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Appellate Division, Second Department, Holds that an Insurer Cannot Retroactively Reform Insurance Policy After Loss

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  • Posted on: Jul 19 2019

McGuckin v. Privilege Underwriters Reciprocal Exch. was decided by the Appellate Division, Second Department, on July 17, 2019.  The facts of McGuckin, at least from the Second Department’s decision, seem rather straight forward.  The plaintiff, who was a passenger in a vehicle owned by Carol Giambrone and driven by Douglas Giambrone, was injured when the vehicle was in an accident.  The vehicle was insured by defendant Privilege under a policy that provided at the time of the accident, inter alia, personal injury coverage of up to $250,000 per person and $500,000 per occurrence.

The Giambrones were sued by McGuckin for the personal injuries sustained in the accident.  A few months later the Giambrones entered into an agreement with Privilege to reform the insurance policy to reduce the bodily injury coverage from $250,000 to a single $80,000 limit (the “Reduction”) and McGuckin was so notified of the reduced coverage.  Ultimately, McGuckin obtained a $300,000 judgment against the Giambrones in the underlying personal injury action.  In this regard, a review of the court file in the underlying personal injury action reveals that McGuckin and the Giambrones entered into a stipulation and confession of judgment in which, inter alia: 1. McGuckin acknowledged the Reduction; 2. McGuckin asserted that he did not consent to the Reduction; 3. Giambrones assigned to McGuckin their right to challenge the reduction; and, 4. McGuckin waived his right to have the judgment satisfied out of the personal assets of the Giambrones and would limit its recovery to such sums as recovered in his contemplated declaratory judgment litigation against Privilege.

McGuckin commenced a declaratory judgment action against Privilege in which he sought an order declaring, among other things, “that the purported reformation of the subject insurance policy was invalid and unenforceable [and] that the defendant is bound by the full bodily injury coverage limits stated in the original policy….”  McGuckin moved for summary judgment and Privilege cross-moved for summary judgment.   In denying McGuckin’s motion and granting Privilege’s motion, supreme court held:

Plaintiff offers no basis for his claim [that the reformation of the subject insurance policy was impermissible].  The Gambrones were legally permitted to reach an agreement with respect to their own rights to defense and indemnification by Privilege….  There is no allegation of collusion between the Giambrones and their insurer, and whatever deal they struck in 2012 with their insurer cannot be set aside in favor of a subsequent agreement in 2015 between the Giambrones and the Plaintiff here.  The settlement between the Giambrones and the Plaintiff expressly provides that the insurance policy had a reduced single limit of $80,000.

In reversing supreme court, the Second Department held that an “insurer may not retroactively reform a policy to reduce the stated bodily injury coverage limits after a loss caused by its insured occurs, even if the reduced limits still meet or exceed the statutory minimum.”  (Citation omitted.)  According to the Second Department, McGuckin made his prime facie case by “demonstrating that the policy in effect at the time of the accident provided for a bodily injury coverage limit of $250,000 per person, and submitting the $300,000 judgment he obtained against [Privilege’s] insureds in the underlying personal injury action….”  The Court also held that McGuckin was entitled to a judgment “as a matter of law declaring that [Privilege] is obligated to satisfy the first $250,000 of the judgment he obtained against the Giambrones.

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