Insurance Companies May Not Blindly Rely On Statements Made By A Potential Insured When Issuing Policies
January, 2010
In Ispat Inland, Inc. v. Kemper Environmental LTD., 2009 U.S. Dist. Lexis 10863 (2009), Plaintiff, Ispat Inland ("Ispat"), operated a steel-making facility in East Chicago, Indiana since the early 1900s. In 1993, Ispat entered into a consent decree with the U.S. Environmental Protection Agency following Ispat's release of hazardous substances into waters of Lake Michigan. Under this decree, Ispat agreed to establish a $19 million reserve fund for a supplemental environmental project which would be used to dredge a shipping canal in Lake Michigan. Id. at 2. In October, 1993, Ispat received a letter from various governmental agencies, including the Department of the Interior, but not the EPA, informing Ispat that they had performed a pre-assessment screen and identified Ispat as a potentially responsible party for environmental damage of the river harbor. The letter further informed Ispat that these agencies intended to perform a natural resource damage assessment pursuant to 43 C.F.R § 11 and invited Ispat to participate in the assessment, as well as requested Ispat to fund all phases of the assessment. Id. at 3.
On May 27, 1998, Ispats' corporate parent, Ryerson Tull, Inc.("Ryerson"), sold Ispat to Ispat International. As part of the sale, Ryerson was required to obtain environmental liability insurance. Kemper Environmental LTD ("Kemper"), issued a policy to Ryerson, Ispat and Ispat International as named insureds. The Policy became effective on July 16, 1998. Id.
In January, 2005, Ispat, along with eight other corporations that were involved with the assessment of the river harbor, reached an agreement whereby Ispat agreed to pay $8,300,940.00 in environmental clean up costs. The $19 million reserve which Ispat created was not part of this settlement. Ispat presented this claim to Kemper in accordance with the Policy. Kemper denied the claim and Ispat filed suit.
Kemper argued that it was not liable for payment because: (1) Ispat fraudulently induced Kemper to issue the Policy by representing that Ispat would receive a $19 million credit; (2) the letter from the government agencies constituted a claim which was received before the Policy came into effect; (3) Ispat did not meet the minimum spending limit under the Policy; and (4) "the Policy precludes coverage because it constitutes damages, administrative fines, or penalties." Id. at 6. Kemper did raise additional arguments.
As to the fraudulent inducement argument, Kemper asserted that Ispat advised Kemper that it would receive a $19 million credit pursuant to an agreement it had with the EPA. Kemper relied on the following exclusionary Policy language: "Exclusion 7 excludes from coverage under the Policy conditions known by Ispat prior to the Policy period and arising from pollution conditions, unless ‘all of the material facts relating to [it] were disclosed to [Kemper] in the application and other supplemental materials . . . and information prior to the inception of th[e] Policy." Id. at fn. 3. Ispat argued that it informed Kemper that the reserve it established with the EPA might not be applied and that it merely hoped it would apply.
To perfect a claim for fraud in New York, the moving party must show: "(1) the knowing or reckless misrepresentation of a material fact; (2) that such misrepresentation was intended to induce a party's reliance; and (3) that the party relied on the misrepresentation and thereby suffered damages. A party claiming fraud by omission must also show that the other party had a duty to disclose the fact at issue." Id. at 9 (citation omitted). The reliance on the representations or omissions by another party must be reasonable to sustain a claim. Id. When considering the reasonableness of a party's reliance, the court must consider the "entire context of the transaction, including factors such as complexity and magnitude, the sophistication of the parties, and the content of any agreements between them." Id. (citation omitted). Claim for fraud will not succeed where a party has been put on notice of the existence of material facts which have not been documented and nevertheless proceeds with a transaction without inserting appropriate language in the agreement for his protection. Id. Reliance in such circumstances is not reasonable because it is the party's own evident lack of due care which is responsible for his predicament. Id.
The Court held that any reliance by Kemper on statements by Ispat was unreasonable. Id. The Court reasoned that both parties were clearly sophisticated business entities. The Policy called for premiums amounting to $1.4 million with complicated issues. Id. Kemper knew of the $19 million reserve created by Ispat and the notice Ispat was given by various governmental agencies regarding potential responsibility of environmental damages. Id. Ispat made Kemper aware of the potential issues by turning over paper work indicating that the $19 million reserve was an agreement with the EPA and that it was on notice by other governmental agencies. Id. Kemper conceded that it did not conduct independent investigations regarding the veracity of Ispat's representations. The Court held that even if the Policy stated that Kemper was entitled to rely on Ispat's representations, a party cannot reasonably rely on representations that it had reason to know are false or it accepted with knowing blindness. Id. at 14. Kemper should have conducted its own investigation into the potential liability of Ispat and the veracity of its statements before issuing the Policy. Id. The Court further held that the letter received by Ispat merely invited Ispat to participate in the assessment process and that while Ispat was requested to fund all stages of the assessment, in no way was Ispat threatened with any consequences if Ispat declined to participate and or fund the assessment. Id.
Kemper also argued that Ispat was put on notice of a claim against it before the Policy was issued. The Policy only covered claims made between July 16, 1998, and July 16, 2003. Id. at 14. Ispat received a letter from the various governmental agencies regarding its potential liability in October, 1996. Kemper argued that the Second Circuit has interpreted a "claim" as an assertion by a third-party that in the opinion of that party the insured may be liable to it for damages. Id. at 17. The Court held that the letter was not notice of a claim, but rather "merely invited Ispat to participate in the assessment process; it did not compel or seek to compel Ispat to conduct clean up efforts or pay damages." Id. The Court also addressed the other issues raised and ultimately granted Ispat's Motion and denied Kemper's Motion.
Learning Point
In New York, when negotiating terms of an insurance contract, it is incumbent on an insurance company to exercise reasonable care in investigating the veracity of representations made by a potential insured, including whether in fact a potential insured was properly placed on notice of a claim before the commencement date of the policy.
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