Full opinion text
MEMORANDUM OPINION BOWDRE, District Judge. This consolidated action involves claims and counterclaims by ten insurance carriers seeking to rescind coverage or, alternatively, to receive a declaratory judgment that their policies provide no coverage to HealthSouth Corporation and various of its officers, directors, and employees who were covered by those policies. Federal Insurance Company (“Federal”), Executive Risk Indemnity, Inc. (“Executive Risk”), Greenwich Insurance Company (“Greenwich”), and Clarendon America Insurance Company (“Clarendon”) also filed suit in the Circuit Court of Jefferson County, Alabama. See Federal Insurance Company, et al. v. HealthSouth Corporation, et al., CV-03-2420; and Greenwich Insurance Company v. HealthSouth Corporation, et al., CV-03-3522. Currently at issue before this court are the motions for partial summary judgment filed by the following parties who will be alternately referred to as the “movants” or “insureds”: (1) HealthSouth Corporation (doc. # 157); (2) Richard Scrushy (doc. # 148); and (3) current or former HealthSouth directors, officers, and employees (doc. # 150, # 153, # 154, # 156 & # 261). The mov-ants seek a determination that the sever-ability clauses in the various primary and excess directors and officers insurance policies ' and primary ánd excess fiduciary responsibility insurance policies issued to HealthSouth preclude rescission of coverage as to all insureds. The carriers in both the state and federal court litigation essentially allege that HealthSouth used materially false and misleading financial information to procure insurance coverage, and that the policies are therefore void ab initio. In support of their allegations, they direct the court’s attention to the Securities and Exchange Commission investigation of HealthSouth’s financial filings, and the numerous guilty pleas entered by HealthSouth former officers and employees- who admitted they participated in a scheme to alter the financial reports of the company to meet Wall Street expectations. Because the federal and state insurance lawsuits involve the same insureds, .the same, legal questions, and will ultimately involve the same factual matters for discovery, this court has coordinated efforts with Judge Allwin E. Horn, of the Jefferson County Circuit Court in a joint effort to conserve resources and, to the extent possible, ensure consistent legal determinations. Numerous lawsuits have been filed against HealthSouth, its officers and directors alleging, inter alia, securities fraud violations. The first series of securities actions was filed in 1998. Another series of class action securities fraud cases were filed in August of 2002, and yet another group of securities fraud cases were filed in the spring of 2003, after the SEC investigation became public. All of these cases were consolidated in this court as In Re HealthSouth Stockholders Litigation, CV-03-BE-1501 and In Re HealthSouth Bondholders Litigation, CV-03-BE-1502. Other cases were also filed against Health-South during the fall of 2002 and the spring of 2003, including, among others, cases alleging violations of the Employee Retirement Income Security Act, which have been consolidated in this court as In Re HealthSouth ERISA Litigation, CV-03-BE-1700-S. The above-referenced lawsuits implicate coverage under the various policies that the insurance carriers seek to rescind in this action and in the state court action. In an effort to methodically address the complex issues involved in the Health-South insurance litigation, this court, along with Judge Horn, held several strategy meetings with the attorneys for the insurance companies and the insureds. Although not unanimously well-received, this court and Judge Horn determined that certain legal issues could be addressed prior to extensive and expensive discovery. The first of these threshold legal issues involves the severability clauses found in the primary insurance policies and the legal effect of these severability clauses on the carriers’ rights to rescind the policies at issue in this case. Consequently, the court invited the filing of motions for partial summary judgment addressing that issue. This matter currently is before the court on the motions for partial summary judgment filed by the insureds seeking a determination that the severability clauses in the various primary policies preclude rescission of coverage as to all insureds under the primary policies and the excess policies that they characterize as “following form” of the primary policies. Specifically, the individual directors and officers request a partial summary judgment that holds: (1) no basis for rescission lies unless the insurer has a written application that corresponds to the precise policy; (2) the primary and excess directors and officers liability policies and the primary and excess fiduciary liability policies, by their express terms, mandate that the question of coverage as to each insured person must be determined separately and subject only to the statements and knowledge of the individual insured; and (3) the policies contractually limit the right of rescission to intentional or knowing fraudulent misrepresentations. Defendant Scrushy filed a separate motion for partial summary judgment seeking a ruling that the claims for rescission are contractually limited to circumstances involving intentional knowing fraudulent representation by the respective insured. In its motion for partial summary judgment, Health-South seeks a ruling on the same three points asserted by the individual directors and officers, plus the additional determination that the “adverse interest” rule precludes imputation to HealthSouth the personal knowledge of any officer acting for his or her personal gain. The insurance carriers filed numerous submissions in opposition to these motions, to which the insureds have responded. The parties have fully briefed the issue. On February 10, 2004, the court conducted a joint hearing on this issue with Judge Horn, who addressed the issue as it .relates to the state court action. For the reasons stated below, the court concludes that the severability clauses preclude rescission as to all insureds regardless of their involvement in the alleged fraud. As more specifically set out in the conclusion, the motions for partial summary judgment will be granted in part and denied in part. I. STATEMENT OF FACTS The history of HealthSouth Corporation is inextricably linked with the facts germane to the issue currently before this court. HealthSouth was incorporated in 1984 by Richard M. Scrushy and grew to become one of the largest providers of physical therapy services in the world. At various times during its history, Health-South was viewed as a darling of Wall Street. However, the guilty pleas entered by former HealthSouth officers and employees indicate that much of Health-South’s unprecedented growth may have been the result of unprecedented fraud. The first inkling of troubles at Health-South occurred in 1998 with the filing of a series of securities fraud lawsuits alleging financial wrongdoings, including the reporting of inflated earnings and insider tradings. The extent of the alleged wrongdoings at HealthSouth began to surface in the spring of 2003 when investigations by the SEC and Department of Justice became public, resulting in numerous civil suits and guilty pleas from eleven former and current HealthSouth officers and employees. In November 2003, an eighty-five count indictment was returned against Mr. Scrushy, to which he pled not guilty. The primary and excess insurance companies on the risk for various of these claims filed suits seeking rescission and/or a declaration that they owed ho coverage to the insureds under théir policies. The policies at issue in this case include the Executive Liability and Indemnity Policy issued by Federal Insurance Company and the excess policies on top of that coverage (“directors and officers” or “D & O policies”); and the Fiduciary Liability Policy issued by Travelers Casualty & Surety Company and the policies excess to it (“fiduciary policies”). Because all of the policies at issue are claims-made policies, the policy years at issue are the years in which claims were made, 1998, 2002, and 2003, although most carriers seek relief as to all policies they issued. Because a different carrier, Royal Indemnity Company, with different policy language, picked up the coverage for policy year September 2002 to September 2003, that policy is not addressed in this Memorandum Opinion. A. Executive Liability and Indemnity Policies — “ D & O” Coverage 1. Federal Policy Beginning in September 1993 and continuing until September 2002, Federal issued primary insurance policies to HealthSouth providing the company and its directors and officers with executive liability and indemnification coverage. On August 29, 2002, HealthSouth purchased an extended reporting period from Federal and Executive Risk. According to Federal’s submissions, after 1994, it did not require HealthSouth to submit renewal application forms. Unlike some of the other carriers, Federal does not seek to rescind its policies as to all insureds. Exactly which insureds are excluded from rescission by Federal has not always been clear, but according to the opposition brief filed by Federal in the state court proceeding, Federal is not currently seeking rescission as to Betsy S. Atkins, Thomas W. Carman, Richard F. Celeste, Patrick A. Foster, Brandon 0. Hale, William W. Horton, Russell H. Maddox, Daniel J. Riviere, Larry D. Taylor, Robert P. May, Robert E. Thomson, Jon F. Hanson, and Edward M. Crawford. The critical language of the Federal primary policies (for both the 1997-98 and 2001-02 policy years) reads: Executive Liability Coverage Insuring Clause 1 The Company shall pay on behalf of each of the Insured Persons all Loss for which the Insured Person is not indemnified by the Insured Organization and which the Insured Person becomes legally obligated to pay on account of any Claim first made against him, individually or otherwise, during the Policy Period or, if exercised, during the Extended Reporting Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted by such Insured Person before or during the Policy Period. Executive Indemnification Coverage Insuring Clause 2 The Company shall pay on behalf of the Insured Organization all Loss for which the Insured Organization grants indemnification to each Insured Person, as permitted or required by law, which the Insured Person has become legally obligated to pay on account of any Claim first made against him, individually or otherwise, during the Policy Period or, if exercised, during the Extended Reporting Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted by such Insured Person before or during the Policy Period. Endorsement 8 added the following coverage: Insured Organization Coverage Insuring Clause 3 The Company shall pay on behalf of any Insured Organization all Loss for which it becomes legally obligated to pay on account of any Claim first made against it during the Policy Period or, if exercised, during the Extended Reporting Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted, by any Insured before or during the Policy Period. Definitions: Insured, either in the singular or plural, means the Insured Organization and any Insured Person. Insured Person, either in the singular or plural, means any one or more of those persons designated in Item 6 of the Declarations for this coverage section. Insured Organization means, collectively, those organizations designated in Item 5 of the Declarations for this coverage section. Endorsement 8 modified the definition of “Wrongful Act”: Wrongful Act means: (a) For purposes of coverage under Insuring Clause 1 or 2... any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted, by any Insured Person, individually or otherwise, in his Insured Capacity, or any matter claimed against him solely by reason of his serving in such Insured Capacity, (b) For purposes of coverage under Insuring Clause 3, any error, misstatement, misleading statemént, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by any Insured based upon, arising from or in consequence of any Securities Transaction. Endorsement 8 also added the following definition: Securities Transaction means the purchase or sale of or-offer to purchase or sell, any securities issued by an Insured Organization. 17. Representations and Severability In granting coverage to any one of the Insureds, the Company has relied upon the declarations and statements ■ in 'the written application for this coverage section and upon any declarations and statements in the original written application submitted to another insurer in respect of the prior coverage incepting as of the Continuity Date set forth in Item 9 of the Declarations for this coverage section. All such declarations and statements are the basis of such coverage and shall be considered as incorporated in and constituting part of this coverage section. Such written application(s) for coverage shall be construed as a separate application for coverage by each of the Insured Persons. With respect to the declarations and statements contained in such written ap'plication(s) for coverage, no statement in the application or knoivledge possessed by any Insured Person shall be imputed to any other Insured Person for the purpose of determining if coverage is available. (Emphasis added.) Endorsement No. 8 to the Federal Policies reads in part: For purposes of coverage under Insuring Clause 3 [Insured Organization Coverage] only, the second paragraph of subsection 17, Representations and Sev-erability, is deleted in its entirety and the following is inserted: With respect to the declarations and statements contained in the written application(s) for coverage, all declarations and statements contained in such application and knowledge possessed by any Insured Person identified in Item 6 of the Declarations shall be imputed to any Insured Organization for the purpose of determining if coverage is available. For purposes of coverage under Insuring Clause 3 [Insured Organization Coverage] only, subsection 7, Severability of Exclusions, is deleted in its entirety and the following is inserted: With respect to the exclusions in subsections 5, 6.1 and 6.2, only facts pertaining to and knowledge . possessed by any past, present or future chief financial officer, President or Chairman of any Insured Organization shall be imputed to any Insured Organization to determine if coverage is available for such Insured Organization. (Emphasis added.) 2. Excess Coverage The following carriers, in order, provided additional layers of coverage above the Federal D & 0 coverage ($10,000,000) for the policy year September 1, 1998 — September 1,1999: Insurer Amount *St. Paul Mercury Ins. Co. $ 10,000,000 excess of $■ 10,000,000 Federal Ins. Co. $ 10,000,000 excess of $ 20,000,000 *RoyaI Ins. Co. $ 10,000,000 excess of $ 30,000,000 *Zurieh American Ins. Co. $ 10,000,000 excess of $ 40,000,000 Executive Risk Indemnity Inc. $ 10,000,000 excess of $ 50,000,000 *St. Paul Mercury Ins. Co. $ 5,000,000 excess of $ 60,000,000 *Royal Ins. Co. $ 10,000,000 excess of $ 65,000,000 Federal Ins. Co. $ 10,000,000 excess of $ 75,000,000 Executive Risk Indemnity Inc. $ 15,000,000 excess of $ 85,000,000 Lloyds of London $ 25,000,000 excess of $100,000,000 Executive Risk Indemnity Inc. $ 25,000,000 excess of $125,000,000 The coverage excess to Federal ($10,000,-000) in policy year September 1, 2001— September 1, 2002, was as follows: Insurer Amount *St. Paul Mercury Ins. Co. $ 10,000,000 excess of $ 10,000,000 Federal Ins. Co. $ 10,000,000 excess of $ 20,000,000 *Royal Ins. Co. $ 10,000,000 excess of $ 30,000,000 ^Zurich American Ins. Co. $ 10,000,000 excess of $ 40,000,000 Clarendon American Ins. Co. AIG Europe UK Ltd. $ 10,000,000 excess of $ 50,000,000 *St. Paul Mercury Ins. Co. $ 5,000,000 excess of $ 60,000,000 *Royal Ins. Co. $ 10,000,000 excess of $ 65,000,000 Greenwich Ins. Co. $ 10,000,000 excess of $ 75,000,000 *GuIf Ins. Co. $ 15,000,000 excess of $ 85,000,000 New Hampshire Ins. Co. Clarendon American Ins. Co. Lloyds of London $ 17,500,000 excess of $100,000,000 Great Lakes UK $ 15,000,000 excess of $117,500,000 *Twin City Fire Ins. Co. $ 10,000,000 excess of $132,500,000 ^Lumbermens Mut. Cas. Co. $ 17,500,000 excess of $142,500,000 Greenwich Ins. Co. $ 40,000,000 excess of $160,000,000 The excess policies contain language that provides, in essence, that except where stated otherwise, the excess policy is subject to the same terms, conditions, limitations, and other provisions contained in the primary policy and any underlying excess policies. Most of the excess policies similarly state that the coverage shall not be broader than would be provided by any underlying insurance. None of the excess policies contain severability clauses, nor make any reference to the representations and severability clause found at paragraph 17 of the Federal policy quoted above. The most strikingly different language in any excess policy is found in the Zurich policy, which provided the fourth layer of coverage in both the 1998-99 and 2001-02 policy years at issue. The 1998 policy provides: In consideration of the payment of the premiums and in reliance upon all statements made and information furnished to Zurich American Insurance Company (hereinafter called the Underwriter) and to the Insurers of the Underlying Insurance, including the statements made in the application and its attachments and any material submitted therewith, all of which are made a part hereof, and subject to the Declarations and the limitations, conditions, provisions, and other terms of this policy (including any endorsements hereto), the Underwriter, the Parent Company and the Insureds agree .... (Emphasis added.) In the 2001 Zurich policy, the following endorsement was added: Endorsement No. 3 In consideration of the premium charged, it is hereby understood and agreed that this policy is issued in reliance upon statements made and materials furnished to the Insurer by the Insured Entity in connection with all Directors and Officers Liability Insurance applications or requests furnished to the Insurer including pñor applications or requests, and all statements made and mateñals incorporated in the folloiving specific documents isstied by the Company ivhether furnished directly to the Insurer or indirectly to the Insurer from public sources available to the Insurer at the time of such request(s): 1. The Company’s Annual report(s); 2. The Company’s Quarterly reports); 3. The Company’s interim financial statements; 4. The Company’s proxy statements) (or other Notices to Shareholders); 5. The Company’s indemnification provisions (and contracts, if any). (Emphasis added.) The excess carriers above the Zurich level claim the benefit of this added language in the Zurich policy because of language in their own policies adopting the limitations and endorsements of the policy immediately underlying its own. B. Fiduciary Responsibility Insurance Policy Travelers Casualty & Surety Company of America provided the primary fiduciary responsibility coverage to HealthSouth. The policy at issue here covers the policy period from September 1, 2001 to September 1, 2003. The policy was issued to the HealthSouth Retirement Investment Plan as named insured. The insuring clause of the policy provides: INSURING AGREEMENT. The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as Damages on account of any claim made against the Insured for any Wrongful Act and the Company shall have the right and duty to defend such claim against the Insured seeking such Damages, even if any of the allegations of the claim are groundless, false or fraudulent, and may make such investigation and settlement of any claim as it deems expedient.... The policy defines “insured,” as relevant here, to include: (1) The Trust or Employee Benefit Plan designated in the Declarations .... (2) An employer who is the sole sponsor of such Trust or Employee Benefit Plan. (3) Any natural person who at any time holds or shall have held the position of: (a) Trustee of such Trust or Employee Benefit Plan. (b) Director, officer or employee of such Trust or Employee Benefit Plan or of such sole sponsor employer. (4) Any other person or organization designated in the Declarations as a Fiduciary. ... The “Conditions” section, Section XI, of the policy contains the following provision: 8. Declarations. By acceptance of this policy, each Insured agrees that the statements in the Application attached to this policy are said Insured’s agreements and representations, that this policy is issued in reliance upon the truth of such representations and that this policy embodies all agreements existing between said Insured and the Company or any of its agents relating to this Insurance. (Emphasis added.) However, section 8 was amended by the “Severability Endorsement:” By adding to Section XI. CONDITIONS (8) the following: No statement in the application or knowledge or information possessed by an Insured shall be imputed to any other Insured for the purpose of determining the availability of coverage hereunder. (Emphasis added) The application, signed by Kimberly S. McCracken, Retirement Plans Manager, contains the following provision: The undersigned declares that the statements set forth herein are true to the best of his or her knowledge and belief The undersigned agrees that this application and attachments form the basis of the contract should a policy be issued and shall be deemed attached to and form a part of a policy. The Company is hereby authorized to make any investigation and inquiry in connection with this application. (Emphasis added.) Federal Insurance Company and Executive Risk Indemnity, Inc. provided excess coverage to supplement Travelers’ primary policy. At the February 10, 2004 oral argument, the parties conceded that the excess policies follow form of Travelers’ primary fiduciary liability policy. C. Other “Facts” Despite the court’s earlier instructions that the insurance policies themselves were the only evidence needed to address the purely legal issue of the effect of the severability clauses, most of the carriers insisted upon submission of affidavits and numerous underwriting materials to emphasize the underwriting process and the degree of reliance they placed on various documents purportedly containing misrepresentations. Some carriers also attempted to support their factual positions concerning the fraudulent “scheme” at HealthSouth that infected the various representations contained in their underwriting materials and, thus, justify rescission. Those factual matters, however, are irrelevant at this stage. As the court previously told counsel, for the purposes of these motions for partial summary judgment, the court will assume the following: 1. Each insurer engaged in some form of underwriting review for the initial issuance of its policy to HealthSouth and for at least some of the subsequent renewals. 2. Each insurer who so alleged received, reviewed, and relied upon publicly available information issued by Health-South, as well as information specifically provided to it by HealthSouth, if any. ■ 3. Each insurer who so stated in its complaint relied upon financial information contained in HealthSouth’s SEC filings and other public statements. 4. The financial information in those SEC reports contained false information that was material to the issuance of the policies. 5. The false information in those reports increased the risk assumed by each insurer. 6. Each insurer, as alleged, would not have issued its policy, or policies, to HealthSouth had it known the truth. These assumed facts, if proven and not defeated by any defenses, would create a prima facie case for rescission under Alabama Code § 27-14-7, discussed below, if no provisions in the insurance policies provide otherwise, and if all statutory prerequisites are established. These assumptions may or may not prove true, but' they are accepted by the court at this time in considering the specific legal issue before it: the. legal effect of the severability clauses on the right of the insurance companies to rescind their policies. Thus, efforts by some insurance companies to raise as “disputed facts” questions regarding, what materials were submitted or obtained in making underwriting decisions, and what information was false or relied upon is irrelevant at this point and will not be used to defeat partial summary judgment on the ground of factual issues. The court specifically finds no dispute as to any material facts relevant to this limited inquiry. The precise language of the insurance policies cannot be disputed and the policies speak for themselves. The question, then; becomes whether the 'moving parties are entitled to judgment as a matter of law oh their motions for partial summary judgment as to the legal effect of the severability clauses. II. STANDARD FOR PARTIAL SUMMARY JUDGMENT The court acknowledges that several insurance companies take exception to the method by which it has chosen to address the various .issues involved in this complex litigation. See, e.g., Traveler’s Opposition, p. 7-10 (doc. #225), joined in by other carriers. Travelers maintains, among other things, that the procedure adopted by this court and Judge Horn is not sanctioned by Rule 56 because the" decision sought here will not finally dispose of any claim or defense, and would amount to an impermissible advisory opinion. Id. Contrary to Travelers’ insinuation, the Eleventh Circuit recognizes the validity of motions for partial summary judgment in such a context as this case. In Stillman v. Travelers Ins. Co., 88 F.3d 911, 913 (11th Cir.1996), the Eleventh Circuit Court of Appeals approved of a partial summary judgment for the purpose of issue-narrowing. Stillman involved an insurance coverage dispute in which Travelers and its insured filed cross motions for summary judgment, in part, on “the legal effect of the pollution exclusion clause.” Id. at 913. The Eleventh Circuit upheld the district court’s power to enter a partial summary judgment at an early stage of the proceedings and recognized that the result was to narrow the issues. Id. at 914 n. 4. The Eleventh Circuit and the Fifth Circuit have both recognized the trial court’s ability to narrow the issues through pretrial proceedings like those employed here. See Diaz v. Schwerman Trucking Co., 709 F.2d 1371, 1376 n. 6 (11th Cir.1983) (indicating that Rule 16 allows the court to decide issues not subject to material disputes of fact); Fox v. Taylor Diving & Salvage Co., 694 F.2d 1349, 1356-57 (5th Cir.1983) (holding that “[a] district judge has both discretion and responsibilities to aid in narrowing the issues to be presented at trial. Fed.R.Civ.P. 16. A groundless contention, one in which both the facts and law are to the contrary, need not be heard in the district court.”) Moreover, Travelers’ suggestion that an order from this court on partial summary judgment would constitute an improper advisory opinion is also unfounded. The United States Constitution merely prohibits advice from a district court on wholly abstract, hypothetical, or collusive lawsuits. McKusick v. City of Melbourne, Fla., 96 F.3d 478, 482 (11th Cir.1996). A controversy is not abstract,, hypothetical, or collusive when a “real and substantial controversy” exists between the parties. Dixie Elec. Co-op. v. Citizens of the State of Alabama, 789 F.2d 852, 858 (11th Cir.1986). Under the facts of this case, a justiciable controversy exists in that the parties disagree on the legal effect of the sever-ability clause on the carriers’ rights under Alabama’s rescission statute. • An order on this issue would not be advisory, but rather an interlocutory adjudication of a very real, present legal dispute. This consolidated case involves a real, concrete, and justiciable controversy in. which the parties are genuinely adverse. This court has the authority to direct the parties to brief, and the authority to decide, the legal effect of the severability clause upon the Insurers’ right to rescind the policies. Furthermore, the court’s October 7, 2003 Order was consistent with Fed.R.Civ.P. 16 and 26, which explicitly authorizes the district court to adopt special procedures to expedite the settlement or adjudication of potentially difficult or protracted cases. The complexity of this litigation should be apparent. The court determined that the best way to address this complex case is one issue at a time. Thus, the court has authority to address at this early stage the purely legal question of the effect of the severability clause on the insurers’ right to rescind. Having determined that it has the authority to rule on the insureds’ motions for partial summary judgment, the court next addresses the relevant standard of review. When a district court reviews a motion for summary judgment under Federal Rule of Civil Procedure 56, it must determine two things: (1) whether any genuine issues of material fact' exist; and, if not, (2) whether the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). To succeed, the moving party bears the burden of establishing both prongs of the summary judgment test. The nonmoving party may defeat the motion for summary judgment by establishing either genuine issues of material fact or that the movant is not entitled to judgment as a matter of law. Substantive law determines which facts are material and which are irrelevant. Anderson, 477 U.S. at 248, 106 S.Ct. 2505. A dispute raises' a genuine issue of fact “only if a reasonable jury considering the evidence presented could find for the non-moving party.” Anderson, 477 U.S. at 249, 106 S.Ct. 2505. Material facts affect the outcome of the trial under governing law. 477 U.S. at 248, 106 S.Ct. 2505. To determine whether a material fact exists, the court must consider all the evidence in the light most favorable to the nonmoving party. Anderson, 477 U.S. at 249, 106 S.Ct. 2505; Patton v. Triad Guar. Ins. Corp., 277 F.3d 1294, 1296 (11th Cir.2002); Witter v. Delta Air Lines, Inc., 138 F.3d 1366, 1369 (11th Cir.1998). After both parties have addressed the motion for summary judgment, the court must grant the motion if m genuine issues of material fact exist and if the moving part is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). As previously noted, no genuine issues of material fact exist, so the question becomes whether the moving parties are entitled to judgment as a matter of law. III. DISCUSSION A. General Alabama Law on Insurance Contract Construction Alabama law provides clear guidelines for a court interpreting language in an insurance policy. “[Insurance contracts, like other contracts, are construed so as to give effect to the intention of the parties, and, to determine this intent, a court must examine more than an isolated sentence or term; it must read each phrase in the context of all other provisions.” Celtic Life Ins. Co. v. McLendon, 814 So.2d 222, 224 (Ala.2001). In interpreting the language of an insurance policy, the court must give the words used in the policy their customary and normal meaning, and the court must construe the policy in a manner consistent with the interpretation that a person of ordinary intelligence would place on the policy’s language. Twin City Fire Ins. Co. v. Alfa Mut. Ins. Co., 817 So.2d 687, 692 (Ala.2001); Boone v. Safeway Ins. Co. of Ala., Inc., 690 So.2d 404, 406 (Ala.Civ.App.1997); Sullivan v. State Farm Mut. Auto. Ins. Co., 513 So.2d 992, 994 (Ala.1987). If, under this standard, the words used are reasonably certain in their meaning, they are not ambiguous as a matter of law, and the rule of construction favoring the insured does not apply. Bituminous Cas. Corp. v. Harris, 372 So.2d 342, 344 (Ala.Civ.App.1979). However, “[wjhere there is any doubt or confusion as to the meaning of a term in an insurance policy, the general rule of contracts applies to the policy, so that the contract is interpreted against the party which drafted the contract.” Boone, 690 So.2d at 406. “Any language of an insurance contract that is susceptible to .more than one interpretation must be construed in favor of coverage for the insured.” Id. As explained by the Alabama Supreme Court, “insurance companies are entitled to have their policy contracts enforced as written, rather than risking their terms either to judicial interpretation or the use of straining language, and the fact that different parties contend for different constructions does not mean that the disputed language is ambiguous.” Woodall v. Alfa Mut. Ins. Co., 658 So.2d 369, 371 (Ala.1995) (quoting Gregory v. Western World Ins. Co., 481 So.2d 878, 881 (Ala.1985)). In the absence of a statutory provision to the contrary, insurance companies have the right to limit their liability and to write policies with narrow coverage. United States Fid. & Guar. Co. v. Bonitz Insulation Co., 424 So.2d 569 (Ala.1982); Altiere v. Blue Cross & Blue Shield of Ala., 551 So.2d 290, 292 (Ala.1989); Upton v. Mississippi Valley Title Ins. Co., 469 So.2d 548, 554 (Ala.1985). The Alabama Supreme Court recently emphasized this important canon of construction in Royal Insurance Co. of Am. v. Thomas, Case No. 1011518, 2003 WL 22272781 *8, — So.2d — (Ala. October 3, 2003), where it reasoned: It has been stated that a contract of insurance, being the law between the parties, should have every stipulation construed as written. It being presumed that every condition was intended to accomplish some purpose, it is hot to be considered that idle provisions were inserted. Each word is deemed to have some meaning, and none should be assumed to be superfluous. All portions of a policy should be considered in construing it. Accordingly, a court will attempt to give meaning and effect, if possible, to every word and phrase in the contract in determining the meaning thereof, and a construction which neutralizes any provision of a contract should never be adopted if the contract can be so construed as to give an effect to all of the provisions.- (quoting, Jay Appleman, Insurance Law and Practice, § 7383 (1981)). Thus, courts may not rewrite policy language so as to provide coverage that was not intended by the parties. Am. Nat’l Prop. & Cas. Co. v. Blocker, 165 F.Supp.2d 1288, 1295 (S.D.Ala.2001); Altiere v. Blue Cross & Blue Shield of Ala., 551 So.2d 290, 292 (Ala.1989). But “[a] policy must be construed fairly, must effectuate its purpose, and must reflect common sense so as not to bring about an absured result.” Boone, 690 So.2d at 406. In evaluating the policy provisions at issue in this case, the court has been guided by these general principles of construction. B. Alabama Law Regarding Rescission The insurers claim their policies are void ab initio and seek to rescind coverage under the provisions of Alabama Code § 27-14-7, which reads: Application for policy- — -Representations and misrepresentations, etc. (a) All statements and descriptions in any application for an insurance policy or annuity contract, or in negotiations therefor, by, or in behalf of, the insured or annuitant shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts and incorrect statements shall not prevent a recovery under the policy or contract unless either: (1) Fraudulent; (2) Material either to the acceptance of the risk or to the hazard assumed by the insurer; or (3) The insurer in good faith would either not have issued the policy or contract, or would not have issued a policy or contract at the premium rate as applied for, or would not have issued a policy or contract in as large an amount or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise. Thus, Alabama statutory law provides three alternative grounds for rescission. An insurer can rescind a policy or deny coverage if, in the application or “in negotiations therefor,” the insured made misstatements that either (1) were fraudulent, (i.e., made intentionally with knowledge); or, (2) were material to the risk (although innocently made); or (3) affected the insurer’s good faith decision to issue the policy for which the insured applied. See, State Farm Gen. Ins. Co. v. Oliver, 658 F.Supp. 1546, 1549 (N.D.Ala.1987), aff'd sub nom State Farm Fire & Cas. Co. v. Oliver, 854 F.2d 416 (11th Cir.1988); Nat’l Life & Acc. Ins. Co. v. Mixon, 291 Ala. 467, 282 So.2d 308, 312 (1973). As a general rule, to which exceptions arise, the provisions of § 27-14-7 become a part of insurance policies issued in Alabama. See Gen. Mut. Ins. Co. v. Ginn, 283 Ala. 470, 218 So.2d 680, 684 (1969); cf. Oliver, 854 F.2d at 419. An insurance company cannot include grounds for rescission in its policy that would provide greater protection for the insurance company than is permitted by the Alabama rescission statute. See Oliver, 854 F.2d at 419 (citing Gen. Mut. Ins. Co. v. Ginn, 283 Ala. 470, 218 So.2d 680, 684 (1969); Gen. Accident, Fire & Life Assur. Corp. v. Jordan, 230 Ala. 407, 161 So. 240 (1935)). An insurer, however, can by its policy terms, contractually limit the grounds for rescission to a standard that allows more protection for the insured than those provided in the statute, thereby waiving one or more of the statutory grounds. Oliver, 854 F.2d at 419-20 (citing United Sec. Life Ins. Co. v. Harden, 275 Ala. 169, 153 So.2d 246, 247 (1963)). The insureds argue that, under the Alabama rescission statute, a written application must actually correspond to the specific policy that is sought to be rescinded. See D & O’s Brief in Support, p. 6-7 (doc. # 151). However, the statutory language does not support such a narrow reading of the law on rescission. The statute itself refers to statements in the application “or in negotiations therefor,” indicating that statements other than those contained in the application itself can be the basis for rescission. See Ala.Code § 27-14-7(a). The policy language itself, however, may affect the right to rescind. The insureds rely on two cases for their argument that an application per se is required for each policy sought to be rescinded: Alfa Mutual General Insurance Co. v. Oglesby, 711 So.2d 938 (Ala.1997), and State Farm General Insurance Co. v. Oliver, 658 F.Supp. 1546 (N.D.Ala.1987) (Judge Acker) (applying Alabama law). To determine what effect, if any, the Oliver and Oglesby decisions have on the right of the insurance carriers to rescind under § 27-14-7, the court has closely examined those eases. In Oliver, the insurance company sought to avoid payment of a fire loss based, among other defenses, on an alleged misstatement or concealment by the insured in the application. State Farm dropped its contractual right to rescind for intentional misrepresentation and contended that it was entitled to rescind under § 27-14-7(a)(2) and (3). 658 F.Supp. at 1548. After a jury verdict in favor of the insured, State Farm argued in its post-judgment motion that it was entitled to a directed verdict under § 27-14-7(a)(2) and (3). The policy language at issue provided that the policy would be void if any insured “intentionally concealed or misrepresented any material fact or circumstance relating to this insurance...” 658 F.Supp. at 1550 (emphasis provided by Judge Acker). State Farm elected not to invoke this contractual language but instead sought rescission under § 27-14-7(a)(2) and (3). Judge Acker first addressed rescission under § 27-14-7(a)(3). That subparagraph prevents recovery under a policy if (3) The insurer in good faith would either not have issued the policy or contract, or would not have issued a policy or contract at the premium rate as applied for, or would not have issued a policy or contract in as large an amount or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been known to the insurer as required either by the application for the policy or contract or otherwise. Ala.Code § 27-14-7(a)(2) and (3) (emphasis supplied). Id. at 1549. Judge Acker concluded that he should not have submitted any issue to the jury under § 27 — 14—7(a)(3) for three reasons. First, the court concluded that “neither the application nor the policy by its express terms required exact and full truth if a misstatement, no matter how innocent, might affect the risk.” Id. at 1550 (emphasis in original). Judge Acker noted that “[njowhere in the insurance application can be found any words which track the words in § 27-14-7(a)(3) permitting the insurance company to contractually require the applicant to tell the truth upon penalty of avoidance of the contract. The policy Itself, when it was subsequently issued, also fails to contain any of the express language contemplated by § 27-14-7(a)(3) if the insured is to be placed on notice of the potential disastrous effect of any initiating misstatement or omission.” Id. at 1549-50 (emphasis in original). Another reason the question of rescission under § 27-14-7(a)(3) should not have been submitted to the jury, Judge Acker reasoned, was that the subparagraph did not apply to the renewal policy at issue. An essential element under §.27-14-7(a)(3) requires that “the insurer would not have issued ‘the policy or contract’ but for the misinformation.” Id. at 1550. The policy issued in reliance upon the application was the initial policy, not the renewal policy, which was in force at the time of the loss and for which no application had been required. Based on a strict construction of § 27-14-7, Judge Acker concluded that “ § 27-14-7(a)(3) makes no reference to any ‘policy or contract’ except a ‘policy or contract’ issued in direct and immediate response to the false application.” Id. at 1550. In reaching the conclusion that the only policy for which coverage could be denied under § 27-14-7(a)(3) is the one for which the application contains misstatements, Judge Acker acknowledged that no Alabama cases had construed that subpara-graph in such a context. Id. Thus, his conclusion was based purely on statutory construction of § 27-14-7(a)(3). The third reason why Judge Acker concluded State Farm never had a valid defense under § 27-14-7(a)(3) was that the policy language, in essence, “waived the statutory avenue of avoidance provided by § 27-14-7(a)(3) by contracting for something different .... State Farm contractually excused innocent misrepresentations in the application.” 658 F.Supp. at 1550 (emphasis in original; citation omitted). The court then addressed State Farm’s defense under § 27-14-7(a)(2). That sub-paragraph allows an insurer to avoid coverage if the misrepresentation, etc., was “[m]aterial either to the acceptance of the risk or to the hazard assumed by the insurer; ...” Judge Acker concluded that the question of whether the alleged misstatement was material was a question for the jury, and that the jury could consider the factual context to make such a determination. 658 F.Supp. at 1552. Judge Acker noted that State Farm’s expert witness did not testify that any particular misinformation increased the hazard or risk insured. Instead, the witness acknowledged that “the ‘materiality’ of a misstatement in an original application depreciates over time so that an erroneous answer which might have been ‘material’ to the underwriting at the time of the issuance of the policy might not be ‘material’ twenty years later.” Id. at 1553. The question of materiality was answered by the jury adversely to State Farm. In evaluating State Farm’s position under § 27 — 14—7(a)(2), Judge Acker did'not address whether that subparagraph only applied to a policy for which an application had been taken, as he had found regarding the third subparagraph based on its literal language. Thus, a careful reading of Judge Acker’s opinion reflects that he concluded that an application is required to deny coverage under the alternative of § 27-14-7(a)(8) only and that under that subparagraph the application or policy must place the insured on notice that an innocent misstatement could void coverage. ’ Indeed, the language in subparagraph (a)(3) on which Judge Acker relied is conspicuously absent from subpara-graphs (a)(1) and (a)(2). Instead, a literal reading of the statute, including the prefatory paragraph, wduld indicate an insurer could deny coverage for fraudulent or material misrepresentations contained “in any application for an insurance policy ... or negotiations therefor .... ” See § 27-14-7(a) (emphasis added). On appeal, the Eleventh Circuit decided the question of the carrier’s defenses under § 27-14-7 based on a threshold issue: whether State Farm waived the defenses under § 27-14-7(a)(2) and (3) by referring in the contract only to intentional misrepresentations or concealments as grounds for avoidance of the policy. State Farm Fire & Cas. Co. v. Oliver, 854 F.2d at 419-420. The Court specifically noted that “Alabama courts have read the forerunner statute to §’ 27-14-7 into the policy-when the contract attempted to impose more stringent conditions on the insured than in the statute, but have refused to read the statute into the contract when the contract sets less stringent standards on the insured .... ” Id. at 420 (citing United Sec. Life Ins. Co. v. Harden, 275 Ala. 169, 153 So.2d 246, 247 (1963); United Sec. Life Ins. Co. v. Wisener, 40 Ala.App. 350, 113 So.2d 530, 531 (1959)). Therefore, the Court concluded that State Farm, by providing an intentional misrepresentation standard in its policy, had waived the defenses of innocent misrepresentations otherwise available under § 27-14-7(a)(2) and (3). Id. The Eleventh Circuit did not reach Judge Acker’s alternative reasons for concluding that the innocent misrepresentation defenses should not have gone to the jury. •. Specifically, the Eleventh Circuit did not address Judge Acker’s conclusion that § 27-14-7(a)(3) requires an application for the specific policy of which rescission is sought. The Alabama Supreme Court followed Judge Acker’s Oliver decision in Alfa Mutual Gen. Ins. Co. v. Oglesby, 711 So.2d 938, 941 (Ala.1997). Oglesby involved an effort by the insurance company to rescind coverage because of a false answer on the initial application of a homeowner’s policy concerning the insured’s prior arrests; the policy in effect at the time of the fire loss was a renewal policy for which no separate application had been required. Alfa asserted that the false information “was material to its acceptance of the risk and that if it had known of [the insured’s] arrests it would not have issued the policy of insurance.” Id. at 940. The trial court, relying on Oliver, directed a verdict for the insured on Alfa’s misrepresentation claims under § 27-14-7, and the jury returned a verdict for the insured on the counterclaim for breach of contract. Id. On appeal, Alfa challenged the directed verdict, claiming the trial court erred in finding the Oliver case dispositive. The Court quoted a portion of Judge Acker’s discussion of § 27-14-7(a)(3)’s requirement that the “policy or contract” be the one “ ‘... issued in direct and immediate response to the false application.’ ” 711 So.2d at 941, quoting Oliver, 658 F.Supp. at 1550. The Court then “conclude[d] that the legislature intended that § 27-14-7 apply to initial policies and the applications therefor.” Id. The Court gave no reasons for going beyond Judge Acker’s determination that subparagraph (a)(3) required an application for that particular policy. The Alabama Supreme Court in Oglesby did not address the specific language in 27-14-7(a)(3) upon which Judge Acker relied when he determined that subpara-graph (a)(3) requires an application for the policy to be rescinded. The Court did not even set out under which subparagraph of § 27-14-7 Alfa sought rescission, but apparently Alfa relied on subparagraph (a)(3) when it contended that the misinformation was material and it would not have issued the policy had it known the truth. See 711 So.2d at 940. The Court did not hedge in any way when it stated that § 27-14-7— without reference to any subparagraph— applies to initial policies and applications. However, the Court did not have squarely before it whether subparagraphs (a)(1) intentional fraud or (a)(2) material misinformation are similarly limited. In other words, the only issue squarely presented to the Court was whether subparagraph (a)(3) required an application for the specific policy in question. Because the requirements of § 27-14-7 as a whole was not before the Court and was not necessary to the decision in that case, the Court’s pronouncement is dictum and not controlling. See Mitchell v. Vann, 278 Ala. 1, 174 So.2d 501, 507 (1965); Knight v. State, 273 Ala. 480, 142 So.2d 899, 905 (1962) (describing dictum as “expressfing] an opinion based on facts not shown by the record”); Kimball v. Cunningham Hardware Co. 192 Ala. 223, 68 So. 309, 311 (1915) (same). Because the precise issue before the Alabama Court involved § 27-14-7(a)(3), not the section as a whole, making the court’s pronouncement as to § 27-14-7 dictum; and because the Court only quoted from Judge Acker’s discussion of sub-paragraph (a)(3) as it related to an application for the policy, the court doubts whether the Alabama Supreme Court, if confronted with the precise issue, would follow Oglesby’s broad pronouncement. A closer examination of the initial language of § 27-14-7(a) increases the court’s doubt. The section begins by providing that statements in “any application for an insurance policy ... or in negotiations therefor ” are representations and not warranties. The second sentence, which leads into the three alternative statutory grounds for denial of recovery, provides that misinformation “shall not prevent a recovery under the policy or contract .... ” (Ala.Code § 27-14-7(a)). Applying the same statutory construction employed by Judge Acker and approved by the Alabama Supreme Court, “the policy or contract” in the prefatory paragraph refers to the one issued in response to the application, or in response to “negotiations therefor.” Thus, a solid argument could be made based on statutory construction that an insurer can deny recovery under “the policy or contract” because of fraudulent or material misrepresentations contained in an application for that policy or “in negotiations therefor,” regardless of whether the policy is the initial policy or a renewal policy. Limiting an insurance company’s right to rescind a policy for fraudulent or material misrepresentations made in an application or negotiations for a renewal policy would eviscerate the concept of mutuality that underlies a party’s right to rescind a contract that was procured by fraud. The insured would have no incentive to tell the truth after the expiration of the initial policy period, and insurance companies would be less likely to continue renewing policies when they cannot rely on insureds to be truthful or face the consequences of their misrepresentation. Without the right to rescind renewal policies obtained by fraud or material misrepresentations, insureds would face no consequences. Instead, they would be rewarded for their lies. Section § 27-14-7 nowhere even hints that it was designed to protect insurance companies from misrepresentations in the application only during the length of the initial policy without regard to whether subsequent misstatements were made in obtaining a renewal policy. See Oglesby, 711 So.2d at 945-946 (Hooper, C.J., dissenting). This court seriously doubts that the Alabama Supreme Court would allow this dictum from the Oglesby decision to have such far-reaching consequences. If the Alabama Supreme Court were squarely presented with the issue, this court anticipates that the Alabama Supreme Court would modify the language in Oglesby to apply only to § 27-14-7(a)(3), and would recognize that under subparagraphs (a)(1) and (2) misrepresentations justifying avoidance of coverage could occur in “negotiations therefor” as well as in an application. This court further believes the Alabama Supreme Court would recognize that misrepresentations in a subsequent application or “negotiations therefor” could support rescission of renewal policies as well — provided that an application or negotiations in fact occurred for the renewal policy. Nothing in the language of § 27-14-7 limits its application to only the initial policy if the policy in question were issued in direct response to an application or negotiations for it. Alabama Code § 27-14-7 reflects a modification of prior insurance law that allowed an, insurer to void a policy based on an immaterial or technical breach of a warranty in the policy. The first sentence of § 27-14-7 provides that “[a]ll statements and descriptions in any application for an insurance policy ..., or in negotiations therefor, by,, or in behalf of, the insured ... shall be deemed to be representations and not warranties.” (Emphasis added.) This change in insurance law reflects an effort by the legislature to even the playing field for insureds. Further, the second sentence of § 27-14-7 provides that “Misrepresentations, omissions, concealment of facts and incorrect statements shall not prevent a recovery under a policy or contract unless.. (Emphasis added.) As Judge Acker noted in Oliver, this language mandates a strict interpretation of the statute in favor of the insured. See 658 F.Supp. at 1550. This remedial statute and the Alabama cases interpreting it, read together, reflect the public policy of Alabama that § 27-14-7 should be construed narrowly, and that policy provisions concerning denial of coverage should be construed in favor of the insured — particularly one who did not participate in the fraud — whenever possible. Following the reasoning in Oliver as adopted by the Alabama Supreme Court in Oglesby, this court concludes that an insurance company cannot rescind a policy under § 27-14-7(a)(3) unless the policy was issued “in direct and immediate response to the false application.” Oliver, 658 F.Supp. at 1550. Also, the application or policy must place the insured on notice of the disastrous result of an innocent misstatement to invoke § 27-14-7(a)(3). 658 F.Supp. at 1549-50; § 27-14-7(a)(3). The court need not decide at this stage whether a specific application must be provided for an insurer to rescind under § 27-14-7(a)(l) or (2), or whether misstatements “in negotiations therefor” would suffice because, as discussed subsequently, the relevant policy language at issue here provides greater protection to the insureds than § 27-14-7 and controls the determination of the question before the court. C. Alabama Cases Involving Sever-ability of Interest Provisions Neither the insurance companies nor the insureds have cited the court to any Alabama cases that have addressed the specific issue of the rescission of an insurance policy that contains a severability clause similar to those at issue here, and the court could find none. The most relevant Alabama case involved the application of a severability of interest provision to an exclusion from coverage. In United States Fire Ins. Co. v. McCormick, 286 Ala. 531, 243 So.2d 367 (1970), the Alabama Supreme Court addressed several issues of policy interpretation that arose in the context of the complicated Alabama law regarding co-employee liability. The pertinent issue to this case from McCormick was one of first impression for the Court: the effect of the severability of interest clause in the policy on the exclusion of coverage for “ ‘bodily injury to or sickness, disease or death of any employee of the insured arising out of and in the course of his employment by the insured.' ” Id. at 370. The “Severability of Interest” clause provided that the “ ‘term ‘the insured’ is used severably and not collectively ... ’ ” Id. at 373. After discussing cases from other courts, the court concluded that the severability clause mandated that each insured be considered “separately, independently of every other insured whether named or an additional insured.” Id. at 375. Therefore, in the context of the U.S. Fire policy, each insured was covered except as to his own employee. Id. A closely analogous case is Norwest Mortgage, Inc. v. Nationwide Mutual Fire Ins. Co., 718 So.2d 15 (Ala.1998). That case involved a homeowner’s insurance policy that had been procured by fraud on the part of the homeowner. Norwest Mortgage held the mortgage, and was covered under the policy, but had no knowledge of the named insured’s fraud. 718 So.2d at 16. Nationwide sought to rescind the policy under Alabama Code § 27-14-7. The trial court granted summary judgment for Nationwide, finding the policy void ab initio. The mortgagee appealed and the Alabama Supreme Court reversed. 718 So.2d at 16 The key factor in the Court’s decision in Norwest was the existence of a Mortgage Clause in the policy. That clause provided that “ ‘[i]f we deny your [the homeowner/insured’s] claim, that denial will not apply to a valid claim of the mortgagee.., 718 So.2d at 16. The policy language did not contain the traditional language found in the “standard” mortgage clause to the effect that no act or neglect of the mortgagor would - invalidate the mortgagee’s interest. Nevertheless, the Court held that the mortgage clause created a separate contract of insurance with Norwest “that was not subject to the nullifying effects of § 27-14-7.” 718 So.2d at 17. In Norwest, only the mortgage holder appealed, so the Court did not address the trial court’s conclusion that the' policy was void ab initio as to the homeowner. D. Cases from Other Jurisdictions Involving Severability Clauses Very few decisions exist concerning the effect of severability clauses on the right of a carrier to rescind a policy as to all insureds. Perhaps this lack of case law is because,'as counsel for some of the carriers stated, the presence of severability clauses as to coverage is a relatively new phenomenon in insurance policies. The few decisions that have been cited to the court, though not binding authority, add insight to the primary issue before the court at this time. The most enlightening cases are those that involved Federal Insurance Company, the primary D & 0 carrier here. In Wedtech Corp. v. Federal Insurance Co., 740 F.Supp. 214 (S.D.N.Y.1990), the court had to interpret a severability clause similar to the one at issue here in determining whether the policy was void ab initio as to certain directors. As in this case, the insured company, Wedtech, was the subject of government investigations, and several former directors and officers had been convicted of various crimes. Id. at 216. Federal rescinded the policies, which included the original policy and a renewal policy, based on false information provided “in connection with applying for and maintaining” the policies. Id. at 217. Wedtech filed suit, seeking a declaration that “ ‘the Policies are not void ab initio and are in full force and effect with respect to those directors and officers who acted in good faith in the performance of their duties for Wedtech.’ ” Id. The court acknowledged the basic principles of New York law that fraud in th