Insurer Need Only Respond to Risk It Agreed to Insure

   By Barry Zalma, Attorney and Consultant

In Seneca Insurance Company, Inc., Plaintiff-Appellant-Respondent v. Cimran Co., Inc., et al., Defendants-Respondents-Appellants., No. 9226 (N.Y.App.Div. 04/09/2013), [enhanced version available to lexis.com subscribers], the parties brought an appeal that provided the New York Appellate Division with the opportunity to reiterate and reaffirm an ancient principle of insurance law: that insurance coverage cannot be imposed based on liability for which insurance was not purchased or provided.

It is axiomatic that insurance coverage cannot be imposed based on liability for which insurance was not purchased or provided.

Seneca's motion for summary judgment sought a declaration that it has no duty to defend and indemnify defendants in the underlying personal injury action because the commercial general liability insurance policy it issued to them did not cover the portion of their property on which the accident occurred. Simply, that it never agreed to insure the insured against the risk of loss at any place other than the place described in the policy.

FACTS

On or about October 12, 2009, while construction was under way to add three additional stories onto defendants' one-story building at 34-45 Francis Lewis Boulevard, in Flushing, Queens, an employee of the subcontractor handling the framing for the additional floors fell and sustained injuries. While the complaint in the personal injury action states merely that the plaintiff fell at "the construction site," the bill of particulars adds that the incident took place while "the plaintiff was working on the fourth floor on top of the steel framing of the fourth floor side and/or edge."

By a Notice of Occurrence/Claim dated February 19, 2010, defendants provided notice of the occurrence to Seneca. In a letter dated March 3, 2010, Seneca advised defendants that it had received the summons and complaint, stating that this constituted its first notice of the claim. By follow-up letter dated March 15, 2010, Seneca reserved its rights to disclaim coverage and/or rescind the policy, stating that further investigation of the claim was needed, including whether defendants had misrepresented on their insurance application that they had no intention of conducting demolition or construction at the premises.

Meanwhile, by notice of cancellation dated March 11, 2010, Seneca had cancelled defendants' policy effective April 1, 2010, for the reason that "[t]he building is currently under construction."

THE LITIGATION AND ANALYSIS

Seneca then sued seeking a declaration that it had no duty to defend the defendants in the underlying action because the accident did not take place at the "Designated Premises" covered by the policy. The policy described the insured premises as a 10,000-square-foot, one-story building. The accident occurred on the three story addition, which materially altered the "Designated Premises."

Both sides moved for summary judgment.

The appellate court concluded that there were no issues of fact precluding summary judgment declaring that the construction site from which the injured worker fell was not part of the insured premises and therefore was not covered under the policy. He was on the fourth floor, 40 feet or more above the ground, when he fell and was injured.

The property was described in defendants' application for insurance, and on the policy, as a one-story building occupied by a billiard hall and a health spa. Since the policy was explicitly issued in reliance on the representations made in the application, there can be no real dispute or confusion that the purchased coverage was limited to the one-story building, which housed two commercial tenants. Nor was there any dispute or confusion regarding where the accident occurred; according to the plaintiff's bill of particulars in the personal injury action, the accident took place "on the steel framing of the fourth floor" of what he described as the "construction site" at 34-45 Francis Lewis Boulevard.

Coverage cannot be afforded on liability for which insurance was not purchased. While the obligation to defend is broader than the duty to indemnify, it does not extend to claims not covered by the policy.

If a policy insures a portion of a building, it does not cover an injury occurring in another portion of the building. Since the policy only provided coverage for injuries arising out of the insured building, namely, the 10,000 square feet located on the first, and at that time only, floor of the building, it necessarily did not provide coverage for an additional three floors of an intended four-story structure, nor for the structure that existed during the construction of three additional floors on top of the insured building.

Seneca is therefore entitled to summary judgment on its second cause of action for a declaration that it has no obligation to defend and indemnify defendants for the claim brought against them by the plaintiff in the underlying action.

ZALMA OPINION

Insurance is a contract of indemnity that specifies in clear and unambiguous language the risks the insurer is willing and agrees to assume. The risk faced by a one story pool hall is much different than the risks faced by an insured in the process of adding three additional floors to the original structure.

The obligation of an insured to treat its insurer with the utmost of good faith requires that the insurer be advised of such a major change in risk or risk having no coverage at all. In this case the failure of the insured to advise the insurer of the change in risk, resulted in a total loss of coverage. The risk was materially changed and the loss did not occur at the place described by the policy.

The prudent insured changing a structure will advise its insurer of the change, gain a commitment to insure the new risks and buy a course of construction policy to protect the insured if the structure is damaged during construction. Keeping it a secret saved the insured nothing and cost the insured, in this case, all coverage and probably a great deal of fees paid to lawyers to try to obtain the coverage that had never been purchased.

Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" "Heads I Win, Tails You Lose - 2011," "Zalma on Diminution in Value Damages," "Arson for Profit" and "Zalma on California Claims Regulations," and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma's Insurance Fraud Letter.

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