It’s hard to believe that it’s been over four years since Superstorm Sandy hit New Jersey. Back then, figuring that discretion was the better part of valor, I gathered up my family and drove out to Pennsylvania to wait out the storm. (I still take abuse for that tactic from one of my neighbors, who insists it wasn’t a “manly” thing to do. I think he’s being sexist.) As it turned out, I was very lucky and the storm didn’t damage my home or my office. We were, however, essentially out of business for three weeks. I remember sitting in my hotel room and thinking that, if the electricity didn’t get turned on in New Jersey soon, we soon might be out of business.  (Many thanks to my good friend Dave Oberdick, an excellent lawyer, who bought me a few Pennsylvania beers one day to help me cope.)

Because I’m not the sharpest tool in the shed, I neglected to consider that we do a lot of insurance coverage work here. When we got back to the office, the telephone started ringing, and didn’t stop for a long time. In fact, some of our Sandy cases are just now moving toward a conclusion.  It’s amazing how long it’s all taken.

One of the iconic Sandy images involved a crane collapse in New York City at a 74-story skyscraper that was under construction. (Alas, we didn’t handle that one.) The building owner was a named insured on a program of builders’ risk insurance in the amount of $700 million, which was the total estimated cost of the project. The carrier denied coverage for the crane collapse (of course), and, this being America, coverage litigation ensued. The question in the coverage case (Lend-Lease (US) Const. LMB Inc. v. Zurich American Ins. Co.)  was whether the policy covered damages resulting from the weather-related harm to the crane. A main issue was the potential applicability of an exclusion in the policy for “tools, machinery, plant and equipment”.

The policy provided coverage for damage to “temporary works” that were “incidental to” the project. The New York Court of Appeals (New York’s highest court) found that the crane qualified, because the crane was supposed to be removed when the project was over, and the installation and disassembly of the crane were “incidental” to the construction.  So far, so good. But the Court still had to deal with the contractor’s tools exclusion, which the carrier argued applied to the crane.  The policyholders (fairly) argued, how can that exclusion apply, when the crane is a covered “temporary work” under the policy? That would be using an ambiguous exclusion to make the coverage for “temporary work” illusory, which is an insurance law no-no.

Pshaw, said the Court: “An insurance policy is not illusory if it provides coverage for some acts [subject to] a potentially wide exclusion.” Here, said the Court, the “temporary works” coverage wasn’t illusory at all, because it provided coverage for other stuff, like fences.  (Which would be great, except the policyholders weren’t seeking coverage for damage to fences…)

Here’s the interesting part.  In the opinion, the Court recited the principles of insurance law with respect to whether or not insurance policy provisions are “ambiguous,” so that they have to be construed in favor of the policyholder. The Court wrote, for example: “Where the policy may be reasonably interpreted in two conflicting manners, its terms are ambiguous, and any ambiguity must be construed in favor of the insured and against the insurer.”

Then, with respect to the contractor’s tools exclusion, the court noted that two justices in an intermediate appellate court had “concluded that the application of the contractor’s tools exclusion effectively would defeat all of the coverage granted in the first instance by the policy’s temporary works provision, and that such exclusion therefore is unenforceable as a matter of public policy.”  (Emphasis mine.)

So I ask you, the reader:  If several highly-qualified appellate-level judges construe an insurance policy provision in diametrically opposed ways, then isn’t that provision by definition “ambiguous”?  (Don’t expect an answer to that one from any Court.)

Businesses sometimes ask me to review their insurance coverage program and tell them whether they’re protected against loss. I generally tell them that they’re looking at the problem incorrectly. An insurance policy is not, in many instances, protection against loss. An insurance policy simply creates the right to sue an insurance company if something goes wrong — and the outcome of that coverage suit is usually uncertain. This case is another example of that unfortunate fact. So: Never let the insurance tail wag the dog. Make sure you’re doing everything you can to prevent loss in the first place.

You can read the decision here.  And you can watch the argument in the New York Court of Appeals here.