Certificates of Insurance may not be worth much, but…

The refrain that an insurance certificate is not worth the paper it’s printed on is often heard. That response to certificates is strong enough, and simple enough, that it usually ends the discussion: the certificate holder loses. Spector v Cushman & Wakefield, Inc., NY Slip Op 08236 (Appellate Division, First Dept. November 29, 2012) does not make certificates into worthwhile instruments, but it is nonetheless instructive. Defendant leased space to plaintiff under a lease that required the tenant to maintain liability insurance with million-dollar limits.  The plaintiff tendered an insurance certificate that attested that the policy had such limits. In fact, the policy had a $1.5 millon limit of liability, subject to a $500,000 self-insured retention.

Not long ago, I was called upon to test whether a lease that required the tenant to maintain insurance with limits of $3,000,000 for personal injury and $1,000,000 for property damage (this is how CGL was written before 1986) was satisfied by obtaining a CGL policy for $1,000,000, subject to a deductible per occurrence of $1,000,000; and an excess policy for $5MM. There were not many cases and they shed little light on how to handle this kind of dispute. So, when the Spector court observed

The motion court properly granted summary judgment to Citibank on its cause of action for failure to procure insurance. Under the Citibank-OneSource agreement, OneSource was required to purchase an insurance policy with a limit of $1 million each occurrence; however, OneSource obtained a policy with an each occurrence limit of $1.5 million, an aggregate limit of $1.5 million, and a $500,000 self-insured retention. Although OneSource correctly maintains that the agreement did not prohibit self-insured retentions, it required OneSource to provide a certificate of insurance notifying Citibank of such a provision and no such notice was given. Thus, the insurance procurement provision was breached because Citibank reasonably expected (see Federated Retail Holdings, Inc., 77 AD3d 573, 574 [1st Dept 2010]) that OneSource would either provide effective coverage or notice of the amount of the self-insured retention.

it was evident–even before citing the Federated case–that the court was walking the same walk it had trod before.

Note that the requirement (in a lease, for instance) that a contract party supply a certificate of insurance usually comes with demands that the certificate attest to many things: that the policy covers additional insured parties is a common request for inclusion in a certificate; so is a request for 30 days’ notice of cancellation. It’s against the rules to add legends to an insurance certificate, especially ones that go against the terms of the policy, but it is an open secret that insurance brokers issue these certificates regularly: Their policyholder contractors must have the legend on the certificate (otherwise they may be excluded from the site or the payroll) and if they, the broker, don’t issue the certificate, then the contractor will go to the schlemiel next door, who will write the paper. The law has long been clear that the insurance company is not bound by any of these uncanonized addenda to the certificates. It has also long been clear that the certificate holder (who is not the broker’s client) cannot maintain an action against the broker in the absence of fraud. Negligent misrepresentation requires privity, absent which there is no duty to speak the truth.

Here, however, we have a case in which the court found a duty to disclose–in the certificate–that the policy reserved a substantial self-insured retained amount. That is, the policy varied from the requirements of the lease. The landlord’s reasonable expectation of better coverage was not dispelled by a warning on the certificate about the SIR. It would have been “against the rules” to add that legend to the certificate, but its addition would not, or might not, have been meaningless. This may herald a whole new jurisprudence pertaining to insurance certificates.

It’s still not a good idea to rely on certificates, but of late, New York’s courts have shown a tendency to adopt a rule of reason. This bears watching.

NY Court of Appeals–November 2012

The Court of Appeals (NY) has been busy dealing with issues pertinent to real estate lawyers. Yesterday, I discussed American Bldg. Supply Corp. v Petrocelli Group, Inc., decided November 19, which changes the rules that have governed insurance brokers and policyholders for a very long time.  That decision stands alongside a series of decisions that real estate lawyers should note.

J. D’Addario & Co., Inc. v Embassy Indus., Inc. (2012 NY Slip Op 07850) addressed a claim by a seller of real estate to receive interest on an escrow deposit and held that an agreement that the seller may retain the down payment as liquidated damages precludes any claim for further compensation–including interest.

Douglas Elliman LLC v Tretter (2012 NY Slip Op 07846) is a claim by a broker for the commission claimed under an exclusive-right-to-sell agreement. The buyer met the broker at the open house for the subject apartment. A different prospect made an offer of $1.5MM, which was accepted, but the buyer continued to work with the broker, viewing some dozen apartments. The $1.5MM offer fell through and the buyer, through the same broker, tendered a bid of $1.4MM, which was accepted. Seller resisted paying the 5% commission on the ground that the broker had become a dual agent, thereby infecting the entire relationship with disloyalty. The Supreme Court agreed, finding a triable issue as to the broker’s dual agency status. The Appellate Division reversed, but granted leave to appeal. The Court of Appeals affirmed the Appellate Division’s decision in a memorandum opinion, observing

The parties here did not — although free to do so — “specifically agree” that Douglas Elliman was required to “decline a prospective purchaser’s request to see another property” (Sonnenschein, 96 NY2d at 376). As a result, Lockwood had “no duty to refrain” from offering other properties to the buyers (id. at 375). A contrary holding would “unreasonably restrain” brokers from cultivating potential clients at open houses for their principals (id. at 376). 

The sad part is that more than four years after the closing, the $70,000 commission remained unpaid. The game seems hardly worth the cost, which no doubt is why the Seller resisted payment.

Jade Realty LLC v Citigroup Commercial Mtge. Trust 2005-EMG 2012 NY Slip Op 07847), also decided November 19, dealt with the payment of a “yield maintenance amount” in connection with pre-paying a mortgage. The note was inartistically drafted, tying the payment to calculations that turned on the “date of default.” Since there was no default, the borrower claimed, there could be no amount payable under the clause. The court enforced the document literally as written. Judge Smith filed a stinging dissent, but seems to have missed a point that the Court mentioned but did not emphasize: the holder of the note never requested reformation. Judge Smith’s points are undoubtedly pertinent to a claim for that relief.

Rounding out the Court’s busy day was East Midtown Plaza Hous. Co. v Cuomo, in which the ongoing saga of a Mitchell-Lama project and its privatization took yet another turn, but one that may signal an impending lawsuitdammerung. There have been several votes of the Tenant-Cooperators as to whether to privatize the project or remain a limited-profit housing cooperative. If votes are counted on the basis of the number of shares, then the privatization plan had enough vote to prevail. If the count is based on the number of apartments, then the plan lacked the needed votes. The courts already held, based on the plain language of the certificate of incorporation, that voting is per apartment, not per share. The Attorney General had been enjoined from accepting a plan of cooperative ownership. or amending the extant plan, unless its adoption had been approved by a majority of the apartments in the project.

The developers than concocted a scheme under which the rights of the tenant shareholders would be amended without any transfer of the pertinent shares taking place. Since there was no sale of realty interests, there was no basis for applying the Martin Act and therefore no approval of the Department of Law was required.

You have to ask whether the developer’s counsel was able to keep a straight face during this argument. It did not succeed: the Martin Act has enough reach to address real estate monkeyshines of every sort.

Ignore the Fine Print and Sue the Broker

November saw the New York Court of Appeals hand down an important decision in insurance law, one that dramatically changes the balance of responsibilities between producers and insured parties. New York’s lower and intermediate courts have for some time held a lively debate on the question whether the policyholder has a duty to read and understand the policy, but the rule has been that if you don’t understand the policy you had better ask questions. The leading case, Metzger v Aetna Ins. Co., 227 NY 411, 416 [1920], held that the policyholder is presumed to know the contents of the policy, and is barred from suing the producer  for getting the coverage wrong if he retains the policy without objection. New York’s highest court took up the question anew in American Building Supply Corp. v Petrocelli Group, Inc. and answered the question in the negative: the policyholder is entitled to rely on the expertise of the producer in obtaining the requested insurance. A lively dissent by Judge Pigott does not change the holding: the policyholder can sue the producer even after years of renewals. It’s a dangerous development in the law for producers. However, the current ability of producers to duck responsibility for getting the coverage wrong certainly needed a correction. The Court may have overcorrected, but the case certainly opens the curtains on vast vistas of insurance broker liability.

Prudent brokers have already ramped up their quality assurance programs.

American Building Supply Corp. v Petrocelli Group, Inc., No. 181, Decided November 19, 2012.

“Insuring the Cloud”

I recently had a discussion with risk managers on the topic of “The Cloud.” Lots of noise about insurance but not much in the way of risk management.

Risk Management in the information world is “different” from the usual P-C world. Yes, there is a ‘breakable’ component in the coverage, hardware can burn or be stolen, but even here, the value of the data inside the server is many times greater than the cost of the server itself. Loss prevention is the focus of attention. You can rebuild the server room but you can’t unring a bell or undisclose secrets.

So attention switches to third party coverage for data breaches, etc. But First Party Coverage can get lost in the shuffle. If I have a mission-critical component of my business whose cost is a mere fraction of the value of the business that is run with that system, then I am seven kinds of fool if I do not have seamless redundancy. Telephone switches go down all the time, but the network routes around the damage.

And I keep coming back to Boiler&Machinery coverage: it’s more about the inspection service–to prevent explosions–than about paying to rebuild the factory after the boiler mishap levels the plant. Maybe what is needed is a package that includes a sign-off from Thawte or an equivalent certifier that the database is “secure.” In this context, security has three aspects: system availability (authorized users can gain access to data and perform transactions), integrity (the data in the system are tracked to authorized users) and privacy (unauthorized users don’t get to see the data or perform transactions). Based on this, a P-C company writes coverage for loss of use, reconstruction costs and third-party liability following a breach.

Perhaps we will see an exclusion for fixing the glitch that gave rise to the loss, much as CGL policies do not pay to correct a defect in construction but they may pay for damage to the other parts of the work caused by the glitch. “Insuring the Cloud” is a great attention-grabber, but when you break it down the coverage is much more down to earth.