Can you imagine the frustration of a policyholder trying to find the exclusion relied upon by the insurance company and getting this response after the fact: “Whoops, we mistakenly forgot to send you the portion of the policy which excludes your loss?” This was the factual scenario in a recent federal case out of New York.1  

The insurer relied upon the common defective workmanship exclusion found in the HO3 policy form. The court stated the facts surrounding the policy not being supplied to the policyholder:

Quinn also noted that the ‘Scottsdale/Nationwide adjuster has a different copy of the [P]olicy for some reason.’ On July 30, Gaetano informed Scottsdale that he was unable to locate the relevant section in his version of the Policy. The Scottsdale agent responded, ‘I have researched with our general agent and the policy form was not sent to you. I have spoken with your agent and explained this as well. They will have the policy mailed out to you accordingly. . . . Unfortunately, the policy does not provide coverage for this.’ According to Scottsdale, the HO3 policy form, in full, was inadvertently omitted from the documents sent to Gaetano and Quinn due to a printing error. A Scottsdale representative wrote that she had explained to Quinn that the HO3 policy form had not been included in the documents sent to him and Plaintiff, and that J&J would ‘add this back in to the inception date of the policy.’ She added that ‘this doesn’t change coverage on our side as the policy was written as an HO3 which excludes faulty/defective material/workmanship, etc.’ The Policy was re-issued with the same policy number and effective dates, but now including the HO3 form.

I know that many readers are wondering how Scottsdale can enforce an exclusion that was never provided to the policyholder. The central theme in many of these cases is whether the transaction somehow references the missing policy or policy 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 (S.D.N.Y. 2018), aff’d, 774 F. App’x 714 (2d Cir. 2019) (summary order). Courts consider two factors in making this determination:

(1) whether the allegedly incorporated document is expressly identified and so referred to and described in the instrument that the paper may be identified beyond all reasonable doubt; and (2) whether the language incorporating 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 incorporation by reference doctrine, I must consider two factors. As to 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 all reasonable doubt. The evidence overwhelmingly demonstrates that there is only one ‘HO3 form’ and that it is a standard form created by the ISO and used in the insurance industry. Kevin Brown, an underwriter at Scottsdale, testified that a reference to ‘HO3’ refers to the ‘Homeowners 3 Special Form,’ and that the defective materials exclusion is a ‘standard exclusion contained in the HO3 policy form,’ When asked whether there were any other policy forms to which the HO3 designation could refer, Brown testified, ‘No, there is only one HO3 policy form.’ McDonald testified that despite the fact the HO3 form was not included in the Policy, Quinn ‘could have searched for an HO3 Policy Form online. HO3 Policy Form is a standard insurance form that’s used industry-wide. It’s the same thing 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 clearly are intended to represent that Plaintiff’s type of homeowners insurance policy is an HO3, in light of the fact that it is identified in the Declarations on the first pages of the Policy as Plaintiff’s ‘policy form,’ and many of the endorsements specify that they are modifying the Homeowners 3 form. 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 – let alone a reasonably intelligent person ‘cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business,’ could reach any conclusion other than that the reference to ‘HO3’ in the Policy unambiguously incorporates the HO3 form by reference.

These types of “whoops, I forgot to send you the policy provision which excludes coverage” cases are highly fact intensive. Indeed, what is often referenced is an endorsement that provides coverage, but what is sent is the more restrictive policy language. So, the referenced provision issue can sometimes work against the insurer. 

The best practice for all following a loss is to check the declaration page and the referenced policy provisions. See if the exact referenced policy provision was included in the policy form provided. This is the only way to make certain you have all the correct policy provisions. 

Thought For The Day 

If you live long enough, you’ll make mistakes. But if you learn from them, you’ll be a better person. It’s how you handle adversity, not how it affects you. The main thing is never quit, never quit, never quit.

—William J. Clinton

1 232 Dune Road, LLC v. Scottsdale Ins. Co., No. 20-cv-7721 (S.D. N.Y. Feb. 13, 2023).