New York Insurance Coverage Law Update

First Department Finds That Excess Policy May (Or May Not) Be Triggered Before Primary Policy In Another Year

Burlington Insurance Company issued primary policies to a contractor in 2013-14 and 2014-15, and Century was the excess insurer for 2013-14.  The contractor was sued for property damage resulting from its construction work during an unspecified time, and Burlington filed a declaratory judgment action as to the availability of coverage.  The trial court granted Century’s motion to dismiss, finding that its excess policy is necessarily triggered after Burlington’s primary policies, but the Appellate Division, First Department, re-versed.  The court reasoned that the Century excess policy states that it is excess to “the available limits of ‘controlling underlying insurance’”, i.e., only Burlington’s 2013-14 policy, and that Century’s excess “other insurance” clause applies “only when two or more policies provide coverage during the same period”.   The court also found that Century did not present documentary evidence supporting its contention that coverage will be allocated on a pro rata basis among available policies, resulting in all primary policies being exhausted before Century’s policy is reached.  As to Century’s argument that case law addressing other “long-tail” claims support its argument, the court opined that Century had not established that the underlying property damage would present similar difficulties in allocating the damage to particular policy periods.  [Burlington Ins. Co. v. New York Constr. & Renovation, Inc., 2022 N.Y. App. Div. LEXIS 6629 (1st Dep’t Nov. 29, 2022).]

Second Circuit Finds That Insured’s Claims For Coverage And For Breach Of Implied Covenant Of Good Faith Both Time-Barred By Policy’s Limitations Provision

In January 2016, an insured discovered that its CFO was embezzling from the company.  The insured submitted a claim under its policy with Hanover Insurance Company because it believed the embezzlement was a covered loss, but Hanover denied the claim.  In turn, the insured obtained a judgment against the CFO and submitted a second claim to Hanover that was again denied.  The insured sued Hanover in 2020 for breach of both the express terms of the policy and the implied covenant of good faith and fair dealing.  The United States Court of Appeals for the Second Circuit held that both claims were time-barred under the policy’s contractual limitations period that required the insured to bring any action “involving loss” within two years “from the date … [it] ‘discovered’ the loss” and defined “discovered” as when the insured “first become[s] aware of facts which would cause a reasonable person to assume that a loss of the type covered by this policy has or will be incurred.”  The court rejected the insured’s argument that the term “loss” is ambiguous as to Hanover’s breach of the implied covenant of good faith because “[e]ven adopting [the insured’s] proffered meaning of loss”, i.e., the loss for which the insured seeks coverage, the implied covenant claim is still time-barred.  [Sportsinsurance.com, Inc. v. Hanover Ins. Co., 2022 U.S. App. LEXIS 30669 (2d Cir. Nov. 4, 2022).]

Eastern District Holds That Tear Out Provision In Homeowners Policy Does Not Apply To Insured’s Whole Loss

The insured purchased a homeowners policy from State Farm.  Water leaked from the base of the toilet on his bathroom floor and damaged his vanity.  To remedy the situation, the insured’s plumber located and cleared the house’s underground sewer trap.  The next day, the plumber dug up the trap and determined it was cracked and needed to be replaced.  As they kept digging, they found wastewater was rushing from the inside of the house to the outside. They kept excavating for ten more days and found that a sewage pipe was cracked and needed to be replaced.  State Farm paid for the damage to the vanity and the cost to detach and reset the toilet, but disclaimed coverage for the costs associated with replacing the sewer pipe.  The insured sued State Farm for breach of contract and consequential damages, and the United States District Court for the Eastern District of New York granted summary judgment to State Farm.  The court explained that where there is damage to property covered under the policy (here, the vanity), the Tear Out Provision applies to reasonable costs in tearing out “only that particular part” of that “system or appliance” necessary to access the “specific point” of the appliance from which “the water or sewage escaped” (here, the toilet). The court concluded that the provision is inapplicable to any water that leaked from the sewer line because the insured did not demonstrate that covered property was damaged by that water.  [Haas v. State Farm Fire and Cas. Co., 2022 U.S Dist. LEXIS 198233 (E.D.N.Y. Sept. 24, 2022).]