Communications Between Outside Coverage Counsel and His Insurer Client Regarding "the Investigation and Potential Rescission of a Claim" Ordered Disclosed

HOMEOWNERS -- APPLICATION MISREPRESENTATION -- RESCISSION -- ATTORNEY-CLIENT PRIVILEGE -- DISCOVERY

Prorokovic v. United Property & Casualty Ins. Co.

(S.D.N.Y. 02/02/2022)

From time to time I remind my insurer clients that before a first-party insurance claim has been investigated and coverage denied, not everything they or their adjusters write to me or I write to them is protected from discovery by the doctrine of attorney-client privilege.  I also remind them that my role is not to assist them in the investigation of a claim, but to provide a legal advice and opinion to them regarding whether a particular loss and its related claim are covered under the particular policy at issue.  

Why do I remind my insurer clients of this?  Because some New York courts consider outside counsel who assist their insurer clients in investigating first-party property losses and claims to be performing "claim handling activities" that are subject to discovery.  And because of cases like this one.  

On November 5, 2020 the plaintiffs suffered a total fire loss of their recently purchased New City, New York home and initiated a claim with defendant UPCIC under their homeowners insurance policy.  They had applied for and obtained their homeowners policy in August 2020, stating , among other things, on the policy's application that the home's "roof age" was 18 years and that "the dwelling both has a Certificate of Occupancy and is not an incomplete newly constructed home. If under additional construction or renovation, will be completed within the next 90 days."

On October 13, 2020 UPCIC issued a notice of cancellation, citing the policyholder's failure to send requested self-inspection photos to confirm the property's condition.  On October 16, 2020, UPCIC emailed the insured's agent to advise that home inspection photos showed the roof to be in very poor condition, but that UPCIC would rescind the policy cancellation if the roof was fully replaced before the cancellation date of November 17, 2020.  

In investigating the fire, UPCIC learned that:

• the roof was approximately 27 years old; 
• construction of a substantial addition to the home had begun after the September 17, 2020 closing date, was underway at the time of the fire, and was not expected to be complete until January 2021; and
•  the plaintiffs were not occupying the home at the time of the policy's application, but had moved into the house on October 1, 2020.

UPCIC's investigation of the loss and claim included retaining outside counsel on November 17, 2020 to conduct an examination under oath of the policyholder, which was done on December 11, 2020.  

On January 19 2021, UPCIC rescinded the policy and denied coverage, stating, in part: 

UPC has determined that you made material misrepresentations and/or false statements on the Application for Insurance. The misrepresentations identified include, but are not limited to, false statements and/or concealment of the age of the roof, condition of the roof, concealment of renovations and/or construction efforts, questionable habitability of the subject premise, occupancy, etc. Had UPC known the true facts, the policy would not have been issued or would have been written under different terms, conditions, and premiums. As a result, the policy issued by UPC, policy number *****, will be rescinded and any policy premiums paid to date will be refunded. Therefore, there is no coverage available for the above-referenced loss. UPC denies any and all coverage.

According to UPCIC's counterclaim in this action, on January 20, 2021, a UPCIC underwriter signed an affidavit stating that "if the Insured had provided the correct information regarding the roof update year, the occupancy prior to September 17, 2020, the fact that construction on the property would not be completed in ninety (90) days, or answered 'no' in response to a question on the Application regarding the occupancy and roof, then United would either not have written the policy or have written it under different terms."

On January 22, 2021, UPCIC sent the plaintiffs a "Policy Voidance" letter based on “[m]isrepresentation of material facts in obtaining a homeowners insurance policy with UPC Insurance Company for the property located at [address], by falsely providing the incorrect roof age, incorrect occupancy type and number of months the risk is occupied or rented. In addition, there is existing damage to premises which was not disclosed on application."  A week later UPCIC refunded plaintiffs the $1,366.35 they had paid in premiums up to that point by direct deposit into their bank account. 

On March 8, 2021, plaintiffs commenced this action, seeking $600,000 in compensatory damages and $1,000,000 in punitive damages based on UPCIC allegedly having acted "intentionally, maliciously, wrongfully, and in bad faith" in disclaiming coverage.

In the course of discovery plaintiffs sought production of communications between retained outside counsel and UPCIC from when counsel was retained on November 17, 2020  through the date of UPCIC's January 19, 2021 declination.  When UPCIC refused to disclose those communications, plaintiffs' counsel wrote to the court on December 15, 2021 to request a conference, claiming 

Defendant has asserted the frivolous position that virtually its entire claim file, underwriting guidelines and communications with attorneys and non-attorneys pre-dating its declination decision, are protected from disclosure under the attorney-client and work product privileges. The parties have met and conferred in good faith on multiple occasions but have reached an impasse.

This decision is the result of that conference.  

In opposing plaintiffs' demand for production of outside counsel communications in this case, UPCIC argued that these communications were protected by attorney-client privilege because 

they relate to the retention of outside counsel for legal advice relating to the investigation and potential rescission of a claim. This is fundamentally different than advice relating to the processing of a claim, or the denial of a claim, in the ordinary course of business. UPC is in the business of processing claims, but is not in the business of rescinded policies.

Aside from the fact that claims aren't rescinded (policies are), the judge rejected UPCIC's attempted "fine line" distinction, and ordered UPCIC to produce all responsive communications with outside counsel between November 17, 2020 and January 19, 2021: 

"New York law governs the applicability of the attorney-client privilege in this diversity case." Roc Nation LLC v. HCC Int'l Ins. Co., PLC, No. 19 Civ. 554, 2020 WL 1970697, at *2 (Apr. 24, 2020). "[U]nder New York law, an insurance company's claim handling activities are generally subject to discovery even if they were performed by an attorney. Id. This rule is grounded in an obvious principle: "The payment or rejection of claims is part of the regular business of an insurance company." Advanced Chimney, Inc. v. Graziano, 153 A.D.3d 478, 480, 60 N.Y.S.3d 210 (2d Dep't 2017). Thus, "[t]he key question is whether the attorney is predominantly investigating an insurance claim or providing legal advice." Roc Nation, 2020 WL 1970697, at *2 (quotation marks and citations omitted). This approach extends to evaluations of assertions of attorney-client privilege in the context of an insurance company's decision to rescind a policy based upon alleged material misrepresentations made by the insured in the procurement of the policy. See Advanced Chimney, 153 A.D.3d at 479-80. 

Here, defendant attempts to draw a fine line between its handling of plaintiffs' claim and its evaluation of the rescission option. In the first place, defendant's proposition that it is "not in the business of rescinded policies" defies logic. Defendant is in the business of providing insurance coverage; it assesses risk (and determines whether or not to provide insurance) based (at least in part) on a potential insured's application. That is precisely why policy rescissions are often based upon misrepresentations or false statements in insurance applications. Defendant's point — that it makes no money from rescinded policies — is facially true, but ignores situations (like the one at bar) where defendant rescinds a policy and avoids paying a substantial claim. In any event, in this case, defendant's decision to rescind plaintiffs' policy was inexorably intertwined with its denial of plaintiffs' claim. In other words, any advice from outside counsel related to rescission of plaintiffs' policy cannot be parsed from defendant's denial of plaintiffs' claim. Thus, defendant's communications with outside counsel were not predominantly of a legal nature and, therefore, are not protected by attorney-client privilege.[2]

I'm not fond of UPCIC's argument that there's an important difference between claim investigations and potential policy rescission investigations.  The better argument IMO would have been on the nature of each of outside counsel's communications.  

Nevertheless, this decision is another reminder to insurers in New York that not all communications with their outside counsel made prior to a declination of coverage are protected from discovery by attorney-client privilege.  If your outside counsel is not aware of this, PLEASE pass this post along to them.

Bottom line: each of outside counsel's pre-declination communications with insurers should be one of only two, distinct kinds: 

1. routine communications (requesting file materials, scheduling, etc.);
2. communications rendering legal advice that are --key words/concept -- predominantly of a legal nature.  

Not a blend of both.  One or the other. Keeping the communications separate will support  the more forceful and likely convincing argument that outside counsel communications which render only legal advice (are predominantly of a legal nature), even if made prior to the insurer-client's coverage declination, are protected from discovery by the doctrine of attorney-client privilege.  

NYS Appellate Division, Fourth Department, Holds That the Undefined Term "Reasonable Care" as Used in a Homeowners Policy's Freezing Exclusion, Is Ambiguous

PROPERTY – HOMEOWNERS POLICY – FROZEN/BURST WATER PIPES – FREEZING EXCLUSION – REASONABLE CARE TO MAINTAIN HEAT

McAleavey v. Chautauqua Patrons Ins. Co.
(4th Dept., 6/17/2021)

Some say there are two things one should never watch being made: law and sausage.  If you are one of those (who say that), avert your eyes and move along.  

The McAleaveys owned a seasonal lake house that they rarely used and which had been on the market to sell for over a year.  With respect to structures coverage, their homeowners policy with Chautauqua Patrons Insurance Company (CPIC) contained this exclusion:

    1.    Freezing, Discharge, Leakage or Overflow -Unoccupied Residence-If the residence is vacant, unoccupied (including temporary absence) or under construction and unoccupied, the insured must take reasonable care to:

a.  maintain heat in the building; or

b.  shut off the water supply and completely empty liquids from any plumbing, heating or air-conditioning system, water heater or domestic appliance.

If an insured fails to do this, we do not pay for loss caused by freezing or the resulting discharge, leakage, or overflow from such system, water heater or domestic appliance. 

Forty-three days after Mr. McAleavey was last inside the house to check on things, on February 24, 2018, the McAleaveys received word that a passerby had reported seeing water coming out of house's front door.  Following its investigation of the reported loss and related claims (during which it was learned that the furnace's circulating pump had failed, causing an upstairs toilet tank to freeze and burst, flooding the home), CPIC denied coverage based on the policy's freezing exclusion.

The McAleaveys sued and, after discovery was conducted and completed, moved and CPIC cross-moved for summary judgment.  In DENYING plaintiffs' motion and GRANTING CPIC's cross motion, Supreme Court held: 

    We turn now to the second issue before this Court, did Plaintiffs "take reasonable care to maintain heat in the building."  Plaintiff has acknowledged that from on or about January 12, 2018 to February 24, 2018, no person entered his lake home for the purpose of inspection. At the time of the loss, and for months prior, Plaintiff had set his thermostat at about 50 degrees, but had not drained the water in his house. This Court takes judicial notice that January and February are generally the two coldest months in western New York.  *  *  *  *  *

In the case at bar, the period that the house was left uninspectcd is forty three days, approximately one and a half months. One and a half months without inspection, especially when said months are January and February, results in this Court finding that Plaintiffs lack of care was unreasonable as a matter of law. 

The McAleaveys appealed and the Fourth Department unanimously REVERSED, denying CPIC's cross motion, granting plaintiffs' motion, and remitting the action back to Supreme Court for an inquest on damages: 

"`Before an insurance company is permitted to avoid policy coverage, it must satisfy' its burden of establishing that the policy does not cover the loss or that an exclusion or exemption applies, and that the policy provisions are clear and `subject to no other reasonable interpretation'" (Place v Preferred Mut. Ins. Co., 190 AD3d 1208, 1209 [3d Dept 2021], quoting Dean v Tower Ins. Co. of N.Y., 19 NY3d 704, 708 [2012]; see Gallo v Midstate Mut. Ins. Co., 45 AD3d 1492, 1493 [4th Dept 2007]). "Policy provisions must be interpreted according to common speech and consistent with the reasonable expectation of the average insured, and ambiguities are to be construed against the insurer" (Place, 190 AD3d at 1209 [internal quotation marks omitted]; see Lobello v New York Cent. Mut. Fire Ins. Co., 152 AD3d 1206, 1209 [4th Dept 2017]). 

Here, the parties correctly recognize that their dispute turns entirely on whether plaintiffs used "reasonable care" to maintain the heat in the subject house. If they did, then the loss is covered under the policy; if they did not, then the loss is not covered. 

To this end, in support of their motion for partial summary judgment, plaintiffs established as follows: the home's heating system was recently installed, was regularly maintained, and had never required repairs; Robert P. McAleavey (plaintiff) winterized the property by setting the internal temperature to approximately 50 degrees in the late fall of 2017; plaintiff checked on the home approximately 15 times during the winter of 2017-2018; during those visits, plaintiff ensured that the temperature was appropriate, that no windows were broken, that the toilets flushed, and that the water ran; and plaintiff last visited the house on January 11 or 12, 2018, at which point the interior temperature was "comfortable." Although plaintiff was unable to visit the property between mid-January and late February 2018 due to a broken leg and his resulting hospitalization, plaintiffs' submissions established that, during such period, they had no notice or reason to suspect that anything was wrong with the premises or the heating system. Moreover, plaintiffs' neighbors and realtor periodically checked on the property's exterior. 

In our view, the term "reasonable care" as used in the policy is ambiguous inasmuch as it is susceptible of at least two reasonable interpretations, at least one of which supports plaintiffs' contention that they exercised reasonable care, and this ambiguity was not resolved by extrinsic evidence (see generally Armstrong v United Frontier Mut. Ins. Co., 181 AD3d 1332, 1334 [4th Dept 2020]). 

"`[U]nder [these] circumstances, the ambiguity must be resolved against the insurer which drafted the contract'" (id.; see Cragg v Allstate Indem. Corp., 17 NY3d 118, 122 [2011]; Randolph v Nationwide Mut. Fire Ins. Co., 242 AD2d 889, 889 [4th Dept 1997]). We thus conclude that plaintiff's loss is specifically covered under the policy and that the exclusion relied on by defendant does not unambiguously apply in this case (see Gallo, 45 AD3d at 1494; see also Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640, 652 [1993]). 

Contrary to defendant's assertion and the court's conclusion, nothing in Stephenson v Allstate Indem. Co. (160 AD3d 1274 [3d Dept 2018], lv denied 32 NY3d 904 [2018]) establishes a per se rule that a policyholder's failure to conduct regular interior inspections at specific intervals, irrespective of any other efforts, constitutes a failure to use "reasonable care" to maintain heat. Rather, Stephenson granted summary judgment to the insurer because, in that case, it was "undisputed that [the policyholder] did not arrange for inspection of the premises or take any other action to ensure that adequate levels of heat were actually maintained during [the winter months]" (id. at 1276 [emphasis added]). The policyholder's wholesale neglect in Stephenson stands in stark contrast to plaintiffs' reasonable—albeit unsuccessful—efforts to maintain the heat in this case.

Does this decision stand for the proposition that the undefined term “reasonable care” as used in a policy's freezing exclusion is ambiguous and must, in the absence of extrinsic evidence or disputed facts (always?) be construed against the insurer? 

If that's the case, how is an insurer to define such a term if the policy were to include a definition? Isn’t something subjective—like the concept of reasonableness—always open to debate and/or interpretation?  How exactly is "reasonable care"--the concept--susceptible to at least two reasonable interpretations? Name two, please, because I can't think of more than one.  Isn't the Fourth Department conflating and confusing the needed quantum of reasonable care with the concept of reasonable care?  

Why doesn’t “reasonable care” simply mean what a normal, prudent person would do under the same circumstances to keep undrained water pipes from freezing during the wintertime? Property policies don’t define “promptly”, “immediately”, “temporarily” and similar words, and yet those words, although not defined or understood in exactly the same way by all people, have not been held to be ambiguous. 

Will insurers wishing to assert the freezing exclusion be required first to set specific minimums regarding how often the interior of a vacant/unoccupied house is to be checked for heat?  What ambient temperature must be maintained within a dwelling?  

Things that make you (and this coverage attorney) go hmm.  

$7,332.02 a Day -- Bench-Trying a First-Party Property Coverage Dispute

Ever wonder how the non-jury trial of a first-party property coverage dispute plays out in court?  Wonder no more.

Christine Wagner's single family home in New Hartford, New York, sustained fire damage on May 1, 2016.  She and her homeowners insurer, New York Central Mutual Fire Insurance Company, agreed that the fire destroyed the home's garage, "bonus room" above the garage, and a breezeway connecting the home to the garage.  Wagner and NYCM disagreed over the extent to which the home sustained indirect damage.  The policy afforded replacement cost coverage.

Wagner's contractor and public adjuster submitted repair estimates of approximately $411,000 (including code upgrades) and $338,000 "plus code upgrades", respectively.  NYCM obtained and submitted a contractor's estimate and its claim handler's estimate of approximately $175,000 and $216,000, respectively.  NYCM ultimately paid Wagner the approximately $216,000 amount.

Wagner sued NYCM in May 2017, seeking "the approximate sum of $100,000.00 or the appproriate amount to be determined by the court."  In March 2018 Wagner's counsel filed her note of issue and statement of readiness for a non-jury trial.

The action was tried to Oneida County Supreme Court Patrick MacRae over the course of three days on November 13, 14 and 15, 2018.  On June 26, 2019, Justice MacRae issued his 21-page, detailed decision awarding Wagner a total of $21,996.06.  A month later, Wagner filed a judgment, with interest and costs, against NYCM for $28,413.10.  Ten days later, Wagner filed a notice of appeal.

Those who would take such a first-party property coverage dispute to trial -- especially a bench trial -- would do well to review Justice MacRae's detailed decision, who began and framed his decision with:

The central question is this: is plaintiff entitled to compensation above the $216,018.92 that has been paid by defendant?  

The first factor that bears on the determination of the appropriate amount of damages is whether plaintiff has met her burden of proof. The burden here is one of preponderance. So long as plaintiff's proof is sufficient to suggest that her evidence carries sufficient weight to tip the balance in her favor, she meets that burden and, at least in the first analysis, is entitled to a finding in her favor. It is only if plaintiff has met that initial burden that the burden would shift to the defendant to come forward with evidence that at least re-balances the scale. If the defendant does this, it has overcome plaintiff's evidence and is entitled to a finding in its favor. 

Plaintiff indicated at trial that the three (3) areas in which she was claiming entitlement to more than the defendant paid were: 1. Contents; 2. Code upgrades; and 3. An additional amount for the general cost of repair (Tr. 5-9).

On page 21, Justice MacRae concluded:

On the basis of the foregoing, plaintiff is awarded the following amounts above the $216.018.92 already paid by defendant.  For contents, $4.079.36; For the following code items: knob and tube wiring, $12,750.00; sheathing upgrade, $1,792.20; insulation upgrade, $1,699.50; and deck attachment, $1,675.00, for a total for code upgrades of $17,916.70; for a total award of $21,996.03.

On July 17, 2020, the Appellate Division, Fourth Department, unanimously AFFIRMED Justice MacRae's decision and the corresponding judgment without writing.  I surmise the Fourth Department concluded that Justice MacRae had written enough.

If there is a moral of this story, I suppose it could be that trying property coverage actions to a single judge rather than a petit jury might be the way to go for parties of the first and second part to insurance contracts, especially during a pandemic when jury trials are few and far between -- literally and figuratively.  I've tried several first-party property coverage action to a judge with good results for my insurer clients.  Especially when such a trial revolves around issues of scope and pricing/damages -- issues often compared in potential juror engagement and interest to watching paint dry -- entrusting the outcome to a sitting judge should, at least in theory, always be less risky (albeit usually less instant) than asking a jury to pay focused attention for three days, understand the technical (and dry) testimony on damages, and render a well-reasoned and accurate verdict.  Right?

Injured Party/Judgment Creditor Who Obtains Assignment of Insureds' Bad Faith Claim After Conclusion of Direct Action May Bring Second Action Against Liability Insurer

HOMEOWNERS – LIABILITY – EXCESS JUDGMENT – STANDING – BAD FAITH – INSURANCE LAW 3420(A)(2) & (B)(1) 

Corle v. Allstate Ins. Co.
(4th Dept., 6/8/2018)

Sometimes called New York's direct action statute, New York Insurance Law § 3420(b)(1) states:

(b) Subject to the limitations and conditions of paragraph two of subsection (a) of this section, an action may be maintained by the following persons against the insurer upon any policy or contract of liability insurance that is governed by such paragraph, to recover the amount of a judgment against the insured or his personal representative: 

    (1) any person who, or the personal representative of any person who, has obtained a judgment against the insured or the insured's personal representative, for damages for injury sustained or loss or damage occasioned during the life of the policy or contract[.]

Teeter accidentally shoots Corle, and Corle sues Teeter.  Allstate disclaims coverage to Teeter, asserting that the accidental shooting was not a covered loss under the policy.  Corle proceeds with his personal injury action against Teeter and obtains a judgment of over $350,000 against him.

Corle then sues Allstate as a judgment creditor under Insurance Law § 3420 (a) (2) and (b) (1), and Supreme Court grants Corle's motion for summary judgment, holding that the shooting was a covered loss under Teeter's parents' homeowners insurance policy with Allstate, awarding Corle the policy's $50,000 limit.

This is not that action, however.  This is Corle's second action against Allstate, commenced after the Teeters assigned their rights and claims against Allstate to Corle, who then sued Allstate for disclaiming coverage in bad faith.

Allstate moved to dismiss this action, arguing primarily that Corle should have taken the assignment and included his bad faith claim in his first action under Insurance Law § 3420(b)(1) against Allstate -- that Corle's judgment in that action for $50,000 was res judicata, barring any additional recovery against Allstate.

The Appellate Division, Fourth Department, disagreed:

Contrary to defendant's contention, we conclude that the failure of James [Corle] to litigate the bad faith claim in the earlier Insurance Law § 3420 (a) (2) action does not bar litigation of that claim in the instant action. "Under the doctrine of res judicata, a party may not litigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter. The rule applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation . . . Additionally, under New York's transactional analysis approach to res judicata, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy' " (Matter of Hunter, 4 NY3d 260, 269 [2005]; see O'Brien v City of Syracuse, 54 NY2d 353, 357 [1981]).  

Insurance Law § 3420 (b) (1) provides that, "[s]ubject to the limitations and conditions of paragraph two of subsection (a) of this section, . . . any person who . . . has obtained a judgment against the insured or the insured's personal representative[] for damages for injury sustained . . . during the life of the policy or contract" may maintain an action against the insurer "to recover the amount of a judgment against the insured or his personal representative." Such an action may be "maintained against the insurer under the terms of the policy or contract for the amount of such judgment not exceeding the amount of the applicable limit of coverage under such policy or contract" (§ 3420 [a] [2]).  

We conclude that, under Insurance Law § 3420 (a) (2) and (b) (1), an injured party's standing to bring an action against an insurer is limited to recovering only the policy limits of the insured's insurance policy. Contrary to defendant's contention, we conclude that, if an injured party/judgment creditor seeks to recover from the insurer an amount above the insured's policy limits on a theory of liability beyond that created by Insurance Law § 3420 (a) (2), the statute does not confer standing to do so. However, if the insured assigns his or her rights under the insurance contract to the injured party/judgment creditor, then the injured party/judgment creditor may simultaneously bring a direct action against the insurer pursuant to Insurance Law § 3420 (a) (2) along with any other appropriate claim, including a bad faith claim, seeking a judgment in a total amount beyond the insured's policy limits.  

Here, when James [Corle] commenced the prior action pursuant to Insurance Law § 3420 (a) (2) individually and on behalf of [his injured son,] Colin, the Teeters had not yet assigned their rights under the insurance contract to James and Colin. As a result, James did not have standing to bring a bad faith claim against defendant (cf. Bennion v Allstate Ins. Co., 284 AD2d 924, 924-926 [4th Dept 2001]). Thus, because James lacked standing to bring a bad faith claim against defendant at the time he brought the Insurance Law § 3420 (a) (2) action, we conclude that the doctrine of res judicata does not bar this action (see generally Hunter, 4 NY3d at 269; Summer v Marine Midland Bank, 227 AD2d 932, 934 [4th Dept 1996]), and defendant's motion insofar as it sought to dismiss the complaint pursuant to CPLR 3211 (a) (5) was properly denied. 

In so holding, the Fourth Department declined to follow the holding on similar facts of the First Department in a 2010 case:

We recognize that the First Department held otherwise on similar facts in Cirone v Tower Ins. Co. of N.Y. (76 AD3d 883 [1st Dept 2010], lv denied 16 NY3d 708 [2011]).  To the extent that the First Department in Cirone concluded that an injured person/judgment creditor who commenced an action against the insurer pursuant to Insurance Law § 3420 (a) (2) had standing to assert a bad faith settlement practices claim in that action in the absence of an assignment from the insured, we disagree with that conclusion and decline to follow Cirone. 

The Fourth Department also concluded that. contrary to Allstate's argument, Corle's complaint in this action sufficiently stated a cause of action for insurer bad faith:

We reject defendant's further contention that the court erred in denying its motion insofar as it sought to dismiss the complaint under CPLR 3211 (a) (7), for failure to state a cause of action. Viewing the facts as alleged by plaintiffs in the light most favorable to them and affording plaintiffs all favorable inferences (see generally Whitebox Concentrated Convertible Arbitrage Partners, L.P. v Superior Well Servs., Inc., 20 NY3d 59, 63 [2012]), we conclude that plaintiffs sufficiently stated a cause of action for bad faith against defendant.

With the apparent split in appellate authority on res judicata issue, it remains to be seen whether Allstate will seek leave to appeal this decision to the New York Court of Appeals.

That's Incredible! (as a Matter of Law)

HOMEOWNERS – PROOF OF LOSS CONDITION – SUMMARY JUDGMENT 

Finley v. Erie and Niagara Ins. Assn.
(4th Dept., 6/15/2018)

Russell Finley's home burned down.  As was its contractual right under the policy, his property insurer, Erie and Niagara Insurance Association, requested a sworn proof of loss and denied coverage when it did not receive that proof of loss within the policy's required 60-day period.  Finley sued and testified during his deposition that he had timely submitted the requested proof of loss.

Anyone involved in litigation knows that credibility ordinarily is a issue of fact for the factfinder(s) at trial.  But are there ever instances in which a court may properly determine credibility as a matter of law?

Yes, reminds the Fourth Department, because motion and appellate courts are not required to shut their eyes "to the patent falsity of a defense."

Erie and Niagara successfully moved for summary judgment on its breach of the policy's proof of loss condition defense, and Finley appealed.  In affirming summary judgment to the insurer, the Appellate Division, Fourth Department, held:

We reject plaintiff's contention that the court erred in granting the motion. "It is well settled that the failure to file sworn proofs of loss within 60 days of the demand therefor constitutes an absolute defense to an action on an insurance policy absent a waiver of the requirement by the insurer or conduct on its part estopping its assertion of the defense' " (Bailey v Charter Oak Fire Ins. Co., 273 AD2d 691, 692 [3d Dept 2000]; see Igbara Realty Corp. v New York Prop. Ins. Underwriting Assn., 63 NY2d 201, 209-210 [1984]; Alexander v New York Cent. Mut., 96 AD3d 1457, 1457 [4th Dept 2012]). Defendant, as the party seeking summary judgment, met its initial burden on the motion by establishing that plaintiff failed to provide a sworn proof of loss within the requisite time (see generally Schunk v New York Cent. Mut. Fire Ins. Co., 237 AD2d 913, 914 [4th Dept 1997]), and that defendant did not waive the requirement. In response, plaintiff failed to raise a triable issue of fact whether he substantially complied with the proof of loss requirement (cf. Delaine v Finger Lakes Fire & Cas. Co., 23 AD3d 1143, 1144 [4th Dept 2005]).  

We reject plaintiff's contention that he raised a triable issue of fact by submitting his deposition testimony in which he averred that he timely submitted the requisite proof of loss to defendant, and that the court made an improper credibility determination in rejecting that testimony and his testimony regarding a lack of knowledge of the cause of the fire. Although "we agree with the general premise that credibility is an issue that should be left to a [factfinder] at trial, there are of course instances where credibility is properly determined as a matter of law'" (Sexstone v Amato, 8 AD3d 1116, 1116 [4th Dept 2004], lv denied 3 NY3d 609 [2004]). Neither this Court nor the motion court is " required to shut its eyes to the patent falsity of a defense' " (id., quoting MRI Broadway Rental v United States Min. Prods. Co., 242 AD2d 440, 443 [1st Dept 1997], affd 92 NY2d 421 [1998]). Here, we conclude that the court properly determined that plaintiff's deposition testimony was "self-serving and incredible on these points, permitting summary judgment in favor of" defendant (Curanovic v New York Cent. Mut. Fire Ins. Co., 307 AD2d 435, 439 [3d Dept 2003]; see Rickert v Travelers Ins. Co., 159 AD2d 758, 759-760 [3d Dept 1990], lv denied 76 NY2d 701 [1990]).

That's a lot of rejecting.  Next time someone tells you credibility is always a fact issue, point them here.  Self-serving testimony and patently false defenses do not triable issues of fact create.

You can watch (and listen) to the oral argument of this appeal to the Fourth Department here.  Perhaps my favorite statement from Justice Troutman at 1:26:33:  "So he complied until he didn't."

Summary Judgment to Homeowners Insurer on Insured's Failure to Reasonable Care to Maintain Heat Affirmed By Third Department

HOMEOWNERS  – FREEZING EXCLUSION – REASONABLE CARE TO MAINTAIN HEAT 

Stephenson v. Allstate Indem. Co.
(3rd Dept., 4/19/2018)

The insured single-family residence was unoccupied from December 2013 through March 24, 2014, when damages were discovered from  water that had discharged from the plumbing system after a pipe broke when it froze as a result of inadequate heat in the premises.  The home's water supply had not been shut off and the plumbing system had not been drained.  The insured had left her property unoccupied during the winter months without making any arrangements to have it inspected during her absence to ascertain whether the heating system was functioning.

Allstate disclaimed coverage based on several policy exclusions, including one for damage caused by "[f]reezing of plumbing, fire protective sprinkler systems, heating or air conditioning systems or household appliances, or discharge, leakage or overflow from within the systems or appliances caused by freezing, while the building structure is vacant, unoccupied or being constructed unless you have used reasonable care to: (a) maintain heat in the building structure; or (b) shut off the water supply and drain the system and appliances."

The insured sued Allstate for coverage and, after discovery was complete, Allstate moved for summary judgment.  Supreme Court granted Allstate's motion and plaintiff appealed.  Noting that the determinative issue in a freezing exclusion case is whether the insured used reasonable care to maintain heat in the premises, the Third Department AFFIRMED the grant of summary judgment to Allstate:

In support of its motion, defendant submitted plaintiff's deposition testimony and a statement that decedent made to defendant's claims investigator showing that decedent left the property unoccupied during the winter months without making any arrangements to have it inspected during her absence to ascertain whether the heating system was functioning. Defendant also submitted the affidavit of an expert witness showing that consumption of natural gas — the fuel used to heat the premises — from December 7, 2013 through February 6, 2014 was insufficient to maintain a level of heat adequate to prevent freezing of the plumbing system. As defendant met its burden of establishing that the exclusion applied here, the burden shifted to plaintiff to raise a triable issue of fact in this regard.

Plaintiff's proof regarding decedent's arrangements regarding maintenance of the property in her absence was limited to the affidavit of Gerald Whitmarsh, who was responsible for lawn mowing and snow removal. Whitmarsh does not aver that decedent asked him to inspect the interior of the premises to confirm whether it was adequately heated, or that he actually entered the premises during the relevant time. His conclusory allegations that the premises were always heated and that he never noticed that the heat was off — which do not specify when those observations may have been made — are insufficient to rebut defendant's showing that decedent made no arrangements to ensure that the heat continued to work during her absence. Plaintiff's argument that defendant was required to prove the cause of the heating system's failure is misplaced because it fails to address the determinative issue of whether decedent used reasonable care to ensure continued operation of the heating system during her absence. We conclude that decedent failed to use reasonable care, as a matter of law, to maintain heat in the premises while it was unoccupied for three months during the winter heating season, because it is undisputed that she did not arrange for inspection of the premises or take any other action to ensure that adequate levels of heat were actually maintained during that time period (see e.g. Amery Realty Co., Inc. v Finger Lakes Fire & Cas. Co., 96 AD3d 1214, 1216 [2012], lv denied 19 NY3d 812 [2012]; Pazianas v Allstate Ins. Co., 2016 WL 3878185, *5, 2016 US Dist LEXIS 92796, *13-15 [ED Pa 2016]; Jugan v Economy Premier Assur. Co., 2018 WL 1432973, *3-4, 2018 US App LEXIS 7218, *8-14 [3d Cir 2018]). Thus, Supreme Court properly granted defendant's motion. Plaintiff's remaining arguments have been considered and found to lack merit.

Facts supporting summary judgment:

• home was unoccupied for three months during the wintertime
• the home's water supply had not been shut off 
• the plumbing system had not been drained
• the insured had made no arrangements to have the home inspected while she was gone
• an expert opined that the home's natural gas consumption was insufficient to maintain a level of heat adequate to prevent freezing of the plumbing system

Jury Verdict Finding Named Insured Was Residing in Insured Premises Affirmed

PROPERTY – HOMEOWNERS – RESIDENCY REQUIREMENT – POLLUTION EXCLUSION – ASBESTOS CONTROL COSTS – LOSS OF RENTS

Cotillis v. New York Cent. Mut. Fire Ins. Co.
(3rd Dept., 2/22/2018)

Last month I blogged about a Third Department case in which summary judgment was denied on the issue of the residency requirement of a homeowners insurance policy.  Last week, the Third Department affirmed a jury verdict against a homeowners insurer on the same issue.

In September 2013, a fire damaged plaintiff's two-family house, where plaintiff claimed to lived in the top-floor unit and rent the first-floor unit. NYCM disclaimed coverage on the basis that plaintiff did not reside at the insured premises on the date of loss. Following a trial, the jury found that plaintiff was a resident of the insured premises and awarded damages of $163,938.94 for the dwelling, $7,873,02 for personal property and $39,600 for additional living expenses (loss of rents).  After unsuccessfully moving to set aside the verdict, NYCM appealed.

In AFFIRMING the jury's verdict on the dwelling, the Third Department rejected NYCM's argument that the evidence was legally insufficient for the jury to conclude that plaintiff was a resident of the insured premises at the time of the loss and reiterated the relevant legal principles:

The insurance policy at issue provides coverage to a dwelling on the "residence premises." As relevant here, "residence premises" is defined as "[t]he two, three or four family dwelling where you reside in at least one of the family units." The policy, however, does not define "reside" and, therefore, "[t]he standard for determining residency for purposes of insurance coverage requires something more than temporary or physical presence and requires at least some degree of permanence and intention to remain" (Dean v Tower Ins. Co. of N.Y., 19 NY3d 704, 708 [2012]; see Sosenko v Allstate Ins. Co., 155 AD3d 1482, 1482 [2017]; Fiore v Excelsior Ins., 276 AD2d 895, 896 [2000], lv dismissed [96 NY2d 755 [2001]). Whether a person resides in any particular location is generally a fact-based determination (see Yaniveth R. v LTD Realty Co., 27 NY3d 186, 194 [2016]). 

The Third Department then recapped the trial evidence supporting the jury's residency finding:

At trial, plaintiff's daughter-in-law testified that she and her husband, plaintiff's son, approached plaintiff to see if she could watch their daughter, plaintiff's granddaughter, during the day. The daughter-in-law stated that plaintiff agreed to so "as long as it was temporary." As such, starting in April 2013, plaintiff stayed at her son's house and babysat her granddaughter in the morning. Aside from a bed and a dresser, plaintiff did not bring other household furnishings from the insured premises to her son's house. Approximately two or three times a week, when the daughter-in-law returned early from work, she would take plaintiff to the insured premises where plaintiff would check the mail and perform household chores. Plaintiff testified that she ate meals at the insured premises, stayed at the insured premises during some weekends, did not change her mailing address from the insured premises and planned to return there after her son stopped working. Plaintiff also testified that she considered the insured premises her home. Furthermore, the fire investigator who testified on behalf of defendant stated that his inspection of the unit where plaintiff lived contained items and furnishings indicative of a person living there. In our view, the foregoing proof was sufficient to establish that plaintiff's stay at her son's house was temporary in nature (see New York Cent. Mut. Fire Ins. Co. v Kowalski, 222 AD2d 859, 861 [1995]) and that she was a resident of the insured premises at the time of the loss. 

Homeowners insurers considering denying dwelling coverage based on the named insured's lack of residency would be wise to review what this jury found to be sufficient evidence of such residency:

• the insured was staying with her son and daughter-in-law temporarily; 
• she had moved only a bed and dresser to her son's house; all other household furnishings remained behind; 
• she would return to the dwelling 2-3 times a week to check mail and perform household chores; 
• she ate some meals at the insured dwelling; 
• she stayed at the insured dwelling during some weekends; 
• she had not changed her mailing address; and
• she considered the insured premises her home.  

NYCM also argued that the amount awarded for the demolition of the insured premises should have been $16,400 and not $28,900, because the latter figure, as testified to by an insurance adjuster, included asbestos control, which NYCM contended was excluded by the policy's pollution exclusion.  That exclusion negated coverage for a loss "caused directly or indirectly" by an ordinance or law requiring an insured "to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, pollutants." In rejecting that argument, the Third Department held that "[e]ven assuming that 'pollutants' in the policy at issue encompassed asbestos, the record does not demonstrate that asbestos directly or indirectly caused the loss."

The Third Department did agree, however, with NYCM that the loss of rents award was double what it should have been, modifying the judgment to reduce it by $19,800.  The trial evidence established that plaintiff intended to derive rental income from only the downstairs unit.  Moreover, to the extent that the jury awarded this amount for monies expended by plaintiff for alternative housing, plaintiff failed to establish that she "incurred" any such expenses as required under the policy.

The HOME in HOMEowner's Insurance -- Questions of Fact on Policyholder's Residence Preclude Summary Judgment

PROPERTY – HOMEOWNERS – RESIDENCY REQUIREMENT
Sosenko v. Allstate Ins. Co.
(3rd Dept., decided 11/30/2017)

No, not HOME as in four-fifths of the Greats Lakes.  The home or residence question again, as it bears on structure coverage under a homeowner's insurance policy.

Core Holding:  Contradictory statements of the policyholder regarding the extent of her own physical presence at the premises are alone sufficient to create an issue of fact that may not be resolved by summary judgment.

Homeowner's insurance is written and intended to insure the policyholder's home -- where the named insured resides.  Many homeowner's insurance policies limit structure coverage to the "insured premises", which includes the "residence premises", which are, in turn, defined as the single-family building structure "where you [the named insured] reside."  Residency reduces certain risks of loss, and premium rates for HO policies are based, in part, on the presumption that the named insured resides in the insured premises.  Seems logical and reasonable, don't it?

HO policies that require residency, however, do not define "reside", causing the New York Court of Appeals in 2012 to conclude that the policy term "residence premises", without a definition of "reside", is ambiguous.  In the seminal case of Dean v. Tower Ins. Co. of NY, the Court of Appeals instructed that "[t]he standard for determining residency for purposes of insurance coverage requires something more than temporary or physical presence and requires at least some degree of permanence and intention to remain[.]"

Something more than temporary or physical presence.  Some degree of permanence and intention to remain.

On January 15, 2014 plaintiff purchased a single-family home and acquired a homeowner's insurance policy from Allstate.  After closing, plaintiff's father started renovating the home, which was destroyed by fire on February 16, 2014.  Allstate disclaimed coverage on the basis that plaintiff was not residing at the premises at the time of the loss.  Plaintiff sued for breach of contract and, after completion of discovery, moved for summary judgment.  The motion record included the following:

• the premises had been unoccupied for at least two years prior to its acquisition by plaintiff and had no electrical service, running water or a functioning furnace; 
• following the closing plaintiff's father did renovation work at the premises nearly every day and had succeeded in stripping the interior walls on both floors of the two-story house and removing much of the existing wiring; 
• in doing the renovation work, plaintiff's father obtained electricity from a gasoline-powered generator, heated the premises with a wood stove located on the first floor and brought water to the premises that he stored in a tank
• when she acquired the premises, plaintiff was residing with her father and, shortly before the fire, she had relocated to an apartment;
• plaintiff testified that she had slept at the premises on several occasions, an average of two to four nights per week, and that she had intended for the premises to be her permanent residence once renovations were completed;
• Allstate's investigator testified that in a statement he obtained from plaintiff shortly after the fire plaintiff stated that she was not living at the premises; and 
• in an affidavit submitted in opposition to plaintiff's motion, Allstate's investigator also averred that when he interviewed plaintiff by telephone eight days after the fire, she stated that at the time of the fire she was in the process of relocating from her father's home to the apartment and, notably, that she had not been to the premises during the two weeks immediately preceding the fire and had stayed overnight at the premises only once.

Supreme Court denied plaintiff's motion and plaintiff appealed.

In AFFIRMING the denial of plaintiff's motion for summary judgment, the Appellate Division, Third Department, held:

On this record, plaintiff's summary judgment motion was properly denied. The Court of Appeals has held that evidence similar to the record in this case presented issues of fact regarding residency that precluded the grant of summary judgment (see Dean v Tower Ins. Co. of N.Y., 19 NY3d at 708-709). Moreover, as Supreme Court correctly held, the contradictory statements that plaintiff made regarding the extent of her own physical presence at the premises are alone sufficient to create an issue of fact that may not be resolved by summary judgment.

And predictions on what the jury will find?  Was plaintiff "residing" in the insured premise at the time of the fire or not?

Can You Find The The Mistake?

HOMEOWNERS – INTENTIONAL ACT – CRIMINAL ASSAULT – DUTY TO DEFEND – DUTY TO INDEMNIFY
State Farm Fire & Cas. Co. v. Gloria
(Sup. Ct., Suffolk Co., decided 3/14/2016)

When I was blogging regularly I rarely blogged about decisions from trial-level courts.  Trial-level decisions are rarely significant enough to merit your time and my effort on these pages.  But I came across this decision today and decided to throw it on here as a sort of can-you-find-the-mistake exercise.

We all know that for liability insurers the duty to defend is broader than the duty to indemnify and is determined, in the first instance, by the allegations of the complaint.  You may also know that once that the liability insurer can establish that it will have no duty to indemnify, its duty to defend terminates.  And that collateral estoppel, when applicable, precludes the re-litigation in a subsequent action of an issue raised and decided against an insured in a prior action.

I think the court made a mistake in deciding State Farm's motion for summary judgment.  Can you find it?  Comment below if you can.

Replacement Cost Coverage Denied to Insured Who Did Not Replace the Dwelling Within Two Years or Show That His Actual Repair/Replacement Costs Exceeded the Insurer's ACV Payment

PROPERTY – HOMEOWNERS – TWO-YEAR REPAIR/REPLACEMENT DEADLINE – REPLACEMENT COST COVERAGE 
Mateyunas v. Cambridge Mut. Fire Ins. Co.
(Sup. Ct., Queens Co., decided 7/16/2015)

Plaintiff's residence was damaged in a fire in 2011 while insured under a policy of homeowners insurance issued by the defendant.  Under the policy defendant was obligated to pay no more in replacement cost coverage than the least of:

(a) the limit of liability under the policy that applied to the building;
(b) the replacement cost of that part of the building damaged for like construction and use on the same premises; or
(c) the necessary amount actually spent to repair or replace the damaged building.

An appraisal of plaintiff's dwelling loss was conducted, resulting in an appraisal ACV award of $400,008.90, and a RCV award of $451,232.98.  At some unspecified time prior to the two-year anniversary of the fire defendant paid a total of $415,232.98 to the plaintiff for his dwelling loss.  Plaintiff did not, however, repair or replace the damaged dwelling prior to the two-year fire anniversary. He sued just within that two-year period, however, alleging that defendant owed him more monies under the dwelling, personal property, and ALE coverages of his policy with defendant.  Both plaintiff and defendant moved for summary judgment.

In GRANTING the defendant insurer's motion for summary judgment with respect to plaintiff's dwelling loss claim, the Supreme Court held:

Defendant has paid plaintiff the amount of $415,232.98 on plaintiff’s claim for loss to his dwelling, and asserts that no further amount is due, as plaintiff has been paid the actual cash value of the dwelling as determined by the umpire. Defendant contends that the language of the Policy permits the withholding of the difference between the actual cash value and the replacement cost until the repair or replacement is completed, because only at that time could defendant ascertain whether the actual cash value or the amount spent on repairing or replacing the property is the lesser amount to which plaintiff is entitled. Defendant further contends that the replacement of the dwelling was not completed within the two-year-from-date-of-loss period required by the Policy, and that plaintiff has not demonstrated the actual cost of the replacement to be in excess of the amount already paid to plaintiff. Plaintiff contends that he is entitled, by the unreserved terms of the policy, to the replacement amount as set by the umpire; that the two-year period is unreasonable and he was entitled to notification by defendant of such limited period; and that his actual expenses exceeded the amount already paid to him, as evidenced by the bills, checks and credit card receipts he included, for the first time, in his opposition/reply papers.  

*  *  *  *  *

The court agrees with the moving parties herein that the Policy terms regarding dwelling loss are unambiguous. Pursuant to the Policy, plaintiff would be entitled to payment, of up to the amount of the replacement cost loss, upon his completion of the replacement of the dwelling within two years and his submission of proof of the costs of replacement in excess of the actual cash loss to the dwelling. Otherwise, plaintiff would be entitled only to the actual cash loss to the dwelling, which amount has already been received by plaintiff. Plaintiff’s contention that he is entitled to the stated replacement cost loss recovery purely by reason of his having maintained a “replacement loss” policy is without merit. Plaintiff does not deny that he failed to complete the replacement of the dwelling within the requisite two-year period, nor has he shown that his expenses incurred in replacing the dwelling exceeded the amount already paid to him. His introduction of the untimely, unexplained, and unsworn-to photocopies of bills, checks and credit card statements are inadmissible to evidence entitlement to summary judgment (see CPLR 3212 [b]; Seidman v Industrial Recycling Props., Inc., 52 AD3d 678 [2008]; see also CPLR 4533[a]; Daguerre S.A.R.L. v Rabizadeh, 112 AD3d 876 [2013]; Matell Contracting Co., Inc. v Fleetwood Park Development, LLC, 111 AD3d 681 [2013]). Plaintiff has failed to submit an affidavit of a person with first-hand knowledge of the facts, and counsel’s reply affirmation herein, made without asserting any personal knowledge of the facts, did not satisfy the statutory requirements of CPLR 3212, because it did not serve as a vehicle to submit admissible documentary evidence[.] 

The court denied both parties' motions for summary judgment with respect to plaintiff's ALE claim, holding that neither party carried its burden of eliminating all material issues of triable fact.

Note:  this is an unreported decision from a trial-level New York state court.  Cite and rely on it accordingly.

Wind or Water? -- A Superstorm Sandy Loss

HOMEOWNERS – PROPERTY – FLOOD – WATER DAMAGE EXCLUSION – WIND – ANTI-CONCURRENT CAUSATION CLAUSE    
Clarke v. Travco Ins. Co.
(S.D.N.Y., decided 8/7/2015)

During Superstorm Sandy, water flooded the lower level of the plaintiff's house to a height of approximately four feet.  Further, a wooden dock from another property, approximately fifteen feet by ten feet in size, entered the property and came to rest within the lower level of the house, causing damage to the house.  Plaintiff asserted that the dock was pushed into the property by wind, causing significant structural damage, while defendant Travco Insurance Company argued that the dock was transported by water.

Plaintiff's policy with Travco contained the following exclusion:

1.  We do not cover any direct or indirect loss or damage caused by, resulting from, contributing to or aggravated by any of these excluded perils. Loss from any of these perils is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. 

These exclusions apply whether or not the loss event:

(a) Results in widespread damage;
(b) Affects a substantial area; or
(c) Occurs gradually or suddenly.

These exclusions also apply whether or not the loss event arises from:

(a) Any acts of nature;
(b) Any human action or inaction;
(c) The forces of animals, plants or other living or dead organisms; or
(d) Any other natural or artificial process.

* * *

c. Water Damage, meaning:

(1) Flood, surface water, ground water, storm surge, waves, wave wash, tidal water, tsunami, seiche, overflow of a body of water, or spray from any of these, whether or not a result of precipitation or driven by wind;

(2) any water or water borne material that enters through or backs up from a sewer or drain, or which overflows from a sump, sump pump or related equipment, as a direct or indirect result of flood;

(3) any water or water borne material located below the surface of the ground including water or water borne material:

1. Which exerts pressure on, seeps, leaks or flows into:

a. Any part of the dwelling or other structures;
b. The foundation of the dwelling or other structures;
c. Any paved surface located on the "residence premises"; or
d. Any spa, hot tub, or swimming pool.

2. Which causes earth movement; or

(4) any overflow, release, migration or discharge of water in any manner from a dam, levee, dike, hurricane barrier or any water or flood control device.

Direct loss by fire, explosion or theft resulting from water damage will be covered.

After discovery was complete, Travco moved for summary judgment.  In GRANTING that motion and dismissing plaintiff's complaint, the District Court for the Southern District of New York first ruled that the report and testimony of plaintiff's professional engineer was inadmissible as expert testimony because his conclusion that the dock was wind-driven was "based on data, a methodology, or studies that are simply inadequate to support the conclusions reached." Secondly, after outlining the insurance policy interpretation principles that are used in New York, the District Court concluded that "[i]t is clear, by the plain and unambiguous language of the policy, that the damage does fall within the [water damage] exclusion, and therefore Plaintiff cannot prevail on his claim":

The facts of this case are essentially undisputed. A dock, floating on top of water, was pushed by wind into the lower level of Plaintiff's house, causing damage to the Property. Plaintiff seeks to differentiate damage to the Property caused by dock from damage caused by flood waters and avers that the damage done by the dock was caused solely by wind and therefore falls outside the provision excluding water damage from coverage under the Policy. (See Pl.'s Opp'n at 3, 4-5.) The Court is skeptical that this sort of differentiation is truly possible or supported by the record before it but, even if it is, the distinction does not defeat the provision of the Policy excluding coverage for water damage. 

The exclusion provision sets forth that the Policy does not cover "any direct or indirect loss or damage caused by, resulting from, contributing to or aggravated by any of these excluded perils." (Sipple Decl. Ex. B at TP 000010 (emphasis added).) The Policy then goes on to include an anti-concurrent causation clause which states that "[l]oss from any of these perils is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss." (Id. (emphasis added).) One of the "excluded perils" in the Policy is "Water Damage," which is defined in part as "flood, surface water, ground water, storm surge, waves, wave wash, tidal water, tsunami, seiche, overflow of a body of water, or spray from any of these, whether or not a result of precipitation or driven by wind." (Id. at TP 000011 (emphasis added).) These terms have a definite and precise meaning when read within the context of the agreement as a whole, in particular when read in conjunction with the various clauses regarding exclusions from the Policy. There is no ambiguity in the relevant portions of the Policy. 

The Policy unambiguously excludes any damage "caused by" or "aggravated by" the types of water described in the exclusion provision, regardless of any other contributing causes and whether or not it was "driven by wind." While it appears possible that the dock may have been driven into the Property by wind, as Plaintiff asserts, it is clear from the record that the dock was driven into the house because it had been floating on, and was also driven by, water. (Aboulafia Decl. Ex. 4 (Transcript of Deposition of Peter Svoboda, October 2, 2014 ("Svoboda Dep.")) at 80:20-81:14.) Even Costa—whose testimony was proffered by Plaintiff to rebut the claim that the damage involved water, as opposed to wind—testified to this in his deposition: 

Q: As you sit here today, based on what you observed is it your belief that this dock was actually lifted up into the air and blown into the house, or that it was pushed by the wind on top of water into the house?. . . .

A: Pushed on top of the water into the house. 

(Costa Dep. at 42:9-17; see also id. at 41:17-21, 45:9-46:9.) There is no dispute that water was involved in the dock's movement. Even if wind were the main cause, it is indisputable that the water upon which the dock was resting at least indirectly caused or aggravated the damage to Plaintiff's property. Further, the language of the anti-concurrent causation clause means that "where a loss results from multiple contributing causes, coverage is excluded if the insurer can demonstrate that any of the concurrent or contributing causes are excluded by the policy." ABI Asset Corp. v. Twin City Fire Ins. Co., No. 96-CV-2067 (AGS), 1997 WL 724568, at *2 (S.D.N.Y. Nov. 19, 1997) (emphasis in original). Ultimately, it is clear that even if wind was a contributing cause and/or the dock was in some way "driven by wind," the exclusion still applies and thus bars Plaintiff from recovering under the Policy for the damage to his property. 

Plaintiff has failed to identify any genuinely disputed issues of material fact as to whether the policy exclusion applies in this matter, which is the crux of the Plaintiff's entire claim. The unambiguous language of the policy exclusion for water damage clearly excludes the damage caused to Plaintiff's property as a matter of law, and a reasonable jury could not return a verdict in Plaintiff's favor. Thus, Defendant's motion for summary judgment is granted.

Water.  No coverage.  

Water Damage from Broken Water Main Not Due to "Explosion"

PROPERTY – HOMEOWNERS – WATER LOSS EXCLUSION – EXPLOSION EXCEPTION
Platek v. Town of Hamburg
(Ct. Apps., decided 2/19/2015)

A subsurface water main abutting the property of plaintiffs ruptured, causing water to flood into and severely damage their home's finished basement. Plaintiffs immediately made a claim under their homeowners' insurance policy with defendant Allstate Indemnity Company.
Plaintiff's homeowners policy with Allstate contained the following exclusion:

We not cover loss to the property ... consisting of or caused by:

4.  Water ... on or below the surface of the ground, regardless of its source[,] [including] water ... which exerts pressure on, or flows, seeps or leaks through any part of the residence premises.

We do cover sudden and accidental direct physical loss caused by fire, explosion or theft resulting from items 1 through 4 listed above. 

Allstate denied coverage under Exclusion 4, and plaintiffs commenced this action against the municipality and Allstate.  Plaintiffs moved for summary judgment on their breach of contract claim, asserting that because they had "sustained a water intrusion loss" caused by "an explosion of the ... water main," their claim fell within the exception to the water loss exclusion.  In support of their motion, plaintiffs submitted the affidavit of an engineer, who stated that the water main "suddenly exploded from the internal water pressure being exerted on the pipe walls. Hence, the explosion resulted from internally pressurized water that was supposed to be contained in a buried underground pipe." He opined that plaintiffs had therefore suffered "direct physical loss to their home and other property," which was "caused by an explosion resulting from internally pressurized water suddenly and accidentally bursting from the underground pipe."  Allstate cross-moved for summary judgment, arguing that the explosion exception did not apply because, under that provision's wording, any "loss caused by ... explosion" must "result[ ] from" the explosion. Allstate argued that in this case, by contrast, any explosion "occurred earlier, outside the residence premises, when the water main broke."

Supreme Court granted plaintiffs' motion and denied Allstate's cross motion, and declared that plaintiffs' loss was covered under the policy and Allstate was required to pay the claim. On Allstate's appeal, the Appellate Division, with two Justices dissenting in part, modified Supreme Court's order by vacating the declaration and otherwise affirmed. All the Justices agreed that since plaintiffs asserted a cause of action against Allstate for breach of contract, Supreme Court erred by "declaring" that plaintiffs' claimed loss was covered under the policy and directing payment. The Court split on the issue of whether the policy's sudden and accidental exception to the water loss exclusion applied.

In REVERSING the Appellate Division's denial of Allstate's cross motion for summary judgment, the Court of Appeals first reviewed the "three basic principles" of insurance policy interpretation guiding its analysis in this case:

1. In determining an insurance coverage dispute the court first looks to policy language, construing the policy in a such way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect.


2. Although the insurer has the burden of proving the applicability of a policy exclusion it is the insured's burden to establish the existence of coverage, which includes demonstrating the applicability of an exception to a policy exclusion.


3. Where a property insurance policy contains an exclusion with an exception for ensuing loss, courts should assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk.

After holding that the plaintiffs' loss clearly fell within the policy's water loss exclusion, the court rejected the plaintiffs' argument that explosion exception applied, holding:

Plaintiffs nonetheless argue that the water damage to their basement was covered because it was "caused by an explosion of the ... water main resulting from highly pressurized water located on or below the surface of the ground," or, as stated slightly differently elsewhere in their brief, that "the explosion occurred as a result of water that was exerting pressure on the Property" or "the Residence." But this is not what plaintiffs' expert said. He opined that "highly pressurized water" exerted internal water pressure on the walls of a pipe buried off plaintiffs' property, not that an explosion resulted from subsurface water "exert[ing] pressure on . . . any part of the residence premises" per item 4 of the water loss exclusion.

* * * * *

In sum, interpreting the insurance policy as plaintiffs propose would contravene the water loss exclusion's purpose, as expressed in unambiguous language, which is to preclude coverage for damages caused by the entry of water onto an insured's property. As stated by the Supreme Court of New Hampshire when interpreting a policy excluding water loss, "[t]o apply the ensuing loss provision to provide coverage for what is essentially a flood would subvert the intent of the parties" (Bates v Phenix Mut. Fire Ins. Co., 156 NH 719, 723, 943 A2d 750, 754 [2008] [internal quotation marks omitted]). In the same way, permitting coverage under the facts of this case would force Allstate to insure a loss it did not contemplate and, indeed, affirmatively excluded.

Claim Professionals Cannot be Held Personally Liable

HOMEOWNERS – BREACH OF CONTRACT – PUNITIVE DAMAGES – FRAUD – ATTORNEYS' FEES – PERSONAL LIABILITY
O'Keefe v. Allstate Ins. Co.
(2nd Dept., decided 12/13/2011) 

There's nothing new in this decision, but it sets forth a number of important and useful principles relating to the defense of first-party property coverage disputes:

Personal Liability of Claims Professionals 

Agents of a disclosed principal cannot be held personally liable for the principal's breach of contract.  Supreme Court properly dismissed this action against the Allstate claims professionals who were named as individual defendants in the complaint.  

The Supreme Court properly granted that branch of the defendants' motion which was pursuant to CPLR 3211(a)(7) to dismiss the complaint insofar as asserted against the individual defendants, Mark Malenczak, David Mateer, and Freida Hicks (hereinafter collectively the individual defendants), all employees of the defendant Allstate Insurance Company (hereinafter the insurer), as they cannot, under the circumstances of this case, be held personally liable to the plaintiffs (see Bardi v Farmers Fire Ins. Co., 260 AD2d 783, 787; Schunk v New York Cent. Mut. Fire Ins. Co., 237 AD2d 913, 915; Benatovich v Propis Agency, 224 AD2d 998, 998-999). 

Fraud Cause of Action

If a complaint's fraud cause of action relates directly to its breach of contract cause of action, it must be dismissed.  

With respect to the complaint insofar as asserted against the insurer, the third cause of action sounds in fraud but relates directly to the breach of contract claims, in that it alleges that the insurer's actions were undertaken to avoid paying the plaintiffs the amounts specified in their insurance policy. Accordingly, the third cause of action cannot be sustained (see Pepper v Hezghia, 307 AD2d 959, 960; Schunk v New York Cent. Mut. Fire Ins. Co., 237 AD2d at 913-915; F. Nathanson & Co. v Marinello, 192 AD2d 575; Manshul Constr. Corp. v City of New York, 143 AD2d 333, 336). 

Attorneys' Fees

As a general rule, attorneys' fees are not recoverable in a breach of contract action.  An insured may not recover the expenses incurred in bringing an affirmative action against an insurer to settle the insured's rights under the policy.

Moreover, the Supreme Court properly granted that branch of the motion which was to dismiss so much of the complaint as sought an award of an attorney's fee against the insurer. An "insured may not recover the expenses incurred in bringing an affirmative action against an insurer to settle its rights under the policy" (New York Univ. v Continental Ins. Co., 87 NY2d 308, 324; see Mighty Midgets v Centennial Ins. Co., 47 NY2d 12, 21).

Punitive Damages

Punitive damages are not recoverable unless the complaint alleges facts supporting the contention that the insurer's conduct was egregious or fraudulent, or that it evidenced wanton dishonesty so as to imply a criminal indifference to civil obligations directed at the public generally.  Private breach of contract disputes generally do not warrant punitive damages.

Further, punitive damages are not warranted, as "[t]he insureds failed to set forth any facts or allegations to support their contention that the defendant insurer'[s] conduct was egregious or fraudulent, or that it evidenced wanton dishonesty so as to imply a criminal indifference to civil obligations directed at the public generally. This case is, in effect, simply a private breach of contract dispute between the insurer[ ] and [its] insureds with no greater implications" (Flores-King v Encompass Ins. Co., 29 AD3d 627, 627; see Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603, 615).

Homeowner Insurer's Failure to Timely Respond to Insured's Proof of Loss or Send 90-Day Delay Letters Does Not Preclude Exclusion-Based Coverage Defenses

PROPERTY – HOMEOWNERS – PROOF OF LOSS – REGULATION 64 – 90-DAY DELAY LETTERS – DEFENSE PRECLUSION
Mallory v. Allstate Ins. Co.
(2nd Dept., decided 12/6/2011) 

Section 216.6 (c) of New York Insurance Regulation 64 (Title 11 NYCRR Part 216) requires an insurer, "[w]ithin 15 business days after receipt by the insurer of a properly executed proof of loss and/or receipt of all items, statements and forms which the insurer requested from the claimant," (30 days if the insurer suspects that the claim involves arson) to advise a claimant, or a claimant's representative, in writing, (1) of its acceptance or rejection of the claim, or (2) that it needs more time to determine whether the claim should be accepted or rejected. Thereafter, if the claim remains unsettled, unless the matter is in litigation or arbitration, the insurer must, 90 days from the date of the initial letter setting forth the need for further time to investigate, and every 90 days thereafter, send to the claimant or the claimant's authorized representative a letter setting forth the reasons additional time is needed for investigation.  These letters are sometimes called "delay letters" by property claims representatives.

What if the insurer fails to comply with this regulatory requirement by not responding to the insured's proof of loss or claim submission or sending the 90-day delay letters within the required time period?  Is the insurer precluded from raising and relying on policy exclusions to deny coverage?  No, says the Appellate Division, Second Department.  Again.

Plaintiff commenced this action to recover the proceeds of a fire insurance policy. Allstate asserted several affirmative defenses based on policy exclusions. Plaintiff moved to dismiss Allstate's exclusion-based affirmative defenses on the ground that it was precluded from raising those defenses because of its failure to comply with 11 NYCRR § 216.6(c) in processing the plaintiff's claim.  Supreme Court denied plaintiff's motion and, reaffirming its 2004 decision in De Marinis v Tower Ins. Co. of N.Y., the Appellate Division AFFIRMED:

In De Marinis v Tower Ins. Co. of N.Y. (6 AD3d 484, 486-487), this Court held that a failure to comply with 11 NYCRR 216.6(c) does not preclude an insurance company from relying on a policy exclusion to disclaim coverage. We decline the plaintiff's invitation to overrule De Marinis. Accordingly, the plaintiff did not demonstrate that the defenses were without merit as a matter of law (see CPLR 3211[b]; Galasso, Langione & Botter, LLP v Liotti, 81 AD3d 880, 882). 

The potential consequence of not complying with 216.6(c) is administrative sanction, not defense preclusion.

Editor's Note (02.07.14) ~~  The New York Court of Appeals unanimously AFFIRMED this decision on August 28, 2012, holding:

Under the facts of this case, the Appellate Division correctly determined that an insurer's failure to comply with 11 NYCRR 216.6 (c) in processing a claim does not preclude that insurer from relying upon a policy exclusion to disclaim coverage.

Insured's 6-Month Delay in Notifying His Insurer of Dog-Bite Incident Found Unreasonable as a Matter of Law

HOMEOWNERS – LATE NOTICE – DOG-BITE INCIDENT – NO-PREJUDICE RULE – GOOD-FAITH BELIEF IN NONLIABILITY
Zimmerman v Peerless Ins. Co.
(2nd Dept., decided 6/21/2011) 

I knew that into an 8-month hole in blogging there would be some back filling.   Here's some late notice fill. 

On October 31, 2006, while jogging in Eaton's Neck, New York, Arthur Angst allegedly was bitten by Erwin Zimmerman's unleashed dog.  Angst and Zimmerman had a brief verbal confrontation, during which Zimmerman saw blood on Angst's hand.  Zimmerman offered to pay Angst's medical expenses, but Angst declined, and the two men did not exchange contact information.  Zimmerman was aware of an incident several years before, in which his dog had "nipped" a neighbor. Within 48 hours of the incident involving Zimmerman's dog and Angst, the Suffolk County Department of Health requested the dog's vaccination records and informed Zimmerman that the dog would be restricted to Zimmerman's property.

Just over six months later, on May 8, 2008, Zimmerman was served with the summons and complaint in the underlying personal injury action. The next day, for the first time, he notified his insurer, Peerless Insurance Company, of the incident.  Zimmerman's insurance policy required that 

in case of an ... "occurrence," the "insured" will perform the following duties that apply:

Give written notice to us or our agent as soon as is practical, which sets forth: 

(1) The identity of the policy and "insured"; 

(2) Reasonably available information on the time, place and circumstances of the ... "occurrence"; and 

(3) Names and addresses of any claimants or witnesses.  

The policy defined an "occurrence" as "an accident ... which results, during the policy period, in: ... 'Bodily injury'" and "bodily injury" was defined, in relevant part, as "bodily harm."

By letter dated May 11, 2008, Peerless disclaimed coverage on the ground that Zimmerman had not complied with the notice provisions of the policy.  Zimmerman commenced this action seeking a judgment declaring that Peerless was required to defend and indemnify him in the underlying action. Following discovery, Peerless moved, and Zimmerman cross-moved, for summary judgment. Supreme Court, Suffolk County (Rebolini, J.), denied the motion and cross motion, and both parties appealed.

In REVERSING the order appealed from insofar as Peerless' motion was concerned, the Appellate Division, Second Department, held that while Peerless had established its prima facie entitlement to summary judgment on the issue of the insured's late notice, the insured had not carried his opposing burden of raising a triable issue of fact as to whether there existed a reasonable excuse for his delay in notifying Peerless of the dog-bite incident:

Here, Peerless established its prima facie entitlement to judgment as a matter of law that Zimmerman's failure to notify Peerless for six months was not based on a reasonable or good faith belief in nonliability by demonstrating that Zimmerman knew immediately that his dog allegedly bit Angst and that Angst may have been injured by the bite. Indeed, Zimmerman knew within 48 hours that a complaint had been made about the incident, even if he did not know Angst's identity. In addition, Zimmerman knew of at least one substantiated incident involving his dog prior to the incident with Angst (see Steinberg v Hermitage Ins. Co., 26 AD3d 426, 427 [2006]; C.C.R. Realty of Dutchess v New York Cent. Mut. Fire Ins. Co., 1 AD3d 304, 305 [2003]; 120 Whitehall Realty Assoc., LLC v Hermitage Ins. Corp., 40 AD3d at 721; cf. Courduff's Oakwood Rd. Gardens & Landscaping Co., Inc. v Merchants Mut. Ins. Co., 84 AD3d 717 [2011]; Ponok Realty Corp. v United Natl. Specialty Ins. Co., 69 AD3d at 597; Sputnik Rest. Corp. v United Natl. Ins. Co., 62 AD3d at 689). Consequently, the burden shifted to Zimmerman to raise a triable issue of fact as to whether there existed a reasonable excuse for his delay in notifying Peerless (see Ponok Realty Corp. v United Natl. Specialty Ins. Co., 69 AD3d at 597; Sputnik Rest. Corp. v United Natl. Ins. Co., 62 AD3d at 689). Even construing all inferences in favor of Zimmerman, he failed to raise a triable issue of fact (see Hanson v Turner Constr. Co., 70 AD3d 641, 643 [2010]; 120 Whitehall Realty Assoc., LLC v Hermitage Ins. Corp., 40 AD3d at 721; Steinberg v Hermitage Ins. Inc., 26 AD3d at 427; C.C.R. Realty of Dutchess v New York Cent. Mut. Fire Ins. Co., 1 AD3d at 305). We reject Zimmerman's argument that the policy was ambiguous as to whether he was obligated to give notice of the occurrence before learning of the possible claimant's identity (see Magistro v Buttered Bagel, Inc., 79 AD3d 822 [2010]). Accordingly, the Supreme Court erred in denying Peerless' motion for summary judgment declaring that it is not obligated to defend or indemnify Zimmerman in the underlying action. In light of this determination, the Supreme Court properly denied Zimmerman's cross motion for summary judgment.  

Because Zimmerman's policy was issued before January 17, 2009 (see Insurance Law § 3420 [c] [2] [A]), Peerless was not required to demonstrate prejudice from Zimmerman's six-month delay in notification.