renewal quote from E. A. Kelly. In response, E. A. Kelly offered to renew the insurance for the Premises. The policy proposed stated that "SMOKE ALARMS, SPRINKLER SYSTEM AND ANSUL SYSTEM WARRANTED." On or about June 9, 1995, Virzi, on behalf of the Duffys, provided E. A. Kelly with a renewal application signed by Virzi and James Duffy. The signed renewal application warranted that the Premises was sprinklered. When E. A. Kelly renewed the insurance policy for the period of June 9, 1995 through June 9, 1996, it contained an endorsement for "Protective Safeguards" which required smoke alarms, an ansul system and an automatic sprinkler.

On July 9, 1995, the Premises sustained fire damage in the amount of $105,713.27. On August 7, 1996, General Star forwarded correspondence to the Duffys denying coverage and rescinding the policy based on the misrepresentation in the 1995 application that the Premises was sprinklered.

General Star thereafter filed a complaint for declaratory judgment pursuant to 28 U.S.C. §§ 2201 & 2202, seeking a judicial determination that General Star had a right to rescind the insurance policy based on the misrepresentation. In response, the Duffys filed counterclaims alleging violations of Massachusetts insurance and consumer protection laws. The district court granted General Star a summary judgment, concluding that under Massachusetts law General Star had a right to rescind the policy because the Duffys' misrepresentation that the Premises was sprinklered was material in that it increased the risk of loss to General Star as a matter of law. The district court further held that Massachusetts law imposed "no requirement to have the Premises inspected prior to issuing a renewal policy" and that "General Star was justified in relying on Mr. Duffy's representation that the Premises was sprinklered."

II.

Summary judgment is warranted only where an examination of the record, viewed in the light most favorable to the non-moving party, reveals no material factual disputes and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Snow v. Harnishfeger Corp., 12 F.3d 1154, 1157 (1st Cir. 1993). We review the grant of a summary judgment de novo. Siegal v. American Honda Motor Co., 921 F.2d 15, 17 (1st Cir. 1990).

We apply Massachusetts law to the insurance contract made in Massachusetts. The Massachusetts statutory provision establishing the conditions under which an insurer may rescind contracts of insurance provides:

No oral or written misrepresentation or warranty made in the negotiation of a policy of insurance by the insured or on his behalf shall be deemed material or defeat or avoid the policy or prevent its attaching unless such misrepresentation or warranty is made with actual intent to deceive, or unless the matter misrepresented or made a warranty increased the risk of loss.

Mass. Gen. Laws ch. 175, § 186. For purposes of this appeal, the Duffys do not challenge the district court's findings that (1) the Duffys unintentionally made misrepresentations in their 1995 insurance application to General Star and (2) the misrepresentation regarding the existence of an automatic sprinkler system increased the insurer's risk of loss as a matter of law. The single issue pressed by the Duffys is whether General Star waived its right to rescind the insurance contract on the basis of that misrepresentation. The Duffys argue that, at the time General Star renewed the Duffys' policy in June 1995, General Star knew that the Premises was in fact not sprinklered because of the inspection report it received in June 1994. Having renewed the policy with knowledge that the Premises was not sprinklered, the Duffys argue, General Star waived its right to rescind on the basis of a misrepresentation about the presence of sprinklers (or so a jury, drawing inferences favorable to the Duffys, could have found).

The Duffys err in their insistence that General Star had knowledge in June 1995 that there were no sprinklers on the Premises because of the inclusion in its files of the June 1994 inspection report. That position wrongly accords no legal significance to the warranty made by the Duffys in their application for renewed insurance in June 1995 that there were sprinklers on the Premises. To the extent that the Duffys argue that the inclusion of the 1994 inspection report in the files of General Star at least creates a factual issue about whether the insurer should have inspected the premises to determine the accuracy of the representation by the Duffys about the presence of sprinklers, the Duffys again misapprehend the legal significance of their representation.

Pursuant to Massachusetts law and insurance law generally, General Star had a right to rely on the Duffys' representation that the Premises was sprinklered in June 1995. See Appleman & Appleman 16B...

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