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Sunrise One, LLC v. Harleysville Ins. Co. of N.Y.
Citation: 293 F. Supp. 3d 317Docket: No. 15–CV–0242 (JFB)(GRB)
Court: District Court, E.D. New York; March 28, 2018; Federal District Court
Joseph F. Biaco, United States District Judge, addresses a legal dispute between Sunrise One, LLC and Sunrise One Operating LLC (collectively "Sunrise") and Harleysville Insurance Company of New York ("Harleysville") regarding an insurance contract breach. Sunrise operates the Rockville Centre Inn in Nassau County, New York, which allegedly suffered wind and rain damage during Hurricane Sandy in October 2012. Harleysville denied coverage for both the physical damage and associated business income losses, leading to this lawsuit.
Currently before the Court are motions for partial summary judgment. Harleysville seeks summary judgment on Sunrise's claims for business income losses, consequential damages, and attorney's fees and costs, as well as a limitation on the damages Sunrise can claim to its Second Estimate, rejecting the Third Estimate of Damages. Conversely, Sunrise seeks summary judgment on several of Harleysville's affirmative defenses and aims to strike certain defenses as redundant.
The Court grants Harleysville's motion for summary judgment on the claims for business income losses, consequential damages, and attorney's fees and costs. However, the request to limit Sunrise to the Second Estimate of Damages is denied due to contested factual issues regarding the timeliness of the Third Estimate. Additionally, Sunrise's motions for summary judgment and to strike are denied.
The relevant background indicates that the Morash Family owns three hotels, including the Rockville Centre Inn, and that Harleysville provides insurance for all properties. The insurance policy, effective from April 22, 2012, to April 22, 2013, covers direct physical loss or damage and actual business income losses, contingent upon Sunrise providing prompt and detailed notification of any damages.
In late October 2012, Hurricane Sandy caused significant damage to the Rockville Centre Inn, as reported by Sunrise. Michael Morash observed visible damage at all three Morash Family hotels on October 29, 2012, and reported this damage to the insurance broker on November 9, 2012, followed by a formal claim submitted via email in January 2013. Harleysville contests that a claim for the Rockville Centre Inn was made on those dates and claims that its inspection found no damage attributable to the hurricane.
The procedural history includes the filing of the original complaint on January 15, 2015, an amendment granted on July 29, 2016, and subsequent motions for partial summary judgment filed by both parties in 2017. The Court heard arguments on December 19, 2017, considering the submissions from both sides.
Under Federal Rule of Civil Procedure 56(a), a court can grant summary judgment if there is no genuine dispute regarding material facts. The burden lies on the moving party to demonstrate entitlement to judgment, while the opposing party must provide specific factual support for any disputes. Summary judgment is inappropriate if a reasonable jury could rule for the non-moving party.
Harleysville seeks summary judgment on Sunrise’s claim for lost business income based on four reasons: (1) lack of coverage for the loss under the Insurance Policy, (2) failure to timely notify Harleysville of the claim, (3) waiver of the right to pursue the claim, and (4) estoppel from seeking the claim. The Court grants summary judgment to Harleysville based on the policy's language, rendering the alternative grounds unnecessary for consideration.
The Insurance Policy from Harleysville covers business income losses at the Rockville Centre Inn due to covered damage, with specific limitations outlined in the "Business Income (and Extra Expense) Coverage Form." This form states that Harleysville will compensate for actual business income losses resulting from the necessary suspension of operations during a defined "period of restoration." The parties dispute the duration of this period, which begins 72 hours after direct physical loss or damage and ends on the earlier of two conditions: when the property is repaired or replaced or when business resumes at a new location.
An "Actual Loss Sustained" endorsement modifies the Business Income Form, stating that the period of restoration concludes either when the property is restored, when business resumes at a new location, or 12 months after the direct loss occurred. Harleysville argues this endorsement clearly limits the restoration period to 12 months post-loss. In contrast, Sunrise claims the endorsement incorrectly references section "G" instead of the correct section "F," suggesting it does not modify the Business Income Form and creates ambiguity.
The Court determines that the endorsement unambiguously modifies the "period of restoration." It emphasizes that insurance contracts are typically interpreted by the courts, requiring a reading of the endorsement alongside the policy. Ambiguities in policy terms arise when they can have multiple meanings, whereas unambiguous terms possess a definite meaning without potential for misunderstanding. The Court concludes that the endorsement's modification is clear, identifying the correct section of the Business Income Form, and the reference to "G" is merely a typographical error that does not create ambiguity.
The Court determined that the Endorsement altered the definition of "period of restoration," establishing that it terminates no later than 12 consecutive months following the direct physical loss or damage to the property. Sunrise's coverage under the policy for lost business income due to a "suspension" of operations requires that such a suspension occurs during this defined period. The modified "period of restoration" commenced 72 hours after the damage from Hurricane Sandy and concluded approximately one year later, on October 30, 2013. Sunrise acknowledged there was no operational suspension during this timeframe, with its representative stating the Rockville Centre Inn was only closed for one day due to the hurricane and experienced a brief power outage. Furthermore, the hotel maintained high occupancy rates and even benefited from increased demand post-storm. Sunrise's argument for future repairs does not meet the policy's requirements for triggering coverage, as the suspension must occur during the specified restoration period, which Sunrise admits did not happen.
Regarding consequential damages, the Court granted summary judgment in favor of Harleysville, concluding there was no evidence of bad faith on Harleysville's part and that no genuine dispute existed over this issue. The Court chose not to address whether such damages were initially contemplated by the parties during the contract formation.
An insured can only recover consequential damages from an insurer if such damages result from the insurer's bad faith refusal to pay a claim and were reasonably foreseeable by both parties at the contract's inception. Courts require that a plaintiff demonstrate the insurer lacked good faith in processing the claim to sustain a claim for consequential damages. An insurer is not liable for damages exceeding policy limits without evidence of bad faith. To prove bad faith, the insured must show that no reasonable insurer would deny coverage based on the facts presented. Mere disagreements over coverage do not suffice. In the case at hand, the Court found no genuine issue regarding Harleysville's good faith in denying Sunrise's claims. Harleysville acted diligently in assessing the claims, retaining an independent adjuster who made multiple attempts to arrange inspections. After delays and cancellations attributed to unprofessional conduct by the adjuster, Harleysville reassigned the claims, hired legal and engineering experts, and ultimately conducted a thorough inspection. The findings indicated that the damage was pre-existing and not storm-related. Consequently, the Court concluded that Harleysville's denial of coverage was made in good faith, with no genuine dispute over the facts presented.
Harleysville is not found to have delayed the inspection improperly; evidence shows they made diligent efforts to schedule it. Following concerns about Mr. Schepis's professionalism during the inspection, Harleysville reassigned the claim to Mr. LaPierre, who actively engaged experts to conduct the inspection. The denial of coverage was supported by independent evaluations from an engineer and a building consultant, both of whom concluded that the damage to the Rockville Centre Inn was not caused by Hurricane Sandy. This provides Harleysville with a reasonable basis for denying coverage, countering any claims of bad faith. Plaintiffs argue that the Supplemental Report by Stephen L. Strzelec indicates bad faith, but it only suggests general disapproval of Harleysville’s investigation, which is insufficient to create a triable issue regarding good faith. Consequently, the court grants summary judgment in favor of Harleysville on the plaintiffs' claim for consequential damages.
Regarding attorney's fees, New York law prohibits recovery of legal expenses in coverage disputes unless the insured demonstrates bad faith in the denial of coverage. Sunrise has not provided evidence of such bad faith, thus is not entitled to fees or costs.
On the issue of the Third Estimate of Damages submitted by Sunrise, Harleysville seeks dismissal of claims exceeding those in the Second Estimate, arguing that Sunrise failed to promptly notify them of the new damages, breaching their obligations. The court finds that there are genuine disputes regarding whether Sunrise notified Harleysville in a timely manner about the damages in the Third Estimate. Under New York law, timely notice is a prerequisite for coverage, and whether the delay was reasonable is typically a factual issue that precludes summary judgment. The burden of proof lies with the insured to demonstrate that any delay was reasonable.
Sunrise presented evidence suggesting that the submission of additional damages in the Third Estimate was reasonable, supported by a declaration from construction consultant Mr. Minor. He stated that the Third Estimate benefited from a thorough inspection of 90% of the units, leading to the inclusion of more rooms and costs. Mr. Minor also noted that obtaining proper equipment and scheduling was necessary for inspecting certain areas, and that it is customary in the industry to revise estimates as new information becomes available. The Court acknowledged these facts as sufficient to create a triable issue regarding whether Sunrise notified Harleysville of the damages in a timely manner.
Harleysville failed to prove it was entitled to summary judgment on its claim that Sunrise did not cooperate under the Insurance Policy. To establish a lack of cooperation, Harleysville needed to demonstrate that it diligently sought Sunrise's cooperation, employed reasonable efforts, and that Sunrise willfully obstructed cooperation. Harleysville argued that Sunrise had the necessary information to provide a complete estimate prior to November 9, 2015, and that Sunrise's delay was unjustified. However, Sunrise countered with evidence indicating it did not possess all relevant information before that date and that its delay was industry-standard. The testimony of Michael Morash regarding the accuracy of the Second Estimate did not sufficiently demonstrate a deliberate failure to cooperate.
The Court concluded that summary judgment was not warranted on Harleysville's claim regarding the Third Estimate's dismissal for lack of cooperation. Moreover, genuine material facts prevented summary judgment on Harleysville's estoppel claim, which requires showing false representation, intent to induce reliance, and knowledge of the true facts. The Court denied summary judgment as Harleysville failed to provide uncontroverted evidence that Sunrise was aware of the additional damages before November 9, 2015, or that Sunrise concealed such information.
In Sunrise's motions, it sought summary judgment on Harleysville's third through fourteenth affirmative defenses and aimed to strike several defenses as redundant. The Court denied all of Sunrise's motions.
Sunrise's Motion for Summary Judgment is denied due to genuine disputes of material fact regarding Harleysville's third through fourteenth affirmative defenses. These defenses assert that Sunrise did not fulfill various obligations under the Insurance Policy, including compliance with relevant terms, conditions precedent, property loss conditions, duties upon loss or damage, and the obligation to provide details of the loss event. Harleysville has presented evidence supporting these claims, which Sunrise disputes, but the evidence is sufficient to prevent summary judgment.
Regarding the seventh affirmative defense, Harleysville claims Sunrise failed to provide prompt notice of the loss, which could bar recovery under the Insurance Policy. Sunrise contends that it did provide timely notice and that any delay did not prejudice Harleysville. Under New York common law, timely notice is a condition precedent for insurance coverage, and failure to provide it relieves the insurer of coverage obligations, regardless of any prejudice. Whether the notice was timely is generally a question of fact. The parties are at odds over whether New York Insurance Law Section 3420 applies to this Insurance Policy. The Court determines that Section 3420, which pertains to liability insurance, does not apply to property insurance policies, as clarified by the language of the statute and guidance from the New York State Insurance Department's Office of General Counsel.
Section 3420 stipulates that the invalidation of a claim due to late notice from the insured or other claimants is only applicable to liability policies, requiring proof of prejudice to the insurer. While the prejudice rule in some states may extend beyond liability policies, New York's Insurance Law 3420 establishes minimum requirements strictly for liability policies. Insurers, however, can voluntarily include a prejudice rule in non-liability policies. New York courts have determined that no prejudice showing is necessary for dismissing untimely claims under property insurance contracts.
In this case, the court concluded that Section 3420 does not apply to Harleysville’s Insurance Policy, meaning Harleysville does not need to demonstrate prejudice due to Sunrise's alleged delay in notification. A factual dispute exists regarding whether Sunrise promptly informed Harleysville of damage to the Rockville Centre Inn, with conflicting evidence presented by both parties about the timing of notifications.
Additionally, Harleysville's ninth affirmative defense claims that Sunrise failed to mitigate damages after Hurricane Sandy, citing discrepancies between damage estimates. Sunrise contends that the later estimate reflects previously uninspected damages. The court found that a genuine dispute exists regarding Sunrise's actions to protect its property, thus denying summary judgment.
Finally, Harleysville's tenth affirmative defense alleges that Sunrise did not cooperate with the investigation of the claim as required by the Insurance Policy.
Sunrise contends that it cooperated with Harleysville's investigation, while Harleysville counters that evidence, including Mr. Minor canceling two inspections and the absence of knowledgeable attendees at a subsequent inspection, indicates a lack of cooperation. The Court finds sufficient evidence to suggest a genuine dispute regarding Sunrise's cooperation, denying summary judgment on this issue.
In Harleysville's eleventh affirmative defense, it claims Sunrise failed to produce requested documents for inspection. The Court determines that there is adequate evidence to create a genuine dispute, leading to a denial of summary judgment on this defense as well.
Regarding the fourteenth affirmative defense, which alleges that Sunrise's claims are barred by a late submission of the Third Estimate, the Court identifies a genuine dispute about the timeliness of the submission, resulting in a denial of summary judgment.
Sunrise's motion to strike the third through eleventh affirmative defenses as redundant is denied. The Court notes that motions to strike are generally disfavored unless the plaintiff can demonstrate that there are no factual or legal questions that could allow the defenses to succeed and that they would suffer prejudice from their inclusion. The Court finds that factual and legal questions exist for these defenses and concludes that Sunrise would not be prejudiced, as discovery is complete and the defenses are related to the merits of the claims.
Sunrise has not demonstrated how it would suffer prejudice from the retention of certain affirmative defenses, with the Court noting that mere assertions of potential prejudice are inadequate. Thus, Sunrise's motion to strike these defenses is denied. The Court grants Harleysville's motion for summary judgment regarding Sunrise's claims for business income losses, consequential damages, and attorney's fees and costs. Conversely, Harleysville's motion for summary judgment on plaintiffs' Third Estimate of Damages is denied due to existing factual disputes regarding the timeliness of the claim under the Insurance Policy.
Sunrise's motion for summary judgment and motion to strike are also denied. The Court evaluates the facts favorably for the nonmoving party. Harleysville contends that Exhibit M, which allegedly shows Mr. Morash's claim submission via email, is not valid evidence; however, the Court identifies a genuine dispute over the timeliness of Sunrise's claim regardless of this exhibit. While Harleysville disputes whether Hurricane Sandy caused damage to the Rockville Centre Inn, this issue is not currently before the Court.
Sunrise's assertion that a determination on business income loss requires proof of damage from the hurricane is incorrect. Business income losses necessitate a suspension of operations during the restoration period. Harleysville argues that Sunrise waived its right to claim business income losses, citing a May 1, 2014 email from plaintiffs' counsel and a statement from Michael Morash during an examination under oath. However, since the Court has granted summary judgment based on the Insurance Policy's language, it does not need to address the waiver issue further. The causation of damage from Hurricane Sandy is not contested in the current motions, and the Court concludes that Harleysville did not act in bad faith regarding coverage denial.
Plaintiffs fail to provide specific references from the Supplemental Strzelec Report to substantiate their claims. New York Insurance Law § 3420, which mandates a prejudice requirement, is deemed inapplicable to the Insurance Policy in question. The Court rejects the defendant's argument against considering Mr. Minor's declaration, affirming that affidavits supporting or opposing a summary judgment must be based on personal knowledge and admissible facts. Mr. Minor's declaration meets these criteria. Furthermore, the Court determines that Harleysville has not proven that any delays were unreasonable as a matter of law, leaving the issue of reasonableness for jury deliberation due to disputed facts. Harleysville has agreed to withdraw its twelfth affirmative defense, which is thus struck from consideration. The Court also finds plaintiffs' claim regarding the Office of General Counsel's opinion lacking merit, as it does not restrict itself to Section 3420(d) and addresses the insured's duty to notify insurers of claims. Harleysville's challenge against Michael Morash's affidavit, claiming it contradicts his earlier testimony, is dismissed by the Court as it does not constitute an unequivocal contradiction. Lastly, Sunrise's motion to strike affirmative defenses is deemed untimely, as it was filed beyond the twenty-one-day window following Harleysville's answer to the Amended Complaint.