On June 3, 2012, prior to cancellation of Orion's policy, a New York City firefighter named Joseph Pomilla allegedly sustained injuries while responding to a fire that occurred during renovation of a home in the Rego Park area of Queens.

On February 11, 2015, Mr. Pomilla sued the property's owner, Arkadiy Bangiyev, alleging that Mr. Bangiyev's negligence had caused the fire and, hence, Mr. Pomilla's injuries.

On December 14, 2015, Mr. Bangiyev filed a third-party complaint against Orion, which had worked on the home.

Subsequently, U.S. Underwriters sued Orion in the U.S. District Court for the Eastern District of New York, seeking a declaration that it had no duty to Orion as to claims asserted against Orion in Mr. Pomilla's lawsuit and seeking rescission ab initio of the insurance policy on the ground that Orion had made material misrepresentations when it applied for the policy.

Orion did not answer U.S. Underwriters' complaint, and the insurer moved for a default judgment against Orion. The magistrate judge recommended denying the motion and dismissing the case for lack of subject matter jurisdiction. The magistrate judge concluded that U.S. Underwriters' claims failed to present a case or controversy, noting that “an attenuated chain of contingencies” would have to occur before Orion could claim entitlement to insurance coverage from U.S. Underwriters.

U.S. Underwriters did not object to the dismissal of its claim seeking the declaration of no coverage, but it did object to the dismissal of its claim seeking rescission.

The district court overruled U.S. Underwriters' objection and adopted the magistrate judge's opinion in full, dismissing U.S. Underwriters' claims without prejudice. The district court substantially adopted the magistrate judge's analysis, stating that “an attenuated chain of contingencies would have to occur” before Orion could claim coverage under its insurance policy with U.S. Underwriters and concluding that U.S. Underwriters' claim for rescission, therefore, was “not justiciable” because it failed to present a “case or controversy” as required by Article III of the Constitution.

The dispute reached the Second Circuit.

The Second Circuit's Decision

In its decision, the circuit court first affirmed the district court's decision dismissing U.S. Underwriters' claim for a declaration of its insurance obligations to Orion, noting that U.S. Underwriters had not objected to that portion of the magistrate judge's decision.

The Second Circuit then reversed the district court's decision to dismiss U.S. Underwriters' claim for rescission, reasoning that “rescission claims may be justiciable even absent a pending claim.”

In this case, the circuit court ruled, U.S. Underwriters had adequately alleged facts establishing a live case or controversy.

The Second Circuit reasoned that, in stating its cause of action for rescission, U.S. Underwriters alleged that Orion had made material misrepresentations about the nature of its work when it applied for coverage from U.S. Underwriters; that U.S. Underwriters would have charged a higher premium or issued a different policy, or would have refused to issue a policy, if it had known that Orion performed work on residential buildings/structures; and that U.S. Underwriters would never have issued the policy to Orion if it had known that Orion performed such work.

According to the Second Circuit, the facts that U.S. Underwriters alleged in its complaint described “an injury in fact sufficient to establish a concrete case or controversy.” The circuit court said that U.S. Underwriters had alleged a reasonable likelihood that it would face liability to Orion based, at minimum, on its duty to defend Orion under its policy.

The Second Circuit concluded that, given U.S. Underwriters' allegations that Orion's misrepresentations induced it to issue the policy and the potential for rescission to eliminate U.S. Underwriters' indemnity and defense obligations, U.S. Underwriters had alleged “sufficient facts to raise an actual controversy about the appropriateness of rescission.”

The case is United States Underwriters Ins. Co. v. Orion Plumbing & Heating Corp., No. 18-2286-cv (2d Cir. March 18, 2019). Attorneys involved include: For Plaintiff Appellant STEVEN VERVENIOTIS, Miranda Sambursky Slone Sklarin Verveniotis, LLP, Mineola, NY.