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New York Appellate Court Affirms That Insurer Properly Notified Policyholder of Addition of Lead Exclusion and That Insurer Owes No Coverage for Underlying Lead Suit

Insurance Coverage Advisory, Issue 74
November 15, 2013

In Preferred Mutual Insurance Company v. Donnelly, CA 13-00319, 2013 WL 5952018 (N.Y. App. Div. Nov. 8, 2013), a New York appellate court, applying New York law, affirmed the trial court’s summary judgment order holding that the insurer, Preferred Mutual Insurance Company, had no duty to defend or indemnify its policyholder under a landlord insurance policy in a personal injury action brought by the policyholder’s tenant. The court held that the insurer had submitted sufficient evidence that it notified the policyholder of the addition of a lead exclusion, that the lead exclusion did not violate public policy, and that the lead exclusion was clear and unambiguous.

In the underlying suit a tenant who had lived from June 1995 until December 1995 in a home owned by the policyholder sued the policyholder. The tenant’s suit alleged that he had sustained personal injuries as a result of exposure to lead-based paint in the policyholder’s house. The policyholder’s landlord insurance policy, which he renewed each year during the three-year period from June 1993 through June 1996, initially did not contain any exclusion of coverage for bodily injury sustained as a result of lead poisoning. That exclusion was added to the policy when the policyholder renewed the policy in June 1994. The exclusion provided, in relevant part, that the insurer would “not pay for loss resulting directly or indirectly from bodily injury . . . resulting from inhalation or ingestion of dust, chips or other residues of lead or lead based materials adorning the interior or exterior of the covered building(s).” Id. at *1 (emphasis in original).

First addressing the evidentiary issues raised, the majority of the Supreme Court Appellate Division panel concluded that the insurer met its burden of establishing that the lead exclusion was properly added to the policy in 1994 and that the insurer had provided notice of the lead exclusion amendment to the policyholder. First, the court noted that the documentary evidence established that a notice for the lead exclusion amendment had been generated for the insured’s policy in 1994. Next, the court concluded that, even though the insurer did not submit evidence that it had mailed the notice to the policyholder and the policyholder could not recall receiving the notice, the insurer had submitted admissible evidence “‘of a standard office practice or procedure designed to ensure that items are properly addressed and mailed,’” which gave rise to a presumption that the policyholder had received the notice. Id. (quoting Residential Holding Corp. v. Scottsdale Ins. Co., 286 A.D.2d 679, 680 (N.Y. App. Div. 2001)). The court explained that the plaintiff “had submitted evidence that it placed the notices in envelopes with windows so that the address on the notice was the one used for mailing,” that “[t]he envelopes were then delivered to the mail room, where they were sealed and the appropriate postage was added,” and that “the mail was then hand delivered to the post office that was located adjacent to plaintiff's parking lot.” Id. The majority expressly rejected the dissent’s conclusion that the insurer was required to provide additional evidence of mailing, such as evidence of a practice to ensure that the number of envelopes delivered to the mail room corresponded to the number of envelopes delivered to the post office. Id. at *2.

The court next considered and rejected the insured’s public policy argument. The court held that the fact that a landlord is required to keep his property in a habitable condition does not mean that “‘public policy requires the responsible party to be covered by insurance or that an insurance company cannot exclude liability for that’” condition. Id. (quoting Suba v. State Farm Fire & Cas. Co., 114 A.D.2d 280, 284 (N.Y. App. Div. 1986)).

Finally, the Donnelly court also held that the lead exclusion was stated in “clear and unmistakable language,” was subject to no other reasonable interpretation, and was applicable to the Donnelly facts. Id. at *3. In doing so, the court rejected the defendant’s argument that the word “adorn” in the lead exclusion limited the exclusion’s application to decorative paint such as murals and frescos. Id.

The Donnelly decision is notable for at least three reasons. First, the decision provides a useful guide to the type of evidence that is necessary to create a presumption that a policyholder received policy materials mailed by an insurer. Second, Donnelly confirms that the reasoning of prior New York precedent holding that insurers are not prohibited from limiting their contractual liability under homeowner’s insurance policies because there is “no statutory requirement for the full panoply of coverages known as homeowner’s insurance,” id. at *2, applies to lead exclusions. Third, the decision demonstrates that an insurer will have no duty to defend or indemnify a bodily injury claim relating to lead poisoning where the insurer’s insurance policy includes a clear and unambiguous lead exclusion.