National Factors, Inc. v. Waters

• Decision Date: 27 March 1964
• Citation: 249 N.Y.S.2d 121,42 Misc.2d 822
• Court: New York Supreme Court
• Parties: NATIONAL FACTORS, INC., as Assignee of Reconstruction Finance Corporation, Plaintiff, v. William A. WATERS et al., Copartners Doing Business as Hall & Henshaw et al., Defendants.

Page 121

249 N.Y.S.2d 121

42 Misc.2d 822

NATIONAL FACTORS, INC., as Assignee of Reconstruction Finance Corporation, Plaintiff, v. William A. WATERS et al., Copartners Doing Business as Hall & Henshaw et al., Defendants.

Supreme Court, Special and Trial Term, New York County, Part XVI.

March 27, 1964.

David Ray Bernstein, New York City, for plaintiff.

Mendes & Mount, New York City, for defendant Holford (J. J. Killea and B. E. Haller, New York City, of counsel).

HARRY B. FRANK, Justice.

This action for a recovery on certain fire insurance policies was submitted to the court upon an agreed statement of facts and the admissions contained in the pleadings.

The policies in suit were issued as a combined 'Lloyd's Fire Policy' by various underwriters at Lloyd's of London insuring certain premises located in the State of Ohio against loss by fire in the total sum of $100,000. The policies, which bear combined policy number 30255, will hereinafter for sake of convenience be referred to singularly as the Lloyds policy. The named assured in the policy is the owner of the premises, Kamen Soap Products Co., Inc., who is not a party to this action. The plaintiff herein is the assignee of the rights of Reconstruction Finance Corporation, the mortgagee of the property to whom loss, if any, under the policy is made payable. The defendant, Holford, is one of the underwriters at Lloyd's who subscribed to the policy, and by stipulation of the parties final determination of the issue of liability against Holford is to be binding upon all of the subscribing underwriters.

The Lloyds insurance was procured through Hall and Henshaw of New York who are surplus line insurance brokers. While dated August 5, 1952, the policy is written effective as of June 14, 1952 for a three year period expiring June 14, 1955. Appearing on the face of the policy, imprinted in red type in distinction to the larger black print used elsewhere therein, are the following provisions:

'Warranted same terms and conditions as and to follow the settlements of LIVERPOOL & LONDON & GLOBE INSURANCE COMPANY, and that said Company has, at the time of any Loss, and at the same gross rate, at least FIFTY THOUSAND DOLLARS (subject only to reduction by amount of any Loss not reinstated) on the identical subject matter and risk, and in identically the same proportion on each separate part thereof.

'This Policy is subject without notice to the same conditions, endorsements, assignments, and alterations of rates as are, or may be, assumed in the above-mentioned Company's Insurance upon which this Policy is based and shall be deemed to include such risks of Lightning and/or Explosion as are included in that Insurance.

'If the Assured shall make any claim knowing the same to be false or fraudulent, as regards amount or otherwise, this Policy shall become void, and all claim thereunder shall be forfeited.'

Prior to delivery of the policy itself, a memorandum of insurance, dated July 17, 1952, was sent to Kamen by Hall & Henshaw advising that 'insurance is held binding for your account by Underwriters in London, England.' In addition to particulars as to the type, amount and duration of coverage, cost of premium, and the like, the memorandum included the statement 'SUBJECT TO THE FOLLOWING WARRANTY CLAUSE:' followed by a verbatim recital of the first two paragraphs of the policy provisions above set forth, which will hereinafter be denominated as the 'warranty clause.' While the provision regarding fraudulent claims did not appear therein, the memorandum further contained certain terms regarding currency and mode of payment, and it concluded with the following:

'NOTE: Any reduction in the amount of the warranted insurance (except by loss) or its termination from any cause, automatically terminates this insurance, unless immediate notice is given and the warranty amended.'

The references to currency and payment are substantially incorporated in the policy which was subsequently delivered and upon which this suit is brought, but the language of the 'NOTE' nowhere appears therein.

The original Liverpool & London & Globe Insurance Company policy which is referred to in the 'warranty clause' carried the expiration date of July 26, 1952, at which time a renewal was issued for the three year period from July 26, 1952 to July 26, 1955.

At the end of 1952, both the Lloyds policy and the Liverpool renewal policy were cancelled by the respective insurers for non-payment of premium. While the Lloyds policy was cancelled on November 28, 1952, the parties agree that no notice of said cancellation was ever sent by, or on behalf of, the insurer to either the assured or to the mortgagee, Reconstruction Finance Corporation. The Liverpool renewal policy was cancelled as of December 8, 1952, and it is conceded that on July 24, 1954, when a fire occurred at the Ohio property, no Liverpool policy, in any amount, was in effect on said premises.

The only question presently to be determined is whether or not plaintiff is entitled to recover on the Lloyds policy, the amount of any such recovery, if warranted, being reserved for a separate trial .

The parties have stipulated that the policy is to be construed and enforced in accordance with the law of New York to the same extent as if such were the place where the contract of insurance was made and was to be performed.

The focal point of the instant controversy is the so-called 'warranty clause', and the crucial issue is the meaning and effect of the provisions of such clause with particular reference to the rights of the mortgagee. While defendant submits that the policy sued upon was in fact cancelled prior to the time of loss, the primary basis upon which it resists liability is that of non-compliance with the terms of the 'warranty clause', it being conceded that no Liverpool policy was in effect at the time of loss. Defendant contends that the existence of the specified Liverpool insurance at that time, and settlements thereunder which could be followed, are conditions precedent to any liability under the Lloyds policy whether to the mortgagee or to the assured.

While warranty provisions similar to those here present have been used by Lloyds underwriters for many years, American precedents dealing with such clauses are few in number. Counsel, despite diligent efforts, have been unable to submit any case specifically relevant to the instant fact pattern, nor has the Court's independent research uncovered any case precisely in point, although some helpful decisions dealing with particular aspects of the problem have come to light.

The English courts have followed the view which was first enunciated in the case of Barnard v. Faber, 1 Q.B. 340 (1893), wherein it was held that a similar 'warranty clause' made it a condition of the insurance that the other named company, or companies, undertook the same risk at the 'same rate and identical interest', and that if such promise was not strictly fulfilled there could be no recovery by the assured. In construing the meaning of the clause, the various judges evidenced some discomfort with the terminology employed and the observation was made that it could not be said that 'the words of this clause of warranty are happily chosen.' In the Barnard case the other insurance was not written at the same rate and identical interest and the court particularized that part of the clause which required identity of rate and interest as a condition precedent 'without which the contract would not be binding', while it denominated the remainder of the clause as a condition subsequent. Later English decisions, however, appear to have de-emphasized this distinction and the various obligations imposed by the clause have been characterized generally as conditions precedent to liability or to a recovery by the assured (see Beauchamp v. Faber, 14 T.L.R. 544; Bancroft v. Heath, 17 T.L.R. 425; Sulphite Pulp Co., Ltd. v. Faber, 11 T.L.R. 547; cf. Versicherungs Und Transport Aktiengesellschaft Daugava v. Henderson, 151 L.T.R. 392).

The English decisions have served as the basis for expressions in some American cases to the effect that any departure from strict compliance with the obligations of the 'warranty clause' renders the policy ipso facto void, or unenforceable, although the construction of the clause in these cases has not been directly in the context of a suit seeking recovery on the policy containing such warranty. (See Federal Intermediate Credit Bank of Baltimore v. Globe & Rutgers Fire Ins. Co. (D.C.Md.), 7 F.Supp. 56; Progress Laundry Co. v. Schweik, 332 Ill.App. 408, 75 N.E.2d 390; Evan L. Reed Mfg. Co. v . Wurts, 187 Ill.App. 378.)

Contrary viewpoints, however, have also been expressed and it has been held that cessation of the other insurance, or some variance in its terms at the time of loss, do not necessarily avoid the insurer's liability, and recovery has been permitted despite such circumstances. (See International Salt Co. v. Tennant, 144 Ill.App. 30; Pugh v. Commonwealth Mut. Fire Ins. Co. of Pa., 3 Cir., 195 F.2d 83; cf. Hirsch v. Fidelitas Societe Anonyme D'Assurances & De Reassurances, 50 Misc. 582, 99 N.Y.S. 517.) The International Salt Co. case is of particular interest since it specifically deals with the effect of the cancellation of the other insurance prior to the time of loss. However, the terms of the policy and the language of the warranty clause in that case are not in all respects identical to the instant policy.

The only authority in this jurisdiction which has been submitted by counsel is the case of Scharles v. N. Hubbard, Jr., & Co., 74 Misc. 72, 131 N.Y.S. 848. Unfortunately, that decision by a divided Appellate Term bench with a vigorous dissent, affords minimal assistance. The warranty clause there involved was construed within the framework of an action in negligence brought against the assured's broker and the facts indicate that the other insurance was...