Godrey v. Executive Risk Indemnity Company

Background

Lee Godfrey and Yun Jae Chung sued Executive Risk Indemnity Inc. in an insurance coverage action. They sought a declaration that the insurer had a duty to defend and indemnify them in an underlying lawsuit brought by Zale Contracting Inc. They also claimed that the insurer breached the homeowner insurance policy by failing to defend and indemnify them. The plaintiffs’ separate bad-faith claim had already been voluntarily dismissed with prejudice.

The underlying lawsuit arose from the renovation of the plaintiffs’ apartment. Zale alleged that a sprinkler-system failure damaged parts of the apartment and required additional labor and materials to complete the renovation. Zale sought $280,456, alleging that the plaintiffs had not paid those additional costs and had been unjustly enriched. After Zale filed that lawsuit, the plaintiffs tendered their defense to the insurer. The insurer initially assigned defense counsel but later notified the plaintiffs that it believed the lawsuit was not covered because Zale alleged unjust enrichment rather than personal injury or property damage. The state court later dismissed Zale’s complaint for failure to appear at a deposition.

Policy Provisions and Legal Standard

The policy’s New York Personal Liability Coverage Part covered damages that a covered person was legally obligated to pay for personal injury or property damage occurring during the policy period and caused by an occurrence, unless an exclusion applied. The policy defined personal injury to include listed injuries such as bodily injury, mental injury, false arrest, wrongful entry, malicious prosecution, and defamation. It defined property damage as physical injury to or destruction of tangible property, and the resulting loss of its use.

The policy also excluded coverage for property damage to property owned by any covered person. The plaintiffs were covered persons under the policy. The parties agreed that New York law governed.

Under New York law, an insured must show that the policy provides coverage. An insurer’s duty to defend is broader than its duty to indemnify and ordinarily depends on comparing the factual allegations in the underlying complaint with the policy language. The insurer has no duty to defend if, as a matter of law, there is no possible factual or legal basis on which it could eventually be required to indemnify the insured.

Court’s Analysis

The court held that the underlying complaint did not allege personal injury or property damage as those terms were defined in the policy. Although the complaint described damage to the apartment from the sprinkler failure, it did not seek to hold the plaintiffs liable for that property damage. Instead, it sought the cost of additional labor and materials needed to complete the renovation and relied exclusively on an unjust-enrichment theory. The court concluded that the underlying action therefore was not covered by the policy.

The court rejected the plaintiffs’ argument that the insurer’s commercial general liability cases were irrelevant because this case involved a homeowner policy. The court found the policy terms sufficiently similar and concluded that the plaintiffs had not explained why those decisions were inapplicable.

The court also rejected reliance on policy language covering “additions and alterations” to the premises. That language appeared in the policy’s first-party Deluxe Condominium Coverage Part, which concerns loss or damage to an insured’s own property. The plaintiffs sought third-party benefits—defense and indemnity for a claim brought against them—so the first-party coverage did not apply.

The court further rejected the plaintiffs’ argument that they reasonably expected coverage for a lawsuit seeking reimbursement related to property damage during the apartment renovations. The court found that argument unsupported by the text of the policy’s third-party liability coverage.

Independently, the court held that the policy’s exclusion for damage to a covered person’s property barred coverage. To the extent the underlying action involved property damage, it involved damage to property owned by the plaintiffs, who were covered persons. The court held that this exclusion was valid and unambiguous and did not conflict with the separate first-party coverage.

Disposition

The court concluded that the policy did not cover the underlying action and that Executive Risk Indemnity Inc. owed the plaintiffs no duty to defend or indemnify them. The court granted the defendant’s motion for summary judgment and denied the plaintiffs’ cross-motion for summary judgment. The Clerk was directed to enter judgment dismissing the case and close the pending motions and case.