Summary Judgment Denied to Commercial Property Insurer on Coverage for Leasehold's Improvements & Betterments

COMMERCIAL PROPERTY – IMPROVEMENTS & BETTERMENTS COVERAGE – BURDENS OF PROOF – NON-COOPERATION – SUIT LIMITATIONS PERIOD
Bread & Butter, LLC v. Certain Underwriters at Lloyd's, London
(2nd Dept., decided 11/30/2010)

In 2000, plaintiff insured purchased a restaurant and assumed the seller's commercial lease with the property owner.  In December 2005, there was a fire at the premises.  Plaintiff made a claim for insurance coverage for the loss of improvements and betterments to the premises which it claimed it had purchased from the restaurant's prior owner, claiming that, pursuant to the terms of the commercial lease which it had assumed, those improvements never became the property of the landlord who owned the real property.  However, the defendant insurer denied coverage for the improvements and betterments on the ground that the plaintiff had neither made nor acquired the improvements as required for them to be covered under the policy.

Plaintiff timely sued in federal court, but later voluntarily discontinued that action when it received documents demonstrating a lack of complete diversity.  Plaintiff then brought this action in state court within six months after the federal court action's discontinuance but after the period of time required by the policy to bring suit.  Defendant insurer cross-moved for summary judgment to dismiss this state court action as untimely and to dismiss plaintiff's improvements and betterments claim.  Nassau County Supreme Court (Palmeri, J.) denied defendant's cross motion and it appealed.

In AFFIRMING the denial of summary judgment to the insurer, the Second Department held first that because the parties had sufficiently expressed their intent that the discontinuance of the previous federal court action was not on the merits, that it was without prejudice and, consequently, the commencement of a new action within six months pursuant to CPLR 205(a) was permitted.

With respect to Lloyd's arguments of non-coverage on the improvements and betterments claim and because the plaintiff allegedly had not cooperated with Lloyd's investigation of the claim by not producing certain requested documents, the Second Department held:

In a dispute over insurance coverage, the insured bears the initial burden of establishing that the loss claimed falls within the scope of the policy (see Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d 208, 220). "Once coverage is established, the insurer bears the burden of proving that an exclusion applies" (id.). However, as the moving party with respect to the cross motion for summary judgment, the defendant had the burden of establishing its prima facie entitlement to judgment as a matter of law (see Lancer Ins. Co. v Whitfield, 61 AD3d 724, 725).

Viewing the facts in the light most favorable to the plaintiff (see Forrest v Jewish Guild for the Blind, 3 NY3d 295, 315; Pearson v Dix McBride, LLC, 63 AD3d 895), the defendant failed to demonstrate either that the improvements and betterments at issue were not installed by the plaintiff's predecessor but by the landlord or a previous tenant, or, that, to the extent that the improvements and betterments were owned by the plaintiff's predecessor, they were not included in the sale of the business's assets.  Consequently, the defendant failed to make a prima facie showing sufficient to shift the burden to the plaintiff (see Ferluckaj v Goldman Sachs & Co., 12 NY3d 316, 321). Likewise, the defendant failed to demonstrate that the plaintiff's failure to provide certain requested documents constituted a "material breach" of the policy requirements or was "unexcused and willful" and thus that it was entitled to deny coverage based upon the policy exclusion for noncooperation with the defendant's investigation of the claim (Matter of New York Cent. Mut. Fire Ins. Co. v Rafailov, 41 AD3d 603, 604; see also High Fashions Hair Cutters v Commercial Union Ins. Co., 145 AD2d 465, 466).

Neither of the substantive non-coverage defenses was dismissed.  The trial and appellate courts merely held that Lloyd's had not established its entitlement to summary judgment on those defenses.