On February 14, 2017, the New York Court of Appeals issued a decision in Lend Lease (US) Construction LMB Inc., et al. v. Zurich American Insurance Co., et al., 2017 N.Y. Slip Op. 01141, 2017 N.Y. LEXIS 112 (Feb. 14, 2017), holding that a broad coverage exclusion in a builder’s risk insurance policy did not render the policy “illusory” because it did not “defeat all of the coverage afforded under the policy.” Slip Op. at 7.

In Lend Lease, the insured, a developer, sought a declaration of coverage under a program of builder's risk insurance issued by Zurich American Insurance Company for weather-related damage to a tower crane caused by Superstorm Sandy. The Court of Appeals was asked to determine whether the crane is covered in the first instance under the insurance provided for a temporary structure, or “temporary works,” and, if so, whether an exclusion in the policy for a contractor’s tools, machinery, plant and equipment (the contractor’s tools exclusion) defeats that initial grant of coverage. Of interest here, the Court noted, “[a]lso at issue—and critical to the analysis—is the question whether the contractor’s tools exclusion is ineffective because it would render the coverage granted in the first instance for temporary works illusory.” Slip Op. at 2.

Following Zurich’s denial and disclaimer of coverage with respect to this matter, the insured commenced an action seeking, among other things, a declaration that the crane is covered property under the policy, and that coverage for the crane is not subject to any policy exclusion.

Although the Court of Appeals departed from an intermediate appellate court ruling by concluding that there is an issue of fact whether the policy provides coverage for the subject loss in the first instance, the Court nevertheless reached the same result, concluding that “there is no coverage for that loss under the policy because any coverage afforded by that contract in the first instance is defeated by the contractor's tools exclusion.” Slip Op. at 6. The exclusion provided:

[t]he Policy does not insure against loss or damage to . . . Contractor's tools, machinery, plant and equipment including spare parts and accessories, whether owned, loaned, borrowed, hired or leased, and property of a similar nature not destined to become a permanent part of the INSURED PROJECT*, unless specifically endorsed to the Policy. Id., Slip Op. at 6.

The insured argued that the exclusion did not apply because the crane was not a “tool” or equipment” within its terms, but the Court rejected that argument, finding that the crane was “machinery” within the terms of the exclusion. The insured further sought to avoid application of that exclusion on the ground that it is so broad as to render coverage afforded under the temporary works provision of the policy illusory. Finding that argument unpersuasive, the Court noted:

We agree with the Appellate Division . . . that “[a]n insurance policy is not illusory if it provides coverage for some acts[ subject to] a potentially wide exclusion” . . . Indeed, the contractor's tools exclusion does not defeat all of the coverage afforded under the policy's temporary works provision. That exclusion would not defeat coverage initially granted for such things as the cost of erecting scaffolding, for "temporary buildings," and for such other things as "formwork, falsework, shoring, [and] fences," which are not "tools" within the meaning of the exclusion. The enforcement of the exclusion does not create a result that “would have the exclusion swallow the policy.” Slip Op. at 7.

The Court concluded that “for the same reason the exclusion does not render the coverage granted under the temporary works provision illusory.” Id.

This decision serves as a reminder to policyholders that they must read and understand the policy they obtain, or bear the consequences of a broadly-worded policy exclusion that may warrant denial of coverage. Insurers, in turn, should tailor broad exclusions so as to avoid a later argument that application of the exclusion would render coverage under the policy illusory.

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