Nearly every insurance policy has a clause that requires the insured to cooperate with the insurer in the investigation of the claim. Most insurance policies also provide that the insured should do everything necessary to secure, and do nothing to impair, the insurer’s subrogation rights. This is especially important when property damage is alleged. These policy provisions appear straightforward. Compliance should not be that difficult. That is until the insured is made an offer the insured can’t refuse.
In a recent case, the insured’s building was structurally damaged by excavation work on the adjacent property. 915 2nd Pub, Inc. v. QBE Ins. Corp., No. 2611 604047/07 (N.Y. App. Div., 1st Dep’t, Jan. 3, 2017). The insured submitted a claim to its insurer and, at the same time, negotiated with the owner of the adjacent property. The adjacent property owner offered “a crazy price” for the insured’s building, which the insured accepted. The adjacent property owner made the offer with the hope of disposing of all liability from the excavation damage.
When the insurer refused to pay the claim, the insured brought an action seeking coverage. The motion court denied the insurer’s motion to dismiss the complaint and granted the insured’s cross-motion for summary judgment as to liability. On appeal, the Appellate Division unanimously reversed, granted the insurer’s motion and denied the insured’s motion. The clerk was then directed to enter judgment dismissing the complaint.
In reversing and granting the insurer’s motion to dismiss the complaint, the court commented that by selling the damaged building, the insured violated the terms of the policy that required the insured to do nothing that would impair the insurer’s rights of subrogation. In other words, selling the property to the adjacent property owner (who then demolished the building) and accepting the “crazy price” for the building did nothing to secure the insurer’s subrogation rights and clearly violated them.
Moreover, held the court, the sale of the building violated the insured’s obligation to cooperate with the insurer in investigating the claim. Because the building was demolished after the sale, there was nothing left to investigate.
What the court did not say was whether the insured’s sale of the building for the “crazy price” was possibly more compensation than the insured might have received from the insurer had the claim not been compromised. Given that payment of an insurance claim generally entitles the insurance carrier to bring a subrogation action against the tortfeasor to reimburse itself for the claim payment made to the policyholder, a payment by the tortfeasor to the insured coupled with an insurance payment would be a windfall to the policyholder.
It may be that the “crazy price” was too much to turn down. If so, one has to question why the recovery against the insurance policy was pursued. What is clear from this case is that if a policyholder is going to pursue an insurance recovery, the policyholder cannot compromise the insurer’s subrogation rights, sell the property or have it demolished so that no investigation could possibly take place.