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Our attorneys stay on top of changes in legislation, agency regulations, case law, and industry trends—then craft timely legal alerts to keep clients up to date on legal developments important to their business.

September 6, 2013

New York Court of Appeals to Address Issue of Apportionment Clause in Fire Policy Limiting Insured's Recovery to a Percentage of Loss

Breaking News: Court of Appeals to Revisit K2 Decision

On September 3, 2013, the New York State Court of Appeals (our state's highest court) granted re-argument of its significant June 11, 2013 decision in K2 Investment Group, LLC, et. al. v American Guarantee & Liability Insurance Company. As you may recall, in K2, the Court had ruled that an insurer may not rely upon policy exclusions to defeat its duty to indemnify an insured where it is ultimately determined that the insurer had breached its duty to defend. This new development means that the Court, in an unusual move, will reconsider its decision. If you would like to contact us to discuss this new development, please e-mail or call John Casey at or 518-429-4277.

The United States Court of Appeals for the Second Circuit recently considered a case where an insurer's residential fire policy contained an "apportionment-of-loss clause" purporting to reduce the insurer's total liability to thirty-eight percent of any covered loss. Quaker Hills, LLC v. Pacific Indemnity Company, U.S. Court of Appeals, 2nd Circuit, August 29, 2013.

Pacific Indemnity Company had issued a fire insurance policy to Plaintiff, Quaker Hills, LLC, covering a custom-built home that was destroyed by fire during the policy period. Pacific initially insured the property in 2005. Thereafter, there were changes in the coverage limits and in the premium charged. Allegedly, at the request of the insured, Pacific added a thirty-eight percent apportionment-of-loss clause to the policy, providing that, in the event of loss, the amount of loss would be apportioned between the insured and the Company, with the Company paying thirty-eight percent of the loss, which meant that the maximum liability of the Company for a covered loss was $5,054,720 (or thirty-eight percent of the stated coverage amount). As a result of the apportionment clause, Quaker Hills' premium was reduced from $50,273 to $20,777.

At the time of loss, the amount of coverage had been increased to $14,388,000. Pacific refused to pay more than thirty-eight percent of the coverage limit based upon the apportionment-of-loss clause in the policy. The insured denied having requested less than full coverage under the policy.

Following the destruction of the residence by fire, Quaker Hills commenced a declaratory judgment action against Pacific in Federal District Court seeking damages totaling 26.5 million dollars, including replacement cost coverage. Quaker Hills asserted that the apportionment-of-loss clause was unenforceable in New York because it did not conform to the minimum requirements imposed by New York State Insurance Law, §3404, the Standard Fire Insurance Policy. Pacific argued that the apportionment-of-loss clause was enforceable, just as co-insurance clauses are permitted in fire policies issued in New York.

Defendant and plaintiff moved for summary judgment. The District Court ruled that regardless of whether the insured consented to the apportionment-of-loss clause, the clause is void under New York law citing Insurance Law, §3404. The District Court noted that the statutory minimum provisions contained in Section 3404(3), require the insurer to insure the insured to the lesser amount of the actual cash value of the property at the time of the loss, or the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after such loss, but not exceeding the specified policy limit.

The District Court also found that New York cases addressing the application of co insurance clauses to fire losses are only enforceable where the insureds sustain a partial, rather than a total, loss as occurred here. The Court noted that "unlike a co-insurance clause, which is designed to encourage homeowners to value properly their property, the apportionment-of-loss clause here has no real purpose other than to make a $5,467,440 policy appear to be a $14,388,000 policy. Thus, the apportionment-of-loss clause is not analogous to a valued co-insurance clause."

On appeal, the Second Circuit reviewed New York Law with respect to the enforceability of co-insurance clauses, and the Standard Fire Insurance Policy. The Court concluded that co-insurance clauses are permissible in New York, and encourage insureds to insure their property to at least 80 percent of its value, thus permitting the insurer to receive an appropriate premium for the risk undertaken.

The Second Circuit noted that it could find no New York Court of Appeals opinion addressing the specific issue involved in the Quaker Hills case.

As a result, the Second Circuit certified the question to the New York Court of Appeals as follows:

(1) In an insurance policy that provides a stated dollar amount of loss coverage in the event of a fire, does a policy clause that, in exchange for a reduction in the premium charged, limits the insurer's liability to a percentage of any loss violate New York Insurance Law?

(a) If such a clause violates New York Insurance Law, is the clause void, or is it voidable or subject to principles of waiver or estoppel?

(2) If such a clause is in general permissible under New York Insurance Law, is it enforceable where there has been a total loss of the subject property?

(3) If such a clause is in general permissible under New York Insurance Law, is there a limit on the percentage of liability that can be apportioned to the insured?

This appeal involves a significant issue of property coverage in fire losses and the application of co-insurance provisions to the amount of recovery.

We will monitor the Court of Appeals and report further once it has ruled on these questions.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact Anthony J. Piazza, Chair of the firm's Insurance Coverage & Regulation Practice Area, at (585) 295-4420 or


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