General Star v. Duffy

• Court: Court of Appeals for the First Circuit
• Decided: September 10, 1999
• Docket: 98-2244
• Status: Published

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 98-2244



                 GENERAL STAR INDEMNITY COMPANY,



                       Plaintiff, Appellee,



                                v.



                JAMES J. DUFFY and MARK K. DUFFY,



                     Defendants, Appellants.


APPEAL FROM THE UNITED STATES DISTRICT COURT

                FOR THE DISTRICT OF MASSACHUSETTS



     [Hon. Charles B. Swartwood, III, U.S. Magistrate Judge]


Before



            Selya, Boudin, and Lipez, Circuit Judges.


Raymond J. Reed for appellants.

          Daniel P. Sullivan for appellee.


September 8, 1999


LIPEZ, Circuit Judge.  James and Mark Duffy own a 48-room

lodging house with two retail stores on the first floor (the

Premises), located at 257 Pleasant Street, Worcester,

Massachusetts.  After the Premises sustained over $100,000 in fire

damage in July 1995, the Duffys' insurer rescinded the policy based

on misrepresentations in the Duffys' application for insurance

about the presence of sprinklers on the Premises.  The insurer

thereafter filed suit in the district court seeking a declaratory

judgment validating its rescission.  The district court obliged,

ruling that the insurer was justified in relying on the

misrepresentation by the Duffys in their application for insurance

that the Premises was protected by sprinklers, despite an earlier

report in the insurer's file indicating the absence of sprinklers.

We affirm.

                               I.

  On June 1, 1994, the Virzi Insurance Agency, Inc.

(Virzi), on behalf of the Duffys, requested a quote from E.A. Kelly

for the cost of insuring the Premises.  E. A. Kelly has authority

to issue policies on behalf of General Star Indemnity Company

(General Star).  In order to facilitate the process, Virzi, on

behalf of the Duffys, forwarded an unsigned application to E.A.

Kelly.  That application indicated that: (a) all building

improvements had been updated within the last five years; and (b)

the Premises was sprinklered.  The notation that the Premises was

sprinklered was handwritten.

  Having received a quote from E. A. Kelly on June 3, 1994,

Virzi, on behalf of the Duffys, submitted a signed application for

insurance on June 9, 1994.  E. A. Kelly issued an insurance policy

for the Premises effective June 9, 1994.  The policy contained an

endorsement for "Protective Safeguards" which required smoke

alarms, an ansul [fire protection] system and an automatic

sprinkler system.  On June 18, 1994, E. A. Kelly, on behalf of

General Star, ordered an inspection of the Premises for the purpose

of verifying its condition.  On July 25, 1994, E. A. Kelly received

the inspection report.  The inspection form included a list of

safety systems and devices, some of which had check marks next to

them and some of which had no markings.  The inspector's report

contained a hyphen after the word "sprinkler"; the district court

assumed for the purpose of its summary judgment ruling that the

report indicated that the Premises was not sprinklered at the time

of the inspection.  Neither E. A. Kelly nor General Star further

investigated whether or not the Premises had an automatic sprinkler

system.

  In May 1995, the Duffys requested a renewal quote from E.

A. Kelly.  In response, E. A. Kelly offered to renew the insurance

for the Premises.  The policy proposed stated that "SMOKE ALARMS,

SPRINKLER SYSTEM AND ANSUL SYSTEM WARRANTED."  On or about June 9,

1995, Virzi, on behalf of the Duffys, provided E. A. Kelly with a

renewal application signed by Virzi and James Duffy.  The signed

renewal application warranted that the Premises was sprinklered. 

When E. A. Kelly renewed the insurance policy for the period of

June 9, 1995 through June 9, 1996, it contained an endorsement for

"Protective Safeguards" which required smoke alarms, an ansul

system and an automatic sprinkler.

  On July 9, 1995, the Premises sustained fire damage in

the amount of $105,713.27.  On August 7, 1996, General Star

forwarded correspondence to the Duffys denying coverage and

rescinding the policy based on the misrepresentation in the 1995

application that the Premises was sprinklered.

  General Star thereafter filed a complaint for declaratory

judgment pursuant to 28 U.S.C.  2201 & 2202, seeking a judicial

determination that General Star had a right to rescind the

insurance policy based on the misrepresentation.  In response, the

Duffys filed counterclaims alleging violations of Massachusetts

insurance and consumer protection laws.  The district court granted

General Star a summary judgment, concluding that under

Massachusetts law General Star had a right to rescind the policy

because the Duffys' misrepresentation that the Premises was

sprinklered was material in that it increased the risk of loss to

General Star as a matter of law.  The district court further held

that Massachusetts law imposed "no requirement to have the Premises

inspected prior to issuing a renewal policy" and that "General Star

was justified in relying on Mr. Duffy's representation that the

Premises was sprinklered."

                              II.

  Summary judgment is warranted only where an examination

of the record, viewed in the light most favorable to the non-moving

party, reveals no material factual disputes and the moving party is

entitled to judgment as a matter of law.  Fed. R. Civ. P. 56(c);

Snow v. Harnishfeger Corp., 12 F.3d 1154, 1157 (1st Cir. 1993).  We

review the grant of a summary judgment de novo.  Siegal v. American

Honda Motor Co., 921 F.2d 15, 17 (1st Cir. 1990).   

  We apply Massachusetts law to the insurance contract made

in Massachusetts.  The Massachusetts statutory provision

establishing the conditions under which an insurer may rescind

contracts of insurance provides:

    No oral or written misrepresentation or

  warranty made in the negotiation of a policy

  of insurance by the insured or on his behalf

  shall be deemed material or defeat or avoid

  the policy or prevent its attaching unless

  such misrepresentation or warranty is made

  with actual intent to deceive, or unless the

  matter misrepresented or made a warranty

  increased the risk of loss.



Mass. Gen. Laws ch. 175,  186.  For purposes of this appeal, the

Duffys do not challenge the district court's findings that (1) the

Duffys unintentionally made misrepresentations in their 1995

insurance application to General Star and (2) the misrepresentation

regarding the existence of an automatic sprinkler system increased

the insurer's risk of loss as a matter of law.  The single issue

pressed by the Duffys is whether General Star waived its right to

rescind the insurance contract on the basis of that

misrepresentation.  The Duffys argue that, at the time General Star

renewed the Duffys' policy in June 1995, General Star knew that the

Premises was in fact not sprinklered because of the inspection

report it received in June 1994.  Having renewed the policy with

knowledge that the Premises was not sprinklered, the Duffys argue,

General Star waived its right to rescind on the basis of a

misrepresentation about the presence of sprinklers (or so a jury,

drawing inferences favorable to the Duffys, could have found).

  The Duffys err in their insistence that General Star had

knowledge in June 1995 that there were no sprinklers on the

Premises because of the inclusion in its files of the June 1994

inspection report.  That position wrongly accords no legal

significance to the warranty made by the Duffys in their

application for renewed insurance in June 1995 that there were

sprinklers on the Premises.  To the extent that the Duffys argue

that the inclusion of the 1994 inspection report in the files of

General Star at least creates a factual issue about whether the

insurer should have inspected the premises to determine the

accuracy of the representation by the Duffys about the presence of

sprinklers, the Duffys again misapprehend the legal significance of

their representation.

  Pursuant to Massachusetts law and insurance law

generally, General Star had a right to rely on the Duffys'

representation that the Premises was sprinklered in June 1995.  See

Appleman & Appleman, 16B Insurance Law and Practice  9086 (2d ed.

1967) ("[A]n insurer is entitled to rely on the representations of

an insured without checking all of its files to determine if such

insured is guilty of fraud.").  The Duffys were in the best

position to know the truthfulness of their statement about the

sprinklers, and Massachusetts law does not impose an affirmative

obligation on an insurer to investigate and verify the accuracy of

an insured's representations.  See U.S. Express, Inc. v. Intercargo

Ins. Co., 841 F. Supp. 1328, 1338 (E.D.N.Y. 1994) (construing

Massachusetts law); see also North American Specialty Ins Co. v.

Savage, 977 F. Supp. 725, 731 (D. Md. 1997) ("Generally, insurers

do not have a duty to investigate insurance applicants and are

entitled to believe what an applicant claims to be true."); Foster

v. Auto-Owners Ins. Co., 703 N.E.2d 657, 660 (Ind. 1998) ("Imposing

this obligation [to cross-check the accuracy of an application

against others submitted by the same applicant] would create the

opportunity to play a catch-me-if-you-can game that would

ultimately generate additional costs to insurers and no legitimate

benefits to insureds."). 

  General Star was further justified in relying on the

Duffys' representation that the Premises was sprinklered because of

the Duffys' impending legal obligation to sprinkler the building. 

On September 25, 1990, the City of Worcester adopted the provisions

of Massachusetts General Laws chapter 148, section 26H, requiring

rooming houses such as the Premises to be equipped with automatic

sprinkler systems no later than September 25, 1995.  This

independent legal obligation, applicable shortly after the renewal

of the insurance contract, further justified General Star's

reliance on the representation by the Duffys in June 1995 that the

Premises was sprinklered.

  We recognize the general proposition, cited by the

Duffys, that an insurer may lose its right to rescind the coverage

of an insurance contract if it knows of the facts that may warrant

rescission and fails to disclaim within a reasonable time, or if it

acts in any way inconsistent with an intention to disclaim.  See

e.g., Kobico, Inc. v. Pipe, 44 Mass. App. Ct. 103 (1997).  Pursuant

to Massachusetts law, "[a]n insurance company is obliged to provide

coverage to an insured who has violated a provision of the policy

if the company has waived its right to assert the policy breach as

a ground for denying liability."  Merrimack Mutual Fire Ins. Co. v.

Nonaka, 414 Mass. 187, 189, 606 N.E.2d 904 (1993).  "Waiver

consists of the insurer's voluntary or intentional relinquishment

of a known right."  Id.

  In this case, however, these principles of waiver are

simply inapposite.  As a matter of law, on the basis of the summary

judgment record, General Star was entitled to rely on the

representation of the Duffys in their application for insurance

renewal that the Premises was sprinklered, despite the presence in

General Star's files of the 1994 inspection report. 

  The Duffys challenge the district court's decision on

another ground, noting that the district court cited to an Oregon

case for the proposition that "the presence of a fully operational

sprinkler in an insured building is material to a fire insurer's

risk."  Coos Head Timber Co. v. Unigard Indemnity Co., 93 Or. 598,

603, 699 P.2d 1143, 1146 (1985).  The Duffys cry foul because the

Coos Head Timber case dealt with a policy in which the presence of

a sprinkler system was a condition precedent while under the

Duffys' policy the insured was only required to warrant the

presence of sprinklers.  Ergo, the Duffys argue, the district

court actually treated the sprinkler requirement as a condition

precedent and therefore failed to analyze whether General Star had

waived its right to rescind.  See Krause v. Equitable Life Ins.

Co., 333 Mass. 200, 203 (1955) (term which is made a condition

precedent to recovery under an insurance policy is not subject to

waiver).

  The Duffys' argument on this point is unavailing.  The

Duffys presented this same argument to the district court in a

Motion to Reconsider and/or Clarify.  In disposing of that motion,

the district court acknowledged, as it had in its original summary

judgment order, that Coos Head Timber dealt with a policy under

which an operational sprinkler system was a condition precedent and

that the sprinkler clause in the Duffys' policy constituted a

warranty.  The district court, however, was merely citing to Coos

Head Timber for the unassailable legal proposition that "the

presence of a fully operational sprinkler system in an insured

building is material to a fire insurer's risk."  Id.  Contrary to

the contention of the Duffys, the court did not treat the sprinkler

requirement as a condition precedent and it did consider the issue

of waiver.  In all events, our review is de novo, and any

misapprehension below would not affect the outcome of this appeal.

                               III.

  In summary, the June 1995 renewal application of the

Duffys warranted that the Premises was sprinklered.  This warranty

was explicitly made a part of the insurance contract.  Despite the

presence in its files of a June 1994 inspection report indicating

the absence of sprinklers at the Premises, General Star was

justified in issuing the policy renewal on the basis of the Duffys'

new warranty without conducting an inspection of the Premises. 

When General Star discovered that the Premises was not in fact

sprinklered in violation of the policy, and contrary to the

representation of the Duffys, it took timely action to rescind the

policy.  The district court was correct in granting summary

judgment for General Star and in dismissing the Duffys'

counterclaims.

  Affirmed.