A boutique New York hotel entered an agreement to operate as a homeless shelter for three years.[i] After the end of the agreement, the hotel discovered significant damage to the premises and sought insurance coverage for damage sustained during that time.[ii] After its insurer denied coverage, plaintiffs sued. A New York federal court denied the defendants’ motion to dismiss a declaratory judgment.
Back in 2017, the hotel had entered into a memorandum of understanding with a contractor for the city to provide temporary housing for homeless families with children. The contractor’s clients utilized the hotel until the contract was terminated on October 30, 2020.
Following the departure of the contractor and its clients, the hotel became aware of substantial damage to guest rooms, hallways, and common areas beyond normal wear and tear. The damage included, but was not limited to: punctures in walls and ceilings, vandalized and defaced furniture, slashed fabric headboard covers, slashed carpeting, and slashed and defaced wall hangings.
The hotel submitted a claim to its insurer for coverage under the applicable insurance policy. Its insurer disclaimed coverage, stating the damage fell within the “wear and tear” exclusion.[iii] The hotel commenced a declaratory judgment and breach of contract action against its insurer, seeking in excess of $1 million in insurance coverage.
Ambiguity Proves Fatal
The insurance policy specifically excluded damages caused by normal “wear and tear” – without defining what “wear and tear” included. Certain acts were carved out from normal “wear and tear” as “specified causes of loss,” which included acts such as vandalism. The insurer’s disclaimer letter also failed to define “wear and tear,” or “normally expected wear and tear,” a phrase which was not included in the policy.
Following discovery, the insurer moved for summary judgment, arguing in part that the wear and tear exclusion applied. The insurer further argued the hotel failed to timely notify it of any loss or damage occurring during the applicable policy period.[iv]
In turn, the hotel argued the wear and tear exclusion did not unambiguously state damage caused by human activity was specifically precluded from the policy’s scope of coverage.[v] The policy language failed to state in “clear and unmistakable language” the wear and exclusion was not limited to losses arising from natural occurrences.[vi] To demonstrate the insurer did not consider causes outside natural occurrences, the hotel cited other exclusions in the policy.[vii] In these other exclusions, the policy did account for natural or other causes.[viii]
The recent one-page decision was not clear-cut. While the hotel’s claims for consequential and punitive damages were struck, the insurer’s motion for summary judgment was denied, leaving the case open for further litigation.[ix]
In New York, the law governing the interpretation of policy exclusions is highly favorable to insureds.[x] Courts must apply an analysis narrowing policy exclusions, which results in rulings for coverage when both the insured and insurer present reasonable constructions of an exclusion.[xi] Therefore, when drafting policy exclusions, insurers must be cognizant of every possible scenario. Using clear and concise language in a policy can help avoid litigation down the road. Even if the case ends up going to trial, an insurer will be in a much better position if the policy is written without any ambiguities.
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[iii] Mave Hotel Investors LLC, d/b/a The Mave Hotel v. Certain Underwrites at Lloyd’s London et al, 1:21-cv-08743 (SDNY).
[v] Mandato, Jennifer, Hotel Says Insurers Must Cover Homeless Families’ Damages, Law360 (Jan. 9, 2023), https://www.law360.com/articles/1563615.
[vi] Mave Hotel Investors LLC, d/b/a The Mave Hotel v. Certain Underwrites at Lloyd’s London et al, 1:21-cv-08743 (SDNY).
[x] Pioneer Tower Owners Ass’n v. State Farm Fire & Cas. Co., 12 N.Y.3d 302, 306 (2009).