​Nunez v U.S. Underwriters Ins. Co. 
​*1] Nunez v U.S. Underwriters Ins. Co. 2011 NY Slip Op 21050 Decided on February 10, 2011 Supreme Court, Queens County Markey, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and subject to revision before publication in the printed Official Reports.

Decided on February 10, 2011
Supreme Court, Queens County

Antonia Nunez, etc., et al., Plaintiffs,

against

U.S. Underwriters Insurance Company, etc., et al., Defendants.


32082/09


Appearances of Counsel:

For the Plaintiff: Greenblatt & Agulnick, by Scott E. Agulnick, Esq., 55 Northern Blvd., Great Neck, New York 11021

For the Defendant Nicholas Gomez and Teodora Gomez: Miranda, Sambursky, Slone, Sklarin, Vereniotis, LLP, by Ondine Slone and Gabriella Camiglia, Esqs., 240 Mineola Blvd., Mineola, New York 11501

For the Defendant U.S. Underwriters Insurance Co.: Martyn, Toher & Martin, by Joseph S. Holotka, Esq., 330 Old Country Rd., Mineola, NY 11501-4187

Charles J. Markey, J.

The following papers numbered 1 to 15 read on this motion by plaintiff pursuant to CPLR 3212 for summary judgment on the first cause of action against the defendant U.S. Underwriters Insurance Company (U.S. Underwriters), dismissing the defendant U.S. Underwriters' fifth affirmative defense, dismissing the defendant U.S. Underwriters' first and second counterclaims; and on the cross motion by the defendant U.S. Underwriters pursuant to CPLR 3212 for summary judgment dismissing the complaint.

Papers Numbered

Notice of Motion - Affidavits - Exhibits ..........................................1-4

Notice of Cross Motion - Affidavits - Exhibits ................................5-10

Answering Affidavits - Exhibits .......................................................11-13

Reply Affidavits ................................................................................14-15

The plaintiff commenced this action to recover money damages for water damage sustained in her retail store at 95-09 Jamaica Avenue, Woodhaven, New York as a result of a fire that occurred in the second floor residential unit above store.

On or about August 3, 2009, the defendant U.S. Underwriters provided Businessowners Liability Coverage and Businessowners Property Coverage to the plaintiff, under policy number xxxxxxxxx. Pursuant to the policy, the defendant U.S. Underwriters agreed to insure the plaintiff's store for a one-year term beginning on August 3, 2009 and expiring on August 3, 2010. The Policy included a Protective Safeguard Endorsement. The Protective Safeguard Endorsement states: [*2]

We will not pay for loss or damage caused by or resulting from fire, if, prior to the fire, you:

1. Knew of any suspension or impairment in any protective safeguard listed in the Schedule above and failed to notify us of that fact; or

2. Failed to maintain any protective safeguard listed in the Schedule above, and over which you had control, in complete working order.

On September 18, 2009, a fire started on the second floor residential apartment above the plaintiff insured's space, a retail store. As a result of the fire the plaintiff sustained damage to the insured premises due to water from extinguishing the fire in the residential unit. At the request of U.S. Underwriters, Independent Adjustment Company inspected the plaintiff's property and found no smoke detectors in the first floor store area and the basement area. In a letter dated October 12, 2009, the defendant U.S. Underwriters denied coverage for the claim based on the plaintiff's failure to comply with the Protective Safeguard Endorsement.

In a letter dated, October 21, 2009, the plaintiff responded, stating that the loss sustained was a result of water damage and was not a result of the fire itself and, therefore, that the failure to have a smoke detector was immaterial, as a matter of law, and could not be used as a basis for denial of coverage. In a letter dated October 26, 2009, the defendant U.S. Underwriters followed up stating that it stood by its denial based on the language of the policy.

The plaintiff commenced this action on November 17, 2009. Issue was joined by the moving defendant on January 22, 2010. The plaintiff has now moved for summary judgment and the defendant U.S. Underwriters has cross-moved for summary judgment.

On a summary judgment motion, the movant has to offer sufficient evidence to establish entitlement to judgment as a matter of law (see, Winegrad v New York Univ. Med. Ctr., 64 NY2d 851 [1985]). The plaintiff concedes that she did not have a functioning and operational smoke/heat detector. However, the plaintiff argues that this was a breach of warranty that did not materially effect the risk of loss and, therefore, is not grounds for the denial of coverage.

The defendant U.S. Underwriter argues, upon the foregoing papers, that the Protective Safeguard Provision was not a warranty, but, rather, an express condition of the contract. The defendant's argument that the Protective Safeguard Provision is an express condition, rather than a warranty within the meaning of Insurance Law section 3106, is without merit.

Insurance Law section 3106(a) defines warranty as:

any provision of an insurance contract which has the effect of requiring as a condition precedent of the taking effect of such contract or as a condition precedent of the insurer's liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage of [*3]the contract.

The Protective Safeguard Provision is a warranty as defined by Insurance Law 3106(a). Similar safety provisions have been found by the First and Second Department to be a warranty under Insurance Law section 3106 (see, Anjay Corp. v Those Certain Underwriters at Lloyd's of London Subscribing to Certificate No. HN01AAF4393, 33 AD3d 323 [1st Dept. 2006] [requiring video cameras at a jewelry store held to be a warranty within the meaning of Insurance Law § 3106]; 730 J & J, LLC v Twin City Fire Ins. Co., 293 AD2d 519 [2nd Dept. 2002] [requiring the premises to be locked and secured held a warranty under Insurance Law § 3106]; M. Fabrikant & Sons, Inc. v Overton & Co. Customs Brokers, Inc., 209 AD2d 206 [1st Dept. 1994] [requiring an armored vehicle to be occupied with an armed guard locked inside whenever insured property was in the vehicle during a delivery was a warranty under Insurance Law § 3106]).

A Protective Safeguard Provision requiring the installation of a fire alarm system has, furthermore, been found to be warranty under Insurance Law section 3106(a). In Mirabelli v Merchants Ins. Co. of New Hampshire (2007 WL 2236395, 2007 NY Slip Op 31615(U) [Sup Ct Suffolk County 2007]), the court stated: Here, defendant adequately demonstrated through its submissions that there was no central station fire alarm or an automatic fire alarm reporting to a public or private fire alarm station at the subject premises on the date of the fire. Through said submissions, defendant established that plaintiffs breached the Automatic Fire Alarm Protective Safeguards warranty in the subject policy.

Insurance Law section 3106(b) provides that a "breach of warranty shall not avoid an insurance contract or defeat recovery thereunder unless such breach materially increased the risk of loss, damage or injury within the coverage of the contract." Only if the lack of a smoke detector was material can it thus be used as a basis for denial of coverage. See, Great Lakes Reinsurance (UK), PLC v Rosin,F Supp 2d, 2010 WL 5397246 [S.D. Fla. 2010] [applying New York law].

The plaintiff submitted an affidavit in which she stated that fire was contained to the residential unit above the store. She further stated that there was no damage to the store from smoke and the only damage occurred as a result of water that was used to extinguish the fire in the unit above the store. The plaintiff further submitted a certified copy of the Fire Incident Report indicating that the fire originated in the second floor apartment and was confined to that apartment. The plaintiff established that inasmuch as no fire or smoke entered into the store that the lack of a smoke detector was not material. In opposition, the defendant failed to raise a triable issue of fact. The defendant, therefore, cannot deny coverage based on a violation of the Protective Safeguard Provision as a result of a lack of a smoke detector.

The defendant, however, alleged in its answer and in a counterclaim that the plaintiff made a material misrepresentation on the application for insurance that she had working smoke [*4]detectors in the insured premises and, therefore, it can rescind the policy based on the misrepresentation. The plaintiff argues that the defendant U.S. Underwriters, by failing to include the claim of misrepresentation in its denial letter, waived its right to assert the claim of misrepresentation and therefore cannot deny coverage or rescind the policy on this ground.

Since this is a case for property damage rather than personal injury, this case does not fall within the ambit of Insurance Law section 3420(d). The plaintiff, therefore, has to show proof of prejudice from the delay in order for the defendant to be estopped from disclaiming coverage or rescinding the policy based on the misrepresentation (Topliffe v US Art Co., Inc., 40 AD3d 967 [2nd Dept. 2007]; Only Natural, Inc. v Realm Natl. Ins. Co., 37 AD3d 436 [2nd Dept. 2007]; Scappatura v Allstate Ins. Co., 6 AD3d 692 [2nd Dept. 2004]). Inasmuch as the plaintiff did not submit any proof of prejudice, the plaintiff is not entitled to summary judgment.

Turning to the defendant's cross motion, in light of the discussion above, the defendant cannot deny coverage based on a violation of the Protective Safeguard Provision as a result of a lack of a smoke detector and thus is not entitled to summary judgment on this ground.

The defendant U.S. Underwriters did establish its prima facie entitlement to summary judgment on the ground that the plaintiff made a material misrepresentation on her application for insurance by stating that she had operational smoke detectors in the premises. In opposition to the cross motion, the plaintiff submitted the affidavit of the manager of the store. The manager stated, in his affidavit, that at the time of the application for insurance there was an operable smoke detector affixed to the ceiling. A triable issue of fact, therefore, exists as to whether the plaintiff had operable smoke detectors at the time the application for insurance was filled out and the cross motion for summary judgment must be denied.

Accordingly, the plaintiff's motion for summary judgment is denied. The cross motion by the defendant U.S. Underwriters for summary judgment is denied.

The foregoing constitutes the decision, order, and opinion of the Court.

Dated: February 10, 2011

J.S.C.

Appearances of Counsel:

For the Plaintiff: Greenblatt & Agulnick, by Scott E. Agulnick, Esq., 55 Northern Blvd., Great Neck, New York 11021

For the Defendant Nicholas Gomez and Teodora Gomez: Miranda, Sambursky, [*5]Slone, Sklarin, Vereniotis, LLP, by Ondine Slone and Gabriella Camiglia, Esqs., 240 Mineola Blvd., Mineola, New York 11501

For the Defendant U.S. Underwriters Insurance Co.: Martyn, Toher & Martin, by Joseph S. Holotka, Esq., 330 Old Country Rd., Mineola, NY 11501-4187



118 F.Supp.3d 548 (2015)

SI VENTURE HOLDINGS, LLC, Plaintiff, v. CATLIN SPECIALTY INSURANCE, Defendant.

United States District Court, S.D. New York.

Signed July 13, 2015.

Attorney(s) appearing for the Case

Scott E. Agulnick, Esq. , Greenblatt & Agulnick, P.C., Great Neek, NY, for Plaintiff.

Patrick M. Tomovic, Esq. , Hodgson, Russ, LLP, Buffalo, NY, for Defendant.

CORRECTED OPINION AND ORDER

SHIRA J. SCHEINDLIN, District Judge.

I. INTRODUCTION AND BACKGROUND1

This case presents an issue of first impression under New York law—whether a contract that requires an insured party to seek approval from its insurer before expending funds for environmental clean-up is void as against public policy. The facts are not in dispute. SI Venture Holdings ("SI"), a real estate development company, entered into an insurance contract with Catlin Specialty Insurance ("Catlin") that included the following provision ("Consent Provision"):

The Insurer shall pay on behalf of the Insured for Clean-Up Costs and related Claim Expense in excess of the Deductible stated in the Declarations because of a Pollution Condition2 discovered by the Insured during the Policy Period. . . but only if the Insured notifies the Insurer of the Pollution Condition, in writing, during the Policy Period or any applicable Extended Reporting Period.. . . The Insured shall not assume or admit liability, make any payment, consent to any judgment, settle any Claim or Protective Third Party Claim or incur any Clean-Up Cost, Claim Expense or Protective Third Party Claims Expense without prior written consent of the Insurer, which consent shall not be unreasonably withheld. The Insurer shall not be liable for any expense, settlement, assumed obligation or admission to which it has not consented.3

In February 2013, SI tested the soil of one of its properties in Staten Island, only to discover that it was contaminated with petroleum.4 The level of contamination was such that SI thought that it was obligated—based on its understanding of New York law—to transport the soil to a disposal site in New Jersey.5 SI did so. Then, six months later, it sent a notice of claim to Catlin, requesting coverage of $250,000 worth of clean-up costs.6 Catlin denied that request, citing SI's failure to comply with the Consent Provision.7

SI concedes that it did not seek Catlin's consent before embarking on the soil disposal. Nor does SI dispute that by failing to obtain such consent, SI breached the Consent Provision. Instead, SI argues that the Consent Provision is unenforceable as against public policy, because it impedes compliance with environmental regulations. According to SI, if an insured party must seek approval from its insurer before incurring clean-up costs, the practical effect will be that less clean-up takes place—to the public's detriment. Therefore, SI has moved for summary judgment, asking the Court to set aside the Consent Provision, and to require Catlin to reimburse SI the amount that it expended in connection with the soil disposal. Catlin has cross-moved for summary judgment, asking the Court to enforce the Consent Provision—and accordingly, to release Catlin from any putative coverage obligations.8 For the reasons set forth below, SI's motion is DENIED, and Catlin's motion is GRANTED.

II. APPLICABLE LAW
A. Construction of Insurance Contracts

Under New York law, "unambiguous provisions of an insurance contract must be given their plain and ordinary meaning, and the interpretation of such provisions is a question of law for the court."9 Pursuant to this general rule, consent-to-settle provisions—requiring insured parties to give insurers notice before entering into voluntary settlement agreements—are "routinely enforced" as "a condition precedent to coverage."10 This[118 F.Supp.3d 551]
same is true, moreover, of settlements between private actors and public agencies that arise from enforcement actions. In 2008, for example, the New York Court of Appeals enforced a consent-to-settle provision against Bear Steams, in connection with a settlement that it entered into with the Securities and Exchange Commission ("SEC").11 And Judge Katherine Forrest of this District recently enforced a similar provision against Northrop Grumman, in connection with an informal agreement it made with the United States Navy to spearhead the clean up of land adjacent to a weapons plant.12

B. Void as Against Public Policy

There is no magic formula for determining when a contract—or a particular provision of a contract—is void as against public policy.13 Under New York law, "[a]n agreement may be unenforceable[] as contrary to public policy even in the absence of a direct violation of a criminal statute, if the sovereign has expressed a concern for the values underlying the policy implicated."14 A contract is "contrary to public policy, not only if it directly violates a statutory prohibition ... but also if it is contrary to the social judgment on the subject implemented by the [relevant] statute."15

III. DISCUSSION

SI argues that the Consent Provision "conflicts with [] and contravenes" numerous environmental regulations, because it leaves insured parties in a position—theoretically—of having to finance clean-up without the benefit of reimbursement.16 In practice, this means that insured parties will be unwilling (or in some cases, unable) to comply with environmental regulation "expeditious[ly]"—an out-come that would clearly imperil the public interest.17

There are two problems with SI's position. First, clauses such as the Consent Provision are routinely enforced, which means that even if SI's position were appealing on policy grounds, adopting it[118 F.Supp.3d 552]
would effectively "revolutionize" New York insurance law.18 Second, SI's argument sweeps too broadly. The rule that SI proposes would be unfair to insurers, because it would preclude even reasonable withholding of consent to reimburse an insured party's clean-up costs.

A. This Court Declines to Revolutionize New York Insurance Law

SI has pointed to no case—nor have I been able to locate one—in which a consent provision, like the one at issue here, was deemed unenforceable on public policy grounds. On the other side, by contrast, Catlin has pointed to ample case law in which consent provisions have been enforced. The consensus among New York courts (and federal courts applying New York law) is clear—consent provisions are typically upheld to their letter.19

SI responds by pointing out that none of the cases invoked by Catlin directly addressed the public policy argument that SI presses here—so the question is open.20 That is true. But it hardly follows that the cases invoked by Catlin are irrelevant. Silence can be revealing. That no court has ruled on the public policy implications of consent provisions suggests that few, if any, courts have confronted such challenges—which in turn suggests that such challenges are rarely, if ever, made.21

In short, SI's argument is either legally innovative or legally precarious—and very likely both. Either way, it is not the role of this Court, exercising diversity jurisdiction, to take the radical step that SI's position would require. On appeal, SI will have an opportunity to request certification to the New York Court of Appeals (and the Second Circuit will have discretion to order such certification sua sponte), at which point the proper institution—the final arbiter of state law-will be able to entertain SI's argument.22 For[118 F.Supp.3d 553]
now, federalism principles counsel in favor of rejecting that argument.

B. The Equities Favor Catlin

The second problem with SI's position is that it would effectively strip Catlin—and, by extension, all insurers—of the ability to reasonably object to compliance-related expenditures that an insured party intends to make. As written, the parties' agreement prohibits Catlin from "unreasonably with[holding]" consent with regard to, inter alia, clean-up costs.23 Therefore, had SI requested Catlin's consent, and had Catlin decided to withhold it, SI would have had legal recourse—it could have sought to enforce the "consent shall not be unreasonably withheld" clause against Catlin, and to seek recovery, on that basis, for whatever hardship Catlin's withholding of consent might have caused. Notably, SI makes no effort to argue that the "consent shall not be unreasonably withheld" clause is somehow inoperative, or that it affords insufficient protection. Instead, SI focuses on (hypothetical) scenarios in which an insured party (1) requests consent from its insurer, (2) receives no consent, but (3) is still required (by law) to proceed with, and foot the bill for, compliance efforts. According to SI, the mere possibility of this outcome—enabled by enforcement of the Consent Provision here—would discourage compliance and imperil the public good.

SI's argument proves too much. According to SI, even when an insurer's decision to withhold its consent with regard to specific clean-up costs is reasonable, that result would still contravene the public interest. It is hard to believe that the requirements of public policy would so dramatically curtail insurers' rights. Under the rule advocated by SI, insurers would never be able to withhold consent regarding proposed clean-up costs, no matter how exorbitant or excessive. But an insurance company should be allowed to negotiate for some mechanism to refuse to underwrite unreasonable expenditures incurred by insured parties, which is just what the Consent Provision provides.

To be sure, if the agreement here did not contain a clause prohibiting Catlin from unreasonably withholding its consent—if Catlin had carte blanche, under the terms of the agreement, to refuse all reasonable requests—a different outcome might well be warranted. In the abstract, SI's concerns about insurers "imped[ing]" environmental clean-up are certainly valid.24 In practice, however, there is little[118 F.Supp.3d 554]
reason to think SI's concerns will materialize. As it stands, Catlin is prohibited—by the very same provision that SI seeks to have invalided—from unreasonably refusing to reimburse an insured party for clean-up costs.25 As written, the Consent Provision strikes a sensible balance between competing interests. If and when the New York courts consider the question, they may conclude that policy considerations require disrupting this balance. In the absence of further guidance, however, I decline to draw that conclusion here.

IV. CONCLUSION

For the reasons set forth above, SI's motion is DENIED, and Catlin' cross-motion is GRANTED. The Clerk of the Court is directed to close both motions (Dkt. Nos. 7 and 13), and this case.

SO ORDERED.

Cohen v Tri-State Consumer Ins. Co.
Cohen v Tri-State Consumer Ins. Co. 2019 NY Slip Op 06470 Decided on September 11, 2019 Appellate Division, Second Department Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and subject to revision before publication in the Official Reports.

Decided on September 11, 2019 SUPREME COURT OF THE STATE OF NEW YORK Appellate Division, Second Judicial Department
WILLIAM F. MASTRO, J.P.
MARK C. DILLON
VALERIE BRATHWAITE NELSON
ANGELA G. IANNACCI, JJ.
2018-02526
(Index No. 601039/17)

[*1]Craig Cohen, et al., respondents,

v

Tri-State Consumer Insurance Company, appellant.



Kaufman, Dolowich & Voluck, LLP (Thomas Torto, New York, NY, of counsel), for appellant.

Greenblatt & Agulnick, P.C., Great Neck, NY (Scott E. Agulnick of counsel), for respondents.



DECISION & ORDER

In an action to recover damages for breach of a homeowner's insurance policy, the defendant appeals from an order of the Supreme Court, Nassau County (Anna R. Anzalone, J.), entered January 16, 2018. The order granted the plaintiffs' motion for summary judgment on the issue of liability.

ORDERED that the order is affirmed, with costs.

After the plaintiffs' home sustained water damage as a result of overflow from a clogged toilet, the plaintiffs filed a claim with the defendant under a homeowner's insurance policy. The defendant disclaimed coverage based on an exclusion in the subject insurance policy for "water which backs up through sewers or drains." The plaintiffs commenced this action alleging breach of the insurance policy. After issue was joined, the plaintiffs moved for summary judgment on the issue of liability. The Supreme Court granted the motion, and the defendant appeals.

The plaintiffs demonstrated their prima facie entitlement to summary judgment on the issue of liability by establishing "that there was a valid policy of insurance covering the subject property, a loss occurred, a timely claim was made, and the loss fell within the terms of the policy" (Anghel v Utica Mut. Ins. Co., 127 AD3d 897, 899). In opposition, the defendant failed to raise an issue of fact as to whether any policy exclusions applied (see Pichel v Dryden Mut. Ins. Co., 117 AD3d 1267).

Accordingly, we agree with the Supreme Court's determination to grant the plaintiffs' motion for summary judgment on the issue of liability.

MASTRO, J.P., DILLON, BRATHWAITE NELSON and IANNACCI, JJ., concur.

ENTER:

Aprilanne Agostino

Clerk of the Court 



GC Clinton, LLC v Leading Ins. Group Ins. Co., Ltd. (United States Branch)
GC Clinton, LLC v Leading Ins. Group Ins. Co., Ltd. (United States Branch) 2017 NY Slip Op 06063 Decided on August 9, 2017 Appellate Division, Second Department Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and subject to revision before publication in the Official Reports.

Decided on August 9, 2017 SUPREME COURT OF THE STATE OF NEW YORK Appellate Division, Second Judicial Department
REINALDO E. RIVERA, J.P.
CHERYL E. CHAMBERS
JOSEPH J. MALTESE
BETSY BARROS, JJ.
2015-09701
(Index No. 502093/15)

[*1]GC Clinton, LLC, appellant,

v

Leading Insurance Group Insurance Co., Ltd. (United States Branch), et al., respondents.

Greenblatt & Agulnick, P.C., Great Neck, NY (Scott E. Agulnick and Steven A. Kotchek of counsel), for appellant.

Chartwell Law Offices, LLP, New York, NY (Linda Fridegotto and Matthew Kraus of counsel), for respondent Leading Insurance Group Insurance Co., Ltd. (United States Branch).

Perry, Van Etten, Rozanski & Primavera, LLP, Melville, NY (Leonard Porcelli of counsel), for respondent Omni Agency, Inc.



DECISION & ORDER

In an action to recover damages for breach of contract and for declaratory relief, the plaintiff appeals, as limited by its brief, from so much of an order of the Supreme Court, Kings County (Bunyan, J.), dated July 29, 2015, as denied its motion for summary judgment on the complaint and for a declaration in its favor.

ORDERED that the order is affirmed insofar as appealed from, with one bill of costs.

The defendant Leading Insurance Group Insurance Co., Ltd. (hereinafter Leading), issued a commercial insurance policy with respect to the plaintiff's residential rental property in Brooklyn. The policy lists the defendant Scottish American Insurance General Agency, Inc., formerly known as Buckingham Badler Associates, Inc. (hereinafter Buckingham), as the agent. According to the plaintiff, the defendant Omni Agency, Inc. (hereinafter Omni), was the plaintiff's broker.

On March 26, 2013, Leading issued a notice of cancellation of insurance for nonpayment of premium and mailed that notice to Buckingham. After the purported cancellation date, there was a fire on the top floor of the plaintiff's building. The plaintiff commenced this action, seeking, inter alia, a declaratory judgment regarding coverage and damages for breach of contract. The plaintiff moved for summary judgment, contending that Leading failed to comply with the requirement set forth in Insurance Law § 3426 that the notice of cancellation be mailed or delivered to the insured's "authorized agent or broker," and therefore, the policy was not effectively cancelled.

The plaintiff made a prima facie showing that mailing the notice of cancellation to Buckingham, rather than Omni, did not satisfy the requirement set forth in Insurance Law § 3426 [*2]that notice be mailed or delivered to the insured's "authorized agent or broker." However, in opposition, Leading raised triable issues of fact, inter alia, as to whether Buckingham was the "authorized agent or broker" (see Longobardi v New York Merchant Bakers Mut. Fire Ins. Co., 238 AD2d 387, 388; cf. Unified Window Sys., Inc. v Endurance Am. Specialty Ins. Co., 149 AD3d 1009; Holowacz v Insurance Corp. of N.Y., 27 AD3d 621, 622).

The parties' remaining contentions need not be addressed in light of our determination.

Accordingly, the Supreme Court properly denied the plaintiff's motion for summary judgment on the complaint and for a declaration in its favor.

RIVERA, J.P., CHAMBERS, MALTESE and BARROS, JJ., concur.

ENTER:

Aprilanne Agostino

Clerk of the Court
​

CONTACT US   (718)352-4800

INSURANCE CLAIM RECOVERY.
PROPERTY DAMAGE.

A DENIED CLAIM ISN'T THE END.  
FOR US, IT'S THE BEGINNING.  

​NEW YORK COURT OF APPEALS

2008 NY Int. 21

This opinion is uncorrected and subject to revision before publication in the Official Reports.


2008 NY Slip Op 01418

Decided on February 19, 2008

No. 14

Bi-Economy Market, Inc., Appellant,
v
Harleysville Insurance Company of New York, et al., Respondents.

Kathleen A. Burr, for appellant.

Michael F. Chelus, for respondents.

New York Public Adjusters Association; United

Policyholders; New York Insurance Association et al., amici curiae.

PIGOTT, J.

In this action brought by an insured against an insurer for breach of a commercial property insurance contract, the principal issue presented is whether the insured can assert a claim for consequential damages. Under the circumstances of this case, we hold that it can.1

I.

Bi-Economy Market, a family-owned wholesale and retail meat market located in Rochester, New York, suffered a major fire in October 2002, resulting in the complete loss of food inventory and heavy structural damage to the building and business-related equipment. At the time of the fire, Bi-Economy was insured by defendant Harleysville Insurance Company under a "Deluxe Business Owner's" policy that provided replacement cost coverage on the building as well as business property or "contents" loss coverage.

The policy also provided coverage for lost business income, what is commonly referred to as "business interruption insurance," for up to one year from the date of the fire. Specifically, the contract stated that Harleysville would "pay for the actual loss of Business Income . . . sustain[ed] due to the necessary suspension of [Bi-Economy's] 'operations' during the 'period of restoration.'" Business income is defined as the "(1) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and (2) Continuing normal operating expenses incurred, including payroll." "Period of restoration" is defined as the period of time that "[b]egins with the date of direct physical loss or damage" and "[e]nds on the date when the property . . . should be repaired, rebuilt or replaced with reasonable speed and similar quality."

Following the fire, Bi-Economy submitted a claim to Harleysville pursuant to the terms of the contract. Harleysville disputed Bi-Economy's claim for actual damages, and advanced only the sum of $163,161.92. More than a year later, following submission of their dispute to alternative dispute resolution, Bi-Economy was awarded the sum of $407,181. During all this time, Harleysville offered to pay only seven months of Bi-Economy's claim for lost business income, despite the fact that the policy provided for a full twelve months. Bi-Economy never resumed business operations.

In October 2004, Bi-Economy commenced this action against Harleysville, asserting causes of action for bad faith claims handling, tortious interference with business relations and breach of contract, seeking consequential damages for "the complete demise of its business operation in an amount to be proved at trial." Bi-Economy alleged that Harleysville improperly delayed payment for its building and contents damage and failed to timely pay the full amount of its lost business income claim. Bi-Economy further alleged that, as a result of Harleysville's breach of contract, its business collapsed, and that liability for such consequential damages was reasonably foreseeable and contemplated by the parties at the time of contracting.

Harleysville answered, and subsequently moved for leave to amend its answer to raise the defense that the contract excluded consequential damages and for partial summary judgment dismissing Bi-Economy's breach of contract cause of action. In support of its motion, Harleysville cited several contractual provisions excluding coverage for "consequential loss."

Supreme Court granted the motion and the Appellate Division affirmed, holding that "the insurance policy expressly exclude[d] coverage for consequential losses, and thus it cannot be said that [consequential] damages were contemplated by the parties when the contract was formed" (37 AD3d 1184, 1185 [internal quotation marks and citations omitted]). The Appellate Division granted Bi-Economy leave to appeal and certified the following question: "Was the order of this Court, entered February 2, 2007, properly made?" We conclude that it was not.

II.

Bi-Economy contends that the courts below erred in dismissing its breach of contract claim seeking consequential damages for the collapse of its business resulting from a failure to fulfill its obligations under the contract of insurance. We agree and therefore reverse the order of the Appellate Division and reinstate that cause of action.

It is well settled that in breach of contract actions "the nonbreaching party may recover general damages which are the natural and probable consequence of the breach" (Kenford Co. v County of Erie, 73 NY2d 312, 319 [1989]). Special, or consequential damages, which "do not so directly flow from the breach," are also recoverable in limited circumstances (American List Corp. v U.S. News & World Report, Inc., 75 NY2d 38, 43 [1989]). In Kenford, we stated that "[in] order to impose on the defaulting party a further liability than for damages [which] naturally and directly [flow from the breach], i.e., in the ordinary course of things, arising from a breach of contract, such unusual or extraordinary damages must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting" (Kenford, 73 NY2d at 319 [internal quotation marks and citations omitted]). We later explained that "[t]he party breaching the contract is liable for those risks foreseen or which should have been foreseen at the time the contract was made" (Ashland Mgt. v Janien, 82 NY2d 395, 403 [1993]). It is not necessary for the breaching party to have foreseen the breach itself or the particular way the loss occurred, rather, "[i]t is only necessary that loss from a breach is foreseeable and probable" (id., citing Restatement [Second] of Contracts § 351; 3 Farnsworth, Contracts § 12.14 [2d ed 1990]).

To determine whether consequential damages were reasonably contemplated by the parties, courts must look to "the nature, purpose and particular circumstances of the contract known by the parties . . . as well as 'what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made'" (Kenford, 73 NY2d at 319, quoting Globe Ref. Co. v Landa Cotton Oil Co., 190 US 540 [1903]). Of course, proof of consequential damages cannot be speculative or conjectural (see Ashland Mgt., 82 NY2d at 403 [damages for the loss of future profits must be proven with reasonable certainty and "be capable of measurement based upon known reliable factors without undue speculation"]; see also Kenford Co. v County of Erie, 67 NY2d 257, 261 [1986]).

The dissent seeks to distinguish this case from the Kenford line of reasoning by grouping it with that separate class of contract actions involving pure "agreements to pay" — contracts for money only — where the only recoverable damage for breach is interest. This distinction is without basis. With agreements to pay money — for example, an agreement to pay sales commissions or a contract to pay a lender $12 tomorrow for $10 given today, the sole purpose of the contract is to pay for something given in exchange. In such cases, what the payee plans to do with the money is external and irrelevant to the contract itself. In the present case, however, the purpose of the agreement — what the insured planned to do with its payment — was at the very core of the contract itself.

The dissent also blurs the significant distinction between consequential and punitive damages. The two types of damages serve different purposes and are evidenced by different facts. Consequential damages, designed to compensate a party for reasonably foreseeable damages, "must be proximately caused by the breach" and must be proven by the party seeking them (24 Lord, Williston on Contracts § 64.12, at 124-125 [4th ed]). Punitive damages, by contrast, "are not measured by the pecuniary loss or injury of the plaintiff as a compensation" but are "assessed by way of punishment to the wrongdoer and example to others" (11 Perillo, Corbin on Contracts § 59.2, at 550 [rev ed]). Unlike consequential damages, which are quantifiable, "[t]here is no rigid formula by which the amount of punitive damages is fixed, although they should bear some reasonable relation to the harm done and the flagrancy of the conduct causing it" (IHP Corp. v 210 Cent. Park South Corp., 16 AD2d 461, 466 [1st Dept 1962], affd 12 NY2d 329 [1963]).

As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that "a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims" (New York Univ. v Continental Ins. Co., 87 NY2d 308, 318 [1995]). An insured may also bargain for the peace of mind, or comfort, of knowing that it will be protected in the event of a catastrophe (see e.g. Beck v Farmers Ins. Exch., 701 P2d 795 [Utah 1985] ["[I]t is axiomatic that insurance frequently is purchased not only to provide funds in case of loss, but to provide peace of mind for the insured or his beneficiaries"]; The Best Place, Inc. v Penn Am. Ins. Co., 82 Haw 120, 920 P2d 334 [1996], quoting Noble v Nat'l Am. Life Ins. Co., 128 Ariz 188, 624 P2d 866 [1981] ["An insurance policy is not obtained for commercial advantage; it is obtained as protection against calamity"]; Andrew Jackson Life Ins. Co. v Williams, 566 So 2d 1172 n9 [Miss 1990] ["An insured bargains for more than mere eventual monetary proceeds of a policy; insureds bargain for such intangibles as risk aversion, peace of mind, and certain and prompt payment of the policy proceeds upon submission of a valid claim"]); Ainsworth v Combined Ins. Co. of America, 104 Nev 587, 763 P2d 673 [1988] ["A consumer buys insurance for security, protection, and peace of mind"]).

III.

The purpose served by business interruption coverage cannot be clearer — to ensure that Bi-Economy had the financial support necessary to sustain its business operation in the event disaster occurred (see Howard Stores Corp. v Foremost Ins. Co., 82 AD2d 398, 400 [1st Dept 1981] ["The purpose of business interruption insurance is to indemnify the insured against losses arising from inability to continue normal business operation and functions due to the damage sustained as a result of the hazard insured against"], affd 56 NY2d 991 [1982]; 3-36 Bender's New York Insurance Law § 36.06). Certainly, many business policyholders, such as Bi-Economy, lack the resources to continue business operations without insurance proceeds. Accordingly, limiting an insured's damages to the amount of the policy, i.e., money which should have been paid by the insurer in the first place, plus interest, does not place the insured in the position it would have been in had the contract been performed (see generally Brushton-Moira Cent. Sch. Dist. v Fred H. Thomas Assocs., 91 NY2d 256, 262 [1998] ["Damages are intended to return the parties to the point at which the breach arose and to place the nonbreaching party in as good a position as it would have been had the contract been performed"]; Goodstein Constr. Corp. v City of New York, 80 NY2d 366, 373 [1992], citing Restatement [Second] of Contracts § 347, Comment a; § 344 ["Contract damages are ordinarily intended to give the injured party the benefit of the bargain by awarding a sum of money that will, to the extent possible, put that party in as good a position as it would have been in had the contract been performed"]).

Thus, the very purpose of business interruption coverage would have made Harleysville aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to Bi-Economy for the loss of its business as a result of the breach (see Sabbeth Indus. v Pennsylvania Lumbermens Mut. Ins. Co. (238 AD2d 767, 769 [3d Dept 1997]).

Furthermore, contrary to the dissent's view, the purpose of the contract was not just to receive money, but to receive it promptly so that in the aftermath of a calamitous event, as Bi-Economy experienced here, the business could avoid collapse and get back on its feet as soon as possible. Thus, this insurance contract included an additional performance-based component: the insurer agreed to evaluate a claim, and to do so honestly, adequately, and — most importantly — promptly. The insurer certainly knew that failure to perform would (a) undercut the very purpose of the agreement and (b) cause additional damages that the policy was purchased to protect against in the first place. Here, the claim is that Harleysville failed to promptly adjust and pay the loss, resulting in the collapse of the business. When an insured in such a situation suffers additional damages as a result of an insurer's excessive delay or improper denial, the insurance company should stand liable for these damages. This is not to punish the insurer, but to give the insured its bargained-for-benefit.

Nor do we read the contractual exclusions for certain consequential "losses" as demonstrating that the parties contemplated, and rejected, the recoverability of consequential "damages" in the event of a contract breach. The consequential "losses" clearly refer to delay caused by third party actors or by the "[s]uspension, lapse or cancellation of any license, lease or contract." Consequential "damages," on the other hand, are in addition to the losses caused by a calamitous event (i.e., fire or rain), and include those additional damages caused by a carrier's injurious conduct — in this case, the insurer's failure to timely investigate, adjust and pay the claim.

Therefore, in light of the nature and purpose of the insurance contract at issue, as well as Bi-Economy's allegations that Harleysville breached its duty to act in good faith, we hold that Bi-Economy's claim for consequential damages including the demise of its business, were reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment.

Accordingly, the order of the Appellate Division, insofar as appealed from, should be reversed, with costs, defendants' motion for leave to amend their answer to raise the defense of contractual exclusion for consequential damages and partial summary judgment dismissing the plaintiff's second cause of action denied, and the certified question answered in the negative.

SMITH, J. (dissenting):

In Rocanova v Equitable Life Assur. Socy. of U.S. 83 NY2d 603 [1994]) and New York Univ. v Continental Ins. Co. 87 NY2d 308 [1995]), we rejected the argument that a bad faith failure by an insurer to pay a claim could, without more, justify a punitive damages award. We held that punitive damages are not available for breach of an insurance contract unless the plaintiff shows both "egregious tortious conduct" directed at the insured claimant and "a pattern of similar conduct directed at the public generally" (Rocanova, 83 NY2d at 613; see NYU, 87 NY2d at 316). Today, the majority abandons this rule, without discussing it and without acknowledging that it has done so. The majority achieves this simply by changing labels: Punitive damages are now called "consequential" damages, and a bad faith failure to pay a claim is called a "breach of the covenant of good faith and fair dealing."

I think that Rocanova and NYU were correctly decided, and that the majority makes a mistake in largely nullifying their holdings.

Underlying our refusal in Rocanova and NYU to open the door to awards of punitive damages was a recognition of the serious harm such awards can do. Punitive damages will sometimes serve to deter insurer wrongdoing and thus protect insureds from injustice, but they will do so at too great a cost. Insurers will fear that juries will view even legitimate claim denials unsympathetically, and that insurers will thus be exposed to damages without any predictable limit. This fear will inevitably lead insurers to increase their premiums — and so will inflict a burden on every New Yorker who buys insurance.

This policy judgment was implicit in Rocanova and NYU. Not everyone agreed with it. The Appellate Division majority in Acquista v New York Life Ins. Co. (285 AD2d 73, 78 [1st Dept 2001]) hardly concealed its disagreement: "It is correct that, to date, this State has maintained the traditional view . . . [citing Rocanova and NYU]. Yet, for some time, courts and commentators around the country have increasingly acknowledged that a fundamental injustice may result . . . ." The Acquista court found a way to avoid what it thought an injustice: award "consequential," not punitive damages. Acquista adopted the rule of some sister-state decisions, notably Beck v Farmers Ins. Exch. (701 P.2d 795 [Utah 1985]), that an insurer that denies a claim in bad faith becomes liable for consequential damages beyond the policy limits (285 A2d at 80-81). With less frankness than the Acquista court — indeed, without even citing either Rocanova or Acquista — the majority here reaches the same result.

The "consequential" damages authorized by the majority, though remedial in form, are obviously punitive in fact. They are not triggered, as true consequential damages are, simply by a breach of contract, but only by a breach committed in bad faith. The majority never explains why this should be true, but the explanation is self-evident: the purpose of the damages the majority authorizes can only be to punish wrongdoers and deter future wrongdoing. They have nothing to do with consequential damages, or with the covenant of good faith and fair dealing, as those terms are ordinarily understood.

The whole idea of "consequential damages" is out of place in a suit against an insurer that has failed to pay a claim — or, indeed, in any case where the obligation breached is merely one to pay money. Consequential damages are a means of measuring the harm done when a party fails in some non-monetary performance — say, the transportation of a broken mill shaft (Hadley v Baxendale, 9 Ex 341 [1854]) or the construction of a football stadium (Kenford Co. v County of Erie, 73 NY2d 312 [1989]). In such cases, where there is no agreement on what money will be paid in the event of a breach, a court must try to decide what damages the parties contemplated — what damages they would have agreed to had they considered the question when the contract was signed (Kenford, 73 NY2d at 320). But in insurance contracts or other contracts for the payment of money, the parties have already told us what damages they contemplated; in the case of insurance, it is payment equal to the losses covered by the policy, up to the policy limits. There is no occasion for a Kenford analysis.

Nor could such an analysis, done in the way Kenford requires, support the results the majority reaches in these two cases. Under Kenford, the premise of consequential damages awards is that they effectuate the parties' presumed intentions at the time of contracting: "the commonsense rule to apply is to consider what the parties would have concluded had they considered the subject" (Kenford, 73 NY2d at 320 [emphasis in original]). Can anyone seriously believe that the parties in these cases would, if they had "considered the subject," have contracted for the results reached here? Imagine the dialogue. Applicant for insurance: "Suppose you refuse, in bad faith, to pay a claim. Will you agree to be liable for the consequences, including lost business, without regard to the policy limits?" Insurance company: "Oh, sure. Sorry, we forgot to put that in the policy."

The majority also departs from the established understanding of the "covenant of good faith and fair dealing" — thus obscuring the fact that the predicate for "consequential" damages here is exactly the same conduct, bad faith failure to pay claims, that we refused to make a predicate for punitive damages in Rocanova and NYU. Ordinarily, the covenant of good faith and fair dealing is breached where a party has complied with the literal terms of the contract, but has done so in a way that undermines the purpose of the contract and deprives the other party of the benefit of the bargain (e.g., 511 West 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144 [2002]). Here, plaintiffs allege that defendants breached, in bad faith, the express terms of the policies, by refusing to pay for the losses the policies covered. There is no need for resort to the implied covenant of good faith, and this is the first time, as far as I know, that we have relied on that implied covenant to condemn the bad faith breach of an express promise.

These two conceptual errors — the misuse of the terms "consequential damages" and "covenant of good faith" — are not the only ones in the majority opinions. The Bi-Economy opinion seems fundamentally to misunderstand the purpose of business interruption insurance — which is to compensate the insured for a business interruption that has already occurred, not to prevent one from occurring (see Bi-Economy majority op at 8-9). If the insured's business is never interrupted, there can be no claim under a business interruption policy. This error seems unimportant, however, for the majority's discussion of business interruption insurance is apparently extraneous to its holding. The Panasia case involves no business interruption coverage — yet the majority upholds the legal sufficiency of Panasia's claim for consequential damages on the basis of a simple citation to Bi-Economy (Panasia majority op at 3-4).

The majority's bad policy choice is more important than the flaws in its reasoning. This attempt to punish unscrupulous insurers will undoubtedly lead to the punishment of many honest ones. Under today's opinions, juries will decide whether claims should have been paid more promptly, or in larger amounts; whether an insurer who failed to pay a claim did so to put pressure on the insured, or from legitimate motives, or from simple inefficiency; and whether, and to what extent, the insurer's slowness and stinginess had consequences harmful to the insured. All these very difficult, often nearly unanswerable, questions will be put to jurors who will usually know little of the realities of either the insured's or the insurer's business. The jurors will no doubt do their best, but it is not hard to predict where their sympathies will lie.

The result of the uncertainty and error that the majority's opinions will generate can only be an increase in insurance premiums. That is the real "consequential damage" flowing from today's holdings.

* * * * * * * * * * * * * * * * *

Order, insofar as appealed from, reversed, with costs, defendants' motion for leave to amend their answer to raise the defense of contractual exclusion for consequential damages and partial summary judgment dismissing the plaintiff's second cause of action denied, and certified question answered in the negative. Opinion by Judge Pigott. Chief Judge Kaye and Judges Ciparick, Graffeo and Jones concur. Judge Smith dissents in an opinion in which Judge Read concurs.

Decided February 19, 2008

Notes

1  This being an appeal from the grant of partial summary judgment to the insurer, we view the facts in the light most favorable to the insured.


BI-ECONOMY MARKET, INC., APPELLANT, V HARLEYSVILLE INSURANCE COMPANY OF NEW YORK, ET AL., RESPONDENTS.








​D.K. PROP., INC. V NATIONAL UNION FIRE INS. CO. OF PITTSBURGH, PA.







​D.K. Prop., Inc. v National Union Fire Ins. Co. of Pittsburgh, Pa.
D.K. Prop., Inc. v National Union Fire Ins. Co. of Pittsburgh, Pa. 2019 NY Slip Op 00347 Decided on January 17, 2019 Appellate Division, First Department Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and subject to revision before publication in the Official Reports.

Decided on January 17, 2019
Sweeny, J.P., Gische, Kahn, Oing, Singh, JJ.
8018 650733/17

[*1]D.K. Property, Inc., Plaintiff-Appellant,

v

National Union Fire Insurance Company of Pittsburgh, Pa., Defendant-Respondent.


Hoguet Newman Regal & Kenney, LLP, New York (Andrew N. Bourne of counsel), for appellant.

Mound Cotton Wollan & Greengrass LLP, New York (Costantino P. Suriano of counsel), for respondent.


Order, Supreme Court, New York County (Robert R. Reed, J.), entered March 3, 2018, which, to the extent appealed from, granted defendant's motion pursuant to CPLR 3211 to dismiss the demand for consequential damages (other than attorneys' fees), unanimously reversed, on the law, with costs, the motion denied, and the claims reinstated.

This action involves an insurance coverage dispute under a commercial insurance policy issued by defendant to plaintiff. Supreme Court dismissed the claims for consequential damages, but otherwise allowed the general breach of contract claim (1st cause of action) and the collateral contract claim for breach of the implied covenant of good faith and fair dealing (second cause of action) to proceed. At issue is whether, at the pleading stage, a claim for consequential damages arising from defendant's processing of plaintiff'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. We find that the motion court erred in dismissing the consequential damages claim, because plaintiff fulfilled its pleading requirement by specifying the types of consequential damages claimed and alleging that such damages were reasonably contemplated by the parties prior to contracting.

The policy that plaintiff purchased from defendant covers

"direct physical loss or damage to" plaintiff's building, located at 40 Prince Street in Manhattan. After certain construction work began in an adjoining building, plaintiff's building began to shift and exhibit structural damage, including cracks. In October 2014, plaintiff filed a timely insurance claim with defendant. Defendant, however, did not pay the claim, nor did it disclaim coverage.

Two causes of action are asserted in the amended complaint; the first cause of action is for breach of contract for failure to pay covered losses under the policy; the second cause of action is for breach of the implied covenant of good faith and fair dealing. Plaintiff seeks consequential damages in connection with each cause of action and legal fees solely in connection with its second (bad faith) cause of action. Supreme Court granted defendant's pre-answer motion to dismiss the amended complaint only to the extent of dismissing the claims for consequential damages, excepting the demand for legal fees.

It is well settled law that on a motion to dismiss pursuant to CPLR 3211(a)(7), the pleading is afforded a liberal construction, facts as alleged in the complaint are accepted as true, plaintiffs are afforded the benefit of every possible favorable inference, and the motion court must only determine whether the facts as alleged fit within any cognizable legal theory (see e.g. Leon v Martinez, 84 NY2d 83, 87—88 [1994]).

The complaint alleges that rather than pay the claim, defendant has made unreasonable and increasingly burdensome information demands throughout the three year period since the [*2]property damage occurred. Plaintiff contends that this was a tactic by defendant to make the claim so expensive to pursue that plaintiff would abandon it altogether. Plaintiff contends 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 are 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. Despite substantial documentation of the cause and extent of the damage to plaintiff's building, not only by plaintiff's engineer, but also an engineer that defendant hired, who inspected the building several times, defendant has persisted in demanding further, unnecessary monitoring, data collection, inspections, and reinspections. Although it has yet to pay the loss or deny the claim, defendant nonetheless sought to intervene as plaintiff's subrogor under the policy when plaintiff sued the owner of the adjoining property. By doing so, defendant forced plaintiff to incur significant, unnecessary legal fees.

A plaintiff may sue for consequential damages resulting from an insurer's failure to provide coverage if such damages ("risks") were foreseen or should have been foreseen when the contract was made (Bi-Economy Mkt, Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 192 [2008]). Although proof of such consequential damages will ultimately rest on what liability the insurer is found to have "assumed consciously," or from the plaintiff's point of view, have warranted the plaintiff to reasonably suppose the insurer assumed when the insurance contract was made, a determination of whether such damages were, in fact, forseeable should not be decided on a motion to dismiss and must await a fully developed record (see Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203 [2008]; see also Bi-Economy at 192). In other words, the inquiry is not whether plaintiff will be able to establish its claim, but whether plaintiff has stated a claim.

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 forseeable 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 forseeable (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.

THIS CONSTITUTES THE DECISION AND ORDER

OF THE SUPREME COURT, APPELLATE DIVISION, FIRST DEPARTMENT.

ENTERED: JANUARY 17, 2019

CLERK

Lee v. Union Mut. Fire Ins. Co.

Decided Aug 15, 2022

20-CV-3191 (MKB)
08-15-2022
FRED LEE and ANN LEE, Plaintiffs, v. UNION MUTUAL FIRE INSURANCE COMPANY, Defendant.

MARGO K. BRODIE, UNITED STATES DISTRICT JUDGE

MEMORANDUM & ORDER

MARGO K. BRODIE, UNITED STATES DISTRICT JUDGE

Plaintiffs Fred and Aim Lee commenced this action against Defendant Union Mutual Fire Insurance Company on June 5, 2020, bringing claims for breach of contract and violation of section 349 of the New York General Business Law (“GBL”). (Compl. ¶¶ 61-81, annexed to Notice of Removal as Ex. A, Docket Entry No. 1-1.) Plaintiffs allege that Defendant wrongfully refused to cover fire damage at Plaintiffs' property after concluding from a “sham investigation!]” of the property that Plaintiffs had lied in their application for insurance. (Id. at ¶¶ 10, 14, 74.)

Plaintiffs move for summary judgment on their breach of contract claim1 and Defendant moves for summary 2

[page1image1216256]

1 judgment as to both claims. For the reasons set forth below, the Court *1 grants Plaintiffs' motion for summary judgment on their breach of contract claim and denies Defendant's motion for summary judgment on Plaintiffs'

breach of contract claim. The Court also grants Defendant's motion for summary judgment as to Plaintiffs' claim under section 349 of the GBL.

1  (Pls.' Mot. for Summ. J. (“Pls.' Mot.”), Docket Entry No. 34; Pls.' Mem. in Supp. of Pls.' Mot. (“Pls.' Mem.”), annexed to Pls.' Mot. as Ex. 3, Docket Entry No. 34-3; Def.'s Mem. in Opp'n to Pls.' Mot. (“Def.'s Opp'n”), annexed to Pls.' Mot. as Ex. 18, Docket Entry No. 3418; Pls.' Reply in Supp. of Pls.' Mot. (“Pls.' Reply”), Docket Entry No. 34-19.)

2  (Def.'s Mot. for Summ. J. (“Def.'s Mot.”), Docket Entry No. 36; Def.'s Mem. in Supp. of Def.'s Mot. (“Def.'s Mem.”), annexed to Def.'s Mot., Docket Entry No. 36-19; Pls.' Mem. in Opp'n to Def.'s Mot. (“Pls.' Opp'n”), annexed to Def.'s Mot., Docket Entry No. 34-22; Def.'s Reply in Supp. of Def.'s Mot. (“Def.'s Reply”), annexed to Def.'s Mot., Docket Entry No. 3623.)

I. Background

Plaintiff Fred Lee has owned the property located at 39-11 27th Sheet, Long Island City, New York (“the Property”) since July of 2013 and at all times pertinent to this action. (Pls.' Resp. to Def,s 56.1 Stmt. (“Pls.' 56.1 Resp.”) ¶ 15, annexed to Def.'s Mot., Docket Entry No. 36-20.) The Property has a two-bedroom apartment on the first floor, a two-bedroom apartment on the second floor, and a finished basement. (Id. at ¶¶ 14, 16-17.) The basement can be accessed directly from outside the building. (Id. at ¶ 22.)

1

Lee v. Union Mut. Fire Ins. Co. 20-CV-3191 (MKB) (E.D.N.Y. Aug. 15, 2022)

a. Relevant insurance policies

On June 27, 2017, Plaintiffs completed an application for commercial insurance and submitted the application

to Defendant. (Id. at ¶¶ 23-24; Def.'s Resp. to Pls.' 56.1 Stmt. (“Def.'s 56.1 Resp.”) ¶ 4, annexed to Pls.' Mot. as

Ex. 17, Docket Entry No. 34-17.) Plaintiffs indicated on the application that the Property contained only two

apartment units. (Pls.' 56.1 Resp. ¶¶ 25-26; Def.'s 56.1 Resp. ¶¶ 5-6.) Defendant issued the requested policy,

covering the period from July 8, 2017 to July 8, 2018 (the “First Policy”). (Pls.' 56.1 Resp. ¶ 23.) It later issued

3

[page2image217308688]

a renewal insurance policy to Plaintiffs for the period from July 8, 2018 to July 8, 2019 (the “Second Policy”), 2 (id. at ¶ 28), and a second renewal policy covering the period from July *2 8, 2019 to July 8, 2020 (“the Third

Policy”), (id. at ¶ 30). Plaintiffs again represented on the second renewal application that the Property only contained two apartment units. (Id. at ¶ 31.) All three policies include the following language:

3 Defendant claims that Plaintiffs applied for renewal and that, on the renewal application, “[P]laintiffs again represented that [the Property] contained only two apartment units.” (Def's Stmt, of Undisputed Material Facts (“Def's 56.1”) ¶ 29, Docket Entry No. 3618.) Plaintiffs dispute this, claiming that they “did not complete a renewal application, presumed the renewal to be automatic, took no action in connection with the renewal, and did not execute any additional documentation in connection with the renewal.” (Pls.' 56.1 Resp. ¶ 29.)

By accepting this policy, you agree:
a. The statements in the Declarations are accurate and complete;
b. Those statements are based upon representations you made to us; and c. We have issued this policy in reliance upon your representations.

(First Policy 78, annexed to Aff. of James Lambert (“Lambert Aff”) as Ex. 1, Docket Entry No. 36-9; Second Policy 76, annexed to Lambert Aff. as Ex. 2, Docket Entry No. 36-10; Third Policy 76, annexed to Lambert Aff. as Ex. 3, Docket Entry No. 36-11.)4 Roundhill Express, LLC (“Roundhill”), “acting as an agent of [Defendant], binds insurance policies on behalf of' Defendant. (Defs.' 56.1 Resp. ¶ 3.) Roundhill's underwriting guidelines state that “[e]ach new policy will undergo an inspection within [sixty] days of its effective date.” (Underwriting Guidelines 2, annexed to Pls.' Mot. as Ex. M, Docket Entry No. 34-16.) On July 11, 2017, Frederick Harper inspected the Property. (Def's 56.1 Resp. ¶¶ 1415; Lambert Aff. ¶ 77, annexed to Def's Mot., Docket Entry No. 36-8; Def's 56.1 ¶ 51.) Harper's report from the inspection includes photos of the outside of the building; the stairway; the electric and gas meters; and the building's heating source. (Inspection Report,

3 annexed to *3 Pls.' Mot. as Ex. F, Docket Entry No. 34-9; Lambert Aff. ¶¶ 81-82; Pls.' 56.1 Resp. ¶ 49; Defs.' 56.1 Resp. ¶ 17.)

4 Because the three policies, the Beltrani Report, the Second Beltrani Report, the Rescission Letter, and Plaintiffs' Reply are not consecutively paginated, the Court refers to the page numbers assigned by the electronic case filing system.

b. Fire notification, inspection and cancellation of policies

On March 2, 2020, Plaintiffs' agent notified Defendant through Roundhill that a fire had occurred and a claim was being made under the Third Policy. (Pls.' 56.1 Resp. ¶ 6.) Roundhill hired Beltrani Consultants, Inc. (“BCI”) to assist in its investigation of the fire. (Id. at ¶¶ 7-8.) BCI produced a report signed by Harry Beltrani that stated that in addition to the apartments occupied by tenants on the first and second floors, the Property also had “a full finished basement [with] a separate entrance” that included “a living area, bedroom with a full bath and kitchen area.” (BCI Preliminary Report (“Beltrani Report”) 3, annexed to Lambert Aff. as Ex. 5, Docket Entry No. 36-13.)5 On April 15, 2020, BCI again inspected the Property. (Pls.' 56.1 Resp. ¶ 12.) hi the

2

Lee v. Union Mut. Fire Ins. Co. 20-CV-3191 (MKB) (E.D.N.Y. Aug. 15, 2022)

report it produced after this second inspection, BCI stated that it had established after its first inspection that there was “a full furnished apartment located in the basement area.” (BCI Proposed Adjustment Report (“Second Beltrani Report”) 3, annexed to Lambert Aff. as Ex. 6, Docket Entry No. 36-14.) The basement apartment was “not occupied at this time” but it was “clear that at minimal cost, the apartment can be tenant[-]occupied at any time.” (Id.) The report included a signed statement by Fred Lee, stating that he had owned the building for seven years, that no one had ever lived in the basement, and that he had “never made a structural change to the building or basement.” (Id. at 4.)

5 Plaintiffs object to the report and its contents as inadmissible hearsay. (Pls.' 56.1 Resp. ¶¶9-11)

By correspondence dated May 19, 2020, Roundhill, on behalf of Defendant, disclaimed coverage for the March

4  2, 2020 fire loss and rescinded Plaintiffs' policy. (Disclaimer of *4 Coverage/Notice of Rescission (“Rescission

Letter”), annexed to Lambert Aff. as Ex. 8, Docket Entry No. 36-16.) The Rescission Letter stated that Plaintiffs had represented on their insurance application and both renewal applications that the Property “contained only two apartment units.” (Id. at 3.) However, the investigator had determined that there was also “a frill basement apartment that has a bedroom, living room, kitchen, bathroom, and separate entrance.” (Id.) Thus, Plaintiffs' statement that the Property only had two apartment units was “false and constitute[d] a material misrepresentation, which [was] a violation of [Plaintiffs'] policy terms.” (Id. at 3-4.) Tire letter further stated that Defendant “would not have issued this same policy to [Plaintiffs] had it known that the [Property] had three apartment units and not two.” (Id. at 4.) Defendant therefore “rescind[ed] the current policy of insurance and [Plaintiffs'] two prior policies ab initio.” (Id.)

c. Supreme court action and removal to the Eastern District of New York

On June 5, 2020, Plaintiffs fried suit in the Supreme Court of the State of New York, Queens County, alleging that Defendant had “wrongfully denied coverage, refused to make payment and rescinded the commercial policy in bad faith.” (Compl. ¶ 14.) Plaintiffs brought two causes of action, breach of contract and violation of section 349 of the GBL, and sought damages “believed to be in excess of five hundred thousand dollars ... along with consequential damages” for each cause of action. (Id. at ¶¶ 61-81.) On July 16, 2020, Defendant removed the action to the Eastern District of New York under diversity jurisdiction. (Notice of Removal, Docket Entry No. 1.)

d. James Lambert's deposition and subsequent affidavit Plaintiffs deposed James Lambert, President of

Roundhill Express, LLC, (Lambert Aff. ¶ 1), on May 4, 2021, (Dep. of James Lambert (“Lambert Dep.”),

5  annexed to Pls.' Mot. as Ex. D, *5

Docket Entry No. 34-7). He testified that Defendant and Roundhill do not have “guidelines ... which relate to the definition of an apartment unit as the term is utilized in an application for insurance” and that Roundhill does “not draw a distinction between legal or illegal units.” (Id. at 33:15-34:11.) Mr. Lambert was asked what “constitutes the definition of an apartment.” (Id. at 34:12-13.) He replied: “Do you want my definition; do you want the most recent court decision definition? I mean my definition doesn't really matter here.” (Id. at 34:15- 17.) He testified that Roundhill “do[es not] have a definition” of “apartment” but rather “ask[s] how many apartments are there.” (Id. at 34:21-22.) Mr. Lambert stated that he personally “considers] places in which people reside to be apartments,” but added that his “personal definition is not material here, it's how courts define apartments.” (Id. at 34:25-35:4.) He then clarified that “[i]f it's capable of someone residing there, it's an apartment.” (Id. at 35:8-11.) Mr. Lambert testified that Roundhill does not “interpret the question” about apartment units, “we simply ask the question,” (id. at 36:13-14), and added that he believed that the number of apartment units in the building is “a fairly clear question,” (id. at 37:4-6).

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In a subsequent affidavit dated October 22, 2021, Mr. Lambert claimed that “[h]ad Roundhill been accurately advised on the [Plaintiffs' applications that the [Property]... actually contained three apartment units, rather than two apartment units. Roundhill would not have issued” the policies that it did to Plaintiffs. (Lambert Aff. ¶ 69.)

6  Instead, “[h]igher *6 premiums would have been charged to insure a three-apartment building than the premiums that were assessed.” (Id. at ¶ 70.)

On December 3, 2021, Plaintiff moved for summary judgment on its breach of contract claim. (Pls.' Mot.) On December 8, 2021, Defendant moved for summary judgment on the entire action. (Def.'s Mot.)

IL Discussion

a. Standard of review

Summary judgment is proper only when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); Borley v. United States, 22 F.4th 75, 78 (2d Cir. 2021); Windward Bora, LLC v. Wilmington Sav. Fund Socy, 982 F.3d 139, 142 (2d Cir. 2020). Tire court must “constru[e] the evidence in the light most favorable to the non-moving party” and “resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought.” Lenzi v. Systemax, Inc., 944 F.3d 97, 107 (2d Cir. 2019) (first quoting VKK Corp. v. Nat 1 Football League, 244 F.3d 114, 118 (2d Cir. 2001); and then quoting Johnson v. Goord, 445 F.3d 532, 534 (2d Cir. 2006)). The role of the court “is not to resolve disputed questions of fact but only to determine whether, as to any material issue, a genuine factual dispute exists.” Rogoz v. City of Hartford, 796 F.3d 236, 245 (2d Cir. 2015) (first quoting Kaytor v. Elec. Boat Corp., 609 F.3d 537, 545 (2d Cir. 2010); and then citing Anderson v. Liberty' Lobby, Inc., 477 U.S. 242, 249-50 (1986)). A genuine issue of fact exists when there is sufficient “evidence on which the jury could reasonably find for the [nonmoving party].” Anderson, 477 U.S. at 252. Tire “mere existence of a scintilla of evidence” is not sufficient to defeat summary judgment. Id. Tire court's function is to decide

7  “whether, after resolving all ambiguities and drawing all inferences *7 in favor of the non-moving party, a rational juror could find in favor of that party.” Pinto v. Allstate Ins. Co., 221 F.3d 394, 398 (2d Cir. 2000).

b. Plaintiffs' motion for summary judgment on their breach of contract claim

i. Defendant's underwriting guidelines

Plaintiffs argue that to establish its right to rescind, an insurer must present (1) “[a]n affidavit or testimony from the insurer's underwriter who testifies that the insurer would not have issued the particular contract if the facts had been disclosed” and (2) “the insurer's underwriting manual, guidelines, or rules.” (Pls.' Mem. 3-4.) Plaintiffs argue that Defendant has not fulfilled the second requirement because it has not presented any “underwriting manuals, guidelines, set of rules, or [] other documentation establishing what [Defendant] would consider an apartment.” (Id. at 4.) Rather, Defendant's underwriting agent, James Lambert, “conceded that [Defendant] did not have a definition for ‘apartment' or ‘apartment unit' for purposes of applying for insurance.” (Id.)

Defendant argues that “the Program Manager's Agreement entered into between [Defendant] and [Roundhill]... provides the underwriting guidelines utilized by Roundhill when issuing commercial package insurance policies through [Defendant].” (Def.'s Opp'n 11.) These guidelines “clearly provide that ‘[t]he apartment and dwelling liability classes listed above base their premium on the number of living units; with a higher premium being charged for each additional unit.'” (Id.) Defendant argues that this is consistent with Mr. Lambert's testimony that “[i]f it's capable of someone residing there, it's an apartment,” regardless of the legality of the space in question. (Id. at 10-11.)

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“Under New York law, an insurer may rescind an insurance policy if it was issued in reliance on material

8  misrepresentations.” U.S. Liab. Ins. Co. v. WW Trading Co., *8 813 F. App'x 636, 638-39 (2d Cir. 2020)

(quoting Fid. & Guar. Ins. Underwriters, Inc. v. Jasani Realty Corp., 540 F.3d 133, 139 (2d Cir. 2008)); Dukes Bridge LLC v. Sec. Life of Denver Ins. Co., No. 20-CV-2687, 2021 WL 5986871, at *2 (2d Cir. Dec. 17, 2021) (“Under New York law, ‘an insurance policy issued in reliance on material misrepresentations is void from its inception.'” (quoting Republic Ins. Co. v. Masters, Mates & Pilots Pension Plan, 77 F.3d 48, 52 (2d Cir. 1996))). New York law defines a misrepresentation as a false “statement as to past or present fact, made to the insurer by ... the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof.” N.Y. his. Law § 3105(a); Fid. & Guar. Ins. Underwriters, Inc., 540 F.3d at 139; Jackson v. Travelers Ins. Co., 113 F.3d 367, 370 (2d Cir. 1997). “The concept of misrepresentation encompasses both false affirmative statements and the failure to disclose where a duty to disclose exists.” Scottsdale Ins. Co. v. Priscilla Props., LLC, 254 F.Supp.3d 476, 481 (E.D.N.Y. 2017) (quoting Chi. Ins. Co. v. Kreitzer & Vogehnan, No. 97-CV-8619, 2000 WL 16949, at *5 (S.D.N.Y. 2000)) “An applicant for insurance is under no duty to volunteer information where no question plainly and directly requires it to be furnished,” Vella v. Equitable Life Assurance Soc'y, 887 F.2d 388, 393 (2d Cir. 1989), and “[a]n answer to an ambiguous question on an application for insurance cannot be the basis of a claim of misrepresentation .. . where ... a reasonable person in the insured's position could rationally have interpreted the question as he did,” Fanger v. Manhattan Life Ins. Co., 709 N.Y.S.2d 622, 624 (App. Div. 2000) (citations omitted); see also Berger v. Manhattan Life Ins. Co., 805 F.Supp. 1097, 1104 (S.D.N.Y. 1992). However, “where the nondisclosure, as to a matter which the insured has not been directly asked, constitutes fraud, the policy may be voided,” Aetna Cas. & Sur. Co. v. Retail Loc. 906 of AFL-CIO Welfare Fund, 921 F.Supp. 122, 132 (E.D.N.Y. 1996) (citing Sebring

9  v. Fidelity-Phenix Fire Ins. Co., 255 N.Y. *9 382, 386 (1931)); see also First Fin. Ins. Co. v. Allstate Interior Demolition Corp., 193 F.3d 109, 117 (2d Cir. 1999) (“[N]ondisclosure of a fact concerning which the applicant has not been asked does not ordinarily void an insurance policy absent an intent to defraud.” (quoting H.B. Singer, Inc. v. Mission Nat 1 Ins. Co., 636 N.Y.S.2d 316, 316 (App. Div. 1996))).

“An insurer may ‘avoid any contract of insurance or defeat recovery thereunder' only if a misrepresentation is ‘material.'” Principal Life Ins. Co. v. Locker Grp., 869 F.Supp.2d 359, 363 (E.D.N.Y. 2012) (quoting N.Y. Ins. L. § 3105(b)(1)). “A misrepresentation is ‘material' if ‘knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.'” Id. (quoting N.Y. hrs. L. § 3105(b)(1)); Vella, 887 F.2d at 391 (“[W]here there has been a misrepresentation by an insured, the insurance company can avoid liability on the policy by showing that had it known the truth it would not have issued the exact same policy it did issue.” (collecting cases)); Varshavskaya v. Metro. Life Ins. Co., 890 N.Y.S.2d 643 (App. Div. 2009). “A single material misrepresentation may suffice,” Scottsdale Ins. Co. v. Bo Steel Grp., No. 14-CV-7318, 2018 WL 7223724, at *3 (E.D.N.Y. July 2, 2018), and “[e]ven an innocent misrepresentation, if material, will support rescission,” Admiral Ins. Co. v. Brookwood Mgmt. #10, LLC, No. 16-CV-437, 2018 WL 5622595, at *19 (E.D.N.Y. Mar. 30, 2018) (quoting Cont'l Cas. Co. v. Marshall Granger & Co., 6 F.Supp.3d 380, 389 (S.D.N.Y. 2014)); see also Vella, 887 F.2d at 391 (“So long as a misrepresentation is material, it is no defense to an action for rescission that the misrepresentation was innocently made.” (citing Process Plants Corp. v. Ben. Nat'1 Life Ins. Co., 385 N.Y.S.2d 308, 310 (App. Div. 1976))).

The materiality determination normally presents an issue of fact for the jury, but “where the evidence

concerning the materiality is clear and substantially uncontradicted, the matter is one of law for the court to

10  determine.” Mut. Ben. Life Ins. Co. v. JMR Elecs. Corp., 848 F.2d 30, *10 32 (2d Cir. 1988) (quoting Process

Plants Corp., 385 N.Y.S.2d at 310-11); Gemini Ins. Co. v. Integrity Contr., Inc., No. 17-CV-1151, 2019 WL 1099705, at *3 (S.D.N.Y. Mar. 8, 2019) (same). “To establish materiality as a matter of law, ‘the insurer must

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present documentation concerning its underwriting practices, such as underwriting manuals, bulletins, or rules pertaining to similar risks, that show it would not have issued the same policy if the correct information had been disclosed in the application.'” Gemini Ins. Co., 2019 WL 1099705, at *3 (quoting Interboro Ins. Co. v. Fatmir, N.Y.S.2d 343, 345 (App. Div. 2011)). hi addition, “the insurer need not produce evidence of its underwriting policies in order to demonstrate materiality” in “cases where ‘ [c]ommon sense dictates that it is simply impossible to believe that, had the frill facts .. . been disclosed,' [the] insurer would have nonetheless issued the same policy, on the same terms.” Travelers Cas. & Sur. Co. of Am., 2018 WL 1508573, at *9 (first alteration in original) (quoting Cont 1 Cas. Co. v. Marshall Granger & Co., 6 F.Supp.3d 380, 390 (S.D.N.Y. 2014), affd sub nom. Conti Cas. Co. v. Boughton, 695 Fed.Appx. 596 (2d Cir. 2017)); see also Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992) (“Where the insurer specifically inquires as to a fact, the insured is thereby on notice that the insurer considers it material....”).

The affidavit and underwriting guidelines produced by Defendant do not establish its right to rescind because, as discussed below, the meaning of “apartment unit” in Defendant's insurance application is ambiguous. Since “[a]n answer to an ambiguous question cannot be the basis of a claim of misrepresentation where a reasonable person in the position of the insured could have rationally interpreted the question as the insured did,” the Court does not consider whether - in the absence of this ambiguity - Lambert's affidavit and Defendant's underwriting

11 *11 guidelines would be sufficient to establish Defendant's right to rescission. GuideOne Specialty Mut. Ins.

6

6 That is, because a reasonable answer to an ambiguous question cannot constitute a material misrepresentation, it is irrelevant whether Defendant's underwriting guidelines and Lambert's affidavit otherwise establish that Defendant would not have issued the policy that it did to Plaintiffs if it knew about the basement of the Property.

ii. Ambiguity of the term “apartment”

Plaintiffs argue that “the term ‘apartment' or ‘apartment unit,' as used in the application for insurance, is ambiguous.” (Pls.' Mem. 5.) They cite to Lambert's testimony that an apartment is a “place[] in which people reside,” arguing that “there is no dispute that no one resided in the basement of the Property” and claiming that no one could live in the basement because it is “not legally habitable as an apartment or dwelling unit.” (Id. at 6-8.) Plaintiffs also cite to Defendants' underwriting guidelines, which state that “the premium is based upon the number of ‘living units,”' noting that no one lives or lawfully could live in the basement. (Pls.' Reply 9-10.) Because case law holds that “when there is no defined term, that ambiguity must be interpreted in favor of the insured,” and because a term in an insurance policy is ambiguous if it is “susceptible to more than one reasonable interpretation,” Plaintiffs argue that summary judgment is proper on their breach of contract claim. (Pls.' Mem. 7-9.)

Defendant argues that “[t]he term ‘apartment unit' as used in the policy unambiguously refers to any portion of a property where a person can reside.” (Def.'s Opp'n 11.) It claims that because the insurance application “seeks information related to the physical property to be insured” rather than the legal status of the property, Plaintiffs' argument about the legal habitability of the basement is irrelevant. (Id.) Defendant cites to Merriam-Webster's

12 definition of an apartment as “a room or set of rooms fitted especially with housekeeping facilities and *12 usually leased as a dwelling.” (Id. at 12). It also points to the photos taken as part of the BCI investigation, showing “a kitchen area with a stove, a bathroom and partitioned living spaces,” as well as the repair estimate showing “numerous basement repairs needed” after the fire. (Id.) Defendant further argues that the term

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Co. v. Congregation Bais Yisroel, 381 F.Supp. 267, 274 (S.D.N.Y. 2005).

6

Lee v. Union Mut. Fire Ins. Co. 20-CV-3191 (MKB) (E.D.N.Y. Aug. 15, 2022)

“apartment” would not be ambiguous to “a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.” (Id. at 13.)

Under New York law, “an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract.” 10012 Holdings, Inc. v. Sentinel Ins. Co., Ltd., 21 F.4th 216, 220 (2d Cir. 2021) (quoting Parks Real Estate Purchasing Grp. v. St. Paul Fire & Marine Ins. Co., M2 F.3d 33, 42 (2d Cir. 2006)); Goldberger v. Paid Revere Life Ins. Co., 165 F.3d 180, 182 (2d Cir. 1999) (same). If the terms are unambiguous, courts should enforce the contract as written. See Parks Real Estate, 472 F.3d at 42; Goldberger, 165 F.3d at 182 (quoting Village of Sylvan Beach v. Travelers Indemnity Co., 55 F.3d 114, 115 (2d Cir. 1995)). However, if the contract is ambiguous, “particularly the language of an exclusion provision,” the ambiguity is interpreted in favor of the insured. See Goldberger, 165 F.3d at 182 (quoting Travelers Indemnity Co., 55 F.3d at 115); see also Olin Corp. v. Certain Underwriters at Lloyd s London, 347 Fed.Appx. 622, 627 (2d Cir. 2009) (same); Pepsico, Inc. v. Winterthur Int'l Am. Ins. Co., 788 N.Y.S.2d 142, 144 (App. Div. 2004) (citations omitted) (“[I]f the language of the policy is doubtfill or uncertain in its meaning, any ambiguity must be resolved in favor of the insured and against the insurer.”); see also Dean v. Tower Ins. Co., 19 N.Y.3d 704, 708 (N.Y. 2012) (“[A]mbiguities in an insurance policy are to be construed against the insurer.” (alteration in

13  original)). An ambiguity exists where “the terms of an insurance contract could suggest ‘more *13 than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integr ated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.'” Morgan Stanley Grp. Inc. v. New England Ins. Co., 225 F.3d 270, 275 (2d Cir.2000); see Glob. Resinsurance Corp, of Am. v. Century' Indemnity Co., 22 F.4th 83, 94 (2d Cir. 2021) (same).

The insurance application's question about the number of apartment units is ambiguous. “An answer to an ambiguous question cannot be the basis of a claim of misrepresentation where a reasonable person in the position of the insured could have rationally interpreted the question as the insured did.” GuideOne, 381 F.Supp.2d at 274 (citing Fanger, 709 N.Y.S.2d at 624); see also Vella, 887 F.2d at 391-92 (holding that if “any ambiguity exists” in questions on insurance applications, “the construction will obtain most favorable to the insured”); Sec. Mut. Ins. Co. v. Perkins, 921 N.Y.S.2d 189, 190 (App. Div. 2011) (“[A] response to a particular application question will only be held to be a material misrepresentation if the question is ‘so plain and intelligible that any applicant can readily comprehend [it],' and any ambiguity will be construed against the insurer.”); Fanger v., 709 N.Y.S.2d at 624; Garcia v. Am. Gen. Life Ins. Co., 695 N.Y.S.2d 420, 421 (App. Div. 1999) (holding that the lower court had “properly granted summary judgment to the plaintiff upon its determination that the question was ambiguous and the [insured's] answer was truthful under a reasonable construction thereof'). The insurance application completed by Plaintiffs and subsequently incorporated in Plaintiffs' insurance policies asks only “How many apartment units are there?” (See First Policy 5; Second Policy 3; Third Policy 3.) The Court finds that “a reasonable person in the position of [Plaintiffs] could have rationally interpreted the question as [Plaintiffs] did,” i.e., as referring only to units that are either occupied or

14  could legally be occupied as apartments. GuideOne, 381 F.Supp.2d at 274; *14 see also Admiral Ins. Co. v. Brookwood Mgmt. #10, LLC, No. 16-CV-437, 2018 WL 5622595, at *21 (E.D.N.Y. Mar. 30, 2018) (finding ambiguous questions on an insurance application about prior losses, suits or claims since a reasonably intelligent person in the position of the insured “could rationally have interpreted those inquiries to pertain only to losses sustained, and claims or suits against it, related to” a specific project); Brondon v. Prudential Ins. Co.

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of Am., No. 09-CV-6166, 2010 WL 4486333, at *7 (W.D.N.Y. Nov. 9, 2010) (finding ambiguous a question about whether insurance applicant suffered from heart trouble “because the term ‘heart trouble' is nowhere defined in the application, insurance plan, or summary or plan provisions”).

Defendant's arguments to the contrary are unavailing. Defendant argues that “[t]he term ‘apartment unit' as used in the policy unambiguously refers to any portion of a property where a person can reside.” (Def.'s Opp'n 11.) It insists, however, that “can reside” bears no relation to whether a person could legally reside in the space and that therefore “Plaintiffs' arguments that the basement apartment... is not ‘legally habitable as an apartment or a dwelling unit in the City of New York' has no bearing on the meaning of the term ‘apartment.'” (Id.) Defendant instead seeks to define “apartment” in terms of “the physical layout of the [Property]” and the amenities it contains, (Def.'s 56.1 Resp. ¶ 28), pointing to the fact that the basement includes “a kitchen area with a stove, a bathroom, and partitioned living spaces,”7 (Def.'s Opp'n 12), as well as “its own independent means of ingress and egress,” (id. at 7). Tire Court finds, however, that “a reasonable person in the position of [Plaintiffs]” could conclude that a basement where no one resides, no one apparently has ever resided, (see Second Beltrani Report 4), and no one legally could reside, (see Def.'s 56.1 Resp. ¶ 28), is not an apartment

15 unit solely because of its physical *15 amenities. GuideOne, 381 F.Supp.2d at 274. Indeed, this would seem to undermine Defendant's own definitions of “apartment unit” as “any portion of a property where a person can reside" and “a living space within a building that can be occupied by one or more persons.” (Def.'s Opp'n 11, 14 (emphasis added).)

7 Plaintiffs dispute Defendant's claim that the basement contains a living room and kitchen area. (Pls.' 56.1 Resp. ¶ 11.) Even assuming that the basement contains both, however, the Court finds that the term “apartment unit” in the insurance application is ambiguous.

Defendant further argues that “apartment unit” should be read in terms of the physical characteristics of the property rather than its legal status because the application “does not ask about the legal status of the property to be insured” but rather “seeks information related to the physical features of the property.” (Def.'s Opp'n 11.) The application, however, plainly seeks information of both physical and legal relevance. (See First Policy 5 (asking, among other things, whether there are “ongoing landlord/tenant disputes or eviction proceedings,” whether “any payments on mortgages on the building [are] overdue by [three] months or more,” and whether there are “any outstanding [Housing Preservation and Development] Class C violations of fire, safety, health, environmental, building or constructions codes”).) In addition, an insurance application is an invitation to a legal relationship, such that it is natural for applicants to construe the application in terms of legal as well as physical constructs. See Fero v. Excellus Health Plan, Inc., 236 F.Supp.3d 735, 773 (W.D.N.Y. 2017) (noting that although an insurance contract does not give rise to a “special relationship of trust or confidence,” it does give rise to a “legal” relationship).

Finally, Defendant relies on the 2021 Merriam-Webster definition of apartment as “a room or set of rooms fitted especially with housekeeping facilities and usually leased as a dwelling.” (Def.'s Opp'n 12.) However, contract language is only unambiguous where there is “no reasonable basis for a difference of opinion,” Care Travel Co. v. Pan Am. World Airways, 944 F.2d 983, 988 (2d Cir. 1991) (quoting Hunt Ltd. v. Lifschultz Fast

16 Freight, Inc., 889 F.2d *16 1274, 1277 (2d Cir. 1989)), and the Court cannot assume that all applicants would have the Merriam-Webster definition in mind and not, for example, the Oxford English Dictionary definition of “[a] set of rooms forming one dwelling-place in a building containing a number of these,” The Oxford English Dictionary (Dec. 2021), https://www.oed.com/view/Entry/9033; see Jingrong v. Chinese Anti-Cult World All. Inc., 16 F.4th 47, 57 (2d Cir. 2021) (citing to both the Oxford English Dictionary and the Merriam-Webster Dictionary to define “place”).

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Although on a motion for summary judgment the Court must “resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought,” Lenzi, 944 F.3d at 107, when the language of an insurance contract is ambiguous, “particularly the language of an exclusion provision, the ambiguity must be interpreted in favor of the insured,” Goldberger, 165 F.3d at 182. Moreover, “[a]n answer to an ambiguous question on an application for insurance cannot be the basis of a claim of misrepresentation by the insurer against its insured where, as here, a reasonable person in the insured's position could rationally have interpreted the question as he did.” Fanger, 709 N.Y.S.2d at 624 (emphasis added). The Court therefore concludes that because “apartment unit” is ambiguous and a reasonable person in Plaintiffs' position could rationally have interpreted the question to exclude the furnished basement, Defendant cannot meet its burden of showing that its rescission was based on a material misrepresentation. See First Fin. Ins. Co., 193 F.3d at 119 (“Tire burden is on the insurer to establish that it would have rejected the application if it had known the undisclosed information.”). Moreover, because it is undisputed that Defendant rescinded Plaintiffs' policy on the basis of Plaintiffs' alleged material misrepresentation, (see Def.'s Opp'n 7-14; Rescission Letter), summary judgment in favor of Plaintiffs is proper. See GuideOne, 381 F.Supp.2d at 272-75

17 (granting summary judgment for insured “[b]ecause [t]here [w]as [n]o *17 [misrepresentation”); Brondon, 2010

WL 4486333, at *6-10 (granting summary judgment for insured where insurance application question was

ambiguous and applicant's answer to that question therefore could “not be used to rescind the policy that was

8

8 Because the Court gi ants summary judgment to Plaintiffs based on the ambiguity of the insurance application question, it does not reach Plaintiffs' argument that Defendant “had actual knowledge of the basement before the Policy was issued in July of 2017.” (Pls.' Mem. 9-11.)

c. Defendant's motion for summary judgment as to Plaintiffs' breach of contract and GBL § 349 claims

i. Breach of contract

Defendant moves for summary judgment on Plaintiffs' breach of contract claim because “an insurer may rescind an insurance policy if it was issued in reliance on material misrepresentations” and “[h]ad [Defendant] known that the [Property] contained three apartment units and not two, it would not have issued the same exact policy to Plaintiffs.” (Def.'s Mem. 714.)

For the reasons discussed above, the Court finds that Defendant cannot meet its burden of showing that it rescinded the contract based on a material misrepresentation and therefore denies Defendant's motion for summary judgment on Plaintiffs' breach of contract claim.

The Court briefly notes that its holding is distinguishable from the recent cases Defendant cites in support of its motion for summary judgment. (Def.'s Mem. 9-10 (citing Konstantakopoudos v. Union Mut. Fire Ins. Co., 144 N.Y.S.3d 346 (App. Div. 2021), 866 E. 164th St., LLC v. Union Mut. Fire Ins. Co., No. 16-CV-3678, 2017 WL 4444334 (S.D.N.Y. Oct. 3, 2017)).) hi Konstantakopoidos, the New York Appellate Division, First Department, affirmed a giant of summary judgment in favor of the defendant. 144 N.Y.S.3d at 347. It held that the defendant had “demonstrated that [the] plaintiff s insurance application contained a material misrepresentation” where

18 “[t]he underwriter's affidavit and excerpts from the underwriting *18 guidelines show that [the] defendant would not have issued the policy if it had known the true nature of the risk, i.e., a four-unit dwelling as opposed to a three-unit dwelling and an ongoing eviction proceeding.” Id. There is no indication from the court's decision in Konstantakopoidos that whether the fourth unit was an “apartment unit” was ever at issue. Rather, the plaintiff appears to have challenged only the phrase “eviction proceedings” as ambiguous. Id.

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issued to her”).

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Lee v. Union Mut. Fire Ins. Co. 20-CV-3191 (MKB) (E.D.N.Y. Aug. 15, 2022)

Konstantakopoidos indicates that if the insurance application question were not ambiguous, the insured's misrepresentation would be material, but it sheds no light on the determinative question of whether the application was ambiguous.

866 E. 164th Street, LLC is similarly distinguishable, hi that case, the plaintiff s insurance broker stated on the plaintiff s insurance application that the property to be insured was not vacant and was not undergoing any major renovations. 2017 WL 4444334, at *1. After the plaintiff submitted a claim for coverage, the defendant investigated the claim and determined that the insured property had been vacant and undergoing major renovations at the time the plaintiff submitted its application. Id. at *2. The court found that the plaintiff had “failed to raise a genuine dispute of material fact as to the definition of ‘vacancy,' whether the [insured property] was vacant on the date of the application, and whether [the insurance broker's] answer to the vacancy question was a misrepresentation.” Id. at *5. Because the misrepresentation was material, the court granted the defendant's motion for summary judgment with respect to the breach of contract claim and denied the plaintiff s cross-motion for summary judgment. Id. at *5-6. The 866 E. 164th Street plaintiff s material misrepresentation

19 bears limited relevance to *19 whether Plaintiffs in this case can be shown to have made a material misrepresentation in their application for insurance.

Because the term “apartment unit” in the insurance application was ambiguous, Defendant cannot show that it rescinded the contract based on a material misrepresentation and the Court therefore denies Defendant's motion

9

9 Because the Court finds that the insurance application contained an ambiguous question, it does not reach the other issues raised by the parties' briefing on Defendant's motion, such as whether Defendant had prior knowledge of the basement, (Def.'s Mem. 10-12), whether the Lambert affidavit is a “sham affidavit,” (Pls.' Opp'n 11-17), and whether the Beltrani Report is inadmissible hearsay, (id. at 17-20).

ii. GBL § 349 claim

Defendant claims that Plaintiffs' cause of action under section 349 must be dismissed because “the complaint alleges only a private contractual dispute between Plaintiffs and [Defendant]” and “does not allege that [Defendant] engaged in consumer oriented deceptive or misleading practices.” (Def.'s Mem. 14.) It argues that in order to succeed on a section 349 claim, “Plaintiffs must plead facts that suggest [Defendant's] acts and practices have a broad impact on consumers at large,” which Plaintiffs have not done here. (Id. at 14-15.)

Plaintiffs do not respond to Defendant's argument. (See Pls.' Opp'n; Def.'s Reply 6.)

GBL § 349 prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state.” N.Y. Gen. Bus. L. § 349. To assert a claim under section 349, “a plaintiff must allege: (1) the act or practice was consumer-oriented; (2) the act or practice was misleading in a material respect; and (3) the plaintiff was injured as a result.” Electra v. 59 Murray Enters., Inc., 987 F.3d 233,

20 258 (2d Cir. 2021) (quoting Spagnola v. Chubb Corp., 574 F.3d 64, 74 (2d Cir. 2009)); *20 Chufen Chen v. Dunkin Brands, Inc., 954 F.3d 492, 500 (2d Cir. 2020) (same); Orlander v. Staples, Inc., 802 F.3d 289, 300 (2d Cir. 2015) (“To successfully assert a claim under either section, ‘a plaintiff must allege that a defendant has engaged in (1) consumer-oriented conduct that is (2) materially misleading and that (3) plaintiff suffered injury as a result of the allegedly deceptive act or practice.'” (citing Koch v. Acker, Merrall & Condit Co., 8 N.Y.3d 940, 944 (2012))); Plavin v. Grp. Health Inc., 35 N.Y.3d 1,10 (2020) (“We have explained that, to state a claim

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for summary judgment on Plaintiff s breach of contract claim.

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Lee v. Union Mut. Fire Ins. Co. 20-CV-3191 (MKB) (E.D.N.Y. Aug. 15, 2022)

under sections 349 or 350, ‘a plaintiff must allege that a defendant has engaged in (1) consumer-oriented conduct that is (2) materially misleading and that (3) [the] plaintiff suffered injury as a result of the allegedly deceptive act or practice.'” (quoting Koch, 18 N.Y.3d at 941)).

As to the first element, “an act or practice is consumer-oriented when it has ‘a broader impact on consumers at large.'” Hinnnelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., 37 N.Y.3d 169, 177 (2021) (first quoting Oswego Laborers'Loc. 214 Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20, 25 (1995); and then citing N.Y. Univ. v. Cont'l Ins. Co., 87 N.Y.2d 308, 320 (1995)), reh 'g denied, 37 N.Y.3d 1020 (2021); see also Crawford v. Franklin Credit Mgmt. Corp., 758 F.3d 473, 490 (2d Cir. 2014) (same). “The ‘consumer-oriented' requirement may be satisfied by showing that the conduct at issue ‘potentially affect[s] similarly situated consumers.'” Wilson v. Nw. Mut. Ins. Co., 625 F.3d 54, 64 (2d Cir. 2010) (alteration in original) (quoting Oswego, 85 N.Y.2d at 25); Koch v. Greenberg, 626 Fed.Appx. 335, 340 (2d Cir. 2015) (same). However, “[p]rivate contract disputes, unique to the parties, for example, would not fall within the ambit of the statute.” Crawford, 758 F.3d at 490 (quoting Oswego, 85 N.Y.2d at 25); see Himmelstein, 37 N.Y.3d at 177 (“[T]he consumer-oriented element precludes a [section] 349 claim based on ‘[p]rivate contract disputes, unique to the parties.'” (quoting Oswego, 85 N.Y.2d at 25)). “[W]hen a plaintiff ‘makes only

21  conclusory *21 allegations of impact on consumers at large, a GBL § 349 claim must be dismissed.'” Green v. Cap. One, N.A., No. 20-CV-4655, 2021 WL 3810750, at *9 (S.D.N.Y. Aug. 26, 2021) (quoting Miller v. HSBC Bank U.S.A., N.A., No. 13-CV-7500, 2015 WL 585589, at *8 (S.D.N.Y. Feb. 11, 2015)).

The Court agrees with Defendant that summary judgment is appropriate as to Plaintiffs' claim under section 349 because “there has been no evidence or testimony presented to prove” that Defendant's conduct has a broader impact on consumers at large. (Def.'s Mem. 16.) Although the Complaint alleges that Defendant has a “pattern and practice” of conducting “sham investigations ... calculated to avoid payments to insureds and to deter such insureds from pursuing their proper claims further,” (Compl. ¶¶ 72-74), Plaintiffs point to no evidence to this effect, nor does there appear to be any in the record. “[W]hen a plaintiff ‘makes only conclusory allegations of impact on consumers at large, a GBL § 349 claim must be dismissed.'” Green, 2021 WL 3810750, at *9 (quoting Miller, 2015 WL 585589, at *8); see also Wilson, 625 F.3d at 65 (finding summary judgment in favor of the insurer proper where “any suggestion that [the insurer] has a practice of [committing the alleged misconduct] is unsupported beyond [the insured's] situation in this case”); 866 E. 164th Street, 2017 WL 4444334, at *6-7 (granting summary judgment for the defendant on section 349 claim where the plaintiff had “set forth no concrete evidence that [the defendant's] conduct was ‘consumer-oriented'” and “[i]ts allegations regarding a larger effect on consumers [were] conclusory and speculative at best”); Sheehy v. New Century' Mortg. Corp., 690 F.Supp.2d 51, 75-76 (E.D.N.Y. 2010) (granting summary judgment for the defendants on section 349 claim where the “plaintiff ha[d] brought forward no evidence from which a

22  reasonable jury could conclude that [the] defendants' actions were *22 consumer oriented.”). The Court therefore gi ants summary judgment to Defendant on Plaintiffs' GBL §349 claim.

III. Conclusion

For the foregoing reasons, the Court grants Plaintiffs' motion for summary judgment as to their breach of contract claim; denies Defendant's motion for summary judgment as to Plaintiffs' breach of contract claim; and grants Defendant's motion for summary judgment as to Plaintiffs' GBL § 349 claim.

23  SO ORDERED: *23

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Lee v. Union Mut. Fire Ins. Co. 20-CV-3191 (MKB) (E.D.N.Y. Aug. 15, 2022)​