New York’s Highest Court Expands the Phrase “Issued or Delivered” Under N.Y. Ins. Law § 3420(a)(2)

In a broad-reaching decision issued late last month, New York’s highest court, the New York Court of Appeals, clarified that the phrase “issued or delivered” in New York Insurance Law Section 3420 applies not only to policies issued by New York insurers or to New York insureds, but also to any policies insuring risks in the state.

Following a fatal automobile accident involving his wife, the plaintiff, Michael Carlson – individually, as the administrator of his wife’s estate, and as an assignee of the underlying individual tortfeasor who was a driver for an express shipping company – brought suit against the shipping company and it’s insurers pursuant to New York Insurance Law § 3420(a)(2) and (b) to collect on multiple insurance policies. Section 3420(a)(2) provides, in relevant part, that liability insurance “issued or delivered in this state” must contain certain provisions “that are equally or more favorable to the insured and to judgment creditors so far as such provisions relate to judgment creditors,” including the right of a direct action. Subsection (b) provides, subject to certain limitations that such actions may be brought by personal representatives of a judgment creditor and assignees of judgments obtained against an insured.

Because a plaintiff must establish that the policy sued upon was “issued or delivered” in New York in order to recover under the law, one insurer argued that the statute failed to apply where its policy was issued in New Jersey and delivered in Washington and then Florida. The court disagreed, stating that its prior decision in Preserver Insurance Company v. Ryba, 10 N.Y.3d 635 (2008) resolved the question in deciding that Section 3420 applies to policies that cover insureds and risks located in New York.

In Preserver the Court concluded that Section 3420(d) required insurers to provide written notice when disclaiming coverage under policies “issued for delivery” in New York. Preserver held that “issued for delivery” referred to the location of the insured risk, and not where the policy document itself was handed over or mailed to the insured. Applying this ruling to all subparts of Section 3420, the New York Court of Appeals thus held in its recent decision that a plaintiff can collect against an insurer if its insured has a “substantial business presence” in New York that “creates risks in New York,” and such an insurer must adhere to the requirements of New York Insurance Law § 3420.

Moreover, Carlson noted that the original legislative intent of Section 3420 was to protect tort victims in New York State. Further amendments to the statute in 2008 expanded the law’s reach. Those amendments also altered the “issued for delivery” language in Section 3420(d) to match the “issued or delivered” language elsewhere in the statute, but there is no indication that the legislature’s minor change to Section 3420(d) was intended to overturn the holding in Preserver. Carlson ruled that interpreting “issued or delivered in this state” narrowly, to apply only to policies issued by an insurer located in New York or by an insurer who mails a policy to a New York address, would undermine the legislative intent of the statute. The Court noted, however, that its interpretation of “issued or delivered” applies only to New York Insurance Law § 3420 and does not apply to other statutes.

In sum, Carlson held that the plaintiff was able to maintain his cause of action under New Yok Insurance Law § 3420 even though the insurer issued the policy in New Jersey and delivered it in Washington and Florida. The insured at issue in Carlson had a substantial business presence and created risks in New York, and therefore the insurer was subject to New York Insurance Law § 3420. The phrase “issued or delivered” in New York will continue to cover both insureds and risks located in the state.

Insurers in all jurisdictions should take note of this decision. As the dissent in Carlson observes, the majority’s ruling as to the meaning of “issued or delivered” in Section 3420(a) “enacts sweeping change across the Insurance Law, generating substantial implications, both known and unknown.” An insurer located outside of New York issuing a policy outside of New York may now be subject to New York law, whether or not a policy is issued in New York or to a New York-based insured.

A link to the decision (Carlson v. American Int’l Group, Inc., 2017 N.Y. LEXIS 3280, 2017 N.Y. Slip Op. 08163 (N.Y. Nov. 20, 2017)) is available on the New York State website: http://nycourts.gov/reporter/3dseries/2017/2017_08163.htm.

Winning Arbitration Battle in the Connecticut Supreme Court Regarding Historic Home Restoration Costs Still Leaves Insurer Defending Legal War in State Trial Court

Concluding that the trial court “improperly substituted its judgment” for that of an appraisal panel, the Connecticut Supreme Court invalidated the trial court’s decision to vacate an arbitration award for property loss caused by a tree falling on the insured’s home. See Kellogg v. Middlesex Mut. Assurance Co., 326 Conn. 638 (2017). Pending the outcome of this appeal, the insured filed a second suit against her insurer, Middlesex Mutual Assurance Company (“Middlesex”), alleging breach of contract under the homeowner’s “Restorationist” insurance policy, as well as various extra-contractual claims based on the allegedly improper and delayed adjustment of the claim. Notwithstanding the overlapping nature of these claims with those addressed by the arbitration panel, the court denied the insurer’s Motion to Dismiss. Thus, the second lawsuit remains pending despite the Supreme Court’s finding in favor of the insurer.

Both cases revolve around Sally Kellogg’s single-family property located in Norwalk, Connecticut, which is listed on the National Registry of Historic Places and sits in Norwalk’s Green Historic District. When Kellogg, an interior designer, purchased the property in 2002, she also purchased the Restorationist policy on the home and its contents. The policy provided for unlimited coverage for repairs, including the replacement or restoration cost of the property without deduction for depreciation.

Eight years later, a four-and-a-half ton tree fell on the house during a severe storm, breaking through the roof and causing extensive structural and other property damage. Following the insured’s submission of her claim, a dispute arose regarding the extent of the damage and the cost of repair. Kellogg invoked the appraisal provision of the policy, which provided for unrestricted arbitration in which a panel of three arbitrators—one appointed by each party, and a referee appointed by the two other arbitrators—had the power to decide issues of law and fact not subject to judicial review. The arbitration proceedings resulted in a combined award of $539,901.84 for both replacement/restoration cost and actual cash value loss to personal property contained within the house.

Kellogg, who had argued for restoration costs exceeding $1.5 million, filed an application in the Connecticut Superior Court to vacate the arbitration award, which Middlesex attempted to dismiss as untimely. Though the trial court stated it would only rule on the motion to dismiss, it went on to hold eight days of trial, which ultimately resulted in a finding that the award violated Connecticut General Statutes Section 52–418(a) because: (1) the trial court disagreed with the amount of the award, and (2) the decision of the appraisal panel “evidenced a manifest disregard of the nature and terms and conditions of the Restorationist insurance policy” in violation of the statute. The trial court vacated the arbitration award and denied Middlesex’s Motion to Dismiss.

In overturning this decision on Middlesex’s appeal, the Connecticut Supreme Court held that the trial court had improperly substituted its own judgment for that of the arbitration panel and failed to follow the proper standard for evaluating a claim of “manifest disregard of the law.” In doing so, the Court recognized the high level of deference paid to arbitrators in unrestricted arbitration proceedings, such that “a court may vacate an unrestricted arbitration award only under certain limited conditions: (1) the award rules on the constitutionality of a statute, (2) the award violates clear public policy, or (3) the award contravenes one or more of the statutory proscriptions of § 52–418.” (Internal citations removed). Further, the award resulting from unrestricted arbitration is not subject to de novo review even for errors of law.

Under this standard, the Supreme Court held, the trial court overstepped the scope of its judicial review, erroneously substituting its judgment for that of the arbitrators by essentially re-trying all of the facts found by the arbitrators regarding an appropriate award to the insured. To permit a party to object to an award simply because the party dislikes the outcome, the Court said, “would completely destroy the deference our law affords to the arbitration process by allowing the trial court to substitute its own judgment on the merits of the question submitted to arbitration.” In the absence of a claim that “the arbitrators refused to postpone a hearing, refused to hear any of the plaintiff’s evidence, or otherwise committed a procedural error,” the trial court should not have vacated the arbitration award, which was “final and binding.” The trial court further erred by construing policy language, when it should not have engaged in de novo review of the policy language at all. However, disagreeing with the trial court’s construction of policy language, the Supreme Court also declined to vacate the arbitration award on the premise that the panel had “manifestly disregard[ed]” the law in violation of Connecticut General Statutes Section 52-418(a)(4) “when it permitted the defendant to withhold depreciation costs until the plaintiff had incurred a debt for the repair or replacement of the property.”

Despite this good news for Middlesex, the company is still saddled with the defense of the second lawsuit. Stemming from the same property loss and claim, this subsequent lawsuit asserts both contractual and extra-contractual claims of bad faith, negligent adjustment of the claim, violations of Connecticut’s Unfair Trade Practices Act and Unfair Insurance Practices Act, negligent infliction of emotional distress, and estoppel. Middlesex moved to dismiss the complaint for lack of ripeness as well as under the “prior pending action” doctrine on the basis that all of the causes of action complained of arose from Middlesex’s allegedly improper conduct in the adjustment and appraisal of the claim.

Nonetheless, the Superior Court sided with Kellogg, categorically denying Middlesex’s motion to dismiss. In doing so, it held that the new action is separate and distinct from the insured’s application to vacate the award, and that her current claims are (or were) not contingent on the outcome of the arbitration appeal. The Court thus allowed the underlying action to proceed, notwithstanding that Kellogg’s claims directly related to the disputed adjustment and appraisal of the loss. For the same reasons, the Superior Court also denied Middlesex’s subsequent motion to stay the proceedings pending the outcome of the appeal.

Insurers should thus take note: a win in connection with issues of coverage and appraisal does not always avoid other potential liabilities arising from the adjustment of claims.

A link to the Connecticut Supreme Court’s decision is available on the judicial branch website: http://www.jud.ct.gov/lawjournal/Docs/CTReports/2017/34/cr326_7908.pdf (p. 100).

Are Insurance Late Notice Provisions Toothless After Arrowood v. King?

*Republished with permission of the Connecticut Law Tribune and The Insurance Coverage Law Bulletin.

Until 2012, an insured seeking coverage after providing late notice of a claim had the burden of proving that its insurer was not prejudiced by the late notice — if the insured could not meet this burden, then the claim would not be covered. See Aetna Cas. & Surety Co. v. Murphy, 206 Conn. 409 (1988); see also Case Notes, infra. In a surprise decision in 2012, Arrowood Indemnity Co. v. King, 304 Conn. 179 (2012), the Supreme Court of Connecticut sua sponte shifted the burden of proof to the insurer, requiring insurers to affirmatively prove that they were prejudiced in order for late notice to negate coverage. Id. (overruling Aetna Casualty & Surety Co. v. Murphy, 206 Conn. 409, 538 A.2d 219 (1988)). Now four years out from King, this article examines subsequent Connecticut case law addressing late-notice provisions in various insurance policies and attempts answer the question: Are late notice provisions now toothless or do they still have some bite?

The claim at issue in King arose from a 2002 accident wherein the insureds’ son towed a friend, who was riding a skateboard, behind an ATV owned by the insureds. The friend on the skateboard (unsurprisingly) suffered significant injury. After the incident, the families socialized and the family of the injured boy never expressed an intent to file suit. As a result, the policyholders never provided notice to their homeowner’s insurance company of a potential claim under their policy until after they were served with a complaint.

The ensuing insurance dispute made its way up to the U.S Court of Appeals for the Second Circuit, where the court certified several questions to the Connecticut Supreme Court, just one of which pertained to late notice. The notice issue was framed as whether the socialization of the families and lack of an indication of intent to file suit excused the delay of notice when the policy required the insured to “give notice as soon as practical.” The court held that the accident was of such a severe nature that any reasonable person would expect a claim could arise. The court noted, however, that there must be prejudice to the insurer before it could be excused from coverage based on the late notice of claim.

Unexpectedly, the court took the opportunity to revisit the burden of proof on the demonstration of prejudice caused by late notice of a claim. Since 1988, Connecticut law allowed insurers to enjoy a presumption of prejudice caused by late notice of a claim; accordingly, it was up to policyholders to disprove prejudice once late notice was established. See Murphy, supra. The King Court concluded that, moving forward, insurance companies would have the burden of proving that they were prejudiced due to late notice of a claim by a preponderance of evidence. See King, supra; see also Arrowood Indem. Co. v. King, 699 F.3d 735 (2d Cir. 2012) (affirming ruling of District Court based on responses to certified questions). The King Court held that this was appropriate because placing the burden on the insured often left the latter with the difficult (if not impossible) task of proving a negative, which difficulty was further exacerbated by the insurer’s potential interest in concealing information regarding whether it actually suffered prejudice. The court reasoned that leaving the burden of proof with the insured would reduce the likelihood of the factfinder obtaining enough information to make the correct determination on the issue of prejudice, creating an unfair result.

With insurers assuming the burden of proving prejudice caused by late notice in the wake of King, outcomes have been mixed. The new burden of proof was first applied in Connecticut with some analysis by the district court in Prizio v. Lincoln National Life Insurance Co., No. 3:11-CV-736 (JBA), 2014 U.S. Dist. LEXIS 43886 (D. Conn. Mar. 31, 2014), in a case that was not particularly close. In Prizio, the insured made a claim for long-term total disability benefits because she fell into a deep depression after her husband’s death. She claimed that her disability began in May of 2006, but she did not make a claim for benefits for over three years, until July of 2009. Her insurer moved for summary judgment, claiming that it was prejudiced by late notice of the claim because it was unable to interview the insured’s co-workers and clients from the pre-May 2006 period, when the plaintiff also purportedly suffered from depression, or to obtain adequate contemporaneous medical information from 2006 to 2009.

Further, the insured did not blame her late notice on her depression, but rather said that she was reluctant to open herself up to a fight with the insurer, and also said that she did not initially know whether her insurance covered mental disabilities. On this record, the court held that the insurer satisfied its burden of proving prejudice, and granted its motion for summary judgment, but not before chastising the insurer for erroneously (and perhaps disingenuously) arguing that the burden of disproving prejudice rested with the insured as it had before King.

About two months after the Prizio decision, the first superior court decision addressing a late notice claim under the post-King framework was issued, though it was not particularly illuminating. Jarrett v. Gov’t Employees Ins. Co., No. CV-13-6036638-S, 2014 Conn. Super. LEXIS 1379 (Conn. Super. Ct. June 4, 2014) (Sommer, J.). The Jarrett plaintiffs suffered a hit-and-run and made an uninsured motorist claim to their insurer 11 months later, even though their policy required notice of hit-and-run accidents within 30 days. The insurer filed a motion to dismiss the plaintiffs’ suit based on their failure to satisfy a condition precedent to coverage, and the court’s consequent lack of subject matter jurisdiction to hear the suit.

The court, in a thoughtful opinion, rejected this argument and denied the motion to dismiss. Although the plaintiffs were undisputedly late in filing their claim and “failed to comply with the relevant cooperation clause,” the court observed that “Supreme and Appellate Court precedent requires the court to make a factual determination on prejudice before it can decide whether the plaintiffs’ failures are a valid enough reason to deny coverage.” Given the court’s remark that the plaintiffs’ lapse might affect the merits of the case, it may have rendered a different decision if the argument had been raised, as it should have been, by a motion for summary judgment. Timely notice is arguably all the more important, and a prejudice defense all the more compelling, in a hit-and-run case, where information can be inherently difficult to gather.

Next, the District of Connecticut addressed the case of State Farm Fire & Casualty Co. v. Yoel, No. 03:13CV101 (AWT), 2014 U.S. Dist. LEXIS 116742, at *11-22 (D. Conn. Aug. 21, 2014). By most accounts, the insured, Mr. Yoel, punched another man several times until his mouth was bloody and he fell onto the ground. However, the accounts began to diverge at that point, as Mr. Yoel testified that the man got right up and seemed okay, whereas his victim stated that he was unconscious and did not regain consciousness until he was brought to the hospital after the fight. Though the altercation occurred in June of 2010, Mr. Yoel did not report his claim to his insurer until January 2012, prompting his insurer to seek summary judgment on the grounds that Mr. Yoel gave late notice of his claim.

The court denied the motion, however, due to an issue of fact as to both prongs of the controlling analysis. First, there was a disputed fact as to whether Mr. Yoel was guilty of “unreasonable delay” in reporting his claims due to conflicting evidence of whether he appreciated the extent of his victim’s injuries. Second, the insurer had not conclusively proven prejudice, because the witness whom the insurer claimed it had lost the ability to interview had provided a statement to the police just after the incident, and the statement was available to the insurer.

The pendulum swung in the insurers’ favor, however, with two Superior Court decisions: Jazlowiecki v. Nationwide Ins. Co. of Am., No. HHD-CV126036618S, 2014 Conn. Super. LEXIS 2004 (Aug. 8, 2014) and Argonaut Insurance Co. v. Town of Berlin, No. CV-12-6017084, 2014 Conn. Super. LEXIS 2929, at *1-11 (Conn. Super. Ct. Dec. 1, 2014) (Swienton, J.).

Jazlowiecki involved a claim for coverage under a homeowner’s insurance policy, after the insured was subject to a counterclaim alleging harassment, retaliation, nuisance, injunctive relief and statutory violations stemming from a dispute between neighbors. Nationwide disclaimed coverage, asserting a late notice defense (among others). The Court (Wahla, J.) granted summary judgment for Nationwide, agreeing that notice was late (it should have been given when the counterclaim was formally served on the insured instead of 10 months later on the eve of trial) and that Nationwide was prejudiced thereby because “discovery had closed, experts had been retained and disclosed, the trial management conference had been completed, and the trial was scheduled to commence within days,” thus robbing Nationwide of its ability to meaningfully participate in the defense.

In Argonaut Insurance, the company pursued a declaratory judgment and moved for summary judgment when it was not notified of a workers compensation claim until 18 months after the incident. The Town apparently did not contest that its delay was unreasonable, instead arguing that the insurer could not establish a good defense to the underlying claim, as the Town argued was necessary to establish prejudice. The insurer argued that it did not need to establish a defense to the underlying claim, since General Statutes Section 31-294(c) created a conclusive presumption that the insurer accepted the claim because it did not contest the claim within 28 days of written notice to the employer, and the deprivation of the insurer’s right to contest the claim constituted prejudice as a matter of law. The court sided with the insurer, granting summary judgment in its favor.

The sixth (and most recent) case to consider this issue did so after trial, holding that the claims notice by the pro se insured, an elderly widow, was not prompt but was nonetheless not unreasonably delayed where she waited until after the spring thaw to present a claim for water damage, and further holding that her homeowners insurer failed to provide any evidence of prejudice. Garre v. Peerless Ins. Co., No. CV-12-6013760S, 2015 Conn. Super. LEXIS 199 (Conn. Super. Ct. Jan. 30, 2015) (Pellegrino, J.T.R.).

Although the evidence showed that the damage stemmed from a storm occurring in late February 2011, with ice damming and significant water seepage occurring after the storm, the plaintiff failed to report the loss until the summer of 2011, in part because she did not know she could. Nonetheless, the court held that the insurer failed to present evidence of prejudice and that, in any event, the insurer was not prompt in its investigation of the claim because it did not send its representative to the plaintiff’s home until months after the claim was made.

At that point, it denied her claim based on “long-term repeated seepage of water, lack of maintenance and visible rot,” a denial which the court held was unsupported by “credible” evidence. Notably, Judge Zemetis had denied a prior motion for summary judgment by Peerless as well, holding that the insurer had failed to substantiate its “mere assertion that ‘the property was not protected in any way from further damage between the date of the alleged loss and the date it was reported to Peerless six months later.’” Garre v. Peerless Ins. Co., No. CV-12-6013760, 2013 Conn. Super. LEXIS 1763, *15, 2013 WL 4504933 (Conn. Super. Ct. Aug. 6, 2013). Accordingly, Peerless failed to prove either prejudice or a breach of the policy’s late notice provision.

As a final note, notwithstanding the above, the type of insurance policy at issue matters. Connecticut law remains clear that proof of prejudice is not required where claims-made policies are at issue, and summary judgment in such cases is routinely granted even without proof of prejudice. See Tucker v. Am. Int’l Group, Inc., No. 3:09-CV-1499 (CSH), 2015 U.S. Dist. LEXIS 9874, *33-34 (D. Conn. Jan. 28, 2015) (Haight Jr., J.) (citing ITC Investments, Inc. v. Employers Reins. Corp., No. CV-98-115128-S, 2000 Conn. Super. LEXIS 3544 (December 11, 2000) (Corradino, J.)); D&M Screw Mach. Prods., LLC v. Tabellione, CV-12-6017117S2014, Conn. Super. LEXIS 417, *11 (Conn. Super. Ct. Feb. 24, 2014) (Gleeson, J.).

Claims-made policies aside, what’s clear from case law in the wake of King is that, while the late notice defense has been dulled by the burden-switching decision, it remains a viable defense and is far from toothless. Care must be taken in the pursuit of such defenses in the case of insurers, and in contesting such defenses in the case of insureds. Policyholders should provide notice as soon as possible lest coverage be foreclosed. Insurers would be wise to document any prejudice they may suffer as a result of late notice, should think twice about denying homeowner’s coverage to sweet old ladies, and should investigate claims promptly in order to boost the chance of success on a late-notice defense.

Hello, Kitty! Can You Smell That Smell? It’s a Covered Loss!

*Republished with permission of the Insurance Coverage Law Bulletin and Connecticut Law Tribune.

The New Hampshire Supreme Court’s recent decision in Mellin v. N. Sec. Ins. Co., 115 A.3d 799, 2015 N.H. LEXIS 32 (N.H. 2015), is getting some attention, and not just because it’s fun to talk about cat pee. The case sets a very important precedent regarding the definition of the term “physical loss” and the construction of pollution exclusions in New Hampshire property insurance policies. It is a decision that is likely going to create uncertainty and increased risk for insurers going forward. The scent-illuminating subject matter is just an added bonus.

1-26The facts started out simply enough. The plaintiffs owned a condominium unit, and their downstairs neighbor had two feline cohabitants. The plaintiffs leased their unit to a tenant in 2009 and 2010, and that tenant was the first person to notice that something didn’t smell right. In November 2010, the tenant decided that he would rather find a new place to live than continue to put up with the noxious odors emanating from below. Undeterred, the plaintiffs moved in themselves and promptly filed an insurance claim under their homeowner’s policy. That claim was denied.

In a continued attempt to take control of the odiferous situation, the plaintiffs contacted the local building and health inspector. After examining the unit, the inspector advised, by way of a letter dated Dec. 22, 2010, that the plaintiffs had “a health problem existing,” and the odor was such that they needed “to move out of the apartment temporarily and have a company terminate the odor.” Unfortunately, remediation efforts were no match for the persistent and pervasive smell of cat urine. The plaintiffs apparently steeled themselves, presumably invested in some scented candles or at least a large can of air freshener, and moved back into the condo until Feb. 1, 2011. At that point, the plaintiffs sold the unit after determining that they could no longer lease it to tenants. Unsurprisingly, they asserted that “the sale price for the unit was significantly less than that for a comparable condominium in the area which was unaffected by cat urine odor.”

In light of this loss and the denial of their claim by the homeowner’s insurer, Northern Security Insurance Company, Inc. (“Northern Security”), the plaintiffs ultimately brought suit, seeking a declaration that they were entitled to coverage for a “direct physical loss” to the unit, namely odor from cat urine. Northern Security moved for summary judgment on the grounds that the smell did not constitute a “physical loss,” and that the claim was barred by the policy’s pollution exclusion.

The trial court ruled in the insurer’s favor, and the plaintiffs appealed. The Supreme Court of New Hampshire began by reciting familiar principles of insurance contract construction: terms shall be accorded their plain meaning; the burden of proof rests with the insurer in a declaratory judgment action; and ambiguities must be construed in favor of coverage.

Are Noxious Odors a ‘Physical Loss’?

The first issue on appeal was whether the trial court erred in holding that the term “physical loss” required a “tangible physical alteration” of the unit, and that the continuous and noxious wafting of cat urine odor did not constitute such a tangible ­physical ­alteration. In addressing this issue, the court noted that the term “physical loss” was undefined in the plaintiffs’ policy, and cited the sixth edition of the Shorter Oxford English Dictionary for the definition of “physical”: “[o]f or pertaining to matter, or the world as perceived by the senses; material as [opposed] to mental or spiritual.” Based on that definition, the court concluded that the term “physical loss” need not be read to include only tangible changes to the property that can be seen or touched, but can also encompass changes that are perceived by the sense of smell.

Turning to case law, the court first recognized that some jurisdictions, like Michigan, have adopted a definition of “physical loss” that is, in fact, restricted to “tangible” changes. In support of its conclusion, however, the court went on to note “a substantial body of case law in which a variety of contaminating conditions, including odors, have been held to constitute a physical loss to property.” Here, the court cited cases from several jurisdictions that, in its view, support a more liberal interpretation of “physical loss.” Among those cases, the court cited decisions from Connecticut (asbestos and lead contamination was physical loss), New Jersey (ammonia release), and Colorado (gasoline vapors).

While the insurer urged the court to follow its own prior definition of the term “physical injury,” the court refused because the case relied upon by Northern Security, Webster v. Acadia Insurance Company, 156 N.H. 317 (2007), turned on the interpretation of the term “property damage” contained in Coverage E, pertaining to personal liability. While the Mellins’ homeowner’s policy contained that same definition, the personal liability coverage part of that policy was not at issue. Simply put, the Mellins’ claim was one for first-party, not third-party, coverage, and was thus distinguishable from Webster.

In ultimately rejecting the trial court’s holding that “physical loss” required “tangible changes,” the New Hampshire Supreme Court articulated the standard that “physical loss” ­requires only a “distinct and demonstrable alteration to the unit” not limited to structural changes and including changes perceived by smell. Interestingly, the trial court’s holding gave effect to the “physical” component of the term “physical loss” by including an ostensible synonym — “tangible” — in its standard of interpretation, while the court did not. Rather than deciding the coverage issue however, the court instead remanded the case to the trial court to apply the newly articulated standard for “physical loss.”

Is the Noxious Odor of Cat Urine Excluded By the ‘Pollution’ Exclusion?

The court next considered the issue of whether the policy’s pollution exclusion would allow Northern Security to relieve itself of its coverage obligation. The operative exclusion disclaimed coverage for “pollutants,” which were defined, in pertinent part, as: “any … irritant or contaminant, including … vapor … [and] fumes.” You may have read that definition, looked at the legal standard above that states that terms must be accorded their plain meaning, and assumed that this second issue would be easily resolved in the insurer’s favor. If so, you would be wrong.

The court began by stating that this definition did not render the term “pollutant” unambiguous. The terms “irritant” and “contaminant” were impugned as “virtually boundless, for there is no substance or chemical in existence that would not irritate or damage some person or property.” As such the definitional phrase “any … irritant or contaminant” was held to be too broad to meaningfully define “pollutant.” Further, the court was persuaded that because other courts have construed similarly worded pollution exclusions in different ways, this meant that the exclusion was ambiguous.

Curiously, nowhere in the court’s analysis did it consider the Oxford definition of the word “fumes”: “Gas, smoke or vapor that smells strongly or is dangerous to inhale; a pungent odor of a particular thing or substance.” It would appear that the latter portion of this definition would end the inquiry, since the smell of cat urine is quite plainly “a pungent odor of a particular thing or substance.” Yet, the court did not engage in this analysis.

Instead, the court held that the policy’s invocation of “vapor” and “fumes,” among other terms, “brings to mind products or byproducts of industrial production that may cause environmental pollution or contamination.” As such, the court held that a reasonable policyholder would not expect these terms to exclude damage resulting from everyday activities gone awry. The court concluded its analysis by construing the ambiguous term “pollutants” in favor of coverage, and holding that the exclusion did not serve to preclude coverage.

In a stinging dissent, Justice Robert J. Lynn harshly criticized the majority’s holding that the pollution exclusion did not apply. Justice Lynn reasoned that “[t]he cat urine at issue in this case fits squarely within the plain and ordinary meaning of contaminant, and is thus a pollutant as defined in the pollution exclusion clause.” He pointed out that the breadth of the exclusion does not mean that it eluded definition and was rendered ambiguous, and further urged that it is ambiguity, not over-breadth, that provides the court with a license to look beyond the plain meaning of the policy. He went so far as to call the majority’s approach “dubious” in following a case that was focused on the historical genesis of environmental pollution exclusions rather than focusing on the plain meanings of the terms at issue. Justice Lynn pointed out that “when a policy’s meaning and intent are clear, it is not the prerogative of the courts to create ambiguities where none exist or rewrite the contract in attempting to avoid harsh results.” He concluded by stating that if the pollution exclusion was overly broad, the remedy must be provided by the open market or the legislature, and not through “creative judicial construction of clear policy language.”

Looking Ahead

All kittens aside, the Mellin decision is bound to leave a physical mark on first-party coverage suits involving “property damage” claims. New Hampshire insurers are going to have a hard time figuring out what isn’t covered as a “physical loss.” The new standard that any “distinct and demonstrable alteration of the unit” could constitute a “physical loss” exposes insurers to endless possibilities of property damage. Since the irremediable stench of cat urine emanating from an adjacent property can satisfy this standard, there is no telling what other odors may satisfy the standard as well. The smell of garbage, sewage, fertilizer, or farm animals kept at a nearby property could potentially trigger coverage, not just for homeowners, but for businesses as well. Likewise, a restaurant moving into the neighborhood and filling the air with the fragrance of faraway spices and fry-a-lator oil might be a covered loss, not otherwise excluded by the pollution exclusion. Looking beyond smells, it stands to reason that an increase or decrease in the amount of sunlight an insured property receives could cause a “distinct and demonstrable change.” Now that there is no requirement of a “tangible” loss, the barn door seems to be wide open for new and creative claims.

Second, it is not clear what language insurers could include in their policies, short of adding increasingly specific language, which would persuasively exclude claims of this type. On its face, it would seem that an exclusion referring to “fumes” would serve to exclude a claim based on urine smells. Yet this is obviously not the case, at least in New Hampshire, and potentially not in any state recognizing the reasonable expectation of the insured over the plain language of the policy. For insureds, on the other hand, it may be viewed as the cat’s whiskers — at least until premiums catch up to the risk.

Conclusion

In sum, the facts of the Mellin case may seem trivial, but the holding is significant as it has far-ranging repercussions for property insurance in New Hampshire and beyond.

Getting Schooled by Sandy and Irene: What Insurance Lessons Can We Learn?

It is a simple premise, but many insurance coverage disputes, perhaps even a majority of them, could be completely avoided if policyholders would take the time to read their insurance policies.  With winter storms upon us, now might be a good time.

No matter how complex the legal issues or controlling authorities are in any coverage case, the analysis almost always starts and ends with the express language of the insurance policy at issue.   As the Connecticut District Court often tells us, insurance policies are interpreted “in accordance with the parties’ intent, as derived from the plain and ordinary meaning of the policy’s terms.”  It nonetheless appears that many of the coverage disputes popping up on Connecticut’s federal docket arise from a failure to follow the most basic commandment applicable to every insurance policy, or any other contract for that matter:  Thou shalt read the policy, and read it in its entirety.

IP BLOG_hurricane sandyTwo cases recently decided by the Connecticut District Court in the wake of Hurricane Irene and Super Storm Sandy shine a spotlight on the importance of reading the entire insurance policy and reviewing your coverage with your agent or broker.  These cases show that understanding the express language of the policy is not only crucial for the policyholder to anticipate which claims will be covered and which will not in order to ensure appropriate coverage, but also so that the policyholder knows exactly what must be done in order to properly present a claim for coverage after the damage has been done.  In each case, the District Court granted summary judgment in the insurer’s favor based on the plain language of the disputed policy.

Azoulay v. Allstate Insurance Company, No. 3:12-cv-1693(JBA), 2014 U.S. Dist. LEXIS 159177 (D. Conn. Nov. 12, 2014)(Arterton, J.) arose from a coverage dispute between the plaintiff, Moshe Azoulay, and his insurer, Allstate, regarding his claim for flood damage to his property caused by Hurricane Irene.  Mr. Azoulay’s policy was a Standard Flood Insurance Policy, which was promulgated by the Federal Emergency Management Agency and which Allstate was not permitted to alter in any way.  Every Standard Flood Insurance Policy requires an insured seeking compensation for a loss to send the insurer a “proof of loss,” which is the insured’s statement of the amount that he is claiming under the policy, within 60 days of the loss.  This proof of loss must be “signed and sworn to by the insured.”  Mr. Azoulay’s property was damaged by Hurricane Irene in August of 2011, and within two months he provided Allstate’s assigned adjuster with receipts for cleanup costs totaling $5,000 and an itemized list of damages to the property totaling an additional $35,983.  Allstate’s adjuster provided Mr. Azoulay with a Proof of Loss concluding that the total cost of repairing his property was $2,044.61, leaving him with a covered claim of $44.61 after factoring out his $2,000 deductible.  Mr. Azoulay signed, notarized, and faxed Allstate this Proof of Loss, adding the notation “undisputed damages only.”  He also sent Allstate copies of receipts, a list of itemized damages, and pictures of the damaged property, none of which were signed or notarized.  Mr. Azoulay then filed suit after Allstate failed to respond to him regarding his claims in excess of $44.61.

Allstate moved for summary judgment, arguing that Mr. Azoulay did not comply with his flood insurance policy’s proof of loss requirement with respect to his additional claims because the only signed and sworn proof of loss that he submitted was for $44.61. The District Court accepted Allstate’s argument, holding that Mr. Azoulay’s attachment of itemized damages did not suffice as a supplemental proof of loss, because this document was neither signed nor notarized as required by the Standard Flood Insurance Policy.  The court relied on the Second Circuit’s legal standard that “[b]ecause the federal government is liable for claims brought under [Standard Flood Insurance Policies] issued by private insurers, the Constitution mandates strict compliance with the [Standard Flood Insurance Policy],” and granted summary judgment in Allstate’s favor.  The world will never know how much Mr. Azoulay might have recovered if he had only signed and notarized his itemized list of additional damages.

Despite the heightened standard applicable to Standard Flood Insurance Policies, the lesson is broadly applicable.  The District of Connecticut’s holding in Great Lakes International Trading, Inc. v. Travelers Property Casualty Company of America is literally the case in point.  No. 3:13-cv-01522(JAM), 2014 U.S. Dist. LEXIS 165378 (D. Conn. Nov. 26, 2014) (Meyer, J.).

The Great Lakes case arose from the plaintiff’s disputed claim for over $1.5 million in damages to the insured’s inventory of seeds, dried fruit, and edible nuts caused by Super Storm Sandy.  The plaintiff, a food importer, had several insurance policies with Travelers, including a Marine Open Cargo Policy that contained a Warehouse Coverage endorsement providing up to $5 million in coverage for damage to goods stored in the Plaintiff’s warehouse.  Unfortunately for the insured, however, the Warehouse Coverage endorsement provided that “the peril of Flood is excluded” from coverage.  After Sandy hit the plaintiff’s New Jersey warehouse, Travelers paid nearly $900,000 for damages caused by rainwater entering the warehouse through openings in the roof, but Travelers refused to pay an additional $650,000 claimed by the plaintiff, stating that these damages were attributable to rising flood-waters from a nearby river, and were therefore excluded from coverage.  The plaintiff filed suit, and Travelers moved for summary judgment, arguing that the plain language of the policy precluded coverage.

While claimants often attack policy exclusions as being ambiguous, the language of the exclusion at issue, which stated, “It is further understood and agreed that the peril of Flood is excluded for the following location,” then listed the name and address of the plaintiff’s New Jersey warehouse, was too clear for the plaintiff to even attempt to argue that any ambiguity existed.  Facing Travelers’ motion for summary judgment, the plaintiff mustered the best argument at its disposal; that the flood exclusion did not apply because it was tacked on at the very end of the Warehouse Coverage Endorsement, and did not have its own sub-heading.  The exclusion appeared as the final paragraph under the sub-heading “Earth Movement Sublimit & Deductible,” following several paragraphs referring to coverage sub-limits and deductibles for losses stemming from “earth movements.”  The plaintiff argued that the placement of the flood exclusion indicated that it only applied if the flood was caused by an earthquake or other earth-movement.

While noting that “[a]n insurance company should know better” than to place the flood exclusion in the policy so “awkwardly”, the court nonetheless enforced the exclusion.  First, the court observed that the wording of the exclusion itself was clear.  Next, the court held that the opening words of the exclusion, stating “It is further understood . . .,” made it sufficiently clear that the flood exclusion stood apart from the remainder of the preceding paragraph regarding earth-movement related sub-limits and deductibles.  Lastly, the court succinctly rejected the argument that the flood itself arose from a covered cause, a storm, holding that damages caused by the flood nevertheless fell within the scope of the flood exclusion.  The court granted summary judgment in the insurer’s favor, and Great Lakes International Trading was left holding a bag of soggy nuts.

Neither Mr. Azoulay nor Great Lakes International Trading appear to have been lazy, unsophisticated, or dilatory – in fact, both demonstrated some acumen when it came to dealing with insurance.  Mr. Azoulay actually took the time to save and organize all of his receipts, to take photographs documenting his property damage, and to create an itemized list of all of the damage that Hurricane Irene caused.  These tasks were all probably more time consuming than simply reading through his entire insurance policy, word for word.  If Mr. Azoulay had only signed and notarized his own itemized list of damages at the same time that he signed and notarized Allstate’s proof of loss, he would likely have been able to recover additional insurance proceeds and avoid litigation entirely.

Great Lakes International Trading, for its part, appears to have been a sophisticated consumer of insurance.  The court observed that Great Lakes had more than one policy with Travelers as well as the fact that Great Lakes had procured a separate Warehouse Coverage endorsement to insure the goods stored in its facilities that would not have been covered by its Marine Open Cargo Policy.  It stands to reason that a business like Great Lakes may have worked with a broker to procure its insurance and that it should have been made aware of the flood exclusion in the first instance.  Nonetheless, if Great Lakes had simply read its own insurance policy, it would have seen the exclusionary language and presumably procured additional insurance to guard against the risk of a flood.  Great Lakes learned an important lesson to be sure, but unfortunately that lesson came at the cost of over a half million dollars in damaged fruit.  Yet, we can all learn from it now.

The words in an insurance policy have a legally binding effect, and they are therefore chosen very carefully.  It behooves policy-holders to read every single one of those words, no matter how tedious, lest they be caught unaware at the worst possible time like Mr. Azoulay or Great Lakes International Trading.  So the next time a nor’easter arrives to give us a snow day, we should all turn off the Netflix for a minute and take the time to read through our insurance policies from cover to cover.  Maybe after just one more episode . . . .

 

This article was originally published in the Connecticut Law Tribune and can be accessed here.

Image courtesy of Flickr by NOAA’s National Ocean Service

Unraveling Plain Meaning, Extrinsic Evidence And the Doctrine of Contra Proferentem

Gordon & Rees insurance attorneys Regen O’Malley and Greil Roberts published an article in the Insurance Coverage Law Bulletin discussing the slow but steady trend of judges willing to consider extrinsic evidence to assist in the interpretation of insurance policies.  This is a positive development for insurers, who frequently come up against the courts’ strict application of the contra proferentem rule whenever policy language is determined to be ambiguous.

To read the full article, click here.