American Automobile Insurance Company v. Security Income Planners & Co, LLC et al
Filing
155
ORDER granting in part and denying in part 123 Motion for Summary Judgment; granting 124 Motion for Partial Summary Judgment; denying 128 Motion for Summary Judgment. As set forth in the attached Memorandum and Order, the Court grants partia l summary judgment to Gross and Cerulli on the duty to defend issue, but denies summary judgment to Gross and Cerulli on the duty to indemnify issue. The Court grants SIPCOLLC's partial motion for summary judgment seeking a declaration that AAIC is obligated to defend SIPCOLLC against the claims asserted by Gross and Cerulli, and awards SIPCOLLC attorneys' fees. The Court denies AAIC's cross-motion for summary judgment in its entirety. SO ORDERED. Ordered by Judge Joseph F. Bianco on 3/22/2012. (Weber, Rebecca)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
_____________________
No 10-cv-00048 (JFB) (GRB)
_____________________
AMERICAN AUTOMOBILE INSURANCE COMPANY,
Plaintiff,
VERSUS
SECURITY INCOME PLANNERS & CO, LLC, ET AL.,
Defendants.
___________________
MEMORANDUM AND ORDER
March 22, 2012
___________________
JOSEPH F. BIANCO, District Judge:
Plaintiff
American
Automobile
Insurance Company (“plaintiff” or “AAIC”)
brought this action against Security Income
Planners & Co., LLC (“SIPCOLLC”),
Security Income Planners & Co., Inc.
(“SIPCOINC”), Jay Hoffman (“Hoffman”),
Maria Gross (“Gross”), Marianna Cerulli
(“Cerulli”),
Christopher
Sommaruga
(“Sommaruga”),
Dominick
Greco
(“Greco”),
Catherine
Sferlazza
(“Sferlazza”),
and
Frank
DiCarlo
(“DiCarlo”) (collectively, “defendants”)
seeking a declaratory judgment that AAIC is
not obligated to indemnify or defend
SIPCOLLC against claims asserted by Gross
and Cerulli in an underlying state lawsuit 1
1
The suit is styled Maria Gross v. Marianna
Cerulli v. Security Income Planners & Co., LLC,
a/k/a SIPCO, Security Income Planners Co., Inc.
and Jay Hoffman, Index No. 005625/2010 and is
concerning the fraudulent activity of
defendant Hoffman, who was the president
of SIPCOLLC, as well as a declaratory
judgment that AAIC is not obligated to
indemnify or defend SIPCOLLC against any
lawsuits which may be filed in the future by
potential claimants who had investments
mishandled and/or defalcated by Hoffman.
Gross and Cerulli moved for summary
judgment seeking a declaration that AAIC
has an obligation to defend and pay the
claims asserted against SIPCOLLC by Gross
and Cerulli on the grounds that those claims
concern services rendered by Hoffman and
the negligence rendered by SIPCOLLC in
failing to implement usual and customary
business practices to avoid foreseeable
misdeeds. SIPCOLLC moved for partial
summary judgment seeking a declaration
that AAIC is obligated to defend
pending in the Supreme Court of the State of
New York, County of Nassau.
SIPCOLLC, and seeking attorneys’ fees.
AAIC, in turn, cross-moved for summary
judgment seeking a declaration that AAIC
has no duty to defend or indemnify
SIPCOLLC against claims relating to
Hoffman’s conduct on the grounds that
Hoffman’s conduct falls within several
exclusions to the AAIC policy.
the opposing party has pointed to no
evidence in the record to contradict it. 2
AAIC issued Independent Life Insurance
Agents Errors and Omissions Liability
insurance policy number ME07324731 for
the policy period from April 18, 2009 to
April 18, 2010, and named SIPCOLLC as
the insured. (G&C’s 3 56.1 ¶¶ 1, 2.) AAIC
asserts that Hoffman was also an insured
under the AAIC policy, but SIPCOLLC
disputes whether Hoffman was insured at
the time of his conduct. (Pl.’s 56.1 ¶ 1; Pl.’s
Response to G&C’s 56.1 ¶ 2; SIPCOLLC’s
Response to Pl.’s 56.1 ¶ 1.)
For the reasons set forth below, the
Court holds that AAIC has a duty to defend
against the claims asserted against
SIPCOLLC by Gross and Cerulli. The Court
refrains from determining whether AAIC
has a duty to indemnify SIPCOLLC for the
claims asserted by Gross and Cerulli
because it would be premature to do so.
Accordingly, the Court grants partial
summary judgment to Gross and Cerulli on
the duty to defend issue, but denies
summary judgment to Gross and Cerulli on
the duty to indemnify issue. The Court
grants SIPCOLLC’s partial motion for
summary judgment seeking a declaration
that AAIC is obligated to defend
SIPCOLLC against the claims asserted by
Gross and Cerulli, and awards SIPCOLLC
attorneys’ fees. The Court denies AAIC’s
cross-motion for summary judgment in its
entirety.
SIPCOLLC, a New York limited
liability company, was formed in 1999 by
Hoffman and Gary Hertzan (“Hertzan”).
(Pl.’s 56.1 ¶ 4, G&C’s 56.1 ¶¶ 3, 4.)
Hoffman was the president and Hertzan
acted as Chief Financial Officer. (Pl.’s 56.1
¶ 5.) Neil Himmelstein (“Himmelstein”)
joined as an “independent producer” of
insurance products, then became a partner of
SIPCOLLC in 2006 and held the title of
senior vice president. (Id. ¶¶ 6, 7.)
Hoffman was also the sole shareholder
of a separate entity known as SIPCOINC, an
inactive New York domestic corporation.
(SIPCOLLC’s 56.1 ¶ 5.) In 2005, Hoffman
began transferring the insurance licenses of
SIPCOINC to SIPCOLLC, which allowed
SIPCOLLC to offer insurance products as an
insurance broker and general agent. (Pl.’s
56.1 ¶ 10.)
I. BACKGROUND
A. Factual Background
The Court has taken the facts set forth
below from the parties’ depositions,
affidavits, and exhibits, and from the parties’
respective Rule 56.1 Statements of Facts.
Upon consideration of a motion for
summary judgment, the Court shall construe
the facts in the light most favorable to the
non-moving party. See Capobianco v. City
of New York, 422 F.3d 47, 50 (2d Cir. 2005).
Unless otherwise noted, where a party’s 56.1
Statement is cited, that fact is undisputed or
2
In addition, although the parties’ Rule 56.1
Statements contain specific citations to the
record to support their statements, the Court has
cited to the Rule 56.1 Statements, rather than the
underlying citation to the record, when utilizing
the 56.1 Statements for purposes of this
summary of facts.
3
The Court refers to Gross and Cerulli’s 56.1
statement as “G&C’s 56.1.”
2
In October 2009, the Securities and
Exchange Commission and the Suffolk
County District Attorney’s Office began
investigating SIPCOLLC in connection with
Hoffman’s handling of investments and
alleged fraud. 4 (Id. ¶ 11.) The District
Attorney eventually brought charges against
Hoffman, and on December 17, 2010,
Hoffman pled guilty to a 24-count
indictment, including 11 counts of seconddegree grand larceny, 11 counts of thirddegree grand larceny, and two counts of
scheme to defraud. (Id. ¶ 15.) At his plea
proceeding, Hoffman testified that between
January 1, 1989 through October 10, 2009,
he engaged in a scheme constituting a
systematic ongoing course of conduct with
the intent to defraud ten or more people by
false or fraudulent pretenses, representations
or promises, and obtained property from one
or more such persons, including Cerulli,
Greco, Gross, Sferlazza, and Sommaruga.
(Id. ¶ 16.) On January 3, 2011, Hoffman
was sentenced to a term of imprisonment of
twenty-eight months to seven years. (Id.
¶ 17.)
redeem, or alter other insurance-related
products to acquire certain fixed annuities.
(G&C’s 56.1 ¶¶ 11, 12.) On November 1,
2008, Hoffman issued a Statement of
Account to Gross reflecting the purchase of
her annuity from SIPCOLLC in the amount
of $50,000. (Id. ¶ 13.) That same day,
Hoffman issued a Statement of Account to
Cerulli reflecting the purchase of her annuity
from SIPCOLLC in the amount of $181,000.
(Id. ¶ 14.)
On October 14, 2009, SIPCOLLC filed
an action in the Supreme Court of the State
of New York, Suffolk County, styled
Security Income Planners & Co., LLC v.
Security Income Planners & Co., Inc., and
Jay Hoffman, Index No. 41348/2009. (Pl.’s
56.1 ¶ 18.) In the complaint, SIPCOLLC
alleges breach of fiduciary duty against
Hoffman, fraud, wrongful diversion of
funds, unjust enrichment, unauthorized
withdrawal and unlawful possession of
funds by Hoffman. (Id. ¶ 19.) On October
19, 2009, SIPCOLLC tendered its claim for
coverage under the AAIC policy in
connection with Hoffman’s actions. (Id. ¶
20.) On December 15, 2009, AAIC denied
SIPCOLLC’s claim based on various
provisions and exclusions of the AAIC
policy. (Id. ¶ 21.) SIPCOLLC does not seek
coverage for the claims asserted in that
lawsuit. (See Mem. of Law in Further
Support of Def. SIPCO, LLC’s Mot. for
Partial Summary Judgment and in Opp. to
Pl.’s Cross-Mot. for Summary Judgment at 1
n.1.)
During the investigation, it was
discovered that Hoffman deposited checks
from individuals made out to “Security
Income Planners” to SIPCOINC’s bank
account. (Id. ¶ 12.) Hoffman also issued
“Statements of Account,” which described
the terms of the investment including the
amount of money invested, the rate of
return, and the maturity date. (Id. ¶ 13.)
These statements were issued on
SIPCOLLC
letterhead,
SIPCOINC
letterhead, and without letterhead, and many
of them were unsigned. (Id.) In 2008 and
2009, Hoffman advised or recommended to
Gross and Cerulli that they should convert,
On October 19, 2009, counsel for
SIPCOLLC provided AAIC with notice of
claims and potential claims that it had
received
concerning
Hoffman.
(SIPCOLLC’s 56.1 ¶ 6.) The notice advised
AAIC that it had received claims from
Greco, Sferlazza, Sommaruga, and DiCarlo,
and advised that potential claims could be
brought by numerous other individuals. (Id.
4
SIPCOLLC denies that the pages referenced by
plaintiff establish that the investigation was of
SIPCOLLC. (SIPCOLLC’s Response to Pl.’s
56.1 ¶ 11.)
3
¶ 6.) AAIC disclaimed coverage for, and
refused to defend, SIPCOLLC against these
actual and potential future claims, and
commenced this declaratory judgment action
against SIPCOLLC. (Id. ¶¶ 7, 8.)
B. Procedural Background
Plaintiff filed the complaint in this action
on January 6, 2010. Sommaruga answered
the complaint on February 17, 2010. AAIC
voluntarily dismissed Frank DiCarlo on
February 19, 2010. AAIC filed an amended
complaint on March 18, 2010. AAIC
voluntarily dismissed defendants Jacqueline
Voliano and Michelle Peck on June 18,
2010. AAIC filed a second amended
complaint on June 22, 2010. Gross and
Cerulli filed an answer on July 20, 2010.
On March 22, 2010, Gross and Cerulli
filed a complaint in the Supreme Court of
the State of New York, Nassau County,
styled Maria Gross v. Marianna Cerulli v.
Security Income Planners & Co., LLC, a/k/a
SIPCO, Security Income Planners Co., Inc.
and Jay Hoffman, Index No. 005625/2010. 5
(Pl.’s 56.1 ¶ 50.) The complaint alleged
failure to pay Gross and Cerulli’s
investments
by
SIPCOLLC,
unjust
enrichment as against SIPCOINC, and
misrepresentation by Hoffman. (Id. ¶ 51.)
Gross filed a motion for summary judgment
in that action and included within her
moving
papers
an
affidavit
and
memorandum of law advising AAIC that she
would amend her complaint to assert
negligence-based
claims
against
SIPCOLLC. (SIPCOLLC’s 56.1 ¶¶ 11, 12.)
AAIC filed motions for entry of default
judgment against Hoffman on January 6,
2011 and against Greco, DiCarlo, and
Sferlazza on March 8, 2011. On August 30,
2011, the Court denied the motions for entry
of default as to Hoffman, Greco, Sferlazza,
and DiCarlo without prejudice to re-filing
the motions once the claims against the nondefaulting defendants have been resolved.
Gross and Cerulli filed a motion for
summary judgment on June 6, 2011.
SIPCOLLC filed a motion for partial
summary judgment on June 20, 2011. On
August 5, 2011, AAIC filed a cross-motion
for summary judgment, including a
memorandum of law in support of the crossmotion for summary judgment and a
memorandum of law in opposition to
defendants’ motions for summary judgment.
On September 15, 2011, Gross and Cerulli
filed a reply memorandum of law in support
of their motion for summary judgment and
in opposition to plaintiff’s cross-motion. On
October 6, 2011, SIPCOLLC filed a reply
memorandum of law in support of its motion
for partial summary judgment and in
opposition to plaintiff’s cross-motion. On
October 18, 2011, AAIC filed a reply
memorandum in support of its cross-motion.
The Court has fully considered the
submissions of the parties.
Gross and Cerulli then filed a motion to
amend their complaint in the underlying
lawsuit against SIPCOLLC. (SIPCOLLC’s
Response to Pl.’s 56.1 ¶ 70.) The proposed
amended verified complaint asserted claims
for negligence, negligent training and
supervision, and breach of fiduciary duty.
(Id. ¶ 71.) On November 28, 2011, Nassau
County Supreme Court Judge Ira B.
Warshawsky granted the motion to amend
the complaint. (Letter from William J.
O’Mahoney to Hon. Joseph F. Bianco, Dec.
1, 2011, ECF No. 153.)
5
SIPCOLLC denies this paragraph, citing the
proposed amended verified complaint in the
underlying state action. (SIPCOLLC’s Response
to Pl.’s 56.1 ¶ 50.) As discussed infra, the Court
has considered the amended complaint in
connection with this motion.
4
II. STANDARD OF REVIEW
facts . . . . [T]he nonmoving party must
come forward with specific facts showing
that there is a genuine issue for trial.’”
Caldarola v. Calabrese, 298 F.3d 156, 160
(2d Cir. 2002) (quoting Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 586-87, 106 S. Ct. 1348, 89 L. Ed. 2d
538 (1986) (emphasis in original)). As the
Supreme Court stated in Anderson, “[i]f the
evidence is merely colorable, or is not
significantly probative, summary judgment
may be granted.” Anderson, 477 U.S. at
249-50, 106 S. Ct. 2505 (citations omitted).
Indeed, “the mere existence of some alleged
factual dispute between the parties” alone
will not defeat a properly supported motion
for summary judgment. Id. at 247-48, 106
S. Ct. 2505 (emphasis in original). Thus, the
nonmoving party may not rest upon mere
conclusory allegations or denials but must
set forth “‘concrete particulars’” showing
that a trial is needed. R.G. Group, Inc. v.
Horn & Hardart Co., 751 F.2d 69, 77 (2d
Cir.1984) (quoting SEC v. Research
Automation Corp., 585 F.2d 31, 33 (2d Cir.
1978)). Accordingly, it is insufficient for a
party opposing summary judgment “‘merely
to assert a conclusion without supplying
supporting arguments or facts.’” BellSouth
Telecomms., Inc. v. W.R. Grace & Co., 77
F.3d 603, 615 (2d Cir. 1996) (quoting
Research Automation Corp., 585 F.2d at
33).
The standards for summary judgment are
well settled. Pursuant to Federal Rule of
Civil Procedure 56(a), a court may only
grant a motion for summary judgment if
“the movant shows that there is no genuine
dispute as to any material fact and the
movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a). The moving
party bears the burden of showing that he or
she is entitled to summary judgment.
Huminski v. Corsones, 396 F.3d 53, 69 (2d
Cir. 2005). “A party asserting that a fact
cannot be or is genuinely disputed must
support the assertion by: (A) citing to
particular parts of materials in the record,
including
depositions,
documents,
electronically stored information, affidavits
or declarations, stipulations (including those
made for purposes of the motion only),
admissions, interrogatory answers, or other
materials; or (B) showing that the materials
cited do not establish the absence or
presence of a genuine dispute, or that an
adverse party cannot produce admissible
evidence to support the fact.” Fed. R. Civ.
P. 56(c)(1). The court “is not to weigh the
evidence but is instead required to view the
evidence in the light most favorable to the
party opposing summary judgment, to draw
all reasonable inferences in favor of that
party,
and
to
eschew
credibility
assessments.” Amnesty Am. v. Town of W.
Hartford, 361 F.3d 113, 122 (2d Cir. 2004)
(quoting Weyant v. Okst, 101 F.3d 845, 854
(2d Cir. 1996)); see Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct.
2505, 91 L. Ed. 2d 202 (1986) (summary
judgment is unwarranted if “the evidence is
such that a reasonable jury could return a
verdict for the nonmoving party”).
III. DISCUSSION
A. Applicable Law
Under New York law, an insurer has an
“exceedingly broad” duty to defend the
insured. Auto. Ins. Co. of Hartford v. Cook,
7 N.Y.3d 131, 137 (2006) (citations
omitted). The duty to defend is broader than
the duty to indemnify. See Seaboard Surety
Co. v. Gillette Co., 64 N.Y.2d 304, 310
(1984) (“Where an insurance policy includes
the insurer’s promise to defend the insured
Once the moving party has met its
burden, the opposing party “‘must do more
than simply show that there is some
metaphysical doubt as to the material
5
the insurer is required to defend the entire
action.” Id.
against specified claims as well as to
indemnify for actual liability, the insurer’s
duty to furnish a defense is broader than its
obligation to indemnify.”); Fitzpatrick v.
Am. Honda Motor Co., 78 N.Y.2d 61, 65
(1991) (“an insurer may be contractually
bound to defend even though it may not
ultimately be bound to pay, either because
its insured is not factually or legally liable or
because the occurrence is later proven to be
outside the policy’s coverage”).
“Insurance policies are contracts to
which the ordinary rules of contractual
interpretation apply.” Accessories Biz, Inc.
v. Linda & Jay Keane, Inc., 533 F. Supp. 2d
381, 386 (S.D.N.Y. 2008). New York
insurance contracts are construed in light of
“common speech.” Ace Wire & Cable Co. v.
Aetna Cas. & Sur. Co., 60 N.Y.2d 390, 398
(1983). Insurance contracts must also be
interpreted “according to the reasonable
expectations and purposes of ordinary
businessman when making an ordinary
business contract.” GMAC v. Nationwide
Ins. Co., 4 N.Y.3d 451, 457 (2005)
(quotations
and
citations
omitted).
Ambiguous terms in a policy “must be
construed in favor of the insured and against
the insurer.” White v. Cont’l Cas. Co., 9
N.Y.3d 264, 268 (2007).
“[A]n insurer will be called upon to
provide a defense whenever the allegations
of the complaint suggest . . . a reasonable
possibility of coverage.” Auto. Ins. Co. of
Hartford, 7 N.Y.3d at 137 (citations
omitted); see Fitzpatrick, 78 N.Y.2d at 65
(“This Court has repeatedly held that an
insurer’s duty to defend its insured arises
whenever the allegations in a complaint state
a cause of action that gives rise to the
reasonable possibility of recovery under the
policy.”). An insurer has a duty to defend a
claim against its policy holder unless it can
“establish, as a matter of law, that there is no
possible factual or legal basis on which the
insurer might eventually be obligated to
indemnify [the insured] under any provision
contained in the policy.” Villa Charlotte
Bronte, Inc. v. Commercial Union Ins. Co.,
64 N.Y.2d 846, 848 (1985). An insurer who
seeks to be relieved of the duty to defend
based on a policy exclusion “bears the heavy
burden of demonstrating that the allegations
of the complaint cast the pleadings wholly
within that exclusion, that the exclusion is
subject to no other reasonable interpretation,
and that there is no possible factual or
legal basis upon which the insurer may
eventually be held obligated to indemnify
the insured under any policy provision.”
Frontier Insulation Contrs. v. Merchants
Mut. Ins. Co., 91 N.Y.2d 169, 175 (1997).
Further, “[i]f any of the claims against the
insured arguably arise from covered events,
B. Duty to Defend
Gross and Cerulli’s initial complaint in
Nassau County Supreme Court against
SIPCOLLC alleged failure to pay Gross and
Cerulli’s investments by SIPCOLLC, unjust
enrichment as against SIPCOINC, and
misrepresentation by Hoffman. Gross and
Cerulli moved to amend their complaint to
assert additional claims. On November 28,
2011, Nassau County Supreme Court Judge
Ira B. Warshawsky granted Gross and
Cerulli’s motion to amend the complaint.
The amended complaint asserts claims for
negligence,
negligent
training
and
supervision, and breach of fiduciary duty.
The amended complaint from the state
action is now properly considered by this
Court in connection with the issues on
summary judgment.
AAIC argues that the “Commingling,
Misappropriation or Conversion” Exclusion
(“Commingling
Exclusion”)
or
the
6
issue provide coverage for negligent
supervision claims arising from intentional,
fraudulent, or criminal acts. For example, in
Bistricer v. Fed. Ins. Co., 02 Civ. 5366
(JSR), 2003 U.S. Dist. LEXIS 17227
(S.D.N.Y. Sept. 30, 2003), the Court held
that an “improper profit” policy exclusion
did not apply to a negligence claim.
Specifically, the policy stated that the
insurer “shall not be liable” for “[l]oss on
account of any Claim made against any
Insured Person: . . .(c) based upon, arising
from, or in consequence of such Insured
Person having gained in fact any personal
profit, remuneration or advantage to which
such Insured Person was not legally
entitled.” Id. at *9. The underlying action
involved allegations that executives of a
company had improperly diverted more than
$3 million in inventory and accounts
receivable to other entities they controlled.
Although most of the claims brought in the
underlying action alleged that “plaintiffs had
committed a dishonest act for their own
personal benefit,” the complaint also
asserted a negligent supervision claim. Id.
The court held that plaintiffs were not
entitled to indemnification for the claims
relating to the “dishonest act,” but that
plaintiffs were entitled to “coverage” and
defense with respect to the negligent
supervision claim, since “neither dishonesty
nor personal profit are elements of the
alleged negligence.” Id. at *11. Similarly, in
the case at bar, the negligent supervision
claim is based on SIPCOLLC’s failure to
train, manage, or supervise its agents.
Improper personal profit by SIPCOLLC is
not an element of the alleged negligence, nor
is commingling, misappropriation, or
conversion of funds an element of such a
claim.
“Improper Personal Profit” Exclusion
(“Improper
Profit
Exclusion”)
bar
defendants’ claims, including the negligent
supervision and breach of fiduciary duty
claims. The Commingling Exclusion states:
We shall not be liable to make any
payment for Loss in connection with
any Claim:
K. Based upon, arising out of . . . 3.
Any commingling, misappropriation
or conversion of funds.
(Declaration of Anthony W. Cummings in
Support of Defendants Gross and Cerulli’s
Motion (the “Cummings Decl.”) at Ex. A.)
The Improper Profit Exclusion states:
We shall not be liable to make any
payment for Loss in connection with
any Claim:
B. Based upon or arising out of any
Insured gaining in fact any personal
profit or advantage to which such
Insured was not legally entitled.
(Cummings Decl. at Ex. A.) AAIC argues
that
Hoffman’s
actions
meet
the
requirements set forth in these two
Exclusions. Specifically, AAIC notes that
the loss sought by Gross and Cerulli is the
repayment of the $50,000 and $181,000
loans, plus interest, which Hoffman
allegedly misappropriated and which he
illegally profited from. AAIC contends that
if SIPCOLLC is found liable to repay Gross
and Cerulli due to its negligence, the
“Commingling” Exclusion and the “Illegal
Personal Profit” Exclusion would bar
coverage because the two loans arise
directly from Hoffman’s misappropriation
and his illegal profit.
Defendants cite several other cases in
which the court found a duty to defend
where the underlying complaint alleged
negligence or negligent supervision.
Defendants argue that New York courts
hold that policies similar to the policy at
7
that the allegations in the underlying
complaint that plaintiffs’ law firm
negligently hired and supervised an attorney
who purportedly made sexual advances to a
client, fall within the type of errors and
omissions coverage provided by defendant’s
professional liability insurance policy.”)
Although none of these cases specifically
address whether the policies at issue had a
Commingling Exclusion or an Improper
Profit Exclusion, and why the alleged
conduct did not fall within these exclusions,
the reasoning in these decisions still applies,
and is persuasive. Specifically, although
Hoffman’s conduct was intentional and
fraudulent, the claim against SIPCOLLC for
negligent supervision does not allege that
SIPCOLLC gained any improper personal
profit through its failure to supervise, or that
SIPCOLLC
improperly
commingled,
misappropriated, or converted funds.
Similarly, in Murphy v. Nutmeg Ins. Co.,
5 A.D.3d 358, 360 (N.Y. App. Div. 2004),
the court held that the insurer was required
to defend plaintiff against RICO violations,
breach of fiduciary duty, and negligence
claims, “as long as there remains a pending
claim sounding in negligence, since the
allegations set forth in that claim for relief
fall within the scope of risks covered by the
subject policy.” Id. The insurance policy
excluded coverage for, “among other things,
dishonest, fraudulent, and criminal or
malicious acts of the insured, as well as acts
arising out of an insured’s activities in a
fiduciary capacity.” Id. at 360. Because
plaintiffs brought the negligence claim in
addition to the other claims, and because
negligence was covered by the policy, the
insurer was required to defend and
indemnify the insured. Thus, even though
the same actors had engaged in conduct
prohibited by the policy in addition to
negligent conduct, the insurer still had a
duty to defend. In the instant action, the
negligent supervision claim is further
removed because it is brought against
SIPCOLLC, not against Hoffman.
For example, in Watkins Glen Cent. Sch.
Dist. v. Nat’l Union Fire Ins. Co., 286
A.D.2d 48 (N.Y. App. Div. 2001), the
school district was sued for negligent
supervision after one of its teachers
allegedly committed criminal acts of sexual
abuse against students while he was
employed as a teacher. Id. at 50. The insurer
disclaimed coverage, pursuant to two policy
exclusions for claims arising from assault
and battery, and bodily injury and emotional
distress. Id. The Appellate Division, Second
Department, held that the insurer was
obligated to provide the school district with
defense and indemnification for its potential
liability for the alleged negligent
supervision. Id. at 55. The court noted,
“[w]hile [the teacher] may have acted
intentionally in perpetrating the sexual
assaults against the two plaintiff students in
the underlying action, liability as against the
School District is predicated upon its
conceptually
independent
negligent
supervision.” Id. at 54. Similarly, while
Hoffman may have acted intentionally in
engaging in the fraudulent conduct, liability
as to SIPCOLLC is “predicated upon its
conceptually
independent
negligent
supervision” of Hoffman. See id.; see also
Gladstein & Isaac v. Philadelphia Indem.
Ins. Co., 82 A.D.3d 468, 468 (N.Y. App.
Div. 2011) (“The court properly determined
That AAIC has a duty to defend where
the complaint alleges a claim sounding in
negligence is supported by additional cases
in New York courts. See, e.g., Westport Ins.
Corp. v. Hamilton Wharton Grp., Inc., 10
Civ. 2188 (RMB)(THK), 2011 U.S. Dist.
LEXIS 20535, at *12-13 (S.D.N.Y. Feb. 23,
2011) (Insurer “has a duty to defend
[insured] in the State Actions because at
least one, if not more, of the claims alleged
in the State Actions, i.e., negligence in the
8
performance of professional services and/or
breach of contract, present a reasonable
possibility of coverage under the Policy.”);
Napoli, Kaiser & Bern, LLP v. Westport Ins.
Corp., 295 F. Supp. 2d 335, 341 (S.D.N.Y.
2003) (“The complaints against [the insured]
primarily allege intentional and fraudulent
conduct. But there remains a reasonable
possibility that [the insured] will be found
liable for conduct covered by the policy.
[The insured] may be found liable for
breach of fiduciary duty based on its
allegedly negligent conduct of the settlement
negotiations and its negligent failure to
contact certain referred clients, all of which
damaged the referred clients and referring
firms.”). 6
supporting authority in New York, AAIC
relies heavily on Nat’l Union Fire Ins. Co. v.
AARPO Inc., 97 Civ. 1438 (JSM), 1999 U.S.
Dist. LEXIS 181 (S.D.N.Y. Jan. 14, 1999).
AAIC contends that AARPO stands for the
proposition that New York “public policy
militates against a rule allowing a plaintiff to
impel a defendant’s insurance carrier to
provide a costly defense for intentional
culpable conduct that [the insurer] expressly
excluded from coverage, simply by adding a
claim of negligence.” Id. at *14. In AARPO,
plaintiffs filed a complaint detailing a
massive campaign of fraud “knowingly
conceived and deliberately executed” by the
defendants. Id. at *4. Nine months after
filing the complaint, plaintiffs filed an
amended complaint that added a claim for
relief for “negligent misrepresentation.” Id.
Plaintiffs
alleged
that
“to
the
extent . . . defendants did not know that [the
submitted] information was false and
misleading, they breached their duties and
were
negligent
in
making
false
representations and providing misleading
and incomplete statements to plaintiffs.” Id.
at *4-5. Defendants demanded that the
insurer defend and indemnify them, but the
insurer disclaimed coverage on the grounds
that the policy provided coverage only for
“negligent acts, errors or omissions” and
excluded from coverage “any dishonest,
fraudulent, criminal or malicious act.” Id. at
*5. The court ruled in favor of the insurer,
holding that it was not required to defend or
indemnify defendants against the claims.
The court relied on the policy rationale that
entities “applying for liability insurance to
protect themselves from claims of
negligence would no doubt be distressed to
think they should be sharing the costs of
defending those accused of perpetrating a
massive criminal fraud simply because the
plaintiff added a last-minute allegation of
negligence wholly at odds with the factual
assertions of the complaint.” Id. at *12-13.
AAIC points to a Sixth Circuit case and
a case from an intermediate appellate court
in Georgia to support its argument that it has
no duty to defend against Gross and
Cerulli’s negligent supervision claim
because the claim falls within the
Commingling
or
Improper
Profit
Exclusions. See Northland Ins. Co. v.
Stewart Title Guar. Co., 327 F.3d 448, 457
(6th Cir. 2003); Fid. Nat’l Title Ins. Co. v.
OHIC Ins. Co., 275 Ga. App. 55 (Ct. App.
2005). Needless to say, these cases do not
set forth the law in New York. For
6
SIPCOLLC also argues that the Improper
Profit Exclusion does not apply to Hoffman
because there is a factual dispute as to whether
Hoffman was an “Insured” at the time of his
conduct. (Mem. of Law in Further Support of
SIPCOLLC’s Mot. for Partial Summary
Judgment and in Opp. to Pl.’s Cross-Mot. for
Summary Judgment at 12.) The Court need not
address this argument because SIPCOLLC was
indisputably an “Insured” under the AAIC
policy, and the basis for the Court’s holding that
AAIC has a duty to defend is that SIPCOLLC’s
alleged negligent supervision of Hoffman did
not cause SIPCOLLC to improperly profit.
Whether Hoffman was insured at the time of his
conduct is not relevant to that determination.
9
defend SIPCOLLC from these yet-to-befiled lawsuits.
The court further noted that “[p]laintiffs do
not seriously contend that the millions of
dollars of losses they suffered resulted
merely from some innocent, though
negligent conduct of the defendants.” Id. at
*11.
C. Duty to Indemnify
AAIC seeks a declaratory judgment that
it has no duty to indemnify SIPCOLLC for
the claims asserted against it by Gross and
Cerulli and by future claimants. Gross and
Cerulli seek a declaratory judgment that
AAIC must indemnify SIPCOLLC for those
same claims. The Court denies summary
judgment to both parties on this claim. It is
premature for the Court to determine
whether or not AAIC has a duty to
indemnify SIPCOLLC because the issue of
indemnification necessarily depends on facts
that will be decided in the underlying state
action.
Although the public policy rationale
expressed in AARPO is correct, the case here
is factually distinguishable. In AARPO,
plaintiffs added a negligence claim that was
“wholly at odds with the factual assertions
of the complaint” because it was implausible
that plaintiffs could have negligently
perpetrated the alleged massive fraud. Id. at
*13. In the case at bar, by contrast, plaintiff
alleges fraud on the part of Hoffman, and
negligent supervision by SIPCOLLC.
Without evaluating the strength of the
negligent supervision claim, it is clear, at the
least, that the claims are not “wholly at
odds” from each other.
“‘An action to declare the insurer’s duty
to indemnify is premature and does not lie
where the complaint in the underlying action
alleges several grounds of liability, some of
which invoke the coverage of the policy, and
where the issues of indemnification and
coverage hinge on facts which will
necessarily be decided in that underlying
action.’” Specialty Nat’l Ins. Co. v. English
Bros. Funeral Home, 606 F. Supp. 2d 466,
472 (S.D.N.Y. 2009) (quoting Hout v.
Coffman, 126 A.D.2d 973, 973 (N.Y. App.
Div. 1987)); see Westport Ins. Corp., 2011
U.S. Dist. LEXIS 20535, at *15 (insurer’s
“duty to indemnify [insured] necessarily
depends on the resolution of one or more
issues to be determined in the State Actions
and is, therefore premature”); Murphy, 5
A.D.3d at 360 (denying summary judgment
on claim that insurer was required to
indemnify insured because “there are triable
issues of fact with respect to the plaintiffs’
negligence in the underlying action”);
Spodek v. Liberty Mut. Ins. Co., 155 A.D.2d
439, 441 (N.Y. App. Div. 1989) (issue of
insurer’s duty to indemnify was “raised
Accordingly, because New York courts
hold that negligence or negligent
supervision claims arising from fraudulent
or intentional acts are not excluded by
insurance policies similar to the policy at
issue, the negligent supervision allegation
set forth in Gross and Cerulli’s amended
complaint
suggests
a
“reasonable
possibility” of coverage. See Auto. Ins. Co.
of Hartford, 7 N.Y.3d at 137. Thus, this
Court grants partial summary judgment to
defendants and holds that AAIC has a duty
to defend SIPCOLLC against the claims
asserted by Gross and Cerulli.
As to future potential claimants seeking
recovery for damages arising from
Hoffman’s actions, the Court denies
summary judgment to AAIC on the grounds
that such a determination is premature.
Potential claimants have not yet articulated
the claims, if any, that they may assert
against SIPCOLLC. Thus, the Court cannot
yet determine whether AAIC has a duty to
10
declaratory judgment action. 7 The Court has
held that AAIC has a duty to defend
SIPCOLLC in the underlying action asserted
by Gross and Cerulli. Accordingly,
SIPCOLLC is entitled attorneys’ fees
incurred in defending the instant action.
prematurely” because it required “resolution
of the underlying claim”).
In the instant action, SIPCOLLC’s
liability for Hoffman’s actions and for
SIPCOLLC’s alleged negligent supervision
hinges on facts that have not yet been
determined. Accordingly, the Court denies
summary judgment to AAIC and to Gross
and Cerulli on the portion of their claims
concerning AAIC’s duty to indemnify
SIPCOLLC.
D. Attorneys’ Fees
Under New York law, “an insured who
prevails in an action brought by an insurance
company seeking a declaratory judgment
that it has no duty to defend or indemnify
the insured may recover attorneys’ fees.”
U.S. Underwriters Ins. Co. v. City Club
Hotel, LLC, 3 N.Y.3d 592, 598 (2004); see
Mighty Midgets, Inc. v. Centennial Ins. Co.,
47 N.Y.2d 12, 21 (1979). Where the
“expenses incurred by [the insured] in
defending against the declaratory judgment
action arose as a direct consequence of [the
insurer’s] unsuccessful attempt to free itself
of its policy obligations, [the insured] is
entitled to recover those expenses from the
insurer.” U.S. Underwriters Ins. Co., 3
N.Y.3d at 598; see Westport Ins. Corp.,
2011 U.S. Dist. LEXIS 20535, at *18
(“[Insurer] has cast [insured] in a ‘defensive
position’ in this declaratory judgment action
which seeks to free [insurer] from its policy
obligation to defend and indemnify [insured]
in the State Actions. Since the Court has
determined that [insurer] does have a duty to
defend and may have a duty to indemnify
(depending upon the resolution of fact issues
in the State Actions), [insured] ha[s]
prevailed on the merits for the purpose of
obtaining legal fees.”).
7
AAIC argues that SIPCOLLC should not be
found to have been in a defensive posture with
respect to the action SIPCOLLC filed against
SIPCOINC and Hoffman in Suffolk County
Supreme Court (Security Income Planners &
Co., LLC v. Security Income Planners & Co.,
Inc., and Jay Hoffman, Index No. 41348/2009),
because SIPCOLLC is the plaintiff in that
action. The Court need not address this issue
since SIPCOLLC does not seek coverage for the
claims asserted in the lawsuit against SIPCOINC
and Hoffman.
AAIC has cast SIPCOLLC into a
defensive posture by pursuing this
11
III. CONCLUSION
For the foregoing reasons, the Court
grants partial summary judgment to Gross
and Cerulli on the duty to defend issue, but
denies summary judgment to Gross and
Cerulli on the duty to indemnify issue. The
Court grants SIPCOLLC’s partial motion for
summary judgment seeking a declaration
that AAIC is obligated to defend
SIPCOLLC against the claims asserted by
Gross and Cerulli, and awards SIPCOLLC
attorneys’ fees. The Court denies AAIC’s
cross-motion for summary judgment in its
entirety.
SO ORDERED.
______________________
JOSEPH F. BIANCO
United States District Judge
Dated: March 22, 2012
Central Islip, NY
***
AAIC is represented by Concepcion A.
Montoya and Douglas A. Johns, Hinshaw &
Culbertson LLP, 780 Third Avenue
4th Floor, New York, NY 10017.
SIPCOLLC and SIPCOINC are represented
by Richard J. Quadrino and William J.
O’Mahony, Quadrino & Schwartz, 666 Old
Country Road, 9th Floor, Garden City, NY
11530. Gross and Cerulli are represented by
Martin P. Unger and Anthony W.
Cummings, Certilman, Balin, Adler &
Hyman, LLP, 90 Merrick Avenue, East
Meadow,
NY
11554.
Christopher
Sommaruga is pro se, 385 Moriches Road,
St. James, NY 11780.
12
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