Insurance Law Hawaii

No Ambiguity in Determining Unharvested Pears are Excluded from Coverage

    The federal district court determined there was no coverage for the insured winery's damaged pears. Root v. Hanover Ins. Co., 2024 U.S. Dist. LEXIS 152481 (D. Or. Aug. 26, 2024). 

    The winery owned and operated a commercial vineyard that produced and sold pear cider. To protect their business and property, the winery held a policy with Hanover. 

    In September 2020, a wildfire adjacent to the winery subjected the pear trees to severe heat and smoke, causing the trees to prematurely drop twelve tons of unharvested fruit. The winery attempted to salvage the dropped pears but found them unfit for cider production. The winery submitted a claim to Hanover seeking $30,000 for loss of the pears and $172,014 in business income loss. Hanover partially compensated the winery for physical damage to the buildings and other personal property, but rejected the claim for lost pears.

    The winery filed suit for breach of contract. Hanover moved for partial summary judgment to dispose of some of the winery's clams.

    The dispute resolved around two terms in the policy, "stock" and "growing crops." The policy provided coverage for business personal property defined as "stock" but not "growing crops." The winery claimed that the unharvested pears were covered by the policy as "stock." Hanover disagreed and argued that the pears were excluded from coverage as "growing crops" even if the court found them to be "stock."

    The policy defined "stock" as "merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping." The policy, however, did not define the phrase "raw materials." The winery submitted that the unharvested pears were the "raw materials" used to produce cider. Hanover argued that the pears were not "stock" until they were harvested and prepared for processing.

    The winery argued that "raw materials" was an ambiguous term, but they failed to present a second plausible interpretation. Hanover, on the other hand, presented a plausible definition: a raw material is ready for processing. In this context, harvested pears were raw materials because they were ready to be processing into cider. 

    Black's Law Dictionary defined a "raw material" as the "basic substances found in their natural, modified, or semi processed state, used as an input to a production process for subsequent modification or transformation into a finished good." Applying this definition, harvested pears may be "ready to be used as an input" in the production of cider. Unharvested pears, however, were not yet ready to be "subsequent[ly] modify[ed] or transform[ed]." 

    The winery's unharvested pears were unambiguously not "stock" under the policy. 

    Regarding coverage for business income loss, the court found that any covered loss had to be caused by the loss of unharvested pears growing in the winery's orchard. While the pears may have been growing within the covered premises, their loss was not caused by a "direct physical loss of" or "damage to" the winery's covered property. 

    Hanover's motion for partial summary judgment was granted.

Late Disclosures Do Not Merit Dismissal of Insured's Case

    The court agreed that the insured's required disclosures were untimely, but it did not support dismissal of the insured's case. Ulloa v Geovera Spec. Ins. Co., 2024 U.S. Dist. LEXIS 150279 (E.D. La. Aug. 22, 2024). 

    The insured's home suffered property damage from Hurricane Ida. The insured filed suit against its insurer, Geovera Specialty Insurance Company, alleging breach of contract and bad faith for Geovera' salleged failure to pay an insurance claim. The parties began litigating the case under the court's Case Management Order (CMO) designed specifically for cases relating to Hurricane Ida. The CMO required the parties to provide initial disclosures within forty-five days of Geovera's responsive pleading. Geovera filed its answer on December 18, 2023. Neither party exchanged initial disclosures by the February 1, 2024 deadline.

    Geovera's counsel made multiple requests for the insured's disclosures, but they were not provided by the time Geovera filed its motion to dismiss. Less than an hour after the motion was filed, the insured provided his initial disclosures. Counsel for the insured contended that the initial disclosures had been prepared but, due to an unintentional oversight by counsel, had not be forwarded to Geovera. 

    The court found there was not a clear record of delay or contumacious conduct by the insured to support Geovera's motion to dismiss. Almost immediately after Geovera filed its answer, the insured filed the initial disclosures. While the disclosures were admittedly untimely under the CMO, this alone did not support finding a clear record of delay or contumacious conduct. Accordingly, the court found the "draconian remedy" of dismissal was not appropriate at this time. 

Finding Insurer's Declaratory Relief Action Raises Unsettled Questions of State Law, Case is Dismissed

    The federal district court for the District of Hawaii dismissed the insurer's action for declaratory relief because it raised issues that were unsettled by Hawaii courts. Association of Apartment Owners of Lahaina Residential Condominium, et al., No. 1-24-cv-00075-JAO-BMK, Order Granting AOAO's Motion to Dismiss (D. Haw. Aug. 29, 2024). 

    The case addressed whether a property damage exclusion barred coverage over an owner's claim that a condominium association and its property manager failed to obtain adequate insurance before the condominium's property was damaged by the Maui wildfire in August 2023. Great American filed suit seeking a declaration that it had no duty to defend or indemnify the Association and the property manage, Quam Properties Hawaiiana, Inc., in connection with a demand for mediation submitted to the Association and Quam on behalf of one of the owners. 

    The policy provided errors and omissions coverage to the Association and Quam. The policy excluded "any Claim made against any Insured . . . based upon, arising out of, relating to directly or indirectly resulting from or in consequence of, or in any way involving . . . damage to to destruction of any tangible property or the loss of use of any tangible property."

    On October 6, 2023, counsel for some of the owners submitted a demand for mediation to counsel for the Association. The demand claimed that the coverage for the Association was woefully inadequate. Mediation was demanded pursuant to Hawaii's condominium statute. 

    The Association tendered the demand to Great American. Coverage was denied because the demand was not a "Claim" under the policy and the property damage exclusion barred coverage.  Great American later agreed to reimburse the costs of defense incurred in connection with the mediation under a reservation of rights, which preserved the right to file this action. A mediation occurred, but no resolution was reached, no further mediation was scheduled, and no owner filed suit against the Association and Quam.

    Great American filed a Motion for Judgment on the Pleadings. The Association responded by filing a motion asking the court to decline to exercise jurisdiction and to dismiss the case because it raised unsettled question of state law.

    The court analyzed its right to exercise discretion to retain jurisdiction under the factors enumerated in Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942). The court first considered whether there was a parallel state proceeding. The Association contended the mediation qualified as a parallel proceeding, particularly because it was expected to ripen into a state court lawsuit if the dispute could not be resolved. Great American objected that the Association had not cited any authority to support its contention that a non-binding mediation qualified as a parallel proceeding under Brillhart - and further that it was pure conjecture whether the owners would ever file a state court lawsuit. While the Association did not show that a presumption in favor of hearing this matter in state court existed, this did not prevent the court from ultimately concluding that state court still provided the better forum based on consideration of other factors. 

    First, insurance law was an area left to the states. Great American may be correct that because the exclusions "arising out of" and "in any way involving" language is interpreted broadly, the property damage exclusion applies. On the other hand, the Association may be correct that potential liability existed based on violations of the Hawaii condominium statutes and breach of the governing documents from the moment the property was underinsured. Because the potential liability (and harm to owners) existed separate and independent from the additional harm from the physical property damage caused by the fire, the property damage exclusion would not bar all coverage here.

    The court also found the parties' briefing on the question of concurrent or independent causation undeveloped, further risking federal court entanglement with this issue that could impact wildfire litigation in Hawaii more broadly. Because these coverage issues were not settled under Hawaii law and could have immediate reification on numerous other insurance coverage disputes related to the fire, it was one better resolved by Hawaii courts, without federal entanglement.

    There was also no compelling federal interest. Balancing these considerations (the existence of parallel proceedings, unsettled questions of state law, and federal interests), the court found that the first Brillhart factor weighed in favor of dismissal. 

    The second Brillhart factor, forum shopping, was neutral. Because diversity jurisdiction provided a basis to bring suit in federal court, Great American did not engage in forum shopping by filing suit here.

    Regarding the next Brillhart factor, duplicative litigation, the court found this factor tipped slightly in favor of dismissal. On the one hand, this finite dispute concerning Great American's obligations under the policy with regard to the demand would be entirely disposed of in either federal or state court. There was some risk, however of duplicative litigation and inconsistent results should the court opt to maintain jurisdiction over the case and the mediation ripened into a state court lawsuit. 

    Therefore, the court concluded that the Brillhart factors weighted in favor of remand because, even assuming no parallel state action or accepting that the risk of duplicative proceedings remained speculative at this point, the needless determination of state law factor weighed strongly in favor of dismissal. The Associatih's motion to dismiss was granted.

Insured Succeeds on Remand by Adding Non-Diverse Agent

    The court granted the insured's motion for remand by finding a cognizable claim was asserted against the non-diverse agent. Kamovitch v. Am. Econ. Ins. Co., 2024 U.S. LEXIS 150295 (W.D. Pa. Aug. 22, 2024). 

    American Economy Insurance Company issued a homeowners policy to the insured. The insured alleged that he retained Gilbert Insurance Agency, Inc. to determine the appropriate coverage for the property and that Gilbert advised the insured as to the amount and types of coverage to acquire. Gilbert then sold the insured the American Economy policy. 

    The insured suffered loss to his property when a windstorm with hail caused substantial damage to his home. American Economy failed to reimburse the insured for the loss. The insured filed suit in state court against American Economy for breach of contract, bad faith, and vicarious liability, and for negligence against Gilbert. 

    American Economy filed a notice of removal and the insured moved to remand. The notice of removal asserted that there was diversity of citizenship as Gilbert was not a plausible defendant and that the insured fraudulently joined Gilbert in order to destroy diversity and bar this action from being tried in federal court.

    The undisputed recored showed that Gilbert was a Pennsylvania corporation. Defendants, however, alleged that Gilbert was not a proper party because the insured failed to assert a plausible cause of action against Gilbert. Defendants argued that the only cause of action against Gilbert was one for negligence and that the only factual allegations against Gilbert were that Gilbert obtained a policy from American Economy. 

    The insured alleged that he initially reported his claim to Gilbert and that Gilbert's aclions or inactions during the claim process may have contributed to American Economy's denial of the insured's claim. The insured further alleged that even if his claims were insufficient to support a negligence cause of action against Gilbert, he retained the right to amend his complaint to add further facts.

    The court found no indication that the insured acted in bad faith to fraudulently join Gilbert. A negligence cause of action was asserted against Gilbert based on Gilbert's advise concerning the appropriate amount and type of coverage the insured should acquire. Further, the insured alleged that Gilbert had a duty to act with reasonable care when procuring the coverage and ensure that all aspects of the property, including the roof, were covered under the policy. 

    Because Pennsylvania law permitted insureds to sue their insurance agents under a theory of negligence and because the insured clearly alleged that Gilbert made recommendations and gave assurances regarding coverage, the insured had alleged a colorable neglignce claim that was recognised by Pennsylvania law. Therefore, the insured's motion for remand was granted. 

Insured's Collapse Claim Survives Summary Judgment

    The insurer's motion for summary judgment seeking to dispose of the insured's claim for collapse was denied. Life Skills, Inc. v. Harleysville Ins. Co., 2024 U.S. Dist. LEXIS 143658 (D. Mass. Aug. 13, 2024). 

    Life Skills was a non-profit social service agency providing residential and day habilitation services to adults with autism and intellectual and developmental disabilities. The head office was covered by a policy issued by Harleysville with building coverage limits of $3,038,300. 

    Damage occurred in a ceramics classroom located in the basement of the building. The floor sank between eight to twelve inches in the northeast corner. The ceramics classroom contained two large kilns weighing approximately 200 pounds. 

    A portion of the floor was removed, revealing that "everything was rotted" and that the structural beams underneath showed severe deterioration. The area was roped off to prevent access. A temporary support system was designed for the second floor above the ceramics classroom, which, due to the failed first floor structure, also become unsafe for occupancy. 

    Harleysville received notice of Life Skills' loss and assigned Michael Coffey, an in-house representative, to handle the case. Coffey retained an independent adjuster, Armand Permian, who inspected the site. Permian initially reported no issues regarding coverage. In his report, Permian stated that "the weight of (2) kilns in the Workspace Area caused the flooring to collapse and cause [sic] damage to laminate flooring, subflooring, concrete and/or blocks, joisting and a foundation wall."

    Coffey then emailed Life Skills to confirm that coverage was provided for damages resulting from hidden decay. He detailed an actual cash value payment of $49,481.06 and requested that Life Skills submit any invoices related to demolition costs they had incurred. Life Skills submitted an initial repair estimate of $264,000.

    Harleysville then sent a forensic structural engineer (EFI Global) to the property. Harleysville raised doubts about whether the observed facts and damages satisfied the policy's criteria for "Additional Coverage - Collapse" and indicated that it was withholding a decision on the claim until a thorough investigation could determine both parties' respective rights and obligations under the policy. 

    EFI then issued a report finding that: "the reported vertical displacement of the floor at the northwest corner of the ceramics room was caused by long-term deterioration, in the form of decay of the floor structure's timber beams." The report identified "elevated levels of moisture in the crawlspace" as the cause of the floor decay. Based on this report, Harleysville denied coverage. 

    Life Skills then filed suit seeking damages totalling $402,801.00. Count I of the complaint alleged breach of contract.

    The policy excluded "Collapse," defined as an abrupt falling down or caving in, or loss of the structural integrity of the building. However, the policy provided "Additional Coverage - Collapse," which preserved coverage for collapse caused by building decay that is hidden from view.

    Harleysville moved for summary judgment arguing the loss was not covered because the floor did not "abruptly collapse" as the policy stated. Although the floor sagged 8 to 10 inches, it did not completely fall to the ground. Further, even though the floor partially detached from the exterior wall, it remained standing. Life Skills, on the other hand, argued that the damage was a "collapse' because the Additional Coverage - Collapse provision, included "partial collapse" and did to specify a minimum vertical displacement to qualify as a collapse. At the very least, part of the building suffered an "abrupt collapse," because the damage was unexpected, and Life Skills had no knowledge of the hidden decay prior to the incident. 

    While both parties offered reasonable interpretations of the policy language as applied to the facts, the court was not persuaded that the policy language unequivocally supported the interpretation of either party. If Harleysville intended for a "collapse" to require the entire building to fall to the gourd immediately, this should have been explicitly defined in the policy. The collapse provisions, however, were internally inconsistent and created ambiguity. Therefore, because the policy language could support reasonable differences of opinion, the court construed the language in Life Skills' favor and denied Harleysville's motion for summary judgment on the breach of contract claim. 

Insurer's Subrogation Rights Preserved

    The insured's motion for partial summary judgment to eliminate the insurer's right to subrogation was denied. Fireman's Fund Ins. Co. v. S.A. Comunale Co, Inc., 2024 U,S. Dist. LEXIS 141930 (N.D. Ohio Aug. 9, 2024). 

    Fireman's Fund provided property insurance to Raisin Industries for property it owned and operated at the Tower City Avenue Shops (Mall). Fireman's Fund also provided property insurance to Jack Ohio, LLC for its Jack Casino located inside the Higbee Building in Cleveland, Ohio.

    Terminal Tower was a skyscraper located directly above the Mall and was owned and operated by K&D Management. In 2017, K&D hired Cleveland Construction, Inc. to convert certain floors in Terminal Tower into residences. Cleveland Construction subcontracted with S.A. Comunale Co., Inc. to install a fire suppression system. A water loss event involving a Victaulic rigid coupling on the fire suppression system occurred, allowing a significant amount of water to escape the fire suppression system and into the adjacent Mall and Casino. Fireman's Fund paid approximately $33,000,000 to Raisin and approximately $3,000,00 to Jack pursuant to the policies it had with each.

    Fireman's Fund filed a complaint alleging Comunale's negligence in installing the fire suppression system caused the water loss event. Comunale moved for summary judgment arguing three points: (1) Fireman's Fund paid Raisin and Jack on a volunteer basis such that it was not entitled to subrogation; (2) Fireman's Fund was obligated to provide evidence of diminution in value to support its claim and failed to do so; and (3) Fireman's Fund could not recover for the claims arising from payment to Jack because the Terminal Tower property was subject to an easement agreement containing a waiver of subrogation clause. The court addressed each of these arguments.

    Comunale first argued that because both the Raisin policy and the Jack policy did not cover loss caused by alleged defective construction or workmanship, and Fireman's Fund alleged that the water loss was caused by negligent construction or workmanship, Fireman's Fund paid these excluded causes of loss as a volunteer and had no right to subrogate against Comunale. The court concluded that a question of fact existed as to whether Fireman's Fund was obligated to pay the water loss claims under the policies. If Fireman's Fund established at trial that water damage was a covered cause of loss under the policies and showed that Comunale's conduct caused or resulted in the water damage, Fireman's Fund was obligated to pay Raisin's and Jack's claims under the policies. Therefore, a question remained as to whether Fireman's Fund paid under an obligation and was entitled to subrogation, rendering summary judgment improper. 

    On the proof of damages issue, Comunale argued Fireman's Fund failed to present evidence regarding the fair market value of the real property before and after the loss and therefore could not present any evidence to prove its claimed damages. The court concluded that Fireman's Fund was not required to show evidence of the fair market value of each property before and after the damage. Either party could offer evidence of diminution of the market value of the property as a factor bearing on the reasonableness of the cost of restoration. But Fireman's Fund's failure to provide evidence of the fair market value of the relevant properties before and after the damage occurred did not warrant granting summary judgment.

    Finally, Comunale argued that a waiver of subrogation clause was included in the Easement Agreement between K&D as owner of Terminal Tower and Jack as owner and operator of the Higbee Building. Comunale contended it was a "Permittee' under the Agreement and was entitled to the benefit of the Agreement, including the waiver of subrogation. The court disagreed with Comunale's interpretation of the Agreement. The language of the waiver provision indicated that no party to the agreement could be liable to the insurance company of another party by way of subrogation rights. For this provision to apply to Comunale, Comunale itself had to be a party as defined in the agreement. Thus, Comunale's status as a permittee did not mean that the waiver provision applied to it.

    Comunale's motion for summary judgment was therefore denied. 

 

California Supreme Court Finds Virus Endorsement Does Not Cover COVID-19 Claim

    Reversing the Court of Appeal, the California Supreme Court determined a virus endorsement did not salvage coverage for business loss due to COVID-19. John's Grill v. Hartford Fin. Serv. Group, Inc., 2024 Cal. LEXIS 4241 (Cal. Aug. 8, 2024). 

    John's Grill was heavily impacted by the COVID-19 pandemic and related state and local public health orders. As a result of the restrictions imposed, John's Grill suffered substantial financial losses and had to terminate 54 workers. 

    John's Grill had a first-party commercial property insurance policy with Sentinel. Sentinel agreed to pay for "direct physical loss of or physical damage to" covered property. The loss of business income was also covered if direct physical loss or damage to property caused a suspension of business operations. 

    The policy included a Limited Fungi, Bacteria or Virus Coverage endorsement (Virus Endorsement) which added a broad exclusion for loss or damage caused by viruses and other microorganisms. However, the exclusion did not apply if the virus resulted from fire or lightning or to the extent the endorsement provided specific additional coverage. The specific additional coverage applied only "when the . . . virus is the result of one or more of the following causes that occurred during the policy period . . . (1) A 'specified cause of loss' other than fire or lightning . . . " Elsewhere in the policy, 'specified cause of loss" was defined as "fire; lightning; erosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; and water damage." Under this specific additional coverage, Sentinel agreed to pay "for loss or damage caused by . . . virus."

    John's Grill sought coverage. Sentinel denied the claim (Hartford was also sued, but successfully moved to quash service based on lack of personal jurisdiction). Sentinel wrote that John's Grill did not identify any direct physical loss to any property at the premises. Regarding the Virus Endorsement, Sentinel wrote, "As we understand your loss, the virus did not result from a specified cause of loss; therefore, there is no coverage for your claim based on the limited coverage for virus."

    John's Grill sued. It contended that the Virus Endorsement rendered any promise of coverage illusory, requiring Sentinel to cover pandemic-related losses regardless of the cause. Sentinel maintained that coverage was not illusory because "there are circumstances where virus . . .coverage could be provided." The trial court sustained Sentinel's demurrer to the complaint. On appeal, the Court of Appeal agreed with John's Grill that the Virus Endorsement was illusory. For the endorsement to apply, the virus had to be the "result of one of a number of enumerated causes. But none of the listed causes had anything to do with the biological processes that actually cause a virus . . ."

    The Supreme Court reversed the Court of Appeal. John's Grill's argument relied on the premise that viruses could not replicate outside of a host organism, and thus could not result from an inanimate force or phenomenon. But replication was not the only way that a force or phenomenon could bring about a virus. A force or phenomenon could also transmit a virus. If a viral infection resulted from contaminated drinking water or contact with a contaminated object, the contaminated water or object did not cause the virus to replicate, but it nonetheless brought the virus to a new environment where it could do so.Therefore, the virus resulted from the contaminated water or object because the contaminated water or object transmitted it to the new environment. Given this ordinary usage, it was reasonable to construe the policy language as including transmission. Under this construction, the policy language was not indecipherable or otherwise unclear when applied to viruses.

    Next, the Court addressed John's Grill's argument that the Virus Endorsement was illusory. Based on the policy language, John's Grill could not have an objectively reasonable expectation when it obtained the policy that it would provide coverge for all virus-related loss or damage, regardless of cause. The clear and unambiguous policy language defined the factual scenarios in which John's Grill would have coverage. John's Grill did not show it had a reasonable expectation in virus-related coverage beyond the policy's terms. John's Grill did not address, for example, why a virus at its premises could not result from phenomena such as a windstorm or water damage that carried it there, or even an erosion, vandalism, or riot or civil commotion that released it. 

    Therefore, the judgment of the Court of Appeal was reversed and the matter was remanded.

Insurer Waives Objection to Appraiser's Partiality by Waiting Until Appraisal Issued

    The Eleventh Circuit affirmed the district court's denial of the insurer's objections on partiality grounds to the insured's appraiser. Biscayne Beach Club Condominium Association, Inc. v. Westchester Surpus Lines Ins. Co., 2024 U.S. App. LEXIS 19663 (11th Cir. Aug. 6. 2024).

    Storms damaged buildings at Biscayne Beach Club Condominium. Biscayne Beach filed claims with its insurer, Westchester. Unsatisfied with Westchester's payments, Biscayne Beach sued. Westchester then invoked the appraisal provision in the policy. The district court abated the action so the parties could pursue appraisal.

    Biscayne Beach appointed Lester Martin, its public adjuster, as its appraiser on a 10 percent contingency fee. Westchester objected because Martinez's retainer created a conflict of interest that would hinder his impartiality. Biscayne Beach then retained Blake Pyka as its appraiser. Westchester appointed its appraiser and and umpire was selected by the parties' two appraisers.

    On February 3, 2020, the appraisal panel met for final negotiations. That morning, Pyka wrote the panel stating he "had a very small percentage representing this file," i.e., he was working for Biscayne Beach on a contingency fee. Westchester's appraiser immediately replied to confirm that Pyka's "representation was based on a percentage of the appraisal outcome. Westcheseer did not object to Pyka's participation in the proceedings.

    On March 12, 2020, the panel appraised the loss at about $14 million. On April 10, 2020 - more than two months after Pyka's disclosure to the panel and about one month after the award issued - Westchester moved to reopen the action and to conduct discovery to probe Pyka's disclosure and partiality. After discovery, Westchester moved to vacate the award on the ground that Pyka had been partial.

    The district court denied the motion and granted Biscayne Beach's motion to confirm the award. The district court found that Westchester had waived its objections to Pykas partiality by failing to make them sooner. Westhester appealed.

    The Eleventh Circuit cited its own precedent holding that when a party discovers an arbitrator's conflict, it must contest the partiality at that time or else waive the right to object in the future. Here, Westchester waived its objections by not raising it sooner. On February 3, 2020, the day the panel began final negotiations, Pyka disclosed to the panel his contingency agreement with Biscayne Beach. Westchester's appraiser acknowledged the disclosure. The panel signed the final award on March 12, 2020. On April 10, 2020 - more than two months after Pyka's disclosure and nearly a month after the award issued - Westchester moved to reopen this action on the ground that Pyka had been partial. This motion was the first sign that Westchester object to Pyka's partiality. Westchester failed to object at the time that Pyka disclosed what he thought was a financial conflict.

    Therefore, the court affirmed the denial of Westchester's motion to vacate and the confirmation of Biscayne Beach's award.

    

Faulty Installation of Heating and Cooling System Does Not Amount to an Occurrence

    The trial court determined the insurer had no duty to defend or indemnify for the insured's faulty workmanship in installing a heating and cooling system. Knoblich v. Erie Ins. Exchange, 2024 Pa. Super. Unpub. LEXIS 1899 (Pa. Super Ct. Aug. 5, 2024). 

    The Knobiches entered a contract with M&M HVAC, LLC for installation of a Direct Exchange dual site geothermal heating and cooling system. EarthLinked Technologies, Inc. manufactured the geothermal system. After completion, the Knobliches claimed that the system was not functioning properly as the temperatures in some of the rooms differed by as much as 40 degrees. M&M unsuccessfully attempted to adjust the air flows. Eventually, the system completely shut down. EarthLinked also was unsuccessful in fixing the air flow and temperature issues. Ultimately, the Knobliches retained an air balance expert who diagnosed the problem, prepared a report, and recommended a plan to improve the situation. The Knobliches hired a new HVAC contractor to remove and replace the majority of the home's old ductwork and complete the system installation,.

    The Knobliches sued M&M and EarthLinked, seeking damages in excess of $90,000. M&M tendered to Erie, but Erie responded it had no duty to cover M&M due to lack of an occurrence that wold trigger coverage for property damage.

    The Knobliches filed suit for declaratory judgment against Erie and M&M, seeking a declaration that Erie had a duty to defend and indemnify M&M for damages alleged in the underlying action. Erie filed a motion for summary judgment that it had no duty to defend or indemnify M&M. The trial court granted Eri's motion, finding there was no accident that caused the damage to the Knobliches' home. Rather, the court found that M&M's faulty workmanship led to the geothermal system's failure. 

    The decision was appealed. The Knobliches alleged in the underlying action that M&M "failed to complete installation of the Geothermal System in a workmanlike manner, in accordance with the manufacturer's specifications" and, accordingly, M&M "breached its contract to perform all work in a professional manner according to all standard practices." 

    The appellate court agreed there was no triggering "occurrence" under the Erie policy to require it to defend or indemnify M&M where the defective work performed by M&M caused the heating problems. Thus, all consequential damages that followed were not a fortuitous or accidental event triggering Erie's duty to defend or indemnify. 

Court Denies Insurers' Motion for Summary Judgment on Occurrence and Property Damage

    The court rejected the insurers' argument that there was no occurrence or property damage. Ceme-Tube LLC v. Chroma Color Corp., 2024 U.S. Dist. LEXIS 134699 (W.D. Wis. July 30, 2024). 

    The insurers argued on summary judgment that their respective policies did not provide coverage for Ceme-Tube LLC's claims against Chroma Color. The court found that construing the policies as an insured like Chroma Color would, a reasonable jury could find Ceme-Tube's claims were "property damage" was caused by an "occurrence." First, a reasonable jury could find that there was an occurrence based on Ceme-Tube's allegations. Faulty workmanship alone was not an "occurrence," but faulty workmanship could cause an occurrence under Wisconsin law. The alleged faulty workmanship was Chroma Conor's adding insufficient UV protectant to its colorant, then selling it to Ceme-Tube. Although Chroma Color providing insufficient UV protectant to Ceme-Tube was not itself an occurrence, it allegedly caused one. The tubes, which allegedly lacked adequate UV protection, suffered repeated exposure to harmful UV rays that resulted in an accident, the unexpected premature degradation of the tubes. 

    Second, a reasonable jury could conclude that Ceme-Tube's complaint and evidence alleged "property damage." Come-Tube alleged that: (a) it received "significant complaints regarding the degradation of its products"; and (b) it may need to repair and replace many tubes that it sold, which at least implied the tubes suffered property damage.

    Third, while the insurers agreed that there was no causal nexus between the "occurrence" and "property damage," a reasonable jury could infer a causal nexus between the alleged insufficient UV protectant and tube degradation. 

    The court went on to find none of the exclusions raised by the insurers were applicable. The "your product" exclusion did not apply when Ceme-Tube alleged that the tubes it manufactured and sold deteriorated prematurely from UV light exposure due to a defect in Chrome Color's product used in production. The "your work" exclusion did not apply for the same reason. Ceme-Tube asserted that its manufactured tubes were damaged not as the result of Chroma Color's work or operations, but by its sale of a defective product.

    The "impaired property" exclusion applied to "property damage to 'impaired property' or property that has not been physically injured, arising out of: A defect, deficiency, inadequacy or dangerous condition in 'your product' or 'your work.'" The impaired property exclusion also required that the impaired property could be restored touse by repair, replacement, adjustment or removal of "your product' or "your work" - here the colorant. Therefore, the "impaired property" exclusion addressed situations where a defective product, after being incorporated into the property of another, must be replaced or removed at great expense, thereby causing loss of use of the property. 

    Accordingly, the insurers' motions for summary judgment were denied as to whether there was an occurrence and property damage.