Insurance Law Hawaii

Faulty Wormanship Exclusion Does Not Bar Coverage

   The court determined that the Faulty Workmanship Exclusion only barred coverage for damages arising from problems with the property under construction itself and not to losses incurred to correct damage from accidents during construction. See 1756 First Associates, LLC v. Continental Casualty Co., 2011 U.S. Dist. LEXIS 117100 (S.D.N.Y. Oct. 3, 2011).

   A tower crane collapsed at the construction site, causing damage. First Associates tendered the claim to its insurer, Continental. Continental reimbursed First Associates for certain costs arising from damage to and cleanup of the construction site and building stemming from the crane collapse. Continental refused, however, to reimburse First Associates for costs associated with construction delays resulting from the collapse.

   Continental relied upon the Faulty Workmanship Exclusion, which read, in part,

[T]his Policy does not insured against physical loss or damage caused by or resulting from the following:

a. . . . Faulty workmanship or faulty materials . . . .

   First Associates argued that the Faulty Workmanship Exclusion excluded losses arising only from errors or defects in the construction itself and not losses such as delays or cleanup costs arising from equipment failure on the construction site which did not impact the insured property. Continental , on the other hand, argued the Faulty Workmanship Exclusion precluded damages caused by the crane collapse because the collapse was the product of faulty workmanship in manufacturing the crane.

   The court agreed with First Associates. "Faulty Workmanship" referred to the work done by the insured to the insured property itself, not work done by the manufacturer of tools or equipment used on the premises. First Associates did not build the equipment which Continental asserted was the product of faulty workmanship, i.e., the crane. Accordingly, First Associates was entitled to coverage for losses incurred after the crane's collapse.

Wind vs. Flood Issues Negate Insurer's Summary Judgment Motion

   Disputed evidence on whether the property damage was caused by wind or flood related to Hurricane Katrina was at issue in C.R. Pittman Constr. Co., Inc. v. Nat'l Fire Ins. Co. of Hartford, 2011 U.S. App. LEXIS 20002 (5th Cir. Sept. 30, 2011).

   Pittman Construction had equipment for pumping units stored both inside and outside of its warehouse in New Orleans. Its "all risks" policy, issued by National Union, was in place when Hurricane Katrina struck. The equipment was damaged. When National Union refused to provided coverage, Pittman Construction sued. The parties disputed whether the damage was caused by rain and wind or by the excluded peril of flooding.

   Both parties moved for summary judgment. Pittman Construction submitted an affidavit by its owner, Jay Pittman, Jr. Mr. Pittman stated he was present at the warehouse when Katrina hit, and that wind tore off parts of the side and roof of the warehouse, allowing rain to destroy the insured property before any flooding occurred. An employee's affidavit stated after wind blew away a tarp covering generators in the construction yard, rain destroyed the generators. In support of its motion for summary judgment, National Union contended the failure of the levee system had caused flooding that destroyed Pittman Construction's equipment. The district court granted National Union's motion for summary judgment and dismissed Pittman Construction's suit.

   The Fifth Circuit reversed, in part. The district court failed to consider the Pittman affidavits because they were self-serving. Although they were arguably self-serving, the Pittman affidavits were not wholly conclusory, but were based on personal knowledge and created a fact issue as to the cause of the damage to the equipment. Therefore, granting summary judgment to National Union was improper.

  

Claims for Hurricane Ike Damage Survive Motion to Dismiss

   Whether the insured's claims based upon the adjustor's inadequate inspection after Hurricane Ike stated a claim was at issue in Stewart v. Nationwide Prop. & Cas. Ins. Co., 2011 U.S. DIst. LEXIS 111465 (S.D. Tex. Sept. 29, 2011).

   Based on the complaint's allegations, the insured's home suffered extensive damage from Hurricane Ike when a tree limb fell on part of the roof, allowing water to enter. Nationwide assigned an adjuster to the claim, who did not perform a thorough investigation. Although damage for the entire roof was claimed, the adjuster failed to inspect the attic area under the damaged roof and did not inspect the potential roof damage over the main part of the house. Nationwide's payment only covered a portion of the roof and interior coverage for only a couple of rooms in the house. Nationwide also failed to give a reasonable explanation for its non-payment of particular damage claims.

   Ruling on the motion to dismiss, the court dismissed fraud claims because the insured did not take any action in reliance on the adjustor's misrepresentations and inadequate inspection.

   Claims based on the breach of the duty of good faith and fair dealing survived the motion to dismiss, however. The complaint alleged that the investigation and evaluation were unreasonable, as Nationwide knew or should have known that its liability was reasonably clear based on the inspection and the reported damages.

   Claims under the Texas Insurance Code were also adequately pled. Nationwide failed to provide a reasonable explanation of its offer of a compromise settlement of the claim. Nor had an adequate investigation been performed. Finally, allegations that Nationwide delayed payment of the claim following its receipt of all items, statements, and forms adequately stated a claim.

Insurer's Motion for Summary Judgment Based on Earth Movement Exclusion Denied

   After carefully dissecting the earth movement exclusion, the court denied the insurer's motion for summary judgment. High Street Lofts Condominium Assoc., Inc. v. Am. Family Mut. Ins. Co., 2011 U.S. Dist. LEXIS 109043 (D. Colo. Sept. 26, 2011).

   The City of Boulder performed road repair work near High Street's property, some of which involved the use of a vibrating compactor to compact and set the roadbed. High Street noticed damage to its building, such as cracks in walls, sloping of floors and separations of porches from the building itself. High Street contacted the City of Boulder, who forwarded the complaint to its contractor, Concrete Express, Inc.

   High Street also filed a claim with its business insurer, American Family, who denied the claim. American Family relied on an opinion letter by High Street's engineer. The letter indicated that the damage was the result of "soil consolidation/settlement," in response to the construction activities. Based on this letter American Family concluded the claim was excluded under the policy's earth movement exclusion.

   High Street sued American Family, who moved for summary judgment. High Street opposed the motion by contending there was a genuine issued of fact regarding the cause of the damage to the building. The court determined the property was damaged by ground vibrations caused by Concrete Express' work.

   Next, the court turned to whether the policy covered property damage arising from these conditions. The exclusion barred coverage for damage caused by earth movement as follows:

Earth sinking, rising, or shifting including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil conditions include . . . improperly compacted soil . . . .

   Perhaps, under this exclusion, American Family could show that the vibrations caused harm to High Street's building because the soil under the around the building's foundation was "improperly compacted" in such a way that the property was susceptible to damage from vibrations caused by Concrete Express. On the other hand, High Street may be able to show that the soil was properly compacted and the shifting of the earth was not caused in party or whole by defective compaction.

   Because this determination depended on a factual finding , i.e., the degree to which improper soil compaction allowed the vibrations to transmit earth movement to the building, American Family's motion for summary judgment was denied.

   Thanks to my Damon Key colleague, Christi-Anne Kudo Chock, for sending this case my way. Christi noted the insurer, carrying the burden to show the exclusion is applicable, may have a tough time proving conditions of the soil retroactively.

Policy's Anti-Assignment Provision Enforced

   After suffering hurricane damage and having repairs made, the insured sought to assign rights under its policy to the contractor performing the remediation work. The anti-assignment provision, however, prevented the contractor's recovery under the policy. Paramount Disaster Recovery, Inc. v. Axis Surplus Ins. Co., 2011 U.S. Dist. LEXIS 98272 (S.D. Texas. Aug. 31, 2011).

   Hurricane Ike damaged the insured's shopping center. Paramount was hired to perform remediation work to protect the properties from additional damage. The insured then filed a claim with Axis for hurricane-related damages. The insured subsequently attempted to assign all insurance proceeds payable to it under the policy to Paramount.

   Paramount filed suit against Axis. Axis moved for summary judgment and no opposition was filed by Paramount. Axis argued the anti-assignment provision barred Paramount's right to proceeds under the policy. The provision read,

Your rights and duties may not be transferred without our written consent except in the case of death of an individual insured . . . .

The court determined the provision would be enforced precluding the assignment of any rights and duties under the policy without Axis's consent.

   Next, the court considered whether anti-assignment provisions were enforceable under Texas law. A review of Texas decisions indicated that Texas courts had consistently enforced anti-assignment clauses in insurance policies. Therefore, the anti-assignment clause in Axis's policy precluded the assignment to Paramount absent Axis's written consent. Axis was entitled to judgment as a matter of law.

First Party Policy's Pollution Exclusion Given Narrow Interpretation

   The California Court of Appeals considered the reach of a pollution exclusion in a first party property policy. See The Villa Los Alamos Homeowners Assoc. v. State Farm Gen. Ins. Co., 2011 Cal. App. LEXIS 1079 (Cal. Ct. App. Aug. 17, 2011).

   A prior case from the California Supreme Court was instructive. In MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635 (2003), the court determined that a standard pollution exclusion in a CGL policy was intended to exclude coverage for injuries resulting from events commonly regarded as environmental pollution. As a result, the court rejected a broader, literal interpretation,thereby foreclosing coverage for any injures arising from various harmful substances. Here, the court of appeals determined a similar interpretation should apply to pollution exclusions in first party policies.

   In 2006 the Association contracted with Cal Coast Construction to scrape the acoustical ceilings and stairways to search for possible asbestos. Cal Coast disturbed asbestos contained in the ceilings, releasing asbestos fibers into the air. Cal Coast was cited by the County and removed from the project. The County ordered the Association to perform a comprehensive abatement of the building. A contractor was hired to perform cleanup.

   Cal Coast refused to help pay for the cleanup. The Association tendered claims to State Farm. The Association's all risk property policy included a pollution exclusion as follows:

2. We do not insure under any coverage for any loss caused by one or more of the items below:

. . . 1. the presence, release, discharge or dispersal of pollutants, meaning any solid, liquid, gaseous, or thermal irritant or contaminant, including vapor, soot, fumes, acids, alkalis, chemicals and waste . . . ."

State Farm denied coverage and the Association paid $650,000 to fully clean and abate the building. The Association sued and the trial court granted summary judgment to State Farm.

   On appeal, the court first looked to the drafting history of the pollution exclusion and its interpretation in the CGL context. The exclusions in first and third party policies were virtually identical. Accordingly, there was no reason to reject MacKinnon's holding that the pollution exclusion was aimed at environmental pollution, and instead adopt a dictionary-based, literal language approach to deciding whether there was coverage.

   Moreover, State Farm's policy included both first and third party coverage with pollution exclusions in each. To interpret the pollution exclusion differently depending on whether first party or third party coverage was implicated under a claim that could trigger either section of the policy did not make sense. Therefore, the court determined that a reasonable insured would expect both exclusions to apply to environmental pollution.

   Nevertheless, the accidental release and airborne dissemination of asbestos fibers amounted to what was commonly regarded as "environmental" pollution. Damage to the Association's property was caused by a "release" of asbestos into the air. "Release" was a defined mechanism within the terms of the pollution exclusion. Consequently, judgment was properly entered in favor of State Farm.

   Thanks to Robert Thomas (www.inversecondemnation.com), my Damon Key blogging colleague, for forwarding this case.

No Coverage Under Ensuing Loss Provision

   The cost of removing and replacing cracked flanges to prevent future leakage was not covered as an ensuing loss under a builder's risk policy in RK Mechanical, Inc. v. Travelers Prop. Casualty Co. of Am., 2011 U.S. Dist. LEXIS 83958 (D. Colo. Aug. 1, 2011).

   The insured, RK Mechanical Inc., was a subcontractor hired to install plumbing for a residential construction project. RK was an additional insured on the general contractor's policy with Travelers. RK installed approximately 170 CPVC flanges on the project. Subsequently, two of the flanges cracked, allowing water to overflow and causing water damage to the project. Travelers was notified of the flange failure and resulting water damage.

   RK subsequently removed and replaced the two cracked flanges and began water remediation. Travelers paid for the cost of the water damage due to the cracked flanges.

   RK then examined all of the flanges installed in the project and discovered many were cracked and/or showed signs of potential failure. RK removed and replaced the cracked flanges. RK tendered a claim and demand for indemnity to Travelers for these repair costs. Travelers denied the claim. RK then sued for breach of contract and declaratory relief. The parties filed cross motions for summary judgment.

   The court first determined that coverage for faulty and defective materials, workmanship, and maintenance were excluded. The court then turned to the ensuing loss provision, which read:

3. We will not pay for "loss" caused by or resulting form any of the following. But if "loss" by a Covered Cause of Loss results, we will pay for the resulting "loss."

. . .

d. faulty, inadequate or defective . . . materials, workmanship or maintenance.

   The court agreed that the costs to remediate and repair property damaged by the water and caused by the cracked flanges fell within the ensuing loss provision. The court disagreed, however, that each of the remaining flanges posed a risk of loss that was covered as an ensuing loss.

   An ensuing loss provision did not cover loss caused by the excluded peril; it covered loss caused to the property wholly separate from the defective property itself. Here, it covered the escaping water, not the cracked flange. Therefore, the cost of correcting the defect was not an ensuing loss.

Surprise: Insurance Company May Become Adversarial After Disaster

  Interesting read from the Insurance Technology website [here]. The article states what appears to be the obvious. In the aftermath of Hurricane Irene, the insurer may be less than accommodating when claims are reported and adjusted. The article reports that not every claim becomes a nightmare. But, "[w]ith more than a million homeowner claims and billions of dollars of damages expected to result from the storm's violent trip up the U.S. East Coast, it's not surprising that the path to an insurance settlement might not be smooth."

Insurance Fallout from Hurricane Irene

  As noted in today's Christian Science Monitor [here], the insurance implications for losses caused by Hurricane Irene will be tempered by at least two factors.  First, much of the damage was caused by flood, a peril not covered under a home owner's or commercial property policy.  Only if the insured has additional flood coverage will flood loss be covered.  Second, many policies have high wind deductibles, effectively moving portions of the risk back to the insured.

    Thanks to my blogging colleague Mark Murakami (www.hawaiioceanlaw.com) for sending the Christian Science Monitor article my way.

Fifth Circuit Revisits Interpretation of Anti-Assignment Provision

   Our prior post reported on the Fifth Circuit's certified question to the Louisiana Supreme Court regarding anti-assignment provisions in policies assigned to the State. Louisiana distributed funds from the "Road Home" program to Louisiana homeowners to repair uninsured and under-insured property damaged by hurricanes. Before funds were issued, the homeowners had to sign a "Limited Subrogation/Assignment Agreement" whereby any claims of future rights to reimbursement were assigned to the State. However, there was a one billion dollar projected shortfall in the Road Home program.

   To remedy the situation, the State sued more than 200 insurance companies pursuant to the assignments to recover the funds granted under the Road Home program. The insurers moved to dismiss, arguing that the State's claims failed as a matter of law because anti-assignment clauses in the policies invalidated the purported assignments. The federal district court denied the motion to dismiss, holding that the contractual anti-assignment provisions did not bar post-loss assignments under Louisiana law.

   The Fifth Circuit asked the Louisiana Supreme Court whether the anti-assignment provisions were valid. The Louisiana Supreme Court responded there was no public policy in Louisiana which precluded an anti-assignment clause from applying to post-loss assignments. The court warned, however, that the anti-assignment clause must clearly and unambiguously state that it applies to post-assignment losses.

   Given this response, the Fifth Circuit determined in it was unable to resolve the parties' dispute on appeal. In Re: Katrina Canal Breaches Litigation, 2011 U.S. App. LEXIS 13169 (5th Cir. June 28, 2011). The district court's judgment denying the insurers' motion to dismiss was vacated and and the case was remanded for further proceedings.

   Thanks to Damon Key blogging colleague Rebecca Copeland (http://www.recordonappeal.com/) for notice of this case.