New York has a reputation for being a jurisdiction that is unfriendly to policyholders — and in many ways that reputation is justified. But in the recent case of Fabozzi v. Lexington Insurance Co., the United States Court of Appeals for the Second Circuit affirmed that New York still adheres to what is a bedrock principle in most jurisdictions around the country: ambiguities in an insurance policy must be construed against the insurer.
The case involves damage to a Staten Island home owned by the Fabozzi family. In 2002, the Fabozzis began to notice cracks and fissures in the walls and floors of their home, and gaps between the walls and window frames. After noticing these problems, the Fabozzis hired an architect to inspect the home. Those inspections revealed that the interior walls of the Fabozzis’ home were so rotted that the entire structure was on the verge of collapse. The imminent collapse made the home uninhabitable and the Fabozzis had to move out.
Faced with the complete loss of their home, the Fabozzis understandably turned to their homeowners’ insurance policy with Lexington Insurance — the same insurer that had been providing the Fabozzis’ homeowners’ insurance since 1992. Among other things, the policy provided the Fabozzis with coverage for collapse (Additional Coverage 8):
Collapse. We insure for direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following:
b. Hidden decay;
c. Hidden insect or vermin damage ...
At first glance, this provision appears straightforward and unambiguous: the policy provides coverage for collapse if the collapse is “caused only by one or more of” the named perils. But that simple, seven-word phrase led to Lexington’s denial of coverage and a decade of litigation.
The Fabozzis read the phrase as providing coverage “only if the collapse is caused by one of the following” named perils. In other words, the Fabozzis would simply need to prove that one of the listed perils caused the collapse, even if another nonlisted peril had contributed. Lexington argued that the phrase limited coverage to a collapse “caused exclusively by one or more of the following” named perils. In other words, if any nonlisted peril contributed to the collapse, the Fabozzis were out of luck.
The United States District Court for the Eastern District of New York agreed with Lexington and instructed the jury that they must find for Lexington if the Fabozzis had not shown “that the collapse was caused only by hidden decay or insect or vermin damage.” (Emphasis added). This instruction was repeated on the jury verdict sheet, which asked: “Have the plaintiffs proven by a preponderance of the evidence that any collapse of the property ... was caused only by hidden decay or hidden insect or vermin damage?” The jury answered “no” and found in favor of Lexington.
On appeal, the Second Circuit disagreed with the trial court, finding that Additional Coverage 8 was ambiguous. The provision clearly operated as a limit on the perils against which Lexington insured. But neither party’s position was clearly the correct interpretation. The susceptibility of the policy to two opposite — but both reasonable — interpretations was a textbook example of ambiguity, and nothing elsewhere in the language of the policy indicated whether one interpretation should have prevailed. However, the Second Circuit noted that several considerations weighed strongly in favor of the Fabozzis’ interpretation.
First, New York law imbues the word “caused” with legal meaning in the context of insurance contracts. If both covered and noncovered perils “cause” a loss, a policyholder is generally entitled to coverage as long as the noncovered peril is not the predominant cause of the loss. If parties to an insurance contract (i.e., the insurer) want to override that principle, they must be clear about it, and Lexington was not.
Second, Lexington knew how to be clear about such issues. Another policy provision (an “anti-concurrent” clause) excluded certain perils and expressly stated that the exclusions applied regardless of any other concurrent cause. If Lexington wanted to similarly limit the coverage available under Additional Coverage 8, it could have done so.
Finally — “and most fundamentally” — insurance policies are to be construed against the insurer and in favor of the policyholder’s reasonable expectations. The Second Circuit observed that any reasonable person whose home had collapsed would expect the policy to provide coverage if the collapse was mostly due to a named peril. “Few would suppose that coverage would be denied merely because some other factor contributed to the event in a minimal, more attenuated way.” Because the trial court was wrong to give preference to the insurer’s interpretation, the jury verdict was vacated and the case was remanded for a new trial or other proceedings.
While the Fabozzis prevailed on this key issue of policy interpretation, their appeal was not a complete victory. The Second Circuit also addressed the burden of proof, an issue that turned on a determination of whether the policy provided “all-risk” or “named-perils” coverage. Everyone agreed that Coverage A of the Lexington policy covered all risks of physical loss, except for those perils specifically excluded. If the Fabozzis had made a claim under this all-risk portion of the policy, their only burden would have been to prove the existence of the policy and their loss. Lexington would then have had the burden of proving that the loss was caused by a peril specifically excluded from coverage.
Even though Coverage A provided all-risk coverage, the language and structure of the policy showed that Additional Coverage 8 provided named-perils coverage for collapse. On its face, Additional Coverage 8 appeared to provide named-perils coverage, and the language was a direct parallel to named-perils provisions discussed in other cases. The Fabozzis argued that nothing in the policy suggested that Additional Coverage 8 changed the type of coverage. But the Second Circuit observed that such a change was “decisively suggested” by Lexington’s decision to exclude collapse from Coverage A, then draft Additional Coverage 8 as a named-perils provision. The Fabozzis thus had the burden of proving that the collapse was the result of a named peril.
The Second Circuit’s short summary order blazes no new trails in the world of insurance coverage. In fact, relying as it does on well-established legal principles, the order is likely to have little impact on an insurance coverage dispute unless that dispute involves the exact same policy language. However, the case acts as an important reminder of one of the basic tenets of policy interpretation in most jurisdictions around the country, including those generally unsympathetic to policyholders. Where a policy provision is susceptible to more than one reasonable interpretation — even where that provision appears simple and straightforward — the insurer that is responsible for drafting the policy is going to have to live with an unfavorable interpretation.