Monday, September 17, 2012

Law and Sausage

Dean v. Tower Ins. Co.

(1st Dept., decided 5/10/2011)

It reportedly was the 19th Century American poet John Godfrey Saxe, not the laconic German aristocrat and statesman Otto von Bismarck, who in 1869 first said, "Laws, like sausages, cease to inspire respect in proportion as we know how they are made."  You may have heard its more modern variation:  if you like law and sausage, you should never watch either one being made. 

And yet, in spite of Mr. Saxe's implied urgings to avert one's eyes, and at the risk of diminishing the great respect I'm sure all of you already have for the legal process, I bring you some law in the making -- the September 11th oral argument of Tower Insurance Company's appeal to the New York Court of Appeals of the First Department's 2011 reversal of the New York County Supreme Court's grant of summary judgment to Tower based on the named insureds' lack of residency in the insured dwelling.

Be warned.  If you, like I, are passionate about first-party property insurance coverage, you may want to watch this 22 minute and 8 second video by yourself in a room that permits some audible, emotive outbursts.  But if you watch -- please watch the video to the end.  There's a surprise twist at the end.  Not really, but as one who clerked for two years at the Appellate Division right out of law school, I found it refreshing that most, but not all, of the judges' questions reflected a relatively balanced peppering of the parties' legal advocates.  Can you tell which of the judges seem to have already made up their minds?   Here's a hint:  one of them authored the Court of Appeals' 2008 5-2 majority opinion in the first-party property insurance groundbreaking decision in Bi-Economy Market, Inc. v. Harleysville Ins. Co. of NY.

For those of you who care, this case involves a denial of coverage under a homeowners insurance policy issued on a dwelling that the named insureds never moved into.  Instead, the named insureds claimed that they had been working on their intended residence for more than a year after the policy was issued to fix termite damage they had discovered around the time of the property's closing.  Approximately 15 months after Tower issued the subject homeowners policy, for a dwelling the named insureds had represented on their signed policy application was to be their primary and only residence, a fire of unknown origin and cause destroyed the property.

Tower denied coverage for the fire loss based, in part, on its position that because the policy insured the "dwelling on the residence premises" and that "residence premises" meant "[t]he one family dwelling ... where you reside", the property did not qualify as a "residence premises because "the dwelling was unoccupied at the time of the loss[.]"  The named insureds sued and the parties move and cross-moved for summary judgment.

In granting summary judgment to Tower, the New York County Supreme Court held:
In Marshall [v. Tower Ins. Co., 44 AD3d 1014 (2d Dept. 2007)], the court found that the exact policy provisions at issue here were not “ambiguous.” According to Webster’s II New College Dictionary (2001) “reside” means "to live in a place for a permanent or extended period of time; to be inherently present.”  Giving the words “where you reside” their “plain and ordinary meaning,” the policy covered a dwelling where the Deans lived for a permanent or extended period of time.  Consistent with this construction, “[t]he standard for determining residency for insurance coverage ‘requires something more than temporary or physical presence and. . . at least some degree of permanence and intention to remain’” Allstate Insurance Co., v Rupp, 7 AD3d 302 (lst Dept. 2004) (citing Government Empls. Ins. Co. v Paolicelli, 303 AD2d 633, 633 [2nd Dept. 20031 (for uninsured motorist coverage, a grandson was a resident of his grandfather’s home where he lived Monday to Friday during the school year for six years and attended school based on the grandfather’s address).  Moreover, for the purposes of residency, a “resident is one who lives in the household with a certain degree of permanency and intention to remain” Canfield v Peerless Ins. Co., 262 AD2d 934,934-935 (4th Dept. 1999), lv denied 94 NY2d 757 (1999) ( the insurer failed to rebut the plaintiffs testimony that she maintained a residence at both her own household and at the household of the insured, where plaintiffs testimony established that she was the sole owner of the home in which the insured resided, spent weekends and holidays in the home, had a key to the home, maintained her own bedroom in the home, in which she kept clothing and necessaries, and paid the heating, water costs and real estate taxes for the home.)

Here, plaintiffs do not allege that they ever lived at the Mountain Road house. At best, plaintiffs have established ownership of the house and presence in it to perform certain renovations, and a stated intent of living there.  The court concludes that under these circumstances, there is insufficient evidence of plaintiffs’ physical presence and permanency to demonstrate that they resided in the premises at any time prior to the date of loss.  Accordingly, defendant has established there is no coverage, and is entitled to summary judgment.
Plaintiffs appealed and the First Department REVERSED, denying summary judgment to Tower based on its finding that because the policy did not define the work "resides", that term was ambiguous:
Because the "residence premises" insurance policy fails to define what qualifies as "resides" for the purposes of attaching coverage, the policy is ambiguous in the circumstances of this case, where the plaintiff insureds purchased the policy in advance of closing but were then unable to fulfill their intention of establishing residency at the subject premises due to their discovery and remediation of termite damage that required major renovations. "[B]efore 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" (Seaboard Sur. Co. v Gillette Co., 64 NY2d 304, 311 [1984] [citations omitted]). Accordingly, the ambiguity in the policy must be construed against defendant under the facts of this case, and precludes the grant of summary judgment in its favor (see Ace Wire and Cable Co. v Aetna Cas. and Sur. Co., 60 NY2d 390, 398 [1983]).
Notably, the First Department rejected the lower court's and Tower's reliance on the Second Department's 2007 decision in Marshall v. Tower Ins. Co., finding that Marshall was "inapposite because it did not address whether the term 'residence premises' is ambiguous in light of the policy's failure to define 'resides'" and because unlike in this case, the plaintiff in Marshall reportedly had no intention of living at the premises. 

The Court of Appeals granted Tower leave to appeal and on last Tuesday, September 11th, heard oral arguments on that appeal.  The judges' questions included:
  • Is a homeowners policy's residency requirement permitted under the 165-line New York standard fire insurance policy of New York Insurance Law § 3404(e)See, Lane v. Security Mut. Ins. Co., 96 NY2d 1 (2001).
  •  Does a HO policy's residency requirement preclude coverage where people have bought insurance and closed on their purchase of a new home but not yet moved into it?
  • Are the concepts of residency and occupancy the same?
  • Doesn't the record in this case indicate that Tower's risk inspection agent knew or should have known that the named insureds were not residing in the dwelling, and does the allegation of such actual or constructive knowledge present a question of fact precluding summary judgment from being granted to Tower?
  • Is the policy's residency requirement found in the definition of the term "residence premises" clear or ambiguous?
What do you think?  Which way do you think the judges are leaning, if any, from their questions?  Any prediction on what the Court will do in deciding Tower's appeal?

Post Script (09.27.12) ~~  Over in LinkedIn's New York Insurance group, a member asked why Tower took a SJ motion denial to the Court of Appeals.  Max Gershweir, who argued the case for Tower, provided the back story.

In April 2011 the Second Department reversed the Supreme Court and granted SJ to Tower in a similar matter, holding, in part, that "the policy's 'residence premises' provision is not ambiguous[.]" That was in Vela v. Tower Ins. Co.  The plaintiffs in that case sought leave to appeal to the Court of Appeals presumably based on the First Department's May 2011 contrary decision in Dean v. Tower, and the Second Department granted leave on September 29, 2011.  Tower itself had made a motion to the First Department for leave to appeal the Dean decision to the Court of Appeal based presumably on the conflicting authority between the First and Second Departments, which was granted on September 8, 2011.  

According to Max, both cases headed to the Court of Appeals together, but Vela was settled and the appeal was withdrawn in January.  


Anonymous said...

Read this article on this issue:

Jim Haddad said...

Does being "passionate" about first-party insurance mean always being pro-insurer? Or can we simply be passionate about being accurate, knowledgeable and fair. There is no question in this case that the "residence premises" provision violates Ins. L. 3404, despite the industry's preference to ignore that section of the code for the HO program. Tower had a valid material misrep defense here, which would have been the proper defense, but apparently failed to raise it. Tough for Tower. Jim Haddad, J.D., CPCU, NYS licensed ins. broker.

max gershweir said...

Jim, I disagree with your contention that the "residence premises" provision violates Ins Law 3404 -- since it addresses only occupancy and vacancy, concepts entirely distinct from residency -- and so did both Supreme Court and the Appellate Division in this case. We'll see what the Court of Appeals says. And Tower most certainly did raise a material misrepresentation defense. Supreme Court failed to reach it because it ruled in Tower's favor on the "residence premises" issue, and the Appellate Division found an issue of fact as respects it.

Jim H. said...

Dear Max, was material misrep also raised as a defense in this case or not and if not, why not? The argument suggests that the applicant mis-answered the "other premises owned, rented, occupied" question and possibly the construction exposure question.

Jim H. said...

Oops, I see your comment already addresses the misrep argument so ignore. Sorry! I think that is where Tower has a stronger case. As for 3404, I think you will see reversal on that point. Thanks for the info. It is an interesting case.

Jim H. said...

Wow, that was a fast decision!

It was not as explicit on the 3404 issue as I would have expected, but did invoke the statute. Unfortunately, it did not also address the misrepresentation issues.

Jim H. said...

Wow, that was a fast decision!

It was not as explicit on the 3404 issue as I would have expected, but did invoke the statute. Unfortunately, it did not also address the misrepresentation issues.

Roy A. Mura said...
This comment has been removed by the author.
Roy A. Mura said...

It's a good news/bad news 4-3 decision for both policyholders and insurers.

The majority's holding that the term "residence premises" is ambiguous is likely limited to the facts of this case, given the Court's deliberate use of the qualifying introductory phrase "under the circumstances of this case" and quotation to the First Department's "in the circumstances of this case" holding. The use of such qualifying language likely means that that there may be factual circumstances under which the Second Department and Court of Appeals would conclude that the term "residence premises" is NOT ambiguous and supports a declination of dwelling coverage.

The 3404(e) reference is non-dispositive. The Court had but apparently passed on the opportunity to rule that 3404(e) makes a residency requirement in a homeowners policy illegal. To cite this decision for that proposition would, in my opinion, be erroneous.

As Max had pointed out in this comment string, Tower asserted material misrep in defense of this action but neither Supreme Court nor the First Department addressed that issue. Neither did the Court of Appeals, for that reason.

Roy A. Mura said...

I meant to say First Department in that previous comment. To my knowledge, the Second Department has never held that the term "residence premises" is ambiguous.