Laxminarayan Lodging, LLC v. First Specialty Insurance Corp.

Background

Laxminarayan Lodging, LLC, doing business as Quality Inn, sued First Specialty Insurance Corporation for breach of an insurance policy and to require appraisal under the policy. The hotel is located in Colby, Texas. The policy covered all risks of direct physical loss or damage to the property and included an appraisal provision allowing either party to demand appraisal when the parties could not agree on the amount of an insured loss.

A June 10, 2020 windstorm damaged the roofs and interiors of three buildings. The hotel’s public adjuster calculated total damage, including emergency mitigation services, at $715,665.08. First Specialty initially issued a $50,000 advance payment, net of the $100,000 deductible, and later determined that $166,567 was owed under the policy, including emergency services, building repairs, and roof tarps. A second windstorm struck on July 13, 2020. The hotel’s public adjuster calculated damage from that storm at $608,213.68. First Specialty rejected the July claim as unsupported and excessive, stating that the hotel had not shown that the claimed damage was separate from the June loss and that emergency repairs had impaired the insurer’s ability to identify additional damage.

The hotel demanded appraisal on August 26, 2021. First Specialty refused, identifying several alleged coverage issues, including whether covered physical damage occurred during the policy period, whether the damage was a prior loss, whether exclusions applied, and how the roof’s age affected valuation. The court had previously denied the hotel’s motion to compel appraisal without prejudice to a later motion for summary judgment. The parties then filed cross-motions for summary judgment.

Appraisal

Under New York law, appraisal determines factual disputes about the amount of loss, not legal disputes about whether the policy provides coverage. First Specialty argued that the parties’ dispute involved coverage issues and therefore could not be sent to appraisal.

The court rejected that argument. First Specialty had conceded that physical loss or damage occurred during the policy period by accepting partial coverage. The question of which damage resulted from the June storm and which resulted from the July storm was a factual causation issue. The hotel also did not dispute that the policy excluded prior loss, wear and tear, and cosmetic damage, or that the roof’s age could affect the amount recoverable. Because no genuine legal dispute remained about the policy’s coverage terms, the remaining questions concerned the cause and amount of damage. The court held that those questions were appropriate for appraisal and that appraisal was warranted.

Business-Income Period of Liability

The policy defined the period for business-income coverage as beginning on the date of insured physical loss or damage and ending when the property could be repaired or replaced, with due diligence and dispatch, and returned to operations. First Specialty sought partial summary judgment declaring that this period could not include delays allegedly caused by the insurer’s failure to pay.

The court denied that motion. It held that an insurer’s delay in paying amounts needed to repair insured property may affect the theoretical time required for repairs. Whether First Specialty’s delay actually affected the hotel’s ability to repair or replace the property remained a disputed factual issue.

Implied Covenant and Bad-Faith Allegations

New York law generally does not recognize a separate claim for breach of the implied promise of good faith and fair dealing when an enforceable contract governs the subject. The court found, however, that the hotel had not pleaded a separate claim of that kind. Instead, the allegation described the alleged breach of the insurance contract.

Because the hotel was not asserting a separate cause of action, the court stated that it did not need to decide whether such a covenant breach could support consequential damages. The court denied First Specialty’s motion to strike the hotel’s allegations of bad faith.

Disposition

The court granted Laxminarayan Lodging’s motion for summary judgment and denied First Specialty’s motion for partial summary judgment. The court also denied First Specialty’s motion to strike the bad-faith allegations. The parties were directed to appear for a status conference on June 2, 2023, to address further proceedings.