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New York Univ. v. Cont'l Ins. Co.

Court of Appeals of New York

November 28, 1995, Argued ; December 27, 1995, Decided

No. 302


 [*313]  [**766]  [***286]    Simons, J.

This appeal addresses the sufficiency of the complaint and the affirmative defenses contained in the pleadings in an action by an insured against its insurer who disclaimed coverage under a commercial crime insurance policy. The two principal issues are (1) whether the complaint states a cause of action for punitive damages under the [****9]  standards set forth in Rocanova v Equitable Life Assur. Socy. (83 N.Y.2d 603, 612 N.Y.S.2d 339, 634 N.E.2d 940) and (2) whether plaintiff has stated a cause of action under General Business Law § 349.

In April 1990, plaintiff New York University (NYU) discovered a substantial shortage of merchandise in the clothing department of one of the university book stores. Its internal investigation led it to determine that Dwight Johnson, the book store's general merchandise buyer, had falsified order forms, invoices, and shipping and receiving documents for [*314]  imprinted apparel purchased from MHK, Inc., a clothing vendor. Plaintiff concluded that Johnson and MHK had acted together in a scheme to bill NYU for merchandise never received and calculated that Johnson's actions had cost the university more than $ 1.6 million.

In September of 1988, NYU had purchased a commercial crime liability insurance policy from defendant Continental Insurance which included an endorsement for losses resulting from "Employee Dishonesty." The endorsement, which was in effect when NYU discovered Johnson's defalcations, provided coverage of $ 10 million. Through its insurance agent, Johnson [****10]  & Higgins, NYU submitted a claim to defendant Continental Guaranty & Credit Corp., the claims servicing agent for defendant Continental Insurance.

Defendants conducted an investigation of plaintiff's claim, including review of the documentation submitted by plaintiff and interviews with NYU's bookstore employees, Dwight Johnson, Michael Kaye (the principal of MHK), and, in addition, consulted with an FBI agent who was investigating possible criminal charges. Johnson and Kaye denied any wrongdoing. Kaye maintained that merchandise had been purchased under a "bill and hold" arrangement and that some $ 200,000 worth of merchandise was being stored for plaintiff in a Brooklyn warehouse. Defendants subsequently denied the claim advising plaintiff that Johnson and Kaye appeared truthful and that the claim was not supported by the documentation submitted.

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87 N.Y.2d 308 *; 662 N.E.2d 763 **; 639 N.Y.S.2d 283 ***; 1995 N.Y. LEXIS 4752 ****

New York University, Respondent, v. Continental Insurance Company et al., Appellants.

Prior History:  [****1]  Appeal, by permission of the Appellate Division of the Supreme Court in the First Judicial Department, from an order of that Court, entered November 10, 1994, which affirmed an order of the Supreme Court (Shirley Fingerhood, J.), entered in New York County, denying a motion by defendants pursuant to CPLR 3211 (a) to dismiss the second through fifth causes of action of the amended complaint and to strike the demand for attorneys' fees and granting a cross motion by plaintiff to dismiss the first and second affirmative defenses of the amended answer. The following question was certified by the Appellate Division: "Was the order of the Supreme Court, as affirmed by this Court, properly made?"

New York Univ. v Continental Ins. Co., 209 A.D.2d 231, 618 N.Y.S.2d 634, reversed.

Disposition:  Order reversed, with costs, defendants' motion to dismiss the second through fifth causes of action in the amended complaint and the demand for attorneys' fees granted, plaintiff's cross motion to dismiss the first and second affirmative defenses of the amended answer denied, and certified question answered in the negative.


cause of action, insured, inventory, defendants', affirmative defense, losses, coverage, alleges, punitive damages, contractual obligation, amended complaint, dishonesty, shortage, records, good faith, computation, damages, parties, plaintiff's claim, attorney's fees, endorsement, provisions, insurance policy, reasonable care, cross motion, give rise, merchandise, obligations, estimation, fraudulent

Civil Procedure, Remedies, Damages, Punitive Damages, Contracts Law, Types of Damages, Torts, Business Torts, Bad Faith Breach of Contract, General Overview, Punitive Damages, Affirmative Defenses, Fraud & Misrepresentation, Material Misrepresentations, Insurance Law, Liability & Performance Standards, Disclosure Obligations by Insureds, Fraudulent Intent, Materiality, Antitrust & Trade Law, Consumer Protection, Deceptive & Unfair Trade Practices, Costs & Attorney Fees