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July 2012

Admiral Insurance Company v. Joy Contractors, Inc. ? Additional Insureds’ Coverage May Be Rescinded Based on Named Insured's Misrepresentation

Where the Named Insured's Misrepresentation in Obtaining Coverage Precluded the Insurer from Evaluating the Risks to be Covered, Dismissal of the Insurer's Claim for Rescission Against Additional Insureds was Improper. (June 12, 2012) __ N.Y.3d __ ; 2012 NY Slip Op 4670

The New York Court of Appeals (New York’s highest court) modified an order of the Appellate Division of the Supreme Court, which had affirmed the trial court’s dismissal of an insurer’s rescission-based claims.  The Court of Appeals held an order dismissing causes of action against additional insureds for rescission, reformation and declaratory relief based on the named insured’s misrepresentations when applying for a policy was improper.  The Court also modified the Appellate Division’s order that a residential construction activities exclusion did not apply, instead finding disputed issues of fact existed.

Joy Contractors, Inc. operated a tower crane which collapsed in 2008 during construction of a high-rise condominium project in Manhattan.  The accident killed seven people and injured dozens more.  One building was destroyed and several others were damaged.

Joy had primary commercial general liability coverage with Lincoln General Insurance Company at the time of the accident, and Admiral Insurance Company issued a following-form excess policy.  Upon notice of the claim, Admiral reserved rights and requested further information from Joy.  Admiral sent similar letters to the general contractor, developer, and the crane’s lessor, which allegedly were additional insureds.

Admiral contended that Joy misrepresented its operations when it applied for the policy and those misstatements precluded coverage.  Joy had represented in its application that it was a drywall installer, and it did not perform exterior work or work above two stories.  But Joy was the structural concrete contractor on the relevant project, and it worked on the entire building exterior using the tower crane.  Admiral also reserved its right to deny coverage on the ground that the accident occurred during “residential construction activities” which its policy excluded by endorsement.

After further investigation, Admiral denied coverage and filed suit against the primary insurer, Joy, and the purported additional insureds seeking a declaration its policy did not apply and other relief.  The parties filed cross-motions to resolve the issues.

The trial court dismissed Admiral’s causes of action against the additional insureds for rescission, reformation and declaratory relief.  It held Joy’s alleged misrepresentations did not affect coverage for additional insureds, regardless of the impact of any misstatements on coverage for Joy.  The Court also held that whether the project was residential or mixed-use construction was a disputed issue of fact which precluded summary judgment.

The Appellate Division modified the trial court’s decision, holding the residential construction activities exclusion did not apply.  It otherwise affirmed the trial court’s order and granted leave to appeal.

The Court of Appeals concluded the lower courts had relied on factually distinguishable cases.  For example, in BMW Financial Services v. Hassan, 273 A.D.2d 428 (2d Dept. 2000), the named insureds misstated their interest in a car, but they nevertheless identified the vehicle and its lessor, BMW, correctly when applying for an auto policy.  On appeal, the court concluded the named insureds’ misrepresentation did not preclude BMW, as an additional insured, from recovering policy benefits after the car was stolen because the insurer had notice of both the vehicle and BMW’s interest in it.

The Court of Appeals also distinguished a pair of older decisions which addressed separation of insureds in the context of an innocent co-insured in an assault case (Morgan v. Greater N.Y. Taxpayers Mut. Ins. Co., 305 N.Y. 243 (1953)) and the scope of an employee exclusion (Greaves v. Public Serv. Mut. Ins. Co., 5 N.Y.2d 120 (1959)).  In each of those cases, the court held an insurer undertakes separate obligations to each insured, and the fact that one insured is not entitled to coverage does not bar coverage for another insured.  But the Court found these cases inapposite because they involved interpretation of the terms of valid and effective policies, not rescission.

In none of the cases on which the lower courts relied did the named insured’s misstatements deprive the insurer of the opportunity to evaluate the risk it undertook.  Admiral, however, agreed to provide excess liability coverage for interior drywall installation, not for the much greater risk posed by exterior construction work performed many stories above grade using a tower crane.  The Court of Appeals agreed with Admiral that the only additional insureds it could have contemplated were entities working on projects where Joy was installing interior drywall.  Thus, the Court of Appeals concluded the trial court erred in dismissing Admiral’s rescission-based claims.

The Court also held the Appellate Division erred by weighing conflicting evidence relevant to the residential construction activities exclusion.  Whether the project was residential or “mixed use” involved material questions of fact which were inappropriate for summary disposition.

For these reasons, the Court of Appeals modified the order of the Appellate Division and held dismissal of the rescission-based claims against purported additional insureds was improper, as was the Appellate Division’s resolution of disputed factual issues.

Please click here for the opinion.

This opinion is not final.  The Court of Appeals may modify it on rehearing.

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Elizabeth F. Lorell