Ruling in Favor of Policyholder, Southern District of New York Emphasizes Importance of Trust in Insurance Contracts

December 16, 2020, Covington Alert

On November 10, 2020, a New York federal court dismissed an insurer’s counterclaims that sought to estop a policyholder from recovering sums in excess of a policy sublimit that the insurer had allegedly procured through inequitable conduct. Pilkington North Am., Inc. v. Mitsui Sumitomo Ins. Co. of Am., 18 Civ. 8152 (JFK), No. 175 (S.D.N.Y. Nov. 10, 2020). The court emphasized the unique importance of policyholders’ trust in their insurance companies in dismissing the insurer’s counterclaims. In this alert, we explain what the court decided and the implications of the court’s ruling for policyholders.

Pilkington North America was insured by Mitsui Sumitomo Insurance Company of America (MSI) for property damage and business interruption losses. Pilkington purchased the policy through its insurance broker, Aon Risk Services Central, Inc. After a tornado struck its Illinois glass-making factory in 2017 and caused tens of millions of dollars in losses, Pilkington filed a claim under its MSI policy. Although the policy’s limit exceeded $300 million, MSI denied coverage for all loss in excess of $15 million, based on a sublimit for windstorm-related losses that MSI had recently altered in a mid-policy-term endorsement.

Pilkington has alleged that MSI obtained this expanded sublimit through inequitable means, including by inserting it in a policy endorsement that MSI repeatedly characterized as making mere technical edits or revisions to currency valuations. Pilkington brought contract and equitable claims against MSI and Aon to recover the portion of its loss in excess of $15 million. MSI asserted a counterclaim for equitable estoppel, which sought to block Pilkington from seeking relief above the contested sublimit, as well as a counterclaim for declaratory judgment, which sought to establish the party’s rights and obligations. Pilkington moved to dismiss both counterclaims.

The court dismissed both counterclaims with prejudice on multiple, independent grounds. On the equitable estoppel counterclaim, the court held that MSI was not entitled to relief because (1) MSI did not allege any facts indicating an actionable misrepresentation by or on behalf of Pilkington; (2) MSI failed to plausibly allege unfair prejudice; and (3) MSI’s estoppel claim was barred by the equitable defense of “unclean hands.”

As to the first point, the court concluded that Pilkington’s attempt to reform a sublimit allegedly procured through fraud or impropriety could not “retroactively” render Pilkington’s putative acceptance of that contract term a “false” representation. As to the second point, the court held that MSI was not at risk of suffering unfair prejudice: if Pilkington were to succeed in establishing improper conduct by MSI that would justify the relief of reforming or not enforcing the revised sublimit, then MSI could hardly claim to be “aggrieved.”

Finally, the court invoked the doctrine of unclean hands to dismiss MSI’s equitable estoppel counterclaim. The court explained that “insurance contracts involve unique promises, including an element of trust from a policyholder to its insurer—here, Pilkington’s trust that if it paid an agreed-upon premium to MSI every year, MSI would indemnify Pilkington for certain losses which may or may not arise.” Yet that trust was being tested in the case at bar. Because MSI’s liability depends on Pilkington proving one or more of its affirmative claims, MSI will necessarily have been found to have acted improperly if it is adjudged liable; in that scenario, MSI’s own counterclaim for equitable estoppel would necessarily be barred by the insurer’s unclean hands.

The court also rejected MSI’s counterclaim for declaratory relief, finding it redundant in light of Pilkington’s affirmative request for a declaration of the rights of all parties. The court dismissed both counterclaims with prejudice because granting leave to amend would be futile.

The dismissal of MSI’s counterclaims reaffirms the importance of trust and forthright conduct by insurers.

When endorsing or renewing a policy, if an insurer seeks to scale back its promise to cover insurable losses through policy limits or exclusions, it ought not downplay or mislead about the effect of those policy terms. Such deceit or lack of candor may abuse the policyholder’s “trust that if it pa[ys] an agreed-upon premium,” its insurer will “indemnify [it] for certain losses” if they arise. And while inequitably procured coverage limitations may draw out the adjustment process and engender litigation, such limitations may not ultimately insulate the insurer from coverage liability.

Likewise, although claims handling was not squarely before the court in this ruling, it follows that at the claims-handling stage, too, insurer honesty and fair dealing are also critical. Although insurance companies generally get paid premiums year in and year out, their obligation to cover the policyholder turns on “losses which,” as the court here noted, “may or may not arise.” For this reason, when such losses do arise, there is an “element of trust” on the part of the policyholder that its insurance company will step up. Insurance companies must diligently investigate losses, fairly and honestly evaluate possible bases for coverage, inform policyholders of coverage decisions and provide explanations for the same, and promptly make coverage payments when liability becomes clear. Anything less falls short of the promise the insurer makes and the trust the policyholder places in its insurer when it purchases insurance coverage.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Insurance Recovery practice.