Opinion
20-CV-3246 (PGG)(KNF)
05-26-2021
AMERICAN EMPIRE SURPLUS LINES INSURANCE COMPANY, Plaintiff, v. UPLIFT ELEVATOR OF NY INC., JERMAINE HICKSON, and HAMILTON HEIGHTS CLUSTER ASSOCIATES, L.P., Defendants.
TO THE HONORABLE PAUL G. GARDEPHE, UNITED STATES DISTRICT JUDGE.
REPORT AND RECOMMENDATION
KEVIN NATHANIEL FOX, UNITED STATES MAGISTRATE JUDGE.
Plaintiff American Empire Surplus Lines Insurance Company (“American Empire”) commenced this action against Uplift Elevator of NY Inc. (“Uplift”), Jermaine Hickson (“Hickson”), and Hamilton Heights Cluster Associates, L.P. (“Hamilton Heights”). The defendants failed to answer or otherwise respond to the complaint. American Empire obtained clerk's certificates of default. See Docket Entry Nos. 17, 20, 21. Thereafter, American Empire filed an amended complaint, seeking damages, declaratory relief, and injunctive relief. See Docket Entry No. 24. Your Honor ordered the defendants to appear and show cause why a default judgment should not be entered against them. See Docket Entry No. 30. The defendants failed to appear, and your Honor directed that an order of default be entered against them. Thereafter, the matter was referred to the undersigned to report and recommend “regarding Plaintiff's request for damages, an award of attorney's fees, and certain declaratory relief.” Docket Entry No. 39. 1
The Court received evidence at an inquest hearing on February 4, 2021. The plaintiff obtained clerk's certificates of default respecting the amended complaint on February 5, 2021. See Docket Entry No. 50. Thereafter, American Empire filed a memorandum of law in support of its inquest submissions. See Docket Entry No. 51.
FACTUAL BACKGROUND
The following facts are drawn from the amended complaint, Docket Entry No. 24. The amended complaint contains factual allegations and claims relating to three insurance policies issued to Uplift by American Empire in 2017, 2018 and 2019. The original complaint filed in this action, Docket Entry No. 1, contains factual allegations and claims relating only to the policy issued in 2018.
American Empire issued to Uplift a Commercial General Liability Insurance policy for the period from August 26, 2018, to August 26, 2019 (the “2018 Policy”). The policy provided that the premium to be paid by Uplift be calculated as a percentage of Uplift's gross receipts during the policy period. American Empire assigned an advance premium to Uplift, based upon Uplift's estimate of its gross receipts. The premium was subject to adjustment should an audit by American Empire reveal that Uplift's gross receipts exceeded its estimate. The policy allowed American Empire to “examine and audit [Uplift's] books and records as they relate to this policy at any time during the policy period and up to three years afterward.” American Empire engaged Matson, Driscoll & Damico to audit Uplift's financial records for the 2018 Policy period. Based upon that audit, American Empire learned that it was owed an additional premium under the policy: $1,542,306. American Empire demanded this amount from Uplift, and Uplift has not paid it. 2
American Empire alleges, “upon information and belief, [that] Jermaine Hickson sustained injuries on or about August 19, 2018 while exiting an elevator in New York, New York,” and, thereafter, filed a lawsuit in New York state court against Hamilton Heights and Uplift (the “Hickson Action”). American Empire alleges, “[u]pon information and belief, [that] coverage under the American Empire 2018 Policy may be implicated relative to the Hickson Action.” According to American Empire, “[all] defendants other than Uplift are named as nominal defendants to the extent that their interests may be affected by the outcome of the causes of action plead by American Empire in this action.”
American Empire issued to Uplift a Commercial General Liability Insurance policy for the period from August 26, 2017, to August 26, 2018 (the “2017 Policy”). The 2017 Policy, like the 2018 Policy, provides for the premium to be calculated as a percentage of Uplift's gross receipts during the policy period, to be determined by an audit of those receipts. American Empire conducted an audit for the 2017 Policy period, but subsequently American Empire obtained contracts which suggested that the audit results were not accurate. American Empire and its auditor tried to schedule and conduct a “re-audit” of Uplift's financial records; Uplift was uncooperative, and no re-audit was performed.
American Empire issued to Uplift a Commercial General Liability Insurance policy for the period from August 26, 2019, to August 26, 2020 (the “2019 Policy”). The policy was cancelled on March 29, 2020. The 2019 Policy provided for the premium to be calculated as a percentage of Uplift's gross receipts during the policy period, to be determined by an audit of those receipts. American Empire and its auditor tried to schedule and conduct an audit of Uplift's financial records for the 2019 Policy period. Uplift was uncooperative, and no audit was performed. 3
INQUEST SUBMISSIONS
American Empire seeks the following:
With respect to the American Empire 2018 Policy [Policy No. 18CG0222749]: judgment in the amount of $1,542,306 for unpaid additional premium; plus interest at 9% from the earliest date allowable by law (interest calculation of $138,807.54 for the one year period from the January 29, 2020 date of audit (Inquest Exhibit “4”) through January 29, 2021); plus $16,697 for attorneys' fees, for a total sum of $1,697,810.50 (including interest up to January 29, 2021) against Uplift; and in the event that Uplift fails to pay this amount by a date certain that this Court declare that American Empire has no duty to defend and/or indemnify Uplift, or any other person or entity seeking coverage under the American Empire 2018 Policy, relative to any occurrence, offense, claim or suit which has been or may be reported to American Empire;
With respect to the American Empire 2017 Policy [Policy No. 17CG0215201]: declaring that Uplift shall submit to a re-audit of its business records pursuant to the terms and conditions of the American Empire 2017 Policy so that American Empire may determine whether an additional premium is due and owing under the same, and in the event that Uplift fails to do so by a date certain that this Court declare that American Empire has no duty to defend and/or indemnify Uplift, or any other person or entity seeking coverage under the American Empire 2017 Policy, relative to any occurrence, offense, claim or suit which has been or may be reported to American Empire; and
With respect to the American Empire 2019 Policy [Policy No. PL2665513]: declaring that Uplift shall submit to an audit of its business records pursuant to the terms and conditions of the American Empire 2019 Policy so that American Empire may determine whether an additional premium is due and owing under the same, and in the event that Uplift fails to do so by a date certain that this Court declare that American Empire has no duty to defend and/or indemnify Uplift, or any other person or entity seeking coverage under the American Empire 2019 Policy, relative to any occurrence offense, claim or suit which has been or may be reported to American Empire.
At the inquest hearing, American Empire submitted evidence consisting of the testimony of Randy Myers (“Myers”), the divisional assistant vice president for Great American Insurance, which owns American Empire; Inquest Exhibit 1, the 2018 Policy; Inquest Exhibit 2, the 2017 Policy; Inquest Exhibit 3, the 2019 Policy; Inquest Exhibit 4, the Audit Report for the 2018 policy; Inquest Exhibit 5, the Audit Endorsement for the 2018 Policy; and Inquest Exhibit 6, the affidavit of Maureen O'Connor (“O'Connor”), counsel to American Empire. 4
Myers testified that the 2018 Policy, the 2019 Policy, and the 2017 Policy all required that the insured, Uplift, submit to an audit for the purpose of calculating the premium.Myers testified that Inquest Exhibit 4, the audit report for the 2018 Policy, was prepared by a forensic accountant engaged by American Empire to perform its audits. Myers testified further that the documents used to create the report were monthly bank statements, quarterly sales tax returns, and quarterly payroll records supplied by Malcom Stewart, the contact designated by Uplift, to the auditor. According to Myers, page 2 of Inquest Exhibit 4 is a “summary report for the gross receipts” of American Empire for August 26, 2018, through August 26, 2019. Myers stated that the gross receipts for that period were $5,536,195. Myers testified that applying the rate associated with the 2018 Policy, which appears in Inquest Exhibit 1, $340 per $1,000 in gross receipts, results in a premium of $1,882,306. Deducting the $340,000 already paid for the advanced premium results in additional premium owed of $1,542,306.
Inquest Exhibit 1, the 2018 Policy, provides:
5. Premium Audit
a. We will compute all premiums for this Coverage Part in accordance with our rules and rates.
b. Premium shown in this Coverage Part as advance premium is a deposit premium only. At the close of each audit period we will compute the earned premium for that period and send notice to the first named Insured. The due date for audit and retrospective premiums is the date shown as the due date on the bill....
c. The first Named Insured must keep records of the information we need for premium computation, and send us copies at such times as we may request.Identical language appears in the 2017 Policy and the 2019 Policy. See Inquest Exhibits 2 and 3.
With respect to the 2017 Policy, Myers stated that American Empire seeks a re-audit of that policy, based on the findings of the 2018 audit and the work of “a different auditing firm that handled that audit.” Moreover, he explained that a re-audit would “fall[] within the three-year window of which we're allowed to conduct an audit.” Myers testified that the three-year window comes from Section C of the common policy conditions in the 2017 Policy, which 5 provides as follows: “We may examine and audit your books and records as they relate to this policy at any time during the policy period and up to three years afterward.” According to Myers, the three-year period commences on the last date of coverage. Myers testified that with respect to the 2019 Policy, American Empire “just request[s] to actually conduct the audit for the . . . policy.” Myers stated that demands to conduct the re-audit of the 2017 policy and the audit of the 2019 policy were made by American Empire, but Uplift did not comply.
Myers testified that the conditions to coverage are found on the “dec. page” of each policy, as well as in Section 4 of the standard commercial general liability form that is found in each policy. Each policy provides that “All Coverage Forms included in this policy are subject to the following conditions,” which include that “the first Named Insured shown in the declarations . . . is responsible for the payment of all premiums.” The only Named Insured in each policy identified above is Uplift.
Myers testified that American Empire seeks approximately $16,000 in attorneys' fees through this action, although the insurance policies do not authorize payment by the insured of American Empire's legal fees.
At the hearing, the Court observed that American Empire had not asked the Clerk of Court to note the default of the defendants respecting the amended complaint, and asked American Empire to submit a memorandum of law addressing: 1) the legal authority, if any, that permits the court to grant the additional relief requested in the amended complaint in the absence of compliance with Rule 55(a) of the Federal Rules of Civil Procedure; 2) “whether the holding of the show cause hearing in the absence of . . . compliance with Rule 55(a) is sufficient to permit a default judgment to be entered against defaulting parties”; and 3) such additional legal arguments as American Empire deemed necessary in connection with its inquest submissions. In 6 its post-inquest memorandum of law, Docket Entry No. 51, American Empire does not address the legal questions posed by the Court at the hearing. Instead, American Empire reports that it obtained a Clerk's Certificate of Default respecting the amended complaint on “February 5, 2020,” which appears at Docket Entry No. 50.
American Empire states that the Clerk's Certificate of Default is dated February 5, 2020, but this appears to be a typographical error, as the certificate on the docket sheet maintained by the Clerk of Court for this action is dated February 5, 2021.
In its memorandum of law, American Empire contends that an action on an unpaid insurance premium is analyzed as a breach of contract, and that the amended complaint sets forth clearly a breach of contract cause of action. According to American Empire, in “matters pertaining to unpaid premiums on commercial insurance policies based on a premium audit, New York courts have found the submission of the insurance policy, the audit statement, and an affidavit from a representative of the insurance company as to the additional amount owed to be sufficient to constitute a prima facie case. Evanston Insurance Company v. Po Wing Hong Food Market, Inc., 21 A.D.3d 333 (1st Dep't 2005).” American Empire contends that it has submitted such evidence in connection with the instant inquest. American Empire maintains that Uplift's failure to comply with demands for the 2019 Policy audit and a re-audit of the 2017 Policy is “tantamount to failure to abide by a condition to coverage under the American Empire Policies,” which required Uplift to keep records of the information American Empire requires to calculate the premium and to send copies of those records to American Empire upon request.
American Empire contends that, under New York law, interest on the sum awarded for a party's breach of a contract is to be computed from the earliest date that the cause of action accrued, except that interest on damages incurred thereafter is computed from the date those damages are incurred. American Empire requests that interest be awarded at the rate of nine 7 percent per annum, from January 29, 2020, the date that the audit on the 2018 Policy was performed.
American Empire contends that Uplift acted in bad faith by failing to: 1) abide by the terms of the insurance contracts; and 2) appear and offer any good-faith defense in this action. Therefore, according to American Empire, the court should make an exception to the “American Rule” that each party pays its own legal fees, and award attorneys' fees to American Empire in the sum of $16,697. In connection with this request, O'Connor avers in her affidavit that “[t]o-date American Empire has paid and/or incurred attorneys' fees and expenses in the total sum of $16,697.00, which represents 52.2 hours of attorney time billed at $310.00 per hour, combined with $515 in disbursements ($400 complaint filing fee, $40 service of process fee on New York Secretary of State, and $75 process server fee).”
LEGAL STANDARD
“Rule 55 of the Federal Rules of Civil Procedure provides a two-step process for obtaining a default judgment.” Priestley v. Headminder, Inc., 647 F.3d 497, 504 (2d Cir. 2011). At the first step, the plaintiff obtains an entry of default from the Clerk of Court, noting that the defendant has failed to plead or otherwise defend the action. See id. at 504-505; Fed.R.Civ.P. 55(a). Local Civil Rule 55.1 of this court requires a plaintiff applying for an entry of default under Rule 55(a) to file a request for a Clerk's Certificate of Default, accompanied by an affidavit demonstrating that “(1) the party against whom a notation of default is sought is not an infant, in the military, or an incompetent person; (2) the party has failed to plead or otherwise defend the action; and (3) the pleading to which no response has been made was properly served.” At the second step, the plaintiff seeks a default judgment under Federal Rule of Civil Procedure 55(b). If the plaintiffs claim is for a sum certain, the Clerk of Court must enter 8 judgment under Rule 55(b)(1); otherwise, under Rule 55(b)(2), the plaintiff must apply to the court for a default judgment. The first step, obtaining an entry of default by the Clerk of Court, is important because then, “pursuant to Rule 55(c), the defendant has an opportunity to seek to have the default set aside.” Meehan v. Snow, 652 F.2d 274, 276 (2d Cir. 1981). However, in some situations, failure to obtain an entry of default under Rule 55(a) is “largely technical because the hearing on the [plaintiff's] motion for the entry of a default judgment afford[s] the defendant[] the same opportunity to present mitigating circumstances that [the defendant] would have had if a default had been entered and [the defendant] had then moved under Rule 55(c) to set it aside.” Id. See also Frazier v. Absolute Collection Serv., Inc., 767 F.Supp.2d 1354, 1360 n.1 (N.D.Ga. 2011) (finding, when the plaintiff filed motion for default judgment prior to the Clerk's entry of default, but later obtained the Clerk's entry of default, that “with the subsequent entry of default, the premature filing for default judgment is harmless, so the District Court need not require Plaintiff to re-file her motion for default judgment”).
When a defendant defaults in an action by failing to plead or otherwise defend against a complaint, the defendant is deemed to have admitted every well-pleaded allegation of the complaint except those regarding damages. Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992). The burden is on the plaintiff to prove that it is entitled to the damages it seeks. See Id. “Even when a default judgment is warranted based on a party's failure to defend, the allegations in the complaint with respect to the amount of the damages are not deemed true. The district court must instead conduct an inquiry in order to ascertain the amount of damages with reasonable certainty.” Credit Lyonnais Sec. (USA), Inc. v. Alcantara, 183 F.3d 151, 155 (2d Cir. 1999) (citations omitted). Establishing the appropriate amount of damages involves two steps: (1) “determining the proper rule for calculating damages on a 9 claim”; and (2) “assessing plaintiff's evidence supporting the damages to be determined under this rule.” Id. When assessing damages, a court cannot “just accept [the plaintiff's] statement of the damages”; rather, damages must be established “with reasonable certainty.” Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., Div. of Ace Young Inc., 109 F.3d 105, 111 (2d Cir. 1997). The Second Circuit Court of Appeals has explained that damages must be established through admissible evidence. See House v. Kent Worldwide Mach. Works, Inc., 359 Fed.Appx. 206, 207 (2d Cir. 2010) (summary order).
APPLICATION OF LEGAL STANDARD
Rule 55(a)Although American Empire did not comply with the two-step process necessary to obtain a default judgment, because it did not ask the Clerk of Court to enter the defendants' default respecting the amended complaint as required by Rule 55(a) before it moved for a judgment by default, the show-cause hearing gave the defendants “the same opportunity to present mitigating circumstances that they would have had if a default had been entered and they had then moved under Rule 55(c) to set it aside.” Meehan, 652 F.2d at 276. Additionally, American Empire complied belatedly with Rule 55(a) by obtaining a Clerk's Certificate of Default, see Docket Entry No. 50, noting that the defendants were served with the amended complaint, on September 4, 2020, and failed to answer or otherwise respond. The Court finds that American Empire's failure to comply with the requirements of Rule 55(a) was therefore harmless.
Choice of Law
Although American Empire makes citation to New York law in its memorandum of law, none of the insurance policies appears to contain a choice-of-law provision. A federal court sitting in diversity applies the choice-of-law rules of the forum state; therefore, New York's 10 choice-of-law rules apply. See Krauss v. Manhattan Life Ins. Co. of New York, 643 F.2d 98, 100 (2d Cir. 1981). In a contract case, New York law looks to the “center of gravity” or “grouping of contacts” to determine the law to apply. Matter of Allstate Ins. Co. (Stolarz), 81 N.Y.2d 219, 226, 597 N.Y.S.2d 904, 907 (1993). “The ‘center of gravity' in an insurance contract dispute is generally the state where the insured risk is located.” Liberty Mut. Ins. Co. v. Fairbanks Co.,170 F.Supp.3d 634, 642 (S.D.N.Y. 2016). Here, the contract is a commercial general liability policy insuring Uplift's business. Uplift is a New York corporation with its principal place of business in New York; Uplift's full name is “Uplift Elevator of New York, Inc.” The Court finds that the 2018 Policy's center of gravity is New York; therefore, New York law governs.
Damages
American Empire seeks damages for breach of the 2018 Policy. “Under New York law, insurance policies are interpreted according to general rules of contract interpretation.” Olin Corp. v. Am. Home Assur. Co., 704 F.3d 89, 98 (2d Cir. 2012). “To state a claim for breach of contract under New York law, ‘the complaint must allege: (i) the formation of a contract between the parties; (ii) performance by the plaintiff; (iii) failure of defendant to perform; and (iv) damages.'” Orlander v. Staples, Inc., 802 F.3d 289, 294 (2d Cir. 2015) (quoting Johnson v. Nextel Commc'ns, Inc., 660 F.3d 131, 142 (2d Cir. 2011)). The well-pleaded allegations in the amended complaint are sufficient to establish Uplift's liability for breach of contract respecting the 2018 Policy. American Empire alleges plausibly through the complaint that: 1) it entered into a contract of insurance with Uplift; 2) the premium for the insurance policy would be calculated after an audit of Uplift's records; 3) Uplift breached the contract by refusing to pay the outstanding premium following the audit; and 4) it suffered damages. However, American 11 Empire has not pleaded facts sufficient to implicate Hickson and Hamilton Heights in the breach of contract.
American Empire seeks damages in the amount of $1,542,306, the additional unpaid premium. American Empire's submission of the insurance policy, the audit report, and testimony from Myers, its representative, is sufficient to establish the amount owed to it. See Evanston Ins. Co. v. Po Wing Hong Food Mkt., Inc., 21 A.D.3d 333, 334, 800 N.Y.S.2d 396, 396 (App. Div. 1st Dep't 2005). The 2018 Policy provides:
5. Premium Audit
a. We will compute all premiums for this Coverage Part in accordance with our rules and rates.
b. Premium shown in this Coverage Part as advance premium is a deposit premium only. At the close of each audit period we will compute the earned premium for that period and send notice to the first named Insured. The due date for audit and retrospective premiums is the date shown as the due date on the bill....
c. The first Named Insured must keep records of the information we need for premium computation, and send us copies at such times as we may request.
The policy provides further that Uplift, as the first Named Insured on the policy, “is responsible for the payment of all premiums . . .” Inquest Exhibit 1, § E (1).
The audit summary, Inquest Exhibit 4, shows Uplift had total gross receipts of $5,536,195. As Myers testified, the rate provided for in the 2018 Policy, $340 per $1,000 in gross receipts, results in a premium of $1,882,306.Subtracting the $340,000 advance premium that Uplift paid results in $1,542,306 in unpaid premium. This calculation is reflected in Inquest Exhibit 5, the audit endorsement to the 2018 Policy. Awarding American Empire $1,542,306 in damages against Uplift is, therefore, warranted. 12
The exact figure is $1,882,306.30.
Interest
American Empire requests an award of interest. New York law allows a prevailing party to recover prejudgment interest “upon a sum awarded because of a breach of performance of a contract.” New York Civil Practice Law and Rules (“CPLR”) § 5001(a). “Interest shall be computed from the earliest ascertainable date the cause of action existed.” CPLR § 5001(b). “Interest shall be at the rate of nine per centum per annum, except where otherwise provided by statute.” CPLR § 5004. American Empire requests that interest be awarded from January 29, 2020. This is the date on which Inquest Exhibit 5, the audit endorsement showing the additional premium due, was issued. Awarding American Empire interest at a rate of nine per cent per annum, from January 29, 2020, until the date of judgment, is warranted.
Declaratory Relief
American Empire seeks declaratory relief. With respect to the 2018 Policy, American Empire seeks a declaration “in the event that Uplift fails to pay [the unpaid premium] by a date certain . . . that American Empire has no duty to defend and/or indemnify Uplift, or any other person or entity seeking coverage under the American Empire 2018 Policy relative to any occurrence, offense, claim or suit which has been or may be reported to American Empire.” With respect to the 2017 Policy, American Empire seeks a declaration that “Uplift shall submit to a re-audit of its business records pursuant to the terms and conditions of the American Empire 2017 Policy so that American Empire may determine whether an additional premium is due and owing under the same, and in the event that Uplift fails to do so by a date certain that this Court declare that American Empire has no duty to defend and/or indemnify Uplift, or any other person or entity seeking coverage under the American Empire 2017 Policy, relative to any occurrence, offense, claim or suit which has been or may be reported to American Empire.” With respect to 13 the 2019 Policy, American Empire seeks a declaration that “Uplift shall submit to an audit of its business records pursuant to the terms and conditions of the American Empire 2019 Policy so that American Empire may determine whether an additional premium is due and owing under the same, and in the event that Uplift fails to do so by a date certain that this Court declare that American Empire has no duty to defend and/or indemnify Uplift, or any person or entity seeking coverage under the American Empire 2019 Policy, relative to any occurrence, offense, claim or suit which has been or may be reported to American Empire.”
The Declaratory Judgment Act provides that
In a case of actual controversy within its jurisdiction, . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Further necessary or proper relief based on a declaratory judgment or decree may be granted, after reasonable notice and hearing, against any adverse party whose rights have been determined by such judgment.28 U.S.C. § 2201, § 2202.
The requirement of an “actual controversy” means that the controversy must be
one that is appropriate for judicial determination.... [It] must be definite and concrete, touching the legal relations of parties having adverse legal interests. It must be a real and substantial controversy admitting of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.Aetna Life Ins. Co. of Hartford, Conn. v. Haworth, 300 U.S. 227, 240-41, 57 S.Ct. 461 464 (1937). “A claim is not ripe for adjudication if it rests upon contingent future events that may not occur as anticipated, or indeed may not occur at all.” Texas v. United States, 523 U.S. 296, 300, 118 S.Ct. 1257, 1259 (1998) (quotation marks and citation omitted).
However, the fact that liability may be contingent “does not necessarily defeat . . . a declaratory judgment action”; rather, courts should focus on “the practical likelihood that the 14 contingencies will occur . . .” Associated Indem. Corp. v. Fairchild Indus., Inc., 961 F.2d 32, 35 (2d Cir. 1992) (quoting 10A C. Wright, A. Miller & M. Kane, Federal Practice and Procedure, § 2757, at 587 (2d ed. 1983)). “A controversy cannot be a mere possibility or probability that a person may be adversely affected in the future.” U.S. Underwriters Ins. Co. v. Kum Gang Inc., 443 F.Supp.2d 348, 352 (E.D.N.Y. 2006).
In an insurance contract dispute, the duty to defend and the duty to indemnify are legally distinct. See Travelers Prop. Cas. Corp. v. Winterthur Int'l, No. 02 Civ. 2406, 2002 WL 1391920, at *5 (S.D.N.Y. June 25, 2002). While claims involving a duty to defend a pending action are generally justiciable, claims involving a duty to indemnify are not justiciable prior to liability being imposed upon the party to be indemnified. Id. at *6.
With respect to the 2018 Policy, American Empire seeks a declaration that “in the event that Uplift fails to pay” the additional unpaid premium, American Empire has no duty to defend or to indemnify Uplift, or any other person or entity seeking coverage under the policy. In the amended complaint, American Empire alleges that “[u]pon information and belief, Jermaine Hickson sustained injuries on or about August 19, 2018 while exiting an elevator in New York, New York”; “[u]pon information and belief, Jermaine Hickson commenced an action” against Hamilton Heights and Uplift that is pending in the Supreme Court of the State of New York, New York County; and “upon information and belief,” the American Empire 2018 Policy “may be implicated relative to” this action. American Empire did not provide any evidence concerning the Hickson Action in its inquest submissions or at the inquest hearing.
As American Empire has not alleged that liability has been imposed on Uplift in the Hickson Action, the duty to indemnify has not yet been triggered; therefore, with respect to the duty to indemnify, American Empire's claim is not yet ripe. As pleaded, American Empire's 15 allegations are likewise insufficient to show that there is a practical likelihood that American Empire will be called upon to defend Uplift in the Hickson Action, because American Empire has not pleaded facts tending to show that the elevator involved in Hickson's alleged injury is connected to Uplift. Without more, American Empire's allegation that “upon information and belief” coverage under the 2018 Policy “may” be implicated in the Hickson Action is an inadequate basis upon which the Court may rely to conclude that a practical likelihood exists that American Empire will be called upon to defend Uplift in the Hickson Action.
Likewise, American Empire has not shown that a practical likelihood exists that the contingencies that it will be called upon to defend or indemnify Uplift under either the 2017 Policy or the 2019 Policy will occur. American Empire has not alleged that liability has been determined respecting its insured, or that any pending actions or incidents out of which such a determination could be reached exist. Therefore, no actual controversy exists, and granting American Empire's requests for declaratory relief respecting its duty to defend or indemnify Uplift under the 2017 and 2019 policies, at this time, are not warranted. See FSP, Inc. v. Societe Generale, No. 02 CV 4786, 2003 WL 124515, at *4 (S.D.N.Y. Jan. 14, 2003) (“The subject action is not justiciable [sic] to the extent it seeks a declaration regarding [the insurer's] obligation to defend and indemnify [the insured] with regard to potential, unfiled claims.”)
However, declaratory relief concerning Uplift's obligation to submit to a re-audit of its business records pursuant to the 2017 Policy and an audit of its business records pursuant to the 2019 Policy is warranted because the controversy between the parties is definite and concrete. American Empire placed in the record the 2017 Policy and the 2019 Policy, which state clearly that the premiums paid by Uplift are subject to adjustment upon an audit of Uplift's records, that American Empire is entitled to “examine and audit [Uplift's] books and records as they relate to 16 this policy at any time during the policy period and up to three years afterward,” and that Uplift is required to “keep records of the information [American Empire] need[s] for premium computation, and send [American Empire] copies at such times as [American Empire] may request.” Myers testified that American Empire demanded that Uplift submit to the re-audit for the 2017 Policy and the audit for the 2019 Policy, and Uplift did not comply with its demands, in violation of the terms of the insurance contracts.
“[A] court must entertain a declaratory judgment action: (1) when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, or (2) when it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.” Cont'l Cas. Co. v. Coastal Sav. Bank, 977 F.2d 734, 737 (2d Cir. 1992). In order to settle the rights and obligations of the parties with respect to the audits, entry of a declaratory judgment is warranted making clear that, in accordance with the parties' agreed-upon terms in the 2017 Policy and the 2019 Policy, American Empire is entitled to examine Uplift's business records for the purpose of conducting a re-audit pursuant to the 2017 Policy and an audit pursuant to the 2019 Policy to determine whether Uplift owes it additional premium under these policies, and Uplift is obligated to provide its business records to American Empire so that the audits can be conducted.
In requesting a declaration that “Uplift shall submit” to audits pursuant to the 2017 and 2019 policies, American Empire seeks a form of injunctive relief; it seeks to have the court compel Uplift's performance of its obligations under the insurance policies. A court may grant additional relief as necessary to effectuate a declaratory judgment, including injunctive relief. See Starter Corp. v. Converse, Inc., 170 F.3d 286, 298 (2d Cir. 1999). As American Empire sought specific performance of the 2017 and 2019 policies in its amended complaint, granting its 17 request for injunctive relief would not run afoul of Federal Rule of Civil Procedure 54(c) because the judgment by default would not “differ in kind from . . . what is demanded in the pleadings.” This militates in favor of granting American Empire's request for an audit and re-audit of Uplift's relevant business records.
Attorneys' Fees
American Empire seeks attorneys' fees in the amount of $16,697. Myers testified that the insurance policies do not provide for an award of attorneys' fees if American Empire prevails in litigation. “In the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser.” Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247, 95 S.Ct. 1612, 1616 (1975). “Under the general rule, attorney's fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule.” Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491, 549 N.Y.S.2d 365, 366 (1989). American Empire urges that the court make an exception to this rule because, according to American Empire, Uplift acted in bad faith by “failing to appear to offer any good faith defense.” Absent evidence that Uplift's default was willful and, thus, an act of bad faith and not the product of negligence, its default does not convince the Court that an award of attorneys' fees to American Empire is warranted.
Costs
American Empire requests an award of costs in the amount of $515, consisting of: 1) the $400 fee to file the complaint; 2) a $40 fee to serve process on the New York secretary of state; and 3) a $75 process server fee. See Inquest Exhibit 6. “Unless a federal statute, these rules, or a court order provides otherwise, costs-other than attorney's fees-should be allowed to the 18 prevailing party.” Fed.R.Civ.P. 54. Consequently, an award to American Empire of the costs it incurred, $515, is warranted.
RECOMMENDATION
For the foregoing reasons, I recommend that American Empire be awarded: 1) $1,542,306 in damages against Uplift, and interest on that amount at the rate of nine per cent per annum, from January 29, 2020, until the date of judgment; and 2) $515, the costs it incurred. I also recommend a declaratory judgment be issued that: i) American Empire is entitled to examine Uplift's business records for the purpose of conducting a re-audit pursuant to the 2017 Policy and an audit pursuant to the 2019 Policy to determine whether Uplift owes additional premium under these policies, and ii) Uplift is obligated to submit to the audits by providing its pertinent business records to American Empire by a date certain. I recommend further that American Empire's request for attorneys' fees be denied.
FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Any requests for an extension of time for filing objections must be directed to Judge Gardephe. Failure to file objections within fourteen (14) days will result in a waiver of objections and will preclude appellate review. See Thomas v. Arn, 474 U.S. 140, 106 S.Ct. 466 (1985); Cephas v. Nash, 328 F.3d 98, 107 (2d Cir. 2003). Dated: New York, New York Respectfully submitted, 19