Author: Thomas S. Tripodianos

Question. Can an insurer be compelled to produce a claims diary and certain letters from the insurer’s counsel to the insurer?

Answer. Yes.

The Insurance Company issued a policy insuring the Insured’s boat, and the Insured made a claim under that policy asserting that the boat had been vandalized. The Insurance Company denied the claim. The Insureds seeks an unredacted copy of an electronic claims diary prepared by an employee of the Insurance Company, as well as certain letters from the Insurance Company's attorney to the Insurance Company. The material sought by the Insured had been created prior to the Insurance Company's denial of the claim, and the Insurance Company's attorney drafted the letters while counsel conducted an investigation of the claim on behalf of the Insurance Company. The Insurance Company argues that the material was protected by the attorney-client privilege.

The payment or rejection of claims is a part of the regular business of an insurance company. Consequently, reports which aid it in the process of deciding which of the two indicated actions to pursue are made in the regular course of its business. Reports prepared by insurance investigators, adjusters, or attorneys before the decision is made to pay or reject a claim are thus not privileged and are discoverable, even when those reports are mixed/multi-purpose reports, motivated in part by the potential for litigation with the insured.

Here the materials sought by the Insured were prepared as part of the Insurance Company's investigation into the claim, and were not primarily and predominantly of a legal character. Therefore, the Insurance Company failed to meet its burden of establishing that the materials sought by the Insured were immune from discovery because they were protected by the attorney-client privilege.

Question.   The Guarantor signed a guaranty. The Supplier has sales orders, invoices and statements for purchases made by the Plumbing Company.  The billing statements indicate that the balance for those purchases remains unpaid. The Plumbing Company’s Principal states that the personal guaranty by the Guarantor was made in connection with a prior credit application that the Guarantor made to the Supplier but that credit was never issued in connection with the Guarantor's credit application. Further, the Plumbing Company’s Principal' claims that the Supplier issued credit to the Plumbing Company based on its own subsequent application, and that the Supplier assured the Plumbing Company’s Principal that the Guarantor was not personally liable for the Plumbing Company's debt.

Is the guaranty agreement signed by the Guarantor effective?

Answer. No. 

The Supplier did not extend credit to the Plumbing Company in reliance on the Guarantor’s guaranty. The Guarantor made the guaranty in expectation of receiving credit from the Supplier.  The Supplier did not provide such credit.  No credit was extended to the Plumbing Company until after a subsequent application by the Plumbing Company’s Principal.

The Guarantor's evidence demonstrating a lack of consideration defeats the Supplier's claim for enforcement of the guaranty. Under suretyship principles, a guarantor relationship arises when one party becomes bound to satisfy an obligation owed by another  A suretyship or other contract is not a guaranty unless there is a primary or principal obligation to which the surety's agreement is collateral.  Here, although the Supplier provided evidence that it extended credit to the Plumbing Company subsequent to the execution of the guaranty, the Guarantor rebutted that claim with evidence that the credit was not extended in connection with the Guarantor’s guaranty. The Guarantor offered credible evidence that the guaranty was signed in conjunction with a prior credit application made by the Guarantor, which was denied. The Guarantor further demonstrated that the grant of credit to the Plumbing Company was in fact in reliance on an application made by the Plumbing Company’s Principal, and not in reliance on the Guarantor’s guaranty. Because the evidence indicates that credit was not extended to the Plumbing Company in reliance on the Guarantor's application, the guaranty lacks consideration and is not effective.

Question. Can a plaintiff invoke a forum selection clause after commencing an action in the wrong county?

Answer. No.

Plaintiff commenced a breach of contract action against Defendant in Nassau County Supreme Court. (See Def. Opp. Br., Docket Entry 8-5, at 1.) Defendant then removed the action to Federal Court in Suffolk County.

Plaintiff seeks to send the case back to state court in Nassau County based upon a forum selection clause contained in the Subcontract. That clause provides that "any action or proceeding arising out of, in connection with, or in relation to this subcontract, shall be resolved by litigation in the Courts of the State of New York, Suffolk County."

Generally, a defendant in an action pending in state court may remove that case to federal court only if it could have originally been commenced in federal court. 28 U.S.C. §1441(a)). However, a clear and unequivocal clause in a contract may act as a waiver of a party's statutory right to remove a case to federal court.

Courts that have considered this issue have typically differentiated between forum selection clauses that identify a specific court and those that merely identify a geographic location for venue purposes.

Plaintiff argues that the language of the forum selection clause contained in the Subcontract limits jurisdiction and venue to New York State courts to the exclusion of federal courts and that, therefore, the action must be remanded.

The contractual forum selection clause at issue here specifically designated "Courts of the State of New York, Suffolk County." Yet Plaintiff commenced this action in — and seeks remand to — Nassau County. Plaintiff has effectively waived its right to enforce the forum selection clause and cannot seek remand to Nassau County.

Question. Does the fact that that a payment and performance bond surety has satisfied some suppliers' claims prevent a statutory trust from attaching to the owner withheld funds or otherwise give the surety priority?

Answer. No.
This case stems from the award of a contract for a public improvement. Owner awarded a contract to Prime Contractor. This contract contained a provision that permitted the Owner to "deduct from the amounts certified under this Contract to be due to the Contractor, the sum or sums due and owing from the Contractor to the subcontractors." Shortly thereafter, Surety provided the Owner with a payment bond and a performance bond on behalf of Prime Contractor. A year and a half later the Owner terminated the contract "for convenience" pursuant to the pertinent clause of the contract. Prime Contractor defaulted on payments due to various suppliers of labor and materials. As the surety on the payment bond, Surety paid $127,631. 29 to these suppliers from March 21, to December 1. It has also received additional claims of approximately $188,000.

On November 29, Owner agreed to pay to Surety $171,917.38 in funds that had been approved for payment to Prime Contractor, "upon the satisfaction, discharge, release or cancellation of all those valid liens, levies, restraints and encumbrances filed with the Liens and Disbursements Clerk in the office of the Owner which have a superior or greater legal or equitable right than Surety to said earned funds".

On June 26, the Owner paid the $171,917.38 into court and named as parties defendants, the Prime Contractor, Surety, and the United States of America by and through the United States Internal Revenue Service.

The IRS, claims that Surety was not entitled to priority over the funds and asserts that Prime Contractor failed to remit to the IRS Federal tax withholdings on behalf of employees who worked on the project. The IRS argument is that the funds constitute a Lien Law Article 3-A trust, to which Surety cannot have legal priority.

The IRS claims that the contract fund in this action qualifies as an Article 3-A trust fund to which the IRS should be granted statutory (Lien Law § 77[8]) priority over Surety.

Surety counters that an Article 3-A trust fund never arose in this matter because Prime Contractor, as contractor, never received or had the right to receive the contested funds. Surety states that by paying the outstanding claims of laborers and materialmen, it became equitably subrogated to the rights of the Owner. Because the Owner was entitled to withhold funds pursuant to the contract, Surety urges that it became entitled to similarly withhold funds in order to reimburse itself for its expenditures as a surety. As a result, Surety asserts that Prime Contractor never became entitled to receive the funds at issue, so a trust never attached to the funds.

By depositing the money with the Court, the Owner, in effect, seeks to pay out contract funds, and an Article 3-A trust protects those funds. The classification of the funds as a trust arises by operation of law pursuant to statute (see, Lien Law § 70[4]). This statutory framework governs the resolution of this issue, and guides the outcome of the entire case. A "trust" under Article 3-A can include assets of every conceivable type and form arising from the work. Even rights of action for payment "due or earned or to become due or earned" can constitute a trust (Lien Law § 70[1], [6])

This statutory trust springs to life at the time when any qualifying asset comes into existence, regardless of whether beneficiaries exist at that same time (Lien Law § 70[3] ). This kind of trust will continue until every trust claim arising at any time prior to the completion of the contract has been paid or discharged, or until all such assets have been applied for the purposes of the trust. A trust claim is deemed to be in existence from the time of the making of the contract or the occurrence of the transaction out of which the claim arose (Lien Law § 71[5]). The class of trust beneficiaries is the same as the class of persons who are given the right to file mechanics' liens, as well as the United States and State of New York for pertinent employment related claims.

Surety has acknowledged that unpaid claims related to the project still exist in the amount of approximately $188,000. Regardless of the fact that Surety previously paid $127,631.29 worth of claims related to the project, all of the subcontractors and statutory beneficiaries have not yet been paid, and mechanics' liens, as well as trust fund claims, apparently still remain outstanding. Because Surety has not paid all outstanding claims, any subrogation rights that may otherwise arise have not matured here. In this circumstance, Surety does not have a sufficient beneficial interest in the moneys, due or to become due from the owner under the contract, to give Surety a property right in them, except insofar as there is a balance remaining after all subcontractors and other statutory beneficiaries have been paid. Thus, contrary to Surety's assertions, it is not entitled to apply the $171,917.38 to its earlier payment of some claims.

Question. Can the owner sue for negligent construction when there is a contract in place which covers the subject matter of the dispute?

Answer. No.

The Condominium Developer sued the Contractor in connection with an agreement to provide construction work, labor, and services at a condominium building the Condominium Developer was constructing. Condominium Developer alleges among other things negligent construction. This is a common ploy used by some in Condominium Developer’s position is to allege negligence so as to trigger the Contractor’s insurance coverage which would be otherwise unavailable in a breach of contract action.

The gravamen of the negligence cause of action is that the work performed under the contract was performed in a less than skillful and workmanlike manner. Such a cause of action sounds in breach of contract, not negligence. The Condominium Developer' allegations of negligence are merely a restatement, albeit in slightly different language, of the contractual obligations asserted in the causes of action for breach of contract.

The negligence cause of action should be dismissed.

Question. I know that that the statutory interest rate on judgments in New York is 9 percent. This is a great return on investment (assuming the debtor can pay) these days. If it’s statutory though can the parties fix a different rate of interest or even waive it?

Answer. Yes. Under NY law, interest on a sum awarded as a result of a breach of contract is computed from the earliest date that the claim accrued, “except that interest upon damages incurred thereafter shall be computed from the date incurred” (CPLR 5001 [a], [b]). Thus, CPLR 5001 permits a party that prevailed in a breach of contract action to obtain prejudgment interest. And where a contract provides for periodic payments or installments, the defaulting party is required to pay prejudgment interest on any missed payment from the date the payment became due.

When a claim is predicated on a breach of contract, the applicable rate of prejudgment interest varies depending on the nature and terms of the contract. Most agreements associated with indebtedness provide a “contract rate” of interest (which may be higher or lower than the statutory rate) that determines the value of the loan and that rate is used to calculate interest on principal prior to loan maturity or a default in performance. If the parties failed to include a provision in the contract addressing the interest rate that governs after principal is due or in the event of a breach, New York’s statutory rate (currently 9%) will be applied as the default rate

As an important corollary, when the principal on a loan is due on a date certain and the debtor fails to make payment, the interest rate in the contract will be used to calculate interest on unpaid principal from the date of maturity of the loan to the entry of judgment Thus, inclusion of a clause directing that interest accrues at a particular rate “until the principal is paid” (or words to that effect) alters the general rule that interest on principal is calculated pursuant to New York’s statutory interest rate after the loan matures or the debtor defaults.

Similarly, the parties are free to agree upon a complete waiver of interest. For example, in the context of a real estate transaction, where the parties’ contract language specifying that the seller’s “sole remedy” was liquidated damages in the form of retention of the down payment and the seller had “no further rights” against the defaulting purchaser, that trumps language in CPLR 5001 (a) directing that statutory interest be awarded in a contract dispute. The terms of the contract are controlling, and the seller is not entitled to statutory interest.

Question. Can I be compelled to arbitrate my claim against my employer if the costs of arbitration are prohibitively expensive and I am effectively prevented from vindicating my rights due to financial hardship even if arbitration provision is contained in my employment agreement?

Answer. Not necessarily. Claimant commenced a lawsuit on behalf of himself and others similarly situated, for damages arising from Employer’s alleged failure to pay overtime wages. Employer moves to compel arbitration under the employment agreement pursuant to CPLR 7501 & 7503.

The effect of an arbitration agreement is provided for in CPLR 7501 which states that:

[a] written agreement to submit any controversy thereafter arising or any existing controversy to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award. In determining any matter arising under this article, the court shall not consider whether the claim with respect to which arbitration is sought is tenable, or otherwise pass upon the merits of the dispute (CPLR 7501).

CPLR 7503(a) provides the procedure for a party to compel arbitration.

Application to compel or stay arbitration; stay of action; notice of intention to arbitrate (a) Application to compel arbitration; stay of action. A party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration. Where there is no substantial question whether a valid agreement was made or complied with, and the claim sought to be arbitrated is not barred by limitation under subdivision (b) of section 7502, the court shall direct the parties to arbitrate. Where any such question is raised, it shall be tried forthwith in said court. If an issue claimed to be arbitrable is involved in an action pending in a court having jurisdiction to hear a motion to compel arbitration, the application shall be made by motion in that action. If the application is granted, the order shall operate to stay a pending or subsequent action, or so much of it as is referable to arbitration (CPLR 7503).

Arbitration is a creature of contract and the long established policy of New York courts is to interfere as little as possible with the freedom of consenting parties in structuring their arbitration relationship. However, that policy is not without caveats or scrutiny. It has also been established that so long as the prospective litigant effectively may vindicate his or her statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.

It has been further recognized that the existence of large arbitration costs could preclude a litigant from effectively vindicating their federal statutory rights in the arbitral forum, a result which cuts against the broad public policy in favor of arbitration. Where a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring the costs that would deter the party from arbitrating the claim.

The issue of a Claimant’s financial ability is to be resolved on a case-by-case basis and that inquiry should at minimum consider the following questions: (1) whether the litigant can pay the arbitration fees and costs; (2) what is the expected cost differential between arbitration and litigation in court; and (3) whether the cost differential is so substantial as to deter the bringing of claims in the arbitral forum.

Question. Did an insurer waive its right under New York law to rescind a contractors omnibus general liability insurance policy when it chose to cancel the policy with full knowledge of an alleged material misrepresentation that would have allowed it to rescind the policy as void from the beginning?

Answer. YES. Insurance Company issued a Contractors Omnibus General Liability Policy (the “2005 Policy”) to Contractor. The 2005 Policy had liability limits of $1,000,000 for each occurrence and a policy term of one year, from April, 2005 to April, 2006.

For purposes of the policy, Contractor was classified as Carpentry NOC, which stands for “Carpentry not otherwise classified .” The classification “Carpentry NOC” includes carpentry of a commercial or industrial nature as well as carpentry on structures greater than three stories in height and incidental roofing work. Insurance Company’s underwriting guidelines provide illustrations of what might be considered “incidental” roofing work. In a section entitled “Roofing Exposure,” the guidelines state:

It is not unusual for our typical carpentry contractor to be involved with incidental roofing work over a period of time. This is most likely to occur as part of a remodeling or small addition job but may be a re-roofing job not associated with other work for that customer … We do not want to write insureds that do roofing as described above if it is more than incidental to their operation. Incidental is defined as 1-2 roofs per year for a one or two-man operation and 3-5 roofs per year for a three to five-man operation. It is referred to in number of roofs per year since that is the easiest way to quantify the amount of work, but [this] could also equate to approximately 5-10% of annual receipts…. Risks that do more roofing than this must be classed and rated as roofers.

In 2006, the policy was renewed (the “2006 Policy”) with a policy term of April, 2006 to April, 2007. The policy was renewed again (the “2007 Policy”), with a policy term extending from April, 2007 to April, 2008.The 2007 Policy contained the following provision in the section, “Business owners Common Policy Conditions”:

C. Concealment, Misrepresentation or Fraud This policy is void in any case of fraud by you as it relates to this policy at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning:

1. This policy;
2. The Covered Property;
3. Your interest in the Covered Property; or
4. A claim under this policy.

The above provision of the 2007 Policy was amended by the following endorsement, entitled “New York Changes-Fraud”:

The CONCEALMENT, MISREPRESENTATION OR FRAUD Condition is replaced by the following: FRAUD
We do not provide coverage for any insured (“insured”) who has made fraudulent statements or engaged in fraudulent conduct in connection with any loss (“loss”) or damage for which coverage is sought under this policy.

Part of the Commercial Insurance Application Contractor submitted in April 2005 included a form called a Contractor Supplement. The Contractor Supplement contained various questions related to, among other things, Contractor’s general exposure to liability. Contractor was asked, “Does the applicant do any roofing or re-roofing? If yes, how many in the past year?” Contractor answered the first question, “no” and thus did not provide a number of roofing jobs Contractor had performed in the prior year.

In July, 2007, Worker suffered a fatal injury while working for Contractor at a job site. In August, 2007, an employee in Insurance Company’s Claim Department prepared a Report on Risk Characteristics regarding the incident, which recited that Worker was a 17 year-old female summer employee who fell off a three-story roof and died nine days later. It also stated that the insured was doing roofing work at the time. The report concluded that the incident entailed a risk by the insured that appeared to be misclassified, that the insured engaged in unsafe practices and that the insured employed minors.

In late August, 2007, Insurance Company mailed a written notice of policy cancellation, effective September, 2007. This cancellation notice stated that the policy was being cancelled because: “Type of operations unacceptable to company. A material change in the nature or extent of the risk which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was last renewed.” This letter reflects that in August 2007, Insurance Company elected to cancel rather than rescind the 2007 Policy.

Insurance Company asserts that it is not obligated to perform under the subject insurance contract as it was rendered void ab initio [meaning from the beginning] as a result of the defendants’ material misrepresentation(s) in obtaining the original policy and subsequent renewals.

Insurance Company waived its right to rescind the 2007 Policy as void ab initio because it elected to cancel rather than rescind the policy in September 2007. The cancellation of an insurance policy should be distinguished from the concept of rescission by the insurer. A rescission avoids the contract ab initio, while cancellation merely terminates the policy prospectively, as of the time the cancellation became effective.

Under New York law, where an insurer has knowledge of a misrepresentation that constitutes a basis for rescission of the policy but elects instead to cancel that policy, the insurer has waived its right to thereafter rescind the policy, at least to the extent rescission would be based on the same misrepresentation. Conversely, where an insurer cancels a policy and has not learned of facts that give it the right to rescind the policy, the insurer has not waived its right to rescind the policy. There are situations that these two principles do not address, but these principles are sufficient to address the circumstances presented in the instant case.

Here, Contractor submitted a Contractor Supplement form with the Commercial Insurance Application in April 2005. This form indicated that Contractor did not do roofing jobs. Worker’s accident in July 2007 involved her falling off the roof of a home on which Contractor was performing a roofing job. Insurance Company was in possession of evidence reflecting the alleged material misrepresentation and was at least part of the basis for the decision to cancel the policy. There is no genuine issue as to the fact that Insurance Company was aware of the alleged material misrepresentation at the time it made the decision to cancel the policy.

Insurance Company waived its right to rescind because it chose to cancel the policy with full knowledge of the alleged material misrepresentation that would have allowed it to rescind the policy as void ab initio.

Question. Can purchaser erect a sign on his property inviting prospective home buyers of adjacent property to examine drainage problem allegedly caused by builder at his house?

Answer. NO. The sign is an instrument and incident to primary motive of Purchaser to interfere with Builder’s business and coerce settlement.

Purchaser has brought a claim against the Builder, a residential home builder, for damages resulting from improper grading of the Purchaser’s lot and the lot to his rear.

After the commencement of the lawsuit, Purchaser erected on his lot a sign 30 inches wide and 4 feet high, saying: ‘PROSPECTIVE HOME BUYERS! YOU ARE INVITED TO EXAMINE THE DRAINAGE PROBLEM ON THIS LOT, CAUSED BY [XYZ] HOMES, INC.’

Builder owns other building lots in the same subdivision where the Purchaser’s home is located and wants to prevent the Purchaser from the display of signs referring to the Builder and from any other acts which would harm the business reputation of the Builder.

The Builder argues that allowing the Purchaser to continue to display of the sign during the pendency of the action will produce irreparable injury to the Builder.

When the courts will and will not grant a temporary restraining order in these situations appears to be based upon certain criteria, as follows:

1. Are the signs being displayed at or near the property of the Builder and are they away from the property of the Purchaser?

2. Is the publication of the words merely an instrument and incident to wrongful acts intended to damage the business of the Builder?

In this case the sign in question is located upon the Purchaser’s own property. It is also adjacent to the Builder’s subdivision.

The Purchaser has done more than simply commence a lawsuit. He has erected a sign bearing a message which involves the very issue raised in his suit. This contemporaneous act would seem to indicate that the publication of the words is intended as an ‘instrument and incident’ to the apparent primary motive of the Purchaser to interfere with the Builder’s business and thereby coerce a settlement of the pending action. Were there not a lawsuit pending, the conclusion might well be different, but under the existing circumstances the Purchaser should be compelled to take down the sign.

In addition, the posting of the sign by the Purchaser may also violate deed restrictions and zoning ordinances.