When a Policy Is Not Illusory

A Crane On a Skyscraper Is an Excluded Tool

No insurance policy covers every eventuality that can damage property. All insurance policies contain exclusions advising the insured of those certain risks of loss the insurer is unwilling to accept. People who are insured are obligated to read and understand the policy they acquired. Failure to do so before a loss can be extremely expensive.

In Lend Lease (US) Const. LMB Inc. v. Zurich American Ins. Co., Court of Appeals of New York 2017 N.Y. Slip Op. 01141 — N.E.3d —- 2017 WL 572478 (2/14/17) the Court of Appeals of New York, the state’s highest court was asked to determine  whether a crane is covered in the first instance under the insurance provided for temporary works and, if so, whether the contractor’s tools exclusion defeats that initial grant of coverage.  Also 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.

FACTS

In October 2012, plaintiff Extell West 57th Street LLC (Extell) was constructing a 74–story skyscraper—commonly known as the One57 Building—at 157 West 57th Street in Manhattan. Extell had retained plaintiff Lend Lease (US) Construction LMB Inc. (Lend Lease) to act as the construction manager for that project and, in that capacity, Lend Lease had contracted with nonparty Pinnacle Industries II, LLC (Pinnacle) for certain structural concrete work with respect to that endeavor. Pursuant to its contract with Lend Lease, Pinnacle was to furnish and install, among other things, two diesel fuel tower cranes.

Only one of those cranes is at issue here. That crane was installed on a reinforced slab on the 20th floor of the building and, once all other trade work was completed at the project, it was to be dismantled and removed from the site. Several components of the crane, including beams cast into the slab and materials reinforcing the locations at which the crane was “tied” to the building as it arose next to that edifice, were designed to permanently remain part of the building upon the completion of construction.

By October 29, 2012, the crane had risen approximately 750 feet from its base. On that day, Superstorm Sandy made landfall in the New York City area. One of the most dramatic images of that landfall depicts the damage caused to the crane when the boom of the crane collapsed in high winds and teetered precariously from a height equal to the top of the building. Afterwards, the blocks surrounding the building were evacuated for six days and the crisis became a riveting symbol of the city’s wounded infrastructure.

THE POLICY

At the time of that incident, Extell was the named insured on a program of builder’s risk insurance containing coverage in the amount of $700 million, that is, the total estimated cost of the project. The program is referred to as the “policy,” but it actually is an amalgamation of five separate insurance contracts, each of which was issued by a different defendant-insurer and each of which covers a different percentage of the aggregate risk. Defendant Zurich American Insurance Company assumed half of the aggregate risk and furnished the “lead” policy with respect to that exposure.

At issue in this action is whether the policy covers damages sustained by Extell (the named insured) and Lend Lease (an additional insured) resulting from the weather-related harm to the crane. That determination turns on whether the crane is covered under the policy in the first instance and, if so, whether the policy’s contractor’s tools, machinery, plant and equipment exclusion (generally, contractor’s tools exclusion) defeats that coverage.

Plaintiffs sued 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.

The exclusion at issue provides that: “[t]h[e] 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.”

TRIAL COURT

Supreme (trial) Court entered an order denying the competing motions and cross motions for summary judgment that eventually were filed with respect to that coverage question, ruling that there is an issue of fact whether the contractor’s tools exclusion defeats coverage for the subject loss. On appeal, the court held that “the … crane was integral, not ‘incidental to the project,’ and therefore does not fall within the [policy’s] definition of Temporary Works”  “Even if the … crane fell within the definition of Temporary Works,” the court added, “the contractor’s tools … exclusion would be applicable and … enforceable”.

ANALYSIS

In determining a dispute over insurance coverage the court must first look to the language of the policy. As with the construction of contracts generally, unambiguous provisions of an insurance contract must be given their plain and ordinary meaning, and the interpretation of such provisions is a question of law for the court.

The question whether the policy covers the crane in the first instance turns on the court’s interpretation of language germane to the policy’s insuring agreement. On this point the parties dispute whether the crane is a “temporary … structure” within the meaning of the policy, and whether the crane was “incidental to the project.”

The Court of Appeal concluded that the crane was a “structure” because it is the production or piece of work artificially built up or composed of parts joined together in some definite manner. However, the court also found that the crane was “temporary” in that it was anchored and tied to the building only “during construction” and was to be “removed when … no longer needed.”

The principal purpose of the project was the construction of the building, not the crane, and the installation and disassembly of the crane were merely incidental steps toward the completion of that edifice.

Before an insurance company is permitted to avoid policy coverage, it must satisfy the burden which it bears of establishing that the exclusions or exemptions apply in the particular case, and that they are subject to no other reasonable interpretation.

Extell, in particular, contends that defendants cannot have met that burden here because the crane is not a “tool” or “equipment” within the meaning of the contractor’s tools exclusion. The subject exclusion, however, also defeats coverage for “machinery,” and the crane falls squarely within this definition of that term. “Machinery” means, among other things, “machines in general or as a functioning unit,” and “machine” is defined as “a mechanically, electrically, or electronically operated device for performing a task” (Merriam–Webster’s Collegiate Dictionary 744 [11th ed 2003] ).

Plaintiffs’ effort to avoid application of the exclusion on the ground that it is so broad as to render coverage afforded under the temporary works provision of the policy illusory. An agreement in which one party gives as consideration a promise that is so insubstantial as to impose no obligation unenforceable. However, an 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. For the same reason the exclusion does not render the coverage granted under the temporary works provision illusory.

Assuming that the policy contains coverage for the crane in the first instance, the Court of Appeals concluded that the contractor’s tools exclusion defeats that coverage, and that such exclusion does not render the coverage afforded under the temporary works provision of the policy illusory.

ZALMA OPINION

Too much time is spent in insurance litigation trying to get a court to make an insurance policy provide the coverage the insured needed rather than the insurance the insured wanted, ordered and bought. If the insured buying a $700 million policy thought it was illusory it should have dealt with that issue and have the policy wording changed before it paid its premium.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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