Although the insurer failed to understand the pertinent law that mandated coverage under the policy, its actions did not rise to an unfair claim settlement practice justifying multiple damages. Gelwan v. Vermont Mut. Ins. Co., 2013 U.S. app. LEXIS 210 (2nd Cir. Jan. 4, 2013).
In 1999, a contractor re-roofed the insureds' home. The job was poorly done, and an imperfect seal was created. Over several years, various structures within the house were damaged by water, which caused the rotting of structural beams and joists.
The insureds sued for coverage under their homeowners policy. The district court found that the damage was legally caused by water, a covered risk, rather than by rot or faulty workmanship, which were excluded under the policy.
The Second Circuit agreed with the district court's application of the doctrine of efficient proximate cause under Massachusetts law. When a covered risk caused an excluded risk, there was coverage even though the final form of the property damage, produced by a serious of related events, appeared to take the loss outside of the terms of the policy. The district court properly found that policy's rot exception inapplicable where the rot was caused by prior, covered water damage. Although the roof had been poorly laid, the policy language covered ensuing losses from faulty workmanship if such losses were insured risks under the policy. There was no clear error in the district court's determination, after a 13-day bench trial, that water, rather than faulty workmanship, proximately caused the damage.
Given the demanding factual and legal analysis necessary to resolve the dispute, the court could not say that liability should have been so clear to Vermont Mutual that its failure to settle was unfair so as to justify multiple damages under the state's unfair claims settlement practices act.
