Because its application question about how many apartments were in a New York building was considered ambiguous, an insurer has lost its bid to deny a commercial property insurance claim and rescind the policy.
The Second Circuit Court of Appeals has upheld a New York federal district court ruling in favor of Fred and Ann Lee on their breach of contract claim against Union Mutual.
The policy asked, “How many apartment units are there?” The Lees answered that their property had two apartment units. In so answering, they excluded the property’s finished basement from their count.
Union Mutual deemed this answer to be a material misrepresentation because, in its view, the finished basement was an apartment unit, and therefore the property had a total of three apartment units.
On the basis of this purported misrepresentation, Union Mutual denied coverage and rescinded the policy. The Lees sued.
The federal court for the Eastern District of New York granted summary judgment in favor of the Lees on their breach of contract claim but in favor of Union Mutual on their deceptive business practices claim.
In granting the Lees summary judgment on their breach of contract claim, the district court concluded that the application question regarding the number of units was ambiguous; that a “reasonable person” in their position could have interpreted the question as the Lees did, namely, that the question “referred only to units that are either occupied or could legally be occupied as apartments.” Therefore, Union Mutual could not deny coverage and rescind the policy based on the Lees’ response to that question.
Union Mutual appealed but the Court of Appeals for the Second Circuit agreed with the district court, noting that an answer to an ambiguous question on an application “cannot be the basis of a claim of misrepresentation” by and insurer. “The threshold question of whether a provision in an insurance policy is ambiguous is a question of law to be determined by the court,” the appeals court stated.
In its appeal, Union Mutual contended that under New York law, a question regarding the number of units unambiguously refers to the “structural configuration of the building to be insured,” or, in other words, the number of spaces in the building with “its own kitchen, bathroom, and separate entrance.” Union Mutual asserted that this is how cases applying New York law interpret the phrase, “family dwelling.”
But the appeals court was not persuaded, in part because Union Mutual’s position relied upon the meaning of family dwelling, not apartment unit, and because some New York authorities examined the actual use of the premises at the time of the application or the loss, in addition to the structural configuration of the unit. The court said actual use of the Lees’ finished basement suggests that it was not an apartment unit because it was used only for storage purposes, “never used as a residence,” and “never occupied.”
Also, the court noted, the application for the insurance policy does not define “apartment units.” The court found that the question is “readily susceptible” to more than one reasonable meaning. For example, the question could refer to the number of spaces that legally could be occupied or rented out as apartments, or spaces with the minimum structural configuration necessary for an apartment, which includes a full bathroom, kitchen, bedroom, and a separate entryway
Union Mutual further argued that the district court erred in finding that a “reasonable person” in the Lees’ position could have interpreted the question to “refer only to units that are either occupied or could legally be occupied as apartments,” where there was no evidence of how they interpreted the question.
The appeals court dismissed that argument also. The “reasonable person” standard is an objective one and thus the district court was not required to determine the Lees’ subjective views on the question; it only needed to determine how a “reasonable person” in their position could have interpreted the question, which, the appeals court noted, is what the district court did.