When an Ambiguous Policy Provision Does Not Necessary Mean a Loss in the Win/Loss Columns

LIFE INSURANCE – POLICY INTERPRETATION – AMBIGUITY – GENERAL BUSINESS LAW § 349 – PUNITIVE DAMAGES 

Hobish v. Axa Equitable Life Ins. Co. 
(NY App. Div., 1st Dept., 05/25/2023) 

Although this is a life insurance, rather than a property/casualty insurance, case, there are several important #insurance coverage/policy interpretation points at work in this decision:

1. A policy provision is ambiguous when it is susceptible to two or more reasonable interpretations. 


2. A New York court is not required to resolve the ambiguity against the insurer when extrinsic evidence presented in the case is not conclusory as to the provision's meaning. 


3. Unless the extrinsic evidence supports only one party's proposed interpretation, the ambiguity should not be resolved by the court as a matter of law.

The court also:

• AFFIRMED Supreme Court's denial of summary judgment to the defendant dismissing plaintiff's General Business Law § 349(h) cause of action, holding that "even if the decedent did not read the policy herself, issues of fact exist as to whether there was consumer impact in this case"; 


• AFFIRMED Supreme Court's grant of summary judgment to defendant dismissing plaintiffs' claim for compensatory and consequential damages on the breach of contract cause of action, based on plaintiffs' election not to terminate the contract and sue for a total breach, but instead maintain the policy with higher rates and then under protest exercise the surrender provisions of the policy;
  
  
• AFFIRMED Supreme Court's dismissal of plaintiffs' claim for "restitutionary" damages pursuant to General Business Law § 349(h), holding that such damages were "too speculative to constitute actual damages under the statute"; 
  
  
• AFFIRMED Supreme Court's dismissal of plaintiffs' claim for punitive damages of $12 million on its General Business Law § 349(h) cause of action based on its observation that GBL 349(h) provides for only "limited punitive damages" in the form of "an award of actual damages or fifty dollars, although a court may increase an award up to three times, up to one thousand dollars".

4 + 2 ≠ "Residence Premises"

Last week I received a favorable decision and order for one of my insurer clients from the United States District Court for the Southern District of New York in a number-of-families homeowners policy application misrepresentation case. My client had denied coverage for the Brooklyn, NY fire loss based, in part, on the application misrepresentation but did not rescind the homeowners policy (that's a thing). I conducted the policyholder's EUO and defended the policyholder's subsequent breach of contract action.

The Decision & Order begins:

The material facts, which cannot be disputed, are simple: In his insurance application, plaintiff stated that his property had three units, with three families living in them. The policy that Nationwide issued to him covered "one, two, three or four-family" dwellings. In fact, plaintiff's building had at least six units, rented to unrelated tenants. After the fire, Nationwide discovered the additional units and denied coverage. As explained below, Nationwide was entitled to do so and consequently will be granted summary judgment.

And adds:

Plaintiff contends that the language of the Policy is ambiguous, preventing the Court from granting summary judgment. * * * He argues that because the Policy uses the term “one, two, three, or four family dwelling” rather than “one, two, three, or four unit building,” it is irrelevant that there were at least six separate residential units in the Subject Premises. ***

Neither logic nor precedent supports plaintiff's hair-splitting argument. To the contrary: the New York courts have repeatedly explained that terms like “four family dwelling” are unambiguous. 

The Court granted summary judgment to Nationwide based solely on the uncontroverted fact that at the time of the fire, the dwelling did not meet the policy's definition of a "residence premises" (because it was MORE than a four-family dwelling).

The Court also rejected plaintiff's negligence argument (viz, that Nationwide could've and should've discovered the extra, illegal apartments before the fire) and, given its ruling on the residence premises issue, did not reach Nationwide's alternative argument that the Policy was void because plaintiff intentionally misrepresented the material fact or circumstance of how many families lived within and how many units comprised the Subject Premises at the time he filled out his application.

You can read the decision by clicking the image below:

That or Which and the Rules of Grammar in Insurance Contract Interpretation

Those who follow me on LinkedIn know that I consider myself somewhat of a (okay, an obsessive-compulsive) grammarian.  

A post to LinkedIn that I made this morning today prompted an interesting discussion (at least to me and, at last count, one other) in the comments about policyholders', insurers', and courts' use of dictionary definitions to argue and determine the meaning of an insurance policy's undefined term.  

What's at stake, of course, is the dreaded "A" word:  Ambiguity.  Why?  Because ambiguities in contracts are construed against the drafter of the contract--the insurer in the case of an insurance coverage dispute.  I've heard that insurance recovery attorneys are taught that in kindergarten.  

The A-word can be quite the vorpal blade when it comes to slaying the ambiguous Jabberwock.  Especially for words or terms left undefined in an insurance policy.  But it is well-established in New York (and many other jurisdictions) that an ambiguity does not arise from an undefined term in a policy merely because the parties interpret that term differently.  Mount Vernon Fire Ins. Co. v. Creative Housing, Ltd., 88 NY2d 347, 352 (1996).

So what's the role, if any of grammar (and syntax) in insurance policy interpretation?  The now-retired Justice Bernard J. Fried, who concluded that his "job is not to police the rules of grammar", said it best in his 2006 decision in AIU Ins. Co. v. Robert Plan Corp. (2006 Slip Op. 52538 [Sup. Ct., NY Co., 2006], affd, 44 A.D.3d 355 [1st Dept. 2007]):

Under New York principles of contract interpretation, however, strict rules of grammar do not have the last word, when a grammatical construction of a contract is inconsistent with the parties' intent. Rather, a court's purpose in interpreting a written contract should be: 

to discover the intention which the parties have formulated in its written language. Often punctuation and grammatical construction are reliable signposts in the search. At times the language of a contract, read as a whole and in the light of the circumstances surrounding its execution, may disclose an intention which would be thwarted by a strict grammatical construction. We refuse to follow a signpost when it appears that it points in the wrong direction. Intention may be formulated in words that are not strictly accurate and in terms that are not grammatical. 

Wirth & Hamid Fair Booking v. Wirth, 265 NY 214, 219, 220-21 (1934) (concluding that a fair construction of the language of a written contract manifested that parties intended that defendant should have right to book performances for two circuses during summer months, notwithstanding the strict grammatical construction of the restrictive covenant to the contrary). 

The Court of Appeals has further instructed: 

Contracts are not to be interpreted by giving a strict and rigid meaning to general words or expressions without regard to the surrounding circumstances or the apparent purpose which the parties sought to accomplish. The court should examine the entire contract and consider the relation of the parties and the circumstances under which it was executed. 

William C. Atwater & Co. v. Panama R., 246 NY 519, 524 (1927) (citations and internal quotations omitted). In Atwater, for instance, the Court refused to enforce a provision of a contract for the sale of coal that, read literally, precluded the plaintiff seller from obtaining damages for breach of contract as to any coal remaining unshipped at the expiration of the contract. The Court reasoned that a literal reading of the provision was inconsistent with the "general sense of the contract," read in the light of "reason, equity, [and] fairness." Id. at 523-24. The Court concluded that it was "evident that the plaintiff had not the remotest intention of releasing any claims against defendant [the buyer] for damages for breach of contract which had accrued at the date of the expiration of the agreement and that the defendant could not reasonably have so understood the language thus used." Id. at 523. 

Although Wirth and Atwater were decided some years ago, they articulate principles that remain valid. See, e.g., Kass v. Kass, 91 NY2d 554, 566 (1998); In re Estate of Stravinsky, 4 AD3d 75, 81-82 (1st Dept. 2003).

For those two of you who may be wondering (and didn't click the case's Google Scholar hyperlink), the case before Justice Fried involved the restrictive and nonrestrictive relative pronouns of "that" and  "which" -- a topic which that has brought many grammarians better than me I to fisticuffs for a long time many years (if not decades or centuries).  Justice Fried explained:

In the previous Order, I concluded that the universe of property owned by Plaintiffs is the property described in clause A,[4] after subtracting the property described in clause B. Order at 2-3, 3 n.2. I further stated that clause C the phrase, "which are the property of AGENT" modifies the property described in clause B. Order at 3-4 n.2. These conclusions followed July's oral argument, at which the parties focused on whether "which" modified clause A or clause B. July 14 Trans. at 36-43. The issue of how "which" modified clause B did not arise. It seems necessary now to investigate how clause C modifies clause B, and, in particular, the significance of the word "which" in clause C. 

Strict grammarians prefer the use of the word "that" as the defining, or restrictive relative pronoun, while reserving "which" as the nondefining, or nonrestrictive relative pronoun. William Strunk, Jr. & E.B. White, The Elements of Style 59 (4th ed. 2000). So, for example, in the sentence, "The lawn mower that is broken is in the garage," the restrictive pronoun "that" tells the reader which mower is in the garage. (The broken one.) In contrast, in the sentence, "The lawn mower, which is broken, is in the garage," the nonrestrictive "which" adds a fact about the only mower in question. Id. 

In practice, however, "not all writers observe the distinction between restrictive clauses [] and non-restrictive clauses." The New Fowler's Modern English Usage 774 (R.W. Burchfield ed., 3d ed., Clarendon Press 1996). In fact, "it would be idle to pretend that it is the practice either of most or of the best writers." Id. (quoting with approval H.W. Fowler, A Dictionary of Modern English Usage 635 (1st ed., Oxford Univ. Press 1926)). The relative pronoun "which" is commonly used in both written and spoken English in place of the restrictive relative pronoun "that." Strunk, The Elements of Style at 59. In fact, writers of English sometimes use "which" in both the restrictive and the nonrestrictive sense in the same piece of writing. The New Fowler's Modern English Usage at 774 (emphasis added). 

The agreement itself contains other instances of "which" used in place of "that" as a restrictive relative pronoun. E.g. Agreement art. IV ¶ 4 ("In addition to... any applicable underwriting guideline, bulletin or instruction which may be issued from time to time..."); id. art. VI ¶ 3 ("AGENT will promptly advise the COMPANY in writing of any Insurance Department notice which specifically threatens the Company with disciplinary actions or penalties."). 

However, a strict grammarian would point out that in both of these instances, "which" is not preceded by a comma, whereas it is in clause C. Ordinarily, a comma setting off a modifying clause indicates that the modifier is nonrestrictive. See Strunk, The Elements of Style at 4. Thus, a comma preceding "which" in clause C would tend to suggest that "which" is being used as a nonrestrictive pronoun and that clause C does not limit or define clause B. This is the reading favored by Plaintiffs. 

This reading is supported by the fact that a purpose of paragraph 9 appears to be to identify who, between AIU and TRP, owned certain items relating to the business of TRP's agency. If "which" in clause C were read as a restrictive pronoun, clause B would no longer identify the items that were owned by TRP. Instead, clause B would assume that the reader knew which items were owned by TRP and would simply carve them out from the items identified in clause A, which were owned by AIU.

You had me at "restrictive, relative pronoun", judge. 😜😍

Next up: "different than" or "different from" in insurance contract interpretation?  

Summary Judgment Granted to Insurer Based on Policy's Special Employee Theft Exclusion

COMMERCIAL PROPERTY – EMPLOYEE DISHONESTY COVERAGE – SPECIAL EMPLOYEE THEFT EXCLUSION

Albany Airport HIE, LLC v. The Hanover Ins. Grp., Inc.
(NDNY, decided 8/7/2019)

Plaintiffs owned two hotels in the Albany, New York area. In 2010, plaintiffs entered into a management agreement with Bullock Hospitality LLC ("Bullock Hospitality") to manage both hotels. Tod Hanlon signed the management agreement as the sole member and manager of Bullock Hospitality.

In August 2014 Citizens Insurance Company of America issued a commercial package policy listing eight named insureds, including the two plaintiffs and Bullock Hospitality.  The policy's GOLD FORM BROADENING ENDORSEMENT's Employee Theft section contained this exclusion:

(8)  Special Employee Theft Exclusions 

We will not pay for:  

(a)   Loss resulting from "theft" or any other dishonest act committed by: 

(i) You; or
(ii) Any of your partners or "members"; 

Whether acting alone or in collusion with other persons.

The policy defined "you" and "your" to mean "the Named Insured shown in the Declarations"and "member" to mean "an owner of a limited liability company represented by its membership interest who, if a natural person, may also serve as a `manager.'"

In February 2015, plaintiffs reported to Citizens that their former hotel manager, Tod Hanlon, had stolen over $700,000 from them by depositing checks intended for the hotels into his own bank account.  Based on the fact that the reported loss had resulted from theft by a member (Hanlon) of a named insured (Bullock Hospitality), Citizens denied the plaintiffs' claim.

Plaintiffs sued for coverage and, after discovery was complete, my senior associate, Scott Mancuso, and I drafted and filed a motion for summary judgment on behalf of the defendant insurers.  Although you might think (as I did) that the district judge walking off the bench while I was standing at the podium and making my rebuttal argument (no joke) was a bad sign, the court GRANTED summary judgment to my clients, dismissing the complaint:

It is undisputed Tod Hanlon was a member or sole member of Bullock Hospitality at the time he stole monies from plaintiffs. It is undisputed Bullock Hospitality was a named insured. The policy excludes coverage for theft committed by a named insured or by any partner or member of a named insured. There are no triable issues of material fact regarding the applicability of Special Employee Theft Exclusion 8.a. Plaintiffs seek what the policy simply does not cover—an alleged theft by a member of a named insured.

"[P]arties cannot create ambiguity from whole cloth where none exists, because provisions `are not ambiguous merely because the parties interpret them differently.'" Universal Am. Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 25 N.Y.3d 675, 680 (2015) (quoting Mount Vernon Fire Ins. Co. v. Creative Hous. Ltd., 88 N.Y.2d 347, 352 (1996)). The instant exclusion is not ambiguous. To the extent Ms. Copesky of the PLRB found the exclusion inapplicable, it appears her opinion was based on incorrect or incomplete information. The existence of a conflicting interpretation, based upon incorrect information, does not render the policy "subject to ... other reasonable interpretation." Parks Real Estate Purchasing Grp., 472 F.3d at 42. An interpretation based on incorrect facts cannot be deemed reasonable.

The PLRB opinion is unreasonable in that it found Bullock Hospitality was an "additional insured." Adams Decl., Ex. 6. To the contrary, it is undisputed that Bullock Hospitality was in fact a "named insured." Defs.' SMF ¶ 6. This distinction is key as the relevant policy provision excludes coverage for loss resulting from theft by "you" or "any of your partners or members." As the policy defined "you" and "your" to mean "the named insured," it is significant that Bullock Hospitality was in fact a "named insured" rather than an "additional insured." The PLRB opinion correctly notes that "you" and "your" do not refer to any "additional insureds." Adams Decl., Ex. 6.  

Based on the incorrect premise that Bullock Hospitality was an "additional insured" instead of a "named insured," Ms. Copesky concluded "it appears that Bullock is not likely considered `you' for purposes of the exclusion as they are an additional insured and not the primary named insured." Id. She went on to find that plaintiffs and Bullock Hospitality would not constitute partners within the meaning of the policy, nor would Bullock Hospitality "fall into the other categories for excluding coverage: members, partners, etc." Id. To reiterate, the PLRB's interpretation, in conflict with defendants', does not render the exclusion ambiguous.  

Defendants have carried their burden to show the Special Employee Theft Exclusion applies, that there are no disputed issues of fact, and that they are entitled to judgment as a matter of law. To the extent that plaintiffs urge criticism of Citizens' and Hanover's responsibilities during the underwriting process and their alleged failure to insert policy language to identify, control, or eliminate the resulting risk at the underwriting stage, those arguments have been considered and are found to be without merit.  

Accordingly, defendants' motion for summary judgment dismissing the second cause of action for breach of contract will be granted. Any dispute over whether Hanover issues insurance policies and whether it issued the instant policy is moot as defendants' motion for summary judgment will be granted and the Complaint will be dismissed in its entirety.

As members of PLRB, my clients had requested a coverage opinion of one of PLRB's staff attorneys before making a coverage decision.  The PLRB attorney concluded, based on "incorrect or incomplete information", that the policy's Special Employee Theft Exclusion did not apply to negate employee theft coverage.  In opposition to my client's motion, plaintiffs' counsel argued that the PLRB opinion rendered the Special Employee Theft Exclusion ambiguous, precluding summary judgment.  The court rejected that argument, noting:

"[P]arties cannot create ambiguity from whole cloth where none exists, because provisions `are not ambiguous merely because the parties interpret them differently.' *** The existence of a conflicting interpretation, based upon incorrect information, does not render the policy subject to ... other reasonable interpretation." Parks Real Estate Purchasing Grp., 472 F.3d at 42. An interpretation based on incorrect facts cannot be deemed reasonable.

I love the whole cloth quote.  Have used it before and will likely use it again.

"Stage Hand" Exclusion Found to be Ambiguous

CGL – "STAGE HAND" EXCLUSION – "ARISING OUT OF" – AMBIGUITY
Dzielski v. Essex Ins. Co.
(4th Dept., decided 12/23/2011)

We all know that courts construe policy exclusions narrowly and, when they are found to be ambiguous, against the insurer.  But it's seemingly getting tougher and tougher to sustain exclusion-based denials in New York's Fourth Judicial Department.  Is the "clear and unmistakable language ... subject to no other reasonable interpretation" standard of construing policy exclusions ever attainable when a court wants to find coverage?¹

The Merriam-Webster dictionary defines the intransitive verb "participate" to mean:

a : to take part
b : to have a part or share in something

The "stage hand" exclusion of the "Restaurant, Bar, Tavern, Night Clubs, Fraternal and Social Clubs Endorsement" of Essex' commercial liability policy negated liability coverage for "bodily injury, ... or any injury, loss or damage arising out of ... [i]njury to any entertainer, stage hand, crew, independent contractor, or spectator, patron or customer who participates in or is a part of any athletic event, demonstration, show, competition or contest[.]"

Plaintiff provided sound equipment to a band that was performing at Essex' insured's nightclub.  After the show, plaintiff was carrying some of his equipment from the nightclub to his truck when he fell from the nightclub's allegedly defective loading dock, sustaining injuries.  Essex denied liability coverage to the nightclub based on the policy's "stage hand" exclusion, and plaintiff obtained a $950,000 default judgment against the insured nightclub in his personal injury action.  Plaintiff then brought this action against Essex to recover that judgment pursuant to New York Insurance Law § 3420(b)(1).  Supreme Court, Erie County (Diane Y. Devlin, J.), granted plaintiffs' motion and denied Essex' cross motion for summary judgment, awarding plaintiffs the entire $950,000 underlying judgment amount, plus interest and costs, even though the Essex policy had a $500,000 per occurrence liability coverage limit.  Essex appealed.

In a 3-2 decision, the three-justice majority of the Appellate Division, Fourth Department, AFFIRMED the judgment appealed from, agreeing with the motion court that the exclusion's language was ambiguous:

It is axiomatic that, "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' " (Belt Painting Corp. v TIG Ins. Co., 100 NY2d 377, 383).  We agree with plaintiffs that the language "participates in or is a part of any . . . show" is ambiguous, and that the court properly resolved that ambiguity against the insurer, "particularly [because it is] an exclusionary clause" (Ace Wire & Cable Co. v Aetna Cas. & Sur. Co., 60 NY2d 390, 398). Although, as defendant suggests, the policy language may be read broadly to encompass all persons who performed any tasks in connection with the show, including loading and unloading sound equipment, it may also reasonably be read narrowly to encompass only those persons who actually performed in the show or were injured as a result of activities occurring during the show. It is undisputed that the accident occurred after the show had ended, and we note in particular that the accident was caused by a defect in the premises that was wholly unrelated to the show itself. We thus conclude that the court properly determined that the exclusion does not apply in this case.

We reject defendant's contention that the inclusion of the phrase "arising out of" in the exclusion mandates the broader interpretation espoused by defendant. Even assuming, arguendo, that the phrase "arising out of" is interpreted as "originating from, incident to, or having connection with" (Maroney v New York Cent. Mut. Fire Ins. Co., 5 NY3d 467, 470 [internal quotation marks omitted]), we note that coverage is excluded only if an accident originates from, is incident to or has connection with a person's "participat[ion]" in a "show." Here, it cannot be said that there is no ambiguity concerning whether the accident arose out of plaintiff's participation in a show, which in fact had ended before the accident occurred.

While ruling against Essex on the coverage issue, the majority did at least recognize that a judgment creditor proceeding via Insurance Law § 3420(b)(1) against the judgment debtor's liability insurer may not recover more than the limit of the judgment debtor's liability coverage, which in this case was $500,000 per occurrence, less a $500 deductible.  Consequently, the majority reduced the award against Essex from $950,000 to $499,500, plus interest and costs. 

Justices Fahey and Peradotto dissented, all but guaranteeing an appeal of this case to the New York Court of Appeals.  The dissenting justices concluded that the language "participates in or is a part of any . . . show" is not ambiguous, and that the plaintiff fell squarely within that language:

[P]laintiff was hired by the band to provide sound reinforcement services for the show, and thus there is no question that he "participate[d] in or [wa]s a part of" the show on the night of his accident. The majority's conclusion that such clause may "reasonably be read narrowly to encompass only those persons who actually performed in the show or were injured as a result of activities occurring during the show" is not supported by the plain language of the exclusion. First, if the exclusion was intended to apply only to those persons who "actually performed" in a show, then the language "spectator, patron or customer" in the exclusion would be superfluous. Second, such an interpretation imposes a temporal limitation on the exclusion where no such limitation appears therein. Indeed, if defendant had intended to limit the exclusion in that manner, it could have done so explicitly as it did in other provisions of the policy (see Maroney v New York Cent. Mut. Fire Ins. Co., 5 NY3d 467, 473). For example, the policy's medical payments coverage provision specifically excludes expenses for bodily injury "[t]o a person injured while taking part in athletics" (emphasis added). Similarly, the policy's "combination endorsement" excludes expenses for bodily injury or personal injury to any person "while practicing for or participating in any event or function of a sporting or athletic nature" (emphasis added). Here, by contrast, the absence of such limiting language in the exclusion in question reflects an intent to provide a broad exclusion for all injuries arising from participation in shows or other special events (see Maroney, 5 NY3d at 473).

With respect to the majority's rejection of the broadening effect of the exclusion's "arising out of" language, the dissenters, relying on New York Court of Appeals' case law, noted:

We further conclude that plaintiff's injury "ar[o]se[] out of" his participation in the show within the meaning of the exclusion.  In the insurance context, the phrase "arising out of" has been broadly interpreted to mean "originating from, incident to, or having connection with" (Maroney, 5 NY3d at 472 [internal quotation marks omitted]; see Regal Constr. Corp. v National Union Fire Ins. Co. of Pittsburgh, PA, 15 NY3d 34, 38). Here, plaintiff's accident occurred while he was in the process of removing his sound equipment from the nightclub. The process of packing up and removing sound equipment at the conclusion of a show necessarily "originat[es] from, [is] incident to, or ha[s] connection with" the show (Maroney, 5 NY3d at 472 [internal quotation marks omitted]). The fact that plaintiff's accident was allegedly caused by the defective nature of the loading dock rather than any condition of the show itself does not remove plaintiff's injury from the policy exclusion. "[T]he focus of the inquiry is not on the precise cause of the accident but the general nature of the operation in the course of which the injury was sustained" (Regal Constr. Corp., 15 NY3d at 38). Indeed, "the phrase arising out of' . . . requires only that there be some causal relationship between the injury and the risk for which coverage is provided" (Maroney, 5 NY3d at 472), and such a causal relationship clearly exists here.

With its double dissent, expect this case to head to Albany.   Although the "stage hand" exclusion itself may not be of great interest to most liability insurers doing business in New York, the "participates in" and "arising out of " language of that exclusion, and the New York courts' interpretation of those phrases, should be.

Post Script (July 11, 2012) ~~ On June 5, 2012, the New York Court of Appeals unanimously REVERSED this decision for the reasons given by the dissenting justices at the Fourth Department in a very short memorandum decision that you can read here.

---

1. Rhetorical coverage question.

Federal Appeals Court Holds that "Date of Loss" Does Not Mean the Date of Physical Loss But the Date When an Insured's Claim for Loss Accrues

PROPERTY – HOMEOWNERS – TWO-YEAR CONTRACTUAL SUIT LIMITATIONS PERIOD
Fabozzi v. Lexington Ins. Co.
(US Ct. Apps., 2nd Cir., decided 4/6/2010)

Insurance practitioners and property claims professionals in New York know that most property insurance policies issued in New York or covering New York risks contain a two-year suit limitations period, which requires that there be full compliance with all policy conditions and any suit against the insurer be brought within two years after the occurrence of the loss.

For nearly 100 years, the "Suit" condition of the 165-line New York standard fire policy, codified at New York Insurance Law § 3404(e), has provided:

157     Suit.               No suit or action on this policy for the recov-
158                           ery of any claim shall be sustainable in any
159     court of law or equity unless all the requirements of this policy
160     shall have been complied with, and unless commenced within
161     twenty-four months next after inception of the loss.

The modern homeowners policy, such as the October 2000 edition of  ISO's HO-3 form, sets forth the following two-year suit limitations period:

Suit Against Us

No action can be brought unless there has been full compliance with all the terms under Section I of this policy and the action is started within two years after the date of loss.

Modern New York courts have consistently ruled that absent evidence to support a finding of waiver or estoppel, an action commenced more than two years after the loss date is time-barred.  See, Snyder v. Allstate Ins. Co., 70 AD3d 670 (2d Dept. 2010); Dimmick v. New York Prop. Ins. Underwriting Assn., 57 AD3d 602 (2d Dept. 2008).  There never has been any question or dispute over what the "date of loss" is or means.  That is, until now. 

Paul and Annette Fabozzi had a homeowners insurance policy with Lexington Insurance Company, which covered their oceanside home on Staten Island, New York. When the house began to collapse as the result of structural damage, they filed a claim with Lexington.  Twenty-six months later, Lexington denied coverage and the Fabozzis subsequently sued.  Relying on a policy provision that required any suit to be commenced within two years "after the date of loss," Lexington contended that the Fabozzis had waited too long and the limitations period had expired. The federal district court agreed, granted Lexington's motion for summary judgment, and dismissed the suit.

The Fabozzis' appeal to the US Court of Appeals for the Second Circuit turned on the meaning of "date of loss" and whether, under New York law, the policy's limitations period was triggered when the underlying damage to their home occurred, or when all the conditions precedent to bringing suit had been met.  In selecting the latter, the Second Circuit concluded:

Because, under longstanding New York law, the limitations period did not begin to run until the Fabozzis' claim against Lexington accrued, rather the date of the accident, we conclude that the action must be remanded. Accordingly, the judgment of the district court is vacated.

The Fabozzis' homeowners policy with Lexington contained the following suit limitations period:

Suit Against Us.  No action can be brought unless the policy provisions have been complied with and the action is started within two years after the date of loss.  (Emphasis added.)

In vacating the district court's judgment and reinstating the Fabozzis' lawsuit, the United States Court of Appeals for the Second Circuit held that, for purposes of a homeowners insurance policy's two-year Suit Against Us limitations period, the "date of loss" mentioned in that condition is ambiguous and does not mean the date of physical loss or accident, but the date when the insured's claim accrues.

After surveying the historical evolution in the New York state courts of New York's one-, then two-year contractual suit limitations period -- citing and relying heavily on an 1882 New York Court of Appeals' decision for the proposition that "only by exceptionally clear language could an insurer insist that 'the time of the fire should be looked to as the event, from the happening of which the limitation should run'" -- the Second Circuit noted:

Other generic language, such as that in the Fabozzis' policy, does not carry this same meaning; instead, it ties the limitations period to the moment when a claim accrues.

The Second Circuit went on to scuttle 20th-century New York state court case law which has consistently held that modern "date of loss" suit limitation phrases refer to the date of the catastrophe insured against, and not to the accrual date of the insureds' claim against the insurer for failure to pay.  Then, citing only federal court case law in support, the Second Circuit pronounced:

The Fabozzis' policy provides that the limitations period would expire "two years after the date of loss," a threshold that New York courts have long regarded as signifying the date on which the claim accrues, not the date on which damage was incurred.

Long as is older, perhaps; not long as in continuously into the past.

With the issuance of this decision, New York homeowners insurers that use policies with "date of loss" in their suit limitations conditions, such as the Suit Against Us condition in the HO-3 policy form, will undoubtedly face challenges in New York state and federal courts on this issue of the deadline for commencing suits for policy benefits against the insurer. 

Of course, the potential impact of this decision can be "fixed", if New York property insurers wish to retain what had been a fairly a bright-line two-year suit limitations rule, by amending the policy language either to define "loss" or to substitute words such as "catastrophe or physical damage insured against" for "loss" in the Suit Against Us condition. But should that be necessary? The condition at issue in this case is standard to the standard ISO HO-3 policy. How many time-barred coverage declinations just revived? New York property insurers can expect a good deal of litigation in the New York state courts over this important issue.

Coverage Granted for Hardwood Floor Damage from Longstanding Water "Misting" from Split Sub-Floor Pipe

PROPERTY – WATER DAMAGE – PIPE LEAK – "SEEPAGE" – "SUDDEN"
Flynn v. Allstate Indem. Co.
(Watertown City Ct., decided 3/24/2009)

WARNING:   Reading this decision may cause cognitive vertigo.  There's a lot in here for a $3,000 water damage case.  Click the case link at your own risk.

Plaintiff insureds had $200,000 in improvements done to an older house.  Leave in September 2007 for 6-7 weeks.  Come back in late October.  Discovers their dining room floor had buckled in early November.  Their contractor comes out in mid-November and discovers "major pipe leak with water going all over the place".  Recommends that the insureds call a plumber.  Plumber comes in early December and finds a pipe beneath the dining room floor had split and was spraying water onto the sub-floor over a six to seven foot radius.  Puts a temporary patch on the leak.  Insureds finally report the loss to their Allstate agent on December 21, 2007.

Allstate inspected the loss and denied coverage, based on the policy's exclusion of water damage due to:

18.  Seepage, meaning continuous or repeated seepage or leakage over a period of weeks, months, or years, of water, steam or fuel:
a)  from a plumbing, heating, air conditioning or automatic fire protection system or from within a domestic appliance; or
b)  from, within or around any plumbing fixtures, including, but not limited to, shower stalls, shower baths, tub installations, sinks or other fixtures designed for the use of water or steam.

Allstate's claims adjuster did not inspect the patched pipe, but spoke with the plumber, who told him that he had found a "split on the very top of the pipe...spraying mist onto the sub-floor above this split covering ten foot diameter[.]"   From his investigation, the adjuster concluded that the loss had not been "sudden" and that the "misting" which led to a steady saturation of the structures above it, including over time the affected floor, met the policy's definition of "seepage" excluded by the policy, i.e., "...continuous...leakage over a period of weeks...of water...(a) from plumbing[.]"  In defense of its denial, Allstate also argued that the policy does not cover damage due to "seepage" of water, but rather, only water damage resulting from a "burst" pipe.

Following Allstate's denial, the insureds had the dining room floor repaired.  The cost of repairs was $3,000, but the flooring contractor, although he had prepared a bill, decided under the circumstances that he would not charge the insureds for that repair work.

After conducting an evidentiary hearing or trial, Watertown City Court Judge James Harberson awarded plaintiff $3,000 plus costs.  Based on New York pollution exclusion case law addressing the meaning of "sudden and accidental" in liability coverage contexts, Judge Harberson found an "ambiguity in the policy language involving the 'seepage' term and 'sudden and accidental.'"  Relying heavily on the Second Department's 2006 decision in Hudson v Allstate Ins. Co., 25 AD3d 654 (2nd Dept. 2006), the court found that that the plumbing system pipe failure was covered under plaintiff's policy as a "sudden and accidental escape of water...from a plumbing...system" as provided under the exception to Exclusion # 15, which negates coverage for:

15. a) wear and tear, aging, marring, scratching, deterioration, inherent vice, or latent defect;

b) mechanical breakdown;

c) growth of trees, shrubs, plants or lawns whether or not such growth is above or below the surface of the ground;

d) rust or other corrosion, mold, wet or dry rot;

e) contamination, including, but not limited to the presence of toxic, noxious, or hazardous gases, chemicals, liquids, solids or other substances at the residence premises or in the air, land or water serving the residence premises;

f) smog, smoke from the manufacturing of any controlled substance, agricultural smudging and industrial operations;

h) insects, rodents, birds or domestic animals. We do cover the breakage of glass or safety glazing materials caused by birds; or

i) seizure by government authority.

If any of (a) through (h) cause the sudden and accidental escape of water or steam from a plumbing, heating or air conditioning system, household appliance or fire protective sprinkler system within your dwelling, we cover the direct physical damage caused by the water or steam.  If loss to covered property is caused by water or steam not otherwise excluded, we will cover the cost of tearing out and replacing any part of your dwelling necessary to repair the system or appliance. This does not include damage to the defective system or appliance from which the water escaped.

As the Second Department had in Hudson, Judge Harberson ruled that this exception to Exclusion # 15 created a latent ambiguity in the policy's Exclusion # 18, the seepage exclusion.

Although plaintiffs did not present any evidence of what caused the pipe beneath their dining room's floor to split, the court found "[i]t ... reasonable to observe that, as described by the plumber, such a split in the pipe could be due to any of the conditions listed at 15(a)(b) or (d) allowing the 'sudden and accidental escape of water' from this split in the top of the pipe for which the policy will cover in such case."

A strong argument could be made that inasmuch as the language the court relied upon is from an exception to an exclusion, the court erred in not requiring the insured to prove the cause of the pipe splitting.  Rather, the court ruled that Allstate "fail[ed] to investigate the cause of the pipe's failure and exclude as a cause the conditions listed at paragraph 15 a), b) and d) for it[.]"  Although insurers must prove the applicability of policy exclusions, insureds always carry the burden of proving inclusionary policy provisions.  An exception to an exclusion can be considered an inclusionary provision for which an insured must shoulder the burden of proof. 

On the issue of damages, while not disputing the reasonableness of the $3,000 repair cost figure, Allstate argued that because the flooring contractor had not billed the insureds for the $3,000 in repairs, the  insureds  had suffered no damages.  In an interesting use of Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of NY, 10 NY3d 187, defense counsel for Allstate also argued that plaintiff's proof of "consequential damages" (which they weren't) was speculative and, thus, legally insufficient.  In angrily rejecting Allstate's arguments, Judge Harberson ruled:

[T]he $3,000 is still due to be paid without regard to whether someone else gave him $3,000 (a bank loan or private loan, or as in this case, a gift of the value of the labor and materials).

* * * * *

The Court finds the defense argument that no damages were due because the contractor, Mike Goodwin, decided not to send the $3,000 bill for the work to be spurious and for Allstate to attempt to piggyback on this generosity of Mr. Goodwin to make itself a beneficiary of it to avoid paying the $3,000 due under the policy is also reprehensible and outrageous conduct engaged in by Allstate Insurance Company. 

Water damage claims are tough.  There is usually more than one policy provision or exclusion that has the potential of applying to affect the coverage outcome. Is a pipe's splitting not a bursting?  Is it possible for a pipe to leak and the first drop of water to escape gradually rather than suddenly?   I think I understand the underwriting intent underlying the seepage exclusion, but both the Second Department and this court validly observed what appears to be an inherent conflict between the seepage exclusion and the "sudden and accidental escape of water" exception to the wear and tear, etc. exclusion.  Things that make you go hmmm.

Anyone other than me get the irony of this case's venue?

Spray Painting Operations and Work Product Exclusions Held Not to Negate Liability Coverage for Subrogation Suit

CGL – COVERAGE FOR SUBROGATION CLAIM – SPRAY PAINTING OPERATIONS EXCLUSION – WORK PRODUCT EXCLUSION
Nova Cas. Co. v. Central Mut. Ins. Co.
(3rd Dept., decided 2/5/2009)

If you were in the business of exterior painting and had a commercial liability policy that excluded coverage for bodily injury or property damage from "spray painting operations", would you expect that exclusion to apply to damage caused by the spray application of a protective sealant instead of paint? No, not if that was your weekend job and sat as a justice during weekdays on the Third Department, Appellant Division.

Nova Casualty Company insured a painting contractor, who was hired to apply a protective sealant to the exterior cedar wood siding of a customer's home. As the sealant was being applied, drop cloths were used to catch any of the solution that dripped during the application process. The drop cloths were then stored in an enclosed porch at the rear of the customer's home. Later, the home was significantly damaged by a fire that the homeowners claimed was caused by the spontaneous combustion of chemicals in the sealant that had collected on the drop cloths.

Central Mutual Insurance Company insured and paid the homeowners for the fire damage. It then commenced a subrogation action against Nova's insured to recover its claim payments. Nova agreed to defend its insured, but disclaimed indemnification coverage based on two policy exclusions: the first "bodily injury and property damage arising out of [s]pray [p]ainting [o]perations"; and the second for for any damage "to that specific part of real property on which work is being performed ... if the 'property damage' arises out of such work." Nova then commenced this declaratory judgment action, seeking a declaration that it was not obligated under its policy to indemnify or defend its insured in the underlying subrogation action. Defendants Central Mutual and its insureds successfully moved for summary judgment, and Nova appealed.

In AFFIRMING the lower court's award of summary judgment to the defendants, the Third Department ruled first that the spray painting operations exclusion was ambiguous as applied to the facts of the loss in question:

Initially, we note that to gain the benefit of an exclusion clause in an insurance policy, the insurer has the burden of demonstrating "that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case" (Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640, 652 [1993]; see RJC Realty Holding Corp. v Republic Franklin Ins. Co., Utica Natl. Ins. Group, 2 NY3d 158, 165 [2004]; Frontier Insulation Contrs. v Merchants Mut. Ins. Co., 91 NY2d 169, 175 [1997]; Villanueva v Preferred Mut. Ins. Co., 48 AD3d 1015, 1016 [2008]). As for the particular provisions in question here, plaintiff argues that the policy exempts it from liability because it specifically excludes from coverage any "bodily injury and property damage arising out of [s]pray [p]ainting [o]perations." However, nowhere in the policy is the term spray painting operations defined or is it specifically stated that such an operation includes the application of sealants or other nontraditional paint materials. Here, the uncontroverted testimony established that Bennett and Pesano were not using a paint; instead, they were applying a product called "Cabot Clear Solution." Given that sealants, as opposed to paints, were not covered by the express wording of the exclusion, this clause, as it is applied to these facts, is, at best, ambiguous and the existence of such an ambiguity serves to bar its application to the facts as presented by this claim (see Villanueva v Preferred Mut. Ins. Co., 48 AD3d at 1016; Boggs v Commercial Mut. Ins. Co., 220 AD2d 973, 974 [1995]; General Acc. Ins. Co. v United States Fid. & Guar. Ins. Co., 193 AD2d 135, 138 [1993]).

Nova's insured had brushed as well as sprayed sealant onto the cedar shingle siding. The court also found that since nothing in the record supported a finding that the fire resulted from sealant that had been sprayed as opposed to brushed onto the siding, the policy exclusion could not apply.

Lastly with respect to the spray painting operations exclusion, the court noted that "[Nova] urges the adoption of an interpretation of this clause that, if correct, would have been applied to any work performed by [Nova's insured] on the [] home and, as such, would have resulted in there being no coverage under this policy. Such a result would have obviously been at odds with [the insured]'s 'reasonable expectations as a businessperson seeking insurance coverage for injuries resulting from the operation of his [painting] business' (Kramarik v Travelers, 25 AD3d 960, 962 [2006])."

The Third Department also agreed with the lower court's rejection of Nova's reliance on the policy's work product exclusion of damages "to that specific part of real property on which work is being performed ... if the 'property damage' arises out of such work." Noting that such a work product exclusion exists to exclude coverage for business risks, including claims that the insured's product or completed work was not that for which the damaged person bargained, the court held:

The [homeowners'] claim is not that they were damaged as the result of the quality of [Nova's insured's] work or that he misapplied the sealant to the siding of their home. Instead, their claim is that the home was damaged by a fire caused by the negligent manner in which [he] and his employees stored materials and equipment used on the job after the sealant had been applied (citations omitted). This exclusion is clearly not intended to exempt from coverage under a general commercial liability policy physical damage caused by the negligence of an insured; instead, it was designed to apply to those situations where coverage is sought "for contractual liability of the insured for economic loss because the product or completed work is not what the damaged person bargained for" (Hartford Acc. & Index. Co. v Reale & Sons, 228 AD2d 935, 936 [1996]). For these reasons, this exclusion does not apply.

Finally, the court also rejected Nova's argument that summary judgment was granted prematurely because Nova had not been given an opportunity to conduct meaningful discovery:

[Nova] not only has been on notice of the existence of this fire and the implications that it held for its policy since shortly after this fire occurred, it also played an intimate and important role in providing the insured with a defense in the underlying litigation. In addition, [Nova] has failed to identify how it, in the course of these proceedings, has been prevented from obtaining what it contends is relevant evidence on the issues that have been raised and resolved by Supreme Court in its determination of this motion for summary judgment (see Zinter Handling, Inc. v Britton, 46 AD3d 998, 1001 [2007]).

The reported decision does not provide or reflect any underwriting intent for the spray painting operations exclusion, leaving open the question of whether that exclusion was intended only to apply to overspray damage claims. Regardless, when an insurance policy uses in an exclusionary provision a non-standard term that is not defined, the chance that a court will find it ambiguous and interpret it against the insurer substantially increases. Such was the outcome in this case.