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Charles Rocco, Tom Orlando, and Venice Yoo Win Appeal in Dispute over Deductible Interpretation in Sandy Claim.

The Appellate Division, Second Judicial Department, of the State of New York ruled in favor of ACE American Insurance Company (“ACE”) in a fight over the interpretation of a deductible provision in a Sandy claim.  In a unanimous opinion, the Appellate Division reversed the Westchester County Supreme Court and agreed with ACE’s interpretation of the flood deductible applicable to Castle Oil Corporation (“Castle Oil”)’s losses.

This litigation arises out of Castle Oil’s insurance claim for flood damage caused by Superstorm Sandy to its Port Morris Terminal location.  At issue was the interpretation of the flood deductible provision, which states that the flood deductible is “2% of the total insurable values at risk per location subject to a minimum of $250,000.”  Castle Oil moved for partial summary judgment, arguing that the deductible should be calculated as 2% of the $2.5 million flood sublimit.  According to Castle Oil, therefore, the appropriate deductible was the minimum $250,000 flood deductible as 2% of the $2,500,000 sublimit was less than $250,000.  ACE opposed and cross-moved for summary judgment, arguing that the deductible should be 2% of $124,701,000, the total valuation of the Port Morris Terminal listed in the policy’s “Schedule of Locations Endorsement.”  According to ACE, the deductible was $2,494,020, and as such, Castle Oil could not recover because Castle Oil’s claimed $2,284,239.95 did not exceed that amount.

Judge Smith of the Westchester County Supreme Court agreed with Castle Oil’s position and granted Castle Oil’s motion.  She found that the language “values at risk” was not defined in the policy, and must necessarily refer to the sublimit amount of $2.5 million.  She reasoned that this interpretation was the only way to give meaning to the language “at risk” because the insurer is “at risk” of paying only the full amount of the sublimit.  Judge Smith also held that the total insurable values of $124,701,000 could not be used to calculate the deductible because the endorsement included a disclaimer that those values were set forth for “premium purposes only.”  She further concluded that ACE’s position rendered Castle Oil’s flood protection illusory.

The Appellate Division disagreed with the lower court’s interpretation of the flood deductible provision, and concluded that the only reasonable interpretation of the flood deductible provision was that set forth by ACE – namely, that the applicable deductible was 2% of $124,701,000, or $2,494,020.  Castle Oil’s interpretation, on the other hand, was unreasonable as it would render much of the deductible provision entirely superfluous.

In reversing Judge Smith’s decision, the Appellate Division found that the “total insurable values at risk” refers to an insured’s own risk of loss and damage, not the insurer’s limit of liability.  In addition, the Appellate Division rejected Judge Smith’s finding that the values in the endorsement cannot be the values referred to in the deductible provision because of the “for premium purposes only” notation.  That note simply indicated that the values were used to determine the premiums only, not the limitations of the policy.  As such, it did not preclude the use of these values in the calculation of the applicable flood deductible.  The Appellate Division also rejected Judge Smith’s finding that ACE’s interpretation would render the policy’s coverage illusory.  While the claim at issue fell within the $2,494,020 deductible, the Appellate Division explained that there were loss scenarios pursuant to which Castle Oil would have been out the $2,494,020 deductible, but also would have been paid the entire $2,500,000 sublimit for flood.  Therefore, as ACE’s interpretation of the flood deductible was the only reasonable interpretation, the Appellate Division reversed the lower court’s decision and ruled in favor of ACE.

Paul Ferland and Venice Yoo Obtain Dismissal of an $18 Million Dollar Claim for Violations of New York General Business Law § 349

Paul Ferland and Venice Yoo obtained dismissal on behalf of Bankers Standard Insurance Company (“Bankers Standard”) of an $18 million dollar claim for violations of New York General Business Law § 349 (“GBL § 349”), in a coverage litigation arising out of Superstorm Sandy (“Sandy”). Federal Judge Joanna Seybert in the Eastern District of New York agreed with Bankers Standard’s argument that Plaintiff’s complaint failed to allege consumer-oriented conduct, as required to maintain a claim under GBL § 349. Accordingly, the $18 million claim was dismissed.

Plaintiff, Yucel Edebali, sued Bankers Standard in connection with his insurance claim for property damage caused by Sandy and a subsequent vandalism claim. Plaintiff asserted claims for breach of contract, violations of GBL § 349, and declaratory relief. In support of his GBL § 349 claim, Plaintiff alleged that Bankers Standard engaged in deceptive conduct in handling Plaintiff’s Sandy claim. Specifically, Plaintiff alleged that he did not rent an alternative premises after Sandy because he relied on Bankers Standard’s representation that it would rent a house for him. When Bankers Standard did not rent another house for him, Plaintiff alleged that Bankers Standard’s denial of his claim for alternative living expenses was improper. In an attempt to meet GBL 349’s consumer-oriented conduct requirement, Plaintiff alleged that this kind of deceptive conduct has the potential to affect the public at large as procuring alternative premises for insureds is a common practice of insurance companies.

Bankers Standard moved to dismiss the GBL § 349 on the ground that Plaintiff’s complaint failed to sufficiently allege that Bankers Standard’s conduct was directed at consumers. Bankers Standard argued that the fact that other consumers may have purchased similar policies and that some of them may have dealt with Bankers Standard’s claim department is not, standing alone, enough to meet the statute’s consumer-orientation requirement. Judge Seybert agreed with Bankers Standard, finding no factual allegations in the complaint to suggest that the parties’ dispute was anything more than a private contractual dispute. Therefore, Plaintiff’s $18 million dollar GBL § 349 claim was dismissed in its entirety.

Brian Devilling and Matt Ponzi obtained dismissal of all claims against an excess property insurer in the District Court of Jefferson County, Kentucky. The insured sought damages in excess of $1 million arising from a fire loss, and argued that it was entitled to sue its excess insurer before its primary insurer paid policy limits. The court disagreed, dismissing the case against the excess insurers and holding that primary limits must be exhausted before filing suit against an excess insurer.

Bridget Liccardi and Michael Foran recently won summary judgment on behalf of an insurer in the United States District Court for the Southern District of Illinois. The case involved a $5 million fire loss claim. The insured argued that it was entitled to replacement cost value coverage, since it has replaced its damaged commercial property with residential investment property. On the eve of trial, the court granted summary judgment for the insurer, holding that residential investment property is not “like kind and quality” in comparison to the damaged commercial property. Thus, the insurer was not obligated to pay replacement cost value under the policy.

Charles J. Rocco, Malcolm Reilly and Mara Hsiung of the New York office recently secured partial summary judgment on behalf of ACE American Insurance Company (“ACE”) and Torus Specialty Insurance Company (“Torus”) (collectively, the “Insurers”) in New York Supreme Court. Judge Cynthia Kern held in favor of the Insurers on the application of the Special Flood Deductible for a Named Storm. This litigation stems from an $86 million insurance claim made by The Howard Hughes Corporation (“HHC”) for damage caused by Superstorm Sandy at the South Street Seaport in New York City. In a motion for partial summary judgment, HHC argued that the Policy’s general $100,000 deductible should apply to the loss rather than the Special Flood Deductible for a Named Storm (approximately $7.7 million). Although HHC recognized that Superstorm Sandy was a Named Storm, it maintained that the Special Flood Deductible was inapplicable because the damage was caused by storm surge, not by flood. In support of its argument, HHC relied upon a definition of “flood” from an occurrence provision of the Policy that excluded storm surge caused by a Named Storm. The Insurers responded by pointing out that the definition of “flood” upon which HHC relied was limited to the occurrence provision of the Policy and was inapplicable to the Policy’s deductible provisions. Moreover, HHC’s interpretation would render the Special Flood Deductible for a Named Storm meaningless, as it could never be triggered. Judge Kern agreed with the Insurers’ interpretation, and granted partial summary judgment to the Insurers.

WSW – Foran Glennon Expands Geographic Reach and Insurance Practice Depth

Foran Glennon proudly welcomes Amy M. Samberg, formerly of Snell & Wilmer, LLP, to the firm and announces the opening of offices in Denver, Colorado, Phoenix, Arizona and Las Vegas, Nevada. Bringing over 25 years of experience to the firm, Ms. Samberg’s practice focuses on advising insurers in coverage matters involving first-party property, general liability, professional liability, directors and officers liability, inland marine and automobile policies. In addition to advising insurers on coverage matters, Ms. Samberg has extensively litigated both first and third party bad faith and coverage suits in state and federal courts throughout the Southwest and has been recognized by Best Lawyers in America® and Southwest Super Lawyers in the area of insurance coverage. Joining the firm as partners, in addition to Ms. Samberg are Justin Hepworth in Las Vegas, along with Sarah Jezairian and Amy Stein in Phoenix. In addition, Chicago attorney Brian Devilling has been elevated to partner and will relocate to the Denver office. Also joining the firm are associate attorneys Tom Blomstrom and Jerri Wettestad in Denver, Howard Andari in Phoenix and Alaina Stevens in Las Vegas.

Foran Glennon Partner Steven Swanson Obtained Summary Judgment on Breach of Design Contract Claim

Foran Glennon attorney Steven C. Swanson recently obtained summary judgment on behalf of his mechanical engineer client in a matter involving purported defects and performance issues in the HVAC system of a remodeled and expanded fire station. The plaintiff fire protection district had previously settled a mechanics lien claim by its contractor by arguing that the contractor breached its construction contract by not completing its work, refusing to correct construction defects, and failing to test-and-balance the HVAC system, among other things. The district then turned around and sued the architect and mechanical engineering subconsultant for purported breaches of their respective design contracts.

The Will County Circuit Court, Judge Powers presiding, granted summary judgment to Mr. Swanson’s client and the architect when it agreed the district failed to meet its burden to prove through admissible expert testimony that the mechanical engineer breached the applicable professional standard of care or proximately caused the alleged defects or performance issues in the HVAC system. The Court also agreed with Mr. Swanson when it rejected the district’s contention that expert testimony was only required for tort-based claims and was not required for the district’s contract-based claim.

Foran Glennon Partner Kevin Glenn Obtains Favorable Jury Verdicts in Two Med Mal Trials

Kevin Glenn of the Chicago office tried two cases to favorable jury verdicts this year. The first involved allegations the decedent’s physician overprescribed a combination of medications, including morphine, that led to her death. The decedent initially collapsed at home, leading to a hospitalization where she underwent a detoxification program. She was prescribed a drug by the attending physician for that hospitalization, suboxone, which negated the effects of morphine. She stopped using it on her own. This led to a jury instruction that any injuries sustained because of her failure to follow the other doctor’s Orders could not be recovered. Had she taken the suboxone, she would not have overdosed and died. As such, all of the damages attributable to her death could not be recovered. Her recovery was limited to the cost of the initial hospitalization which was reduced by 50% due to contributory and comparative negligence of the decedent and her surviving daughter.

The second matter resulted in a defense verdict from the jury in less than 30 minutes. The Plaintiff there claimed he was not told he should consider banking sperm before undergoing chemotherapy for cancer. He sought damages for his inability to conceive. His sister-in-law was a nurse in the Defendant physician’s. She testified she told him about sperm banking and actually called a sperm bank for him while he was in the office. He denied this – but the phone bills showed a call to the sperm bank from the doctor’s office on the very day and at the very time the Plaintiff was in the office.

Foran Glennon Partners Matthew S. Ponzi and Kirk M. Zapp Obtain Partial Summary Judgment on Preservation of Property Claim

U.S. District Judge John A. Jarvey of the Southern District of Iowa granted partial summary judgment in favor The Phoenix Insurance Company, a subsidiary of The Travelers Companies, Inc. Chief Judge Jarvey held in Phoenix’s favor on all issues, finding a question of fact only as to whether certain costs were covered costs to preserve property as opposed to costs to continue business operations.

In June 2011, the insured, Infogroup, Inc., a data provider in Carter Lake, Iowa, began relocating its business operations because of the threat of flooding from the nearby Missouri River. Phoenix insured Infogroup’s two data centers and a combination office and warehouse in Carter Lake under a commercial property insurance policy. Infogroup submitted a preservation of property and extra expense claim of approximately $12 million to recover its relocation costs.

Judge Jarvey agreed with Phoenix that the extra expense clause required that Infogroup suffer “direct physical loss or damage” to trigger coverage. Infogroup argued that its “loss of use” of the Carter Lake facility as a result of the threat of flooding constituted “direct physical loss or damage”. Judge Jarvey rejected this argument, finding that physical loss or damage requires some sort of physical invasion, however minor, and that mere loss of use does not constitute physical loss or damage under the extra expense clause. Moreover, threatened loss of use does not equate to actual loss of use, and the threat of flooding did not prevent Infogroup from using its facility. Since there was no physical loss or damage, Judge Jarvey held that there was no extra expense coverage.

Infogroup also argued that it had suffered physical loss, a contention Phoenix disputed. Even assuming Infogroup had suffered the alleged physical damage, Judge Jarvey found that the alleged damage was not “direct physical loss”. Focusing on the definition of “direct”, Judge Jarvey found that there was no causal relationship between the alleged physical loss and Infogroup’s moving expenses which were incurred because of the threat of flooding and not because of the alleged physical loss. Infogroup’s claimed physical loss occurred after it had already decided to and begun to relocate.

Judge Jarvey further agreed with Phoenix’s interpretation of the preservation of property clause. The preservation of property clause covers property – not business operations, and thus, there is no coverage for the cost to continue or re-establish business operations in a new location. Unlike the extra expense clause, the preservation of property clause does not even mention business income or operations. The judge found that Infogroup was only entitled to recover the costs necessary to remove its property and data but that there was a question of fact as to whether certain costs were “necessary” to remove the covered property or were non-covered costs to re-establish business.

The policy also contained a duty to protect covered property from further damage. Noting that this duty is not a source of coverage by itself, Judge Jarvey again agreed with Phoenix that this duty is only triggered when the insured first suffers loss or damage. There is only coverage if Infogroup can show what costs following its claimed physical loss were “reasonable steps to protect” the damaged property from “further damage”, noting that costs to continue business operations and costs incurred prior to suffering a triggering loss were not recoverable.

Judge Jarvey also rejected Infogroup’s contention that the common law required Phoenix to pay for its mitigation expenses. The common law does not provide additional coverage where the policy explicitly covers a duty to mitigate. Thus, there is no duty to imply a duty to reimburse when such duty is explicitly in the policy.

The reasonable expectations doctrine likewise provided no independent basis for recovery. The doctrine was inapplicable where no exclusion was being implied, the policy language was clear.

Finally, during oral argument, Judge Jarvey granted summary judgment to Phoenix on Infogroup’s bad faith claims. In his written opinion, Judge Jarvey expounded on that ruling, holding that it was not objectively unreasonable for Phoenix to think that Infogroup was not entitled to the entirety of its claimed expenses. Phoenix maintained a consistent coverage position throughout the entirety of the claim adjustment process and the litigation. In the end, Infogorup’s claim was “fairly debatable” and Infogroup was unable to meet either the objective or subjective criteria required to prove bad faith.

The Court’s opinion, which has been featured in Law360, is available here.