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Appellate Division Holds that Insurer is Entitled to Rely on Statements Given by Insured When Investigating Coverage and is Not Later Estopped from Denying Coverage When the Information Changes

The Appellate Division, First Department recently issued a decision clarifying that an insurer is entitled to rely on a statement given to it by its insured in determining that an exclusion contained within its policy does not apply, even where such statement contradicts the pleadings served by the plaintiff; and that the insurer is not later estopped from disclaiming after Its insured provides different information that supports a disclaimer.  Tarry Realty LLC v. Utica First Ins. Co., 2014 NY Slip Op 01117.

Tarry arose out of an accident that occurred on July 2, 2007 when Jose Vidals fell from a scaffold while working at a construction site owned by Tarry Realty.  Vidals sued Tarry, alleging that Tarry owned the site; and Sinis Contracting, alleging that Sinis was the general contractor.  When Sinis’ insurer spoke to Sinis, Sinis advised that it was not the general contractor.  Based upon that information, Sinis’ insurer agreed to provide coverage.

During the course of defending Sinis, the insurer learned that Sinis may have been the general contractor, which, if true, would have triggered an exclusion within Sinis’ insurance policy.  At that point, the insurer reserved its rights.  When Sinis then challenged the insurer’s reservation of rights, Sinis provided information which completely contradicted its initial statement provided to its insurer. At that point, Sinis’ insurer issued a disclaimer to Sinis.

In upholding first the insurer’s agreement to provide coverage and the insurer’s later decision to deny coverage, the First Department explained that the insurer was entitled to rely upon the statement its insured provided and that once it learned the truth, it was not equitably estopped from disclaiming merely because the insurer first agreed to defend without issuing a reservation of rights.  Rather, in order to equitably estop the insurer from disclaiming, proof of prejudice was required and since none was provided, the insurer’s denial was upheld.

This decision is significant since it firmly establishes two important concepts.  First, an insurer is entitled to rely upon information provided to it by its insured; and second, that estoppel is not automatically presumed merely because an insurer defends its insured, but rather, must be established by proof of prejudice.