The U.S. District Court, District of New Jersey held in the case of Harford Mutual Insurance Co. v. Z&D Realty LLC that insurance companies do not have an obligation to investigate whether insurance applicants were truthful on the applications and that applicants—not insurance producers—are reasonable for the veracity of information on an insurance application.
Diane and Ziggy Dobkowski owned and operated three businesses, Z&D Realty, an apartment building and property manager, Landis Pig Roast, a restaurant, and Grant Plaza, a banquet hall/event space. The three businesses were interrelated as Z&D Realty owned the land the other businesses operated on and Landis Pig Roast and Grant Plaza shared several doorways.
In 2015, the Dobkowskis sought insurance for Z&D Realty and Landis Pig Roast through an independent insurance agency. A policy for Z&D Realty was placed through The Harford and for Landis Pig Roast through Firstline. Critically during the application process, the Dobkowskis failed to disclose the existence of Grant Plaza and answered questions on both applications denying to own other businesses.
In 2017, Grant Plaza was leased for a party. During this event a shooting occurred, which resulted in at least three people sustaining injury. A personal injury suit was brought against the Dobkowskis. Then, they notified The Harford and Firstline of the claim. Both carriers denied the claim, and declined to provide defense.
In a twist, The Harford and Firstline brought suit against the Dobkowskis seeking, among other things a recission of the underlying policies based on the claim that the Dobkowskis failed to disclose material information about the risk.
The insurers argued that neither knew about Grant Plaza when the policies were written, as such neither agreed to cover the risks association with Grant Plaza. The Dobkowskis counterargued that they fully and accurately disclosed all information to their insurance producer and that the insurance companies had an obligation to exercise due diligence in confirming the information on the application.
What did the court say?
In deciding to whether to order the recission of the insurance policy, the court considered three questions: 1. whether the defendants made misrepresentations in applying for the insurance policies; 2. whether the insurance companies had a duty to exercise due diligence; and 3. whether recission was warranted.
No. 1: Misrepresentations
On the question of whether the defendants made material misrepresentations the court is clear that they had. The court starts by stating “… Defendants, not their agents, are accountable for the information supplied in their insurance applications.” The court says that the defendants cannot disclaim responsibility for the information on the applications just because the insurance producer provided professional services. With that in mind, the court turns to the insurance application and found that it contained false statements. The defendants denied questions about other exposures, as well as whether social events would be hosted. This was despite Grant Plaza opening prior to the defendants completing and submitting the insurance applications in question here.
Finding there were misrepresentations the court looked to see if they were material to the insurers’ decision to issue the policies. The court found that had the Dobkowskis disclosed the existence of Grant Plaza, it clearly would have impacted the insurers decision to issue the policy or the calculation of appropriate premiums.
No. 2: Due diligence
The court moved on to the second question: whether the insurance companies had a duty to exercise due diligence in investigating the information provided in the insurance application. The Dobkowskis argued that this duty existed and the if the insurance companies had exercised it, like the should, they would have discovered the existence of Grant Plaza.
The court dismisses this argument quickly. The court states that while an insurer does have a duty to investigate, it only arises when there are sufficient facts to call an insurance application into question. Insurance applicants have a duty to be truthful and the insurer is entitled to rely on an applicant’s statement. In the present case, the insurance companies had no reason to expect that the defendants would not be truthful in the application and thus no reason to investigate.
No. 3: Rescission warranted?
Having answered the first two question in favor of the insurance companies, the court turned to the third, and ultimate question: is rescission warranted? The court spent less than a page concluding that it is warranted in this case.
For the court it is an easy case: the defendants committed fraud by omitting material facts that would have impacted the insurance companies’ decision to write the risks. As such, recission is warranted.
But wait there is more!
The court does not find this argument persuasive. Unfortunately, for insurance producers that seems to be more due poor lawyering on the defendants’ part than any unequivocal statement that insurance producers do not owe a duty to investigate the veracity of their client’s statements.
This case involved claims against not only insurance companies, but against two insurance producers as well. The defendants argued that the insurance producer they worked with to place policies for Landis Pig Roast and Z&D Realty polices, as well as another insurance producer who had helped place a policy for Grant Plaza while that property was vacant, had violated their professional duty to the defendants.
In ruling in favor of the insurance producers, the court points to the defendants’ lack of evidence that any breach of duty occurred. While the defendants provided an affidavit of merit, which is required in professional negligence claims, the court did not find this sufficient. The court states the affidavit of merit hardly sets forth enough details for anyone to understand how the insurance producers breached a duty. The court indicated that additional expert witness testimony should have been provided. There being no proof of professional negligence the court ruled in favor of the insurance producers.
What happens next?
While often court decisions involve sending cases back to lower courts for further proceedings, this case is likely over. The court granted motions for summary judgment for the insurance companies and insurance producers. A motion for summary judgment is a common legal motion and is essentially a final adjudication of a case before it even gets started.
Courts only grant motions for summary judgment when there is no material dispute as to the facts and it determines that no reasonable jury could find in favor of the non-moving party—in this case, the Dobkowskis.
In other words, a motion for summary judgment is usually a final adjudication of a case. The court also dismissed all the defendants’ claims with prejudice. When an action is dismissed with prejudice it means that the filer, in this case the defendants, cannot refile the claim again in court.
Combining both the dismissal and the granting of summary judgment, the defendants will have little chance to continue on with their lawsuit.