SJN Properties LLC v. Harleysville Insurance Company

Background

SJN Properties LLC and Stephen J. Nicholas operate a medical practice in two second-floor professional office condominium units. During renovation work in the residential units directly above, contractor personnel left a bathroom sink faucet running over a weekend. The sink overflowed, causing water damage to the building’s lower floors, including the plaintiffs’ units and their waiting-room lobby.

Harleysville issued the plaintiffs a businessowners insurance policy covering the premises. The policy generally covered direct physical loss caused by a covered cause of loss, but it contained provisions addressing water that backs up, overflows, or is discharged from a sewer, drain, sump, sump pump, or related equipment. A Water Back-Up and Sump Overflow Endorsement provided coverage for water or waterborne material that backs up through, overflows, or is otherwise discharged from a sewer or drain. That endorsement limited payment to $25,000 per location unless a higher limit appeared in the policy declarations.

Harleysville paid the plaintiffs $25,000 and maintained that the endorsement limited the recovery. The plaintiffs argued that the policy’s use of the word “drain” referred only to a structure or system carrying water away from a building that originated externally, and therefore did not include the sink drain. They sought summary judgment on their contract claim and other relief. Harleysville sought dismissal of the complaint in its entirety.

Insurance-Coverage Ruling

The court held that the word “drain” has a plain meaning that includes a sink drain. It found no reasonable ambiguity in the term and noted decisions from New York courts treating similar policy language as applying to sink and toilet overflows. The court also found that the water had plainly overflowed the sink, so the policy provisions applied even though the water was flowing in its normal direction rather than backing up.

The policy contained three overlapping provisions: the original water exclusion, the Water Exclusion Endorsement, and the Water Back-Up and Sump Overflow Endorsement. The court concluded that the Overflow Endorsement controlled. It relied on the parties’ apparent agreement on that point and on the rule that ambiguities in an insurance policy are construed in favor of the insured. Applying the endorsement meant that the plaintiffs’ loss was covered, but only up to the $25,000 limit that Harleysville had already paid.

The court therefore denied the plaintiffs’ motion for summary judgment on their contract claim and granted Harleysville’s motion for summary judgment on that claim.

Other Claims and Attorneys’ Fees

The court dismissed Count II, alleging breach of the implied covenant of good faith and fair dealing, because it duplicated the plaintiffs’ breach-of-contract claim. It dismissed Count III, alleging bad-faith denial of insurance coverage, because New York law does not recognize an independent first-party claim for bad-faith denial of coverage.

The court dismissed Count IV, alleging violation of New York Insurance Law Section 2601, because that statute does not provide a private right of action. It dismissed Count V, alleging violation of New York General Business Law Section 349(h), because the claim depended on the plaintiffs’ contention that Harleysville misinterpreted the policy, and the court had ruled that Harleysville’s interpretation was correct. The court also dismissed the plaintiffs’ claim for attorneys’ fees, stating that an insured generally may not recover the costs of bringing an affirmative action against an insurer to establish rights under the policy.

Disposition

Judge Jessica G. L. Clarke’s conclusion states that the plaintiffs’ motion for summary judgment was denied and Harleysville’s motion for summary judgment was granted. The clerk was directed to terminate the pending motion and close the case.