New York Law Review

Tag: Duty of Disclosure

  • People v. Wells Fargo Ins. Servs., Inc., 14 N.Y.3d 164 (2010): Insurance Broker’s Duty to Disclose Incentive Programs

    People v. Wells Fargo Ins. Servs., Inc., 14 N.Y.3d 164 (2010)

    An insurance broker does not have a common-law fiduciary duty to disclose to its customers incentive arrangements that the broker has entered into with insurance companies.

    Summary

    The Attorney General sued Wells Fargo, alleging the insurance broker engaged in fraudulent acts, unjust enrichment, common-law fraud, and breach of fiduciary duties by failing to disclose “incentive” arrangements with insurance companies. Wells Fargo allegedly steered clients to insurers offering kickbacks without informing clients. The complaint didn’t allege misrepresentations or demonstrable harm to clients. The New York Court of Appeals affirmed the dismissal, holding that absent misrepresentation or actual injury, an insurance broker doesn’t have a common-law fiduciary duty to disclose incentive programs. The Court reasoned that the broker’s dual agency status complicates the traditional principal-agent fiduciary relationship, and that a newly enacted regulation was a better remedy than creating a retroactive common-law rule.

    Facts

    Wells Fargo, an insurance brokerage firm, acted as an agent for organizations seeking insurance. They obtained quotes from insurers and offered recommendations. Wells Fargo entered into “incentive” arrangements with insurers, including the “Millennium Partners Program,” where insurers paid Wells Fargo based on the volume of business they brought. These incentive payments were not disclosed to Wells Fargo’s customers. The Attorney General alleged that Wells Fargo “steered” its customers to particular insurance companies based on these incentives.

    Procedural History

    The Supreme Court dismissed the Attorney General’s complaint with leave to replead. The Attorney General declined to replead, and appealed. The Appellate Division affirmed the dismissal. The New York Court of Appeals granted leave to appeal and affirmed the Appellate Division’s order.

    Issue(s)

    Whether an insurance broker has a common-law fiduciary duty to disclose to its customers incentive arrangements that the broker has entered into with insurance companies.

    Holding

    No, because the relationship between an insurance broker and a purchaser of insurance is complex and because a prospective regulation is a better way of addressing this issue than a retroactive common-law rule.

    Court’s Reasoning

    The Court of Appeals reasoned that while insurance brokers act as agents for the insured, they also have a relationship with the insurer, often receiving compensation from them. This “dual agency status” complicates the traditional fiduciary duty analysis. The Court distinguished the case from situations involving affirmative misrepresentations or actual injury to the customer. The Court acknowledged that the non-disclosure of incentive arrangements “may be a bad practice.” However, it noted that a newly adopted regulation by the Insurance Department prohibited such non-disclosure prospectively. The court stated that “A regulation, prospective in effect, is a much better way of ending a questionable but common practice than what the Attorney General asks us to do here: in substance to outlaw the practice retroactively by creating a new common-law rule.” The court also referenced existing Appellate Division cases that held an insurance broker need not disclose contractual arrangements made with insurance companies. The court emphasized that the complaint did not allege that Wells Fargo did anything contrary to industry custom. Absent such allegations, the Court declined to impose a new common-law duty. The Court effectively deferred to the regulatory solution, finding it a more appropriate method for addressing the issue than creating a new, retroactive common-law rule.

  • Sumitomo Marine & Fire Ins. v. Cologne Reinsurance, 75 N.Y.2d 295 (1990): Duty to Disclose Material Facts in Reinsurance Agreements

    Sumitomo Marine & Fire Insurance Co. v. Cologne Reinsurance Co., 75 N.Y.2d 295 (1990)

    A reinsurer can waive its right to rescind a reinsurance agreement based on the reinsured’s failure to disclose a material fact if the reinsurer continues to treat the agreement as valid after learning of the undisclosed fact.

    Summary

    Sumitomo, an insurer, sought reinsurance from Cologne Reinsurance and Buffalo Reinsurance for a policy covering Auburn Steel. The original policy covered “sudden and accidental radioactive contamination.” After a loss occurred due to radioactive contamination, the reinsurers refused to pay, arguing that Sumitomo failed to disclose the radioactive contamination coverage, a material risk. The New York Court of Appeals held that even if Sumitomo had a duty to disclose, the reinsurers waived their right to rescind because they continued to treat the agreement as valid after learning of the coverage.

    Facts

    Sumitomo insured Auburn Steel, a steel mill, under an “all-risks” policy that included coverage for “sudden and accidental radioactive contamination.” Sumitomo then sought reinsurance from several companies, including Cologne Reinsurance and Buffalo Reinsurance, via a telex that did not explicitly mention the radioactive contamination coverage. After Auburn Steel suffered a loss due to radioactive contamination, Sumitomo sought payment from the reinsurers. The reinsurers initially refused payment based on a nuclear incident exclusion clause. Later, they argued that Sumitomo’s failure to disclose the radioactive contamination coverage entitled them to rescission of the reinsurance agreement.

    Procedural History

    The trial court granted summary judgment to the reinsurers. The Appellate Division reversed, holding that the reinsurers were obligated to determine the actual scope of coverage before issuing their formal certificates of reinsurance. The Court of Appeals affirmed the Appellate Division’s order, but on different grounds, focusing on waiver.

    Issue(s)

    Whether a reinsurer can rescind a reinsurance agreement based on the reinsured’s failure to disclose a material fact (the radioactive contamination coverage) if the reinsurer continues to treat the agreement as valid after learning of the undisclosed fact.

    Holding

    No, because the reinsurers waived their right to rescind by continuing to treat the agreement as valid after they were fully aware of the radioactive contamination coverage.

    Court’s Reasoning

    The court acknowledged the general principle that a reinsured must disclose all material facts concerning the original risk to potential reinsurers. Failure to do so entitles the reinsurer to rescission. However, the court emphasized that this right to rescission can be waived. The court found that the reinsurers were aware of the loss and the radioactive contamination coverage (Amendment No. 3) before signing the cover note and issuing their certificates of reinsurance. Despite this knowledge, they did not seek to void the agreement but treated it as valid for a considerable time. The court reasoned that while issuing the formal certificate might be considered “ministerial,” the reinsurers’ continued validation of the agreement, even after denying payment and answering the complaint, constituted a waiver of their right to rescind. The court quoted: “defendants failed to take steps to assert their alleged right to rescission within a reasonable time… but also affirmatively treated the agreement as a valid one well beyond the point where they had the most complete possible notice of the coverage undertaken by Sumitomo.” Therefore, even if the radioactive contamination coverage was considered an unusual or extended coverage that should have been disclosed, the reinsurers’ actions precluded them from later claiming rescission. The court explicitly avoided deciding the broader issue of disclosure when the reinsurer’s independent limitations on its exposure coincide with the reinsured’s allegedly unusual liability.

  • Dynamics Corp. of America v. Marine Midland Bank, 69 N.Y.2d 191 (1987): Debtor’s Duty to Disclose Claims in Bankruptcy

    69 N.Y.2d 191 (1987)

    A debtor-in-possession in a Chapter XI bankruptcy proceeding has a duty to disclose all known or knowable claims in its schedules of assets, and failure to do so precludes the debtor from pursuing those claims individually after the bankruptcy proceeding concludes, unless the claims were properly “dealt with” or abandoned during the bankruptcy.

    Summary

    Dynamics Corporation of America (DCA) sued Marine Midland Bank (Marine) for damages, alleging misconduct that led to DCA’s bankruptcy. DCA had previously undergone a Chapter XI bankruptcy proceeding where it didn’t disclose these claims against Marine. The court held that because DCA failed to list these claims as assets in its bankruptcy schedules, it could not pursue them individually after the bankruptcy concluded. The court reasoned that a debtor-in-possession has a duty to disclose all potential claims so they can be administered for the benefit of creditors.

    Facts

    DCA and Marine had a long-standing banking relationship. In August 1972, DCA initiated Chapter XI bankruptcy proceedings. Marine was a major creditor. In July 1975, DCA sued Marine for $70 million, alleging Marine conspired to destroy DCA’s business beginning in 1970. DCA claimed Marine made misrepresentations about loan renewals, leading DCA to forgo seeking other financing. DCA further alleged that Marine improperly offset DCA’s checking account and seized uncollected checks, forcing DCA into bankruptcy.

    Procedural History

    The Supreme Court, New York County, granted Marine’s motion for summary judgment, dismissing DCA’s complaint. The court relied on the principle that a discharged Chapter XI debtor cannot pursue claims it failed to include in its bankruptcy schedule. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a debtor, after confirmation of a Chapter XI plan of arrangement, can pursue claims against a creditor that were not disclosed in the debtor’s schedules filed with the bankruptcy court.

    Holding

    No, because the debtor-in-possession has a duty to disclose all known or knowable claims in its schedules of assets, and failure to do so precludes the debtor from pursuing those claims individually after the bankruptcy proceeding concludes, unless the claims were properly “dealt with” or abandoned during the bankruptcy.

    Court’s Reasoning

    The Court emphasized the importance of disclosure in Chapter XI proceedings, where debtors-in-possession have a fiduciary duty to their creditors. The court stated that the requirement of disclosure includes “[u]nliquidated claims of every nature, with their estimated value.” The court reasoned that the only property that may revest in the debtor is property that was “dealt with” in the bankruptcy or abandoned. Property is “dealt with” when it has been listed in the debtor’s schedule of assets, administered by the bankruptcy court for the benefit of creditors, and not otherwise affected by the ultimate plan of arrangement involving the debtor’s other assets. Property can be considered abandoned only if the trustee or debtor-in-possession knows of it and manifests an intent to abandon it. Since DCA’s claims against Marine were not disclosed in its schedules, they were not “dealt with” in the bankruptcy and did not revest in DCA after the proceeding. The court found DCA’s argument that it didn’t learn of its fraud or improper offset causes of action until after the Chapter XI proceeding ended to be unpersuasive, holding that DCA presented no evidentiary material sufficient to raise a triable issue of fact. The court quoted Stein v United Artists Corp. in noting that without a rule precluding such a debtor from later pursuing claims about which it knew or should have known at the time of filing its petition, a debtor-in-possession might employ less than diligent efforts to ascertain and disclose all potential claims, thus undermining its obligation to the estate and prejudicing the interests of the unsecured creditors.

  • Glickman v. New York Life Ins. Co., 32 N.Y.2d 55 (1973): Material Misrepresentation in Insurance Applications

    Glickman v. New York Life Ins. Co., 32 N.Y.2d 55 (1973)

    An applicant for insurance has a duty to disclose all material information about their health, and failure to do so constitutes a misrepresentation that can void the policy if the insurer was deprived of its freedom of choice in accepting the risk.

    Summary

    Dr. Glickman applied for a group accident and health insurance policy, failing to disclose a prior diagnosis and treatment for paroxysmal atrial fibrillation. After becoming disabled, his claim for benefits under Plan A ($1,000/month) was rejected, with the insurer only willing to pay under Plan C ($500/month). The court held that Glickman’s failure to disclose his heart condition was a material misrepresentation as a matter of law, entitling the insurer to deny the higher coverage because it deprived them of assessing and accepting or rejecting the risk based on accurate information. The court emphasized an insurer’s right to select its risks based on full disclosure from the applicant.

    Facts

    1. In January 1963, Dr. Glickman applied for group accident and health insurance, stating he was in good health.
    2. He listed several instances of prior medical treatment but omitted a January 1962 diagnosis of paroxysmal atrial fibrillation, for which he was taking quinidine.
    3. The policy offered three plans with varying monthly indemnity amounts, with the insurer reserving the right to limit coverage to the lowest amount if insurability evidence was unsatisfactory.
    4. In 1964, Glickman became disabled and filed a claim, which was partially rejected due to the misrepresentation.

    Procedural History

    The trial court initially ruled in favor of Glickman. The appellate division reversed the trial court’s decision, vacated the judgment, and dismissed the complaint, finding that the misrepresentation was material as a matter of law. The New York Court of Appeals affirmed the appellate division’s decision.

    Issue(s)

    1. Whether Dr. Glickman misrepresented his health as a matter of law by failing to disclose his heart condition.
    2. Whether the misrepresentation was material as a matter of law, justifying the denial of full coverage.

    Holding

    1. Yes, because Dr. Glickman failed to disclose his heart condition and related medical treatment, which constituted a misrepresentation.
    2. Yes, because the misrepresentation was material, depriving the insurance company of the opportunity to properly assess and accept or reject the risk under the chosen plan.

    Court’s Reasoning

    The Court reasoned that Glickman, as a physician, should have been aware of the significance of his heart condition. The court emphasized the insurer’s right to select its risks, stating that failure to disclose is as much a misrepresentation as a false affirmative statement, citing Geer v. Union Mut. Life Ins. Co., 273 N.Y. 261. The court found that the heart condition was not a trivial matter and could have affected the insurance company’s decision regarding the application. The court stated, “By his failure to disclose his heart condition, plaintiff deprived the defendant of freedom of choice in determining whether to accept or reject the risk. On the record, there is little doubt that the defendant would have rejected the risk or certainly would have rejected it under Plan A.” This aligns with Insurance Law § 149 and the precedent set in Wageman v. Metropolitan Life Ins. Co., 24 A D 2d 67, affd. 18 Y 2d 777.