Apportionment of Loss clause questions certified to New York Court of Appeals

Quaker Hills v. Pacific Indemnity, 11-3670 (2nd Cir. Aug. 29, 2013)

In a case with potentially far-reaching implications relating to the right to limit property insurance coverage, the United States Court of Appeals for the Second Circuit has certified three questions to the New York Court of Appeals.

The case involves a total loss by fire to a home valued at over $14,000,000. After insuring the contents and property with a combined limit in that amount, the insured renewed the policy, but advised its broker that the desired amount of replacement coverage it wanted, given the appraised value of $13,000,000, was only $5,000,000. The renewal policy was issued with a 38% apportionment of loss clause, which operated to limit the insurer's maximum liability for a covered loss to $5,054,720. The insured's premium was also reduced from $50,273 to $20,777. The policy was renewed three times thereafter, each time including the 38% apportionment of loss clause, and with an eventual increase in the policy limits to $14,388,000. The fourth and fifth renewals also included Extended Replacement Cost coverage, pursuant to which the insurer was to pay all reconstruction costs under certain conditions. Fire destroyed the home in the fifth year of coverage, and the insurer refused to pay more than 38 percent of the $14,388,000 stated loss coverage on the insured's claim for $26.5 million in losses and replacement costs.

The insured contends that the policy's apportionment of loss clause is invalid as it violates Insurance Law section 3404, which sets the minimum coverage permissible in New York's Standard Fire Insurance Policy, specifically the less of either the actual cash value of the property at the time of loss; or the replacement cost; or the value of the property as predetermined in the policy. The insurer argued that the apportionment of loss clause is analogous to co-insurance clauses which have been enforced. Upon motion for summary judgment, the district court held that the clause was void as a matter of law. The clause is "fundamentally different from a co-insurance clause", the court said, because co-insurance clauses apply only in the event of a partial loss, and because it "has no real purpose other than to make a $5,467,400 policy appear to be a $14,388,000 policy".

The questions certified to the Court of Appeals are:

"(1) In an insurance policy that provides a stated dollar amount of loss coverage in the event of fire, does a policy clause that, in exchange for a reduction in premium charged, limits the insurer's liability to a percentage of any loss violate New York Insurance Law?

"(a) If such a clause violates New York Insurance Law, is the clause void, or is it voidable or subject to principles of waiver or estoppel?

"(2) If such a clause is in general permissible under New York Insurance Law, is it enforceable where there has been a total loss of the subject property?

"(3) If such a clause is in general permissible under New York Insurance Law, is there a limit on the percentage of liability that can be apportioned to the insured?"

The Circuit Court certified these questions, noting that no Court of Appeals opinion directly addressed the analogy of the co-insurance clause to an apportionment of loss clause. Going further, it noted that one of the leading cases dealing with co-insurance clauses, New York Life Ins. Co. v. Glens Falls Ins. Co., 184 Misc. 846, 848-50, 55 N.Y.S.2d 176, 178-79 (Sup.Ct. N.Y.Co. 1945), aff'd 274 A.D. 1045, 86 N.Y.S.2d 191 (1st Dep't 1949), aff'd 301 N.Y. 506, 92 N.E.2d 73 (1950) was affirmed on appeal, but without a majority opinion.

The number and breadth of the certified questions, as well as comments about Glens Falls, create many options for the Court of Appeals, even touching upon the well-established law of co-insurance clauses. Watch for future announcement about Quaker Hills in Newswire.