Direct Physical Loss By Tenants Is Excluded Under Policy’s Dishonest or Criminal Acts Exclusion

Christina Phillips | Property Insurance Coverage Law Blog | October 2, 2018

Is loss or damage caused by a tenant covered under an all-risk insurance policy? Like most issues addressed in the Merlin blog posts, the answer is: it depends on the facts and the policy language.

The Sixth Circuit in KVG Properties, Inc. v. Westfield Ins. Co., 2018 WL 3978211 (6th Cir. Aug. 21, 2018) recently addressed this issue under a factual situation becoming more and more prevalent. Unbeknownst to KVG, it’s commercial tenants were growing marijuana in the property. Ultimately, the tenants were caught during a raid by the U.S. Drug Enforcement Agency. KVG immediately moved to evict the tenants and gain possession of the property. In its eviction proceedings KVG alleged that the tenants were “illegally growing marijuana.” The tenants were evicted and KVG obtained control of the property. However, the tenants had caused extensive damage to the property to accommodate their marijuana operations. The tenants had removed walls, changed duct work, cut holes in the roof, and severely damaged the HVAC systems. It was alleged the tenants had caused nearly $500,000 worth of damage.

KVG ultimately filed a claim against its insurer, Westfield. Westfield denied the claim based on the Dishonest or Criminal Acts Exclusion. In relevant part, the exclusion provides that Westfield will not pay for loss or damage caused by or resulting from any “[d]ishonest or criminal act by you, any of your partners, members, officers, managers employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose.”1 Summary judgment was granted for Westfield. KVG appealed.

On appeal, the Sixth Circuit concluded that the property had sustained physical damage, caused by some risk (or risks) of direct physical loss. The Sixth Circuit then turned to whether the loss and damage was excluded as a result of the Dishonest or Criminal Acts Exclusion. The court focused its inquiry on the core question of whether the tenants committed a criminal act within the meaning of the policy. Dismissing KVG’s argument that Westfield could not invoke the exclusion unless the tenants had been convicted of a crime, the Sixth Circuit affirmed the lower court’s grant of summary judgment. It found there was no dispute that the tenants were engaged in illegal, criminal conduct. In that regard, the Sixth Circuit noted that KVG admitted as much in its eviction proceedings when it stated that the “tenant illegally grew marijuana.” The appellate court also noted that the raid by the DEA was part of a criminal investigation. As such, the Sixth Circuit concluded that Westfield had proven that the Dishonest or Criminal Acts Exclusion applied to bar coverage.
1 KVG did not argue and thus the Court did not address whether the exclusion should apply to someone who obtains “entrustment” by false pretenses.

Better Early Than Late

J. Ryan Fowler | Property Insurance Coverage Law Blog | October 3, 2018

I often get asked: “Can I still file a lawsuit against my insurance company for my claim from. . . .” Like all good lawyers my answer is maybe. The reality is that the deadlines to file a lawsuit against an insurance company are controlled by the state law that applies to your claim and the facts of your individual case.

In Texas claims for breach of the duty of good faith and fair dealing and violations of the Texas Insurance Code must be brought within two years after the cause of action accrues. The normal period of bringing a breach of contract claim, four years, is commonly reduced to within two years and a day of the date of accrual by most insurance policies. Simply stated most lawsuits against an insurance company must be filed within two years of when the causes of action accrues. Sounds easy but “when does the causes of action accrue”, you ask?

Recently the United States District Court, Southern District of Texas, Laredo Division revisited this question in Rodriquez v. State Farm Lloyds.1 The insured had a pipe burst of January 6, 2015, and filed the lawsuit against State Farm Lloyds on July 13, 2017. We can all see that more than two years passed between the date of the loss and the filing of the lawsuit, but when did the causes of action accrue?

The court discussed the general rule that a cause of action accrues when facts come into existence that authorize a party to seek a judicial remedy. The court then discussed that in an insurance case both for breach of contract and insurance code violations, a cause of action accrues when the insurer denies the claim.

Next, the court examined the record for when the insurer denied the claim. The competing two possible dates are below:

  1. January 21, 2015 – State Farm sent a letter to insured informing that evaluation over and damage less than deductible.
  2. October 2015 – State Farm administratively closed the claim for the first time.

The insured argued that after the denial letter in January the insurer continued to communicate with the insured and was still investing the claim until the insurer issued a “final denial” in 2016. The court determined that nothing indicated that the insurer ever changed or withdrew its initial claim determination and that reinvestigation itself is insufficient to show a prior decision’s withdrawal or change. Therefore, the court held that the limitations period was never reset, and the lawsuit was time-barred and must be dismissed.

It is always important to consult a lawyer to review the facts of your case to determine when the applicable statutes of limitations has started to run and ultimately when a lawsuit must be filed to preserve your rights.
1 Rodriguez v. State Farm Lloyds, 2018 WL 3966270, No. 5:17-CV-161 (S.D. Tex. Aug. 17, 2018).

What Constitutes a Dwelling or Building Under Construction or Renovation For Purposes of a Vacancy Exclusion?

Edward Eshoo | Property Insurance Coverage Law Blog | October 8, 2018

The typical vacancy provision in a homeowners property insurance policy is patterned after the Insurance Services Office (ISO) Homeowners 3-Special Form (HO-3 form)1 and excludes coverage for damage caused by vandalism if the dwelling has been vacant for more than 60 consecutive days before the damage occurs.2

The typical vacancy provision in a commercial property policy is patterned after the ISO Building and Personal Property Form (BPP form).3 It excludes loss or damage caused by vandalism, sprinkler leakage, glass breakage, water damage, and theft or attempted theft if the building has been vacant for more than 60 consecutive days. For all other covered causes of loss, including fire, the carrier will reduce payment by 15 percent if the building has been vacant for more than 60 consecutive days before the loss occurs.4

Vacancy provisions in homeowners and commercial property policies typically state that properties “being constructed,” “in the process of construction,” “under construction,” “under renovation,” or “under construction or renovation” are not considered vacant. “Construction” is not limited to the erection of a new structure; it contemplates “renovation,” “remodeling,” and “additions,” although those terms usually are not defined.5 Courts have concluded that when “renovation” is used in conjunction with “construction,” it includes any activity that restores the property to its former condition, such as repairing broken waterlines, repairing or replacing damaged ceiling tiles, toilets, and porches, and replacing drywall or a roof.6 Under this interpretation, a broad range of construction or renovation activity would prevent a property from being deemed vacant.

To support an argument that a vacancy exclusion does not apply because the dwelling or building was under construction or renovation, evidence should be presented that shows substantial, continuous construction or renovation activity. Sporadic entry is insufficient. Inquiry should be made as to the ongoing presence of construction personnel, including the number of people who worked on the project, the amount of time they spent in the building, and how much of the building they occupied.
1 ISO Form HO 00 03 05 11.
2 Homeowners property policies usually do not define “vacant” or ““unoccupied,” so courts give those terms their plain and ordinary meaning. Although they are frequently used interchangeably, the terms have different meanings: vacant means empty or without contents, and unoccupied means the lack of people’s habitual presence.
3 ISO Form CP 10 30 10 12.
4 Under the ISO BPP form, the definition of vacant depends on whether the policy is issued to a building owner or a tenant. For owners, the property is considered the entire building, and it is vacant unless a lessee or sub-lessee rents at least 31 percent of its total square footage and uses it to conduct customary business operations, or the building owner uses it to conduct customary operations. For tenants, the building is the unit the tenant rents, and it is vacant when the premises do not contain enough business personal property to conduct customary operations.
5 Seee.g.TRB Invs., Inc. v. Fireman’s Fund Ins. Co., 145 P.3d 472 (Cal. 2006); Warren Davis Properties V, L.L.C. v. United Fire & Cas. Co., 111 S.W.3d 515 (Mo. App. 2003).
6 Seee.g.Farbman Group v. Travelers Ins. Co., 2006 WL 2805646 (E.D. Mich. Sept. 28, 2006); Baker v. Nationwide Mut. Ins. Co., 2013 WL 1905334 (Ohio App. May 6, 2013).

Failure to Plead Plausible Claims Defeats Lawsuit

Barry Zalma | Zalma on Insurance | September 11, 2018

It is the obligation of every lawyer representing a plaintiff to plead plausible claims for relief or find the suit dismissed summarily. In Eileen Coonce v. CSAA Fire & Casualty Insurance Company, and Automobile Club Insurance Company; AAA Fire & Casualty Insurance Company, No. 18-7000, United States Court Of Appeals For The Tenth Circuit (September 4, 2018) the failure to plead plausible claims for relief resulted in dismissal by the trial court and affirmed by the Tenth Circuit.


On February 15, 2014, tenants living in a certain house in Broken Arrow, Oklahoma, returned home from dinner to find the ceiling in the living and dining areas had caved in. An engineering survey determined the nails used in construction had failed to hold. The home’s owner, Eileen Coonce, made a claim against an insurance policy (the Policy) issued for the house by CSAA Fire & Casualty Insurance Company, doing business as AAA Fire & Casualty Insurance Company. CSAA denied coverage.

After giving Coonce two opportunities to amend her complaint, the district court granted CSAA’s Fed. R. Civ. P. 12(b)(6) motion to dismiss for failure to state a claim. It held the Policy excluded coverage for the ceiling collapse, and because the Policy did not cover the collapse, there could be no bad-faith claim.


In Ashcroft vIqbal, 556 U.S. 662 (2009), the Supreme Court directed:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. A claim has factual plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the line between possibility and plausibility of entitlement to relief. (Emphasis added)

Iqbal‘s plausibility standard controlled the outcome of the appeal. Coonce argued her Second Amended Complaint pleads plausible claims. To the contrary, the Second Amended Complaint fails to allege any facts to overcome the Policy’s unambiguous exclusions and limitations of coverage, and therefore it fails to plausibly establish coverage under the Policy or a bad-faith denial of coverage.

Although the Policy undisputedly covers the dwelling, it explicitly does not cover losses “[i]nvolving collapse, except as provided in [paragraph] Collapse under Section I – Property Coverages.”   The Second Amended Complaint invokes paragraph E.8. to allege coverage under the Policy.

Paragraph E.8. first defines “collapse” for purposes of the Policy. It then establishes coverage for direct physical loss to covered property involving collapse of a building or any part of a building if the collapse was caused by one or more of the following: (1) The Perils Insured Against named under Coverage C; (2) Decay that is hidden from view, unless the presence of such decay is known to an “insured” prior to collapse; (3) Insect or vermin damage that is hidden from view, unless the presence of such damage is known to an “insured” prior to collapse; (4) Weight of contents, equipment, animals or people; (5) Weight of rain which collects on a roof; or (6) Use of defective material or methods in construction, remodeling or renovation if the collapse occurs during the course of the construction, remodeling or renovation.”

Thus, the Policy makes it clear losses due to a collapse are covered only in certain specified circumstances.

The parties disputed whether the ceiling cave-in qualified as a “collapse” under the Policy, with the district court declining to decide the question in favor of CSAA at the dismissal stage. We need not decide that issue. Even assuming the cave-in was a “collapse,” the Policy covers only a “collapse” caused by one or more of the listed circumstances. But the Second Amended Complaint does not contain any well-pleaded facts to show any of these circumstances would apply. To the contrary, the sole averment concerning the cause of the cave-in is that CSAA’s “engineering firm concluded that the ceiling collapsed because the nails did not hold.” This assertion undermines any inference paragraph E.8.’s limited coverage would apply.

In addition, as CSAA argues, the Policy also unambiguously declines to insure “loss . . . [e]xcluded under Section I – Exclusions,” and “loss . . . [c]aused by . . . [w]ear and tear, marring, [or] deterioration.” In turn, “Section I – Exclusions” denied coverage for loss caused by “[f]aulty, inadequate or defective” “[d]esign, specifications, workmanship, repair, [or] construction” or “[f]aulty, inadequate or defective” “[m]aterials used in repair, construction, renovation or remodeling . . . of part or all of [the] property.” The Second Amended Complaint does not contain any facts showing these exclusions do not apply.

Instead, as with Coonce’s “collapse” argument, the allegations tend to show the exclusions would apply.

In sum, to overcome the motion to dismiss, Coonce had to plead plausible claims. And in light of the Policy’s plain language, to make plausible a claim for coverage of the ceiling collapse, she had to include well-pleaded facts showing one or more of the paragraph 8.E. circumstances would apply and the other unambiguous exclusions would not apply. Because she failed to do so, and therefore failed to nudge her claims across the line from conceivable to plausible, the Tenth Circuit concluded her complaint must be dismissed.

As for the bad-faith claim, under Oklahoma law, tort liability arises only where there is a clear showing that the insurer unreasonably, and in bad faith, withholds payment of the claim of its insured. When a court concludes there was no breach of an insurance policy, it follows a company’s denial of coverage was not unreasonable. Because the Second Amended Complaint lacks well-pleaded facts showing coverage and a breach under the Policy, the district court also did not err in concluding Coonce did not state a plausible bad-faith claim.


Either the insured’s lawyers were incompetent and could not plead a plausible set of facts that would allow for coverage of the “collapse” or, more likely, there were no facts that plausibly allowed for coverage, the suit was destined to fail. Lawyers, although creative, will not state false facts in a pleading to get to trial. There was simply no coverage for Ms. Coonce’s loss and the best that could be said was she presented a fair try and probably should have accepted the trial court’s decision to save the appellate lawyers’ fees.

Construction Claim Notice Travesty -Hope On The Horizon?

Henry L. Goldberg | Moritt, hock & Hamroff LLP | September 20, 2018

Many of you who follow our Construction Law Alert know of the acronym I derisively coined on behalf of the industry, namely “COFED” (for “Contractor Forfeiture Enhancement Device”). It refers to the epidemic of wholly unfair and unnecessary contractual notice provisions in public (and increasingly) private sector construction contracts.

The term COFED has become synonymous with public owner disinterest in fundamental fairness in construction contracting and with the resulting contractor and subcontractor forfeiture of extremely valuable contract claims. Should a multi- million dollar claim be forfeited for want of an unnecessary 10 day or 30 day notice? Are these notices even used by contracting agencies?

The extent of outrageous COFEDs in construction contracts today had led to proposed reform legislation. I had the privilege of participating in the origination and drafting of the legislative bills designed to address this problem. The proposed new legislation would have outlawed COFEDs in public construction in New York.

The concept gained wide acceptance in Albany, with the bill passing unanimously in the Assembly and in the Senate by all but four votes! Regretfully, however, the passed bills were ultimately vetoed by Governor Cuomo after sitting on it for six months.

Such near legislative success (particularly for a first attempt!) was in large part due to a unified and truly statewide coalition of construction industry-based trade associations, which effectively mobilized in support of a legislative prohibition of COFEDs in public construction.

Now it appears that New York courts, which have been completely complicit in their strict enforcement of COFED-type notice provisions, may be beginning to reconsider the harshness of their prior decisions. Recently (6/15/18), a New York appellate court found the outrageous circumstances of a particular COFED unenforceable. This was after the lower (trial) court in the case had already dismissed the contractor’s case for its alleged failure to strictly comply with a

COFED requirement that all notices be verified (i.e. sworn to).

In this potentially landmark case, the public agency’s General Conditions had stated:

Any decision or determination of the Consultant, Owner or Owner’s Representative shall be final, binding and conclusive on the Contractor unless the Contractor shall, within ten (10) working days after said decision, make and deliver to the Owner a written verified statement of the Contractor’s contention that said decision is contrary to a provision of the Contract.

The public agency had challenged the claimant’s entitlement to additional payment for 56 specific change orders. It argued that the contractor completely waived its right to seek additional payment by violating the aforementioned COFED by failing to verify its claim.

Interestingly, both the contractor and the government’s court papers were “devoid of material factual disputes” regarding the actual performance of the contractor under the terms of the contract. The public agency simply argued that the plaintiff waived its rights to its claims by allegedly failing to strictly comply with the verification provision set forth in the public contract. Stripped to the essentials, the public agency shamefully sought to dismiss the claimant’s entire claim merely for its failure to submit its extra work request in “verified” form. In other words, because the contractor did not swear under oath to the validity of all of its claim, the entire claim was sought to be, and was, dismissed.

The trial court had also pointed out, as purported justification for its harsh decision, that NYC-based appellate courts had consistently dismissed contractor claims for extra work payments where a contractor failed to strictly comply with COFED-like notice and other reporting requirements.

In fact, the trial court pointed out in justification for its decision in this case that in yet another, earlier, New York appellate decision, the appellate court had faced the very same absence-of-verification issue and held that failure to “verify” all requests for additional payment constituted a waiver and resulted in a forfeiture of all rights by the contractor.

However, in the recent appellate decision of June 5, 2018 discussed herein, the contractor reasonably argued that it should not be severely penalized for simply failing to submit its notice to the agency in “verified” form. There was no allegation that the claim documents were in any way inaccurate.

Although reprehensible, the trial court’s original decision of May 8, 2017 was basically “correct” given the current obnoxious state of the law. The June 2018 appellate court’s reversal of the trial court’s decision appears to be an outlier, and inconsistent with prior holdings of the very same appellate court.

For its part, the appellate court’s June 5, 2018 decision was as interesting, as it was brief. It stated that:

It is undisputed that plaintiff failed to satisfy a condition precedent to recovering disputed costs for extra work on which defendant forced price reductions. Although contractor gave detailed written statements contesting [Owner’s] determinations of the fair and reasonable value of the extra work… it failed to give verified statements pursuant to the contract’s General Conditions.

The appellate court further noted that:

[The agency] does not argue that plaintiff failed to document the costs of the claimed extra work, to provide timely notice of its claims for extra work, or to provide timely notice of its objections to defendant’s rejections of, and price reductions on, the claimed extra work.

The appellate court also observed that the agency did not contend, other than in “conclusory terms,” that plaintiff’s failure to submit verified written notices was in any way prejudicial to it.

Finally, the appellate court pointed out that the cases upon which the public agency relied in court did not consider whether the failure to strictly comply with the condition precedent of verified notice should be excused to avoid a “disproportionate forfeiture” under circumstances where the noncompliance was de minimis and the defendant-public agency had shown no prejudice.

MH&H Commentary

It’s hard to explain why this intermediate appellate court “found its conscience” in this case. As stated, this very same appellate court has repeatedly enforced hyper- strict enforcement of COFED notice provisions. Was it simply unable to reconcile how far the pendulum had swung in favor of public agencies in their blind enforcement of COFED’s? The appellate court’s decision found the failure to verify the claim notices an inconsequential and de minimis noncompliance, with no resulting prejudice to the agency specifically alleged.

Under such extraordinary facts, and despite the well settled law, this particular intermediate appellate court, at this particular time, based on these facts, could not in good conscious enforce the COFED involved. Is this appellate decision establishing a “lack of prejudice” and/or a “de minimis/inconsequential noncompliance” exception to the enforcement of COFEDs? Will “disproportionate forfeiture” be a new litigated concept for consideration?

What the future holds for this sorry state of affairs, and this outlier case, remains to be seen. For now, the industry must continue its legislative reform efforts. COFEDs, after all, challenge the very survival of contractors and subcontractors. There is no assurance that other courts, or this court, will in the future do the right thing in confronting COFED abuse.

Have you lost a valuable claim against a public agency due to a COFED? Is the public agency against which you asserted a valuable claim, asserting a COFED as a bargaining tool for you to substantially waive your valuable rights? This appellate case raises the hope that in the right hands, and under the right circumstances, COFEDS can be successfully challenged.