Insurance Law Hawaii

Coverage for Additional Insured Not Limited to Vicarious Liability of Named Insured

   The insurer unsuccessfully moved for reconsideration of the court's holding that additional insured coverage was not limited to vicarious liability of the named insured. First Mercury Ins. Co. v. Shawmut Wood-Working & Supply, Inc., 2014 U.S. Dist. LEXIS 155095 (D. Conn. Oct. 31, 2014)

   The additional insured endorsement provided coverage for liability for "bodily injury" caused, in whole or in part, by:(1) the insured subcontractor's acts or omissions; or (2) the acts or omissions of those acting on the insured's behalf in the performance of the insured's ongoing operations for the additional insured.  

   In the initial summary judgment motion, the insurer contended that the purpose of the additional insured endorsement was to provide coverage for vicarious liability only. The court rejected this argument. The policy language contained no language to achieve this limitation. 

   

On Rehearing, Fifth Circuit Finds Contractual-Liability Exclusion Does Not Apply

   On rehearing, the Fifth Circuit determined that the contractual-liability exclusion did not apply to bar coverage for damage caused by the insured contractor to the home it constructed. Crownover v. Mid-Continent Cas. Co., 2014 U.S. App. LEXIS 20727 (5th Cir. Oct. 29, 2014).The court withdrew its prior opinion, summarized here.

   Arrow Development, Inc. contracted with the Crownovers to construct a home. The contract had a warranty-to-repair clause, which, in paragraph 23.1, provided that Arrow would "promptly correct work . . . failing to confirm to the requirements of the Contract Documents." After the Crownovers moved in, cracks began to appear in the walls and foundation of the home. Additional problems with the heating, ventilation, and air conditioning ("HVAC") caused leaking in the exterior lines and air ducts inside the home. To compensate for defects in the HVAC system, the system's mechanical units ran almost continuously in order to heat or cool the home. Because they were overburdened, the mechanical units had to be replaced. The Crownovers paid several hundred thousand dollars to fix the problems with the foundation and HVAC system. 

   In arbitration, the arbitrator found the HVAC system was not installed properly and did not perform as required. Arrow was responsible for the cost of replacing the HVAC system. Arrow was also found responsible for the costs of repairing the foundation. Accordingly, the arbitrator concluded that the Crownovers had meritorious claims for breach of the express warranty to repair contained in paragraph 23.1 of the contract with Arrow. 

   Arrow filed for bankruptcy. The automatic stay was lifted so the Crownovers could attempt to recover from any applicable insurance policy. 

   The Crownovers sued Arrow's insurer, Mid-Continent. The district court granted summary judgment to Mid-Continent. The policy's contractual-liability exclusion applied, barring coverage. The exclusion provided that "this insurance does not apply to 'property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." There was an exception to the exclusion for "liability that the insured would have in the absence of the contract or agreement." The district court noted that the arbitration award to the Crownovers was based only on Arrow's breach of the express warranty to repair contained in paragraph 23.1. Because Arrow "became legally obligated to pay the arbitration damages on the basis of its contractually assumed liability," the contractual-liability exclusion applied. 

   On appeal, Mid-Continent first argued there was no "occurrence." Since Texas had expansive clay soils, foundation movement was to be expected. The Fifth Circuit noted, however, that neither Arrow nor the Crownovers anticipated the cracks in the walls and foundation or the failure of the HVAC system.

   Mid-Continent further argued that the HVAC system had to have caused damage to some other property in  order to be covered. The economic cost of replacing the faulty work itself was not "property damage." The Crownovers responded that the "property damage" was the damage to the HVAC units themselves due to being run almost continuously. The court found that the defective installation of the HVAC system caused the system to be deficient and eventually required the stressed mechanical units to be replaced. The HVAC units were themselves "tangible property," and the loss of their used amounted to property damage. Therefore, Arrow's defective work was an "occurrence" that caused the HVAC system and the foundation to require repairs, which amounted to "property damage." Accordingly, the Crownovers met their initial burden of establishing coverage under the policy.

   The burden then shifted to Mid-Continent to show that the contractual-liability exclusion applied. There were three elements of paragraph 23.1 that could potentially have triggered the contractual-liability exclusion: (1) it constituted an express rather than implied warranty; (2) it was a duty to repair rather than construct; (3) it referred to performance in conformity with the contract documents rather than simple competent performance. The court found that none of these factors extended Arrow's liability beyond its liability under general law. 

    Mid-Continent first argued that since the award was based on a contractual duty, the contractual-liability exclusion applied. The question, however, was not whether the obligation was contained in an express contractual provision, but whether that provision reflected an expansion of liability. 

   Second, there was no doubt that the general law provided a duty to repair. The remedy for failure to fulfill the duty to repair was the same as for failure to perform work in a workmanlike manner; the remedy was the cost to repair the defective work. Paragraph 23.1, therefore, did not expand Arrow's liability simply because it was framed in terms of a duty to repair, as opposed to a duty to construct.

   Third, paragraph 23.1's reference to the requirements of the contract documents did not increase Arrow's liability in any relevant manner. The contract provided there was a duty to correct work failing to confirm to the requirements of the contract documents. Mid-Continent could not avoid indemnification merely by noting that the duty to repair referred to the requirements of the contract documents. Further, the facts determined by the arbitrator meant that Arrow's adjudicated liability was no greater than that called for under general law. The arbitrator found that both the foundation and HVAC system began showing signs of problems shortly after the Crownovers moved in. The HVAC system was not installed properly and did not perform as required. It eventually had to be replaced. Paragraph 23.1 did not expand Arrow's obligations by articulating a duty to repair such defects. The obligation was substantively the same as Arrow's obligations under general law.

   Therefore, the court held that although Arrow's violation of its duty to repair reflected a breach of contract, Arrow's liability was no greater than what Texas general law conferred.

Pollution Created by Business Does Not Deprive Insured of Coverage

   The federal district court determined that coverage was properly denied under the pollution exclusion of the policies.  Headwaters Resources, Inc. v. Illinois Union Ins. Co., 2014 U.S. App. LEXIS 20060 (10th Cir. Oct. 20, 2014).

   Over 400 residents of Chesapeake, Virginia, filed two lawsuits against the insured, Headwaters, alleged property damage and bodily injury due to pollution generated in connection with the development of a golf course. The complaints alleged that between 2002 and 2007, the defendants used 1.5 million tons of toxic fly ash during construction of a golf course. The insured allegedly transported the fly ash to an open pit adjacent to residential neighborhoods. The chemicals from the fly ash leached into the ground water, damaging the private wells. The fly ash pit also released airborne contaminants that produced a strong smell of ammonia. As a result of the alleged contamination, the property values of plaintiffs' homes depreciated and members of the community faced increased risk of serious bodily injuries caused by exposure to the fly ash. 

   The insurer denied coverage and Headwaters filed suit. The district court found that the pollution exclusions unambiguously applied to bar coverage. The exclusions barred coverage for "bodily injury" and "property damage" that stemmed from "actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants." The underlying complaints alleged bodily injury and property damage arising out of the actual or threatened dispersal of pollutants from waste that was processed by Headwaters. These allegations fell within the pollution exclusions of the policies.

   Headwaters argued that the pollution exclusions were so broad that they barred from coverage events arising from the insured's regular business activities. The Tenth Circuit determined there was no rule that prohibited a normal business activity from also producing pollution, or a product from also being classified as a pollutant. 

   The language of the pollution exclusions were unmistakably plain both on their face and as applied to the facts. Because that clear language applied to the causes of action alleged in the complaints, the insurer was not required to defend the underlying lawsuits.

Denial of Coverage for Bulge in Wall Upheld

   The insurer properly denied coverage for a bulge in a warehouse wall that the insured claimed was caused by Hurricane Ike. Russell v. Scottsdale Ins. Co., 2014 U.S. Dist. LEXIS 143882 (S.D. Tex. Sept. 30, 2014).

   Hurricane Ike displaced metal roof coverings on the insured's warehouse, causing interior water damage to several rooms. Scottsdale eventually paid $84,820.36 for the loss of the roof, less the deductible. The parties disagreed on whether a horizontal bulge on the north wall of the warehouse was also caused by the hurricane. The bulging portion of the wall was not cracked, but cracks were seen around the corners and windows. The insured admitted to an engineer retained by Scottsdale that the cracks in the exterior walls had been filled with caulking on several occasions prior to Hurricane Ike. 

   Scottsdale denied coverage for the damage to the north wall under exclusions for soil sinking, rising, or shifting and for damage from faulty, inadequate or defective design, construction, and repair.The insured later sent a demand for $800,000 for the damage to the wall. A suit was eventually filed by the insured.

   Thereafter, an appraisal was requested by the insured. Two appraisers agreed on an award of $112,004.99 for the damaged roof. Scottsdale tendered this amount less the deductible and the excess amount paid over the cost of the temporary roof.

   The appraisers could not agree on the amount of loss for the north wall. Scottsdale's appraiser and the umpire, however, agreed to an amount of $204,377.51.

   Subsequent investigations located pictures that showed a bulge was present prior to Hurricane Ike. Nevertheless, the insured insisted that the north wall was not damaged before Hurricane Ike. After examining the engineers' reports, the umpire and Scottsdale's appraiser agreed to an award for the north wall of $153,283.13, equal to the actual cash value of the damage to the north wall. The insured refused payment and demanded $500,000 for the north wall plus costs and fees of litigation.

   On Scottsdale's motion for summary judgment, the court found that the breach of contract claim against Scottsdale failed. When an insurer tenders the amount of the appraisal award, there is no breach of contract even if the payment is refused by the insured. Nor was Scottsdale in bad faith because it relied on expert reports in denying coverage. Summary judgment was granted to Scottsdale. 

Flood Coverage Denied Based on Failure to Submit Proof of Loss

   The court granted summary judgment to the insurer because the insureds submitted only documentation of damage by flood, not proof of loss forms required by the policy. Alexander v. Allstate Ins. Co., 2014 U.S. Dist. LEXIS 143284 (E.D. La. Oct. 8, 2014).

   Hurricane Isaac caused flood damaged to the insureds' home. A claim was filed for flood damage under their Standard Flood Insurance Policy issued by Allstate. An independent adjuster estimated that building repairs would be $50,025. Allstate also prepared a contents loss estimate of $22,655 based on a personal property list submitted by the insureds. Proof of loss forms for these amounts were sent to the insureds and returned to Allstate. Consequently, these claims were paid.

   The insureds submitted a new proof of loss for additional lost contents, and another payment was made. Additional building damages were found. Again, the proof of loss was resubmitted and an additional payment was made by Allstate.

    The insureds then submitted a flood damage estimate from their adjuster. No separate proof of loss was submitted to support additional amounts requested from Allstate. 

   When Allstate refused to make additional payments because a new proof of loss was not timely filed, the insureds sued. The court noted that strict compliance with flood insurance was required. This included requiring the insured to provide a signed and sworn proof of loss within 60 days after the loss. 

   Here, the insureds did not submit a signed and sworn proof of loss in support of the additional sums. They contended that the signed and sworn proof of loss forms they previously provided and under which Allstate made payment, combined with the additional documentation on flood damage, gave Allstate sufficient information to evaluate their claim. 

   The court rejected this argument. The Fifth Circuit's precedent mandated strict adherence to all of the Standard Flood Insurance Program's requirements as a precondition to filing suit. Because the insureds had not met the requirements, Allstate was entitled to summary judgment.

Wildfire Is Efficient Proximate Cause of Moisture Reaching Expansive Soils Under Residence

   The court considered whether a wildfire (covered risk) or moisture in the soils (excluded risk) was the cause of damage to the insureds' home. Encompass Ins. Co. v. Berger, 2014 U.S. Dist. LEXIS 142870 (C.D. Cal. Oct. 7, 2014).

   In May 2009, the Jesusita Fire caused damage to the insureds' home and surrounding area. The west wall of the house was burned, causing damage to a bedroom. A shed, hot tub, wooden decks and some vegetation, including eucalyptus trees, were damaged.

   The insureds submitted a claim to Encompass. Eventually, Encompass spent $400,000 repairing the property. 

   In April 2011, walls began to separate in the home, sheet rock buckled, tiles throughout the house were dislodging, and doors were not fitting in their frames. A geotechnical firm investigated and determined that the Jesusita Fire did not cause the new damage to the home. Instead, the damage was caused by the age and nature of the construction, shrinking and swelling of the highly expansive soils, changes in drainage, new utility trenches, etc.

   Encompass denied coverage for the 2011 damage based on the reports. Encompass determined that the damage appeared to be predominantly caused by settling and expansion of the property and soils, and resulting cracking, which was excluded under the policy. 

   In September 2012, Encompass filed suit seeking a declaration that the damage was not covered under the policy. Encompass' expert at trial testified that the interior damage to the house was primarily the result of water in the main utility trench along the west side of the property and pooling in the expansive soils beneath the concrete slab of the residence, causing the soils to expand and exert pressure. Changes in vegetation and irrigation from the post-fire changes and repairs would not have caused the damage to the home. The insureds' expert, on the other hand, testified that changes in vegetation, irrigation, and soil constitution after the fire led to increased variability in soil moisture content, which was the primary cause of the damage to the home.

   The court found that the fire was the efficient proximate cause of the damage to the home. There was no evidence that the property had previously experienced distress and damage as it did in 2011. This suggested that the significant changes to the property which occurred after the Jesusita Fire were the more important causes than the underlying problems with the foundation. The fire had resulted in the construction of the main utility trench that conducted water to the site of the damage. Because the fire was the efficient proximate cause of the damage and fire damage was not excluded under the policy, the damage was covered.

   However, the insureds were not entitled to recover the cost of reconstructing the foundation. The Jesusita Fire did not cause the foundation to be inadequate. Therefore, the policy did not require Encompass to upgrade the foundation from the way it existed before the fire. It only required Encompass to insure against damage proximately caused by a covered peril. Consequently, the insureds were entitled to damages in the amount of $5,173.80 for repair of the utility trench. The insureds were also entitled to $26,208.50 for repairs to the existing damage within the house. 

No Indemnity Coverage Where Insured Suffers No Loss

   The insured subcontractor sought coverage under its Builder's Risk policy for loss despite already being paid under contract the amount sought under the policy. MKB Constr. v. Am Zurich Ins. Co., 2014 U.S. Dist. LEXIS 136096 (W.D. Wash. Sept. 24, 2014). 

   MKB contracted with the Lower Yukon School District (LYSD) to place gravel fill for a new building pad upon which a school building would be placed in Emmonak, Alaska. The project site was built on tundra that melted in the summer, becoming marshy and pocketed by pools of standing water. LYSD provided the bidding contractors with information stating that settlements of 3 to 9 inches could be expected in areas with 30 inches of fill. 

   The contract was awarded to MKB, who subsequently realized it had under bid the amount of gravel fill that would be required. The estimated difference in the amount bid and the amount that would be needed was 6,583 cubic yards. LYSD refused to increase the contract price. 

   When it began placing the fill, MKB found that the settlement was much greater than what LYSD had indicated. MKB was forced to have additional gravel barged from Nome, Alaska, at a higher cost. At the end of the summer season, the MKB had not completed its work. LYSD terminated MKB's contract and withheld the final contract payment of $1.4 million.

   The parties went to arbitration and settled for $1.4 million. MKB later stated in a Rule 30 (b) (6) deposition that this settlement was for the contract balance owed by LYSD.

   MKB then sought indemnity for its losses on the project under its policy with Zurich. The policy provided coverage for "direct physical loss or damage to Covered Property caused by or resulting from a Covered Cause of Loss." Zurich denied the claim because the shortage of gravel fill did not constitute "physical loss or damage."

      MKB sued and sought the contract balance of $1.4 million under the policy. The parties filed motions for summary judgment. 

   The court decided the contract balance issue in favor of Zurich. There was no dispute that LYSD paid MKB $1.4 million in the arbitration settlement. This was the precise amount of the contract balance that MKB claimed in the arbitration and later in its claim letter to Zurich. MKB did not suffer loss for this amount. An insured could receive only that amount that would indemnify actual loss, not an additional windfall above this amount.