Star Ins. Co. v. At-Saf, Inc.

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STAR INSURANCE COMPANY, Plaintiff, v. AT-SAF, INC., INDERPAL SINGH, SIKANDER SINGH, SARBJIT SINGH, TEJINDER “MIKE” SINGH, HARVINDER PAL SINGH, STATE FARM FIRE & CASUALTY COMPANY as subrogee of BACI'S PET PALACE INC., WESCO INSURANCE COMPANY as subrogee of CROSSBAY ASSOCIATES LLC, CROSSBAY ASSOCIATES LLC, BACI'S PET PALACE INC d/b/a ANIMAL PANTRY, NORGUARD INSURANCE COMPANY as subrogee of CROSSBAY EXPRESS LAUNDROMAT, INC. AND AREPALICIOUS, Defendants.

No. 22-CV-7968 (EK)(TAM)

United States District Court, E.D. New York

September 27, 2024

MEMORANDUM & ORDER

ERIC KOMITEE, UNITED STATES DISTRICT JUDGE.

In this action, Star Insurance Company seeks a declaratory judgment that it has no duty to defend or indemnify certain defendants in a number of underlying state negligence suits. The defendants in those lawsuits are insured by United Specialty Insurance Company (USIC). Star Insurance is USIC's reinsurer, and it is not a defendant in the underlying state actions.

The defendants in this case believe that USIC is the real plaintiff in interest here. And they think they know why it did not bring this action: because its presence as a plaintiff would have destroyed diversity and thereby precluded federal jurisdiction.

Defendant Wesco Insurance Company, joined by a number of other defendants, filed a motion to dismiss this action pursuant to Rule 12(b)(6). Wesco asserts that as a reinsurer, Star lacks “contractual standing” to sue under (or seek declaratory relief concerning) the relevant policies.

For the reasons set forth below, the defendants' motion is granted.

I. Background

Unless otherwise indicated, the following facts are taken from Star Insurance Company's amended complaint and the documents referenced therein and are assumed to be true.

A. The Underlying Dispute

In November 2018, a building on Crossbay Boulevard in Queens (the “Crossbay Building”) partially collapsed, causing substantial losses to the building's owners and its tenants. Am. Compl. ¶ 20, ECF No. 84. The Crossbay Building is owned by Crossbay Associates LLC. Id.

In the several state court actions that followed, various plaintiffs blamed the collapse on Inderpal^[1] Singh, who owned a neighboring property that the complaint refers to as the Albert Road Property. Id. Inderpal Singh purchased that undeveloped property with an eye towards constructing a two-story building on it. Id. Singh has his own construction firm - At-Saf, Inc., which was the general contractor for the Albert Road construction project. Id. He also engaged two engineering firms for the project. Id. At-Saf is insured by USIC under a general liability policy and an excess policy (the “USIC Policies”). Id. ¶¶ 33-38.

During “early stage excavation and earth work” at the Albert Road Property, a section of the Crossbay Building “collapsed and fell into the construction site at the Albert Road Property.” Id. ¶ 20. This caused extensive damage to the Crossbay building. The City's Department of Buildings issued a stop-work order shutting down construction on the Albert Road project. Id. Five separate state-court cases followed.^[2]In those cases, the plaintiffs (which include Crossbay Associates, various tenants of the Crossbay Building, and the insurers of these entities) allege that At-Saf and Inderpal were negligent in designing and executing the Albert Road project. Id. Certain of these actions also name Sikander Singh, Sarbjit Singh, Tejinder Singh, and Harvinder Pal Singh as co-owners of the Albert Road Property. Id ¶ 22.

B. The Reinsurance Arrangement

After executing the USIC Policies, but before the Crossbay Building collapsed, USIC sought reinsurance from Star Insurance Company (“Star”). Star initially agreed to reinsure the USIC Policies alongside a number of other reinsurers; together they executed a Quota Share Reinsurance Agreement (“QSA”), and certain related agreements, with USIC. Id. ¶¶ 4243.^[3]Years later, however, Star agreed to take the entirety of the reinsurance obligation on itself. See id. ¶ 44; see also Wesco Mem., Ex. D, General Agency Novation Agreement (“GANA”) 1, ECF No. 95-2. Star thus became fully “responsible for paying out any obligations owed under the [USIC] Policies to At-Saf and other policyholders.” Am. Compl. ¶ 44.

Pursuant to these agreements, Star is currently defending Inderpal, At-Saf and certain other state-court defendants under the USIC Policies. Id. ¶¶ 18, 21, 24, 27, 30.

C. Procedural History

This action was initially prosecuted by USIC, not Star. In June 2022, USIC sued At-Saf and the Singhs in this district, invoking the Court's diversity jurisdiction. USIC sought the same remedy that Star now seeks: a declaratory judgment that it has no duty to defend or indemnify At-Saf and the individual defendants in the state-court actions. Complaint, United Specialty Ins. Co. v. At-Saf, Inc., et al., No. 22-CV-3786 (E.D.N.Y. June 28, 2022), ECF No. 1.

USIC did not name Crossbay's insurer, Wesco Insurance Company (“Wesco”), as a defendant - notwithstanding the fact that Wesco is a plaintiff in one of the state actions, and USIC's requested declaratory judgment would likely impact Wesco's ability to recover. Id. ¶¶ 8-13. Wesco then apparently informed USIC that it would move to intervene. Mem. of L. in Supp. of Def. Wesco Ins. Co.'s Mot. to Dismiss (“Wesco Mem.”) at 2, ECF No. 96. As USIC and Wesco are both Delaware corporations, Wesco's intervention would have destroyed diversity. Id.

Rather than adding Wesco, USIC voluntarily dismissed its case. Notice of Voluntary Dismissal, United Specialty, No. 22-CV-3786 (E.D.N.Y. Jan. 3, 2023), ECF No. 9. Shortly thereafter, Star filed the present action for the same relief. Compl., ECF 1. As the caption indicates, Star did name Wesco as a defendant. That addition did not destroy diversity, because Star is incorporated and headquartered in Michigan, not Delaware. Am. Compl. ¶ 1.^[4]

In January 2024, Wesco filed this motion to dismiss. Wesco Mem. 1-3. Several defendants join Wesco's motion.^[5]

II. Legal Standard

To overcome a motion to dismiss under Rule 12(b)(6), a complaint must plead facts sufficient “to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).^[6]In reviewing such a motion, the court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. See Lundy v. Cath. Health Sys. of Long Island Inc., 711 F.3d 106, 113 (2d Cir. 2013).

III. Discussion

The declaratory relief that Star seeks is premised on various exclusions and limitations in the USIC Policies. Am. Compl. ¶¶ 49-109. Because Star is not itself a party to the USIC Policies, Wesco moves to dismiss this action for lack of contractual standing. Wesco Mem. 8. Wesco argues that Star lacks privity with the defendants and thus is not the real party in interest. Id.

Contractual standing is an inquiry into “whether a party has the right to enforce a contract.” SM Kids, LLC v. Google LLC, 963 F.3d 206, 211 (2d Cir. 2020). As such, “[c]ontractual standing is distinct from Article III standing and does not implicate subject-matter jurisdiction.” Id. Instead, “contractual standing speaks to a party's right to relief” under a contract and is thus considered under Rule 12(b)(6). See id. at 211-12.

A plaintiff seeking remedies under a contract must be “in privity of contract with the defendant or [] a third-party beneficiary of the contract.” Hillside Metro Assocs., LLC v. JPMorgan Chase Bank, N.A., 747 F.3d 44, 49 (2d Cir. 2014). For the reasons that follow, Star has failed to plead privity or third-party beneficiary status.

A. Star Lacks Contractual Standing

New York law is clear that non-parties to insurance policies lack standing to sue under those policies. Brettler Tr. of Zupnick Fam. Tr. 2008 A v. Allianz Life Ins. Co. of N. Am., 57 F.4th 57, 61-62 (2d Cir. 2022) .^[7] This includes suits for declaratory judgments regarding the policies' terms. Id. New York courts have specifically held that “no privity exists between the reinsurer and the original insured.” Reliance Ins. Co. v. Aerodyne Engineers Inc., 204 A.D.2d 944, 944 (3d Dep't 1994).

This is true because reinsurance agreements, generally speaking, are “contracts of indemnification in which a ceding insurer is indemnified by a reinsurer against loss on its policies.” Jurupa Valley Spectrum, LLC v. National Indem. Co., No. 06-CV-4023, 2007 WL 1862162, at *6 (S.D.N.Y. June 29, 2007), aff'd, 555 F.3d 87 (2d Cir. 2009) (citing Cont'l Cas. Co. v. Stronghold Ins. Co., Ltd., 77 F.3d 16, 19 (2d Cir. 1996)). “Since the relationship” between a reinsurer and the first-line insurer “is one of indemnification, the reinsurer has no privity with, and is generally not liable to, the original purchaser of the underlying policy.” Id. at *6 (citing Travelers Indem. Co. v. Scor Reinsurance Co., 62 F.3d 74, 76 (2d Cir. 1995)).

The Appellate Division's brief order in Reliance Insurance is instructive. That case arose out of an oil spill that occurred when an oil company - “Big S. Oil” - delivered its product to a customer. Reliance Ins., 204 A.D.2d at 944. Big S. was insured by a non-party, Planet Insurance, and Reliance had agreed to reinsure Planet. Id. After Reliance paid a damages claim for the spill, it sued Aerodyne Engineers, alleging that Aerodyne had negligently installed the oil tanks at issue. Id.

In the state Supreme Court, Reliance asserted the right to sue Aerodyne as Big S.'s “subrogee.” Id. The lower court denied Aerodyne's motion to dismiss Reliance's complaint, but the Appellate Division reversed. Id. at 945. The appellate court held that a “contract of reinsurance is one of indemnity to the entity reinsured. It is distinct and separate from...