DECLARATORY JUDGMENT SAVES $27M FOR INSURER OVER LOSS FROM FRAUD

By Henry Gottlieb, New Jersey Law Journal, October 24, 2005

In the Matter of: Tri-State Armored Services Inc.

An insurer did not have to cover losses by a bankrupt armored car company that made material misrepresentations on its policy application, a bankruptcy judge has ruled.

Tri-State Armored Services of Hammonton had contracts from banks to fill and service ATMs, and in 1999 and 2000 the company bought insurance from Great American Insurance Companies of Cincinnati to cover losses caused by crime. Tri-State went bankrupt and three owners pleaded guilty in 2002 to diverting company money to their own accounts during the period covered by the policies.

Trustee Thomas Subranni, of Subranni, Ostrove & Zauber in Voorhees, says he has recovered $23 million of about $50 million owed to creditors – mostly banks – and sought the remainder from the $40 million in crime loss coverage from Great American. The carrier denied the claim.

During a a trial last year before U.S. Bankruptcy Judge Judith Wizmur in Camden, Great American lawyers Stephen Dratch and Julian Wilsey of Livingston’s Franzblau Dratch presented evidence that the policy was invalid because Tri-State committed fraud by failing to report prior losses as required on the application.

The Trustee and his counsel, John Ellison and Claudine Homolash of Philadelphia’s Anderson Kill & Olick, counted that the policy clause requiring loss reports was ambiguous, therefore to be construed in favor of the policyholder.

They argued that red flags in Tri-State’s record gave the carrier plenty of warning that something was amiss but it took the risk anyway and now must pay. Wizmur agreed with the carrier. Subranni says he will appeal the Oct 3 Ruling.