A well known principle of insurance policy interpretation is that courts narrowly read policy exclusions and find in favor of coverage where the exclusion is deemed ambiguous.  Another important adage to consider is that “Bad facts make bad law,”  which was recently seen in a decision where the Appellate Division, Second Department, refused to apply a parking lot exclusion even though the injury took place in a parking lot.

The underlying facts of Lancer Indemnity Company v. JKH Realty Group, LLC are macabre – and sympathetic to the claimant.  On a cold February day, the employee of a store in a shopping plaza drowned in a leaching pool after falling through an allegedly defective manhole cover in the paved parking area behind the plaza.

The shopping plaza’s commercial general liability policy contained an exclusion for claims “arising out of . . . [t]he ownership, maintenance or use of [a specified parking lot] or any property located on these premises; [or] Operations . . . necessary or incidental to the ownership, maintenance or use of those premises [i.e. the parking lot].”  After disclaiming coverage based on the parking lot exclusion, the insurer commenced a declaratory judgment action against the shopping plaza owner.

The trial court ruled that the exclusion was inapplicable and the Second Department affirmed the trial court’s decision finding even if the parking lot exclusion applied to the paved area behind the shopping plaza, the exclusion was not so broad as to apply to the building’s septic system.  The Court found that the manhole cover and leaching pool were part of the septic system, and therefore the employee’s death arose out of operations necessary and incidental to the building and not the rear parking lot.

As such, although the employee fell to his death while walking in the parking lot, the Second Department nonetheless applied a strained reading of the parking lot exclusion to find coverage.   In our view, the fact that a fatality was involved likely colored the Court’s decision, resulting in “bad law” for this insurer.

Thanks to Steve Kaye for his contribution to this post and please write to Mike Bono for more information.