Friday, May 29, 2009

Turnabout Is Fair Play -- Court Finds Disclaimer Ineffective Against Injured Party

Tri-State Ins. Co. v. Salguero

(Sup. Ct., Queens Co., decided 5/26/2009)

Salguero was injured in an 2004 auto accident with Frempong. Tri-City insured Salguero; State Farm insured Frempong. When negotiations with State Farm became unsuccessful, Salguero's attorney commenced a personal injury action against Frempong but did not notify State Farm of either the action or Frempong's default in that action. After obtaining a $33,173.98 default judgment against Frempong in 2007, Salguero commenced an Insurance Law § 3420(b)(1) action against State Farm in January 2008.

In response to the 3420(b)(1) action, State Farm issued a disclaimer letter to Frempong, its insured, advising her that "[y]our failure to send us copies of any notices or legal papers received is in violation of your policy's provision regarding the reported claims. As such State Farm Mutual Automobile Insurance Company disclaims coverage for any and all claims resulting from this loss". A copy of that letter went to Salguero's attorney. On the same day, State Farm send a separate letter to Salguero's attorney, advising him that "[o]ur Insured failed to forward the Summons & Complaint for the law suit filed against her to State Farm Insurance. This is in violation of our insured's policy provision regarding the duties after an accident or loss. You received an order of judgment entered on September 5, 2007 that allegedly was served on the insured, Sherina Frempong. Again our insured has not forwarded us the court's order of default. Accordingly, we decline to afford coverage for the above date of loss due to our insured's failure to forward suit papers."

Based on State Farm's disclaimer, Salguero then filed and demanded arbitration of a uninsured motorists (UM) coverage claim made to Tri-City. Tri-City then commenced this special proceeding pursuant to CPLR 7503 to stay arbitration of Salguero's UM claim, and the court added Frempong and State Farm as respondents and directed a hearing on the issue of whether coverage for the accident was available from State Farm. The parties agreed that the sole question for determination was whether State Farm's disclaimer letters -- to Frempong and Salguero's attorney -- were ineffective as to Salguero for having not disclaimed coverage on the separate ground that Salguero had also failed to provide timely notice of his underlying personal injury to State Farm.

In finding in favor of Tri-City and declaring that State Farm was obligated to defend and indemnify Frempong for her accident with Salguero, Queens County Supreme Court Justice Jaime Rios rejected State Farm's reliance on a First Department decision, holding that Second Department case law controlled and required the finding that State Farm's disclaimers were ineffective as against Salguero for having said nothing about Salguero's late notification of the underlying personal injury action:
In support, State Farm relies on the holding in Schlott v Transcon. Ins. Co., Inc., (41 AD3d 339 [2007]), wherein the Appellate Division, First Department determined that the insurer complied with the mandates of Insurance Law § 3420(d) when it gave notice of disclaimer to the insured and sent a copy to the injured party, despite its omission of any specific reference to the injured party's failure to timely notify it of the accident.

Salguero maintains that State Farms's disclaimers are not effective against him, since they failed to include his alleged failure to timely notify State Farm of the lawsuit as a basis for disclaiming and only referred to its insured's failure. /div>

Insurance Law §3420(d) provides that an insurer shall give written notice of a disclaimer of liability or denial of coverage to the insured and injured party or any other claimant as soon as is reasonably possible (see First Fin. Ins. Co. v Jetco Contr. Corp., 1 NY3d 64 [2003]; Hereford Ins. Co. v Mohammod, 7 AD3d 490 [2004]; State Farm Ins. Co. v Cooper, 303 AD2d 414 [2003]).

The notice of disclaimer must address with a high degree of specificity the grounds upon which it is based (see General Acc. Ins. Group v Cirucci, 46 NY2d 862 [1979]; State Farm Mut. Auto. Ins. Co. v Cooper, 303 AD2d 414, supra; State Farm Mut. Auto. Ins. Co. v Joseph, 287 AD2d 724 [2001]). An insurer's justification for denying coverage is limited to the ground(s) stated in the disclaimer and waives any ground for denying coverage that is not specifically asserted in its disclaimer, regardless of merit (see General Acc. Ins. Group v Cirucci, 46 NY2d 862, supra; Adames v Nationwide Mut. Fire Ins. Co., 55 AD3d 513 [2008]; Vacca v State Farm Ins. Co., 15 AD3d 473 [2005]).

Additionally, contrary to the holding in Schlott v Transcon. Ins. Co., Inc., (41 AD3d 339, supra), the Second Department has consistently held that in order for a disclaimer to be valid against an injured party, the notice of disclaimer must advise the claimant that his or her notice was not timely (see State Farm Mut. Auto. Ins. Co. v Cooper, 303 AD2d 414, supra; State Farm Mut. Auto. Ins. Co. v Joseph, 287 AD2d 724, supra).

Here, the sole basis of State Farm's disclaimer notices was Frempong's failure to notify it of the lawsuit. The disclaimer notices are thus, ineffective against Salguero, despite his failure to provide State Farm with notice of the lawsuit. As such, State Farm is estopped from raising his failure as a ground to disclaim coverage, despite the questionable practices of respondent's attorney (see Vacca v State Farm Ins. Co., 15 AD3d 473, supra; Gov. Empl. Ins. Co. v Jones, 6 AD3d 534 [2004]; Hazen v Otsego Mut. Fire. Ins. Co., 286 AD2d 708 [2001]; Legion Ins. Co. v Weiss, 282 AD2d 576 [2001]; Eagle Ins. Co. v Ortega, 251 AD2d 282 [1998]).
In State Farm v. Cooper, a CPLR 7503 proceeding to stay a UM claim, State Farm had made precisely the same argument against Zurich -- that Zurich's disclaimer was ineffective vis-à-vis Cooper, State Farm's insured (the UM claimant) because Zurich's disclaimer had said nothing about Cooper's failure to give timely notice to Zurich of the underlying lawsuit. Both Nassau Supreme and the Second Department agreed, staying Cooper's UM claim against State Farm. The other Second Department decision Justice Rios cited and relied upon -- State Farm v. Joseph -- involved an insured's late notice of the accident, not of the subsequent personal injury lawsuit.

Liability coverage disclaimers and denials can both be untimely and defective. What is sometimes called a "Cirucci defect", based on the New York Court of Appeals' 1979 decision in General Acc. Ins. Group v. Cirucci, 46 NY2d 862, relates to a disclaimer letter's omission of any reference to an injured party's late notice as a separate ground for denying coverage.

Although Justice Rios properly followed the binding precedent of State Farm v. Cooper, since Queens County falls within the Second Judicial Department, the Second Department erroneously decided that case. Cirucci and its progeny apply only to the defense of an insured's or injured party's late notice of an accident, not late notice of the subsequent personal injury lawsuit:
The only other ground stated in the insurance company's notice of disclaimer, the "insured's failure to report this accident to us", was likewise not effective against the third-party claimants. As noted by the Appellate Division, an injured third party may seek recovery from an insured's carrier despite the failure of the insured to provide timely notice of the accident ( Lauritan v American Fid. Fire Ins. Co., 3 AD2d 564, affd 4 NY2d 1028). Although, under the facts of this case a disclaimer might have been premised on the late notice furnished by the third parties themselves to the insurer, since this ground was not raised in the letter of disclaimer, it may not be asserted now. General Acc. Ins. Group v. Cirucci, 46 NY2d 862, 863.
The First Department's 2007 decision in Schlott v Transcon. Ins. Co., Inc. states what I believe is the correct interpretation of Insurance Law §§ 3420(a)(3) and 3420(d) with respect to late notice of lawsuits: "The fact that defendant [insurer] omitted from that notice any specific reference to the injured party's own failure to afford the insurer timely notice [of the underlying lawsuit] did not prejudice plaintiffs." Absent prejudice to the injured party from such an omission -- which in Salguero's case could not have existed or even been argued given his attorney's "questionable practices" of suing and taking a default judment against State Farm's insured without having notified State Farm, which whom that attorney had been negotiating -- a Cirucci defect is immaterial provided the injured party received a copy of the disclaimer letter.

With "only" $33,000 and change at stake, it remains to be seen whether State Farm will appeal this decision to the Second Department (which it likely will lose) and then put the conflict between the First and Second Departments before the Court of Appeals for determination.

Wednesday, May 27, 2009

Court Denies Summary Judgment Motion Based on Insureds' Recorded Statements

Metropolitan Cas. Ins. Co. v. Shaid

(Sup. Ct., Queens Co., decided 5/21/2009)

On June 8, 2006, a vehicle operated by the underlying plaintiff Justin Marvisi collided with a vehicle insured by Metropolitan operated by Arshad and owned by Shaid. In initially reporting the accident, Shaid advised Metropolitan that he did not know the identity of the person who was driving his vehicle at the time of the accident and that he had dropped off his vehicle at a service station with the keys inside it. It was not until 2008 that Shaid acknowledged that he knew Arshad, the driver, and had given him permission to use the vehicle for personal and non-business related reasons. Both Shaid and Arshad provided recorded statements to an investigator for Metropolitan.

In October 2006, Metropolitan denied liability coverage to Shaid and Arshad based on the policy's exclusion for use of the insured auto in an “auto business.” Marvisi brought a personal injury action against Shaid and Arshad and obtained a default judgment against them. Metropolitan then commenced this action, seeking a declaratory judgment declaring that Shaid and Arshad had breached the policy's cooperation clause.

Metropolitan moved for summary judgment based on the contents of recorded statements obtained from Shaid and Arshad. Queens County Supreme Court Justice Bernice Siegel initially agreed that:
[t]he law is well settled that an insured who falsely informs his insurer as to who was driving the insured vehicle at the time of the accident breaches the cooperation clause of the insurance policy. (Geico v. Fisher, 54 AD2d 1087 [4th Dept 1976].)In this matter, the insurer contends that Shaid knew who was driving his vehicle at the time of the accident and for what purpose, but intentionally misrepresented those facts to Metropolitan.

An insured breaches the condition of cooperation and seriously prejudices the insurer in handling the claims and lawsuits arising out of the accident when making false statements concerning the facts of an accident. (see State Farm Mutual Automobile Ins. Co. v. Brown, 21 AD2d 742 [4th Dept. 2004].) However, even through the insurer may be prejudiced by the lack of cooperation “[t]he lack of prejudice to the insurer is immaterial when there has been a breach of a condition.” (National Grange Mutual Liab. Co. v. Fino, 13 AD2d 10 [3d Dept 1961].)
In spite of these legal principles, however, the court denied Metropolitan's motion for summary judgment, finding that the recorded statements Shaid and Arshad gave to Metropolitan's investigator were not business records that qualified as admissible under the business records exception to the hearsay rule:
Hearsay is a statement made out of court offered for the truth of the fact asserted in the statement. (People v. Romero, 78 NY2d 355 [1991].) A hearsay statement may be received in evidence only if it falls within one of the recognized exceptions to the hearsay rule, and then only if the proponent demonstrates that the evidence is reliable. (Nucci v. Proper, 95 NY2d 597 [2001].)

Plaintiff contends that the statements fall under the business records exception to the hearsay rule. For the purposes of determining whether hearsay is admissible under business records exception, the concern relating to trustworthiness extends to “each participant in the chain producing the business record, from the initial declarant to the final entrant.” (Matter of Leon RR, 48 NY2d 117 [1979].)

The Court of Appeals has ruled that “the statement is inadmissible hearsay if any of the participants in the chain is acting outside the scope of the business duty.” Id. at 122. It is undisputed that the insured was outside the insurers enterprise at the time of the statement.

At issue though, is whether the duty of an insured to cooperate with an insurer is comparable to a business duty during an insurance investigation. (Hochhauser v. Electric Insurance Co., 46 AD3d 174 [2d Dept 2007].) However, “despite potential consequences which may befall an insured who fails to provide accurate and truthful information to, or to cooperate with, an insurer, the insured’s statement to the insurance investigator ... was not made under the circumstances which create a high probability that the statement was truthful.” (Corsi v. Town of Bedford, 58 AD3d 225, 231 [2d Dept 2008], quoting Hochhauser v. Electric Insurance Co., 46 AD3d at 1823.)

The essence of the business records exception to the hearsay rule is that records systematically made for the conduct of business are inherently highly trustworthy because (1) the records are routine reflections of the day to day operations of a business; (2) the entrant is obliged to be truthful and accurate for purposes of conducting the enterprise. (Hochhauser v. Electric Insurance Co., 46 AD3d 174 [2d Dept 2007].)

Here, the insured was outside of the insurer’s enterprise and was not communicating information regarding the accident under the compulsion of any business duty. (see generally, Matter of Leon RR , 48 NY2d 117 [1979].) Accordingly, the statements made by Shaid and Arshad to the insurance investigator do not constitute a business record. Without the benefit of the business record exception, the plaintiffs statements to the investigator are simply impermissible hearsay.
Contrast this decision with Tower Ins. Co. v. Rajaram (Sup.Ct., NY Co., 2008) and Tower Ins. Co. v. Kravtchouk (Sup.Ct., NY Co., 2008) in which New York County Supreme Court Justice Eileen Rakower found signed statements of the insureds to be admissible as evidence on Tower's motions for summary judgment in those cases. In rejecting the defendants' argument that their signed statements were inadmissible hearsay, Justice Rakower ruled: "While hearsay, admissions by a party of any fact material to the issue are always competent evidence against that party."

Did Metropolitan also argue that Shaid's and Arshad's recorded statements constituted party admissions and, thus, were admissible under a separate exception to the hearsay rule? Once the declaratory judgment action was pending, couldn't Metropolitan also have converted the recorded statements into evidentiary form by attaching transcripts to a notice to admit or marking and using the transcripts during party depositions of Shaid and Arshad? This decision does not indicate in what form and under whose sponsoring affidavit the recorded statements were submitted in support of Metropolitan's motion.

Heading to Albany

Set three alarms for 3:30 this morning and made it with 11 minutes to spare for my 4:45 a.m. departure at Amtrak's Buffalo-Depew station. I'm rumbling east in business class (very nice) with a cup of hot coffee and the Verizon broadband AirCard-slotted laptop, heading to Albany to meet with one of my no-fault clients and a state assemblyman or two to discuss proposed legislation to amend New York's 30-day no-fault preclusion rule.

Beats steering with my knee any day.

Friday, May 22, 2009

Fire Subrogation Action Dismissed Based on More Specific Lease Provision

Greenwich Ins. Co. v. Volunteers of America-Greater N.Y., Inc.

(1st Dept., decided 5/21/2009)

Greenwich Insurance Company paid for fire damage to premises leased to the defendant and commenced this subrogation action to recover its payments.  The defendant's lease with Greenwich's insured, the subrogor, contained two provisions regarding the defendant's liability for damages to the leased premises -- one specific to fire damage, and one general to all damages.  Which do you think controlled?

In AFFIRMING New York Supreme's order granting defendant's motion for summary judgment, the First Department held:
Paragraph 12 of the lease, which obligates defendant to pay for damages specifically caused by fire only if the fire was "caused by [defendant's] actions," controls over paragraph 13, which generally obligates defendant to pay for any damages "caused by [defendant] or any occupant or visitor" (see Bank of Tokyo-Mitsubishi, Ltd., N.Y. Branch v Kvaerner a.s., 243 AD2d 1, 8 [1998]). Since the fire was allegedly caused by defendant's subtenant smoking in bed, and not by defendant's own actions, defendant cannot be held responsible for the cost of repairing the damage under the terms of the lease. We have considered plaintiff's other arguments and find them unavailing.
Subrogating insurers are bound by the provisions in their insureds' contracts and leases with parties who would be potential defendants in subrogation actions.  Contract or lease provisions that are more specific generally trump ones that are less specific or more general.  As in this case.

New York State Insurance Department Office of General Counsel Opinions for April 2009

Posted yesterday to the NYS Insurance Department's website are the Office of General Counsel Opinions for April 2009. Two of the 6 posted opinions are relevant to P&C insurers doing business in New York.

Applicability of Workers' Compensation Board Directive to Durable Medical Equipment Fee Schedule in No-Fault Claims (April 6, 2009)

Question Presented:

Is the Workers’ Compensation Board’s (“WCB”) directive of July 18, 2008 concerning the inapplicability of the durable medical equipment (“DME”) fee schedule to medical providers supplying such equipment applicable to no-fault claims?

Yes, the WCB’s directive of July 18, 2008 concerning the inapplicability of the DME fee schedule to medical providers supplying such equipment is applicable to no-fault claims.


The inquiry is of a general nature, without reference to particular facts.


Under New York’s “no-fault” insurance law, see Article 51 of the New York Insurance Law, a provider of health services is limited in what he can charge to an insurer by the amounts specified in the workers’ compensation fee schedules. See N.Y. Ins. Law § 5108 (McKinney 2000). Section 68.1(a) of N.Y. Comp. Codes R. & Regs. tit. 11, pt. 68 (Regulation 83) adopts certain workers’ compensation fee schedules for purposes of the no-fault law. That regulatory provision reads as follows:
The existing fee schedules prepared and established by the chairman of the Workers’ Compensation Board for industrial accidents are hereby adopted by the Superintendent of Insurance with appropriate modification so as to adapt such schedules for use pursuant to the provisions of section 5108 of the Insurance Law.
Furthermore, 11 N.Y.C.R.R. 68.1(b)(1) incorporates the grounds rules of the workers’ compensation fee schedules by providing in relevant part that “[t]he general instructions and ground rules in the workers’ compensation fee schedules apply” for purposes of no-fault billing. Thus, any charges for health services submitted to an insurer for reimbursement under the no-fault law are limited to the fee schedules and ground rules put forth by the WCB. This includes charges for DME, for which the WCB has established a fee schedule. 

Injured persons typically receive DME either directly from a medical provider or from a DME supplier, as when the equipment has been prescribed by a physician. On July 18, 2008, the WCB issued a directive addressing the fee schedule for DME. The directive makes the DME fee schedule inapplicable to medical providers supplying DME, and reads in relevant part as follows:
The Durable Medical Equipment Fee Schedule does not apply to medical providers supplying durable medical equipment to injured workers as part of medical treatment described in the New York Workers’ Compensation Medical Fee Schedule. Billing and reimbursement follows the ground rules as described in the fee schedule.
The directive thus establishes a separate reimbursement system for medical providers supplying DME directly to patients, while leaving in effect the current DME fee schedule for suppliers of DME (who are not licensed medical providers) to patients. 

For those medical providers, the directive states that billing and reimbursement will instead follow “the ground rules” set forth in the fee schedule. With respect to the reimbursement of medical providers, Ground Rule No. 4 of the Medical Fee Schedule reads in pertinent part as follows:
Supplies and materials provided by the physician…over and above those usually included with the office visit or other service rendered may be charged for separately…. Payment shall not exceed the invoice cost of the item.
Ground Rule No. 4 thus requires that the compensation physicians may receive for providing DME directly to patients shall not exceed the invoice cost of the item.

Since 11 N.Y.C.R.R. 68.1(b)(1) (Regulation 83) adopts the WCB’s fee schedules and ground rules for no-fault billing and reimbursement, and because physicians are excluded from the DME fee schedule, the WCB’s directive interpreting the DME fee schedule applies to charges arising from no-fault claims, in accordance with the clear intent of Insurance Law § 5108(a) to ensure that no-fault health services are reimbursed in accordance with the WCB fee schedule. Thus, the DME fee schedule applies only to DME suppliers, and not to medical providers supplying DME directly to patients, for purposes of reimbursing the cost of DME under the no-fault law.

For further information you may contact Principal Attorney Lawrence M. Fuchsberg at the New York City office.

Insurer's Obligation to Notify the Insured's Authorized Agent of the Insurer's Nonrenewal of the Policy (April 8, 2009)

Question Presented:

Does an insurer have an obligation to notify an insured's authorized agent if the insurer mails a notice of its intention not to renew a non-commercial automobile insurance policy to the named insured?


Yes.  Under N.Y. Ins. Law § 3425(h)(3) (McKinney Supp. 2009), if an insurer mails a notice of intention not to renew a non-commercial automobile insurance policy to the named insured, the insurer shall mail, deliver or transmit a copy of the notice to the insured's authorized agent or broker within seven days of the time the notice is mailed to the named insured.


The inquiry is of a general nature, without reference to particular facts.


Insurance Law § 3425 is germane to the inquiry. The statute applies to most non-commercial automobile insurance policies other than those issued through the New York Automobile Insurance Plan. Insurance Law § 3425(a)(1) defines a "covered policy" to mean an insurance policy issued or issued for delivery in this State by an authorized insurer, on a risk located or resident in this State, and that insures against losses or liabilities arising out of the ownership, operation or use of a motor vehicle, when a natural person is the named insured.

Insurance Law § 3425(h)(3) is relevant to the inquirer’s inquiry because that provision governs an insurer's obligation to notify the insured's authorized agent or broker if the insurer mails a notice of its intention not to renew a non-commercial automobile insurance policy to the named insured. Insurance Law § 3425(h)(3) reads as follows:
(3) A copy of every notice of cancellation, reduction of limits, substitution of policy form, elimination of coverages, conditioned renewal or of intention not to renew, including the reasons therefor, or a summary of such notice, shall be mailed, delivered or transmitted to the insured's authorized agent or broker within seven days of the time such notice is mailed to the named insured. Electronic transmission or any other means of delivery or transmission of information commonly used by the insurer to communicate with agents or brokers shall be deemed sufficient for compliance with this paragraph. Failure to mail, deliver or transmit a copy of such notice to the insured's authorized agent or broker pursuant to this paragraph shall not render any such notice ineffective, provided that all of the other requirements of this section are met and shall not be considered failure to include a provision required by this section for purposes of paragraph two of this subsection. (Emphasis supplied.)
Insurance Law § 3425(h)(1), too is relevant here, because proof of mailing of a notice of intention not to renew a non-commercial automobile insurance policy constitutes sufficient proof of notice. Insurance Law § 3425(h)(1) reads as follows:
(h) (1) Proof of mailing of a notice of cancellation, reduction of limits, substitution of policy form, elimination of coverages, conditioned renewal or of intention not to renew, or proof of the mailing of the reasons therefor, to the named insured at the address shown in the policy, shall be sufficient proof of the giving of notice and the giving of reasons required by this section.
For further information, you may contact Senior Attorney Robert Freedman at the New York City office.

Thursday, May 21, 2009

Tender Letter from One Coinsurer to Another Coinsurer on Behalf of Mutual Insureds Held to Trigger the Timely Disclaimer Requirement of New York Insurance Law § 3420(d)

JT Magen v. Hartford Fire Ins. Co.

(1st Dept., decided 5/14/2009)

New York Insurance Law § 3420(d) requires timely disclaimers and denials of liability coverage for death or bodily injury arising out of an accident occurring in New York.  In Bovis Lend Lease LMB, Inc. v Royal Surplus Lines Ins. Co. (27 AD3d 84 [2005]), the First Department held, in part, that 3420(d) does not apply to claims for contribution or full coverage by one coinsurer against another.

The issue before the First Department in this case was whether the prompt disclaimer requirement of 3420(d) is triggered when an insurance carrier receives the notice of claim from another insurance carrier on behalf of a mutual insured asking that the insured be provided a defense and indemnity.  The First Department held that a tender letter one insurer sends to another insurer — asking that their mutual insureds be provided with a defense and indemnity as additional insureds under the latter insurer's policy — fulfills that policy's notice-of-claim requirements so as to trigger that insurer's obligation to issue a timely disclaimer pursuant to Insurance Law § 3420(d).

Travelers insured plaintiff, the manager of a construction site.  Hartford insured a subcontractor and named the construction manager and the site's two owners as additional insureds.  An employee of the subcontractor was injured on the job and sued the owners and construction manager.  Travelers notified Hartford of the underlying action and requested that Hartford defend and indemnify the construction manager and site's two owners as additional insureds.  Fifty-one days after Travelers re-sent a copy of the underlying summons and complaint to Hartford, Hartford informed Travelers that it was disclaiming coverage on the ground that the additional insureds had failed to comply with the policy requirement that they provide notice "as soon as practical" of any "occurrence" that might result in damages covered under the policy, even if no demand has been made against them. A copy of the disclaimer letter was also sent to the additional insureds. 

In AFFIRMING New York Supreme's order which granted plaintiff's cross motion for summary judgment declaring that Hartford's policy was primary to any other policy covering plaintiff, thus obligating Hartford to defend and indemnify plaintiff and the nonparty site owners in the underlying personal injury action, the First Department noted:
Finally, defendant Hartford has not made any attempt to justify its 45-to 50-day delay in disclaiming coverage of the underlying accident. Indeed, it has not even suggested that the letter tendering notice of the claim against plaintiff, IDA and the Yeshiva did not provide it with sufficient facts to disclaim coverage on any basis. Rather, misinterpreting the import of Bovis, Hartford argues that Insurance Law § 3420(d) is inapplicable since the tender letter was from an insurer and the statute does not require a prompt response to claims asserted by other insurers. We thus conclude that Hartford's disclaimer letter was untimely as a matter of law (see e.g. West 16th St. Tenants Corp. v Public Serv. Mut. Ins. Co., 290 AD2d 278 [2002], lv denied 98 NY2d 605 [2002] [30 days unreasonable as a matter of law where sole ground on which coverage was disclaimed was insured's delay in notifying insurer of occurrence]), and that as a result, Hartford is precluded under § 3420(d) from disclaiming coverage.
 Rule:   a tender letter from one coinsurer to another coinsurer on behalf of a mutual insured may trigger the prompt disclaimer requirement of Insurance Law § 3420(d).

Wednesday, May 20, 2009

2008 Annual Report of the NYS Insurance Department Superintendent

Coming in again at 248 total pages replete with 68 tables and 10 color charts, the 2008 Annual Report of the Superintendent of Insurance to the New York State Legislature was released on May 15, 2009.

With respect to auto insurance, the report advises the following (page 67):

18. Automobile Insurance

a. New York Automobile Insurance Plan

The number of vehicles insured in the Plan has continued to decline for the past few years and remains at an historic low.  Approximately 1.1% of New York private passenger registered vehicles are insured in the Plan as compared to a range of 12% to 17% around two decades ago. Furthermore, at year-end 2008, there were approximately 16% fewer vehicles in-force than year-end 2007 and approximately 42% fewer than year-end 2006. This continual decrease in the Plan population can be attributed, at least in part, to various Department initiatives such as those to combat fraud and incentives to voluntary market insurers that provide coverage to drivers who otherwise would have been placed in the Plan.

b. Legislation

Chapter 136 of the Laws of 2008 extends until June 30, 2011 the provisions of Section 2328 regarding the prior approval of rates for Public Automobile insurance. It also extends until June 30, 2011 the provisions of Section 3425 regarding the cancellation and non-renewal of private passenger automobile policies.

Chapter 136 of the Laws of 2008 also added a new Insurance Law section 2350. Chapter 136 replaced the prior approval system, in effect since 2001 for nonbusiness motor vehicle insurance rates, with a flexible rating (flex-rating) system. The new system, which is a blend of prior approval and competitive rating, became effective on January 1, 2009. Regulation 153 (11 NYCRR 163) was promulgated on an emergency basis to implement the new flex-rating system. The regulation allows periodic overall average rate changes up to 5% on a file-and-use basis. It requires the superintendent’s prior approval of filings that produce overall rate increases above 5% or individual policyholder rate changes above 30% in any twelve-month period.

Chapter 136 also added a new Insurance Law subsection 3425(r), which allows an insurer that has no more than 750 personal automobile insurance policies in-force at last year-end and intends to non-renew all of the policies, to submit a plan for the nonrenewal of those policies to the superintendent for approval. The plan must describe the measures the insurer will take or has taken to minimize market disruption. Prior to this new statute, an insurer could only terminate all of its personal automobile policies under very limited circumstances, such as if it withdrew its license to write the applicable property/casualty lines of business or if continuation of the policies would be hazardous to the interests of policyholders of the insurer, its creditors, or the public pursuant to Section 3425(c).

c. No-Fault Motor Vehicle Insurance Law Activity – 2008
i. Impact of recent case law on the Automobile No-Fault system
Two 1997 Court of Appeals decisions, Central General Hospital v. Chubb, and Presbyterian Hospital v. Maryland Casualty, had an enormous impact on No-Fault adjudication and the number of disputes generated by the No-Fault system. These cases generally established that a No-Fault insurer may not assert a defense when it does not timely deny a claim within 30 days of receipt. In a 2008 decision, Fair Price Medical Supply v. Travelers, the Court of Appeals upheld the application of a preclusion sanction for a late denial where durable medical equipment supplies were billed for and never provided, so that any amount billed by a health provider for non-existent services must be paid by the insurer when there is a late denial. Essentially, the fundamental requirements established by the Legislature in 1973 that all reimbursable No-Fault health care expenses must be necessary and billed in accordance in the fee schedule limits have been frustrated by the decisions mentioned above.  Therefore, the Legislature should enact legislation similar to the bill proposed by the Senate two years ago in S2638 that would restore the fundamental requirements for No-Fault health care expenses to be reimbursable by permitting an insurer to assert a defense when it does not deny a claim within 30 days of receipt.
ii. Mandatory arbitration for all No-fault insurance disputes
The Civil Court of the City of New York and District Courts in Nassau and Suffolk Counties have been inundated with lawsuits filed by medical providers seeking reimbursement of No-Fault benefits for services rendered to injured claimants. This strain on the judiciary’s resources led the Chief Administrative Judge's Local Courts Advisory Committee (Unified Court System) to propose a bill in 2006 that would amend NYIL §5102 to require mandatory arbitration for all No-Fault insurance disputes. Since the improvements in the administration of the No-Fault Arbitration System in the past few years permit it to process substantially more requests for arbitration without compromising the goal of a speedy dispute resolution system, the Legislature should consider legislation that would reduce the strain on the judiciary’s resources by revising NYIL §5102 to require mandatory arbitration for all No-Fault insurance disputes.

* * * * *

The Superintendent's press release regarding this annual report claims that insurance companies refunded or credited more than $217 million to New Yorkers over the past two years and paid $18 in million in fines during that period and summarizes other aspects of the annual report. 

Private passenger automobile rate filings reviewed and approved in 2008 can be found in Table 41 beginning on page 85 of the report.

A legislative and regulatory recap runs from pages 193 to 207.

Passing percentages for licensing examinations administered in 2008 (Table 60, page 225): public adjusters - 39% (no change from 2007); independent adjusters (overall) - 44% (down from 51% in 2007); agents & brokers (overall) - 45% (up from 44% in 2007).

Table 64 on page 236 reports that for the fiscal year ending March 31, 2008, the Department's total recepits were $717,882,551 and total expenditures were $183,598,083, for an excess of receipts over Department expenditures of $534,284,468.

Court Declines to Declare Six Informal Opinion Letters of New York State Insurance Department's Office of General Counsel Regarding Services Provided by Independent Contractors to be Irrational

State Farm Mutual Automobile Ins. Co. v. Manuel Farescal, M.D., et al.

(Sup. Ct., Queens Co., decided 5/13/2009)

State Farm brought this action against to recover damages for common-law fraud and unjust enrichment, and for a judgment declaring that State Farm had no obligation to pay no-fault claims submitted by the professional corporation defendants as assignees of policyholders. State Farm alleged that defendant professional services corporations were fraudulently incorporated in the name of defendant Manuel Farescal, M.D., a physician, while, in fact, the professional corporations were owned, operated, and controlled by defendants Adnan Munawar and P. Clifford LoBrutto, unlicensed persons, in violation of applicable statutes and regulations. State Farm also alleged that the defendant professional corporations were not entitled to receive such payments because they were not owned and controlled solely by a licensed medical physician and the services provided were not rendered by employees but, rather, by independent contractors in violation of state law.

Defendants moved pursuant to CPLR 3212(e) for partial summary judgment declaring that six “informal opinions” of the office of General Counsel of the State of New York Insurance Department are irrational and not entitled to deference, and to dismiss State Farm's causes of action regarding services provided by independent contractors.

In denying defendants' motion, Queens County Supreme Court Justice Allan Weiss ruled that defendants had failed to assert any counterclaim for such affirmative declaratory relief, and any ruling, in the context of this case, that the opinion letters were irrational and not entitled to deference would constitute an impermissible advisory opinion.
A state court lacks subject matter jurisdiction in cases when no justiciable controversy is presented (see Matter of New York State Inspection, Security & Law Enforcement Employees, Dist. Council 82, AFSCME, AFL-CIO v Cuomo, 64 NY2d 233, 241, n 3 [1984]; Morrison v Budget Rent A Car Systems, Inc., 230 AD2d 253, 258-259 [1997]). It is well settled law that “[t]he courts of New York do not issue advisory opinions for the fundamental reason that in this State ‘[t]he giving of such opinions is not the exercise of the judicial function’ (Matter of State Indus. Commn., 224 NY 13, 16 [1918]) . . .,” (Cuomo v Long Island Light Co., 71 NY2d 349, 354 [1988]).

Any ruling by the court regarding the opinion letters would not be dispositive of a cause of action asserted by plaintiff (citations omitted). * * * Nothing about the opinion letters themselves constitutes a final determination by the State regarding the propriety of plaintiff’s actions, and the Farescal defendants are not aggrieved by their issuance. Rather, the question of whether plaintiff properly may withhold payments of no-fault benefits to defendants All Family, Universal and Painpro in instances where professional health services were rendered by independent contractors, as opposed to their employees, is one of law, which must be decided based upon interpretation of statute and regulation, and case law.
With respect to defendants' motion to dismiss State Farm's causes of action seeking a declaration that defendants were not entitled to recover for services provided by independent contraction, Justice Weiss held:
The Farescal defendants assert an insurer may not deny payment for no-fault benefits on the ground that the professional health services billed to plaintiff were performed by independent contractors. The Farescal defendants, therefore, argue plaintiff cannot obtain a judgment declaring that defendants All Family, Universal and Painpro are not entitled to collect no-fault benefits for charges submitted to it when such professional health services were rendered by independent contractors. The court notes that the Farescal defendants make no factual argument that the professional health services billed to plaintiff were performed by their employees, or that they exercised a particular level of control over the independent contractors. Their motion raises purely legal arguments regarding the propriety of plaintiff’s withholding of payments to the professional corporations based upon the rendering of services by independent contractors.

CPLR 3001, in relevant part, provides: “The supreme court may render a declaratory judgment having the effect of a final judgment as to the rights and other legal relations of the parties to a justiciable controversy whether or not further relief is or could be claimed.” “An action is justiciable when the controversy presented touches the legal relations of the parties having adverse interests from which harm is presently flowing or could flow in the future in the absence of a court determination of the parties’ rights” (Initiative For Competitive Energy v Long Is. Power Auth.,178 Misc 2d 979, 989 [1998]). “The controversy must be capable of disposition and be presented in an adversarial context with a set of concrete facts” (Goodwill Adv. Co. v State Liq. Auth.,14 AD2d 658 [1961]). The complaint herein demonstrates the existence of a controversy between the parties regarding plaintiff’s withholding of payments to defendant professional corporations to the extent the services were rendered by independent contractors, and the practical need for its resolution. The No-Fault Law, which supplants common-law tort actions for most victims of automobile accidents with a system of no-fault Insurance, has as its primary aims to ensure prompt compensation for losses incurred by accident victims without regard to fault or negligence, to reduce the burden on the courts and to provide substantial premium savings to New York motorists (see Medical Society of State v Serio, 100 NY2d 854, 860 [2003]). The Superintendent has promulgated regulations implementing the No-Fault Law, currently contained in 11 NYCRR Part 65. Section 65-3.11(a) of that part (formerly section 65.15[j][1]), in relevant part, provides, “An insurer shall pay benefits for any element of loss, . . ., directly to the applicant or . . . upon assignment by the applicant . . ., shall pay benefits directly to providers of health care services . . . .”

11 NYCRR 65-3.11(a) and its precursor, 11 NYCRR 65-3.15(j)(1), have been interpreted to mean that a medical provider cannot recover assigned no-fault benefits if services were provided by an independent contractor rather than by it or its employees (see Health & Endurance Medical, P.C. v Liberty Mut. Ins. Co., 19 Misc 3d 137[A], 2008 NY Slip Op 50864(U) [NY Sup App Term, 2d and 11th Jud Dists (2008)]). In Health & Endurance, a provider sought to recover assigned first-party no-fault benefits for services which were not rendered by it or its employees, but rather by a treating provider who was an independent contractor. The Appellate Term held that the plaintiff was not a “provider” of the medical services rendered within the meaning of Insurance Department Regulations (11 NYCRR) § 65-3.11[a]), and, therefore, was not entitled to recover “direct payment” of assigned no-fault benefits from the defendant insurer. Such holding is consistent with the holdings in A.M. Medical Services, P.C. v Progressive Cas. Ins. Co., (22 Misc 3d 70, 2008 NY Slip Op 28528, [App Term, 2d, 11th and 13th Jud Dists (2008)]); Health & Endurance Med. P.C. v State Farm Mut. Auto. Ins. Co., (12 Misc 3d 134[A], 2006 NY Slip Op 51191[U] [App Term, 2d and 11th Jud Dists 2006]);Craig Antell, D.O., P.C. v New York Cent. Mut. Fire Ins. Co., (11 Misc 3d 137[A], 2006 NY Slip Op 50521[U] [App Term, 1st Dept 2006]); Rockaway Blvd. Medical P.C. v Progressive Ins., (9 Misc 3d 52, 2005 NY Slip Op 25278 [App Term, 2d Dept 2005]); A.B. Med. Servs. PLLC v Liberty Mut. Ins. Co., (9 Misc 3d 36 [App Term, 2d and 11th Jud Dists 2005]); A.B. Med. Servs. PLLC v New York Cent. Mut. Fire Ins. Co., (8 Misc 3d 132[A], 2005 NY Slip Op 51111[U] [App Term, 2d and 11th Jud Dists 2005]). These opinions of the Appellate Term are persuasive authority, and the court is convinced of their reasoning. Under such circumstances, the third and fourth causes of action asserted by plaintiff state viable claims for declaratory relief.

Monday, May 18, 2009


hi⋅a⋅tus [hahy-ey-tuhs]
–noun, plural -tus⋅es, -tus.
1. a break or interruption in the continuity of a work, series, action, etc.

After a nearly two week hiatus, my postings will resume tomorrow. Like in Mark Twain's case, the rumors of my demise have been greatly exaggerated. Thanks to the one of you (and you know who you are) who checked in a few times to make sure I'm still here. I am.

In case you're wondering, here's where I was on one of the days over the past 12 when I wasn't in New York State.  My photo.  Rocky Mountains' elk. 

Wednesday, May 6, 2009

Policy for Dominos Pizza Deliveryman's Personal Auto is Primary

Eveready Ins. Co. v. Illinois Natl. Ins. Co.

(1st Dept., decided 5/5/2009)

Plaintiff insurer brought this declaratory judgment action todetermine the parties' respective obligations to contribute towards a settlement of an underlying personal injury action, which had stemmed from an accident involving a Dominos Pizza deliveryman's use of his personal auto to deliver a pizza.  Plaintiff insured the deliveryman under a personal auto policy; defendant insured Dominos under a commercial auto policy and took the position that its coverage was excess to plaintiff's.  New York Supreme granted defendant's motion for summary judgment, declaring that defendant was not required to contribute to the underlying settlement in the proportion that the limits of its policy bears to the total of the limits of both its policy and plaintiff's policy. 

Finding the "other insurance" clause of defendant's policy to be clear and unambiguous, the First Department AFFIRMED, holding:
The clear and unambiguous "other insurance" clause of defendant's policy limits its policy to "excess" coverage where a covered accident involves a vehicle not owned by its insured, Dominos Pizza. As it was undisputed that the vehicle involved in the accident belonged to plaintiff's insured, a deliveryman for Dominos Pizza who was making a pizza delivery, defendant is an excess insurer required to contribute to the settlement only after the exhaustion of plaintiff's policy (Federal Ins. Co. v Ryder Truck Rental, 189 AD2d 582, affd 82 NY2d 909 [1994]). There is no merit to plaintiff's argument that this "excess" provision of the other insurance clause is contradicted and negated by the "proportionate payment" provision of the same clause. The latter, by its terms, only applies to coverage that is "on the same basis," i.e., where the policy is primary and there are other primary policies, the policy will pay pro rata with the other primary policies, and where the policy is excess and there are other excess policies, the policy will pay pro rata with the other excess policies (General Acc. Fire & Life Assur. Corp. v Piazza, 4 NY2d 659, 669). Here, plaintiff's policy is primary and defendant's policy is excess.

Monday, May 4, 2009

Framed-Issue Hearing Ordered on Whether SUM Claimant's Injuries Arose from a Motor Vehicle Accident and While Claimant Was Occupying His Vehicle

Matter of American Protection Ins. Co. v. DeFalco

(2nd Dept., decided 4/28/2009)

Claimant, a Suffolk County police officer, was injured while placing a motorist under arrest.  He settled his personal injury claim against the motorist and made this SUM claim under his own personal auto policy to American Protection, which commenced this special proceeding to stay the arbitration of that SUM claim and sought a framed hearing on whether claimant's injuries arose from: (1) an accident; (2) the "use and operation" of the underinsured motor vehicle; and (3) while claimant was "occupying" his patrol car.

Although he claimed in an affidavit that his injuries occurred when he was exiting his vehicle as it was struck by the motorist's vehicle, this description contrasted with claimant's prior statement, recorded in a "Suffolk County Police Department Injured Employee Report," in which he stated that he was injured "while attempting to subdue and place a violently struggling suspect under arrest."

In REVERSING the motion court's denial of American Protection's petition and remitting that matter back to Nassau Supreme for a framed-issue hearing, the Second Department held:
SUM benefits are not recoverable if the injuries were intentionally caused and not the result of an accident (see State Farm Mut. Auto. Ins. Co. v Langan, 55 AD3d 281; Met Life Auto & Home v Kalendarev, 54 AD3d 830; Matter of Allstate Ins. Co. v Massre, 14 AD3d 610, 611). It is also clear that DeFalco would not be entitled to SUM benefits under the American policy if he was not "occupying" a vehicle when he was injured. Thus, the occurrence of an accident and the "occupation" of a vehicle are conditions precedent to SUM coverage herein.

"The party seeking a stay of arbitration has the burden of showing the existence of sufficient evidentiary facts to establish a preliminary issue which would justify the stay" (Matter of Liberty Mut. Ins. Co. v Morgan, 11 AD3d 615, 616; see Matter of Eagle Ins. Co. v Viera, 236 AD2d 612). Here, American submitted documentary evidence which indicated that DeFalco's injuries did not arise from the "use or operation" of a vehicle. Although DeFalco submitted an affidavit in opposition to the petition, wherein he claimed that his injuries occurred when he was exiting his vehicle as it was struck by the Bell vehicle, this description contrasted with his prior statement, recorded in a "Suffolk County Police Department Injured Employee Report," in which he stated that he was injured "while attempting to subdue and place a violently struggling suspect [Bell] under arrest." At the very least, the two explanations of how DeFalco incurred his injuries raise a question as to his credibility, and thus a framed-issue hearing on the issue of coverage is warranted (see Matter of Eagle Ins. Co. v Lucia, 33 AD3d 552; Matter of Travelers Prop. Cas. Co. v Landau, 27 AD3d 477).

Similarly, American submitted documentary evidence which indicated that the collision could have been the result of an intentional act on Bell's part. Although this same evidence may be consistent with a conclusion that the collision was accidental, under all of the circumstances presented, American met its burden of tendering evidence sufficient to warrant a framed-issue hearing with respect to this issue as well (see Matter of Country-Wide Ins. Co. [Law], 97 AD2d 699).

Sunday, May 3, 2009

New York State Insurance Department Circular Letter No. 23 (2008) Supplement No. 1

April 7, 2009
TO: All Insurers Writing Homeowners’ Policies in New York
RE: Mid-Term Cancellation of Policies Based Upon Residence Becoming Unoccupied

STATUTORY REFERENCE: Insurance Law Section 3425

Circular Letter No. 23 (2008), issued November 23, 2008, noted that the lack of occupancy of an insured home does not constitute a “physical change” within the meaning of New York Insurance Law § 3425(c)(2)(E). Circular Letter No. 23 further advised that the fact that an insured is not occupying a residence does not, standing alone, constitute grounds for cancellation of a homeowners’ policy under Insurance Law § 3425(c)(2)(D); rather, the insurer must consider the totality of the circumstances. The circular letter also stated that an insurer may not use the existence of a foreclosure action as a basis to cancel a homeowners’ insurance policy under Insurance Law § 3425(c)(2)(D) or (E).

The Department issues this Supplement to Circular Letter No. 23 to respond to questions that the Department received after the circular letter was issued. Specifically, the Department was asked to distinguish between the terms “vacant” and “unoccupied”; whether an absence from the property can itself constitute a physical change; whether an insurer may cancel a vacant or unoccupied property based upon an exclusion in the underlying policy for damage that occurs when the property is vacant or unoccupied; and whether the circular letter applies to foreclosure actions that have culminated in the sale of the insured property.

I.                "Vacant” and “Unoccupied”

Subsequent to the Department’s issuance of Circular Letter No. 23, the Department received inquiries about the circular letter’s application in circumstances where the insurer discovers that a property is “vacant” or “unoccupied.” Those terms are not defined in the Insurance Law, including in the standard fire insurance policy set forth in Insurance Law § 3404, which permits an exclusion for losses that occur when a property has been vacant or unoccupied for more than 60 days. Although the term “vacant” is found in Insurance Service Organization (ISO) Form HO3, it is not defined there, either. 

According to the common meaning of these terms, a “vacant” residence is one that typically contains no personal property and no inhabitants, whereas an “unoccupied” residence is one that, at that moment, is neither in use nor being lived in. See New Oxford American Dictionary: Second Edition (2005) at 1841, 1856 (defining “vacant” as “having no fixtures, furniture, or inhabitants; empty” and “unoccupied” as “having fixtures and furniture but no inhabitants or occupants”). Similarly, in Lamourex v. NY Central Mutual Fire Ins., 244 A.D.2d 645 (3d Dept. 1997), the policy defined “vacant” as a property in which the “occupants have moved leaving the building empty except for limited personal property,” and “unoccupied” as “not being lived in but personal property has not been removed.” In Gallo v. Travelers, 21 A.D.3d 1379 (4th Dept 2005), the policy defined as “vacant” a property that “does not contain business personal property to conduct customary operations,” and “unoccupied” as containing no “personal property usual to the occupancy of the building while customary activity and operations are suspended.” Likewise, in Coutu v. Exchange Insurance Co., 174 A.D.2d 241 (3d Dept 1992), the policy defined “vacant” as “containing no contents pertaining to operations or activities customary to the occupancy of the building.”

Insurance Law § 3425(c)(2)(D) permits an insurer to cancel coverage upon “discovery of willful or reckless acts or omissions increasing the hazard insured against.” Circular Letter No. 23 notes whether an insurer may lawfully cancel a homeowners’ policy pursuant to Insurance Law § 3425(c)(2)(D) because of “nonoccupancy” or “vacancy” is a question of fact that depends on the totality of the circumstances. The insurer, in such instance, must establish that under the particular facts, the nonoccupancy or vacancy is a willful or reckless act or omission, and that it increases the hazard insured against.

 Thus, where, for instance, an insured enters a nursing home or other health care facility intending for the stay to be temporary and takes steps to protect or maintain the property by having a neighbor or relative routinely check the property, nonoccupancy alone would likely not constitute a permissible ground for cancelling the policy. But where a nonoccupancy were to result from the “abandonment” of the property (where “abandonment” means that the insured has left the property empty or uninhabited, without any intention to return, see New Oxford American Dictionary: Second Edition (2005) at 2), the insurer would likely be justified in cancelling the policy in accordance with Insurance Law § 3425(c)(2)(D).

II.              Absence as Physical Change

The Department received inquiries about whether absence from the property itself can constitute a “physical change” within the meaning of Insurance Law § 3425(c)(2)(E), which permits an insurer to cancel when there has been a “physical change” to the property that occurs after the policy’s issuance or last renewal date and that renders the property uninsurable in accordance with the insurer’s underwriting guidelines in effect at the time the policy was issued or renewed.

Nowhere does the Insurance Law define the term “physical change.” Nor does a survey of other states’ laws reveal a uniform answer. At least nine states countenance “physical change” as a basis for cancellation, but four of them – Alaska, California, Maine, and New Hampshire – expressly distinguish between “physical change” and occupancy, which suggests that they are mutually exclusive. Only one state, Massachusetts, appears to equate a change in occupancy with a physical change.

In the absence of any statutory definition or clear guidance from other states, the Department interprets the term “physical change” as used in Insurance Law § 3425(e)(2)(E) in accord with its “ordinary and accepted meaning.” See N.Y. Statutes § 94 (McKinney Supp. 2009). The word “physical” is commonly defined to mean something of concrete material or matter, as opposed to an abstract concept. See Webster’s NewWorld Dictionary: Second College Edition (1980) at 1074 (“of nature and all matter; natural; material”); New Oxford American Dictionary: Second Edition (2005) at 1282 (“of or relating to things perceived through the senses as opposed to the mind; tangible or concrete”). Thus, a “physical change” within the meaning of the statute is one in which the dwelling or property is altered or changed in a tangible manner. See Opinion of Office of General Counsel (OGC) No. 04-11-20 (November 29, 2004). For instance, the addition of an in-ground pool constitutes a tangible alteration to the permanent structure of the property that satisfies the “physical change” requirement of Insurance Law § 3425(c)(2)(E). OGC Opinion No. 04-11-20 (November 29, 2004). But nonoccupancy is not a tangible change to the property.

Nevertheless, if the nonoccupancy leads to a physical change, such as the deterioration of the property’s condition, the insurer could conceivably cancel the policy pursuant to Insurance Law § 3425(c)(2)(E) where the insurer determines, based upon the specific facts of the situation, that a change occurred after the latter of the policy issuance or the latest policy renewal that renders the property uninsurable in accordance with the insurer’s objective, uniformly applied underwriting standards in effect at such time of policy issuance or last renewal. In applying the underwriting standards to determine whether to cancel the policy, the insurer must ensure that underwriting standards are reasonably related to the risks insured. See OGC Opinion No. 04-09-14 (September 22, 2004).

III.              Exclusions Based on Vacancy or Lack of Occupancy

After the issuance of Circular Letter No. 23, the Department also received comments asserting that an insurer should be permitted to cancel a homeowners policy that sets forth an exclusion for damages that occur while a property is vacant or unoccupied when the criteria for the exclusion are met. These exclusions typically apply once the nonoccupancy has existed for a certain period of time, and only for losses that occur after the specified time period has passed. For instance, the standard fire insurance policy, which is set forth in Insurance Law § 3404 and establishes the minimum provisions in this state for a policy or contract of fire insurance, states that the insurer shall not be liable for loss that occurs “while a described building, whether intended for occupancy by owner or tenant, is vacant or unoccupied beyond a period of sixty consecutive days.” Similarly, ISO Form HO 3 excludes coverage for the breakage of glass or safety glazing material if the property has been vacant for a period of more than 60 days, and damages from vandalism or malicious mischief if the property has been vacant for more than 30 days.

Although the standard fire insurance policy and the ISO policy permit an insurer to exclude certain losses that occur after the property has been “vacant or unoccupied” for more than a prescribed period of time, it does not follow that an insurer therefore has the right to cancel the policy pursuant to Insurance Law § 3425(c)(2) solely based upon nonoccupancy. Rather, the insurer must meet the criteria of one of the specific grounds set out in Insurance Law § 3425(c)(2). That statute does not specify nonoccupancy as a ground for cancellation. Nor does it specify that an insurer may predicate cancellation upon the same criteria that might trigger a policy exclusion.

Indeed, the application of an exclusion and the cancellation of the policy are distinctly different events. A cancellation results in all coverage ending due to the termination of the policy, whereas an exclusion only limits coverage to the extent of the exclusion, which, where vacancy or nonoccupancy is concerned, may be limited to particular types of losses. Further, a homeowner may remedy a vacancy or lack of occupancy simply by reoccupying the property, making the exclusion no longer operative for prospective losses. Moreover, exclusions are “given a strict and narrow construction, with any ambiguity resolved against the insurer.” Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377 (2003). And, the insurer has the burden to prove that the exclusion applies. See Westview Assocs. v. Guar. Nat'l Ins. Co., 95 N.Y.2d 334 (2000) (“To negate coverage by virtue of an exclusion, an insurer must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case[.]") (citation omitted).

IV.             Foreclosures

Finally, the Department received queries asking whether Circular Letter No. 23 applies to a completed foreclosure action. The circular letter only speaks to pending foreclosure actions, not ones that already have concluded and resulted in the insured’s loss of title to the property.
*    *    *            
Questions regarding this Circular Letter should be addressed to Deborah Jewell, Senior Examiner, New York State Insurance Department, One Commerce Plaza, Albany, New York, 12257, 518-402-2312,

Friday, May 1, 2009

Tie Goes to the Runner -- New York Court of Appeals Construes Settling or Cracking and Earth Movement Exclusions Narrowly

Pioneer Tower Owners Assn. v. State Farm Fire & Cas. Co.

(Ct. Apps., decided 4/30/2009)

When the New York Court of Appeals speaks on an insurance coverage issue, sit up and pay attention. This is only the eighth time in just over a year that our highest state court has issued a decision regarding insurance.

The case involved two property insurance policy exclusions: (1) the "earth movement" exclusion; and (2) the exclusion for "settling, cracking, shrinking, bulging or expansion". Plaintiff owned a condominium apartment building. After cracks began appearing in the building, a structural engineer was called in. He found a number of cracks, separations and open joints, and concluded that they were caused by work that was in progress on the lot next door. That lot was being excavated, and underpinning had been built to protect the foundation of plaintiff's building. The engineer concluded that the underpinning was flawed, and that as a result earth slid away beneath plaintiff's building, causing damage.

State Farm denied coverage based on the policy's earth movement exclusion, which provided:
We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss.
b. earth movement, meaning the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not. Earth movement includes but is not limited to earthquake, landslide, erosion, and subsidence but does not include sinkhole collapse.
But if accidental direct physical loss by fire, explosion other than explosion of a volcano, theft or building glass breakage results, we will pay for that resulting loss.
The motion court and Second Department, Appellate Division, found that the exclusions State Farm relied upon to deny coverage, including the earth movement exclusion, did not clearly and unambiguously apply to the plaintiff's loss to negate coverage. The parties stipulated to damages in the amount of $122,500 and judgment was entered in favor of plaintiff. The Court of Appeals granted leave to appeal.

On appeal, State Farm asserted and argued that several exclusions, including the earth movement exclusion, applied to negate coverage for plaintiff's loss. The Court addressed only two of those exclusions in its decision: the earth movement exclusion; and the policy's settling, cracking etc. exclusion, which provided:
We do not insure for loss either consisting of, or directly and immediately caused by, one or more of the following: ....
f. settling, cracking, shrinking, bulging or expansion.
But if accidental direct physical loss by any of the "Specified Causes of Loss" or by building glass breakage results, we will pay for that resulting loss.
None of the 14 "Specified Causes of Loss" was present in this case.

In AFFIRMING the declaration in favor of coverage, the Court of Appeals started with its well-established and longstanding rule for interpreting policy exclusions:
The law governing the interpretation of exclusionary clauses in insurance policies is highly favorable to insureds. We said in Seaboard Sur. Co. v Gillette Co. (64 NY2d 304 [1984]):
"[W]henever an insurer wishes to exclude certain coverage from its policy obligations, it must do so in clear and unmistakable language. Any such exclusions or exceptions from policy coverage must be specific and clear in order to be enforced. They are not to be extended by interpretation or implication, but are to be accorded a strict and narrow construction. Indeed, before an insurance company is permitted to avoid policy coverage, it must satisfy the burden which it bears of establishing that the exclusions or exemptions apply in the particular case, and that they are subject to no other reasonable interpretation."
(Id. at 311 [citations and internal quotation marks omitted; see also Cone v Nationwide Mut. Fire Ins. Co., 75 NY2d 747, 749 [1989] [exclusions from coverage "construed strictly against the insurer"]; Breed v Insurance Co. of N. Am., 46 NY2d 351, 353 [1978] ["ambiguities in an insurance policy are to be construed against the insurer, particularly when found in an exclusionary clause"].) We have enforced policy exclusions only where we found them to "have a definite and precise meaning, unattended by danger of misconception ... and concerning which there is no reasonable basis for a difference of opinion" (Breed, 46 NY2d at 355).
Acknowledging that "[t]his case is a close one", the Court was "unable to say that the event that caused plaintiff's loss was unambiguously excluded from the coverage of this policy."

State Farm had argued for a literal interpretation of the asserted exclusions, pointing out that plaintiff's own engineer had reported "that the left wing of the building ... had settled ... as evidenced by the cracking and lateral displacement of the structure."

Plaintiff argued, however, that a literal reading of the words would not give the meaning that an ordinary reader would assign to the exclusionary clauses. As to the earth movement exclusion, plaintiff stressed the examples of earth movement given in the policy — "earthquake, landslide, erosion and subsidence", and argued that an excavation — the intentional removal of earth by humans — is a different kind of event from an earthquake and the other examples given. Plaintiff contended that when specific examples of excluded causes are mentioned in a policy, those not mentioned should be understood to be things of the same nature or kind. Plaintiff argued that if the drafter of the policy had intended to bring excavation — an obvious and common way of moving earth — within the scope of the earth movement exclusion, why was it not listed as an example while less common events were listed?

Similarly, plaintiff argued that the settling or cracking exclusion would not be thought, by an ordinary reader, to apply to settling or cracking that is the immediate and obvious result of some other event, such as the intentional removal of earth in the vicinity of the building. Read literally, the exclusion would apply, for example, where a refrigerator fell over and cracked a wall, but that can hardly have been the intent of the policy's drafters, plaintiff argued.

With little analysis, and relying on two First and Second Department decisions, as well as one from the federal District Court of Minnesota, the Court of Appeals held:
We conclude that both plaintiff's and defendant's readings of the clauses are reasonable. Our precedents require us to adopt the readings that narrow the exclusions, and result in coverage. As to the earth movement exclusion, our holding is also supported by precedent which, though not binding on us, is directly on point. Two Appellate Division cases and one federal district court decision have held that earth movement exclusions using identical language are not applicable to losses caused by excavation (Lee v State Farm Fire & Cas. Co., 32 AD3d 902 [2d Dept 2006]; Burack v Tower Ins. Co. of N.Y., 12 AD3d 167 [1st Dept 2004]; Wyatt v Northwestern Mut. Ins. Co. of Seattle, 304 F Supp 781 [D Minn 1969]). The parties have cited no case, and we have found none, applying the earth movement exclusion to intentional earth removal.
Like in baseball, a tie goes to the runner. If an exclusion is subject to two, competing but equally reasonable interpretations, a New York court will construe it narrowly in favor of coverage.

Policy drafters, such as the Insurance Services Office, reacted years ago to case law construing the earth movement exclusion not to apply to man-made causes. The October 2000 edition of the HO-3 form, for example, provides:

A. We do not provide insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.

2. Earth Movement

Earth movement means:

a. Earthquake, including land shock waves or tremors before, during or after a volcanic eruption;
b. Landslide, mudslide or mudflow;
c. Subsidence or sinkhole; or
d. Any other earth movement including earth sinking, rising or shifting;
caused by or resulting from human or animal forces or any act of nature unless direct loss by fire or explosion ensues and then we will pay only for the ensuing loss.
As always, check your policies.