Property Owner in Name Only Found Not Entitled to Coverage for Fire Loss of Rental Income Property

COMMERCIAL PROPERTY – INSURABLE INTEREST – DE FACTO OWNERSHIP
Porter v. State Farm Fire & Cas. Co.
(WDNY, decided 6/6/2019)

If your name is on the deed and insurance policy but you invested no money in the acquisition,  operation and insuring of rental income property and want nothing to do with its post-loss claim, are you entitled to policy proceeds in the event the property burns down?

Under the facts of this case, the court said no, you (and the real owner) get nothing.

Plaintiff went to a property foreclosure auction in Buffalo, New York, and, as an accommodation to her sister's boyfriend, successfully bid on 254 Strauss Street.  Plaintiff paid the required $500 deposit, but her sister and sister's boyfriend reimbursed her that amount in full and paid the remaining balance of the auction price.  Although the Strauss Street property was placed in plaintiff's name, she did not manage or have any interest in the subject property. Rather, her sister's boyfriend maintained, and leased the subject property, made renovations, paid property taxes on the property and "handled everything" pertaining to evictions.

Plaintiff testified that she had no authority to sell the property, and did not receive any economic benefit from the property. With regard to the property's insurance policy, plaintiff testified that she was not involved in obtaining the policy; rather, her sister's boyfriend obtained the policy providing plaintiff's information as the owner and he paid the premiums on the policy. Plaintiff knew nothing about the basic coverage of the policy insuring the property and only learned of the policy limits when she "started receiving letters after the property was burned down."

As to her receiving any economic benefit from the property, plaintiff explained to the insurance agency salesman, "I told Mike from State Farm I just — they say sign here, I just sign. I don't even read. I don't even know what I be signing, I just sign."  At a second deposition plaintiff testified that any money she would receive from State Farm "will go straight to [her sister's boyfriend] . . . [b]ecause it's his property."  Plaintiff further testified that, although what remained of the subject property was demolished after the fire, she was not aware who paid for the demolition costs.

In GRANTING State Farm's motion for summary judgment, the District Court (Telesca, J.), held:

• Replacement Cost Coverage Claim:  "Plaintiff has repeatedly disclaimed any interest in the subject property and testified unequivocally that she had no plans to replace the property. Accordingly, the 'equitable considerations' the Court considered in Zaitchick are not present in this instance. The Court therefore adopts Judge Schroeder's recommendation that the Court grant summary judgment to Defendant on Plaintiff's claim for replacement cost coverage."


• Debris Removal Coverage:  "It is also undisputed that [the sister's boyfriend] used Plaintiff's auction identification number to bid on the subject property. Although the deed to the subject property lists Plaintiff as the owner, she clearly explained that [the boyfriend] managed and received any benefit from the property in all respects. She was at best an accommodating owner benefitting [the boyfriend] for reasons best known to them. In short, the Demolition Invoice does not create a genuine issue of material fact as to Plaintiff's claim for debris removal coverage. Plaintiff made it very clear in her sworn testimony that "I didn't put any money into the property, [and] I shouldn't get anything from it." She further testified that any payment from the insurance policy would go straight to [the boyfriend] "[b]ecause it's his property."  Accordingly, the demolition costs should be the responsibility of the property owner, which Plaintiff has testified unequivocally is [the sister's boyfriend] . Thus, the responsibility, if any, for the payment of demolition costs is left to be resolved between Plaintiff and [the boyfriend]. Accordingly, the Court declines to adopt Judge Schroeder's recommendation that the Court deny Defendant's motion for partial summary judgment on Plaintiff's claim for debris removal coverage.  

In conclusion, Judge Telesca held:

Based on the above-mentioned information, the Court concludes that Plaintiff's complaint must be dismissed in its entirety. The debt created by the loss of the subject property is not remedied through the insurance policy, based on the understanding as to actual ownership which existed between Plaintiff and Mr. Spencer. Therefore, it is undisputed that Plaintiff is unable to recover under the insurance policy. Her complaint, which alleges that she is entitled to reimbursement under that policy, is inconsistent with her testimony and is hereby dismissed. See Wierzbic v. Cnty. of Erie, No. 13-CV-978S, 2018 WL 550521, at *4 (W.D.N.Y. Jan. 25, 2018); Brandon v. Bd. of Educ. Of Guilderland Cent. Sch. Dist., 487 F. Supp. 1219, 1233 (N.D.N.Y. 1980) (the court may search the record on a motion for summary judgment, and grant relief as it deems proper).

In a decision issued the very following day, the District Court DENIED plaintiff's motion for reconsideration, reiterating:

The evidence shows that Plaintiff clearly and unequivocally claimed no interest in the proceeds of the insurance policy as a result of the fire damage to the property by stating that the insurance proceeds belong to Mr. Spencer, and that she did not want any proceeds paid out to her.  Plaintiff was emphatic that she wanted no financial benefit from the policy, even though she is the named insured, by stating, "I didn't put any money in to the property, [and] I shouldn't get anything from it.".  * * * Plaintiff has failed to articulate a valid basis upon which reconsideration is warranted, and the June 6th Decision and Order dismissing the complaint in its entirety stands.

Plaintiff has filed an appeal to the Second Circuit Court of Appeals. If that appeal is perfected, I'll report the outcome. Scott Storm oversaw the litigation of this matter. Questions about this case may be directed to him or me.

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.

Not "Dependent Property" -- Denial of Business Income Loss Claim Upheld

COMMERCIAL PROPERTY – BUSINESS INCOME LOSS CLAIM – "DEPENDENT PROPERTY" 
Cohen & Slamowitz, LLP v. Zurich Am. Ins. Co.
(2nd Dept., 1/23/2019)

Commercial property policy for the plaintiff, a former debt collections law firm, provided coverage for actual loss of "business income" sustained by the plaintiff "due to the necessary suspension of operations' caused by direct physical loss or damage by a Covered Cause of Loss to dependent property'" at a premises not owned, leased, or operated by the plaintiff. The policy further defined "dependent property" as premises operated by others on whom the plaintiff depended to "[d]eliver materials or services to you, or to others for your account (not including water, communication or power supply services)."  (Underlining added.)

Plaintiff claimed loss of business income from a disruption of its telephone service as a result of severe flooding at it telephone service provider's lower Manhattan switch center during Hurricane Sandy.  (Ironic that a debt collection firm that primarily used the telephone as its method of communicating with alleged debtors would not recognize that the switch center, which provided communication services to plaintiff, did not meet the definition of "dependent property."  Then again, debt collection firms that take no for an answer probably don't stay in business very long.)

If you've read this far, you probably know the outcome.  Summary judgment to Zurich AFFIRMED:

The defendants demonstrated, among other things, that the plaintiff's claimed business income losses resulted from damage to a property operated by a communication service provider, and, therefore, that the cause of loss was a disruption in communication services, not a "Covered Cause of Loss" to "dependent property" under the policy. In opposition, the plaintiff failed to raise a triable issue of fact. Accordingly, we agree with the Supreme Court's determination to grant the defendants' motion for summary judgment dismissing the complaint and for a judgment declaring that the defendants are not obligated to indemnify the plaintiff for its claimed business income losses pursuant to the policy (see Conlon v Allstate Veh. & Prop. Ins. Co., 152 AD3d at 489-491; ABM Mgmt. Corp. v Harleysville Worcester Ins. Co., 112 AD3d at 764-765).

Cause of Action for Consequential Damages Found Allegationally Sufficient and Reinstated

COMMERCIAL PROPERTY – CONSEQUENTIAL DAMAGES – IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING – BAD FAITH – ALLEGATIONAL SUFFICIENCY 
DK Prop., Inc. v. National Union Fire Ins. Co. of Pittsburgh
(1st Dept., 1/17/2019)

Question:
Must, at the pleading stage, a claim for consequential damages arising from the insurer's processing of the insured's insurance claim requires a detailed, factual description or explanation for why such damages, which do not directly flow from the breach, are also recoverable?

Answer of the First Department:
No.  A cause of action for consequential damages is sufficiently pled by specifying the types of consequential damages claimed and alleging that such damages were reasonably contemplated by the parties prior to contracting.

The complaint in this case alleged that rather than pay the claim, defendant made unreasonable and increasingly burdensome information demands throughout the three-year period since the property damage occurred. Plaintiff contended that this was a tactic by defendant to make the claim so expensive to pursue that plaintiff would abandon it altogether. Plaintiff contended defendant's investigatory process has taken so long and become so attenuated that the structural damage to the building has worsened. Among the consequential damages alleged were engineering costs, painting, repairs, monitoring equipment, and moisture abatement to address water intrusion, loss of rents, and other expenses attributable to mitigating further damage to the property.

In REVERSING Supreme Court's dismissal of and reinstating the complaint's second, bad faith cause of action, the First Department held:

Here, plaintiff's allegations meet the pleading requirements of the CPLR with respect to consequential damages, whether in connection with the first cause of action or the second cause of action for breach of the covenant of good faith and fair dealing in the context of an insurance contract (id.). Contrary to defendant's claim, there is no heightened pleading standard requiring plaintiff to explain or describe how and why the "specific" categories of consequential damages alleged were reasonable and foreseeable at the time of contract. There is no heightened pleading requirement for consequential damages (Panasia Estates Inc. v Hudson Ins. Co., 68 AD3d 530, 530 [1st Dept 2009], affd 10 NY3d 200 [2008], citing Bi-Economy 10 NY3d at 192). Furthermore, an insured's obligation to "take all reasonable steps to protect the covered property from further damage by a covered cause of loss" supports plaintiff's allegation that some or all the alleged damages were foreseeable (Benjamin Shapiro Realty Co. v Agricultural Ins. Co., 287 AD2d 389, 389-390 [1st Dept 2001]).

As noted by the Court of Appeals in Bi-Economy, a claim for breach of contract and one for bad faith handling of an insurance claim are not necessarily duplicative (id. at 191). The first and second causes of action plead different conduct by defendant and, in any event, defendant did not cross-appeal with respect to Supreme Court's denial of its motion to dismiss the bad faith claim on the basis of duplication.

Nothing else to see here.  Move on.

When 5 + 3 = 1

COMMERCIAL PACKAGE POLICY – EMPLOYEE DISHONESTY COVERAGE – NUMBER OF OCCURRENCES – ANTI-STACKING PROVISION 
Dan Tait, Inc. v. Farm Family Cas. Ins. Co.
(Sup. Ct., Albany Co., 7/2/2018)

Over a five-year period, plaintiff's former bookkeeper stole approximately $500,000 from his employer by: (1) making unauthorized purchases with company credit cards; (2) making unauthorized withdrawals from the company's line of credit; and (3) taking company inventory for personal use.  Plaintiff made a claim for employee dishonesty coverage to its commercial package insurer, Farm Family.

Deeming the former bookkeeper's course of dishonest acts committed over multiple policy periods to constitute one "occurrence" under the language of the policy, Farm Family paid $15,000, representing the limit of the employee dishonesty coverage for one policy period.  Plaintiff sued.

Under the subject policy, Farm Family agreed to pay for the direct loss of business property or cash "resulting from dishonest acts committed by [the named insured's] employees acting alone or in collusion with other persons[.]" The policy further provided that "[t]he most [Farm Family] will pay for loss or damage in any one occurrence is [the policy limit of $15,000]" and that "[a]ll loss or damage . . . [c]aused by one or more persons; or. . . [i]nvolving a single act or series of acts . . . is considered one occurrence" under the policy.

The policy also contained what the motion court characterized as "robust anti-stacking language", which provided:

If any loss is covered: (1) Partly by this insurance; and (2) Partly by any prior cancellation or terminated insurance that we or any affiliate had issued to you or any predecessor in interest; the most we will pay is the larger of the amount recoverable under this insurance or the prior insurance. We will pay only for loss or damage you sustain through acts committed or events occurring during the Policy Period. Regardless of the number of years this policy remains in force or the number of premiums paid, no Limit of Insurance cumulates from year to year or period to period.

On the issue of the number of occurrences, Supreme Court rejected plaintiff's asserted reliance on the "unfortunate-event test" and held that the former bookkeeper's series of thefts from plaintiff constituted "one occurrence" under the policy and, therefore, was subject to the $15,000 limit applicable to losses arising from employee dishonesty.

With respect to the anti-stacking issue, Supreme Court rejected plaintiff's argument that the policy was ambiguous and held:

Based on the foregoing, the Court concludes that [plaintiff] cannot recover an amount in excess of $15,000, representing "the larger of the amount recoverable under" any one of the insurance policies that were in effect during the multi-year period in which [the former bookkeeper]'s dishonest acts were committed.

If Supreme Court is right that there are no prior reported decisions of the New York courts that speak directly to the "occurrence" issue, we may see this case head to the Appellate Division, Third Department.  Stay tuned. 

Two-Year Suit Deadline Runs from Actual Loss Date, Not from Loss Date Used on Insurer's Correspondence

COMMERCIAL PROPERTY – TWO-YEAR SUIT LIMITATION CONDITION – ESTOPPEL 

Kotecki's Grandview Grove Corp. v. Acadia Ins. Co.
(4th Dept., 2/9/2018)

Property insurance policies in New York can limit an insured's time to sue the insurer for breach of the policy to one or two years.  Equitable estoppel is a legal doctrine by which a party to a legal claim or defense can be precluded or "estopped" from taking a legal action that is inconsistent with that party's previous words, claims, or conduct.  For equitable estoppel to apply, however, the party seeking to apply equitable estoppel must have reasonably relied to that party's detriment on the other party's prior words or conduct.

With respect to a suit limitations defense, a defendant may be estopped from pleading such a defense if the plaintiff was induced by fraud, misrepresentations or deception to refrain from filing a timely action.  Plenty of New York insurance coverage cases exist in which insureds have argued -- sometimes successfully and sometimes unsuccessfully -- that their insurers should be estopped from asserting the policy's two-year suit limitations period because they either (1) engaged in a course of conduct which lulled the insureds into inactivity in the belief that their claims would ultimately be processed or (2) induced the insureds by fraud, misrepresentation or deception to refrain from commencing a timely action.

So what if the insurer consistently uses the wrong loss date on all its claim correspondence, including the coverage declination letter that, among other things, advised the commercial insured that it had two years from the reported loss date to sue (per 11 NYCRR § 216.6[c]) and the insured commences suit within two years of that date?  Does estoppel apply?

No, says the Appellate Division, Fourth Department, REVERSING Supreme Court's denial of summary judgment to the insurer, Acadia Insurance Company:

Plaintiff commenced this action to recover under an insurance policy issued by defendant Acadia Insurance Company (Acadia) for loss that it allegedly sustained in a "rain and/or windstorm." Plaintiff reported the loss to its insurance broker, defendant First Niagara Risk Management, Inc. (First Niagara). First Niagara prepared a property loss notice listing the date of loss as June 10, 2013. Acadia investigated the claim, partially denied it in October 2013, and reaffirmed that denial in February 2014. All of Acadia's correspondence listed the date of loss as June 10, 2013. The correspondence also advised plaintiff pursuant to New York insurance regulations that, in the event it wished to contest the denial, plaintiff was required by the policy to commence such an action within two years of the reported date of loss. On June 3, 2015, plaintiff commenced this action. During discovery, it was learned that the actual date of loss was May 28, 2013. In response to Acadia's notice to admit, plaintiff admitted that it noticed the damage to its property on May 28, 2013, that it contacted a roofing company on that date to repair the damage, and that it also contacted First Niagara on that date. Acadia then moved for summary judgment dismissing the amended complaint against it as time-barred.  

Supreme Court erred in denying the motion. Acadia met its initial burden of establishing that plaintiff's action was not commenced within two years of the date of loss as required by the policy (see Compis Servs. v Hartford Steam Boiler Inspection & Ins. Co., 272 AD2d 886, 887 [4th Dept 2000]; see generally Nowacki v Becker, 71 AD3d 1496, 1497 [4th Dept 2010]), and plaintiff failed to raise an issue of fact to defeat the motion (see generally Zuckerman v City of New York, 49 NY2d 557, 562 [1980]). Contrary to plaintiff's contention, it did not raise a triable issue of fact whether Acadia should be equitably estopped from relying on the limitations period provided in the policy. "Under the doctrine of equitable estoppel, a defendant is estopped from pleading a statute of limitations defense if the plaintiff was induced by fraud, misrepresentations or deception to refrain from filing a timely action" (Richey v Hamm, 78 AD3d 1600, 1601-1602 [4th Dept 2010] [internal quotation marks omitted]; see Simcuski v Saeli, 44 NY2d 442, 449 [1978]). "A plaintiff seeking to apply the doctrine of equitable estoppel must establish that subsequent and specific actions by defendant[] somehow kept [him or her] from timely bringing suit' " (Putter v North Shore Univ. Hosp., 7 NY3d 548, 552 [2006]). Here, Acadia did nothing to keep plaintiff from commencing the suit in a timely manner. Although Acadia listed the date of loss incorrectly in its correspondence disclaiming coverage, that was the result of incorrect information provided by First Niagara, plaintiff's agent. In any event, plaintiff was always aware of the actual date of loss and that an action had to be commenced within two years of that date. Thus, plaintiff was not induced by Acadia's conduct to refrain from filing this suit in a timely manner.

No inducement because the insured could not and should not have relied on what it knew or should have known was a erroneous loss date in the insurer's correspondence. 

Leasing Property is Entrusting Property for Purposes of the Dishonest or Criminal Act/Entrustment Exclusion

COMMERCIAL PROPERTY – VANDALISM DAMAGE TO LEASED PREMISES – DISHONEST OR CRIMINAL ACTS EXCLUSION – ENTRUSTMENT EXCLUSION 

Winking Group, LLC v. Aspen American Ins. Co.
(SDNY decided 1/18/2018)

Many commercial property insurance policies exclude coverage for loss or damage caused by or resulting from a dishonest or criminal act of the named insured and certain categories of persons related to the named insured:

2.  We will not pay for loss or damage caused by or resulting from any of the following: 

h.   Dishonest or criminal act by you, any of your partners, members, officers, managers, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose:

(1) Acting alone or in collusion with others; or

(2) Whether or not occurring during the hours of employment.

This exclusion does not apply to acts of destruction by your employees (including leased employees); but theft by employees (including leased employees) is not covered.  (Emphasis added.)

If a tenant intentionally trashes the leased property while being evicted, does this exclusion apply to negate property coverage?  If an order of eviction has issued, can it be said that the leased property is still "entrusted" to the tenant?

In this case, the federal District Court said yes to both questions.

Winking Group leased Manhattan premises to Ming Dynasty, Inc, which in turn subleased the premises to East Market, Inc., which occupied the premises with Winking's knowledge and consent from 2009 to early January 2015.

In 2014, Ming Dynasty sued East Market for nonpayment of rent. The parties agreed to a stipulation of settlement whereby East Market was to vacate the premises no later than January 10, 2015. On or around January 10, 2015, a notice of eviction was posted on the door of the premises, and East Market was evicted. After the eviction notice was posted, Winking did not retrieve the keys to the property, and it did not change the locks until January 23, 2015.

Also around January 10, 2015, the premises were vandalized. On January 15, 2015, the property's manager told the New York City Police Department that East Market had caused the damage to the premises.

Aspen denied coverage for the vandalism damage on the basis of the policy's dishonest or criminal act ("entrustment") exclusion.  Winking commenced this breach of contract action, contending in opposition to Aspen's summary judgment motion that the entrustment exclusion did not apply because: (1) it was disputed whether East Market vandalized the premises; and (2) even if East Market did vandalize the premises, it was after Winking had revoked its entrustment of the leased premises.

The District Court rejected both arguments and granted summary judgment to Aspen.  As to Winking's second argument in opposition to the motion, the court held:

Plaintiff argues that the entrustment exclusion does not apply to the facts of this case because Plaintiff terminated its entrustment by evicting East Market from the premises on January 5, 2015. This argument is unpersuasive. Construing the entrustment exclusion in Plaintiff's favor, but interpreting it in accordance with its plain meaning, it is sufficient that the vandalism was causally related to Plaintiff's initial entrustment of the premises to East Market. See, e.g., Lexington Park Realty LLC, 992 N.Y.S.2d at 1-2 (holding that the entrustment exclusion applied where plaintiff's tenant did not return cabinets and appliances after the termination of the lease agreement); see also Easy Corner, Inc. v. State Nat'l Ins. Co., 56 F. Supp. 3d 699, 707 (E.D. Pa. —) (applying Pennsylvania law, granting summary judgment based on a similar entrustment exclusion because "the loss [was] causally connected to the act of entrustment: because of [the employee's] prior management of the bar, [the employee] had a key and was able to access the building easily"). The entrustment exclusion applies broadly to "loss or damage caused by or resulting from" a dishonest or criminal act by "anyone to whom you entrust the property for any purpose," and includes no language suggesting that the parties intended to limit its application to acts occurring before the conclusion of the parties' legal relationship. See, e.g., id. (applying Pennsylvania law, holding that "entrustment exclusions . . . apply even after the temporal termination of an entrustment, provided that there is a causal connection between the between the act of entrustment and the resulting loss"); Su v. New Century Ins. Servs., Inc., No. 12 Civ. 3894, 2013 WL 5775160, at *4 (C.D. Cal. Oct. 25, 2013) (internal quotation marks omitted) (applying California law, finding that "[e]ven if the loss occurs after the entrustment of the property has terminated, the exclusion still applies so long as there is a causal connection between the act of entrustment and the resulting loss"); F.D. Stella Prods. Co. v. Gen. Star Indem. Co., No. 03 Civ. 5151, 2005 WL 3436388 (N.D. Ill. Dec. 12, 2005) (applying Illinois law, holding that an entrustment exclusion "applies even if the dishonest or criminal act occurs after the entrustment has terminated"). Nor has Plaintiff proffered any evidence of the parties' intent to limit the entrustment exclusion's applicability.  

Plaintiff also argues that this case is distinguishable from the cases cited by Aspen because, here, East Market was legally evicted, as opposed to the parties' relationship coming to its natural conclusion, or concluding in some other way. Plaintiff provides no legal authority for the proposition that East Market's formal eviction is legally relevant to the scope of the entrustment exclusion.

This exclusion has been held also to apply to:

• a vacating tenant's damage to the leased premises and removal of most of the business personal property -- Grover Commercial Enterprises, Inc. v. Aspen Insurance UK, Ltd., Case No. 3D14-1987 (Fla. 3d DCA Sept. 7, 2016); and 


• contamination damage from a tenant's operation of a methamphetamine lab in a home -- Neighborhood Investments, LLC v. Kentucky Farm Bureau Mut. Ins. Co., 430 S.W.3d 248 (Ky. Ct. Ap. March 28, 2014).

Summary Judgment Granted to Commercial Property Insurer on New York General Business Law § 349 Deceptive Acts and Practices Claim

COMMERCIAL PROPERTY – WATER DAMAGE – BROADENED WATER-DIRECT DAMAGE COVERAGE EXTENSION – ENGINEERING EXPERT – GENERAL BUSINESS LAW § 349 DECEPTIVE ACTS AND PRACTICES CLAIM
JD&K Assocs. LLC v. Selective Ins. Group, Inc.
(4th Dept., decided 10/07/2016)

During last month's NYSBA Law School for Insurance Professionals' Interactive Presentation with an Expert Engineer: Homeowners Insurance topic I reminded those attending about the importance of vetting the insurer's expert.

In this case, Selective had been sued, in part, for its allegedly deceptive act and practice of commissioning and using in the making its coverage decisions "Investigative Engineering Analysis Report[s]" that had been prepared and signed by someone who was not an engineer.  The plaintiff insured alleged that this was a general practice of Selective that violated New York General Business Law § 349.  Why add a GBL § 349 claim to a breach of contract action?  To recover treble damages and one's attorneys' fees for prosecuting the action if successful.

In June 2014, the Appellate Division, Fourth Department, agreed with Selective that Supreme Court had erred in denying its motion for summary judgment dismissing plaintiff's bad faith, misrepresentation and fraud cause of action, but affirmed the lower court's denial of Selective's dispositive motion to dismiss the complaint's GBL § 349 deceptive acts and practices cause of action because discovery relating to that cause of action was not yet complete, holding:

The court also properly denied that part of defendants' motion seeking summary judgment dismissing the fourth cause of action, alleging deceptive acts and practices under General Business Law § 349.  Plaintiff alleged that the Vallas employee who investigated the loss and prepared the Vallas Report was not an engineer, and that defendants misrepresented his credentials to plaintiff. Plaintiff further alleges that defendants' conduct was deceptive and part of a pattern of conduct that was not unique to plaintiff, but was directed at their policyholders generally. Certain discovery relevant to the General Business Law § 349 cause of action remains outstanding, and thus the court properly concluded that summary judgment with respect to that cause of action would be premature (see Skibinsky v State Farm Fire & Cas. Co., 6 AD3d 975, 976 [2004]; see generally Colombini v Westchester County Healthcare Corp., 24 AD3d 712, 715 [2005]). Inasmuch as punitive damages may be available under General Business Law § 349 (see Ural v Encompass Ins. Co. of Am., 97 AD3d 562, 565 [2012]; Wilner v Allstate Ins. Co., 71 AD3d 155, 167 [2010]), the court properly concluded that dismissal of plaintiff's claim for punitive damages would also be premature.

After discovery was complete, Selective again moved for summary judgment on the GBL § 349 cause of action, and Supreme Court again denied that motion, instead granting plaintiff's cross motion to amend that cause of action.  Selective appealed and the Fourth Department unanimously REVERSED Supreme Court's order, finding that Selective had established as a matter of law that its conduct in this case was not consumer-oriented (the first of the three required elements of a GBL § 349 claim) and that, in any event, plaintiff was not injured as a result of the allegedly deceptive act or practice (the third of the three required prima facie elements).  The Fourth Department explained: 

We agree with defendants that they met their initial burden of establishing as a matter of law that their conduct was not consumer-oriented. It is well settled that, although the conduct need not be repetitive or recurring to qualify as consumer-oriented, a plaintiff "must demonstrate that the acts or practices have a broader impact on consumers at large" and, thus, "[p]rivate contract disputes, unique to the parties, . . . [do] not fall within the ambit of the statute" (Oswego Laborers' Local 214 Pension Fund v Marine Midland Bank, 85 NY2d 20, 25; see New York Univ. v Continental Ins. Co., 87 NY2d 308, 321). Defendants established that the conflict here stems from "a private' contract dispute over policy coverage and the processing of a claim which is unique to these parties, not conduct which affects the consuming public at large" (New York Univ., 87 NY2d at 321). Indeed, the record establishes that defendants' decision to disclaim coverage was based on the particular facts concerning the nature of plaintiff's property damage and the language in the policy (see Security Mut. Life Ins. Co. of N.Y. v DiPasquale, 283 AD2d 182, 182, lv dismissed 97 NY2d 653, 700), and that the alleged deceptive practice here, i.e., defendants' use of the report from a non-engineer in disclaiming coverage, had the potential to affect only a single commercial property loss claim between plaintiff and defendants (see Canario v Gunn, 300 AD2d 332, 333). Contrary to plaintiff's contention, the information concerning defendants' prior use of Vallas' investigative services contained in the affidavit of defendants' in-house complex claims counsel, which was based upon his personal knowledge, established that defendants had not implemented any type of practice of hiring an unqualified site investigator and then misrepresenting his or her qualifications to render an investigative report as a method of deceiving unsuspecting policyholders and improperly disclaiming coverage. We further conclude that the fact that defendants may have disclaimed coverage based in part on reports drafted by Vallas in a few commercial property cases closed within the last 15 years is insufficient to raise a material issue of fact whether the allegedly deceptive practice was standard or routine such that it potentially affected similarly situated consumers (cf. Oswego Laborers' Local 214 Pension Fund, 85 NY2d at 26-27; North State Autobahn, Inc. v Progressive Ins. Group Co., 102 AD3d 5, 14), or whether the alleged conduct had a broad impact on consumers at large as contemplated by the statute (see Anesthesia Assoc. of Mount Kisco, LLP v Northern Westchester Hosp. Ctr., 59 AD3d 473, 479-480). Furthermore, we reject plaintiff's contention that the court properly determined that the investigator's deposition testimony indicating that he prepared a significant number of engineering analysis reports for defendants in the past raises a material issue of fact whether the allegedly deceptive conduct impacted consumers at large. The underlying inference supporting that determination is that, if the investigator had prepared other reports for defendants, then defendants must have also misrepresented the investigator as an engineer to other policyholders, and such an inference is purely speculative and unsupported by the evidence in the record (see generally Edelman v O'Toole-Ewald Art Assoc., Inc., 28 AD3d 250, 251, lv denied 7 NY3d 706; Drepaul v Allstate Ins. Co., 299 AD2d 391, 392-393; Teller v Bill Hayes, Ltd., 213 AD2d 141, 149, lv dismissed in part and denied in part 87 NY2d 937). 

Even assuming, arguendo, that there is an issue of fact whether defendants' conduct was materially misleading, we nonetheless further agree with defendants that the record establishes that plaintiff was not injured as a result of the allegedly deceptive act or practice. "[W]hile the statute does not require proof of justifiable reliance, a plaintiff seeking compensatory damages must show that the defendant engaged in a material deceptive act or practice that caused actual, although not necessarily pecuniary, harm" (Oswego Laborers' Local 214 Pension Fund, 85 NY2d at 26; see generally Small v Lorillard Tobacco Co., 94 NY2d 43, 55-56). Here, the submissions establish as a matter of law that the alleged misrepresentation of the investigator's credentials, and/or any reliance on the conclusions set forth in the report, did not cause actual harm to plaintiff. With respect to the claimed injury arising from the disclaimer of coverage, the record establishes that defendants' decision was based upon the factual observations contained in the report, i.e., that the depressions in the concrete slab were caused by settling of the fill with water discharge from a drain pipe as a contributing factor, coupled with defendants' interpretation of the policy exclusions as applied to those facts. The disclaimer was wholly unrelated to any misrepresentation made by defendants to plaintiff regarding the investigator's credentials. That conclusion is further supported by the fact that defendants erroneously continued to disclaim coverage even after the policy extension applicable to certain water damage was brought to their attention (see JD&K Assoc., LLC, 118 AD3d at 1402-1403). To the extent that plaintiff contends that it suffered actual harm because it was compelled to retain a professional engineer to investigate the cause of the property damage, that decision resulted from defendants' adherence to the disclaimer given its interpretation of the policy despite the investigator's factual observations that supported coverage under the applicable policy extension (see id.). We note that the factual findings in the report are not challenged by plaintiff and are essentially indistinguishable from the findings made by plaintiff's professional engineer. We thus conclude that plaintiff's alleged injuries were caused by a disclaimer made on the basis of the undisputed factual circumstances of the property damage and defendants' adherence to its erroneous interpretation of the policy language, and did not result from any misrepresentation to plaintiff about the investigator's credentials (see Amalfitano v NBTY, Inc., 128 AD3d 743, 746, lv denied 26 NY3d 913).

Important case.  Be sure to read it through if your job includes the oversight or direct handling of litigated first-party property coverage disputes.

"Continuous Input" Not Required for Public Adjuster Who Provided "Valuable Services"

COMMERCIAL PROPERTY – PUBLIC ADJUSTER COMPENSATION – "VALUABLE SERVICES"
Public Adjustment Bureau, Inc. v. Greater New York Mut. Ins. Co.
(1st Dept., decided 10/29/2015)

When an insured hires a public adjuster but the claim is not resolved short of a lawsuit that an attorney for the insured eventually settles, is the public adjuster still entitled to its agreed-upon compensation percentage of the insured's recovery?  It is if it performed "valuable services" for the insured.

Section 25.10(b) of New York's insurance regulations (Title 11 NYCRR), entitled "Right to compensation", states:

(b) If a public adjuster performs no valuable services, and another public adjuster, insurance broker (in accordance with section 2101[g][2] of the Insurance Law) or attorney subsequently successfully adjusts such loss, then the first public adjuster shall not be entitled to any compensation whatsoever. 

Following a partial collapse of a garage at the Seward Park Housing Complex on January 15, 1999, defendant Seward Park Housing Corp. made a claim to its insurer, defendant Greater New York Mutual Insurance Company (GNYMIC), for repair/rebuilding costs. To help with its insurance claim, Seward Park retained plaintiff, Public Adjustment Bureau, Inc. (PAB), a licensed public adjuster. Seward Park's retainer agreement with PAB stated that PAB would "perform valuable services, to include preparation and submission of claim detail and to advise and assist in the adjustment of the loss," and would be paid "seven percent of the amount of loss and salvage . . . when adjusted or otherwise recovered."

Following extensive first-party coverage litigation Seward Park eventually settled with GNYMIC in May 2010, but disputed its obligation to pay PAB its fee.  PAB commenced this action against Seward Park and GNYMIC to collect its percentage fee of Seward Park's settlement recovery.  Seward Park moved and PAB cross-moved for summary judgment. Supreme Court granted Seward Park's motion, dismissing PAB's complaint, but in 2012 the First Department, Appellate Division, reversed that order and reinstated the complaint, holding that the question of whether PAB performed "valuable services" for Seward Park presented a question of fact.

This lawsuit returned to Supreme Court and was eventually tried to a jury, which found in favor of PAB.  Supreme Court granted Seward Park's post-trial motion for judgment notwithstanding the verdict, reasoning that PAB's services were limited to a futile initial attempt to settle with GNYMIC and that none of PAB's work was used in the trial against GNYMIC or to obtain the ultimate settlement. Supreme Court expressed the view that "valuable services" "must consist of continuous input that contributed to the settlement or adjustment of the claim," and concluded that PAB made no such continuous input. PAB appealed (again).

In REVERSING the Supreme Court's judgment and reinstating the jury's verdict, the First Department found no basis in New York Insurance Law or the related regulations for the trial court's imposition of the requirement that a public adjuster provide "continuous input" in the settlement process to be entitled to its fee. Instead, the First Department concluded that when viewed in the light most favorable to PAB, evidence presented at the trial

could lead rational jurors to find that although PAB was not directly involved in the trial against [GNYMIC], it had provided "valuable services" in connection with the ultimate settlement of Seward Park's insurance claim. These services could have included the preparation of the initial claim forms, the retention of a firm to investigate the damage and repairs, meeting with that firm and with architects, engineers, and counsel to discuss the claim, communicating with the insurance company regarding those repairs, and making [PAB senior adjuster Gerald] Scheer — who was deposed — available to testify at the trial. From this, the jury could have rationally concluded that PAB's work before trial constituted a valuable contribution to the trial and to the ultimate settlement, if only by preserving Seward Park's claims and aiding in the damages assessment and investigation.

In rejecting Seward Park's argument that PAB's work could not be deemed valuable because it did not directly procure or contribute to the lawsuit or the ultimate settlement, and because Seward Park could have settled its claim without PAB's input, the First Department noted that PAB was undisputedly involved in Seward Park's substantial compliance with all policy requirements, "which is a prerequisite for an insurer's obligation to pay under the policy [.]"

Seward Park also unsuccessfully argued that PAB failed to establish that but for PAB's conduct, Seward Park would not have recovered against its insurer, the First Department observing that "neither the Insurance Law nor the retainer agreement requires a 'direct and proximate link,' or the actual procurement of a settlement. Each requires merely that the public adjuster provide 'valuable services' in connection with a settlement."

New York's Highest State Court Finds that a Two-Year Suit Limitation Period Is Unreasonable and Unenforceable in Cases Where the Insured Property Cannot Reasonably Be Replaced in Two Years

PROPERTY – SUIT LIMITATIONS PERIOD – PERIOD OF TIME TO REPAIR OR REPLACE
Executive Plaza, LLC v. Peerless Ins. Co.
(Ct. Apps., decided 2/13/2014)

We'll start with this statement from the second paragraph of this decision:

[W]e hold that such a [two-year] contractual limitation period, applied to a case in which the property cannot reasonably be replaced in two years, is unreasonable and unenforceable.

Read that again and let it sink in.  Answering a certified question from the United States Court of Appeals for the Second Circuit, the New York Court of Appeals has essentially eliminated the two-year contractual suit limitations condition found in most New York property insurance policies in cases where insured property, damaged or destroyed by a covered peril, "cannot reasonably be replaced in two years[.]"

Executive Plaza LLC owned a commercial building in Long Island that was severely damaged by a fire in February 2007.  The building was insured for $1 million, and the insurer, Peerless Insurance Company, made a $757,812.50 actual cash value payment to the insured.  Rather than replacing the insured building by buying another one elsewhere, the insured chose to rebuild the building on the same site, but ran into zoning problems due to various changes it had proposed for the new building.  Those zoning problems allegedly caused the insured not to be able to complete the reconstruction of the insured building until October 2010, more than two and a half years after the loss.

The policy under which the plaintiff's building was insured contained the following replacement cost condition:

We will not pay on a replacement cost basis for any loss or damage:  

(i)  Until the lost or damaged property is actually repaired or replaced; and
(ii)  Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.

The policy also contained a "Legal Action Against Us" suit limitations condition that provided:

No one may bring a legal action against us under this insurance unless:

a.  There has been full compliance with all terms of this insurance; and
b.  The action is brought within 2 years after the date on which the direct physical loss or damage occurred.

Just prior to the February 2009 two-year anniversary of the fire loss but before it had completed the insured building's reconstruction, the insured commenced an action against Peerless.  That action was removed to federal court and dismissed on motion based on Peerless' argument that the insured had not yet expended more than the ACV payment in repairs or replacement of the building.  The insured eventually completed the building's reconstruction in October 2010 and sued again for the replacement cost holdback of approximately $250,000.

Peerless again moved to dismiss the action based on the policy's two-year suit limitations period.  In granting that motion, the United States District Court held:

[T]he Court finds that the Policy unambiguously bars any and all suits commenced more than two years after the date of the damage or loss. Since Plaintiff commenced this action well beyond the limitations period prescribed in the Policy, Plaintiff's action is time-barred.

Plaintiff appealed that decision to the United States Court of Appeals for the Second Circuit and that court, rather than deciding that appeal, certified the following question to the New York Court of Appeals:

If a fire insurance policy contains

(1) a provision allowing reimbursement of replacement costs only after the property was replaced and requiring the property to be replaced "as soon as reasonably possible after the loss"; and  

(2) a provision requiring an insured to bring suit within two years after the loss; 

is an insured covered for replacement costs if the insured property cannot reasonably be replaced within two years?

The New York Court of Appeals has now answered that question in the affirmative, adding that it would consider any suit limitations condition that bars a suit for replacement cost coverage benefits for property that cannot be reasonably replaced within two years to be unreasonable and unenforceable:

"[A]n agreement which modifies the Statute of Limitations by specifying a shorter, but reasonable, period within which to commence an action is enforceable" (John J. Kassner & Co. v City of New York, 46 NY2d 544, 551 [1979]; emphasis added). We conclude that the contractual period at issue here — two years from the date of "direct physical loss or damage" (i.e., from the date of the fire) — is not reasonable if, as the Second Circuit's question requires us to assume, the property cannot reasonably be replaced within two years.

It is true, as the District Court pointed out, that there is nothing inherently unreasonable about a two-year period of limitation. In fact, we have enforced contractual limitation periods of one year (Blitman Constr. Corp. v Insurance. Co. of N. Am., 66 NY2d 820 [1985]; Sapinkopf v Cunard S.S. Co., Ltd., 254 NY 111, 114 [1930]) and six months (Continental Leather Co. v Liverpool, Brazil & Riv. Plate Steam Nav. Co., 259 NY 621 [1932]; Aron & Co. v Panama R.R. Co., 255 NY 513, 519 [1931]; see also John J. Kassner, 46 NY2d at 552). The problem with the limitation period in this case is not its duration, but its accrual date. It is neither fair nor reasonable to require a suit within two years from the date of the loss, while imposing a condition precedent to the suit — in this case, completion of replacement of the property — that cannot be met within that two-year period. A "limitation period" that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim. It is true that nothing required defendant to insure plaintiff for replacement cost in excess of actual cash value, but having chosen to do so defendant may not insist on a "limitation period" that renders the coverage valueless when the repairs are time-consuming.

We have found no case in which we have squarely held that an otherwise reasonable limitation period may be rendered unreasonable by an inappropriate accrual date. We think, however, that the law was correctly stated in Judge Crane's dissenting opinion in Continental Leather Co.: "[T]he period of time within which an action must be brought . . . should be fair and reasonable, in view of the circumstances of each particular case . . . . The circumstances, not the time, must be the determining factor" (259 NY at 622-623). While that rule was stated in a dissent, the majority, in affirming without opinion, apparently disagreed not with the principle but with its application to the case. The Appellate Division opinion that we affirmed in Continental Leather stated essentially the same rule in saying that the issue was whether the plaintiff had "a reasonable opportunity to commence its action within the period of limitation" (Continental Leather Co. v Liverpool, Brazil & Riv. Plate Steam Nav. Co., Ltd., 234 App Div 386, 387 [2d Dept 1932]).

Blitman also supports our holding here. In that case, we enforced an agreed-upon twelve-month limitation period, rejecting the insured's argument that it was "commercially unreasonable" under the circumstances (66 NY2d at 823). But in doing so, we pointed out that the policy enabled the insured to "protect itself by . . . beginning an action before expiration of the limitation period" (id.). Here, the insured did begin an action on the last day of the limitation period — and the insurer successfully argued that that action was brought too soon. It is unreasonable for it now to say, as it in substance does, that a day later would have been too late.

Some legal commentators has opined that this decision has limited precedential value or impact.  I disagree.  Insureds and their public adjusters will now argue in both building and contents loss claims that where the insured property "cannot reasonably be replaced" within two years the insurer must consider payment beyond the loss's two-year anniversary.  First-party property coverage suits brought after that two-year anniversary will no longer be subject to automatic dismissal based on a clear violation of the policy's two-year suit limitations condition.  Insureds undoubtedly will argue that they could not reasonably repair or replace the insured property within that two-year period and, therefore, should not be subject to the policy's two-year suit limitation.  Property insurers that previously had been able to take down reserves on open claims for replacement costs holdbacks will no longer be able to do so confidently in all claim situations.  Insurers that seek to avoid the impact of this decision by making it clear that damaged or destroyed property must be repaired or replaced within that two-tear period may face legal challenges and court nullification of such redrafted conditions based on the Court of Appeals' expressed view that such a condition would be unreasonable and unenforceable.

Of course, who's to say when it is that insured property "cannot reasonably be replaced" within two years after its damage or destruction?  What test or standard will be utilized to assess whether the reasons given for such delay are reasonable?  And does the court's use of the adverb "reasonably" mean that all disputes over a more than two-year delay in repair or replacement will involve one or more questions of fact, not amenable to summary disposition on motion?  We shall see.

Redefining Vandalism 1,558 Years Later

COMMERCIAL PROPERTY – VANDALISM – INTENT & STATE OF MIND OF THE VANDAL – MALICE
Georgitsi Realty, LLC v Penn-Star Ins. Co.
(Ct. Apps., decided 10/17/2013)


Till Goths, and Vandals, a rude Northern race, Did all the matchless Monuments deface.
John Dryden, "To Sir Godfrey Kneller" 47-48 (1694)

If Valentinian III had not been assassinated in 455 AD, his daughter Eudocia had not married Petronius Maximus' son Palladius instead of her original betrothed, Vandal king Genseric's son Huneric, and the Vandals had not then sacked Rome, marking the end of the Roman Empire, what term would we be using for the willful and malicious or mischievous damage or destruction of property without permission?  Hunnism?  Gothism?  Visigothism?

Since its first appearance in 1530 or 1794, the term "vandalism" has meant the willful and malicious or mischievous damage to or destruction of someone else's property without permission.  King Genseric's intent and state of mind was never in doubt.  He intended to and reportedly did "sack" Rome, even if that sacking included the burning of only one church.  But it was the stripping and thieving of the gold and bronze roof shingles of the Temple of Jupiter Optimus Maximus, and the intentional defacement of Rome's artwork, statues and monuments that reportedly prompted French Bishop Henri Grégoire to coin the term vandalism to describe the destruction of artwork following the French Revolution.

Criminological research into vandalism reportedly has found that it serves many purposes for those who engage in it and stems from a variety of motives. Sociologist Stanley Cohen and criminologist Mike Sutton have enumerated seven different types of vandalism:

1. Acquisitive vandalism (looting and petty theft). 
2. Tactical vandalism (to advance some end other than acquiring money or property – such as breaking a window to be arrested and get a bed for the night in a police cell).
3. Ideological vandalism (carried out to further an explicit ideological cause or deliver a message).
4. Vindictive vandalism (for revenge). 
5. Play vandalism (damage resulting from children’s games). 
6. Malicious vandalism (damage caused by a violent outpouring of diffuse frustration and rage that often occurs in public settings).
7. Peer status motivated vandalism.

So what if your neighbor hires a contractor to build a new building on the lot right next to yours, and the contractor's excavation of that adjacent lot, which continued in spite of the issuance of "stop work" orders by the local building department and a temporary restraining order by a local court, causes your building's foundation and walls to crack?  Is that vandalism?  To your building?  Covered vandalism?  In this case, the New York Court of Appeals said yes, it could be.

Penn-Star Insurance Company issued a broad form, named perils policy of commercial insurance to the plaintiff, Georgitsi Realty, LLC, covering "direct physical loss ... or damage ... caused by or resulting from" any of 14 kinds of events or perils, including vandalism, which the policy defined as "meaning willful and malicious damage to, or destruction of, the described property."  The policy covered plaintiff's four-story apartment building in Park Slope, Brooklyn, New York.  Armory Plaza, Inc., the owner of the lot adjacent to plaintiff's property, decided to build a new building and underground parking garage on its property and hired a contractor to excavate for that new construction. According to the plaintiff, the excavation caused cracks in the walls and foundations of plaintiff's building.  As the cracks became more pronounced and the building began to settle, plaintiff feared the building would collapse. Plaintiff complained to the New York City Department of Buildings, which issued a series of violations and "stop work" orders. Plaintiff alleged that the violations resulted in guilty pleas or defaults and fines totaling more than $36,000, but that the stop work orders were ignored and the contractors kept working. Plaintiff obtained a temporary restraining order from New York Supreme Court, directing the adjacent property owner and its contractors "to cease all construction and/or excavation work." This order too was ignored, according to plaintiff.

Plaintiff's building on left; Armory Plaza's new building on right after completion.

Plaintiff made a claim for damage to its building caused by the excavation contractor, contending that the damage was covered due to that contractor's vandalism.  Penn-Star denied coverage on the basis that there was no willful and malicious damage "to the described property" because there was no evidence that the excavation contractor intended to and did maliciously damage plaintiff's property.  Plaintiff sued for breach of contract and the New York Supreme Court action was removed to federal court.

In granting Penn-Star's motion for summary judgment, the US Eastern District Court held that because the policy clearly stated that the willful and malicious damage or destruction must be to "the described property," and plaintiff was not alleging that the adjacent property owner or excavator acted with deliberate intent to damage or destroy the plaintiff's building, the policy did not afford vandalism coverage for plaintiff's building damage.

Plaintiff appealed that decision to the US Court of Appeals for the Second Circuit, which, based on its finding that "New York case law on the circumstances under which activities conducted on adjacent property can constitute vandalism is unclear", certified two questions to the New York Court of Appeals:

1. For purposes of construing a property insurance policy covering acts of vandalism, may malicious damage be found to result from an act not directed specifically at the covered property? 
2. If so, what state of mind is required?

In a 6-1 opinion authored by Judge Robert Smith, the New York Court of Appeals answered the two certified questions as follows:

1. Yes.
2. The state of mind is the same that would be required to award punitive damages against the alleged vandal: such a conscious and deliberate disregard of the interests of others that the conduct in question may be called willful or wanton.

Relying on a 1976 Appellate Division, Second Department decision, and a 1985 6th Circuit US Court of Appeals' decision, the majority reasoned:

We see no reason why the term "vandalism" should be limited to acts "directed specifically at the covered property." Vandalism, as the term is ordinarily understood, need not imply a specific intent to accomplish any particular result; vandals may act simply out of a love of excitement, or an unfocused desire to do harm, or (as in Cresthill, Louisville, and in the present case) out of a desire to enrich oneself without caring about the consequences to others. Nor does it seem relevant that the alleged act of vandalism here—as in Cresthill and Louisville—did not bring the alleged vandals in direct contact with the covered property. Where damage naturally and foreseeably results from an act of vandalism, a vandalism clause in an insurance policy should cover it.

With respect to the Second Circuit's second certified question -- concerning what state of mind is required for vandalism to be said to have occurred -- the majority held:

In common speech, and by the express terms of the policy in suit, vandalism is "malicious" damage to property. The Second Circuit's second question asks, in essence, what state of mind amounts to "malice" for these purposes. We answer by adopting, insofar as it relates to property damage, the formulation we have used in reviewing awards of punitive damages. Conduct is "malicious" for these purposes when it reflects "such a conscious and deliberate disregard of the interests of others that [it] may be called wilful or wanton" (Marinaccio v Town of Clarence, 20 NY3d 506, 511 [2013], quoting Dupree v Giugliano, 20 NY3d 921, 924 [2012]; see also Prozeralik v Capital Cities Communications, 82 NY2d 466, 479 [1993]; Carvel Corp. v Noonan, 350 F3d 6, 24 [2d Cir 2003]; Prosser & Keeton, Torts § 2 at 9 [5th ed 1984]). This familiar test, we believe, will serve to distinguish between acts that may fairly be called vandalism and ordinary tortious conduct. Insurance against vandalism should not be converted into something approaching general coverage for property damage. Insureds who want broader coverage should obtain it and pay an appropriate premium.

It is important to understand that the New York Court of Appeals did not decide plaintiff's appeal of the federal district court's grant of summary judgment to Penn-Star; it only answered the two certified questions put to it.  If the case continues (is not settled), the Second Circuit will decide the pending appeal based on the New York Court of Appeals' answers to the certified question.  What that means is that the Second Circuit may reverse the grant of summary judgment to Penn-Star based on there being questions of fact as to whether the excavation contractor's conduct was both "willful and malicious".

In her dissent, Judge Sheila Abdus-Salaam did not disagree with the majority's answer to the first certified question, but did disagree somewhat with how majority answered the second certified question:

I would hold that, to recover under a policy insuring against a loss caused by vandalism, the insured must prove that the damage was caused by a malicious act intended to damage property, even if not the insured's specific property. Such an evidentiary requirement would better confine vandalism coverage to the bounds contracted for by the parties to an insurance contract, and prevent coverage from extending to willful and malicious acts not properly categorized as vandalism because property damage was not the actor's primary intent.

The outcome of this case is likely explained by the excavation contractor's continued work in spite of the stop work orders and TRO.  Regardless of whether you believe that the New York Court of Appeals has broadened the scope of vandalism coverage in New York with this decision, absent explicit policy language addressing the issue, New York insurers must now consider vandalism claims that stem from conduct not specifically directed at and occurring off or away from the insured property.

Defamation Claim Against Property Insurer Dismissed

COMMERCIAL PROPERTY – ARSON – DEFAMATION – COMMON INTEREST QUALIFIED PRIVILEGE – GENERAL BUSINESS LAW § 349
Farm Fresh Gourmet Salads, LLC v. Sentinel Ins. Co.
(Sup.Ct., NY Co., decided 1/10/2014)

It has been my observation that the assertion of defamation causes of action against property insurers has become more common over the past few years, especially in claims investigated or denied for possible fraudulent or intentional conduct.  I guess that's why I developed a training presentation on this topic nearly four years ago.  I've also blogged about a number of New York cases before, which you can review here.

In this case, Sentinel investigated its insured's fire loss and denied coverage based, in part, on its conclusion that the insured caused or procured the fire.  The disclaimer letter sent to the insured and copied to the insured's attorney, public adjuster and insurance agent stated: "Sentinel's investigation has determined that the fire was the result of an intentional act caused or procured by the insured, or someone acting on its behalf."

A summons and complaint followed, with the complaint unsurprising alleging a breach of contract cause of action.  Presumably in an effort to recover plaintiffs' attorneys' fees in the event they prevailed, also somewhat unsurprisingly the complaint alleged a violation of New York General Business Law § 349, New York's deceptive business acts and practices act.

But what caught my eye when I read this decision was its mention of the defamation causes of action against the insurer AND its adjuster who had signed the disclaimer letter.  Is it possible to deny coverage based on the insurer's conclusion that its insured intentionally caused or procured the loss, or breached the policy's fraud/misrepresentation condition, without incurring defamation liability?  As this case illustrates, the answer is yes, of course it is.

Defendants made a motion for partial summary judgment to dismiss the complaint's two defamation causes of action.  In GRANTING that motion, New York County Supreme Court Justice Eileen Rakower agreed that the common interest qualified privilege applied to preclude defamation liability:

Defamation arises from "the making of false statement which tends to expose the plaintiff to public contempt, ridicule, aversion or disgrace, or induce an evil opinion of him in the minds of right-thinking persons, and to deprive then of their friendly intercourse in society." Foster v. Churchill, 87 N.Y.2d 744 (1996)(citations omitted).

The elements of defamation "are a false statement, published without privilege or authorization to a third party, constituting fault as judged by, at a minimum, a negligence standard, and, it must either cause special harm or constitute defamation per se." Dillon v. City of New York, 261 A.D.2d 34, 38 [1st Dept 1999]. "Truth provides a complete defense to defamation claim." (Id.).

"Slander per se" "consist of statements (I) charging plaintiff with a serious crime; (ii) that tend to injure another in his or her trade, business or profession; (iii) that plaintiff has a loathsome disease; or (iv) imputing unchastity to a woman." Liberman v. Gelstein, 80 N.Y.2d 429, 435 (1992).

"Even though a statement is defamatory, there exists a qualified privilege where the communication is made to persons who have some common interest in the subject matter." (Id. at 751). "A privileged communication is one which, but for the occasion on which it is uttered, would be defamatory and actionable." (Id.). "The defense of qualified privilege will be defeated by demonstrating a defendant spoke with malice. Moreover, the conditional or qualified privilege is inapplicable where the motivation for making such statements was spite or ill will (common law malice) or where the statements [were] made with [a] high degree of awareness of their probable falsity (constitutional malice)." (Id.) (citations omitted).

Here, Defendants have established prima facie evidence of entitlement to summary judgment on the defamation/libel claims by establishing that the alleged defamatory statement was made to persons who share a common interest in the subject matter and therefore was subject to qualified privilege. The only persons that the allegedly defamatory statement was published to were Plaintiffs' lawyer, and Plaintiffs' agents handling their insurance affairs (Plaintiffs' public adjuster and insurance agent). In additionally, Plaintiffs have presented no evidence of malice to defeat this privilege.

It is important to understand that the court did not conclude that the statement contained in Sentinel's disclaimer letter was defamatory.  It concluded that even if it were, the common interest qualified privilege, undefeated by any showing of malice, applied to preclude defamation liability.

Defendants also moved for summary judgment to dismiss plaintiffs' GBL § 349 cause of action, arguing that plaintiffs had not sufficiently alleged the type of consumer-oriented deceptive practices that this statute was intended to eradicate.  Because plaintiffs did not oppose that aspect of defendants' motion, the court granted summary judgment on and dismissed that cause of action, as well.

The 10-Year Life Cycle of a New York Consequential Damages Claim

COMMERCIAL PROPERTY – CONSEQUENTIAL DAMAGES
Stern v. Charter Oak Fire Ins. Co.
(4th Dept., decided 9/28/2012)

Who out there other than I remembers this case and the position it forever occupies in the evolutionary chain of the recoverability of consequential damages against property insurers in New York State?  Those who do might understand then why I am blogging about a one-line decision.  

Vivian Stern made a claim to The Charter Oak Fire Insurance Company (Travelers) for losses stemming from an armed robbery that occurred at her jewelry store on or before December 28, 2001.  For reasons not apparent in the 13 (!) reported decisions of the Fourth Department in this case (most regarding motion practice), a dispute arose between the parties and Stern sued Charter Oak in 2002 for both contractual damages and consequential damages, including future lost profits and future sale value of the business.

In September 2005, Charter Oak moved to dismiss the complaint's consequential damages claim arguing, among other things, that coverage for such damages was negated by the policy's consequential loss exclusion.  Onondaga County Supreme Court (Deborah H. Karalunas, J.) granted that motion and plaintiff appealed.

In a decision issued March 16, 2007, the Appellate Division Fourth Department, unanimously affirmed Supreme Court's order dismissing the consequential damages claim, holding:

Supreme Court properly granted Charter Oak's motion to dismiss plaintiff's claim for consequential damages, including future lost profits after December 28, 2001 and future sale value of the business. The court also properly granted Charter Oak's motion to preclude plaintiff's expert from testifying with regard to that claim and denied plaintiff's cross motion seeking partial summary judgment determining that the expert's testimony was admissible at trial. The insurance policy expressly excludes coverage for the consequential damages claimed by plaintiff (see Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 37 AD3d 1184 [2007]; J.R. Adirondack Enters. v Hartford Cas. Ins. Co., 292 AD2d 771, 772 [2002]; Crawford Furniture Mfg. Corp. v Pennsylvania Lumbermens Mut. Ins. Co., 244 AD2d 881 [1997]).

In that decision, keen-eyed property coverage professionals will notice the Fourth Department's citation to its decision of one month earlier in Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y.,which decision those same professionals will also recall the New York Court of Appeals reversed in the watershed decision on the recoverability of consequential damages against New York property insurers in February 2008.

So what's a robbed jewelry store owner to do under those circumstances?  Make a motion to renew the motion that resulting in the adverse order based on a change in the law, of course.  Unfortunately, plaintiff made such a motion to the Appellate Division, which in July 2008 denied her motion and referred her back to Supreme Court with the instruction that "[i]f [she was] is aggrieved by an order of Supreme Court, plaintiff's remedy is an appeal to this Court from that order."

The order to which the Appellate Division was referring was one apparently granted by Supreme Court Justice Karalunas on May 5, 2008, which had denied plaintiff's Bi-Economy-based motion to renew her opposition to Charter Oak's original motion to dismiss plaintiff's consequential damages claim based on the doctrine of "law of the case", which essentially is a "because I already said no" legal doctrine that courts sometimes apply when litigants want a do-over.

So plaintiff appealed that order back to the Appellate Division, Fourth Department, and in February 2009 that court, in light of the intervening opinion of the Court of Appeals in Bi-Economy, modified the order appealed from to grant plaintiff's motion to renew her opposition to Charter Oak's original motion and then, on such renewal, denied Charter Oak's motion to dismiss and reinstated the plaintiff's consequential damages claim:

Following our decision in the prior appeal, the Court of Appeals reversed the order in Bi-Economy Mkt., Inc., concluding under circumstances similar to those present in this case that a contractual exclusion for consequential losses in the insurance policy issued to the plaintiff business did not bar its claim for consequential damages caused by the defendant insurer's alleged breach of the terms of the policy (Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 194-196 [2008]; see Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203 [2008]).

While the instant action remained pending, plaintiff moved, inter alia, for leave to renew her opposition to Charter Oak's motion to dismiss her claim for consequential damages, based upon the decisions of the Court of Appeals in Bi-Economy Mkt., Inc. and Panasia Estates, Inc.  Supreme Court erred in denying that part of plaintiff's motion for leave to renew with respect to consequential damages based upon the doctrine of law of the case and instead should have granted leave to renew and, upon renewal, denied Charter Oak's motion.  "[A] court of original jurisdiction may entertain a motion to renew or [to] vacate a prior order or judgment even after an appellate court has rendered a decision on that order or judgment" (Tishman Constr. Corp. of N.Y. v City of New York, 280 AD2d 374, 377 [2001]). Furthermore, we conclude that, because "the analysis employed by this [C]ourt in the prior appeal no longer reflects the current state of the law, the doctrine of law of the case should not be invoked to preclude reconsideration of" Charter Oak's motion to dismiss plaintiff's claim for compensatory damages (Szajna v Rand, 131 AD2d 840, 840 [1987]; see Foley v Roche, 86 AD2d 887 [1982], lv denied 56 NY2d 507 [1982]). We therefore modify the order accordingly.

Rearmed with her complaint's consequential damages claims, plaintiff went back to Supreme Court where in late 2009 or early 2010 the parties moved and cross-moved for summary judgment.  As best as can be discerned from the limited information available on eCourts, those motions resulted in a November 18, 2010 order denying plaintiff's subsequent motion to correct the motion record and holding that: (1) Charter Oak had breached the insurance policy; (2) that the plaintiff's alleged business failure (aka consequential damages) was not proximately caused by that breach; and (3) that plaintiff was entitled to money damages of $7,887.19, plus interest.  That's right -- $7,900.  The printing costs already expended in the two previous trips to the Fourth Department had to cost more than the award amount.

Apparently having never heard of throwing good money after bad, or perhaps having unlimited resources to file and respond to six (!) more appellate motions prior to perfecting an appeal (five for filing extensions and one pro hac vice admission of new appellate counsel for Charter Oak), coupled with the fact that a relative of some kind assumed lead counsel responsibilities for her, plaintiff appealed Supreme Court's order denying her consequential damages and awarding her only $7,887.19 in contractual damages, plus interest.

Which brings the story of Stern v. Charter Oak to present.  In a "for reasons stated in the decision at Supreme Court" one-sentence memorandum decision issued on September 28, 2012, the Fourth Department unanimously affirmed Justice Karalunas' nth order, effectively concluding the case.  Except, of course, for perhaps another motion to renew and a motion for leave to appeal to the Court of Appeals.  Set your Google Scholar alert.