‘Extra’ Apartment Doesn’t Allow Insurer to Rescind Policy After Fire Damage Claim Filed

New York City housing is often jammed into tight spaces. Old houses are carved into several apartments. Not all of them are legal.

Alexi Home Design’s property in the Bronx had two official residences on the main floor and an unofficial basement apartment below. When the company purchased a property insurance policy, only two apartments were listed on the application.

After a fire damaged the property, Union Mutual Fire Insurance Co. asserted that the unlisted third apartment gave it grounds to rescind the policy and not pay Alexi’s claim. A New York appellate court rejected that argument on Thursday, when it affirmed a decision by the Bronx Supreme Court that the insurance application was ambiguous and must be interpreted in favor of the policyholder.

“The term ‘apartment units’ was not defined in the relevant policies or elsewhere; and it is thus unclear whether the premium would have been higher if plaintiff had disclosed the presence of a walk-in basement apartment that was not listed on the certificate of occupancy,” the decision by a panel of the First Department of the New York Appellate Division says.

Alexi Home’s attorney, Craig A. Blumberg, said Union Mutual’s ploy is a common strategy for insurers of New York properties. He said he’s been practicing in the city for more than 30 years and has seen a fair share of similar cases — even at the appellate division level — decided in favor of insurers.

“It’s just a real easy way for insurance companies to get way with not paying claims here,” he said.

Alexi Home filed a lawsuit alleging breach of contract after Union Mutual denied its claim. The insurer filed a counterclaim seeking a declaratory judgment that no coverage is owed because of the misrepresentations on Alexis Design’s insurance application.

Blumberg said he didn’t know who provided the information on the application, but they are almost always filled out by insurance agents. He said policyholders typically only report the “legal” dwelling units within their properties. And he said sometimes it’s difficult to discern what is an apartment and what is not. Tenants often sublet bedrooms within their apartments. Are those rooms separate apartment units?

Property owners often don’t find out that they have what the insurer considers to a separate unit until after they file a claim.

“The insurance companies will just read it the way they want to,” Blumberg said. “They see something that can be an extra apartment and then automatically, ‘Well, that’s another apartment,’ and they don’t pay.”

The appellate division’s opinion says case law has established that a misrepresentation on an insurance policy is material to a claim if the insurer can show that it would refused to issue a policy or charged a higher premium if the facts were known.

Union Mutual, however, had failed to show either was true. Even if it had proved that it would have charged more or refused to issue a policy to Alexis, the lack of any definition for the term “apartment units” in the insurance application rendered the term ambiguous, the opinion says.

The appellate panel noted that Union Mutual had sent a representative to inspect Alexi Home’s property in 2016 and 2018 and renewed the policy after the inspections.

The panel affirmed the Bronx County Supreme Court’s decision to dismiss Union Mutual’s counterclaim and deny the insurer’s motion for summary judgment against Alexi Home.

Top photo: Aerial view of The Bronx in New York City.