XL Specialty Ins. Co. v. Prestige Fragrances, Inc.

• Decision Date: 08 November 2019
• Docket Number: 18 Civ. 733 (PGG)
• Citation: 420 F.Supp.3d 172
• Parties: XL SPECIALTY INSURANCE COMPANY, Plaintiff/Counterclaim-Defendant v. PRESTIGE FRAGRANCES, INC., Defendant/Counterclaim-Plaintiff.
• Court: U.S. District Court — Southern District of New York

420 F.Supp.3d 172

XL SPECIALTY INSURANCE COMPANY, Plaintiff/Counterclaim-Defendant

v.PRESTIGE FRAGRANCES, INC., Defendant/Counterclaim-Plaintiff.

18 Civ. 733 (PGG)

United States District Court, S.D. New York.

Signed November 8, 2019

JoAnna Lyn Young, Kennedys Cmk LLP, Todd D. Kremin, Goldberg Segalla, LLP, New York, NY, Louis H. Kozloff, Kennedys, Hillary N. Ladov, Goldberg Segalla, LLP, Philadelphia, PA, for Plaintiff/Counterclaim-Defendant.

Dennis Joseph Nolan, Joshua Gold, Anderson Kill P.C., New York, NY, for Defendant/Counterclaim-Plaintiff.

MEMORANDUM OPINION & ORDER

PAUL G. GARDEPHE, U.S.D.J.:

In this action, Plaintiff and Counterclaim-Defendant XL Specialty Insurance Company seeks a declaration that three successive insurance policies it issued to Defendant and Counterclaimant Prestige Fragrances, Inc. are rescinded and void ab initio and that, as a result, it has no obligation to pay Prestige for losses that Prestige incurred in connection with a theft from Prestige's warehouse. (Am. Cmplt. (Dkt. No. 47)) Prestige has counterclaimed, seeking a declaration that the policies are not void and that XL Specialty is obligated to cover losses from the warehouse theft, and contending that XL Specialty has breached its obligations under the most recently issued insurance policy. (Third Am. Counterclaim (Dkt. No. 48)) Plaintiff moved for summary judgment on its claims in the Amended Complaint and Defendant's counterclaims. (Mot. (Dkt. No. 54))

In a September 30, 2019 Order, this Court granted Plaintiff's motion only to the extent that it found that the insurance policies at issue constitute maritime contracts that are governed by federal admiralty law. Plaintiff's motion was otherwise denied. See Sept. 30, 2019 Order (Dkt. No. 73).

The purpose of this memorandum opinion and order is to explain the Court's reasoning.

BACKGROUND

I. FACTS

Plaintiff XL Specialty is an insurer that offers marine cargo insurance. (Pltf. R. 56.1 Stmt. (Dkt. No. 56) ¶ 1) Defendant Prestige is a wholesale distributor of brand name fragrances and cosmetics. (Pltf. R. 56.1 Stmt. (Dkt. No. 56) ¶ 2)¹ Although most of Prestige's customers are located in the United States (Third Am. Counterclaim (Dkt. No. 48) at 12 ¶ 4; Sunkara Dep. (Dkt. No. 63-2) at 77), 50 to 60 percent of the goods it sells are imported, and 99 percent of this merchandise is shipped to Prestige via ocean-going vessels. (Pltf. R. 56.1 Stmt. (Dkt. No. 56) ¶ 12; Sunkara Dep. (Dkt. No. 63-2) at 77) Prestige stores its imported cargo and domestic goods at its warehouse in Hillsborough, New Jersey. (Pltf. R. 56.1 Stmt. (Dkt. No. 56) ¶ 4)

A. Prestige's Insurance Coverage and Loss History

Beginning in 2005 – when Prestige first began importing goods transported by ocean-going vessels – the company procured marine cargo insurance from Indemnity Insurance Company of North America. (Sunkara Dep. (Dkt. No. 63-2) at 80) In June 2010, Prestige's warehouse in Hillsborough was burglarized;² thieves broke through a wall between the warehouse and an adjacent vacant building. (Pltf. R. 56.1 Stmt. (Dkt. No. 56) ¶ 42; Def. R. 56.1 Counterstmt. (Dkt. No. 65) ¶ 42) Prestige reported the burglary to Indemnity Insurance and to Hartford Insurance Company of the Midwest, its commercial property insurer. Prestige claimed that it had lost inventory worth $790,642.97, and suffered $331,321.14 in losses of business personal property and due to business interruption. Indemnity Insurance settled Prestige's inventory loss claim in full; Hartford Insurance also settled Prestige's business income loss and business personal property claims in full. (June 2010 Indemnity Insurance Claim (Dkt. No. 63-6) at 41-49; June 2010 Hartford Insurance Claim (Dkt. No. 63-6) at 51-61) In September 2010, Indemnity Insurance ceased providing marine cargo insurance coverage to Prestige. According to Rao Sunkara, Prestige's chief executive officer, Indemnity elected to discontinue coverage "[d]ue to the [June 2010] burglary issue." (Sunkara Dep. (Dkt. No. 63-2) at 81-82)

In September 2010, Prestige obtained marine cargo insurance coverage from Allianz, also known as AGCS Marine Insurance Company. (Id. at 85) While Allianz served as Prestige's insurer, Prestige submitted two claims: a March 2012 loss resulting from a freight forwarder's mishandling of cargo; and a January 2013 loss resulting from a shortage of cargo upon delivery of inventory. (Pltf. R. 56.1 Stmt. (Dkt. No. 56) ¶¶ 47-48, 50-51) Prestige claimed a $52,576.71 loss in connection with the March 2012 incident, and obtained $37,576.71 from Allianz. Prestige claimed a $29,000.98 loss in connection with the January 2013 incident, and obtained $14,000.98 from Allianz. (Id. ¶¶ 49, 52; see also March 2012 Loss Claim (Dkt. No. 63-6) at 63-70; Jan. 2013 Loss Claim (Dkt. No. 63-6) at 72-80)

B. The 2014, 2015, and 2016 XL Specialty Insurance Policies

1. Frenkel & Company's Producer Agreement with XL Specialty

Frenkel & Company is a marine insurance broker. (See Frenkel Website (Dkt. No. 63-6) at 83) In 2013, Frenkel entered into an "Insurance Producer Agreement" (the "Producer Agreement") with XL Specialty. (Producer Agreement (Dkt. No. 63-6) at 97-110)

The Producer Agreement authorizes Frenkel to "periodically submit risks to [XL Specialty] for its consideration," but Frenkel has "no right to bind [XL Specialty], [or to] alter or cancel any coverage in the absence of specific authorization to do so." (Producer Agreement (Dkt. No. 63-6) at 97) The Producer Agreement does grant Frenkel "the authority and the responsibility" to:

1. Collect, account for and pay to [XL Specialty] premiums, fees and other charges ... for business placed with [XL Specialty] ...;

2. Deposit premiums collected on behalf of [XL Specialty] ...[;]

...

4. Transmit to [XL Specialty] ... premiums collected on behalf of [XL Specialty;]

5. Receive and report promptly to [XL Specialty] all known or reported claims, losses, or notices thereof, made pursuant to the terms of any binder, certificate of insurance, or insurance policy issued by or on behalf of [XL Specialty;]

....

(Id. at 97-98)

The Producer Agreement further provides that "[t]he ... commission ...earned by [Frenkel] shall be negotiated between the parties with regard to each insurance proposal accepted by [XL Specialty] hereunder." (Id. at 99)

With respect to Frenkel's "[s]tatus" vis a vis XL Specialty, the Producer Agreement provides that "[Frenkel] acknowledges that it is an agent of the insured and not an agent of [XL Specialty]. [Frenkel] will at all times act solely in the capacity of a broker on behalf of the insureds. [Frenkel] has no authority to bind coverage on behalf of [XL Specialty]." (Id. at 100)

The Producer Agreement includes a mutual indemnity and release provision in which, inter alia, Frenkel "agree[s] to indemnify, defend and hold harmless [XL Specialty] ... against all liability for losses, costs and expenses of whatsoever kind ... which [XL Specialty] ... may incur (i) by reason of any breach and/or misuse of the limitations, authorizations, responsibilities, or instructions contained in this [Producer] Agreement, (ii) in enforcing any covenants and conditions of this Agreement, or (iii) arising out of the willful or negligent acts or omissions of [Frenkel], its employees or its agents with respect to the business involved under this Agreement." (Id. at 103)

2. Procurement of the 2014 XL Specialty Policy

In September 2014, Frenkel began soliciting Prestige for its marine cargo insurance business. On or before September 4, 2014, Frenkel employees Steven Lauria and Frank Doria met with Prestige CEO Sunkara at Sunkara's office. (Lauria Dep. (Dkt. No. 63-6) at 3; Sunkara Dep. (Dkt. No. 65-8) at 6 (recalling a meeting with a Frenkel representative in "late August or September")³ On September 4, 2014, Lauria (copying Doria) emailed Anne Jones – who manages Frenkel's Cargo Department – asking her to "provide a stock throughput policy" for Prestige.⁴ Lauria told Jones that Prestige "stated no losses." (Votinelli Dep. (Dkt. No. 63-6) at 30); Sunkara Dep. (Dkt. No. 65-8) at 7, 8; Lauria Dep. (Dkt. No. 63-6) at 6)

According to Lauria, at the meeting with Sunkara, he asked Sunkara about prior claims Prestige had made under cargo insurance policies. (Lauria Dep. (Dkt. No. 63-6) at 6) Lauria does not specifically recall what Sunkara said. Lauria believes, however, that Sunkara told him that Prestige had made no prior claims, because Lauria "brought the information [he] gathered from Prestige" to Jones, and "would have discussed the loss history, if there were any known losses" with her. He and Jones had no such discussion. Indeed, Lauria told Jones that Prestige had "stated no losses." (Id. at 3, 6) Sunkara testified, however, that he never told any Frenkel employee that Prestige had experienced no cargo losses. (Sunkara Dep. (Dkt. No. 65-8) at 8)

On September 5, 2014, Frenkel employee Tom Votinelli sent the following email to Angela Nolan, an XL Specialty underwriter:

Hi Angela, I have another one for you....

– Prestige currently has cargo cover w/ Allianz – through Aon; anniversary is 9/25/14. Please be as aggressive as you can.

– This is smaller than the one we worked last couple weeks. So there's no competition ... outside of whomever incumbent broker is going to. But don't believe they are marketing this on their end.

Let me know if interested, I understand the account is currently loss free....

(Dkt. No. 65-15 at 7)⁵ Votinelli's "understanding that Prestige was currently loss free" was premised on "a prior email that [he had] received from Anne Jones." (Votinelli Dep. (Dkt. No. 63-6) at 32)

In response to Votinelli's email, Nolan asked, inter alia, "[h]ow long has the account been loss-free for? Any chance you have hard copy loss runs?" Votinelli replied, "I'll see what I can get, but may not be able." Nolan forwarded Votinelli's response to XL Specialty employee Ray Bartels, noting that Votinelli "never answered the loss question which is iffy. We can...