Hybrid Property Policies: The Burden of Proof to Establish Policy Coverage and Exclusions

Cozen O'Connor

Cozen O'Connor

One coverage issue frequently arising under first-party property insurance policies entails a determination as to which party has the burden of proof to establish coverage, or to show the applicability and effect of a policy exclusion. Generally, in an action arising under an insurance policy, it is a necessary prerequisite . . . for the insured to show that a claim lies within the coverage provided by the policy. See Miller v. Boston Ins. Co., 420 Pa. 566, 218 A.2d 275, 278 (1966); Betz v. Erie Ins. Exch., 957 A.2d 1244, 1256 (Pa. Super. 2008). New Jersey law is similar. See Rosario v. Haywood, 351 N.J. Super. 521, 529, 799 A.2d 32 (App. Div. 2002). Generally, labeling a policy as “all risk” does not relieve the insured of the burden of demonstrating a covered loss. See Roundabout Theatre Co. v. Continental Cas. Co., 302 A.D.2d 1, 751 N.Y.S. 2d 4 (N.Y. App. Div. 1st Dept. 2002).

The burden of proof issue arises when parties classify the insurance policy under two long-term traditional concepts. A policy is frequently labeled as either all-risk or as a “named-perils.” Under an all-risk policy, losses caused by a fortuitous peril not specifically excluded under the policy will be covered. See Parks Real Estate Purchasing Grp. v. St. Paul Fire & Marine Ins. Co., 472 F.3d 33, 41 (2d. Cir. 2006) (applying New York law).

Under an all-risk policy, after property damage is established, the burden shifts to the insurer to show by a preponderance of the evidence that the damage was caused by an excluded event. Thus, “where an insurer relies on a policy exclusion as the basis for its denial of coverage . . ., the insurer has asserted an affirmative defense and, accordingly, bears the burden of providing such defense.” Spece v. Erie Ins. Grp., 850 A.2d 679, 682 (Pa. Super. 2004) (quoting Madison Construction Co. v. Harleysville Mutual Ins. Co., 557 Pa. 595, 605, 735 A.2d 100, 106 (1999) (citations omitted); see also Princeton Ins. Co. v. Chunmuang, M.D., 698 A.2d 9, 16-17 (N.J. 1997).

In a named-perils policy, coverage for property damage or loss is afforded only to damage suffered from an enumerated peril. See Parks Real Estate, 472 F.3d at 41. Thus, the burden is on the insured to show by a preponderance of the evidence that the loss was caused by a covered peril.

However, in addition to these classifications, the same policy may contain coverages afforded both under all-risk language, as well as named-perils. These policies have been classified as a “hybrid” policy. Recently, the U.S. District Court for the Eastern District of New York, in Fabozzi v. Lexington Ins. Co., 23 F. Supp. 3d 120 (E.D.N.Y. 2014), and the U.S. Court of Appeals for the Second Circuit, in Fabozzi v. Lexington Ins. Co., No. 15-911-cv, 2016 WL 860280 (2d Cir., March 7, 2016), weighed in on the burden of proof issue in a collapse case. See generally, id.

Initially, in the District Court, the Fabozzis argued that the burden of proof to establish that the home’s rotted interior walls, indicative of a collapse, was upon Lexington, as an excluded cause under the policy of insurance. They claimed that the ISO language in the policy of insurance (an HO-3 special form) was an all-risks policy of insurance requiring Lexington to establish that the damages were specifically excluded. Lexington, on the contrary, argued that coverage for a collapse was a “named peril coverage.” Thus, Lexington argued that the extension for “additional coverage 8,” there, provided named peril coverage, such that the insured had the burden of proving that the collapse resulted from one of a number of specific perils. See Fabozzi v. Lexington Ins. Co., 23 F. Supp. 3d 120, 124. The District Court held that both parties’ positions, in characterizing the insurance policy as a whole, as all risk or named perils, were misplaced. The court held that a single insurance contract may include both all-risk and named-perils coverage, citing Costabile v. Metro. Prop. & Cas. Ins. Co., 193 F. Supp. 2d 465, 474 (D. Conn. 2002); and N. An. Foreign Trading Corp. v. Mitzui Sumitomo Ins. USA, Inc., 413 F. Supp. 2d 295, 300 (S.D.N.Y. 2006).

The District Court held that the policy of insurance was a hybrid policy and that "additional coverage 8" provided named-perils coverage requiring the plaintiffs to show that the collapse was caused only by one or more of six enumerated perils.

On appeal, the Second Circuit ultimately reversed the lower District Court, holding that the homeowners’ policy at issue was ambiguous as to whether it provided coverage when a listed peril caused collapse, but a non-listed peril contributed to the collapse as well. For our purposes here, however, the Second Circuit affirmed the Eastern District in determining that various provisions in the policy of insurance could establish the policy as a hybrid policy – i.e., a policy providing all-risk coverage generally, but also named-perils coverage for coverage extensions. This holding sanctioned the insurer’s position concerning the burden of proof issue that the insureds must prove that the collapse of their house was caused by an enumerated peril. Accordingly, the Second Circuit held that the District Court did not err in requiring the Fabozzis to prove that the collapse of their home was caused by a covered peril, rather than requiring Lexington to prove that it was not.

The Second Circuit held, that under an all-risk policy, once the insured demonstrates the existence of the all-risk policy and damage or loss, the insurer bears the burden to prove that the loss was caused specifically by an excluded peril. If coverage is named perils, it is the insured’s burden of proof to demonstrate that an enumerated peril caused the loss, citing Potoff v. Chubb Indem. Ins. Co., 60 A.D. 3d 477, 874 N.Y.S. 2d 124-124 (First Dept. 2009). See id. The Circuit Court held that the insureds’ argument that the provision “covers all risk of physical loss, except for those perils specifically excluded,” was impossible to square with the policy’s plain terms. 2016 WL 860280 at *2(citation omitted).

Relying upon the cases cited by the District Court, the Second Circuit held that the property policy does not have to be either all risk or named perils. “We can think of no reason that should be the case, and many reasons that it should not, chief among them that such a rule would frustrate the efforts of contracting parties to allocate different risks in different ways according to their needs and desires. Several district courts within this circuit have treated insurance contracts as all-risk/named-perils ‘hybrids’ as a matter of course, and they were right to do so.” Id., 2016 WL 860280 at *2, Footnote 1 (citations omitted).

Other cases have sanctioned placing the burden of proof of coverage extensions upon the insured. See Southern Surgery Center v. Fidelity & Guaranty Ins. Co., Civil Action No. 2:07cv181, 2008 WL 4549871, at *4 (S.D. Miss., Oct. 10, 2008); Commstop, Inc. v. Travelers Indem. Co. of Connecticut, Civil Action No. 11-1257, 2012 WL 1883461 (W.D. La., May 17, 2012). Similarly, in ruling on an extension of coverage provision in a property policy of insurance, the U.S. District Court for the Western District of Pennsylvania also placed the burden of proof on the insured in establishing collapse, under the Extension of Coverage provision in the policy. PMW Real Estate Management, LLC v. State Farm Fire & Casualty Co., Civil Action No. 2:11cv1395, 2013 WL 3993759 (W.D. Pa., Aug. 5, 2013). Thus, the Western District held that the insured there, PMW, must produce evidence that the collapse can be attributed to one of the enumerated causes for collapse under the specific terms of the contract. See id., 2013 WL 3993759 at *5-6.

It has also been stated that the rule that the insured has the burden of proof with respect to a coverage extension is akin to the well-accepted principle that places the same burden on the shoulders of the insured when seeking to evoke an exception to an exclusion. See, e.g., Buell Industries, Inc. v. Greater New York Mut. Ins. Co., 259 Conn. 527, 551, 791 A.2d 489, 504 (2002); Hritz v. Saco, 18 A.D. 3d 377, 378 (N.Y. App. 2005) (after the insurer established its burden of proving that the mold exclusion applied, the burden then shifted to plaintiff insureds to prove the applicability of an exception to that exclusion); see also 19 Couch on Insurance (2d Ed. 1983), Section 79:385 (when a policy contains an exclusion with an exception, the insurer need not negative the internal exception; rather, the insured must establish that the exception to the exclusion applies).

In sum, and where possible, insurers should consider whether it or the policyholder may have the burden to establish the various coverage provisions, exclusions and other limitations at issue in a claim. Where an insurer can consider such burden of proof issues early – when initially considering its grounds for a potential reservation of rights or a denial of coverage – the insurer is likely better able to evaluate the true and actual strength of potentially relevant exclusions on which it may consider for a denial. Like insurers, practitioners, too, need to be cognizant of the different burdens of proof allocated to different provisions in a first-party policy of insurance at the outset of coverage litigation, as it is certain to weigh heavy on the strength of pleadings as well as dispositive motions. The mere labeling a policy as all risk due to lead in language, does not establish that the insurer bears the burden of proof for every extension of coverage, or for additional coverage provisions provided for in the policy of insurance that must be analyzed separately and independently from the broad initial coverage provided.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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