Air-Sea Packing Grp., Inc. v. Applied Underwriters, Inc.

211 N.Y.3d 87

AIR-SEA PACKING GROUP, INC., respondent,

v.APPLIED UNDERWRITERS, INC., et al., appellants.

Supreme Court, Appellate Division, Second Department, New York.

Argued—November 17, 2023

April 17, 2024

Appeal by the defendants, in an action, inter alia, to recover damages for fraud and for a judgment declaring that a reinsurance participation agreement between the plaintiff and the defendant Applied Underwriters Captive Risk Assurance Company, Inc., dated April 1, 2014, is void and unenforceable, from an order of the Supreme Court (Marguerite A. Grays, J.), entered May 22, 2020, in Queens County. The order, insofar as appealed from, denied those branches of the defendants’ motion which were pursuant to CPLR 3211(a) to dismiss the first, second, fourth, fifth, and sixth causes of action.

DLA Piper LLP (US), New York, NY (Shand S. Stephens, Anthony P. Coles, and Steven M. Rosato of counsel), for appellants.

Bryan Cave Leighton Paisner LLP, New York, NY (James D. Lawrence, Chris LaRocco, and Suzanne Berger of counsel), for respondent.

FRANCESCA E. CONNOLLY, J.P., ROBERT J. MILLER, DEBORAH A. DOWLING, CARL J. LANDICINO, JJ.

OPINION & ORDER

MILLER, J.

This action is just one of many such actions commenced across the country alleging that the defendant Applied Underwriters, Inc. (hereinafter Applied Underwriters), and affiliated entities, all subsidiaries of Berkshire Hathaway, Inc., deceptively circumvented state laws and regulations in the marketing and sale of an unlawful workers’ compensation insurance program. Here, the defendants seek to enforce a forum selection clause, in favor of Nebraska, contained in an insurance policy that New York State regulators have found violates New York law. While parties are generally free to select a forum in which to resolve their contractual disputes, here, where it is alleged by the plaintiff, and found by New York State regulators, that New York law has been violated, a foreign corporation may not profit from such violation to the detriment of New York employers and workers. The forum selection clause contained in an illegal insurance policy is not enforceable. As a matter of public policy, New York companies shall not be compelled to litigate in Nebraska to vindicate their rights.

I. Factual and Procedural Background

The plaintiff, Air-Sea Packing Group, Inc., is a New York corporation providing packing, shipping, storage, and transportation services. As an employer in New York, the plaintiff is required to purchase workers’ compensation insurance to protect workers and their dependents by providing reasonable compensation and necessary medical benefits in the event of workplace injuries incurred by reason of such employment (see generally New York Hosp. Med. Ctr. of Queens v. Microtech Contr. Corp., 98 A.D.3d 1096, 1096-1097, 951 N.Y.S.2d 546, affd 22 N.Y.3d 501, 982 N.Y.S.2d 830, 5 N.E.3d 993). The defendants, including Applied Underwriters and Applied Underwriters Captive Risk Assurance Company, Inc. (hereinafter AUCRA), which are headquartered in Nebraska, marketed and sold a workers’ compensation insurance program in New York known as EquityComp (hereinafter the Equity Comp program). As alleged, all of the defendants are affiliated subsidiaries of Berkshire Hathaway, Inc., which is headquartered in Omaha, Nebraska.

The plaintiff purchased the EquityComp program and participated in it from April 2014 to October 2016. Participation in the EquityComp program required the plaintiff to enter into a "Reinsurance Participation Agreement" (hereinafter RPA) with AUCRA. The RPA included a forum selection clause that provided that any action "arising out of, related to or based upon this agreement, or the transactions contemplated hereby or thereby must only be instituted in … the State of Nebraska … and each party irrevocably submits to the exclusive jurisdiction of such Court[ ]."

In December 2015, the New York State Department of Financial Services (hereinafter DFS) commenced an investigation into whether Applied Underwriters, AUCRA, and several other defendants violated the Insurance Law and the Financial Services Law by marketing and selling to New York employers "a program consisting of workers’ compensation insurance offered with a separate agreement that was not filed with [DFS]." This workers’ compensation insurance program was marketed and sold under multiple names, including, as here, the EquityComp program.

In or around 2018, the defendant AUCRA commenced an action in Nebraska against the plaintiff to recover money that allegedly was owed to it under the RPA. In April 2019, that action was dismissed on the ground that Nebraska did not have personal jurisdiction over the plaintiff.

In June 2019, the plaintiff commenced this action, alleging that Applied Underwriters, AUCRA, and the other affiliated defendants made false and deceptive representations about important aspects of the EquityComp program and fraudulently induced the plaintiff to buy the EquityComp program. The plaintiff further alleged that the EquityComp program violated the Insurance Law and constituted a fraudulent scheme whereby the defendants netted millions of dollars in profits without providing promised savings to New York employers.¹ As alleged, the defendants touted "up front savings," but failed to mention significant fees that insureds would be expected to pay throughout the life of the EquityComp program and upon cancellation. The plaintiff specifically alleged that the defendants made knowing misrepresentations about the EquityComp program and fraudulently induced the plaintiff to enter into various agreements, including the RPA, as part of the EquityComp program and that the RPA had never been filed with or approved by DFS or the New York Compensation Insurance Rating Board. As pertinent to this appeal, in the first cause of action, the plaintiff sought a judgment declaring that the RPA is void and unenforceable under Insurance Law § 2347. In the second cause of action, the plaintiff sought a judgment declaring that the RPA is void and unenforceable as an unlawful reinsurance agreement. In the fourth cause of action, the plaintiff sought equitable rescission of the RPA. In the fifth cause of action, the plaintiff sought to recover damages for violation of General Business Law § 349. In the sixth cause of action, the plaintiff sought to recover damages for commonlaw fraud.

On July 17, 2019, in order to avoid litigation, Applied Underwriters, AUCRA, and several other defendants entered into a consent order with DFS. In this consent order, DFS found that the RPAs were unlawfully delivered to New York employers without having been filed with DFS, the "RPAs resulted in fees that were different from the rates in the filed and approved guaranteed-cost policy," and parts of the EquityComp program constituted an unlicensed insurance business. DFS found that, by marketing and selling the EquityComp program in New York, the defendants that signed the consent order violated Insurance Law §§ 2117 and 2324 and Financial Services Law § 408. DFS further found that, in violation of Insurance Law § 1102, Applied Underwriters engaged in an "unlicensed insurance business" and, in violation of Insurance Law § 2307, "AUCRA issued for delivery … unfiled policy forms." Pursuant to the consent order, the defendants that signed the consent order stopped selling the EquityComp program in New York and paid a $3 million civil penalty. The parties to the consent order agreed that the consent order would not constitute evidence of wrongdoing for the purpose of any third-party proceeding, and it would not create liability or waive any defenses of the defendants that signed it.

A. The Defendants’ Motion to Dismiss

On August 16, 2016, the defendants moved, inter alia, pursuant to CPLR 3211(a)(1), (3), (7), and (10) to dismiss the first, second, fourth, fifth, and sixth causes of action. Among other things, the defendants argued that these causes of action should be dismissed on the ground that the forum selection clause required that this action be commenced in Nebraska and for failure to state a cause of action.

In an order entered May 22, 2020, the Supreme Court, among other things, denied those branches of the defendants’ motion. The defendants appeal.

II. Legal Analysis

A. Enforceability of the Forum Selection Clause

[1, 2] "Under CPLR 3211(a)(1), a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law" (Leon v. Martinez, 84 N.Y.2d 83, 88, 614 N.Y.S.2d 972, 638 N.E.2d 511). " ‘[A] contractual forum selection clause is documentary evidence that may provide a proper basis for dismissal pursuant to CPLR 3211(a)(1)’ " (Landmark Ventures, Inc. v. Birger, 147 A.D.3d 497, 497, 48 N.Y.S.3d 315, quoting Lischinskaya v. Carnival Corp., 56 A.D.3d 116, 123, 865 N.Y.S.2d 334).

Contrary to certain contentions raised by the plaintiff, this action falls within the scope of the RPA’s broad forum selection clause (see Couvertier v. Concourse Rehabilitation & Nursing, Inc., 117 A.D.3d 772, 773, 985 N.Y.S.2d 683), and since the enforceability of a forum selection clause involves a procedural rather than a substantive issue, New York law applies despite the RPA’s inclusion of a Nebraska choice-of-law clause (see North Am. Elite Ins. Co. v. Space Needle, LLC, 200 A.D.3d 425, 159 N.Y.S.3d 396; Matter of Frankel v. Citicorp Ins. Servs., Inc., 80 A.D.3d 280, 285-286, 913 N.Y.S.2d 254).²

[3, 4] "Although once disfavored by the courts," New York law now recognizes that contracting parties may freely select a forum to "resolve any disputes over the in- terpretation or performance of the contract" (Brooke Group v. JCH Syndicate 488, 87 N.Y.2d 530, 534, 640 N.Y.S.2d 479, 663 N.E.2d 635; see DiRuocco v. Flamingo Beach Hotel & Casino, 163 A.D.2d 270, 271, 557 N.Y.S.2d 140). "A contractual forum selection clause is prima facie valid and enforceable unless it...