16-2384

Continental Casualty Company v. Boughton

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

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At a stated term of the United States Court of Appeals

for the Second Circuit, held at the Thurgood Marshall United

States Courthouse, 40 Foley Square, in the City of New York,

on the 5th day of June, two thousand Seventeen.

PRESENT: AMALYA L. KEARSE,

DENNIS JACOBS,

DEBRA ANN LIVINGSTON,

Circuit Judges.

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CONTINENTAL CASUALTY COMPANY, 

Plaintiff-Counter-DefendantAppellee,

 -v.- 16-2384

JOSEPH J. BOUGHTON, JR., NORTHSTAR

INVESTMENT GROUP, LTD., 

Intervenor-DefendantsCounter-ClaimantsAppellants,

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MARSHALL GRANGER & COMPANY, LLP,

LAURENCE M. BROWN, RONALD J. MANGINI,

Defendants.*

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FOR APPELLANTS: JOHN W. SCHRYBER, Reed Smith

LLP, Washington, DC.

Mark S. Goldstein, Reed Smith

LLP, New York, NY. 

FOR APPELLEE: RICHARD A. SIMPSON, Wiley Rein

LLP, Washington, DC. 

Appeal from a judgment of the United States District

Court for the Southern District of New York (Seibel, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED

AND DECREED that the judgment of the district court is

AFFIRMED. 

Joseph J. Boughton, Jr. and Northstar Investment Group,

Ltd. appeal the judgment of the United States District Court

for the Southern District of New York (Seibel, J.),

rescinding an insurance policy issued by Continental

Casualty Company (“Continental”) to Marshall Granger &

Company, LLP (“Marshall Granger”). Continental’s

declaratory judgment action against Marshall Granger and its

owners sought rescission on the ground that Marshall Granger

procured the policy through material misrepresentations. 

Boughton and Northstar (collectively “Intervenors”)

argue that Continental cannot rescind, notwithstanding the

misrepresentations, because Continental (1) “ratified” the

insurance policy and (2) unreasonably delayed in seeking

rescission, grounds to foreclose rescission under New York

law. The district court granted summary judgment to

Continental on the ratification issue, and, after trial, a

jury determined that Continental’s delay in filing its

rescission lawsuit was reasonable. We assume the parties’

familiarity with the underlying facts, the procedural

history, and the issues presented for review.

* We respectfully direct the Clerk of Court to amend

the caption.

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1. An insurer may not rescind a policy if, after

having the requisite knowledge of the insured’s fraud, it

commits an act that affirms the policy. See Agristor

Leasing-II v. Pangburn, 557 N.Y.S.2d 183, 185 (4th Dep’t

1990); Brennan v. Nat’l Equitable Inv. Co., 247 N.Y. 486,

489 (1928). We review a district court’s grant of summary

judgment de novo. Urbont v. Sony Music Entm’t, 831 F.3d 80,

88 (2d Cir. 2016).

In this Court, the Intervenors allege four acts of

ratification. Not all of these arguments are properly

before us. As to those that are, none of the acts amount to

ratification, and we thus need not consider the degree of

knowledge of the insured’s fraud that an insurer must have

before being capable of ratifying the contract with an

affirming act.

a. Continental sent a letter to one of Marshall

Granger’s owners invoking one of the policy’s clauses to

deny coverage of a claim. The Intervenors did not argue to

the district court that this constituted ratification, so we

do not consider it. “[I]t is a well-established general

rule that an appellate court will not consider an issue

raised for the first time on appeal.” Greene v. United

States, 13 F.3d 577, 586 (2d Cir. 1994).

The Intervenors contend that the issue was preserved in

their summary judgment papers. While this issue was

discussed to some extent, it was raised in the portion of

their memorandum that sought to prove that Continental had

the level of knowledge of fraud necessary to allow it to

justify rescission; the denial-of-coverage letter was not

alleged to have ratified the policy in the section of their

memorandum that discussed Continental’s particular acts said

to constitute ratification. Consequently, the Intervenors

did not properly apprise the district court of this

argument. 

b. The Intervenors argue that Continental ratified the

policy by amending it. The amendments in question, however,

merely changed the insured’s name and address. Ministerial

changes cannot serve to ratify an insurance policy. Cf.,

e.g., U.S. Life Ins. Co. in N.Y.C. v. Blumenfeld, 938

N.Y.S.2d 84, 87 (1st Dep’t 2012) (holding insurer’s

acceptance of premiums after acquiring rescission-justifying

knowledge ratified policy); Sitar v. Sitar, 878 N.Y.S.2d

377, 380 (2d Dep’t 2009).

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c. Continental agreed to pay $12,500 to one of

Marshall Granger’s owners to defray his legal costs in

defending various investigations. 

The district court properly rejected this ratification

argument because Continental was legally compelled to make

the payment. When an insurer promises to pay an insured’s

defense costs, New York law requires the insurer to continue

performing that obligation until a court enters a judgment

granting rescission of the contract. See Fed. Ins. Co. v.

Kozlowski, 792 N.Y.S.2d 397, 400-02, 403-04 (1st Dep’t 2005)

(rejecting insurer’s argument that it was not required to

pay defense costs to the insured after the insurer sought

rescission of the policy); In re WorldCom, Inc. Sec. Litig.,

354 F. Supp. 2d 455, 465 (S.D.N.Y. 2005) (“Until the issue

of rescission is adjudicated, a contract of insurance

remains in effect and the duty to pay defense costs is

enforceable.”). 

The Intervenors concede that “an insurer who has sought

rescission may not stop performing its coverage obligations

once it files for rescission.” Appellants’ Reply Br. at 6. 

However, the Intervenors contend that this rule requires

insurers to pay defense costs only after filing for

rescission, and that a decision to pay defense costs before

seeking rescission serves as ratification. The district

court soundly refuted this argument:

If the law were as [Intervenors] argue, insurers

would be obligated to advance defense costs before

learning of a potential ground for rescission (as

normally required under the policy), would be

forbidden from advancing defense costs during an

investigation into that potential ground (lest it

later be found to have waived rescission), and

then would be again obligated to resume advancing

defense costs once a formal action for rescission

was filed . . . . This flip-flopping cannot be

what the law requires.

Cont’l Cas. Co. v. Marshall Granger & Co., 6 F. Supp. 3d

380, 398 n.22 (S.D.N.Y. 2014). Since New York law required

Continental to pay these defense costs, such payment did not

“ratify” the policy.

d. Continental offered “extended reporting coverage”

to the insured when Continental decided not to renew the

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policy. Once again, this act does not constitute

ratification because New York law required Continental to

offer this coverage. See N.Y. Comp. Codes R. & Regs. tit.

11, § 73.3(c)(1) (“Upon termination of coverage, extended

reporting period coverage required by this Part must be

available for any claims-made liability coverage provided

under the policy.”). Consequently, ratification cannot be

based on this act.

The Intervenors cite N.Y. Ins. Law § 3426 to argue that

New York law did not require Continental to offer extended

reporting coverage in these circumstances. We assume that

the Intervenors are relying on the following statutory

wording: “Nothing in this section shall be . . . construed

to limit the grounds for which an insurer may lawfully

rescind or suspend a policy or decline to pay a claim under

a policy.” N.Y. Ins. Law § 3426(m). We do not see (and the

Intervenors do not explain) how this provision affects

Continental’s responsibility to offer a required extension

of reporting coverage when a policy’s coverage ends. Since

Continental was required to offer such coverage, it did not

ratify the policy by doing so.

The Intervenors further argue that Continental’s

issuance of a notice of non-renewal without previously

seeking rescission signified that the policy would remain in

effect through its normal termination date. The Intervenors

cite a New York case holding that a policy was ratified when

the insurer informed its policyholder that it was canceling

the policy as of a specific future date. Stein v. Sec. Mut.

Ins. Co., 832 N.Y.S.2d 679, 681-82 (3d Dep’t 2007).

But the cancellation notice in Stein meant that the

insurer decided to continue current coverage until the

(future) date of cancellation, whereas Continental gave

notice that it would decline to enter into a new insurance

contract upon the expiration of the old policy. It may be

that a decision to cancel a policy precludes later attempts

to seek rescission because cancellation evinces an

understanding that the policy is currently valid, cf. Merry

Realty Co. v. Shamokin & Hollis Real Estate Co., 230 N.Y.

316, 323 (1921), but here Continental’s non-renewal did not

affirm the policy’s validity.1 When Continental sent its

1 The Intervenors cite another case that held that

“where an insurer who is aware of the insured’s material

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non-renewal letter, it was still considering whether to seek

rescission and explicitly reserved its right to do so. 

Because the Intervenors have not demonstrated that

Continental performed any act that ratified the policy, we

affirm the district court’s grant of summary judgment to

Continental on this issue.

2. The Intervenors challenge the jury instructions

regarding the circumstances in which an insurer loses the

right to rescind by failing to promptly seek rescission. We

review “a claim of error in jury instructions de novo,

reversing only where appellant can show that, viewing the

charge as a whole, there was a prejudicial error.” United

States v. Tropeano, 252 F.3d 653, 657-58 (2d Cir. 2001).

a. The Intervenors assert that the district court did

not properly advise the jury when Continental’s duty to

promptly file a rescission lawsuit arose, and that the jury

should have been told that “Continental’s obligation to act

promptly arose once it formed the belief . . . that would

allow it to file a lawsuit seeking rescission.” Appellants’

Opening Br. at 46.

The instructions given were consistent with the

Intervenors’ proposal:

An insurer seeking rescission of an insurance

policy may not unreasonably delay upon learning of

the grounds for rescission. An insurer waives or

forfeits its right to rescind when it fails to

rescind a policy promptly after learning of

sufficient facts to justify rescission. . . .

[O]nce an insurer forms a reasonable belief that

it has a factual basis to rescind, it must move

with dispatch. 

misrepresentations elects to send a notice of non-renewal

stating coverage will remain effective through the end of

the policy, but will not be renewed, the insurer is estopped

from seeking rescission.” GuideOne Specialty Mut. Ins. Co.

v. Congregation Adas Yereim, 593 F. Supp. 2d 471, 485

(E.D.N.Y. 2009). However, GuideOne relied solely on Stein

for that proposition. Because Stein dealt with cancellation

rather than non-renewal, GuideOne is unpersuasive.

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App’x at 3620. 

Notwithstanding the similarity of the actual charge to

what was proposed, the Intervenors assert that other parts

of the instructions render the actual charge erroneous. For

example, the Intervenors challenge the additional statement

that “[o]nce the insurer has a clear legal and factual basis

to seek rescission, it must act promptly.” App’x at 3621

(italics added). The Intervenors argue that this phrase

incorrectly states the level of knowledge that an insurer

must have before the “prompt action” requirement is

initiated. Because the Intervenors did not object to this

language in the district court, we review it only for “plain

error,” Fed. R. Civ. P. 51(d)(2), denying relief unless “the

error affect[ed] substantial rights,” id. We see no such

error or effect.

The Intervenors are splitting hairs. To win on this

point, the Intervenors would have to show that Continental

had “formed the belief . . . that would allow it to file a

lawsuit seeking rescission,” but did not have a “clear legal

and factual basis to seek rescission.” The gap between

these two statements is vanishingly small and insufficient

to justify a new trial, especially when considered in light

of the jury charge as a whole. See Tropeano, 252 F.3d at

657-58. 

Oddly, the Intervenors challenge as prejudicial the

reference to rescission as being a “drastic remedy.” The

Intervenors suggest that an insurer would be seen as

justified in a long delay before seeking a drastic remedy. 

We review jury instructions in their entirety, see id., and

the district court made clear that “[o]nce an insurer forms

a reasonable belief that it has a factual basis to rescind,

it must move with dispatch.” App’x at 3620. Considered as

a whole, the jury charge does not warrant a new trial.

b. The Intervenors contend that the district court

improperly instructed that the Intervenors bore the burden

of demonstrating that Continental delayed too long in filing

for rescission. “‘An erroneous instruction requires a new

trial unless the error is harmless’” and “[a]n error is

harmless only if the court is convinced that the error did

not influence the jury’s verdict.” Gordon v. N.Y.C. Bd. of

Educ., 232 F.3d 111, 116 (2d Cir. 2000) (quoting LNC Invs.,

Inc. v. First Fidelity Bank, N.A. N.J., 173 F.3d 454, 460

(2d Cir. 1999)). 

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Even if the district court’s instruction were

incorrect, we would find the error to be harmless. The

trial in this case was limited to a single issue: whether

Continental unreasonably delayed in filing for rescission. 

The trial lasted for three days, and both parties introduced

evidence related to that question. After trial, the jury

deliberated (over lunch) for only sixty-four minutes. The

verdict sheet asked the jury whether Continental

“unreasonably delay[ed] in filing its rescission action,”

and the jury wrote “NO!” in the answer blank. App’x at 4021

(capitalization and exclamation mark in original).

The district court also instructed the jury that the

Intervenors “need not prove more than a preponderance. So

long as you find that the scales tip, however slightly, in

favor of [Intervenors] . . . then their defense of waiver

will have been proven by a preponderance of the evidence.” 

App’x at 3618 (emphasis added). In light of that

instruction, placing the burden on Intervenors could have

affected the verdict only if the jury believed that

Intervenors and Continental put forward equally compelling

evidence. That is untenable in light of the jury’s speedy

and emphatic verdict. In the circumstances of this case, we

have no difficulty in concluding that the district court’s

instructions regarding the burden (assuming it had been

wrong) would have been harmless.

For the foregoing reasons, and finding no merit in

Intervenors’ other arguments, we hereby AFFIRM the judgment

of the district court.

FOR THE COURT:

CATHERINE O’HAGAN WOLFE, CLERK

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