Burke v. Rhoads

81 N.Y.S. 1045

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: April 24, 1903
• Status: Published

Opinions

HATCH, J.

We agree with the disposition of the demurrer made by the learned court at Special Term (79 N. Y. Supp. 407), and also in his opinion delivered in reaching such conclusion. It does not follow, however, from this view, that the defendant may escape liability, even though at the time when this action was brought he had in fact paid the full sum of $2,500, the limit of his liability. It does not appear from the answer, or otherwise from the record, when the liabilities which exhausted the $2,500 were incurred, or when they were paid. The terms of the policy, so far as they are made apparent by the pleadings in the action, show that the parties contracted with reference to the limited liability upon the part of the underwriter. It is evident, therefore, that, when losses had been sustained which equaled such limited amount, then, as to policies issued thereafter, there could be no individual liability of the underwriter, and consequently no insurance by him under such policies, if the rule is to obtain that without regard to the number of policies issued, or the amount of losses sustained, the extent of liability is measured by the payment in full of the limited liability. It is manifest that, if such be the construction of this contract of insurance, then, the moment that losses are sustained to the extent of the limited liability, there is no insurance by the underwriter upon those policies issued after the happening of such event, and consequently a contract might be made, and the insured pay his premiums for the individual liability of the underwriter, when in fact, under the terms of the contract, there could be no such liability, for the reason that the losses already sustained equal the full amount which the underwriter agreed to pay by the terms of his contract. If such be the construction, a case is presented where the underwriter may issue a policy, and receive premiums therefor, without in fact furnishing the insured any security, or imposing upon the underwriter any liability. The bare statement of this proposition is sufficient to show that a construction which works such a result is not permissible. The underwriter, when he issues the policy, holds out to the insured, by the terms of his contract, that he is liable upon such policy in the amount specified therein. The insured, of course, takes his chance of being able to secure payment of his loss from such limited liability, and, if he is so unfortunate as to suffer a loss after the time when the liability of the underwriter has occurred to the full extent of his limited liability, he has secured nothing by virtue of his contract. The insured, however, is entitled to the benefit of his contract as a contract of insurance for the amount mentioned therein when the policy is issued, or of such sum as still remains unexpended of the limited liability. If, however, that sum is exhausted when his policy is issued, then he is not insured at all, so far as concerns the individual liability of the underwriter. In effect, the underwriter' agrees to provide a fund, limited in amount to $2,500. When that sum is exhausted, manifestly the underwriter’s business of insurance must cease, because he is then in no position to farther conduct the business, as he has no funds, and is liable for no loss, as his liability is exhausted. To continue to issue policies thereafter, with full knowledge that no fund exists from which a loss may be payable, and receive premiums for a liability which cannot exist, would authorize the perpetration of the grossest fraud upon the insured. He has no means of determining when he receives his policy that the fund, measured by the limited liability, has been wiped out, in consequence of which he contracts for something which he does not get, and the underwriter reaps a benefit, misleads the insured to his prejudice, and furnishes no consideration for the payment which the insured makes. When the fund which measures the limited liability of the insurer is exhausted, he must cease to underwrite, or, if he continues the business, he must also continue to furnish the liability for which his contract called. If, after the fund is exhausted, he continues to issue policies and sell insurance, he must be regarded as occupying precisely the same position and incurring the same liabilities as he did when he issued the policies which resulted in loss, to the amount of the fund which he had agreed to pay. If he chooses to continue in the business of insurance thereafter, he must be held to have renewed his contract upon its original terms, and is bound to provide a fund upon the terms and conditions of the contract; and the payment of his previous liability constitutes no defense to the enforcement of such policy in accordance with its terms. To hold otherwise would be to mislead the insured to his ruin, and to enable the underwriter to secure a consideration without giving anything therefor in return. Its effect would be to sanction fraud of so gross a character as to shock the moral sense. It will therefore become important upon the trial of this action to determine when the losses were sustained which exhausted the fund, and when the policy was issued in respect of such losses. The question can only be determined upon the proof as it appears upon the trial.

It follows that the interlocutory judgment should be affirmed, with costs.

VAN BRUNT, R J., and PATTERSON and O’BRIEN, JJ., concur.