TLSS obtains summary judgment in Southern District of New York Voiding Excess Property Insurance Policy and Awarding Insurer Nearly $4 Million for Recoupment of Payments

Signal International, LLC (“Signal”) owned drydock AFDB-5, located in Port Arthur, Texas.  After AFDB-5 sank, Signal tendered claims to certain insurers.  The primary property insurer paid its $10,000,000 limit.  TLSS’s client, Max Specialty Insurance Company (“MSIC”) paid the remaining $3,600,000 for the drydock’s represented value and for lost rental equipment under an excess property policy.  Signal’s marine liability insurer commenced suit seeking contribution from MSIC and Signal’s pollution liability insurer for wreck removal costs.  Signal filed a cross-claim against MSIC for alleged business interruption losses.

Discovery revealed that AFDB-5 was dangerously dilapidated.  In its underwriting submission, Signal provided a property condition report indicating AFDB-5 was in good repair.  There were multiple withheld additional engineers’ reports indicating that AFDB-5 faced catastrophic failure absent extensive repairs.

Upon learning the true condition of AFDB-5, MSIC sought to void the policy ab initio based on Signal’s material misrepresentations and to recoup payments made.  In an earlier ruling, the court held that maritime law did not apply to the MSIC policy because AFDB-5 was not a “vessel.”  MSIC’s rescission claim would thus be adjudicated under state law.

Signal and MSIC filed summary judgment motions on MSIC’s rescission claim.  Signal argued that Texas law applied requiring the claim’s dismissal because MSIC could not prove intentional misrepresentation. MSIC argued that Mississippi law, which does not require intent, applied dictating policy rescission.  The court agreed with MSIC and applied Mississippi law.  The court held Signal’s omissions material, given MSIC’s underwriter’s testimony that the policy would not have been issued had Signal disclosed the withheld information.  The court voided the policy ab initio and awarded MSIC summary judgment on its recoupment claim, totaling approximately $4 million including interest.  Fireman’s Fund Ins. Co. v. Great Am. Ins. Co., 2014 U.S. Dist. LEXIS 45843.