This was a petition by American Country Insurance Company for an order vacating an arbitration award against it on the basis that the arbitrator “exceeded her authority, it was rendered in violation of and the decision is utterly arbitrary.” Neither MVAIC nor AAA opposed this motion and the Court decided it on default.

“American Country was at one time the insurer of a vehicle registered to non-party Work for Freedom, Co., Inc. (“WFF”) On September 20, 2008, the vehicle, being driven by Carmen Munoz, was involved in a collision. American Country had, however, terminated WFF’s policy effective September 15, 2008. WFF had been notified that coverage would be terminated due to non-payment of premiums. That notice was sent to WFF on August 11, 2008.” “After claims were filed with American Country, American Country notified WFF and other insureds that the insurance policy had expired on September 10, 2008, prior to the date of the accident on September 20, 2008.”

“MVAIC brought an arbitration proceeding on behalf of Munoz who was injured in the collision. According to Frank Petrino, American Country’s Claims Supervisor, once he received notification of the arbitration he contacted MVAIC’s attorney handling the matter and advised the attorney that there was lack of coverage. Assuming the hearing would be cancelled, Petrino states that no one appeared for the hearing which took place September 21, 2010. In her decision, the arbitrator notes American’s nonappearance.” “She also wrote the following notations: ‘Carmen Munoz is a covered person’ and ‘No evidence of cancellation no document from DMV.’”

“Petrino states that he immediately contacted the arbitrator after receiving a copy of the arbitration award to try to ‘resolve the Decision.’ He has not however, provided the court with any proof he did this nor explained what he means by ‘resolve.’” “Apparently no formal attempt was made to bring a motion to vacate the arbitration award. Petrino also refers to emails he sent to and received from the arbitrator, but none of them have been provided to the court. American Country’s attorney makes a similar statement that he also made attempts to “resolve” this matter and his request was “refused.”

“American Country contends the arbitrator’s award is an abuse of discretion because there was no insurance policy in effect with the insured on the date of the accident and that the arbitrator simply went by what was listed in the police report which is inadmissible hearsay. Petitioner alleges further that the arbitrator’s award is contrary to public policy because it imposes a contract where there is none. Petitioner argues that MVAIC had the burden at the hearing of proving an insurance policy was in effect on the date of the accident which it did not do and that insurance cannot be created through equitable estoppel.”

“CPLR § 7511 [b] sets forth the narrow grounds upon which an arbitrator’s award may be vacated. An award may be vacated by the court only if the petitioner can prove it was procured by corruption, fraud, or misconduct, the arbitrator was not impartial, the arbitrator exceeded his or her power, or executed it so imperfectly that the award is indefinite or not final. It may also be vacated if there was a complete failure to adhere to required arbitration procedures.” “Although in certain extraordinary circumstances, an award may be vacated if the petitioner can prove it is “utterly arbitrary or violative of public policy,” this is a difficult burden to meet, and an award will not be vacated by the court merely because the arbitrator may have committed an error of law or fact. Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 NY3d 471 (2006).” “Pursuant to Vehicle and Traffic Law, an insurer must adhere to certain notice requirements when seeking to terminate an insured’s insurance contract. Among the requirements is that the insurer keep records of the notice of termination sent and the certificate of mailing as proof such notice was sent. Another requirement is that the notice of termination must be filed with DMV. Notice of cancellation of automobile liability policy is ineffective unless in strict compliance with requirements of VTL 313.” “In her award, the arbitrator specifically noted that there was no evidence of cancellation or proof of filing with DMV. Since American Country would have had the burden of presenting evidence of its compliance with all applicable statutes, but the insurer defaulted in appearing for the hearing, the arbitrator made her decision based upon the information available to her. American Country has failed to show that the arbitrator exceeded her authority in rendering her award. Therefore, the petition to set aside the award is denied although the petition is before the court on default.”

“In accordance with the foregoing, It is hereby ordered that the petition is denied and this proceeding dismissed….” Comment: From reading this decision, I can only come to the conclusion that we have here an insurance company whose claims department does not understand how the laws work here in New York. And based on the Court’s recitation that American Country’s attorney contacted AAA in an attempt to “resolve” the matter after the default, I will give their defense counsel the benefit of the doubt and assume they were not retained until after the arbitration, when there was nothing they could do about it (because, heaven forbid, if the attorneys had advised the carrier not to appear at the arbitration because they had previously cancelled the policy, that would be really dumb). Assuming that defense counsel was only retained after the default, they did the best they could by bringing this Petition — and as you can see, a Petition like this does no good after a default. The main lesson from this decision is that an insurer must never default at an arbitration, no matter what. Or else you can get results like this, where the carrier is forced to provide coverage where none exists.

Lack of Smoke Detectors Does Not Void Fire Coverage Where Damage Results From Water Putting Out Fire in Other Premises

Nunez v U.S. Underwriters Ins. Co.

In this action by an insured to recover under a fire insurance policy, the insurer disclaimed on the ground that the policy required the insured to have working smoke detectors. The fire originated in an apartment above the insured’s store which did not belong to the insured. The insured premises was not damaged by fire or smoke, but by water cascading down from the effort to put out the fire above. The Court held that because the damage to the insured premises did not result from a fire in the premises that a smoke detector might have helped prevent, the lack of the smoke detector did not violate the policy. LNR

The plaintiff commenced this action to recover money damages for water damage sustained in her retail store at 95-09 Jamaica Avenue, Woodhaven, New York as a result of a fire that occurred in the second floor residential unit above store. On or about August 3, 2009, the defendant U.S. Underwriters provided Businessowners Liability Coverage and Businessowners Property Coverage to the plaintiff, under policy number BP3550113. Pursuant to the policy, the defendant U.S. Underwriters agreed to insure the plaintiff’s store for a one-year term beginning on August 3, 2009 and expiring on August 3, 2010. The Policy included a Protective Safeguard Endorsement. The Protective Safeguard Endorsement states: We will not pay for loss or damage caused by or resulting from fire, if, prior to the fire, you:

1. Knew of any suspension or impairment in any protective safeguard listed in the Schedule above and failed to notify us of that fact; or

2. Failed to maintain any protective safeguard listed in the Schedule above, and over which you had control, in complete working order.

On September 18, 2009, a fire started on the second floor residential apartment above the plaintiff insured’s space, a retail store. As a result of the fire the plaintiff sustained damage to the insured premises due to water from extinguishing the fire in the residential unit. At the request of U.S. Underwriters, Independent Adjustment Company inspected the plaintiff’s property and found no smoke detectors in the first floor store area and the basement area. In a letter dated October 12, 2009, the defendant U.S. Underwriters denied coverage for the claim based on the plaintiff’s failure to comply with the Protective Safeguard Endorsement.

In a letter dated, October 21, 2009, the plaintiff responded, stating that the loss sustained was a result of water damage and was not a result of the fire itself and, therefore, that the failure to have a smoke detector was immaterial, as a matter of law, and could not be used as a basis for denial of coverage. In a letter dated October 26, 2009, the defendant U.S. Underwriters followed up stating that it stood by its denial based on the language of the policy.

The plaintiff commenced this action on November 17, 2009. Issue was joined by the moving defendant on January 22, 2010. The plaintiff has now moved for summary judgment and the defendant U.S. Underwriters has cross-moved for summary judgment. U.S. Underwriter argues… that the Protective Safeguard Provision was not a warranty, but, rather, an express condition of the contract. The defendant’s argument that the Protective Safeguard Provision is an express condition, rather than a warranty within the meaning of Insurance Law section 3106, is without merit. Insurance Law section 3106(a) defines warranty as:

any provision of an insurance contract which has the effect of requiring as a condition precedent of the taking effect of such contract or as a condition precedent of the insurer’s liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage of the contract.

The Protective Safeguard Provision is a warranty as defined by Insurance Law 3106(a). Similar safety provisions have been found by the First and Second Department to be a warranty under Insurance Law section 3106 (see, Anjay Corp. v Those Certain Underwriters at Lloyd’s of London Subscribing to Certificate No. HN01AAF4393, 33 AD3d 323 [1st Dept. 2006] [requiring video cameras at a jewelry store held to be a warranty within the meaning of Insurance Law § 3106]; 730 J & J, LLC v Twin City Fire Ins. Co., 293 AD2d 519 [2nd Dept. 2002] [requiring the premises to be locked and secured held a warranty under Insurance Law § 3106]; M. Fabrikant & Sons, Inc. v Overton & Co. Customs Brokers, Inc., 209 AD2d 206 [1st Dept. 1994] [requiring an armored vehicle to be occupied with an armed guard locked inside whenever insured property was in the vehicle during a delivery was a warranty under Insurance Law § 3106]). A Protective Safeguard Provision requiring the installation of a fire alarm system has, furthermore, been found to be warranty under Insurance Law section 3106(a). In Mirabelli v Merchants Ins. Co. of New Hampshire (2007 WL 2236395, 2007 NY Slip Op 31615(U) [Sup Ct Suffolk County 2007]), the court stated: ‘Here, defendant adequately demonstrated through its submissions that there was no central station fire alarm or an automatic fire alarm reporting to a public or private fire alarm station at the subject premises on the date of the fire. Through said submissions, defendant established that plaintiffs breached the Automatic Fire Alarm Protective Safeguards warranty in the subject policy.’

Insurance Law section 3106(b) provides that a “breach of warranty shall not avoid an insurance contract or defeat recovery thereunder unless such breach materially increased the risk of loss, damage or injury within the coverage of the contract.” Only if the lack of a smoke detector was material can it thus be used as a basis for denial of coverage. See, Great Lakes Reinsurance (UK), PLC v Rosin,F Supp 2d, 2010 WL 5397246 [S.D. Fla. 2010] [applying New York law].

The plaintiff submitted an affidavit in which she stated that fire was contained to the residential unit above the store. She further stated that there was no damage to the store from smoke and the only damage occurred as a result of water that was used to extinguish the fire in the unit above the store. The plaintiff further submitted a certified copy of the Fire Incident Report indicating that the fire originated in the second floor apartment and was confined to that apartment. The plaintiff established that inasmuch as no fire or smoke entered into the store that the lack of a smoke detector was not material. In opposition, the defendant failed to raise a triable issue of fact. The defendant, therefore, cannot deny coverage based on a violation of the Protective Safeguard Provision as a result of a lack of a smoke detector.

The defendant, however, alleged in its answer and in a counterclaim that the plaintiff made a material misrepresentation on the application for insurance that she had working smoke detectors in the insured premises and, therefore, it can rescind the policy based on the misrepresentation. The plaintiff argues that the defendant U.S. Underwriters, by failing to include the claim of misrepresentation in its denial letter, waived its right to assert the claim of misrepresentation and therefore cannot deny coverage or rescind the policy on this ground.

Since this is a case for property damage rather than personal injury, this case does not fall within the ambit of Insurance Law section 3420(d). The plaintiff, therefore, has to show proof of prejudice from the delay in order for the defendant to be estopped from disclaiming coverage or rescinding the policy based on the misrepresentation (Topliffe v US Art Co., Inc., 40 AD3d 967 [2nd Dept. 2007]; Only Natural, Inc. v Realm Natl. Ins. Co., 37 AD3d 436 [2nd Dept. 2007];Scappatura v Allstate Ins. Co., 6 AD3d 692 [2nd Dept. 2004]). Inasmuch as the plaintiff did not submit any proof of prejudice, the plaintiff is not entitled to summary judgment. Turning to the defendant’s cross motion, in light of the discussion above, the defendant cannot deny coverage based on a violation of the Protective Safeguard Provision as a result of a lack of a smoke detector and thus is not entitled to summary judgment on this ground.

The defendant U.S. Underwriters did establish its prima facie entitlement to summary judgment on the ground that the plaintiff made a material misrepresentation on her application for insurance by stating that she had operational smoke detectors in the premises. In opposition to the cross motion, the plaintiff submitted the affidavit of the manager of the store. The manager stated, in his affidavit, that at the time of the application for insurance there was an operable smoke detector affixed to the ceiling. A triable issue of fact, therefore, exists as to whether the plaintiff had operable smoke detectors at the time the application for insurance was filled out and the cross motion for summary judgment must be denied.

Accordingly, the plaintiff’s motion for summary judgment is denied. The cross motion by the defendant U.S. Underwriters for summary judgment is denied. The foregoing constitutes the decision, order, and opinion of the Court.