Home Mutual Insurance v. Broadway Bank & Trust Co.

OPINION OF THE COURT

A premium finance agency is under no duty to the insurer, under section 576 of the Banking Law, with respect to cancellation of an automobile liability insurance policy after default by the insured in payment to the agency of a premium installment, nor does its inaccurate representation to the insurer that the policy has been propery canceled impose on it any liability to the insurer for moneys paid in settlement of a policy claim arising out of an accident occurring after the date of the misrepresentation.

At the time of the events that give rise to this action defendant Broadway Bank was authorized under article 12-B of the Banking Law to engage in the business of a premium finance agency, advancing premiums for an insurance con

On June 19, 1972 Shelva Ludwig, through her insurance agent, executed a premium finance agreement with defendant, in connection with plaintiff’s issuance to her of an automobile liability policy through the assigned risk pool, by which she agreed to make monthly payments to the bank and authorized the bank to cancel the policy in the event of her default. Defendant bank thereafter paid the full premium for the policy to plaintiff insurer. The insured apparently defaulted in payment of the installment due the bank in July and, on July 21, 1972, the bank mailed a default notice to her and to her insurance agent, urging payment to avoid cancellation and containing an entry of August 24, 1972 as the effective date of cancellation, without however a check mark in a box which was to be marked if the paper was to serve as a cancellation notice. No copy of this paper was sent to the insurer.

One month later, on August 21, 1972, when the insured still had not paid the installments due the bank, the bank sent to her and to her insurance agent, as well as to the insurer, a default notice identical to that sent in July except that this time there was a mark in the box indicating that it was a cancellation notice. The effective date of cancellation was again stated as August 24, 1972 and, as on the prior notice, the line titled “Original Date of Notice” bore the date “7/21/72” — thereby erroneously representing that the statutory period which must elapse between notice of cancellation to the insured and the effective date of cancellation had been complied with. As a consequence of the receipt of its copy of this paper, the insurer, believing that

As the courts below and the parties all have recognized, the critical issue here is whether there is any predicate for the duty plaintiff insurer would have us impose on defendant bank — a duty not to represent to the insurer that a proper notice of cancellation of one of its liability policies had been sent to the insured when in fact it had not. Concluding, as we do, that plaintiff has failed to establish the existence of any such duty, breach of which was the cause of the economic loss sustained by the insurer in discharging its obligations under the policy of insurance, we affirm the order of the Appellate Division.

At the outset we observe that plaintiff cites no decided case in this or other jurisdictions in which its argument has been accepted. Rather, it seizes on the definition of the cause of action for negligent misrepresentation contained in lnternational Prods. Co. v Erie R. R. Co. ( 244 NY 331 , 338) and, as a foundation for its claim that there here existed the necessary element of a relationship between the parties giving rise on the part of one (here, the bank) to give accurate information, points to section 576 of the Banking Law. It argues that, because that statute vested in the bank, as premium finance, agency, the exclusive power to cancel

The difficulty with plaintiff’s argument is that there is no basis for the consequence it would attach to the power vested in the bank as financer of the premium due and paid to the insurer. Plaintiff concedes that the bank was not obligated by the statute to cancel Ludwig’s policy when she defaulted in her payments to it; the choice whether to do so was with the bank and the carrier had no right either to demand or expect cancellation of the obligation it had assumed when it entered into the contract of insurance. The statutory authorization for cancellation by the financing agency was for the benefit of the agency, which could thereby recoup a part of the premium it had advanced to the insurer. When the bank chose to exercise that authority it was acting solely for its own interest and not for the purpose of extending any advantage to the carrier; indeed, cancellation of a policy, the premium for which had been fully paid to the insurer, would normally be regarded at that time as contrary to the interests of the carrier which presumably was .interested in writing insurance. It was only the subsequent, improvidential loss under the policy which prompted the insurer to seek to shift the economic burden of the risk it had been paid to underwrite. The present case is therefore quite different from White v Guarente ( 43 NY2d 356 ), on which plaintiff relies, in which the defendants’ accountants had contractually undertaken to perform auditing services for the purpose and with the intention of benefiting a partnership of which the plaintiff, suing for negligent performance of the services, was a member.

Plaintiff asserts that, even if defendant bank was not obliged to cancel the Ludwig policy, nevertheless when it undertook to work a cancellation it was bound to complete the cancellation in a careful manner, an adaptation of the principle stated in Glanzer v Shepard ( 233 NY 236 , 239) that “one who assumes to act, even though gratuitously, may thereby become subject to the duty of acting carefully,

The present case is very like Gerace v Liberty Mut. Ins. Co. ( 264 F Supp 95 ) in which the court dismissed an action against a contractor’s liability insurance carrier by a workman injured by a defective condition on a construction site previously inspected by the carrier. In rejecting the claim that the carrier was under a duty to make inspections with sufficient care to discover the defective condition the court said(p 97):

“There is a general principle of law that a person who volunteers to do something that he is under no obligation to do, must nevertheless use due care in carrying on the voluntary activity. This doctrine applies if the volunteered act is undertaken for the benefit of someone else. A Good Samaritan who carelessly injures the person he is trying to help may perhaps be liable for his negligence.

“In this case, however, the insurance carrier did not undertake to perform a voluntary act for the benefit of someone else. It did so for its own protection in order to reduce risks that might give rise to liability on the policy.”

So here, the bank in attempting to cancel the Ludwig policy was not doing it to benefit someone else, but for its own benefit in order that it might recover that portion of the premium it had advanced to the insurer that would be unearned if the policy were canceled.

A short answer to plaintiff’s claim (with a citation to Palsgraf v Long Is. R. R. Co., 248 NY 339 ) that the duty for which it argues existed because the bank could have

Finally, with respect to duty, public policy argues strongly against the creation of the duty sought by plaintiff and never heretofore recognized in this, or apparently any other, jurisdiction. If indeed a financial institution or an agency authorized to advance insurance premiums on the strength of premium finance agreements were to be subjected not merely to a loss of recoupment of the premium advanced by it but also to contingent liability for whatever loss (potentially large) might befall an insurer under its policy obligations in the event the lender ineffectively attempted to cancel a policy on the insured’s default in payments to it, qualifying banks and lending units might well decline to act as premium financing agencies. The gain to the lender (interest chargeable on the premium advanced— in this case, $20.94) might look all too small when contrasted with the potential liability (in this case, $25,000 plus) to make the premium finance agreement an attractive, or even palatable, lending device. That a lender might avoid the risk of liability by foregoing the exercise of its right of cancellation would make the agreement no more acceptable inasmuch as that election would deprive the lender of the only ready method available to it to reduce its loss when a borrower defaults. If, as might therefore be expected, lenders chose not to engage in the premium finance arrangements authorized by article 12-B of the Banking Law, the intent of the Legislature in enacting it would be effectively frustrated. That prospect alone weighs heavily against imposition of the duty for which plaintiff argues.

The dependence placed both by plaintiff and by a fellow insurance carrier which has filed a brief amicus curiae on

One other aspect of this litigation merits comment — the question of plaintiff’s asserted reliance on defendant’s negligent misrepresentation that the Ludwig policy had been canceled and the claim that that reliance resulted in the damage of more than $25,000 flowing from the defense and settlement of the personal injury action which was within the policy coverage. Reliance, as that term describes an element of an action for negligent misrepresentation, connotes something more than simply a bare hope or anticipation; in order that liability result from a negligent statement the words communicated must be “words upon which others were expected to rely and upon which they did act or failed to act to their damage” (White v Guarente, 43 NY2d 356 , 363, supra). In the case before us the only action plaintiff took in reliance on the misrepresentation made by defendant that the August 21, 1972 notice of policy cancellation had been timely sent to the insured was the refund to the bank of the $243 unearned premium, which the bank unsuccessfully attempted to return and which has been awarded to plaintiff by the judgment affirmed by the order we are reviewing. Beyond that refund the insurer neither did nor omitted to do anything with respect to the policy it had issued to the insured Ludwig. It. does not suggest that there is anything it would have done — or indeed could have done — to have relieved itself of the contractual obligation to which it was bound, by which it was subjected to a significant liability, if the bank had not erroneously led it to believe that the policy had been canceled. It was the insurance contract entered into by plaintiff, by which for a premium it undertook the very risk that opérated when the Ludwig vehicle became involved in a collision, which was the predicate for its loss; it has no complaint because defendant bank, in ineffectively protecting itself, failed to exonerate it from that contractual obligation. That it lost

For the reasons stated, the order of the Appellate Division should be affirmed, with costs.

Chief Judge Cooke and Judges Jasen, Gabrielli, Wachtler, Fuchsberg and Meyer concur.

Order affirmed.