Second Department Grants Summary Judgment to Insurer Despite 4-Year Delay in Issuing Disclaimer
On April 15, 2015, the Appellate Division, Second Department held that “[a]n insurer’s delay in giving notice of disclaimer of coverage, even if unreasonable, will not estop the insurer from disclaiming unless the insured has suffered prejudice from the delay.” Ira Stier, DDS, P.C. v. Merchants Insurance Group, 2015 N.Y. Slip. Op. 03128 (2d Dep’t 2015). Although this principle is not new to New York case law, it is significant in light of the four-year delay between the insureds’ submission of their claim and the insurer’s disclaimer of coverage. It is significant to note that this decision related to a first party claim; as such, New York’s “strict” disclaimer statute, Insurance Law Section 3420(d), was not applicable.
The plaintiffs operated a dental practice out of a single-family home in Poughkeepsie, New York. The Business Owners Insurance Policy that they purchased from defendant Merchants Insurance Group (“Merchants”) included coverage for loss of business income, so long as the loss of income was attributable to a covered loss. Importantly, the policy excluded losses caused by the “enforcement of any ordinance or law regulating the construction, use, or repair of any property.”
In January 2007, plaintiffs’ dental practice sustained significant damage after vandals inserted a running garden hose through a broken window, causing the basement ceiling to collapse. When the Town of Poughkeepsie building inspector responded to the incident, he discovered that a proper certificate of occupancy had never been issued to the plaintiffs. As a result, the building inspector issued an Order to Remedy Violation requiring the plaintiffs to obtain a proper certificate of occupancy before they reopened their practice.
Eleven months later – after the certificate was obtained – the dental practice reopened for business. The plaintiffs submitted a claim to Merchants for, among other things, the loss of business income that resulted from the eleven-month closure of their practice. More than four years after the date of loss, Merchants disclaimed coverage for that portion of the claim attributable to loss of business income, on the grounds “that the period of time when the dental office was closed was caused by the enforcement of the building code by the Town’s Building Department, rendering the loss excluded pursuant to the policy.” Plaintiffs then commenced an action alleging that Merchants had breached its policy when it failed to provide coverage for the loss of business income. Merchants moved for, and was granted, summary judgment dismissing plaintiffs’ complaint.
On appeal, the Second Department affirmed the lower court’s decision. The Court held that Merchants was not estopped from disclaiming coverage four years after plaintiffs had submitted their claim, insofar as plaintiffs had not shown they were prejudiced by the disclaimer. Accordingly, Merchants’ “disclaimer was effective” notwithstanding the passage of time.
Importantly, the Court observed that the policy “clearly and unambiguously exclude[d] coverage for losses caused directly or indirectly by the enforcement of any ordinance or law regulating the construction, use, or repair of any property.” In this case, the loss of business income was directly attributable to plaintiffs’ failure to obtain “a proper certificate of occupancy,” and not the flooding caused by the vandals.
This case is significant because it illustrates that a lengthy delay, indeed even an “unreasonable” one, will not defeat an insurer’s disclaimer of coverage in the absence of prejudice to the insured. Here, there was no question that the policy operated to exclude coverage for the loss at issue, and the insureds could not demonstrate any prejudice arising from the insurer’s delay in disclaiming.
Should you have questions regarding the information presented in this alert, please contact Anthony J. Piazza, Chair of the firm’s Insurance Coverage & Regulation Practice Area, at (585) 295-4420 or firstname.lastname@example.org.