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Insurance Exclusions As Defenses To Breach of Contract

Insurance Exclusions As Defenses To Breach of Contract

The Appellate Division of the Supreme Court of New York, Fourth Department recently heard an appeal in the case of Conley & Tibbitts Properties v. Leatherstocking Cooperative Insurance Co. This relatively simple case nonetheless elucidates some of the finer and more practical aspects of contract law and is thus, a good teaching tool. One of the most important, and often, most overlooked aspects of entering into a contract is actually reading the contract! In our fast-paced world, people are always in a hurry, in a rush, distracted, and eager to get on to the next thing. Interestingly at the turn of the 20th century the average American slept between 9 and 10 hours per night – this figure has experienced a steep decline and now most estimates now have the average American getting a scant 6 hours of sleep per night, and often fitting the profile of a narcoleptic.

At any rate, those of us in the business of contract law understand that a contract is an important document, governing a relationship between two parties that may last for years and involve a great deal of money. Insurance contracts are a particularly important type of contract as they cold-bloodedly delineate obligations and payments in the event of an accident, tragedy, or other catastrophe. Realize that experienced attorneys for the insurance company have carefully analyzed every word of the contract – it thus behooves the party seeking insurance (“the insured”) to examine it very carefully and resolve anything that is unclear to them. Perhaps it is only human nature to assume that disaster and bad luck will never happen to one’s own self, and that an insurance policy is simply there for peace of mind. As hurricane, flood, fire, and theft victims realize, post hoc, nothing could be further from the truth.

Equally important is the idea that insurance contracts (and contracts in general) are concerned with remote contingencies. Because arcane contract interpretation principles may be applied if the contract is silent, contracts generally address even the remotest foreseeable contingencies – generally in the form of exclusions. For example, your sailboat may be insured against destruction except when it occurs during an act of war.

Background of the Case

Plaintiff purchased an insurance policy on their building from the defendant. The policy covered loss from fire damage. Plaintiff’s building suffered a fire, and defendant paid for the damage pursuant to the policy. Then things got weird.

As the fire was being extinguished by the firefighters, plaster was disturbed. A state building code required that when plaster was disturbed, an asbestos inspection had to be made. Lo and behold, asbestos was discovered during the inspection: and of course state code now required the asbestos to be removed, a costly and annoying hassle.

Plaintiff then sought the cost of asbestos removal from the defendant – after all it was a direct consequence of the fire. Well, tragically, the defendant had written the contract and contemplated this remote possibility.

The contract specifically excluded costs arising from the enforcement of building codes or laws under any circumstance, regardless of any cause or occurrence that contributed to a loss.

Analysis

The plaintiff lost at trial and appealed, and the Appellate Division was not sympathetic. The language of the contract clearly excluded building code-related loss such as asbestos removal. When drafting the contract the defendant’s contract attorney(s) had clearly contemplated this type of downstream loss and acted to protect themselves.

Plaintiff’s only chance was to take action prior to signing the contract. Hypothetically they could have gone with a different insurance company, or negotiated to have building code enforcement loss to be placed into the contract, perhaps for a few dollars more in premiums per month. Yet plaintiff, having already undergone the harm of a fire, now became stuck with this additional loss, having assumed they were totally covered by insurance. One can learn a great deal from this cautionary tale.

When signing an insurance contract, it is paramount that you retain experienced counsel to protect your interests. Be assured that the insurance company will always have done the same during the drafting of the agreement. Please don’t hesitate to contact our office for a consultation.

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