Ocean-Clear, Inc. v. Continental Cas. Co.

• Decision Date: 09 May 1983
• Docket Number: OCEAN-CLEA,INC
• Citation: 94 A.D.2d 717,462 N.Y.S.2d 251
• Parties: et al., Appellants, v. CONTINENTAL CASUALTY COMPANY et al., Respondents. In the Matter of David C. SPRAFKIN et al., Appellants (The North River Insurance Company, Respondent).
• Court: New York Supreme Court — Appellate Division

Page 251

462 N.Y.S.2d 251

94 A.D.2d 717

OCEAN-CLEAR, INC. et al., Appellants, v. CONTINENTAL CASUALTY COMPANY et al., Respondents In the Matter of David C. SPRAFKIN et al., Appellants (The North River Insurance Company, Respondent).

Supreme Court, Appellate Division Second Department.

May 9, 1983.

Samuel M. Sprafkin, New York City (David C. Sprafkin, New York City, of counsel), appellants pro se and for other appellants.

Ira J. Greenhill, New York City (Charles T. Rubin, New York City, of counsel), for respondent The North River Ins. Co.

Before DAMIANI, J.P., and LAZER, GULOTTA and BRACKEN, JJ.

MEMORANDUM BY THE COURT.

In an action on two fire insurance policies, plaintiffs and their attorney appeal from an order of the Supreme Court, Nassau County, dated March 17, 1982, which denied their motion to quash subpoenas served on the attorneys, and granted defendants' cross motions to disqualify the attorneys.

Order modified, by deleting the first decretal paragraph thereof and substituting a provision denying defendants' cross motion to disqualify plaintiffs' attorneys. As so modified, order affirmed, without costs or disbursements.

Plaintiffs, who are in the lobster business, seek recovery under two insurance policies for fire damage to their premises on or about June 28, 1977. Their claim is that one of their water pumps caught fire causing the pump's motor to malfunction, ultimately resulting in the death of their lobsters. In December, 1977--prior to the current lawsuit but after the defendants' expert inspected a motor proffered by the plaintiffs--the defendants disclaimed liability on the ground that the motor malfunction was not caused by the fire. In their papers submitted in connection with the instant motions, the defendants assert that during a discovery proceeding conducted in August, 1980, after the lawsuit had begun, one of plaintiffs' attorneys showed a second motor to the carriers' lawyer but subsequently admitted that this motor and the one shown to the carriers' expert in 1977 were not involved in the fire. The attorney is alleged to have declared that the motor involved in the fire had been already discarded by plaintiffs' repair company. When the first inspection took place in 1977, plaintiffs' attorneys had not as yet been retained, since there had not yet been either disclaimer or legal action. After the 1980 discovery proceedings, defendants successfully moved to amend their answers to include the affirmative defense of fraud based on concealment of the motor, referring to both the 1977 and 1980 inspections.

Defendant North River Insurance Company subsequently served subpoenas on plaintiffs' attorneys, Samuel and David Sprafkin, to testify at trial, contending that the Sprafkins had personal knowledge of the alleged concealments both in 1977 and 1980. Plaintiffs' attorneys responded with a motion to quash the subpoenas and defendants cross-moved to disqualify them as counsel for plaintiffs in this action. After an evidentiary hearing, Special Term held that the testimony of plaintiffs' attorneys would be relevant to the concealment defense and denied the motion to quash. The court also granted the cross motion to disqualify the Sprafkins, holding that their testimony might be prejudicial to their clients. Plaintiffs and their attorneys have appealed.

Ordinarily, an insurer may assert as an affirmative defense the breach of the standard willful concealment or misrepresentation clause by its assured (Insurance Law, § 168; Saks & Co. v. Continental Ins. Co., 23 N.Y.2d 161, 295 N.Y.S.2d 668, 242 N.E.2d 833). Once an insurer repudiates liability, however, the assured is excused from any of its obligations under the policy (Lentini Bros. Moving & Stor. Co. v. New York Prop. Ins. Underwriting Assn., 53 N.Y.2d 835, 440 N.Y.S.2d 174, 422 N.E.2d 819; Sherri v. National Surety Co., 243 N.Y. 266, 153 N.E. 70; Beckley v. Ostego County Farmers Coop. Fire Ins. Co., 3 A.D.2d 190, 159 N.Y.S.2d 270, app. dsmd. 2 N.Y.2d 990, 141 N.E.2d 326) and therefore it is generally accepted that fraud arising after the commencement of an action on a policy does not void the policy (see, e.g., Halbreich v. Travelers Fire Ins. Co., 238 App.Div. 841, 262 N.Y.S. 741; Mercantile Trust Co. v. New York Underwriter's Ins. Co., 376 F.2d 502, 7th Cir.1967; American Paint Serv. Inc. v. Home Ins. Co. of New York, 246 F.2d 91, 3rd Cir.1957; Home Ins. Co. v. Cohen, 357 S.W.2d 674 [Ky.1962]; Tarzian v. West Bend Mut. Fire Ins. Co., 74 Ill.App.2d 314, 221 N.E.2d 293). The reason for this conclusion was summarized by the Third Circuit in American Paint Serv. Inc. v. Home Ins. Co. of New York, supra, p. 94:

"The fraud and false swearing clause is one beneficial to the insurer and it reasonably extends to protect the insurer during the period of settlement or adjustment of the claim. When settlement fails and suit is filed, the parties no longer deal on the non-adversary level required by the fraud and false...