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Commercial General
Liability |
Policy Rescission |
Unjust Enrichment |
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Duty To Defend And
Indemnify |
Negligent
Misrepresentation |
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Okie Dokie, Inc. (Okie
Dokie) owned a nightclub called "Dream" located in the District of
Columbia. C.J. Thomas, Inc. (Thomas), Okie Dokie's insurance broker, secured a
commercial general liability insurance policy covering Dream from Burlington
Insurance Company (Burlington). The application described Dream as a
"Restaurant/Bar with a Dance Floor." It also stated that Dream's
prior insurance carrier had canceled its policy because Dream had a dance
floor. In addition, it stated that Dream did not sponsor "Social
Events," and that its sales consisted of $3 million in food sales and $1
million in liquor sales.
Shortly after Burlington
issued the policy, an underage drunk driver suspected of drinking at Dream
killed a police officer named Hakim Farthing. Farthing's estate sued Okie Dokie
for $50 million. Burlington paid some costs associated with the Farthing
lawsuit, including a $410,000 settlement, but claimed it had no duty to defend
or indemnify Okie Dokie in the action. It filed its own action against Okie
Dokie and Thomas, seeking a declaration that it had no duty to defend or
indemnify. It also requested rescission of the policy as well as reimbursement
of all costs it had already paid. The United States District Court, District of
Columbia, decided the case. Because Okie Dokie's corporate offices were in the
District of Columbia, and because the Farthing case was brought there, the law
of the District of Columbia applied.
In its complaint, Burlington
claimed that in making its decision to issue the policy, it reasonably relied
on one or more false statements and omissions in the application. Specifically,
Burlington claimed that Thomas failed to disclose that Dream: (1) was a
nightclub, (2) hosted concerts, (3) sought the patronage of 18- to 20-year-olds,
(4) derived over 25% of its revenue from the sale of alcoholic beverages, and
(5) regularly featured an "open bar." According to Burlington, Thomas
had a duty to reveal these facts because they would have affected Burlington's
decision to issue the policy.
During the trial, Ms. White,
the Thomas account executive who worked with Okie Dokie, testified regarding
the circumstances surrounding the insurance application process. According to
White, the original liquor liability application stated that liquor sales could
be as high as $1.5 million--40% of total sales. Eleven days later, the
estimated liquor sales figure was changed to $1 million--25% of sales. This was
the figure eventually used for the commercial general liability application.
White testified that the
change in estimated liquor sales did not "raise any red flags with
her" because the liquor liability application requires only that an
establishment classified as a restaurant have liquor sales that are less than
75% of its annual total sales. She also stated that it did not seem strange to
her that Dream's estimates had changed because "it was a new
business."
Burlington argued that White
violated her duty of care because she failed to tell Burlington that the liquor
sales estimate had changed. The court disagreed. It found that there was
nothing in the record to prove that White violated her duty of care. In its
pleadings, Burlington had stated merely that Thomas was
"indisputably" obligated to disclose that a previous liquor liability
application contained a different sales estimate. As a result, the court denied
Burlington's negligent misrepresentation claim.
Burlington also argued that
it had a right to rescind the policy because the application contained a false
statement. According to Burlington, the sales figures listed on the application
materially affected its decision to insure Okie Dokie. It testified that it had
stated it was not interested in the Okie Dokie account if liquor sales were
higher than 25% of total sales. It also testified it had submitted a binder to
its agent showing that it considered the level of alcohol sales to be an
important factor in its decision to cover Okie Dokie and that it would
non-renew the account if it found actual sales to be higher than 25% of total
sales.
In response to Burlington's
claim, Okie Dokie argued that Thomas was responsible for any false statement on
the application. The court disagreed. Because Thomas was acting as Okie Dokie's
agent, Okie Dokie was liable for its acts. Okie Dokie also argued that
Burlington was not entitled to rescission of the policy because it chose
non-renewal of the account as its only remedy. Again, the court disagreed.
District of Cloumbia law provides that "proof that an application for
insurance contains a false statement which materially affects the acceptance of
risk or hazard assumed by the insurer is sufficient to defeat a claim under the
policy." As a result, Burlington was not limited to non-renewal of the
policy as its only remedy. Finally, Okie Dokie argued that Burlington was
required to conduct its own independent investigation of the facts contained in
the insurance application. According to Okie Dokie, since Burlington knew the
previous insurer canceled its policy because Dream had a dance floor, it should
have been on notice that Dream was not a traditional restaurant. The court was
not convinced. Burlington had a right to rely on the statements made in the
application. It had no duty to investigate the sales figures and the sales
figures provided in the application affected its decision to provide coverage.
The court found that Burlington was not obligated to provide coverage.
Burlington also argued that
Okie Dokie was "unjustly enriched" because it received the benefit of
the commercial general liability coverage even though coverage was barred. The
court agreed. In addition, it found that Burlington had been deprived of the
money it paid in the settlement for a period of over one year and awarded
prejudgment interest to Burlington.
The parties' motions were
granted in part and denied in part.
Burlington Insurance Company
vs. Okie Dokie, Inc., and C.J. Thomas, Inc.- No. CIV.A. 03-2002(RMU) - United
States District Court - District of Columbia-October 18, 2005-398 Federal
Supplement 2d 147