Collapse of Underground Storage Cave Not Covered

Tred R. Eyerly | Insurance Law Hawaii

    The Eighth Circuit faced unusual facts in determining that the collapse of a cave serving as a storage facility was not covered under the policy. Westchester Surplus Lines Ins. Co. v. Interstate Underground Warehouse & Storage, Inc., 2020 U. S. App. LEXIS 83 8th Cir. Jan. 3, 2020).

    Interstate operated an underground storage facility in a cave that formerly housed a limestone mine. In 2014, Interstate experienced a series of “dome-outs,” in which layers of rock destabilized, detached, and collapsed from above into the cave.

    Interstate’s policy with Westchester included coverage for collapse of a “building” caused by “building decay.” Westchester sought a declaratory judgment that Interstate’s loss was not covered. The district court granted summary judgment for Westchester because the cause of the loss was not “building decay” within the meaning of the primary policy.

    When Interstate constructed its facility, a limestone slab from the middle zone of the Bethany Falls limestone provided a natural ceiling. The rubble zone was above this natural ceiling. To ensure that the slab of limestone from the middle zone did not detach and fall into the facility, Interstate inserted steel bolts through the natural ceiling, through the rubble zone, and into the more stable layers of rock above the rubble. 

    For purposes of the appeal, Westchester accepted that Interstate’s facility was a “building” within the meaning of the policy. The appeal turned on whether the collapse that damaged the “building was caused by “building decay.” So the dispositive question was whether decay in the rubble zone was “building decay.”

    The Eighth Circuit was not convinced that the bolting process transformed the rubble zone and other earth around the bolts into part of the “building.” Rather, the bolts reinforced the facility’s natural ceiling, much like pilings beneath a large building provide support to that structure. 

    The court concluded that the rubble zone above the natural ceiling of Interstate’s facility was not part of the “building.” Because the decay that caused the dome-outs occurred within the rubble zone, the dome-outs were not caused by :building decay” within the meaning of the policy. Therefore, the judgment of the district court was affirmed. 

The “Advice of Counsel Defense” in Coverage Cases: You Might Be Waiving More Than You Realize

Eileen GilBride, Patrick Gorman and Donald Myles | Jones, Skelton & Hochuli

In United Specialty Ins. Co. v. Dorn Homes Inc.,__ F.R.D. __, 2020 WL 443872,(D. Ariz. Jan. 28, 2020), the United States District Court, District of Arizona, analyzed whether the insurer’s assertion of the advice of counsel defense operates to waive the work-product defense for documents its counsel created but did not communicate to the insurer client.  The court said yes, assertion of the defense waives the work-product protection. The insurer must disclose those work-product protected documents if it affirmatively waives the attorney client privilege by relying on advice of counsel defense.  Moreover, the court ordered the insurer to produce work-product documents that were created even after it had filed its declaratory judgment action, though many courts hold that the waiver ends with the filing of the declaratory lawsuit.

In this case, coverage counsel for the insurer, United Specialty, filed a declaratory judgment action against the insured, Dorn Homes, claiming there was no coverage for construction defects on 87 homes alleged against Dorn. The day before the lawsuit was filed, the insurer had issued a coverage determination for five of the 87 homes. Dorn Homes was continuing to pay for repairs and remediation on the 87 homes, and the claims adjustment process was ongoing at the time of filing. Dorn counterclaimed for bad faith, and the insurer asserted advice of counsel as a defense, thus waiving the attorney-client privilege.

The insured sought disclosure of coverage counsel’s file, and asked for “All documents relating to coverage of Dorn’s claim including time entries of the law firm whether before or after the case was filed.” Dorn cited three reasons for obtaining these documents: (1) the insurer’s assertion of the advice of counsel defense waived work product protections for pre- and post-lawsuit documents related to coverage; (2) the insurer waived work product protection under Evidence Rule 502 (which discusses the attorney-client privilege and work product doctrines and limits on waiver); and (3) Dorn had a “substantial need” for the information and had no other way to obtain it.

The insurer argued it was not required to disclose attorney work product that its counsel had not communicated to it (since the insurer could not have relied on its attorney’s uncommunicated work product in making coverage decisions); and that its assertion of the advice of counsel defense did not waive the protection for post-lawsuit attorney work product.

The court disagreed with the insurer on both points. First, the court held that the insured could obtain attorney work product even though it had not been communicated to the insurer. Said the court, “A party may not invoke the sword of an advice of counsel defense and also raise the shield of the work-product doctrine.” The court reasoned that fairness required giving the insured the opportunity to fully test the legitimacy of the advice of counsel defense, which would involve allowing Dorn to inquire into the basis and facts surrounding the advice provided by counsel, not just those materials that communicated the advice to the insurer. The court agreed with the insured that to rule otherwise “would ignore the vast number of ways [coverage counsel] could share information with [the insurer] without technically sending a document, especially with modern technology.” Work product, including uncommunicated work product, might reveal communications between the insured and counsel and thus be probative of what information the insurer’s counsel considered, the reasonableness of its advice, and whether the insurer relied on the advice in good faith. In short, permitting the work-product documents to remain privileged would ignore “the potential for litigation abuses, and erects too much of an impediment to the truth seeking process.”

Second, the court said the insured could obtain work product material created even after the lawsuit was filed. Many courts conclude that the privilege waiver ends upon the lawsuit’s filing because once the lawsuit is filed, defense counsel is engaged in critical trial preparation, including analyzing the weaknesses of their client’s case. As such, there is an enhanced interest in protecting against disclosure of trial strategy and planning. The disclosure of such analyses would chill communications between trial counsel and client and would impair trial counsel’s ability to give the client candid advice regarding the merits of the case. In this case, however, the insurer’s waiver of the privilege lasted throughout the case due to the specific circumstances involved here. Specifically, the filing of the complaint did not form a clear cutoff of research and analysis that would inform the advice of counsel defense. The suit was filed the day after the insurer issued a coverage determination for five of the 87 homes at issue; the insured was continuing to pay for repairs and remediation on the 87 homes; the claims adjustment process remained fluid and ongoing at the time of filing; and counsel’s billing records reflected their research on coverage in the days immediately after the filing. In short, said the court, the presumption that nothing transpiring during litigation is pertinent to the client’s state of mind was “not in accord with the reality of litigation.”

As the court concluded, “invoking the advice of counsel defense is not a painless decision or a free lunch. There are discovery consequences to such an assertion. Fairness requires that a party who seeks to be absolved of willful infringement because it relied on counsel’s advice pay the discovery price.”

Insured’s Bad Faith Insurance Claim Goes Up in Smoke

Garret Murai | California Construction Law Blog

Sometimes it’s right there before your eyes. Then, poof, it’s gone. This was the experience of one insured, who brought a bad faith insurance denial claim against his insurer thinking that the facts were in his favor, only to discover they were not.

The 501 E. 51st Street Case

The Water Main Break and AGI’s Report

The owner of a 10-unit apartment building built in 1963, 501 East 51st Street, Long Beach-10 LLC (just rolls off the tongue doesn’t it?), filed a bad faith action against its insurer Kookmin Best Insurance Co., Ltd., after it denied 501 East’s insurance tender following a water main break that caused the building’s foundation to subside.

The water main break occurred sometimes between December 31, 2015 and January 2, 2016 next to the southwest side of the building. 501 East tendered its insurance claim to Kookmin on March 8, 2016, and in April 2016, presented a report prepared by American Geotechnical, Inc. (“AGI”) concerning damage to the building. According to the report prepared by AGI, AGI conducted a “limited geotechnical investigation” to “evaluate site conditions relating to the reported building distress following a waterline breach near the south end of the building.” The scope of AGI’s investigation was limited to “observation, photo documentation of the site conditions, [and[ floor-level survey of the interior of the first level units.” AGI’s investigation did not involve any subsurface investigation or soil testing.

The report prepared by AGI noted cracks in the interior walls and the concrete slab floor of units 1 and 4. As to the exterior of the building, the report noted “significant cracks on the foundation stem wall in the south side of the building near the reported water leak.” The report also noted “[n]umerous stucco cracks,” “significant floor defamation,” “toward tilting to the rear as well as to the right and left sides of the building” and that “[t]he steepest floor tilt . . . occurs at the left side of Unit 1, close to the reported water leak.”

In conclusion, AGI opined that “existing building distress was substantially contributed to by the water main break. The water introduced to the soil medium appears to have triggered differential movement causing the stress features to develop. Some of the distress may have pre-existed and be due to long-term soil influences as well as inadequate original design and/or construction. Further investigation including soil sampling and testing can be performed to determine the site soil conditions. AGI’s preliminary cost of repair was estimated to be $259,900.77.

Kookmin’s Investigation

After receiving AGI’s report, Kookmin hired J.S. Held LLC, a construction consulting firm, to help investigate the claim. At J.S. Held’s recommendation, Kookmin also hired Wiss, Janney, Elstner Associates (“WJE”) to assist with the investigation.

On June 4, 2016, J.S. Held, WJE, and representative of 501 East conducted a site survey. No soil tests were conducted during the site survey. On June 29, 2016, WJE issued a report. WJE’s report noted numerous previous repairs to the stucco on the building, at the west and south facades, and near the water leak. The report also noted that “[a]t some locations, particularly at the sound end of the main building, some of the [previously repaired] cracks have opened up. . . .” and that the window in Unit 1, the unit closest to the water main break, had been replaced with acrylic after replacement glass windows had broken three times since the pipe break.

In conclusion, WJE opined that “at least some settlement and movement of the building occurred prior to the water supply line break event and subsequent running water from the broken line.  However, the reopening of previously repaired cracks, presence of open cracks, observed discontinuity with vertical offsets in Unit 1, and the multiple occurrences of glass breakage in the window in Unit 1 as reported by residents, indicate that there has been some movement or settlement of the building since the early 2016 water supply line break event. WJE concluded its report by recommending that “floor finishes in Unit 1 be removed to investigate further the noted floor slab discontinuity and vertical offset.

Kookmin’s Retention of Coverage Counsel

On June 30, 2016, Kookmin retained insurance coverage counsel to render an opinion regarding coverage for the damage under the policy.

On July 27 2016, overage counsel issued an opinion letter. According to the coverage counsel, while damage to the building caused by earth movement and settlement are excluded, water damage resulting from an “accidental discharge” of water was covered. The letter noted that both AGI and WJE had agreed that there was “pre-existing, ongoing general settlement” of the building, and that while “there are a number of candidates for the ‘efficient proximate cause’ of loss,” that “both experts concur that the water leak set in motion forces that seriously exacerbated the preexisting condition of the property and likely caused new damage.”

In conclusion, coverage counsel opined that “damage to the insured apartment building attributable to the recent water line break is covered. There was undoubtedly pre-existing settlement and cracking at the insured location. To the extent the experts can reasonably segregate the repair cost between the two types of damage, then coverage would exist only for damage applicable to the pipe break.” Coverage counsel also suggested that obtaining water usage records “to verify that this leak was a sudden occurrence in the December-January time frame as opposed to a chronic condition at the property.”

Kookmin Seeks Further Expert Opinions

On October 5, 2016, Kookmin retained geotechnical engineer Ninyo & Moore.

On October 11, 2016, Ninyo & Moore visited the site and conducted subsurface exploration consisting of the “excavation, logging, and sampling pf two hand excavated test pits and four hand-angered exploratory borings around the subject buildings.” On December 6, 2016, Ninyo Moore issued a report. Ninyo & Moore’s report noted previously patched cracks in the stucco that experienced “minor re-opening.” The report also noted large cracks in the concrete slab under Unit 1, but noted that the “slab bracket were generally noted to have aged characteristics including rounded and worn edges” and they were filled with debris. The report also noted that a “topping slab/replacement slab” had been applied to the southwest bedroom floor in attempt to level the sloping floor.

In conclusion, Ninyo & Moore concluded “that the reported December 31, 2015, pipe leak did not contribute to the tilt of the building floor or the cracks in the building. The tenants of the building reportedly observed water from the leaking pipe flowing into the drainage channel property to the north of the subject site. Based on our . . . surveying around the southwest part of the site, surface drainage in the vicinity of the reported pipe leak location would tend to flow away from the building toward the south and west into the drainage channel property adjacent to the subject site. . . . This suggests that water from the leaking pipe escaped to the ground surface and flowed away from the building and that a significant amount of water did not infiltrate the subsurface soils at the location of the leak. Additionally, the tilt of the slab-ongrade is relatively consistent from the south end of the building to the north end and cracks in the building walls were observed to be widespread across the structure. . . . We did not observe indications that the distress was isolated at the location of the reported pipe leak at the southwest corner of the building. . . .”

On December 5, 2016, WJE issued a supplemental report. Using ground penetrating radar (GPR), WJE’s supplemental report noted that “GPR surveys performed in several locations throughout the exposed slab revealed that the slab is largely unreinforced, and as a result, does not have the tensile strength to resist differential movement, which results in cracking. Some areas of the slab exhibit evidence of previous repairs.” WJE’s supplemental report further noted that “there has been ongoing, general settlement of the building, towards the south and west, resulting in the observed cracking in the slab and walls of Unit 1, which will likely continue without remediation of

the conditions that are causing the settlement, and which is not a result of the December 2015 water supply line break and subsequent discharge of water.”

Based on Ninyo & Moore’s report and the supplemental report of WJE, Kookmin denied coverage to 501 East. Claim notes, however, indicated that:

  1. On July 26, 2017, Kookmin decided to extend coverage, but only to Unit 1, subject to reviewing previous water bills for the building.
  2. J.S. Held’s estimator, who reviewed water bills in the months of December 2015 and January 2016 which revealed that in December and January water usage had increased 9,500 gallons more than in previous months, opined that 9,500 gallons more “is representative of enough water to cause the settling and deformation described.”
  3. WJE opined that the water bills did not change its earlier report that pre-existing settlement of the building “was likely exacerbated as a result of the water supply line break.”
  4. J.S. Held’s estimator provided an estimate to repair Unit 1 at an estimated cost of $227,752.90, to which a colleague at J.S. Held, stated that the estimate was “more than . . . expected and quite a bit more than the Insured’s estimate, so I want to be sure before we send.”
  5. J.S. Held’s estimator explained that, because WJE had not recommended a scope of work or how to repair the damage to the building, that developing an estimate was difficult due to “unknowns.”

In the trial court, Kookmin filed a motion for summary adjudication on 501 East’s breach of covenant of good faith and fair dealing cause of action, arguing that “genuine dispute doctrine” provided a complete defense to a finding of bad faith, since its denial of 501 East’s insurance tender was based on expert opinions that the damage to the building was caused by long-term settlement and movement which was not a covered loss under the policy. The trial court agreed and 501 East appealed.

The Appeal

On appeal, 2nd District Court of Appeal explained that if a loss is “caused by more than one occurrence, including covered and not-covered events, then the insurer is liable only if the ‘efficient proximate cause’ or the ‘predominate” cause was a covered risk.” Moreover, explained the Court, where an insurer denies an insured’s tender, and “there is a genuine issue as to the insurer’s liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute.”

This, explained the Court of Appeals, is the “genuine dispute” doctrine, which applies where an insurer denies a claim based on the opinions of experts. However, explained the Court, the “genuine dispute” doctrine “will not automatically insulate an insurer from a bad faith claim based on a biased investigation” and “summary judgment on a bad faith claim must be denied where the evidence shows ‘the insurer dishonestly selected its experts[,] the insurer’ experts were unreasonable[,] [or] the insurer failed to conduct a thorough investigation.”

Here, however, held the Court of Appeals, although Kookmin’s experts had originally opined that the water main break was likely the “predominate” cause of the building’s subsidence, each of those initial opinions suggested that further investigation might be necessary, and as a result of subsequent investigation the opinions of Kookmin’s experts had changed from the water main break being the “predominate” cause of the building’s subsidence to long-term settlement as the “predominate” cause.  “As the trial court aptly stated,” held the Court, “[I]nitial opinions are often superseded by further investigation.”


This was a hard pill to swallow for the insured. Particularly, since the claim file included documents that could suggest that the insurer was conducting further investigations in the hope of finding information that would offset earlier expert opinions that coverage was appropriate. However, as the Court of Appeal explained, under the “genuine dispute” doctrine, a carrier’s denial based on expert opinion will be upheld unless there is evidence that the insurer dishonestly selected its experts, its experts took unreasonable positions, or the insurer failed to conduct a thorough investigation, none of which were met in this circumstance.

Resulting-Loss Exception Does Not Restore Coverage For Faulty Workmanship

Larry P. Schiffer | Insurance and Reinsurance Disputes Blog

The faulty workmanship exclusion precludes coverage where the claimed damage is caused by or resulting from an act, error or omission (negligent or not) that relates to the design, specifications, construction, materials or workmanship.  Can coverage nevertheless be restored by the resulting-loss exception to the exclusion?  The Tenth Circuit recently addressed this question.

In Rocky Mountain Prestress, LLC v. Liberty Mutual Fire Insurance Co., No. 19-1169 (10th Cir. Jun. 2, 2020), a subcontractor sought insurance coverage under the property owners’ builders risk policy for the cost of regrouting concrete pillars and columns that the subcontractor had installed.  The insurer denied coverage on multiple grounds, including that the loss was excluded by the policy’s exclusion for faulty or defective workmanship.  The subcontractor brought this action seeking damages and coverage.  The district court granted summary judgment to the insurance company.  On appeal, the Tenth Circuit affirmed.

In affirming, the circuit court rejected the subcontractor’s restoration of coverage theory.  Essentially, the subcontractor argued that because the faulty workmanship exclusion had an exception, that exception restored coverage because of the necessary ambiguity.  The exception provided that “if an act, defect, error or omission as described above results in a covered peril, [the insurer] covers the loss or damage caused by that covered peril.”  Basically, the subcontractor was arguing that the resulting-loss exception restored coverage because covered peril is defined as a risk of loss or damage that is not caused or limited by an excluded peril.  This, according to the subcontractor, made the provision circular and ambiguous and, therefore, the provision should be construed in favor of coverage.

The court pointed to many other court decisions construing similar language that concluded the resulting-loss exception restored coverage only when the excluded peril leads to a loss from an independent non-excluded peril (citations omitted).  In other words, there has to be two causes of a loss, one excluded and one not excluded. One example is where acts taken during construction cause a fire.  The fire is a covered peril and, therefore, there is coverage.  But when there is only one cause of the loss–in this case the faulty workmanship–the exclusion applies and the resulting-loss exception does not restore coverage.

As the circuit court noted, “the exception cannot be allowed to swallow the exclusion.” The court concluded that the “resulting-loss exception to a defective-workmanship exclusion does not provide coverage for the costs of repairing or replacing defectively designed or constructed parts of a structure; rather, the exception only restores coverage for damages sustained when the defective workmanship becomes the cause of additional, separate damage.”

Sanctions Award Against Pro Se Plaintiff Upheld

Tred R. Eyerly | Insurance Law Hawaii

    The plaintiff’s failure to timely name an expert witness in his bad faith action led to sanctions being awarded against him in favor of the insurer. Black v. Fireman’s Fund Ins. Co., 2020 Cal. App. Unpub. LEXIS 2477 (Cal. Ct. App. April 23, 2020).

    After Black’s claim was denied by Fireman’s Fund, he communicated with company through letters, emails and phone conversations. Black complained that Fireman’s Fund handled his claim improperly, engaged in illegal activities and had ties to the Nazi regime in Germany. Fireman’s Fund sued Black alleging that his communications amounted to civil extortion, interference with contractual relations, interference with prospective economic advantage, and unfair business practices. Fireman’s Fund eventually dismissed its complaint without prejudice. 

    Black, however, had filed a cross-complaint in which he asserted a number of claims, including bad faith. Black designated attorney Randy Hess as an expert on insurance claims. Over the next year and a half, Fireman’s Fund repeatedly attempted to take Hess’s deposition. In March 2018, Fireman’s Fund moved to compel the deposition or exclude the testimony. The court set a July 20, 2018 deadline for the disposition to take place or else the testimony would be excluded. 

    In mid-July 2018, a new law firm entered its appearance for Black, and asked to postpone Hess’s deposition to July 20. Fireman’s Fund agreed. Then the firm asked for a 45-day extension for Black to locate and designate a new expert to replace Hess. Fireman’s Fund declined. Black moved ex parte to extend the expert discovery period. The court denied the motion. 

    Black filed another motion, seeking “a short continuance to allow a further expert designation and expert deposition.” Fireman’s Fund opposed the motion and sought $7,862.50 in sanctions. The court denied the motion, finding that Black was given 18 months’ notice of Hess’s reluctance or refusal to act as an expert. The court also awarded sanctions. 

    The Court of Appeals affirmed. In April 2017, early in the discovery period, Hess told Black that he would not act as an expert or appear at a deposition unless he was paid. A year later, Hess told Black he had withdrawn as an expert because he had not been paid. 

    Between April 2017 and July 2018, Black could have reached an agreement with Hess or found another expert. He failed to do either, forcing Fireman’s Fund to spend additional time and money to pursue and protect its discovery interests. Sanctions were warranted because in his motion, Black did not identify an additional expert witness, making the motion little more than another effort to delay the proceeding.