New York Insurance Coverage Law Update

March 28, 2023 | Alan C. Eagle | Insurance Coverage

Southern District Finds That Exclusion In HO3 Form Precludes Coverage Even Though Form Inadvertently Omitted From Copy Of Policy Sent To Insured

Scottsdale Insurance Company issued a homeowner’s policy to 232 Dune Road LLC (insured) for a vacant oceanfront property in Quogue, New York where the insured was building a home.  On March 26, 2020, the insured’s principal received a copy of the policy from his broker.  The policy neither contained a copy of an HO3 form nor listed the HO3 Form on the Schedule of Forms, but it did refer to “HO3” as the “policy form” on each of the declaration pages and the first two pages of the policy.  Also, several endorsements expressly modified the “Homeowners 3 – Special Form.”  After the concrete foundation for the home was installed, testing revealed it was defective, and the insured made a claim under its policy.  Scottsdale disclaimed coverage based on an exclusion in the HO3 form for faulty workmanship, and the insured sued Scottsdale in the United States District Court for the Southern District of New York.  The insured’s principal testified that he thought that such a claim would be covered, and that he did not know and was never told by his broker what HO3 means.  The court held that the exclusion in the HO3 form precluded coverage, reasoning that courts use an objective “reasonable person” standard in determining whether a document is incorporated by reference into a contract.  The court stressed that the policy expressly identified and referred to the HO3 form, which is an ISO form used in the insurance industry.  In addition, without the HO3 form, the policy “neither explained its coverage nor set forth its exclusions ….”  Accordingly, the court granted summary judgment to Scottsdale.  [232 Dune Rd., LLC v. Scottsdale Ins. Co., 2023 U.S. Dist. LEXIS 24224 (S.D.N.Y. Feb. 13, 2023).]

Eastern District Holds That Retroactive Cancellation Of Policy For Nonpayment Of Premium Allowed Under New York Law But Only If Policy So Provides

A homeowner purchased a policy from Occidental Fire & Casualty Company that provided fire coverage for his home through July 17, 2020.  Five weeks before the policy was set to expire, Occidental sent a renewal notice with a premium invoice, which was not paid. Occidental then sent a Notice of Cancellation effective July 17, 2020, which provided a 15-day grace period to pay the renewal premium.  Four days into the grace period, a fire occurred at the insured’s home. Occidental denied coverage maintaining that the insured’s failure to pay the renewal premium during the grace period resulted in a retroactive lapse of coverage on July 17, 2020, before the fire.  The United States District Court for the Eastern District of New York agreed that retroactive cancellation is permitted under the New York Insurance Law if the premium is not paid during the grace period, which “makes sense” or “every policyholder would be insured for free during the grace period.”   However, the court held that Occidental could not retroactively cancel its policy because its policy did not clearly provide for retroactive cancellation; instead, the policy’s cancellation provisions merely stated that [w]hen you have not paid the premium, we may cancel” it “by mailing to you at least 15 days’ notice of cancellation”.  [Jiminez v. Occidental Fire Cas. Co., 2023 U.S. Dist. LEXIS 21491 (E.D.N.Y. Feb. 8, 2023).]

Northern District Dismisses Insured’s Claim For Breach of the Covenant Of Good Faith And Fair Dealing As Duplicative Of Breach Of Contract For Coverage

Continental Insurance Company (CIC) disclaimed coverage to its insured for an underlying action based on late notice and the insured’s failure to meet its burden to prove the terms of the policies from 1970 to 1990 under which the insured claimed coverage.  The insured sued CIC in the United States District Court for the Northern District of New York seeking a declaration that CIC breached its duty to defend and to indemnify the insured under an insurance contract, and that CIC’s denial violated its duty of good faith and fair dealing.  The insured alleged that the insurer’s denial lacked any reasonable basis.  The court dismissed the breach of good faith and fair dealing claim, reasoning that it is “well-settled” in New York that there is no separate cause of action for breach of the implied covenant of good faith and fair dealing when based upon the same alleged facts as the breach of contract claim.  The court found that the insured’s allegations that CIC “failed to allege a good faith claim or basis for claiming [late notice] prejudice” and “exhibited a gross disregard” for the insurance policies merely “rehashed” the allegations of the breach of contract claim that CIC offered “meritless reasons for the denial of coverage.”  [County of Warren v. Cont’l Ins. Co., 2023 U.S. Dist. LEXIS 27043 (N.D.N.Y. Feb. 17, 2023.)]

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