Continental Casualty Company v. Boughton

16-2384
Continental Casualty Company v. Boughton

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST
SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals
for the Second Circuit, held at the Thurgood Marshall United
States Courthouse, 40 Foley Square, in the City of New York,
on the 5th day of June, two thousand Seventeen.

PRESENT: AMALYA L. KEARSE,
DENNIS JACOBS,
DEBRA ANN LIVINGSTON,
Circuit Judges.

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CONTINENTAL CASUALTY COMPANY,
Plaintiff-Counter-Defendant-
Appellee,

-v.- 16-2384

JOSEPH J. BOUGHTON, JR., NORTHSTAR
INVESTMENT GROUP, LTD.,
Intervenor-Defendants-
Counter-Claimants-
Appellants,

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MARSHALL GRANGER & COMPANY, LLP,
LAURENCE M. BROWN, RONALD J. MANGINI,
Defendants.*
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FOR APPELLANTS: JOHN W. SCHRYBER, Reed Smith
LLP, Washington, DC.

Mark S. Goldstein, Reed Smith
LLP, New York, NY.

FOR APPELLEE: RICHARD A. SIMPSON, Wiley Rein
LLP, Washington, DC.

Appeal from a judgment of the United States District
Court for the Southern District of New York (Seibel, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
AND DECREED that the judgment of the district court is
AFFIRMED.

Joseph J. Boughton, Jr. and Northstar Investment Group,
Ltd. appeal the judgment of the United States District Court
for the Southern District of New York (Seibel, J.),
rescinding an insurance policy issued by Continental
Casualty Company (“Continental”) to Marshall Granger &
Company, LLP (“Marshall Granger”). Continental’s
declaratory judgment action against Marshall Granger and its
owners sought rescission on the ground that Marshall Granger
procured the policy through material misrepresentations.

Boughton and Northstar (collectively “Intervenors”)
argue that Continental cannot rescind, notwithstanding the
misrepresentations, because Continental (1) “ratified” the
insurance policy and (2) unreasonably delayed in seeking
rescission, grounds to foreclose rescission under New York
law. The district court granted summary judgment to
Continental on the ratification issue, and, after trial, a
jury determined that Continental’s delay in filing its
rescission lawsuit was reasonable. We assume the parties’
familiarity with the underlying facts, the procedural
history, and the issues presented for review.

*
We respectfully direct the Clerk of Court to amend
the caption.
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 1. An insurer may not rescind a policy if, after
having the requisite knowledge of the insured’s fraud, it
commits an act that affirms the policy. See Agristor
Leasing-II v. Pangburn, 557 N.Y.S.2d 183, 185 (4th Dep’t
1990); Brennan v. Nat’l Equitable Inv. Co., 247 N.Y. 486,
489 (1928). We review a district court’s grant of summary
judgment de novo. Urbont v. Sony Music Entm’t, 831 F.3d 80,
88 (2d Cir. 2016).

In this Court, the Intervenors allege four acts of
ratification. Not all of these arguments are properly
before us. As to those that are, none of the acts amount to
ratification, and we thus need not consider the degree of
knowledge of the insured’s fraud that an insurer must have
before being capable of ratifying the contract with an
affirming act.

a. Continental sent a letter to one of Marshall
Granger’s owners invoking one of the policy’s clauses to
deny coverage of a claim. The Intervenors did not argue to
the district court that this constituted ratification, so we
do not consider it. “[I]t is a well-established general
rule that an appellate court will not consider an issue
raised for the first time on appeal.” Greene v. United
States, 13 F.3d 577, 586 (2d Cir. 1994).

The Intervenors contend that the issue was preserved in
their summary judgment papers. While this issue was
discussed to some extent, it was raised in the portion of
their memorandum that sought to prove that Continental had
the level of knowledge of fraud necessary to allow it to
justify rescission; the denial-of-coverage letter was not
alleged to have ratified the policy in the section of their
memorandum that discussed Continental’s particular acts said
to constitute ratification. Consequently, the Intervenors
did not properly apprise the district court of this
argument.

b. The Intervenors argue that Continental ratified the
policy by amending it. The amendments in question, however,
merely changed the insured’s name and address. Ministerial
changes cannot serve to ratify an insurance policy. Cf.,
e.g., U.S. Life Ins. Co. in N.Y.C. v. Blumenfeld, 938
N.Y.S.2d 84, 87 (1st Dep’t 2012) (holding insurer’s
acceptance of premiums after acquiring rescission-justifying
knowledge ratified policy); Sitar v. Sitar, 878 N.Y.S.2d
377, 380 (2d Dep’t 2009).

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 c. Continental agreed to pay $12,500 to one of
Marshall Granger’s owners to defray his legal costs in
defending various investigations.

The district court properly rejected this ratification
argument because Continental was legally compelled to make
the payment. When an insurer promises to pay an insured’s
defense costs, New York law requires the insurer to continue
performing that obligation until a court enters a judgment
granting rescission of the contract. See Fed. Ins. Co. v.
Kozlowski, 792 N.Y.S.2d 397, 400-02, 403-04 (1st Dep’t 2005)
(rejecting insurer’s argument that it was not required to
pay defense costs to the insured after the insurer sought
rescission of the policy); In re WorldCom, Inc. Sec. Litig.,
354 F. Supp. 2d 455, 465 (S.D.N.Y. 2005) (“Until the issue
of rescission is adjudicated, a contract of insurance
remains in effect and the duty to pay defense costs is
enforceable.”).

The Intervenors concede that “an insurer who has sought
rescission may not stop performing its coverage obligations
once it files for rescission.” Appellants’ Reply Br. at 6.
However, the Intervenors contend that this rule requires
insurers to pay defense costs only after filing for
rescission, and that a decision to pay defense costs before
seeking rescission serves as ratification. The district
court soundly refuted this argument:

If the law were as [Intervenors] argue, insurers
would be obligated to advance defense costs before
learning of a potential ground for rescission (as
normally required under the policy), would be
forbidden from advancing defense costs during an
investigation into that potential ground (lest it
later be found to have waived rescission), and
then would be again obligated to resume advancing
defense costs once a formal action for rescission
was filed . . . . This flip-flopping cannot be
what the law requires.

Cont’l Cas. Co. v. Marshall Granger & Co., 6 F. Supp. 3d
380, 398 n.22 (S.D.N.Y. 2014). Since New York law required
Continental to pay these defense costs, such payment did not
“ratify” the policy.

d. Continental offered “extended reporting coverage”
to the insured when Continental decided not to renew the

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policy. Once again, this act does not constitute
ratification because New York law required Continental to
offer this coverage. See N.Y. Comp. Codes R. & Regs. tit.
11, § 73.3(c)(1) (“Upon termination of coverage, extended
reporting period coverage required by this Part must be
available for any claims-made liability coverage provided
under the policy.”). Consequently, ratification cannot be
based on this act.

The Intervenors cite N.Y. Ins. Law § 3426 to argue that
New York law did not require Continental to offer extended
reporting coverage in these circumstances. We assume that
the Intervenors are relying on the following statutory
wording: “Nothing in this section shall be . . . construed
to limit the grounds for which an insurer may lawfully
rescind or suspend a policy or decline to pay a claim under
a policy.” N.Y. Ins. Law § 3426(m). We do not see (and the
Intervenors do not explain) how this provision affects
Continental’s responsibility to offer a required extension
of reporting coverage when a policy’s coverage ends. Since
Continental was required to offer such coverage, it did not
ratify the policy by doing so.

The Intervenors further argue that Continental’s
issuance of a notice of non-renewal without previously
seeking rescission signified that the policy would remain in
effect through its normal termination date. The Intervenors
cite a New York case holding that a policy was ratified when
the insurer informed its policyholder that it was canceling
the policy as of a specific future date. Stein v. Sec. Mut.
Ins. Co., 832 N.Y.S.2d 679, 681-82 (3d Dep’t 2007).

But the cancellation notice in Stein meant that the
insurer decided to continue current coverage until the
(future) date of cancellation, whereas Continental gave
notice that it would decline to enter into a new insurance
contract upon the expiration of the old policy. It may be
that a decision to cancel a policy precludes later attempts
to seek rescission because cancellation evinces an
understanding that the policy is currently valid, cf. Merry
Realty Co. v. Shamokin & Hollis Real Estate Co., 230 N.Y.
316, 323 (1921), but here Continental’s non-renewal did not
affirm the policy’s validity.1 When Continental sent its

1
The Intervenors cite another case that held that
“where an insurer who is aware of the insured’s material
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non-renewal letter, it was still considering whether to seek
rescission and explicitly reserved its right to do so.

Because the Intervenors have not demonstrated that
Continental performed any act that ratified the policy, we
affirm the district court’s grant of summary judgment to
Continental on this issue.

2. The Intervenors challenge the jury instructions
regarding the circumstances in which an insurer loses the
right to rescind by failing to promptly seek rescission. We
review “a claim of error in jury instructions de novo,
reversing only where appellant can show that, viewing the
charge as a whole, there was a prejudicial error.” United
States v. Tropeano, 252 F.3d 653, 657-58 (2d Cir. 2001).

a. The Intervenors assert that the district court did
not properly advise the jury when Continental’s duty to
promptly file a rescission lawsuit arose, and that the jury
should have been told that “Continental’s obligation to act
promptly arose once it formed the belief . . . that would
allow it to file a lawsuit seeking rescission.” Appellants’
Opening Br. at 46.

The instructions given were consistent with the
Intervenors’ proposal:

An insurer seeking rescission of an insurance
policy may not unreasonably delay upon learning of
the grounds for rescission. An insurer waives or
forfeits its right to rescind when it fails to
rescind a policy promptly after learning of
sufficient facts to justify rescission. . . .
[O]nce an insurer forms a reasonable belief that
it has a factual basis to rescind, it must move
with dispatch.

misrepresentations elects to send a notice of non-renewal
stating coverage will remain effective through the end of
the policy, but will not be renewed, the insurer is estopped
from seeking rescission.” GuideOne Specialty Mut. Ins. Co.
v. Congregation Adas Yereim, 593 F. Supp. 2d 471, 485
(E.D.N.Y. 2009). However, GuideOne relied solely on Stein
for that proposition. Because Stein dealt with cancellation
rather than non-renewal, GuideOne is unpersuasive.
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App’x at 3620.

Notwithstanding the similarity of the actual charge to
what was proposed, the Intervenors assert that other parts
of the instructions render the actual charge erroneous. For
example, the Intervenors challenge the additional statement
that “[o]nce the insurer has a clear legal and factual basis
to seek rescission, it must act promptly.” App’x at 3621
(italics added). The Intervenors argue that this phrase
incorrectly states the level of knowledge that an insurer
must have before the “prompt action” requirement is
initiated. Because the Intervenors did not object to this
language in the district court, we review it only for “plain
error,” Fed. R. Civ. P. 51(d)(2), denying relief unless “the
error affect[ed] substantial rights,” id. We see no such
error or effect.

The Intervenors are splitting hairs. To win on this
point, the Intervenors would have to show that Continental
had “formed the belief . . . that would allow it to file a
lawsuit seeking rescission,” but did not have a “clear legal
and factual basis to seek rescission.” The gap between
these two statements is vanishingly small and insufficient
to justify a new trial, especially when considered in light
of the jury charge as a whole. See Tropeano, 252 F.3d at
657-58.

Oddly, the Intervenors challenge as prejudicial the
reference to rescission as being a “drastic remedy.” The
Intervenors suggest that an insurer would be seen as
justified in a long delay before seeking a drastic remedy.
We review jury instructions in their entirety, see id., and
the district court made clear that “[o]nce an insurer forms
a reasonable belief that it has a factual basis to rescind,
it must move with dispatch.” App’x at 3620. Considered as
a whole, the jury charge does not warrant a new trial.

b. The Intervenors contend that the district court
improperly instructed that the Intervenors bore the burden
of demonstrating that Continental delayed too long in filing
for rescission. “‘An erroneous instruction requires a new
trial unless the error is harmless’” and “[a]n error is
harmless only if the court is convinced that the error did
not influence the jury’s verdict.” Gordon v. N.Y.C. Bd. of
Educ., 232 F.3d 111, 116 (2d Cir. 2000) (quoting LNC Invs.,
Inc. v. First Fidelity Bank, N.A. N.J., 173 F.3d 454, 460
(2d Cir. 1999)).

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 Even if the district court’s instruction were
incorrect, we would find the error to be harmless. The
trial in this case was limited to a single issue: whether
Continental unreasonably delayed in filing for rescission.
The trial lasted for three days, and both parties introduced
evidence related to that question. After trial, the jury
deliberated (over lunch) for only sixty-four minutes. The
verdict sheet asked the jury whether Continental
“unreasonably delay[ed] in filing its rescission action,”
and the jury wrote “NO!” in the answer blank. App’x at 4021
(capitalization and exclamation mark in original).

The district court also instructed the jury that the
Intervenors “need not prove more than a preponderance. So
long as you find that the scales tip, however slightly, in
favor of [Intervenors] . . . then their defense of waiver
will have been proven by a preponderance of the evidence.”
App’x at 3618 (emphasis added). In light of that
instruction, placing the burden on Intervenors could have
affected the verdict only if the jury believed that
Intervenors and Continental put forward equally compelling
evidence. That is untenable in light of the jury’s speedy
and emphatic verdict. In the circumstances of this case, we
have no difficulty in concluding that the district court’s
instructions regarding the burden (assuming it had been
wrong) would have been harmless.

For the foregoing reasons, and finding no merit in
Intervenors’ other arguments, we hereby AFFIRM the judgment
of the district court.

FOR THE COURT:
CATHERINE O’HAGAN WOLFE, CLERK

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