Generally, if you want to know who is insured under a policy, you usually look at the declarations page, the "Who Is Insured" section, and endorsements. There may, however, be situations where one has to look beyond the policy to determine if a party is insured.
The recently decided case of El-Ad 250 West LLC v. Zurich Am. Ins. Co., No. 652964/2013, 2016 WL 1241933 (N.Y. Sup. N.Y. Cty. Mar. 30, 2016) ("El-Ad II"), raises important questions of who is insured under an insurance policy and if it matters whether that entity is specifically named in the policy. El-Ad II suggests that, just because a particular party is not named in a policy, coverage is not precluded if the intent to cover the risk is clear.
In El-Ad II, the court had to decide whether Zurich and El-Ad intended to cover certain losses for El-Ad affiliates who were not named in the policy. Zurich moved for summary judgment, claiming that because the policy did not specifically name the affiliates, they were not covered. The court denied Zurich's motion, finding that material issues of fact existed about whether the loss suffered by the affiliates was encompassed in the risk intended to be insured by Zurich and El-Ad.
In October 2012, El-Ad was developing a building located at 250 West Street in Manhattan (the "Property").1 Zurich sold El-Ad an "all-risk" builders risk insurance policy that covered, inter alia, property damage and delay-in-completion losses. On October 29, 2012, Superstorm Sandy severely damaged the Property and, as a result, caused delay-in-completion losses. El-Ad timely filed its claims, which Zurich rejected. El-Ad filed suit seeking coverage.
At issue in El-Ad II was coverage for certain delay-in-completion damages suffered by affiliates of El-Ad. El-Ad financed the project with five construction loans: (1) Term Loan, (2) Building Loan, (3) Project Loan, (4) Mezzanine Loan, and (5) Related Loan. El-Ad was the borrower on the first three loans (collectively, the "El-Ad 250 Loans"), and the affiliates (El-Ad 250 West Mezz, LLC, and El-AD 250 West Holding, LLC) were the borrowers on the Mezzanine and Related Loans (collectively, the "Affiliated Loans"), respectively.2 El-Ad sought to recover additional interest paid on construction loans due to delays and lost earnings due to delay in selling units in the Property.
On summary judgment, Zurich argued that the losses suffered by the affiliates were not covered because they were not named in the policy. Zurich pointed to specific language in the policy's "Delay in Completion Schedule," which stated the following.
For the purpose of Delay in Completion Coverage only, the Named Insured shall be as shown below [i.e., El-Ad 250]. There shall be no Additional Named Insureds, unless otherwise endorsed.
El-Ad conceded that the affiliates were not listed as additional named insureds.
The El-Ad II Decision
El-Ad argued that even though it was the only named insured on the policy, because El-Ad and Zurich had intended that the extra interest expenses on the project would be recoverable, these costs were covered. El-Ad based its argument on a line of New York cases following Lipschitz v. Hotel Charles, 234 N.Y.S. 513 (N.Y. App. Div. 1929).
The Lipschitz line of cases stands for the proposition that if "an insurance policy inaccurately recites the party for whom it was intended that coverage for the subject risk would be available, then that intended insured could receive coverage, despite not being named in the policy."3 The Lipschitz court held that "[t]he name of the insured in the policy is not always important if the intent to cover the risk is clear."4 Using the reasoning from this line of cases, the court held that, as a matter of law, Zurich could not establish that, just because the affiliates were not named in the policy, coverage for the insured risk—delay-in-completion—was not available.
The El-Ad II court rejected Zurich's argument that Lipschitz and its progeny were based on the principles of mistake and reformation. For example, the court found that Schlueter v. Manhattan Fire & Marine Ins. Co., 238 N.Y.S.2d 384 (N.Y. App. Div. 1963), turned, instead, on the fact that the "predominant purpose and intent of the parties to the insurance policy was to provide for indemnity against loss of the property specifically scheduled."5
Moreover, none of the Lipschitz cases held that mistake was an essential element of the claim that the intended insured was not identified in the policy. In fact, the court commented that several cases granted coverage to an unnamed party based exclusively on intent, without any consideration of whether a mistake was made. The court pointed out that New York appellate courts have found that denying coverage based on an absence of "evidence of mutual mistake or unilateral mistake coupled with fraud... [may] not [be] justified."6 Instead, the parties' intent is what matters.
The court also found that even if mistake was an essential element, El-Ad raised sufficient questions of fact as to whether the parties mistakenly failed to list the affiliates as named insureds. Indeed, the court commented that Zurich's underwriting process appeared to have accounted for the affiliates, suggesting Zurich understood coverage might extend to the affiliates.
In light of Lipschitz and its progeny and the factual questions regarding intent, the court denied Zurich's motion, rejecting Zurich's argument that El-Ad was the only insured able to recover under the policy.
Significance of the El-Ad II Decision
There are several important takeaways from the El-Ad II decision. First, it reiterates that New York courts are willing to look beyond names on the policy and, instead, look at the actual risk the parties intended to cover. Second, it signals that policyholders and brokers should pay careful attention to both the risks intended to be insured as well as which entities should be named in the policy. If policyholders with multiple affiliates intend for those affiliates to be insured for certain risks, those policyholders should ensure that the affiliates are named or otherwise specifically accounted for in the policy.
Policyholders and brokers should keep accurate records in the insurance application process. This will help preserve arguments of mistake and contract reformation if an affiliate is inadvertently not named in the policy. Similarly, policyholders should carefully scrutinize their policies when received to verify that the parties they want named are actually named.
While the policyholder in El-Ad II successfully raised issues of fact to survive summary judgment, the case must still be decided by a jury with the attendant risk and expense. Policyholders without sufficient documentation to survive summary judgment may not be even that fortunate.
The author would like to thank and acknowledge the contributions to this Commentary by Anthony B. Crawford, an associate with Reed Smith's Insurance Recovery Group, in the New York Office. He can be reached at [email protected]
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.