Cases & Trends

In this "Cases and Trends" section of the GKASN website, we will be reporting from time to time about recent New York and New Jersey cases of interest dealing with first-party property and liability insurance, including subrogation, as well as claim and evidence issues related to the work we do. These cases may stand for other legal propositions which are not reported here and the views about the import of the cases are strictly our own. We intend these summaries to be informative, thought provoking and useful. Should you wish to discuss any of these decisions, please feel free to contact us.

•   More Rigorous Standard in New Jersey for Losses Resulting from Mysterious Disappearances

In Trademark Plastic Corp. v. Hartford Fire Insurance Co., decided on March 31, 2015, a New Jersey United States District Court judge granted summary judgment to Hartford, upholding a provision of the policy excluding from coverage loss resulting from disappearance of property “when there is no clear evidence to show what happened to it”. In that case, involving a warehouse storing plastic product for the Hartford insured, the insured plaintiff was unable to demonstrate with sufficient specificity how the merchandise came to be missing.

The New Jersey judge rejected New York cases upholding a more liberal standard for “mysterious disappearance”, i.e., cases allowing an insured to recover based upon a demonstration of a “series of circumstances” that “might lead to the inference that a theft had occurred”, instead upholding a prior New Jersey decision and decisions in the Sixth Circuit and California upholding a more rigorous standard.

•   Second Circuit Court of Appeals, New York, Issues Controversial Decision Over An Exception To An Exclusion

In Scottsdale Insurance Company v. R.I. Pools, Inc., 710 F.3d 488, the United States Court of Appeals, Second Circuit, purportedly interpreting a Connecticut law (although there was no Connecticut case cited), effectively held that, even though, generally, damage to an insured’s own “work” does not constitute an “occurrence” under a general liability policy, the presence of an exception to the exclusion for the insured’s “work” when performed by subcontractors. The court, in so ruling, held that to rule otherwise, i.e., that damage to an insured’s work could never constitute an “occurrence”, would be to render the exception to the exclusion as having no meaning.

This decision is controversial, we believe, in that other courts have ruled to the contrary, that is, that an exception to an exclusion cannot create coverage and that, therefore, regardless of whether the underlying “work” was performed by a subcontractor, damage to the insured’s “work” does not constitute an occurrence. See, e.g., Pennsylvania National Mut. Ins. Co. v. Park Shore Development Corp., 403 Fed.App.770 (3rd Cir. 2010).

The dichotomy between the holdings reflects what is essentially a flaw in the ISO CGL Form, that allows an exception to an exclusion (mistakenly, we believe) to be cited as providing coverage, this being contrary to the usual interpretation of an insurance policy. On the other hand, we well understand the thinking of the Second Circuit Court of Appeals that the subcontractor exception to the “work” exclusion would have no meaning whatsoever if one does not “get to” the exclusions under the policy, such as by holding, as in Parkshore, that any damage to the “work” of the insured, regardless of who performed it, could not constitute an “occurrence” in the first place. Courts generally find that policy language has an intended purpose, and they prefer not to read it out of the policy.

•   Federal District Court (Northern District, New York) Finds Innocent Members Of LLC Cannot Recover Losses Caused By Defrauding Member

In JMM Properties, LLC v. Erie Insurance Company, 2013 WL 149457, decided on January 14, 2013, the United States District Court for the Northern District of New York had before it the question of whether, for purposes of an insurer’s ability to void a policy based upon a fraudulent claim and arson by one of the members of the limited liability company, the actions of that member in torching the premises and in submitting the fraudulent claim were binding upon the LLC.

In what appears to be a case of first impression in New York, the court imputed the actions of the defrauder/arsonist to the LLC, notwithstanding that there was apparently no dispute but that there were actually innocent members of the LLC who had nothing to do with the fraud or arson, with the court, essentially, following a line of cases pertaining to corporations and partnerships.

•   New York Courts Alleviate Concern Over 'Proper' Consequential Damages

On November 7, 2012 the Appellate Division of New York, Second Department, in Stein LLC v. Lawyers Title Insurance Corp., 100 A.D.3d 622, held that notwithstanding prior decisional law of the Court of Appeals in Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., et al. 10 NY3d 187, and Panasia Estates, Inc. v. Hudson Ins. Co., 10 NY3d 200, allowing a plaintiff to seek consequential damages in a first party claim, attorneys fees are not viewed as proper consequential damages.

There had been some ambiguity on this issue in some lower court decisions, with corollary concern on the part of insurers, but the Second Department decision goes a long way to alleviate those concerns.

•   New York Takes A New View Of The Exclusion For The Backup of Sewage or Drains

In Wilner v. Allstate Insurance Co., 99 A.D.3d 700, decided on October 3, 2012, the Appellate Division of New York, Second Department, held, in a case involving a Home Owners policy of insurance, that the “clogging” of a drain was excluded from coverage. While to insurers this is hardly a startling holding, the fact of the matter is that some have argued,

from time to time, that the exclusion for the “backup” of sewage or drains requires that the liquid physically back up from a downstream source, and this decision, as far as the New York Courts are concerned, should go a long way to preclude such arguments in future cases.

•   New York's Highest Court Rules In Favor Of Insurer, Despite Regulatory Violation

In Mallory v. Allstate Insurance Company, 19 NY3d 978 (2012), the New York Court of Appeals, New York's highest court, affirmed the decision of the Appellate Division, Second Department, holding that an insurer's violation of an unfair claim settlement practices regulation--in this instance, failing to reject a proof of loss with fifteen business days after receipt of the proof of loss--did not bar the insurer from asserting various defenses to the claim.

The rationale, essentially, was that the regulation did not provide a "private right" of action to the insured to enforce the regulation, though a series of such violations involving multiple claims might provide support to a bad faith claim, or might justify regulatory action.

•   'Gradual or Sudden Loss' Exclusion Faces Scrutiny in New Jersey

A recent decision, Grossberg v. Chubb Insurance Company of New Jersey, 2012 WL 3553002, decided on August 20, 2012 in the New Jersey Superior Court, Appellate Division, has come to our attention. Although the matter was not contested by the insured, the decision is, nevertheless, of interest. The case involved a single family home which suffered sufficient deterioration due to the entry of water, alleged by the insured to be due to wind driven rain, that it was supposedly in danger of falling down. Chubb relied upon an exclusion to its homeowner's policy involving, "Gradual or Sudden Loss", (including "gradual deterioration...dry or wet rot...however caused"). The verbiage of the policy pertaining to the foregoing was preceded by the statement, "the words, 'caused by', mean any loss that is contributed to, made worse by, or in any way results from that peril". Upholding Chubb's claim denial, as well as a summary judgment granted to Chubb in the lower court, the Appellate Division found that Chubb's policy verbiage was "plain and unambiguous". This finding was made despite the insured's contention that the efficient cause of the loss was wind driven rain, the court stating that it, "makes no difference what the cause of the excluded loss may have been, and the sequence of cause is likewise irrelevant". The court emphasized the words, "however caused", in the Gradual or Sudden Loss Exclusion.

Notably, the Chubb policy did not contain typical "anti-concurrent causation" verbiage commonly used by carriers, in which the policy states that the exclusion applies regardless of other causes or the sequence of events. The court distinguished a frequently reported GKASN case, Franklin Packaging Company v. California Union Insurance Company, 171 N.J.Super. 188, decided in 1979, where the Appellate Division, ruling in favor of an insured suing a carrier, found ineffective policy language which excluded coverage for loss, "caused by, resulting from, contributed to, or aggravated by any of the following". This verbiage does not appear much different from the verbiage of the Chubb policy pertaining to, "loss that is contributed, made worse by, or in any way results from that peril" and indicating dry or wet rot to be excluded, "however caused". However, Franklin Packaging was a reported decision, such that it would ordinarily be given greater precedential effect than the unreported decision in Grossberg.

•   Second Circuit Court of Appeals, New York, Issues Important Appraisal Decision

On May 10, 2012, The United States Court of Appeals for the Second Circuit issued an important appraisal decision in Amerex Group, Inc. v. Lexington Insurance Company, Westchester Surplus Lines Insurance Company, and ACE-USA, 678 F.3d 193, a case in which Mark Antin, Esq. and Michael Leavy, Esq. of GKASN represented the insurers.

The decision is the clearest and most comprehensive Second Circuit Decision regarding (1) timing of an appraisal demand and waiver; (2) what constitutes an improperly resolved “legal” issue in connection with a business income loss appraisal and (3) whether an insurer’s pre-demand investigation of the claim violates an insured’s due process rights because the insured lacked a “corresponding right to seek discovery before or in connection with the appraisal”.

The claim arose from a partial rack collapse on August 3, 2001, at Amerex’s clothing warehouse. Claim was made to Amerex’s primary insurer, Fireman’s Fund, with notice to its excess insurers, Lexington and ACE. It was initially thought the claim would not exceed primary limits. However, after two years, the primary paid policy limits and claim was submitted to the excess insurers for an addition $6.3 million.

An investigation led excess insurers to deny the claim in 2006, for a number of reasons, including that the business income loss did not exceed the primary limits. During mediation, with an offer pending, the insured filed suit. Excess insurers immediately demanded appraisal, the insured objected, and the court ordered it. The appraisal confirmed excess insurers’ contention that the insured’s business income loss did not exceed the primary limits as then taken on appeal.

Under New York law, the Second Circuit found that excess insurers’ appraisal demand was timely, even though suit had been filed. A critical finding of the Second Circuit was that in determining the timeliness of an appraisal demand, no “mechanistic” or “fact sensitive” rule should be followed, identifying the factors to be considered.

The Court also resolved against Amerex its claim that the scope of the appraisal process was exceeded because “legal issues” were resolved. In doing so, the Court acknowledged that when a business income appraisal is involved, the distinction between “coverage” and “amount of loss” may not be straightforward, particularly where the policy does not specify the method for calculating loss of business. In the case at hand, the appraisal panel’s determination regarding the duration of the restoration period was not considered to be a coverage issue; it was a factual question about damages. If there is a legal dispute regarding the interpretation of the operative language of the policy related to those damages that issue would have to be resolved by a court before the appraisal could proceed. Other coverage disputes, independent of the valuation of damages, can await the outcome of the appraisal.

Finally, in response to Amerex’s argument that the appraisal process became the equivalent of an arbitration and thereby violated its due process rights, the Court found no due process violation because the excess insurers were allowed to use the results of their investigation (particularly examinations under oath and documents received in connection therewith) during the appraisal process.

•   GKASN Prevails In Second Circuit Court of Appeals, New York, In Case Involving Interpretation Of "Vacancy" Provision

In a case handled by Stanley Kallmann, Esq. and Michael Leavy, Esq. of our office, on February 16, 2012, the Second Circuit Court of Appeals, in Keren Habinyon Hachudosh D’Rabeinu Yoel of Stamar BP v. Philadelphia Indemnity Insurance Company, 2012 WL 497586, interpreted the “vacancy” provision of the ISO Building and Personal Property Coverage Form, CP 00 10 10 00. In so doing, the Court upheld a decision of the United States District Court that the plaintiff’s premises, originally added to the insured’s policy in 2004 as a purported “high school”, was not covered for vandalism because it was vacant for more than 60 days. The Court agreed with the United States District Court that the policy provision was unambiguous, and held that the plaintiff’s argument that it had a meeting at the building involving about 25 teachers and some students

(who played on a playground on the roof and ate lunch in the dining room) was unavailing to establish occupancy of the building during that 60-day period. Instead, the Court looked through the policy verbiage pertaining to “customary operations”, concluding that the single event within 60 days of the loss “does not change the uncontroverted fact that since February 2006, the building had not been used as a ‘school’, at least as that term is defined in both the dictionary and everyday usage”. In so ruling, the Court cited case law in other jurisdictions similarly holding.

•   Circumstantial Evidence To Prove Cause Of Fire May Not Be Admissible In New Jersey

In New Jersey Manufacturers Insurance Company v. Cujdik, 2012 WL 444016 (App. Div. 2012), the New Jersey Appellate Division precluded a subrogation plaintiff from producing expert testimony as to causation of the fire by the defendant, a resident of the particular room in a house where the Fire Marshal had eliminated all electrical or other causes, leaving as the only possible causes careless smoking or misuse of candles. The court essentially held that, notwithstanding the fact that the remaining causes would constitute “human error” causes, the trial court was within its authority to preclude the expert testimony as being a “net opinion” and speculative.
This decision highlights the tension between proof by circumstantial evidence, an accepted methodology, and a court’s role as “gatekeeper” of proof by expert testimony. Apparently, the standards for admissibility are higher, at least in the view of this appellate court, when circumstantial evidence is involved. Because decisions as to the admissibility of evidence are reviewed on appeal using the difficult to establish “abuse of discretion” standard, they invest the trial court with considerable authority to control the outcome of litigation.

•   Does An Insured's 'Cooperation' Extend To Facilitating Its Insurer's Appeal From An Adverse Building Inspector's Decision In New York?

This, SCW West, LLC v. Westport Insurance Corporation, (U.S. District Court, EDNY 2012), is a most interesting, recent case. Because it is a federal district court case, and because it is not “precedential”, being a trial level decision, it is still a decision from a well-regarded federal judge and can be cited to some benefit in both state and federal matters.

The case involved a dispute as to the extent of necessary code upgrades; the dispute, in turn, being precipitated by what the carrier viewed as a building inspector’s grandiose view of what needed to be done.

Here, after the building department was recalcitrant (despite the carrier actually hiring an architect to propose “proper” plans according to the building code), the carrier wanted to take an appeal but was thwarted by New York statute indicating that only an “aggrieved” party could take an appeal, with the appeal board, then, taking the position that the insurer was not an “aggravated” party and therefore could not seek review of the building inspector’s decision.

When the insurer then asked the insured to sign off on the appeal, the insured, for obvious reasons, refused to do so, following which the carrier indicated that the insured was in breach of the cooperation clause of the policy. The insured then brought action against the insurer on the policy.

The matter came before the court on cross motions for summary judgment and the court’s decision was to deny both parties’ motions, finding there was a question of fact as to the insured’s cooperation for a jury to decide, with the court stating that it wasn’t “unreasonable as a matter of law” for the insurer to interpret the cooperation clause in the manner in which it did.

While the outcome of this dispute at trial may be problematic for the insurer, at least the issue of cooperation in this setting was not decided against the insurer as a matter of law. To the extent that policies do not specifically provide for such cooperation, consideration might be given to doing so.

•   Immediate Denial Of Liability Required In New York Even If The Grounds For Denial Are Under Investigation

In George Campbell Painting v. National Fire Insurance Co., 2012 WL 118461 (1st Department 2012), the Supreme Court of New York, Appellate Division, on January 17, 2012, reversed a prior decision of the same court in DiGuglielmo v. Travelers, 776 N.Y.S.2d 542 (2004), which held that, where a liability insurer received a late notice claim, it could desist from immediately denying coverage, where it was investigating additional potential defenses. In the new case, the Appellate Division, citing the express verbiage of the Insurance Law § 3420(d), held that the insurer, indeed, notwithstanding DiGuglielmo, was charged with the responsibility of immediately denying coverage, such that, unfortunately, it lost its late notice defense.
One can be certain that National Union was more than disappointed in the result, given the fact that it expressly followed the prior decision.

Special note should be taken of this decision and the importance of an immediate denial. Such denial shall refer to other potential grounds for denial and a further denial should be issued if a basis is found.

•   Who Is A “Real Estate Manager” Under A Tenant’s Liability Coverage In New Jersey?

In Cambria v. Two JFK Blvd, LLC, 423 N.J. Super. 499 (App. Div. 2012), the New Jersey Appellate Division, while holding that a landlord and a landlord’s real estate manager was not a real estate manager within the meaning of a general liability insurance policy issued to a tenant (which, in turn, insured “your” real estate manager), implied that, if the tenant had responsibility under the lease for maintenance of the portion of the premises where the slip and fall at issue occurred (i.e., the parking lot), then, conceivably, the landlord and the landlord’s manager could be viewed as “your” real estate manager within the meaning of the tenant’s general liability policy.
Obviously, this decision, together with a prior decision finding that a mortgagee in possession was “your” real estate manager within the meaning of a policy issued to a mortgagor, could, in an appropriate case, greatly expand the coverages afforded under a general liability policy.

•   GKASN Gains Summary Judgment Win For Lloyd's In New Jersey

In a matter recently successfully handled by our office, Grande Leather and Fur v. Certain Underwriters at Lloyd’s, 2011 WL 1661072 (App. Div. 2011), decided May 4, 2011, the Appellate Division of the Superior Court upheld a summary judgment which we secured on behalf of Lloyd’s in the court below. The case involved a misrepresentation as to the insured’s loss history and the prior cancellation of coverage, and the court, based upon an affidavit submitted by an assistant vice president of Lloyd’s producer, and based upon a certification by a Lloyd’s underwriter (that the policy would not have been written if the true facts of the insured’s prior losses and denial of coverage had been disclosed), upheld the lower court’s grant of summary judgment.
The insured, opposing summary judgment, had attempted to argue that because the policy was procured by a Fiscal Agent appointed by the court on behalf of the insured, therefore this was insurance for a separate entity which had not actually had the prior losses. The court rejected that argument, indicating that it was clear that it was the actual insureds, under the policy, who had incurred the prior losses and cancellation of coverage, with the court, then, citing a number of cases in which coverage had been defeated because of an insured’s “equitable fraud”.

•   New Jersey's Appellate Division Tackles & Upholds Property Damage Exclusion

In Ohio Casualty v. Island Pool & Spa Inc., 418 N.J.Super. 162 (App. Div. 2011), a declaratory judgment action filed by a liability insurer, the Appellate Division of the New Jersey Superior Court decided, on February 9, 2011, in favor of the insurer in a matter involving an exclusion to the policy for “property damage” to “that particular part of real property in which you or any contractors or sub-contractors... are performing operations ... .” The lower court had denied a summary judgment to Ohio Casualty, evaluating a different exclusion, for "faulty workmanship". This is another exclusion under the policy, and was not asserted by Ohio Casualty, with the trial court, then, ignoring Ohio Casualty’s reliance on the “ongoing operations” exclusion.
The Appellate Division reversed, recognizing that the carrier was entitled to deny coverage for damages to the “particular part of real property” on which the insured was “performing operations, if the property damage arises out of those operations,” regardless of whether faulty workmanship was allegedly involved. The Appellate Division noted that this was the first case in New Jersey involving that particular exclusion, but that its interpretation was based upon significant case law elsewhere.

•   An Analysis Of Denial Based On Misrepresentation In New Jersey

While hardly earth shattering, the recent decision of the Appellate Division in Inchon LLC v. Hartford Fire Insurance Company, 2011 WL 134757 (App. Div. 2011), decided on January 18, 2011, re-emphasizes the carrier’s right to deny a claim based upon misrepresentations made by an insured during the first party property claims process, although the type of misrepresentation at issue was less formal than usually the case in matters such as this.

What is particularly interesting about Inchon is that the misrepresentation by the insured was made, not in a sworn document, such as a Proof of Loss, or at an examination under oath, but, rather, in a verbal communication to a Hartford adjuster who had simply asked the insured whether he had ever had a prior loss
(and in response to which the insured untruthfully responded in the negative). Most of the cases which we have seen in this area, of course, involve falsified documents, a sworn Proof of Loss, or false testimony at an examination under oath, but it is certainly of interest to find a case in which a single unsworn statement to an adjuster turned out to be the basis for denial of the claim.

•   Claim Involving Insured's 'Work' Is Not An Occurrence Under New Jersey Liability Policy

The recent Third Circuit Court of Appeals decision in Pennsylvania National Mutual Casualty Insurance Co. v. Parkshore Development Corporation , 2010 WL 5027147 (C.A.3 (N.J.)), is of considerable interest. There, the Court upheld the decision of the United States District Court in New Jersey to the effect that a claim against a general contractor for defective workmanship is not a claim involving an "occurrence" within the meaning of a General Liability form.
The case is of interest because heretofore most court decisions have emphasized the applicability of various "work" exclusions under the policy. Under the decision, a claim against an insured involving only its "work" isn't even an occurrence, such that there is no coverage in the first place, effectively meaning that the insurer need not get to the applicability of exclusions (as to which, of course, the insurer bears the burden of proof).

•   New Jersey Appellate Division Applies Equitable Fraud To Property Claim Based On Application Misrepresentation

The Appellate Division of the Superior Court of New Jersey, recently issued a decision, found at, 2009 WL 2341444, upholding the trial court’s dismissal of a $700,000-plus insurance claim filed against Vigilant Insurance Company, arising from a pipe freeze which caused excessive water damage to a newly built home. The case, Chen v. Vigilant Insurance Company, involved a home builder who built a $2 million dollar home in Boonton Township, New Jersey. In applying for the policy, he represented to Vigilant’s agent that he was building the home for his family to live in. Vigilant, relying on that representation, issued a homeowner’s policy but because some “punch list” items had not been completed and the insured had not moved in yet, a vacancy premium surcharge was applied. As you may have guessed, the Chen family never moved in to the house, and never intended to. Instead, Mr. Chen had contracted to sell the home to a third party and had become embroiled in litigation with that buyer. Chen failed to pay the natural gas bills, and as a result of that, the gas service to the home was shut off while he was out of the country. Water pipes froze and burst, causing water damage.

The insured’s claim was initially denied on the grounds that the insured had failed to take reasonable steps to maintain heat in the dwelling. The insured then sued Vigilant and GKAR was asked to defend. At deposition, it was learned for the first time that Mr. Chen had never intended to live in the house and had, instead, built the house for a third party. Had that fact been known to the underwriters, they could not have issued a homeowner’s policy but would have been required to issue a commercial policy, typically a builder’s risk policy. Vigilant obtained permission from the court to raise the misrepresentation in the application as a defense to payment and argued that the doctrine of equitable fraud should apply to rescind the policy based on the misrepresentation.

A non-jury trial was held in Superior Court, Morris County. The judge found that Vigilant had produced clear and convincing evidence, the higher standard which applies in equitable fraud cases, that the insured had misrepresented the intended use and occupancy of the house.
The court further found that the misrepresentation was material to the issuance of the policy; that is, he accepted the testimony of the underwriter that a homeowner’s policy could not have been issued under the circumstances. The court ruled that the coverage was void back to inception and that there was no coverage for the loss. (Vigilant was ordered to refund the full premium to the insured.)

The insured appealed the adverse verdict. In a decision dated July 31, 2009, the Appellate Division noted that a misrepresentation is material if, had it been revealed, it would either have resulted in the policy not being issued or a higher premium would have been charged. The Appellate Division found that the doctrine of equitable fraud would apply in the circumstances of this case. The doctrine, in contrast to legal fraud, which does require intent, does not require the innocent party (in this case, the insurer) to prove that the misrepresenting party knew that the representation was false. The court held that the insurer must prove that the insured misrepresented a presently existing or past fact; that he intended that the insurer rely on it; and that the insurer did detrimentally rely on it. The Appellate Division rejected the insured’s argument that Vigilant had waived the misrepresentation defense by retaining the insured’s premium up through the time of trial.

This decision is noteworthy in that it applies the doctrine of equitable fraud, which New Jersey courts have traditionally applied in life insurance cases, to the field of property insurance. The decision is not officially reported in the New Jersey law books, but it may be cited as an unreported decision pursuant to the New Jersey Court Rules.

•   Evolution Of New York Law Allowing Consequential Damages In First Party Litigation

The door to recovery of consequential damages in a first party contract action was opened in Acquista v. New York Life Ins. Co., 730 N.Y.S.2d 272 (App. Div. 2d Dept. 2001), in which the court acknowledged that under the right circumstances, consequential damages might be recovered. That door was recently opened wide in two cases recently decided by New York's highest court, reflecting the clear trend in New York toward recovery of such damages. Punitive damages, however, still remain off limits.

This evolving trend is reflected in the New York Court of Appeals decision, Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York, 10 N.Y.3d 187 (2008), in which consequential damages were found to be available to an insured where the insurer breached an insurance contract by failing to timely and adequately pay benefits for business interruption. The court stated that consequential damages beyond policy limits may be available in the event of an insurer's breach of contract if such damages were the reasonably foreseeable and probable result of the breach at the time the contract was created.

In Bi-Economy Market, a family owned wholesale and retail meat market suffered a fire loss to building, equipment and inventory. Its business owner's policy provided replacement cost coverage for the building, contents and business interruption coverage. Initially, the insurer advanced $163,161.00. The insurer offered to pay for only seven months of business income loss, although the policy provided coverage for up to 12 months of such loss. The insured never resumed operations. More than a year later, after an appraisal, the insured was awarded $407,181.00.

The lower courts found, as a matter of law, and the New York Court of Appeals agreed, that consequential damages were reasonably contemplated by the parties, in part because the policy provided coverage for business interruption, thereby, purportedly, placing the insurer on notice of the insured's needs for the financial support provided by such coverage in order to sustain its business operations in the event of a covered disaster. The threshold for determining foreseeability of consequential damages in the event of non-payment is obviously a low one, and in this case did not even require a remand for an evidentiary hearing.

In the other case, Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200 (2008), the insured's rental property suffered water damage while undergoing renovations. At the time of the loss, the insured maintained commercial property insurance which included builder's risk coverage. The insurer denied the claim three months after notification, based upon exclusions for wear, tear and long term, pre-existing water infiltration. The policy contained an exclusion for "consequential loss". In the suit which followed, the insured made claim for reimbursement of its property damage loss and consequential damages.

On a motion to dismiss the claim for consequential damages, the New York Court of Appeals determined that the policy exclusion for consequential damages did not preclude recovery of consequential damages if it could be established that such damages resulted from breach of the covenant of good faith and fair dealing, so long as the damages were "within the contemplation of the parties at the time of or prior to contracting". The matter was remanded for a determination of whether the specific damages claimed were a foreseeable result of the insurer's breach. How this will ultimately be determined is unclear, but we do not believe courts or juries will have much difficulty finding that many types of consequential damages are a foreseeable consequence of an insurer's breach of contract.

All should take notice that in neither Panasia Estates or Bi-Economy Market did the courts require any "bad faith" or egregious conduct to justify payments for consequential damages. The trigger was simply an insurer's failure to make timely payment of the full amount owed to its insured. In both cases, there were strong dissents by two justices, but to no avail.

These cases mark a significant change in New York insurance law, and will undoubtedly mark a new phase in insurance coverage litigation.

•   New Jersey Appellate Division Denies Liability Coverage To Innocent Spouse of Child Molester on Public Policy Grounds

High Point Insurance Co. v JM, et al 398 N.J. super. 562, 942 A.2d 804 (N.J. Super. A.D. 2008), was a declaratory judgment action by an insurer seeking a declaration that it was not obligated to provide a defense or indemnification in a personal injury action filed against its insureds under a homeowners policy. Mrs. Insured pleaded guilty to sexual assault on a minor and, when an action was brought against Mr. and Mrs. Insured, both insureds sought coverage and indemnification from their insurer. Not surprisingly, the insurer prevailed as to Mrs. Insured based upon the intentional acts exclusion of the policy, but, somewhat surprisingly, the court also held that the carrier did not have a duty to defend or indemnify her husband, even though he was not accused of any wrongful act.
The court's rationale was that New Jersey public policy requires spouses to "remain vigilant to protect children", and that the same public policy should not allow insurance policies to be interpreted to provide liability coverage for spouses of sexual molesters. It is unclear whether the holding in this case will be extended to other areas where "public policy" trumps the more familiar rules regarding coverage for "innocent" insureds.

•   New Jersey Appellate Division Requires "Appreciable Prejudice" for Failure to Cooperate Defense

Both property and liability insurance policies typically contain sections setting forth the insured's "duties after loss". Those include the duties of giving immediate notice to the company of any loss, protecting the property from further damage, segregating damaged from undamaged property, the submission of a proof of loss within 60 days after demand, and provision of claim-related documents.

New Jersey courts have generally required an insurer to prove that it has suffered prejudice from the insured's breach of a policy condition such as those listed above. Cooper vs. Geico, 51 N.J. 86, 237 A.2d 870, a 1968 case from New Jersey's highest court, addressed an insured's failure to give prompt notice of an accident. There, the New Jersey Supreme Court held that it would be unfair to have the insured forfeit coverage where there was no evidence that the insurer was prejudiced by the late notice.

The court was also concerned with the insurer receiving a windfall based on what might be merely a technical breach of the policy. This has been standard stuff in New Jersey for some time.

This issue was recently revisited by New Jersey's Appellate Division in Hager vs. Gonsalves, 398 N.J. Super. 529, 942 A.2d 160 (N.J. Super. A.D. 2008). The circumstances were a bit unusual.

Hager involved automobile liability coverage. The driver at fault, Gonsalves, was not a named insured. She negligently operated a pickup truck owned by the named insured, Chilito, injuring a third party. Neither Gonsalves nor Chilito notified the automobile insurer of the accident. The insurer, Rutgers Casualty, only learned of it via a letter from the injured party's lawyer five weeks after the accident. Its SIU department tried to investigate the accident but neither Gonsalves nor Chilito responded to numerous telephone calls and letters.

Rutgers filed a lawsuit seeking a declaratory judgment that it had no obligation to defend or indemnify Gonsalves or Chilito. The Appellate Division ruled that the failure of both the driver and the named insured to cooperate prejudiced Rutgers as a matter of law. A key issue was whether Gonsalves had permission from the vehicle owner, Chilito, to drive his car; if she did not, there would be no coverage. The insurer was able to demonstrate prejudice because it was precluded from obtaining any facts from which it could determine whether Gonsalves had Chilito's permission to drive his pickup truck.

Hager held that a court addressing the prejudice issue should look at two factors: (1) whether substantial rights have been irretrievably lost by the insured's breach and (2) the likelihood of success of the insurer in defending against the accident victim's claim, had there been no breach of policy requirements.

The court noted that the innocent victim would be adequately compensated for her injuries by her uninsured motorists coverage. Thus, the strong public interest in seeing that victims of accidents are compensated, which pervades coverage decisions, particularly in New Jersey, was not a factor here. Had such insurance coverage not been available to the accident victim, the Appellate Division may have reached a different result.

•   Presumption Of Fraud Arising From Overvaluation Is Conclusive In New York

A first party coverage claim, of interest because an insurer may void coverage is Latha Restaurant Corp. v. Tower Ins. Co., 38 A.D. 3d 321, 831 N.Y.S.2d 411 (1st Dept. 2007). The insured's proof of loss included duplicative items, property as to which it demonstrably had no insurable interest and representation of a loss attributable to debris removal expense, when, it was later learned, the expense had never been incurred. These problematic claims represented approximately $400,000 of the insured's $675,000 in claims.

The Court found that "overvaluation of insured property raises a presumption of fraud in proportion as to the excess...". More importantly, the Court found that the presumption of fraud becomes conclusive where, as was the case, the insurer demonstrates that,
"the difference between the amounts claimed in the proof of loss and the losses actually shown to have been sustained are grossly disparate and without reasonable explanation." It was not necessary, in this case, for the Court to elaborate on the degree of disparity between claimed and actual losses in order for the presumption to become conclusive, although that could become an issue in post-Latha cases. The Court also rebuffed the insured's attempt to attribute the gross disparity to its public adjuster, finding that under recognized agency principles, the adjuster was acting within the scope of his authority and the plaintiff signed a sworn proof of loss.