Can you imagine the frustration of a policyholder trying to find the exclusion that the insurance company is claiming and getting this response after the fact: “Oops, we accidentally forgot to send you the part of the policy that excludes your loss?” This was the actual scenario in a recent federal case from New York.1
The insurer relied on the standard exclusion of defects found in the HO3 policy form. The court stated the facts surrounding the failure of the policy to be delivered to the policyholder:
Quinn also noted that the ̵6;Scottsdale/Nationwide adjuster has another copy of the [P]olicy for any reason.’ On July 30, Gaetano informed Scottsdale that he could not find the relevant section in his version of the policy. The Scottsdale agent replied: ‘I have checked with our general agent and the policy form was not sent to you. I have spoken to your agent and explained this as well. They will have the policy sent to you accordingly. . . . Unfortunately, the insurance does not cover this.’ According to Scottsdale, the HO3 policy form was mistakenly omitted in its entirety from the documents sent to Gaetano and Quinn due to a typographical error. A Scottsdale representative wrote that she had explained to Quinn that the HO3 insurance form had not been included in the documents sent to him and the plaintiff, and that J&J would “add this back to the policy start date.” She added that “this does not change the coverage on our side as the policy was written as an HO3 which excludes faulty/defective materials/workmanship, etc.” The policy was reissued with the same policy number and effective date, but now includes the HO3 form.
I know many readers are wondering how Scottsdale can enforce a waiver that was never provided to the policyholder. The central theme in many of these cases is whether the transaction somehow refers to the missing insurance or insurance provisions by reference so that the intended insurance contract was known to all.
The court noted New York law on this subject:
“To determine whether a contract has incorporated a document by reference, courts look to whether a reasonable person would understand the specific document to be incorporated by reference, in other words, an objective standard.” Miller v. Mercuria Energy Trading, Inc., 291 F. Supp. 3d 509, 517 (SDNY 2018), aff’d, 774 F. App’x 714 (2d Cir. 2019) (summary order). Courts consider two factors when making this decision:
(1) whether the purported incorporated document is expressly identified and so referred to and described in the instrument that the paper can be identified beyond a reasonable doubt; and (2) if the language containing the document clearly communicates that the purpose of the reference is to incorporate the referenced material into the contract.
Applying the facts to the relevant case, the court noted the following:
As described above, under the doctrine of incorporation by reference, I must consider two factors. On the first factor – whether the document is expressly identified and referred to in the instrument – the HO3 form was expressly and clearly identified in the policy beyond reasonable doubt. The evidence overwhelmingly shows that there is only one “HO3 form” and that it is a standard form created by ISO and used in the insurance industry. Kevin Brown, a Scottsdale underwriter, testified that a reference to ‘HO3’ refers to the ‘Homeowners 3 Special Form’ and that the defective materials exclusion is a ‘standard exclusion included in the HO3 policy form,’ when asked if there were any other policy forms to which the HO3 designation may refer, Brown testified, “No, there is only one HO3 policy form.” McDonald testified that although the HO3 form was not included in the policy, Quinn could have searched for an HO3 policy form online. HO3 insurance form is a standard insurance form used across the industry. It’s the same across the board. So if he really wanted to find the HO3 policy form he could have googled it.’
… No reasonable jury could conclude that “HO3” referred to anything other than the standard form.
As to the second factor—whether the language clearly communicates that the purpose of the reference is to incorporate the referenced material—the references to the HO3 form are clearly intended to represent that the plaintiff’s type of home insurance is an HO3, in light of the fact that in the declarations on the first few pages of the policy are identified as plaintiff’s “policy form,” and many of the endorsements state that they modify the form Homeowners 3. This conclusion is supported by the record.
The court ruled for the insurer:
In light of the evidence presented, I find as a matter of law that no rational juror—much less a reasonably intelligent person who is “aware of the customs, practices, usages, and terminology generally understood in the particular trade or business” could reach any other conclusion than that the reference to “HO3” in the policy unambiguously incorporates the HO3 form by reference.
These types of “oops, I forgot to send the insurance policy that excludes coverage” are very fact-intensive. What is often referred to is actually a recommendation that provides coverage, but what is sent is the more restrictive policy language. So, the referred deposition issue can sometimes work against the insurer.
The best practice for anyone following a loss is to check the declaration page and the referenced policy provisions. See if the exact insurance provision was included in the policy form. This is the only way to ensure that you have all the correct policy provisions.
If you live long enough, you will make mistakes. But if you learn from them, you will become a better person. It’s how you deal with adversity, not how it affects you. The main thing is never stop, never stop, never stop.
—William J. Clinton
1 232 Dune Road, LLC v. Scottsdale Ins. Co.No. 20-cv-7721 (SDNY Feb. 13, 2023).