Does an Insurer Have the Right to Raise a Defense in Litigation If Not a Basis For Its Denial?

The Appellate Court in New York recently reversed the trial court’s finding in favor of the insured which had concluded the vandalism exclusion did not apply to the loss.¹ The insured owned certain real property which it was renovating and using as rental property. It was admitted the property had been vacant and unoccupied for six months before a fire substantially damaged it. The insureds filed a claim under their Landlords Package Policy, which was denied by Allstate.

At trial, Allstate moved for the first time asserting the policy did not cover the loss based upon the vandalism exclusion. The exclusion provided that “[w]e do not cover loss to the property…. consisting of, or caused by…vandalism. However, we do cover sudden and accidental direct physical loss caused by fire resulting from vandalism unless your dwelling has been vacant or unoccupied for more than 90 consecutive days immediately prior to the vandalism.”

The policy defined vandalism as “willful or malicious conduct resulting in damage or destruction of property.”

The trial court concluded that Allstate had effectively waived any reliance upon the vandalism exclusion by not including it as a ground for denying coverage in their initial disclaimer letter sent to the insured.

Unfortunately for the insured, the appellate court concluded that the defendant was not precluded from invoking the vandalism exclusion under common-law principles of waiver and estoppel since the insured had presented neither evidence of Allstate’s intentional relinquishment of its right to rely upon the exclusion, nor had their conduct lulled the insured into “sleeping on their rights” and prejudicing them.

Allstate has presented evidence in the underlying litigation that an arson investigator and private fire investigator determined that the fire was “intentionally set.” The court concluded this fell within the policy’s definition of vandalism, i.e., “willful or malicious conduct resulting in damage or destruction of property.” Additionally, because the property was admittedly vacant for more than 90 days, the court concluded the loss was excluded.
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¹ Swanson v. Allstate Ins. Co., 2017 N.Y. Slip Op. 04311 (May 31, 2017).