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AIG unit prevails in New York case concerning excess policy

NY court of appeals

New York’s highest state court affirmed a lower court decision in favor of an American International Group Inc. unit, ruling it was not obligated to pay additional interest under its excess policy in a case in which the primary policy was voided.

The plaintiff in the complex case was Jin Ming Chen, who was injured at a construction site and sued the general contractor, New York-based Kam Cheung Construction Inc., according to Tuesday’s ruling by the New York Court of Appeals in Jin Ming Chen v. Insurance Co. of the State of Pennsylvania.

At the time, Kam Cheung had a primary policy with a liability limit of $1 million with Arch Specialty Insurance Co., a unit of Hamilton, Bermuda-based Arch Capital Group Ltd., and an excess policy that provided $4 million per occurrence with AIG unit Insurance Co. of Pennsylvania, according to the ruling.

In December 2011, a lower court, the New York Supreme Court, granted partial summary judgment to Mr. Chen of $2.3 million, plus $396,934 in prejudgment interest.

During that time, Arch successfully sought a recission of its policy because of material misrepresentations the construction company had made in its application. As a result, it provided no coverage in the case, according to the ruling.

Mr. Chen then began proceedings against AIG, which led to the Supreme Court accepting AIG’s proposed judgment of $1.3 million, plus additional interest.

Mr. Chen appealed to the appellate division, with one of the issues in the case certain interest payments that were covered in the primary policy.

The appellate division affirmed the lower court’s ruling. The Court of Appeals also affirmed the appellate division order in a 5-2 decision. 

“By its terms, the (AIG) policy did not drop down in the event Arch failed to satisfy its obligations; it existed to cover losses in excess of those covered by the Arch Policy, up to (AIG’s) $4 million limits of liability.

“The fact that the Arch Policy was voided does not warrant a different reading of the plain language of the two policies although it unfortunately resulted in a coverage gap that included both the $1 million liability limit of the Arch Policy and certain interest covered” in the Arch policy’s supplementary payments provision, it said, in affirming the appellate division’s ruling.

There were two dissenting opinions, one of which said, “The facts of this case are very odd, which perhaps has led the majority to misinterpret the contracts at issue.” 

Attorneys in the case and AIG did not respond to requests for comment.