Insurance Law Hawaii

Flood Sublimit Applies, Seawater Corrosion to Amtrak's Equipment Not Ensuing Loss

    The insurers were granted summary judgment on three issues regarding Amtrak's claim for damages caused by Hurricane Sandy. Amtrak v. Aspen Sec. Ins. Co., 2016 U.S. App. LEXIS 16074 (2nd Cir. Aug. 31, 2016). 

    Hurricane Sandy caused flooding which damaged two of Amtrak's tunnels under the East and Hudson Rivers. Seawater from the flooding caused extensive damage to equipment in the tunnels. The district court granted summary judgment to the insurers on the following issues: (1) the damage caused by an inundation of water in the tunnels was subject to the policies' $125 million flood sublimit; and (2) the corrosion of equipment after Amtrak pumped out the seawater was not an "ensuing loss" and therefore was also subject to the flood sublimit. 

    Various policies offered different definitions of "flood." Some of the policies did not include within the definition of flood "sea surge" and "wind driven water." Therefore, Amtrak argued the wind-driven tidal surge did not fall within the definition. The court disagreed. The policies' definitions of "flood" were sufficiently broad to include an inundation of seawater driven by storm surge or a wind storm under their plain meaning. Consequently, the $125 million flood sublimit applied. 

    The ensuing loss clause provided that: "Even if the peril of flood . . . is the predominant cause of loss or damage, any ensuing loss or damage not otherwise excluded herein shall not be subject to any sublimits." The court noted that coverage for an ensuing loss directly related to the original excluded risk was not allowed. Amtrak contended that the corrosion of its metal equipment was caused by a "chloride attack" arising from the combination of seawater residue with oxygen in the air, and thus an "ensuing loss" that was not subject to the flood sublimit. The corrosion began only after Amtrak pumped the seawater out of the tunnels. The court found Amtrak's interpretation of the ensuing loss clause so broad that it would contravene the flood sublimit's purpose. Therefore, damage due to the corrosion was also subject to the $125 million flood sublimit.

    

Coverage For Faulty Workmanship Not Saved Under Ensuing Loss Provision

    The policy's faulty workmanship exclusion barred coverage despite an ensuing loss provision. Gateway II LLC v. Hartford Fire Ins. Co., 2016 N. Y. Misc. LEXIS 1325 (Sup. Ct. N. Y. April 5 , 2016).

    Water damage occurred at Gateway. The policy provided, "We will not pay for loss or damage caused by or resulting from any of the following. . . But if loss or damage by a Covered Loss results, we will pay for the loss or damage caused by that Covered Loss." Gateway argued that because of the exception, the damages should be covered under the policy's water-damage coverage.

    But no coverage existed when the causing loss was directly related to the original excluded risk. Where the property policy contained an exclusion with an exception for ensuing loss, the exception did not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded loss.The damages sought here were caused by faulty workmanship and therefore not covered by the policy.

    Gateway was also eleven months late in notifying the insurer of the loss. This excluded the loss, as well, even if there was no prejudice to the carrier. Under New York law, the notice provision operated as a condition precedent and the insurer did not have to show prejudice to rely on the defense of late notice.

    Gateway also sued its agent, Putman Insurance Agency, LLC, for its failure to secure coverage for development construction defects. Putman's motion to dismiss was denied. An insurance agent could be held liable for negligence or breach of contract when its client established that a specific request was made for coverage that was not provided in the policy. Gateway alleged that Putman assured it that sufficient coverage would be obtained. Thus, material issues of fact required a trial to decide whether Putman advised Gateway that the insurance included coverage for faulty workmanship.

Resulting Loss Provision Does Not Salvage Coverage

   The court confirmed that there was no coverage for damage to the policyholder's building caused by a large volume of water. Praetorian Ins. Co. v. Arabia Shrine Ctr. Houston,  2016 U.S. Dist. LEXIS 20186 (S.D. Texas Feb. 19, 2016).

   The damage occurred when water began seeping through the baseboards of the Shrine. Employees saw a large amount of water entering the building. Eventually, the city shut off a water main valve. It was later determined that an 8 inch diameter fire suppression metal pipe failed at the elbow, causing over one million gallons of water to be released into the building. Damages were estimated at nearly $1.7 million. Clean up and repair costs amounted to $237,156. 

     The Shrine held a commercial property policy. The insurer eventually agreed to pay $62,376. This consisted of $12,376 to remove and replace the pipe, $25,000 for limited additional coverage for water damage under a Masonic Coverage Extension in the policy, and $25,000 for damage to personal property. The insurer then filed suit for a declaratory judgment.

   Under the property policy, there were two coverage requirements. First, the loss or damage had to be to "Covered Property." Second, the cause of the loss or damage must have been from a "Covered Cause of Loss." "Covered Property" included a building and personal property used to maintain the building. "Covered Property" did not include foundations of buildings or underground pipes. 

   The parties disagreed whether the concrete slab that heaved and cracked qualified as a foundation. The court did not reach this issue because the Water Exclusion Endorsement applied. The endorsement stated the insurer would not pay for damage caused by "water under the ground surface pressing on, or flowing or seeping through . . . foundations [or] walls."  

   Nevertheless, the Shrine argued that the ensuing loss clause for sprinkler leakage restored coverage. Under this provision, if sprinkler leakage occurred, the insurer would "pay for the loss or damage caused by . . . sprinkler leakage (if sprinkler leakage is a Covered Cause of Loss)." The insurer argued the ensuing loss provision did not bring coverage back because there was no new loss to property that was not excluded by the policy. 

   The court agreed. The policy required a particular sequence of events. First, an excluded cause of loss had to occur. Then, that excluded cause of lost had to result in sprinkler leakage. Finally, the sprinkler leakage had to cause loss or damage. Here, the second and third steps were missing. Although an excluded cause of loss occurred, there was no evidence that the water under the surface of the ground from the failed pipe "resulted in" sprinkler leakage or that a subsequent sprinkler leakage caused further loss or damage. 

Damage to Plaintiffs' Home Caused By Unmoored Boats Survives Surface Water Exclusion

   The magistrate's recommended decision found that damage to plaintiffs' home caused by boats that became loose during Hurricane Sandy was not barred as  "water borne material" under the surface water exclusion. Spindler v. Great N. Ins. Co., 2016 U.S. Dist. LEXIS 16532 (E.D. N. Y. Feb. 2, 2016).

   Plaintiffs' home abutted the East Bay. The property had an exterior deck and a long dock that floated on the bay. Hurricane Sandy damaged plaintiffs' home and dock. A neighbor witnessed two boats, driven by the storm, repeatedly strike plaintiffs' dock, house, and deck. There was no dispute that water infiltrated plaintiffs' yard prior to the entry of the boats. Plaintiffs spent $286,280 to repair damaged items from the storm. 

   Plaintiffs had an all risk-policy with Great Northern. The policy did not cover loss caused by flood. The surface water exclusion stated the policy did not cover "flood, surface water, tidal water, overflow of water from a body of water, or water borne material from any of these . . ." An ensuing loss provision stated, "but we do insure ensuing covered loss unless another exclusion applies."

   Great Northern denied coverage and plaintiffs filed suit. Cross-motions for summary judgment were filed. Great Northern argued that the boats constituted "water borne material." The policy did not define the phrase. The court found that the usage of "water borne material" suggested that it referred to something other than marine conveyances. The use of "water borne material" commonly included "enter," back up," "discharge," "overflow" or "located in the ground," processes one would generally associate with materials such as sand, silt and sewage. Therefore, "water borne material" appeared to exclude fugitive sailing vessels.

   Further, the policy had multiple provisions dealing with "watercraft," a term that plainly incorporated vessels like those that damaged plaintiffs' property. Having failed to clearly define "water borne material" as including watercraft, Great Northern's reliance on this language of the surface water exclusion was misplaced.

   Next, Great Northern argued that, even if the "water borne material" language was inapplicable, the damage inflicted by the storm-driven vessels constituted damage from flood, and was therefore excluded. There was evidence, however, that the property was undamaged by flood waters. Instead, the damage was caused by the physical collision with the watercraft, a peril distinct and separate from flood, and therefore not specifically excluded by the surface water exclusion. 

   Finally, the ensuing loss provision rendered the question of coverage beyond doubt. Because damage caused by the boats followed the entry of water, the boat damage was an ensuing loss to property that was not excluded by the policy.  

    The district court subsequently overruled Great Northern's objections to the magistrate's recommended decision. Spindler v. Great N. Ins. Co., 2016 U.S. Dist. LEXIS 30255 (E.D. N. Y. March 9, 2016).

No Coverage For Damage Caused by Chinese Drywall

   The Florida Court of Appeals determined that there was no coverage for damage to the insured's home caused by the installation of Chinese drywall. Peek v. Am. Integrity Ins. Co., 2015 Fla. App. LEXIS 14147 (Fla. Ct. App. Sept. 25, 2015).

   Chinese drywall was installed in the Peek's new home. After moving in, the Peeks reported to American Integrity a sulfur odor caused by the Chinese drywall. The odor caused the Peeks to vacate their home. The Peeks also claimed corrosion and deterioration of copper coils in the air conditioning system were caused by the Chinese drywall. 

   American Integrity denied coverage based upon policy exclusions for latent defects, corrosion, pollutants, and faulty, inadequate or defective constrution materials. The Peeks sued American Integrity. 

   To prevail at trial, the Peeks had to prove that a covered peril at least contributed to the cause of the loss under the concurrent cause rule. The Peeks proved that they suffered a loss within the policy period. The Peeks, however, did not present any expert testimony or other evidence as to the cause of loss. American Integrity's expert, Dr. Ralph Moon, a botanist, opined that the Chinese drywall was emitting destructive gases at the moment they were manufacutred, prior to its installation in the Peeks' home. He therefore concluded that it was a faulty, inadequate, or defective construction material. 

   On cross-examination, the Peeks' counsel tried to prove that Florida's high humidity was a concurrent cause that acted in concert with the sulfur gases to cause the loss to their home. Dr. Moon conceded that humidity could accelerate the emission of the sulfur gases. He qualified this statement, however, by stating that this was based upon an assumption that the Peeks did not use air conditioning in their home during times of high humidity. There was no evidence, however, that the Peeks did not use air conditioning during such periods. Both parties moved for a directed verdict.

   Before the court could rule on the motions, the Florida Court of Appeals issued a decision in Am. Home Assurance Co. v. Sebo,141 So.3d 195 (Fl. Ct. App. 2013). In Sebo, the court determined that in deciding coverage under first party claims, the efficient proximate cause test should be used, not the concurrent causation test. Therefore, if the efficient proximate cause of the loss was a covered peril, the loss was covered; if it was an excluded peril, the loss was not covered. 

   The Peeks did not request to reopen the case to address the new causation doctrine, nor did they move for a mistrial. Therefore, the court entered a directed verdict for American Integrity. The Chinese drywall was the proximate efficient cause for the loss and there were no ensuing losses because all of the losses occurred as a direct and continuous result of the corrosive Chinese drywall. 

   The appellate court affirmed. The Peeks' evidence was insufficient to establish that humidity contributed to the loss. Dr. Moon testified that the Chinese drywall would produce the destructive gases in any climate. The Peeks did not present an expert witness to contradict this testimony. Therefore, the uncontradicted evidence was that humidity was not a peril that caused the loss, nor was it the efficient proximate cause of the loss.

    Nor was there an ensuing loss. The sulfur gases and the corrosion caused by the chemicals released by the sulfur gases eminated from the Chinese drywall. Thus, the losses were not "ensuing." Further, the claimed ensuing losses were excluded by the policy because an excluded cause of loss - defective Chinese drywall - led directly to another set of exclusions - pollution and corrosion. 

   

Ensuing Loss Does Not Salvage Coverage For Defective Design

   A Builders Risk policy's ensuing loss exception to the exclusion for defective design was held inapplicable. Performing Arts Cmty. Improvement Dist. v. Ace Am. Ins. Co., 2015 U. S. Dist. LEXIS 71592 (W. D. Mo. June 3, 2015).

   Plaintiff oversaw the design and construction of a parking garage. The project included installation of a fifty foot retaining wall between the garage and limestone rock face. The design called for concrete fill in the area between the retaining wall and the limestone embankment. The architect and structural engineer provided the design for the retaining wall and the specifications for 18 inches of back-fill between the wall and the embankment. The general contractor requested approval for an increase in the amount of fill, up to 36 inches, which the structural engineer approved. 

   Construction commenced. During installation of the fill, the wall cracked, requiring an investigation, repair and replacement. Plaintiff's expert determined the design permitted too much fill between the wall and the embankment. 

   The Builder's Risk policy included exclusions, as follows:

This policy does not insure loss or damage caused by any of the following unless direct physical loss or damage by an insured cause of loss ensues and then this policy insures only such ensuing direct physical loss or damage.

.  .  .  

Error, omission or deficiency in design, plans, specifications, engineering or surveying. 

   The plaintiff requested coverage, but Ace denied coverage because the wall's failure was caused by the defective design, and no insurable cause occurred thereafter. 

   Plaintiff filed suit, contending the exclusion did not apply because the wall's failure was "direct physical loss or damage by an insured cause of loss" that "ensued" after the deficient plans.

   The exception to the exclusion invoked by plaintiff only came into play if "loss or damage by an insured cause of loss ensued." Plaintiff argued the ensuing cause of loss was the excessive pressure caused by the fill. The court characterized this argument as an attempt to divorce the defective design from the losses it caused.

    This argument was not legally viable. An ensuing loss was one that occurred subsequent to the excluded loss. This case presented no subsequent event. A defective wall was created (in accordance with the defective plans), and the defective wall failed. There was no ensuing event that caused the wall to fail. If a defectively designed retaining wall failed to retain the pressure it was intended to retain, one did not characterize the pressure as a distinct and separate event, and the resulting need to replace the defectively designed wall was not an ensuing loss.

  This short opinion provides a helpful, conceptual analysis of how the ensuing loss provision is applied. 

    

Water Seepage, Ensuing Mold Damage Covered by Homeowner's Policy

   The appellate court reversed the trial court's determination that the policy covered only mold damage, but not damage caused by water seepage. Henderson v. Georgia Farm Bureau Mut. Ins. Co., 2014 Ga. App. LEXIS 539 (Ga. Ct. App. July 16, 2014). 

   The homeowner's policy covered losses caused by constant seepage or leakage of water or the presence of condensation or moisture over a period of time. The insureds also paid for additional coverage for "ensuing mold . . . caused by or resulting from" one of the covered risks, including water seepage.

   Ms. Henderson discovered a puddle of water in her kitchen and contacted Georgia Farm Bureau. The insurer's contractor tore out a section of the floor, but found no other problems of water seepage. Later, the Hendersons removed another part of the floor and discovered standing water and black mold underneath. The Hendersons had to vacate their house for one year. 

   Subsequently, more damage to the home was found as repairs commenced. Areas of the flooring and subflooring were rotted through. In the crawlspace under the house, water flowed and collected in puddles. 

   Georgia Farm Bureau paid policy limits of $32,675 for the mold damage, but denied the claim for other non-mold damage taht resulted from the seepage of water. A jury found for the Hendersons, but the trial judge granted Georgia Farm Bureau's motion for judgment notwithstanding the verdict. The trial judge reasoned that the resulting damage was not water damage, but mold damage. There was no evidence of any non-mold damage that could support an award of damages beyond the mold endorsement limit. The Hendersons had failed to show any damages that were caused solely by water or moisture that were separate and distinct from the mold damage.

   The court of appeals reversed. The trial court had implicitly construed the policy to mean that mold damage was not an item of damage that resulted as a consequence of water seepage. Yet, the policy expressly required that mold damage ensue as a consequence of a covered risk such as seepage of water. The evidence showed that all of the Hendersons' property damage was from the seepage of water, and that, of that damage, some of it was from ensuing mold. For the damage resulting from the seepage of water that was not solely mold damage, the policy limit of $153,500 applied. 

   Therefore, the trial court erred in granting Georgia Farm Bureau's motion for judgment notwithstanding the verdict as to the jury's award for property damage.

Property Damage Caused By Construction Next Door Covered as Ensuing Loss

   Damage to the insureds' property caused by construction undertaken on the adjacent lot was covered under the insureds' property policy. Chubb Indem. Ins Co. v. 21 E. Cedar, 2014 U.S. Dist. LEXIS 79906 (N.D. Ill. June 12, 2014). 

   The insureds' home sustained damage contemporaneous with demolition, excavation, and construction taking place on a adjacent lot. Chubb paid benefits to the insureds for their loss, and then sought to recover as subrogee from the defendants who performed the construction.

   The defendants argued there was no coverage under Chubb's policy. Faulty planning, construction or maintenance were excluded. An exception to the exclusion stated, however, "we do insure ensuing covered loss unless another exclusion applies." Defendants argued characterizing the damages as ensuing losses was purely semantic and self-serving, designed to involve the ensuing loss provision in order to protect Chubb's coverage determination. Chubb contended the exclusion applied only to the specific property being insured and not to a neighbor's property where work is being performed. Therefore, the faulty construction exclusion did not apply and the ensuing loss provision was triggered. 

   The court agreed with Chubb. It was reasonable to interpret the exclusion as applying only to faulty construction related to the insured property. All-risk policies were intended to cover fortuitous losses, not brought about by an insured's own misconduct, unless the losses were expressly excluded. It would not make sense to exclude coverage for mishaps entirely outside of the insured's knowledge or control merely because they occurred as a result of a neighbor's construction project.

Loss Ensuing from Faulty Workmanship Covered

   The court found coverage for damage resulting from faulty workmanship. Drury Co. v. Mo. United Sch. Ins. Counsel, 2014 Mo. App. LEXIS 319 (Mo. Ct. App. March 25, 2014). 

   The School District entered a contract with general contractor, Penzel Construction Company, Inc., to build an addition to a high school. Under the prime contract, the School District was to purchase property insurance, including builder's risk "all-risk" coverage. The policy was to cover the interests of the owner, the contractor, subcontractors and sub-subcontractors in the project.

   The School District obtained a policy from Missouri United School Insurance Counsel (MUSIC). Exclusions in the all-risk policy included loss due to faulty workmanship or materials, "unless loss by a peril not otherwise excluded ensues and then MUSIC shall be liable only for such ensuing loss." 

   Penzel entered a subcontract with Drury to install a roof deck made of Tectum. Drury began installing the Tectum on the project's roof. Rain and ice storms occurred over the next several months and the Tectum suffered moisture damage. Drury submitted the claim to MUSIC, which the claim denied based upon the faulty workmanship exclusion. 

   Drury sued MUSIC for breach of contract, among other claims. The trial court granted summary judgment to Drury, finding that regardless of MUSIC's assertion that the faulty workmanship exclusion applied, the trial court determined the loss was covered because the covered peril of rain ensued.

   The court of appeals affirmed. The policy covered damage to the Tectum resulting from "rain snow, or sleet." Although loss caused by faulty workmanship was excluded, MUSIC did not allege that Drury undertook deliberate damage-inducing actions. Because Drury sustained an ensuing loss from the precipitation, MUSIC was liable for the ensuing loss regardless of whether Drury's workmanship was faulty. 

Coverage Denied for Ensuing Loss After Foundation Damage

   The insureds attempt to secure coverage for ensuing losses after foundation damage was properly denied by the insurer. Walker v. Nationwide Prop. & Cas. Ins. Co., 2014 U.S. Dist. LEXIS 6683 (W.D. Tex. Jan. 6, 2014).

   Two provisions excluding coverage under Nationwide's homeowner's policy were key to the court's decision. Exclusion 3 (e) barred coverage for "continuous or repeated seepage or leakage of water or stem over a period of time . . . ." Exclusion 3 (f) (6) precluded coverage for settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls, floors, roof or ceiling.

   The policy also included a Dwelling Foundation Endorsement which covered settling, cracking, bulging of floor slabs or footings that supported the dwelling caused by seepage or leakage of water or steam. This endorsement stated the limit of liability would not exceed an amount equal to 15% of the limit of coverage for the dwelling. 

   The parties agreed that the Dwelling Foundation Endorsement limited the amount payment under the policy to 15% of the $250,800 Dwelling Limit, or $37,620. The insureds argued, however, that they were also entitled to coverage for any loss or damage that occurred as the result of any necessary foundation repairs. They argued the Dwelling Foundation Endorsement created an exception to Exclusion 3 (f)(6) for "settling, cracking, shrinking, bulging or expansion of pavements, patios, walls floors, roofs or ceilings."

    The court disagreed. The Dwelling Foundation Endorsement limited Nationwide's liability for foundation damage to 15% of the limit of coverage for the dwelling. 

   Further, the Dwelling Foundation Endorsement only applied to settling, cracking, shrinking, bulging, or expansion of the foundations, floor slabs or footings. Exclusion 3 (f) (6) applied whenever the Dwelling Foundation Endorsement applied, meaning that Nationwide was not obligated to cover "settling, cracking, shrinking, bulging, or expansion of pavement, patios, walls, floors, roofs or ceilings." 

   The insureds contended they were covered for any cracking of walls, floors, and ceilings where the damage ensues from foundation movement caused by a plumbing leak. But Exclusion  3 (e) stated that Nationwide did not have to coverage damaged resulting directly from "continuous or repeated seepage or leakage of water or steam over a period of time from a plumbing system." The insureds' claim fell squarely within this exclusion. In addition, Exclusion 3 (f) (6) stated that Nationwide did not have to cover settling, cracking, shrinking, bulging or expansion of foundations, walls, floors, roofs or ceiling.

   Therefore, the insureds were contractually barred from recovering the ensuing loss damage they sought. The maximum amount they could recover for alleged foundation damage was $37,620.00.