Spagnola v. Chubb Corp.

Decision Date28 July 2009
Docket NumberDocket No. 07-1296-CV.
Citation574 F.3d 64
PartiesFred SPAGNOLA, individually, and on behalf of all those similarly situated, Plaintiff-Appellant, v. The CHUBB CORPORATION, Federal Insurance Company, Great Northern Insurance Company, John D. Finnegan and Thomas F. Motamed, Defendants-Appellees.
CourtU.S. Court of Appeals — Second Circuit

Roger W. Kirby (David Kovel, on the brief), Kirby McInerney & Squire, LLP, Kenneth Elan, Harold Edgar, New York, NY, of counsel, for Plaintiff-Appellant.

Keara M. Gordon, (Joseph G. Finnerty III, Sara Z. Moghadam, on the brief), DLA Piper U.S. LLP, New York, N.Y. and Washington, DC, for Defendants-Appellees.

Before WALKER, KATZMANN, and JOHN R. GIBSON,* Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

On July 13, 2001, Fred Spagnola and his wife purchased a Chubb Masterpiece homeowner's policy.1 The policy provided dwelling coverage of $600,000, contents coverage of $300,000, and liability coverage of $500,000.

The Masterpiece policy allows the insured to select one of three types of coverage: extended replacement cost, verified replacement cost, or conditional replacement cost. Spagnola purchased the extended replacement coverage, which, in the event of an insurable loss, pays the cost of reconstruction even if that cost exceeds the stated coverage of the policy.2 The policy defines "reconstruction cost" as the "amount required at the time of loss to repair or rebuild the house whichever is less, at the same location, with the same quality of materials and workmanship which existed before the loss."

The amount of coverage was listed in the policy's Coverage Summary and during each annual policy period, Chubb indicated that the coverage amount:

will be increased daily to reflect the current effect of inflation. At the time of a covered loss, your amount of house coverage will include any increase in the United States Consumer Price Index from the beginning of the policy period.

The coverage amount could be changed:

With your consent, we may change [the amount of coverage reflected in the coverage summary] when appraisals are conducted and when the policy is renewed, to reflect current costs and values.

The term "costs and values" is not further defined in the policy. Spagnola's policy originally had a one year policy period. Chubb, however, was obligated to renew the policy for three years and could decline to renew the policy "only on grounds for which [Chubb] could cancel it."3 The policy also contained a conditional renewal provision. Under this provision, if Chubb had grounds to cancel or refuse to renew the policy, it could instead make continued coverage conditional on a change in policy limits or on eliminating any coverage not required by law.

As far as renewing coverage, the policy stated that at the time of renewal, Chubb "may offer to renew [the policy], at the premiums and under the policy provisions in effect at the date of renewal . . . by mailing [the insured] a bill for the premium . . . along with any changes in the policy provisions or amounts of coverage." If Spagnola did not pay the new premium, the policy would automatically terminate at the end of the current policy period. "Failure to pay the required renewal premium when due shall mean that you have not accepted our offer."

Over the next five years, Chubb annually increased Spagnola's coverage and likewise his premiums. The coverage amount for house and contents was increased each year by approximately ten percent, well in excess of the Consumer Price Index ("CPI"). Chubb sent the annual premium summary renewals with the bill for the next year's coverage describing it as an "annual premium savings." In 2006, Spagnola discovered that the increases in his premiums had risen faster than the CPI and he filed suit on behalf of a putative class, in state court, later removed to federal court, claiming that Chubb breached the terms of the policy and violated New York Insurance Law by improperly increasing coverage and premiums without his consent and in excess of the CPI. In addition, Spagnola brought an unjust enrichment claim as well as a deceptive business practices claim under New York General Business Law § 349. Chubb responded by filing a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6).

The district court granted Chubb's motion to dismiss all claims. First, the court held that the complaint failed to state a claim under New York Insurance Law § 3425 because the coverage adjustments at issue were properly made pursuant to a mechanism established in the policy. The court concluded that the policy established that the premium increases were tied to "current costs and values." The court concluded that the original policy notified Spagnola that Chubb had the right to increase coverage and premiums annually and that Spagnola's payment of the annual premium bill reflected Spagnola's consent to each such increase. The court also dismissed the breach of contract claim, both because the contract terms upon which Spagnola relied "[did] not exist," and because the breach of contract claim was "barred by the voluntary payment doctrine." Finally, the court dismissed the deceptive business practices claim under New York law, holding that there were not sufficient facts to support a finding that the policy was "misleading in a material respect" or that Spagnola or any other member of the putative class was injured as a result. Spagnola now appeals.4

We review a Rule 12(b)(6) order of dismissal de novo. Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338, 343 (2d Cir.2006). In reviewing such an order, we take all well-pled factual allegations as true and draw all reasonable inferences in the plaintiff's favor to decide whether the plaintiff has pled a plausible claim for relief. See Ashcroft v. Iqbal, ___ U.S. ___, ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

I.

Spagnola first argues that the district court erred in dismissing his claim under New York Insurance Law § 3425.5 Section 3425 restricts when and how an insurer may condition renewal or changes of limits or elimination of coverage. With respect to a "personal lines" insurance policy, such as this one, § 3425(e) provides: "[N]o notice of nonrenewal or conditional renewal of a covered policy shall be issued to become effective during the required policy period unless it is based upon a ground for which the policy could have been cancelled." N.Y. Ins. Law § 3425(e). The statute defines "required policy period" in this instance as "a period of three years from the date as of which a covered policy is first issued or is voluntarily renewed." Id. at § 3425(a)(7). Spagnola contends that, if Chubb wanted to change the limits of the policy, it was obligated under § 3425(d)(1) to issue a conditional notice that provided the "specific reason or reasons" for the changes. Id. at § 3425(d)(1). Since Chubb did not follow the notice requirement of § 3425(d)(1), Spagnola contends that any unilateral increases by Chubb violated the statute.

Spagnola's § 3425 argument is essentially twofold. First he argues that under the protections of § 3425 he was entitled to three years of continuous coverage unless he failed to pay the premiums due under the policy. See N.Y. Ins. Law § 3425(a)(7). He goes on to assert that Chubb could only increase his premiums and coverage during the three-year period by providing the required notice and statement of reasons required by § 3425(d)(1). Spagnola concedes that under § 3425 an insurer may increase coverage limits (and premiums) during the three-year required policy period if the policy itself provides for an "automatic increase" or a "mechanism" to determine the increase, such as a predetermined figure or the CPI. Spagnola argues, however, that § 3425 bars the increases Chubb imposed because the policy did not provide for an automatic increase or specify a mechanism by which the increase could be measured. Spagnola alleges that the policy's provision permitting a change in the amount of coverage "when the policy's renewed to reflect current costs and values" is not a "mechanism" by which the increase could be measured because the insured cannot look to the policy itself to determine the amount of an increase which could be subject to the "whim" of the insurer.

Chubb and Spagnola agree that § 3425 permits an insurer to increase coverage limits (and therefore premiums) when the policy itself provides for such periodic increases. The two disagree on whether there is such a provision in this policy. Chubb characterizes the policy as an "inflation guard" policy which permits periodic coverage increases upon renewal to reflect current costs and values. In his complaint, Spagnola similarly characterizes the policy: "Annual premiums for replacement cost policies theoretically are based on the home's estimated replacement cost, not its market value. These premiums are subject to limited annual cost increases, sometimes referred to in the industry as `inflation guard coverage.'"

It is well established that we defer to an agency's construction of a statute when "the interpretation of a statute or its application involves knowledge and understanding of underlying operational practices." N.Y. State Ass'n of Life Underwriters, Inc. v. N.Y. State Banking Dep't, 83 N.Y.2d 353, 610 N.Y.S.2d 470, 632 N.E.2d 876, 879 (1994) (quoting Kurcsics v. Merchants Mut. Ins. Co., 49 N.Y.2d 451, 426 N.Y.S.2d 454, 403 N.E.2d 159 (1980)). Several opinions from the New York Department of Insurance are instructive.

In a July 23, 2003 opinion, the Department unequivocally concluded that the three-year policy period requirement of § 3425 "[does] not have any effect upon the ability of the insurer to renew policies with a premium change, provided that the premium change conforms to its rate...

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