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Posted: February 16, 2017

Broad Coverage Exclusion Does Not Render Insurance Policy “Illusory” Where Some Coverage Is Afforded

On February 14, 2017, the Court of Appeals issued a decision in Lend Lease (US) Construction LMB Inc. v. Zurich American Insurance Co., 2017 NY Slip Op. 01141, holding that a broad coverage exclusion in a builder’s risk insurance policy did not render the policy “illusory” because it did not “defeat all of the coverage afforded under the policy.”

In Lend Lease, a developer sought insurance coverage for weather-related damage to a construction crane in New York City during Hurricane Sandy. A divided panel of the First Department found that the crane was not covered under the policy, and in any event, the claim was subject to a “contractor’s tools exclusion” that carved out “loss or damage to . . . Contractor’s tools, machinery, plant and equipment . . . and property of a similar nature not destined to become a permanent part of the INSURED PROJECT.” See our previous post on the oral argument in the Court of Appeals, which includes a link to the First Department decision, here. The Court of Appeals found that there were issues of fact precluding summary judgment on the question of whether “the policy contains coverage for the subject loss in the first instance,” but affirmed the First Department’s holding that the exclusion applied. The Court rejected the insured’s argument that the exclusion should not be enforced because it rendered the coverage “illusory,” explaining:

[T]here is no force to plaintiffs’ effort to avoid application of that exclusion on the ground that it is so broad as to render coverage afforded under the temporary works provision of the policy illusory. To be sure, an insurance agreement is subject to principles of contract interpretation, and an illusory contract — that is, an agreement in which one party gives as consideration a promise that is so insubstantial as to impose no obligation — is unenforceable. We agree with the Appellate Division, however, that 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.

(Citations omitted). This decision illustrates the importance of paying careful attention to an insurance policy’s exclusions. Even broad exclusions that dramatically narrow the scope of coverage are generally enforceable.

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