Paraco Gas Corp. v. Travelers Casualty & Surety Co. of America

Citations: 51 F. Supp. 3d 379; 2014 WL 5007862Docket: Case No. 12-CV-5562 (KMK)

Court: District Court, S.D. New York; September 30, 2014; Federal District Court

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Paraco Gas Corporation (Plaintiff) has initiated a lawsuit against Travelers Casualty and Surety Company of America, Fairfield County Bank Insurance Services, LLC (FCBIS), Alice Lara, and Jeffrey Welsch, with FCBIS and Lara identified as the "FCBIS Defendants." The claims arise from an insurance policy obtained by Paraco through FCBIS from Travelers. FCBIS has filed cross-claims against Travelers, alleging negligent or fraudulent misrepresentations, violations of state law regarding unfair trade practices, and breach of the implied covenant of good faith and fair dealing. FCBIS further seeks reformation of the policy and indemnification under a previous agreement with Travelers.

Travelers has moved to dismiss both Paraco’s Second Amended Complaint and FCBIS’s cross-claims, with the court granting in part and denying in part these motions. The factual background, drawn from Paraco's Second Amended Complaint, outlines that in 2009, Paraco engaged FCBIS to secure Directors and Officers liability insurance, replacing an expiring policy from Chubb Insurance Company. Paraco provided FCBIS and Travelers with documentation of its expiring policy and a list of shareholders, indicating that only one shareholder, the "Grandchildren’s Trust," held less than a 0.5% interest.

Throughout the fall of 2009, FCBIS communicated with Jason E. Hull, an underwriter at Travelers, discussing various insurance coverage proposals. On October 2, 2009, Hull presented three options for Paraco's insurance, each featuring an "Ownership Percentage Exclusion" of 5% for the named insured under certain endorsements. FCBIS informed Paraco that Travelers had a policy matching the prior Chubb coverage. On October 20, 2009, Hull provided four additional proposals, reiterating the same exclusion for specific quotes. Paraco accepted the first quote from Hull’s October 20 letter, under the belief that it would cover suits against its directors and officers by shareholders.

Travelers issued an insurance policy to Paraco that includes an "Ownership Percentage Exclusion," which limits coverage for suits brought by shareholders owning 5% or more of Paraco’s shares. At the relevant time, the only shareholder below this threshold was the Grandchildren’s Trust. Paraco claims it was unaware of this exclusion while asserting that Travelers and FCBIS had knowledge of it. A lawsuit, the "Armentano Action," was filed by Robert Armentano, a shareholder owning more than 5%, against Paraco's directors and officers, alleging breach of fiduciary duty on behalf of similarly situated shareholders. Paraco sought defense and indemnification from Travelers for this action, but Travelers denied coverage based on the exclusion. 

Paraco initiated legal proceedings in New York State Supreme Court on June 18, 2012, which were later removed to federal court. Paraco amended its complaint twice, alleging that the policy should be reformed due to mutual mistake or fraud and claiming damages for negligent misrepresentations by Travelers. Additionally, Paraco requested a declaration affirming coverage for the Armentano Action and asserted claims against FCBIS for breach of fiduciary duty, though those claims are not the focus here. 

Travelers moved to dismiss the Second Amended Complaint, with subsequent filings from both parties addressing the motion. The FCBIS Defendants also filed an answer raising several defenses and cross-claims against Travelers, alleging negligent or fraudulent misrepresentations, unfair trade practices, and the need for policy reformation, along with claims of indemnity and breach of good faith in their agency agreement. Travelers responded with a motion to dismiss these cross-claims, leading to further legal exchanges between the parties.

In addressing a motion to dismiss under Rule 12(b)(6), the Court must accept the factual allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. The review of a district court’s dismissal is conducted de novo, focusing solely on the allegations in the complaint, documents attached or referenced, and facts subject to judicial notice. While detailed factual allegations are not required, a plaintiff must provide sufficient grounds for relief beyond mere labels or conclusions, as established in Bell Atlantic Corp. v. Twombly. Allegations must raise the right to relief above a speculative level, and a claim must be plausible on its face. If the claims are not sufficiently supported, the complaint must be dismissed.

The Court will first evaluate Paraco’s claim regarding coverage of the Armentano suit, which may affect the validity of Paraco’s other claims. Subsequently, it will assess Paraco's remaining claims, which are largely similar to the FCBIS Defendants’ cross-claims. Finally, the Court will examine the FCBIS Defendants’ cross-claims, focusing on the contractual relationship with Travelers. New York law will be applied to the state-law claims, considering that Paraco is a New York corporation and Travelers is authorized to operate in New York, whereas FCBIS is a Connecticut corporation with offices in Connecticut.

Both parties in the legal dispute have implicitly agreed that New York law governs their claims, as evidenced by their submissions and the FCBIS Defendants’ assertions that the laws of New York and Connecticut regarding negligent misrepresentation and fraud are similar enough to avoid a conflict of law determination. Paraco seeks a declaratory judgment asserting that the Armentano Action should be covered by the insurance policy, while Travelers contends that coverage is barred by the policy's plain language.

The "Ownership Percentage Exclusion" in the policy explicitly states that coverage does not apply to claims brought by individuals or entities owning more than 5% of Paraco. The Armentano Action is initiated by Mr. Armentano, who is a shareholder owning 15.8% of Paraco, thus falling under the exclusion. Paraco argues that a Trust, which owns 4% of Paraco, is a "similarly-situated shareholder" and therefore should not invoke the exclusion. However, the court emphasizes that under New York law, it cannot alter the policy terms or their clear meanings. Since the Armentano Action is brought by a party owning more than 5%, the exclusion applies, negating Paraco's claim for coverage under the policy.

The Policy's plain language indicates that the Ownership Percentage Exclusion applies to the Armentano Action, as Robert Armentano is a named plaintiff who participated in the action, even with other shareholders involved. Citing *Julio, Sons Co. v. Travelers Cas. Sur. Co. of Am.*, the exclusion applies regardless of whether all shareholders are insured. Paraco contends the Court must determine if the Grandchildren’s Trust is a "similarly situated" shareholder to assess coverage of the Armentano Action. However, this factual question does not affect the viability of Paraco’s claim against Travelers’s Motion to Dismiss. Assuming Paraco's assertions regarding the Trust's status, the analysis remains unchanged, leading the Court to conclude that the Policy’s Ownership Percentage Exclusion bars coverage for the Armentano Action, resulting in the dismissal of Paraco’s request for a declaratory judgment.

Regarding the reformation claims, both Paraco and the FCBIS Defendants seek to amend the Policy to remove the Ownership Percentage Exclusion. According to New York law, reformation can occur due to mutual mistake or fraud, as established in cases like *Chimart Assocs. v. Paul* and *George Backer Mgmt. Corp. v. Acme Quilting Co.* To succeed, a plaintiff must show that the contract was executed under a mutual mistake or a unilateral mistake caused by fraudulent misrepresentation. Courts impose strict procedural and substantive requirements to prevent false claims of oral agreements. The proponent must provide clear and convincing evidence of the mistake and articulate precisely what the parties originally agreed upon, as emphasized in *Collins v. Harrison-Bode* and *Healy v. Rich Prods. Corp.*.

Both Paraco and the FCBIS Defendants claim that the Ownership Percentage Exclusion in the insurance policy may have resulted from a mistake or fraud by Travelers. To evaluate the viability of these reformation claims against Travelers’ Motions To Dismiss, the court must determine if sufficient allegations of mistake or fraud have been presented.

Under New York law, reformation for mutual mistake occurs when the signed contract does not reflect the true agreement due to an error, requiring clear and convincing evidence to overcome the presumption that a written document represents the parties' intentions. Paraco claims it accepted a quote from Travelers believing it mirrored its previous policy without the exclusion; however, it fails to demonstrate that Travelers intended to enter into an agreement without the exclusion. Instead, Paraco suggests that Travelers was aware of the exclusion while Paraco was not, indicating a lack of mutual understanding necessary for a mutual mistake claim.

Similarly, the FCBIS Defendants’ cross-claim contradicts their assertion of mutual mistake by implying Travelers acted with ill intent, citing that the exclusion was obscured in the policy documentation. They allege that Travelers misled them regarding the policy's alignment with the expiring Chubb policy and anticipated that Paraco and FCBIS would overlook the exclusion. Overall, neither Paraco nor the FCBIS Defendants have adequately pleaded claims for reformation based on mutual mistake or fraud.

The FCBIS Defendants argue that if Travelers intended to provide coverage to Paraco equivalent to the expiring Chubb policy, then the inclusion of the Ownership Percentage Exclusion was a mutual mistake. However, evidence suggests this inclusion was intentional, preventing the FCBIS Defendants from successfully asserting a claim for reformation based on mutual mistake. Additionally, Paraco and FCBIS allege they were fraudulently induced to accept the Ownership Percentage Exclusion. To establish fraud, they must demonstrate: (1) a material misrepresentation of fact; (2) intent to deceive; (3) reasonable reliance on the misrepresentation; and (4) resulting damages. Paraco's complaint claims that Travelers’s agent misrepresented that the second quote matched the Chubb policy, that Paraco relied on this quote, and that Travelers knew the quote did not match. Paraco has pleaded these elements with sufficient particularity under Federal Rule of Civil Procedure 9(b). However, to succeed in a fraud claim, Paraco must show that its reliance on Hull's statements was reasonable. Under New York law, a party cannot claim reliance on a misrepresentation if the truth could have been discovered through due diligence.

If the facts presented are not solely within the defendant's knowledge, and the plaintiff can ascertain the truth through reasonable diligence, the plaintiff must utilize those means or risk losing the ability to claim misrepresentation. Paraco acknowledges the Ownership Exclusion Provision's presence in the Policy and could have discovered it by simply reading the contract they signed. Under New York law, signatories are obligated to read and understand their contracts, being bound by their terms. Paraco claims reliance on a representation from Travelers that a quote matched an expiring policy, despite evidence of multiple policies involved. The October 2, 2009 email, which Paraco cites as containing the misrepresentation, included a proposal that explicitly listed an Ownership Percentage Exclusion. Furthermore, the subsequent proposal letter also highlighted these exclusions in the quotes offered to Paraco. Paraco argues that the lengthy Policy obscured the exclusion and was complex, but courts generally hold that ignorance of contract terms does not exempt parties from their obligations. Courts presume awareness of contract contents regardless of actual familiarity with specific clauses, reinforcing the importance of reading agreements before signing.

New York courts consider declaration pages of insurance policies as conclusive presumptive knowledge of their terms, especially when received multiple times, indicating that insured parties are presumed to have read and understood the policy (Am. Bldg. Supply Corp. v. Petrocelli Grp. Inc., 2012). Sophisticated corporate parties, such as Paraco and Travelers, are held to a higher standard regarding claims of reasonable reliance on oral communications related to formal contracts. Courts are reluctant to accept reliance on such communications when sophisticated parties have the means to verify the terms (Junk v. Aon Corp., 2007). A party that fails to use available means to verify representations cannot claim to have been misled (DDJ Mgmt., 2010). If a sophisticated plaintiff does not adequately plead justifiable reliance due to a lack of verification, it may be dismissed as unreasonable (Ventur Grp. LLC v. Finnerty, 2009). The presumption that parties accept the written terms of signed agreements further complicates claims of reliance (Isaacs v. OCE Bus. Servs. Inc., 2013). However, the context in which Paraco engaged FCBIS to find a policy similar to its expiring Chubb policy raises questions about the reasonableness of its reliance on communications from FCBIS. A precedent from American Building Supply illustrates that even when a party takes reasonable precautions against deception, such as hiring a broker, it should not be denied recovery if hindsight suggests the possibility of detecting fraud (Am. Bldg. Supply Corp., 2012).

An employee of the plaintiff was injured at the facility, leading to a denial of insurance coverage based on an exclusion clause. Consequently, the plaintiff filed a lawsuit against the broker for negligence and breach of contract. The Court of Appeals dismissed the broker's claim that the lawsuit was barred due to the plaintiff's prior acceptance of the insurance policy without objections, asserting that an insured can rely on the broker's expertise in insurance matters. Although it is advisable for insured parties to read their policies, the court concluded that failure to do so should not completely prevent recovery under the circumstances.

The plaintiff, Paraco, hired the broker FCBIS to obtain a policy that would replicate the coverage of an expiring Chubb policy, expecting it to cover claims from its shareholders. The inclusion of an Ownership Percentage Exclusion in the new policy, which limited coverage for suits from all but one shareholder, was deemed contextually unreasonable, especially since FCBIS and Travelers were aware of the ownership stakes. Paraco only discovered this exclusion after coverage was denied. The court indicated that Paraco’s reliance on FCBIS’s expertise was not unreasonable and thus should not bar the lawsuit.

The court also noted an unresolved issue regarding whether FCBIS’s involvement absolves Travelers from liability, allowing for the possibility of further motions on this matter. Additionally, the FCBIS defendants brought a cross-claim against Travelers, alleging fraudulent misrepresentation regarding the adequacy of the policy compared to the Chubb policy, supported by specific facts that met the particularity requirements of Rule 9(b).

The Court addressed the FCBIS Defendants' assertion that Hull had explained how the Travelers policy would provide comparable coverage to the expiring Chubb policy. However, the Court found that the Defendants failed to specify when or where these statements occurred, which is required under Rule 9(b). Furthermore, the Defendants did not adequately plead that their reliance on Travelers’ representations was reasonable. Unlike Paraco, the FCBIS Defendants had access to the terms of both the ownership percentage exclusion in the Policy and the Chubb policy they aimed to replace, allowing them to verify Hull's statements. Additionally, FCBIS was aware of the ownership stakes in Paraco and had passed this information to Travelers, meaning they had sufficient information to uncover any alleged fraud. Under New York law, it was unreasonable for FCBIS to rely solely on Hull’s email without reviewing the policies, which would have revealed the exclusion. The Court emphasized that FCBIS, as Paraco's broker, had a duty to ensure that the coverage requested was obtained and could not rely solely on Travelers' representations without verifying them. Consequently, the claims for reformation due to fraud and for fraudulent misrepresentation were dismissed due to inadequate pleading of reasonable reliance.

Negligent misrepresentation claims brought by the Plaintiff and FCBIS Defendants against Travelers hinge on New York law, which requires demonstrating (1) a special or privity-like relationship that imposes a duty on the defendant to provide accurate information, (2) that the information was incorrect, and (3) reasonable reliance on that information. Both Paraco and FCBIS allege that the information from Travelers was incorrect. The court must assess whether Travelers had a duty to provide correct information and whether Paraco and FCBIS reasonably relied on it. Under New York law, negligent misrepresentation is actionable only if a fiduciary duty exists. Generally, arms-length commercial transactions do not create fiduciary relationships unless one party's superior position or access to confidential information necessitates trust from the other party. The relationship between an insurer and insured typically does not establish such a fiduciary duty. However, under specific circumstances, elements of trust and confidence may arise, transforming the relationship beyond a mere arms-length transaction. Courts evaluate the existence of such relationships on a case-by-case basis, focusing on the unique facts of each situation.

Allegations of one party possessing superior knowledge about a product or service do not, on their own, establish a fiduciary relationship, particularly among sophisticated business entities. In RNK Capital LLC v. Natsource LLC, the court ruled that superior knowledge regarding specific investment products was insufficient to create a fiduciary relationship, especially since the plaintiffs were also sophisticated businesses. Similarly, in Phillips v. American International Group, the court found that claims of superior actuarial knowledge by an insurance company did not meet the threshold for establishing a special relationship or fiduciary duty. To establish such a duty, an insured must demonstrate extraordinary circumstances, like actions taken by the insurer to gain the insured's trust. Cases like Murphy and Batas highlight that a fiduciary relationship may arise from significant interactions where one party relies on the expertise of another, but mere claims of superior knowledge do not suffice. 

In the current case involving Paraco and Travelers, the communications over a month regarding the insurance policy are characterized as standard business negotiations rather than a fiduciary relationship. Paraco sought a policy matching its expiring insurance with Chubb and provided necessary information to Travelers, relying on the latter's representations about the coverage. However, Paraco did not demonstrate that these interactions were outside typical practices for obtaining insurance. Additionally, Travelers’ representations about policy comparisons merely reflect its knowledge of the products offered. Paraco has not shown that Travelers acted in an agent capacity in procuring the policy, as it explicitly retained FCBIS as its broker for this purpose.

Paraco has not presented sufficient facts to establish that an "exceptional and particularized situation" exists that would require Travelers to owe Paraco a duty. Similarly, the FCBIS Defendants have failed to demonstrate a special relationship with Travelers. Although FCBIS has provided evidence of interactions with Travelers, such as communications regarding the Chubb policy and analyses comparing coverage, these interactions appear typical for a broker-insurer relationship. FCBIS asserts that it acted as Travelers's agent rather than Paraco's broker, citing an "Agency Contract" that allows it to solicit and service policies for Travelers. However, this claim is undermined by FCBIS’s own admissions in its pleadings, which indicate it acted as a broker for multiple insurance carriers, including Travelers, on behalf of Paraco. FCBIS's argument is further weakened by its characterization of the relationship, which conflicts with Paraco's understanding of the arrangement. Additionally, Travelers has not claimed it was authorized to enter into a policy with Paraco, as required by the Agency agreement. FCBIS has not provided documentation supporting its compensation from Travelers for the policy in question, reinforcing the conclusion that it acted as Paraco's broker rather than as an agent for Travelers.

New York law establishes that an insurance broker acts as the agent of the insured, not the insurer. A broker may be considered an agent of the insurer if there is evidence indicating the insurer's actions or a general authority to represent the insurer. In the current case, no evidence was presented suggesting that FCBIS acted as Travelers' agent; rather, Paraco explicitly identified FCBIS as its broker. The concept of apparent authority relies on the principal's actions interpreted by a third party, not the agent's representations. Consequently, the court found no basis for the FCBIS Defendants' claim that a special relationship existed between FCBIS and Travelers, which would support their negligent misrepresentation claim. Additionally, the FCBIS Defendants did not adequately demonstrate that their reliance on Travelers was reasonable. Therefore, the negligent misrepresentation claims from both Paraco and FCBIS were dismissed.

The FCBIS Defendants asserted cross-claims that included a contractual indemnification claim against Travelers, alleging that Travelers breached an implied covenant of good faith and fair dealing and violated state laws against unfair business practices. They claimed a contract with Travelers contained an indemnity provision making Travelers liable for damages adjudicated against them and for defense costs. This provision was referenced in their cross-claim and can be considered by the court in ruling on Travelers' motion to dismiss. The indemnity clause stated that Travelers would indemnify FCBIS for civil and administrative liabilities arising directly from Travelers' errors or omissions, unless FCBIS contributed to those errors. Travelers contended that the FCBIS Defendants had contributed to any alleged errors leading to discrepancies in the insurance policy.

FCBIS acted as Paraco's broker and allegedly breached its duty of care by recommending a policy to Paraco. The policy's language does not entirely exclude indemnification for harm caused by FCBIS; it limits indemnification to exclude the harm FCBIS contributed to. A factual inquiry is necessary to determine FCBIS's contribution to any error and its impact on Paraco, which the Court cannot undertake at this stage. Assuming FCBIS's claims are accurate, an agreement requires Travelers to indemnify FCBIS for liability due to Travelers's errors, including discrepancies between the Travelers and Chubb policies. The FCBIS Defendants have sufficiently alleged a plausible breach of indemnification terms, leading to the Court's denial of Travelers's Motion to Dismiss regarding the breach of contract claim.

Additionally, the FCBIS Defendants have raised a claim against Travelers for breaching the implied covenant of good faith and fair dealing related to the agency contract. This claim asserts that Travelers's misleading actions, including misrepresenting the policy's alignment with the Chubb policy, prevented FCBIS from benefiting from the agency contract. Under New York law, a separate cause of action for breach of the implied covenant cannot coexist with a breach of contract claim based on the same facts. Therefore, a claim for breach of the implied covenant must rely on different allegations than those supporting the breach of contract claim, necessitating distinct factual grounds to survive a motion to dismiss.

FCBIS Defendants argue that their breach of the implied covenant of good faith and fair dealing is distinct from their contract claim against Travelers, as it pertains to Travelers's acts and omissions during the development and negotiation of the policy, which allegedly hindered FCBIS from providing insurance to Paraco. However, these acts and omissions are central to the contractual indemnification claim, which requires evaluating the actions of both parties to determine potential indemnification. Consequently, the relief sought for both claims is effectively the same, leading the court to classify them as duplicative under New York law. The court grants Travelers's motion to dismiss the implied covenant claim but allows FCBIS Defendants to potentially articulate a distinct basis for it.

Additionally, the FCBIS Defendants allege that Travelers's actions constitute unfair trade practices under Connecticut law and deceptive business practices under New York law. However, for these statutes to apply, the alleged actions must have a broader impact on consumers beyond a single incident. The court references prior case law indicating that isolated misrepresentations do not meet the threshold for statutory violations. The FCBIS Defendants' claims are limited to misrepresentations about the policy without evidence of a broader harmful pattern. They have also indicated a willingness to withdraw these claims in an amended pleading. As a result, the court will dismiss the state-law unfair trade and business practice claims.

Travelers's Motions to Dismiss Paraco's Second Amended Complaint and the FCBIS Defendants' Cross-claims are granted in part and denied in part. Specifically, Paraco's claim for a declaration regarding the Ownership Percentage Exclusion in the Armentano Action, its reformation claim due to mutual mistake, and its negligent misrepresentation claim are dismissed without prejudice. However, Travelers's Motion is denied concerning Paraco's fraud claims. The FCBIS Defendants' claims for reformation, negligent misrepresentation, breach of implied covenant of good faith and fair dealing, and unfair trade practices are also dismissed without prejudice, while their claims for contractual indemnification are upheld. Paraco and the FCBIS Defendants have 30 days to file amended complaints. The Clerk of Court is instructed to dismiss the pending motions.

Lara and Welsch, referred to in the complaint, will be referenced by names used in their sworn declarations. The complaint relies on the "directors and officers liability insurance policy" from October 25, 2009, to July 12, 2010, though the dates suggest it is a renewal, and the Ownership Percentage Exclusion endorsement matches in both parties' versions, differing only in effective dates. The Court may consider the Policy despite it not being attached to the Complaint because it is integral to the claims. The Court notes that if the Trust is not similarly situated, it cannot be part of the Armentano Action, which undermines Paraco's argument. If the Trust holds a 5% or greater interest in Paraco, coverage would be excluded.

In resolving FCBIS's Cross-claims, the Court accepts FCBIS's analysis regarding the quotes offered for insurance coverage, noting a pattern of varying $1 million and $2 million policies, but concludes that FCBIS's assertion of a mistake by Travelers regarding the Ownership Percentage Exclusion is insufficient to survive a Rule 12(b)(6) motion. The Court finds it equally plausible that any mistake was the omission of the Exclusion in one of the quotes.

FCBIS's arguments are undermined by other endorsements referenced by Travelers, which do not align with FCBIS's suggested pattern, making it implausible for FCBIS to claim the Ownership Percentage Exclusion was a mistake. The FCBIS Defendants assert a claim for fraudulent misrepresentation, which aligns with New York's fraud elements: a false representation of material fact, intent to deceive, justifiable reliance, and pecuniary loss. The court notes that the insurance policy's renewal dates might complicate Paraco's claim that its reliance on Travelers's statements was reasonable, referencing prior case law indicating knowledge of policy terms upon receipt. Paraco's Second Amended Complaint is less clear but identifies a claim for negligent misrepresentation. The case differs from Gulf Ins. Co. v. Burns Motors, where an insurance broker's misrepresentation led to a claim for indemnification. In that case, the court denied indemnification because the broker was found to have knowingly misrepresented coverage. Conversely, Travelers does not allege that the FCBIS Defendants engaged in fraud or knowing misrepresentation. Additionally, Travelers argues that FCBIS's claims under Connecticut General Statutes section 42-110b are barred by the three-year statute of limitations, although this point does not need to be resolved for the dismissal of the unfair trade and business practices claims.