Cosmopolitan Mut. Ins. Co. v. Lumbermen’s Mut. Cas. Co., 20 N.Y.2d 145 (1967)
An insurance company cannot retroactively cancel a binder after the insured risk has matured (i.e., an accident has occurred), particularly when a third party’s rights have vested and another insurer’s obligation has been established.
Summary
This case concerns a dispute between two insurance companies, Cosmopolitan and Lumbermen’s, regarding liability for an accident. Lumbermen’s initially provided a 30-day binder to Riva Service Corporation, the new owner of a garage. During that period, an accident occurred. Cosmopolitan, seeking Riva’s business, later issued a policy retroactive to the date Riva took ownership. Riva’s broker then canceled Lumbermen’s binder “flat.” The court addressed whether this retroactive cancellation relieved Lumbermen’s of liability. The court held that once the accident occurred during Lumbermen’s binder period, their risk matured, and a subsequent agreement between Riva and Lumbermen’s could not unilaterally alter Cosmopolitan’s coinsurance obligation.
Facts
1770 First Avenue Corporation sold its garage business to Riva Service Corporation on June 1, 1958, granting a 20-year lease.
On June 19, 1958, Sharon Higgins was injured on the sidewalk in front of the garage.
1770 was insured by Cosmopolitan.
Riva obtained a 30-day insurance binder from Lumbermen’s effective May 28, 1958, through its broker, Buhler.
Buhler notified Lumbermen’s of the June 19 accident on June 24.
Lumbermen’s extended the binder to July 13 to allow Riva to find other coverage.
Cosmopolitan, seeking Riva’s business, informed Buhler it would provide coverage retroactive to June 1 if 1770 agreed.
Cosmopolitan complied, making the coverage retroactive to June 1.
Buhler then canceled the Lumbermen’s binder “flat.”
In November 1958, Riva received a claim from Higgins and forwarded it to Cosmopolitan.
Cosmopolitan learned of the Lumbermen’s binder in February 1961 and filed a declaratory judgment action in September 1961, seeking to avoid liability and hold Lumbermen’s responsible.
Procedural History
Cosmopolitan sued Lumbermen’s for a declaratory judgment regarding liability.
The trial court found both insurers liable, allocating two-thirds of the liability to Lumbermen’s and one-third to Cosmopolitan based on their policy limits.
The Appellate Division reversed, holding Cosmopolitan solely liable due to the retroactive cancellation of Lumbermen’s binder.
The New York Court of Appeals reversed the Appellate Division and reinstated the trial court’s judgment.
Issue(s)
Whether an insured can retroactively cancel an insurance binder “flat” after an accident has occurred, thereby affecting the rights of an injured third party and altering the coinsurance obligations of another insurer.
Holding
No, because once the risk matured with the occurrence of the accident, the insured could not unilaterally cancel the Lumbermen’s binder in a way that increased Cosmopolitan’s liability without Cosmopolitan’s consent.
Court’s Reasoning
The court reasoned that while an insured and insurer can agree to cancel a binder “flat” before a risk matures, this is not permissible after an accident occurs and a third party’s rights have vested. The court emphasized that Lumbermen’s risk had fully matured into a responsibility when Buhler notified them of the accident, and Lumbermen’s assigned an investigator to the claim and opened a file. Cosmopolitan deliberately assumed the risk retroactively, and there was no finding of fraudulent misrepresentation.
The court stated, “It is clear that Lumbermen’s, while it was the only insurance carrier protecting the insured, could not have effectively can-celled the binder insofar as the injured party was concerned after June 19, the date of the accident. The right of Higgins, the injured party, to proceed against Lumbermen’s had fully matured at that time.”
The court also pointed out that Cosmopolitan’s coinsurance clause limited its liability to its proportional share. Riva could not release Lumbermen’s from its obligation without Cosmopolitan’s consent. Allowing a retroactive cancellation would essentially allow Riva to alter Cosmopolitan’s liability *nunc pro tunc*.
Therefore, the court concluded that Cosmopolitan’s liability was limited to its proportionate share ($15,555.55), and Lumbermen’s was liable for its proportionate share ($31,111.10). The court explicitly stated that this determination did not affect any potential controversy between Lumbermen’s and Riva based on the cancellation agreement.