Insured’s Leaky “Abrupt” Interpretation of All-Risk Insurance Collapses Under Eleventh Circuit Scrutiny

D. Barret Broussard | Property Casualty Focus

In S.O. Beach Corp. v. Great American Insurance Company of New York, No. 18-1967 (11th Cir. Oct. 31, 2019), the Eleventh Circuit affirmed the district court’s grant of summary judgment in full to the insurer, finding there was no ambiguity in the all-risk policy’s definition of a “collapse” as “an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its intended purpose” (emphasis added).

The case involved the caving in of several floors of the insured’s building, which the insured claimed was caused by water damage from a leaking pipe that deteriorated the floors’ sill plates, causing a “collapse.”

Under the all-risk policy, all fortuitous loss or damage would be covered unless there is fraud, willful misconduct, or a delineated exception. One such exception was for a “collapse,” which, as set forth in the policy, would only be covered when caused by a specified cause of loss, including hidden decay.

The district court granted summary judgment in full to the insurer on the basis that the insurer produced evidence that the collapse of the three floors was gradual, rather than abrupt, and therefore the loss was excluded under the policy. On appeal, the insured argued that the collapse provisions were ambiguous and should be construed against the insurer — specifically, the policy allegedly defined a collapse as abrupt while also providing that gradual decay may qualify as a collapse.

The Eleventh Circuit disagreed with the insured, finding that “collapse” was not ambiguous because causation and occurrence are not the same. While a collapse’s causation may be something gradual or abrupt, the question is whether the collapse (i.e., the event of occurrence) itself is abrupt. Therefore, because the insured failed to produce any evidence that the collapse was abrupt, the Eleventh Circuit affirmed the district court’s decision, effectively ending this campaign to carve out extra-contractual caving coverage.

Insurer Awarded Summary Judgment on Collapse Claim

Tred R. Eyerly | Insurance Law Hawaii

   The Eleventh Circuit agreed with the insurer that there was no coverage for a collapse under the policy. S.O. Beach Corp. v. Great Am. Ins. Co.,2019 U.S. App. LEXIS 32569 (11th Cir. Oct. 31, 2019).

    S.O. Beach Corporation and Larios on the Beach, Inc (“Larios”) owned a building in Miami Beach. Sometime between march 4, 2012 and April 10, 2013, Larios discovered that parts of the first three floors of its building had caved in to varying degrees. The primary cause of the collapse was a wooden support beam that had severely rotted. Larios found a broken pipe that was gushing water onto the beam, causing deterioration. Larios was forced to evacuate the building until the damage was repaired. 

    Larios submitted a claim under its all-risk policy with Great American. The policy required that a collapse an “abrupt falling down or caving in of a building or any part of a building” to be covered. Before a coverage decision was made, Larios sued for breach of contract. The parties filed cross-motions for summary judgment. The district court granted Great American’s motion and denied Larios’ motion. 

    On appeal, the court noted that Larios carried its initial burden under the all-risk policy of showing that a loss – the purported collapse – happened while the policy was in effect. The burden shifted to Great American to prove that the cause of the purported collapse was excluded under the terms of the policy. Great American produced documentary evidence along with testimony from expert witnesses and fact witnesses showing that the purported collapse was gradual, not abrupt. 

    Therefore, the burden shifted back to Larios to prove that an exception to the exclusion applied. Larios argued the policy was ambiguous. But the court found there was no conflict between explicitly covering collapses that resulted from a gradual cause like decay and limiting coverage to collapses that were abrupt. Decay was just one of over a dozen covered causes listed in the policy’s collapse coverage provisions. Some of the causes were abrupt, like “lightning” or an “explosion.” Others were more gradual, like “decay” or “water damage.” But regardless of whether the cause of a collapse was gradual or abrupt, the collapse itself was covered only if it was abrupt. Larios’ contention that the collapse provisions were ambiguous was rejected and the district court was affirmed. 

Illinois Appellate Court Clarifies What Is and Is Not an “Occurrence” in the Construction Defect Context

Marianne Bradley and Anthony Miscioscia | White and Williams LLP

On December 31, 2019, the First District Illinois Appellate Court issued its decision in Owners Insurance Company v. Precision Painting & Decorating Corporation, clarifying what does and does not constitute “property damage” caused by an “occurrence” in the construction defect context. 2019 IL App. (1st) 190926-U, 2019 Ill. App. Unpub. Lexis 2425.

The underlying case involved allegations of negligence, consumer fraud and breach of contract. In particular, the underlying homeowner claimants alleged that Precision Painting & Decorating Corporation (Precision), whom the homeowners had hired to perform certain exterior paintwork at their home, failed to conform to U.S. Environmental Protection Agency (EPA) regulations with respect to the presence of lead-based paint. In its contract, Precision had agreed to take special care with respect to containing lead dust while working on the homeowners’ property. Despite having agreed to do so, Precision (allegedly) took almost no precautions, resulting in significant contamination to the interior of the home.

Owners Insurance Company (Owners) had issued Precision a CGL policy, providing coverage for “property damage” caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Precision tendered its defense to Owners. Owners filed a DJ Action arguing that it owed no duty to defend as the homeowners had failed to allege any “property damage” caused by an “occurrence.” Specifically, Owners argued that, under Illinois law, damages resulting from an insured’s breach of contract are not recoverable under a CGL policy.

The trial court agreed, finding that no “accident” or “occurrence” was alleged. The trial court observed that the homeowners’ contract with Precision had specifically provided for various EPA-required precautions with respect to the use of lead-based paint. The trial court concluded that Precision’s failure to implement those precautions was not an “accident,” which in the trial court’s view, referred to something “unforeseen or untoward or disastrous.” Instead, the trial court characterized Precision’s conduct as nothing more than a foreseeable breach of contract.

Precision appealed, and the Appellate Court reversed and remanded. The Appellate Court found that the trial court’s focus on foreseeability was misplaced. It observed that: “[i]nstead of focusing on the foreseeability of the event itself (the release of lead-based particles), or even generally the damages (lead contamination),” Illinois case law instructs courts “to focus on what, specifically, was damaged, and whether the remediation of that damage fits within the general purpose of a CGL policy.” Id. at *12 (emphasis added). The Appellate Court emphasized that: “when the underlying lawsuit against the insured contractor alleges damages beyond repair and replacement, and beyond damage to other parts of the same project over which that contractor was responsible, those additional damages are deemed to be the result of an ‘accident.’” Id. at *14.

The Appellate Court was careful to contrast these so-called “beyond” damages with damages arising out of faulty workmanship, alone. It reiterated that it is well-settled under Illinois law that “there is no occurrence when a [contractor’s] defective workmanship necessitates removing and repairing work.” Id. at *14. This is true even when a contractor’s faulty workmanship results in consequential damages to any other part of the project for which the contractor has responsibility, as it remains part of the contractor’s work product. However, where damages extend beyond the scope of a contractor’s work product, the court concluded that those damages are more properly classified as unforeseeable accidents, and thus “occurrences.”

The Appellate Court found that Precision’s “work product” was limited to the exterior of plaintiffs’ house. Thus, any damage to the interior of the home, as well as to the surrounding land, was outside the scope of Precision’s project. Because plaintiffs had alleged damages “beyond repair and replacement, and beyond damage to other parts of the same project over which [Precision] was responsible,” plaintiffs had satisfactorily alleged “property damage” caused by an “occurrence.” The Appellate Court reversed and remanded in accordance with those findings.

Ohio Appellate Court Rejects Policyholder’s Notice-Prejudice and Continuity of Coverage Arguments

Andrew Daechsel | Property Casualty Focus

Claims-made liability insurance policies typically require the policyholder to notify the insurer of a claim within a set amount of time — typically during the policy period, or within a specific period of time after the end of the policy period — to obtain coverage. When policyholders fail to do so, they often argue that the “notice-prejudice rule” should apply, such that the insurer can only deny coverage if it was prejudiced by the policyholder’s untimely notice. Additionally, policyholders sometimes argue that their failure to provide timely notice should be excused if they renewed the subject policy and thus had an expectation of continuous coverage. In ISCO Industries, Inc. v. Great American Insurance Co., Ohio’s First District Court of Appeals, applying Ohio law, rejected both of these arguments.

Great American’s Claims-Made Liability Policy

The case involved a claims-made liability insurance policy that Great American issued to ISCO for the policy period from March 19, 2013, to March 19, 2014. The policy provided defense and indemnity coverage for certain “claims,” including lawsuits, first made against ISCO during the policy period and reported to Great American “as soon as practicable from the date the General Counsel, Risk Manager, or person with equivalent responsibility has knowledge of the Claim, and in no event later than ninety (90) days after the end of the Policy Period.”

Underlying Lawsuit Filed Against ISCO

In February 2014, during the policy period, a third-party company filed a lawsuit against ISCO, but ISCO did not provide notice of the lawsuit to Great American until August 2015, well after the notice deadline set forth in the policy. Great American subsequently denied coverage for the lawsuit due to ISCO’s failure to provide timely notice. Following this denial of coverage, ISCO settled the underlying lawsuit.

ISCO’s Coverage Lawsuit Against Great American Is Dismissed With Prejudice

After settling the underlying lawsuit, ISCO sued Great American for breach of contract, alleging that Great American had breached its duty to defend ISCO against the underlying lawsuit and to indemnify ISCO for the amount it paid to settle the underlying lawsuit. Great American moved to dismiss the lawsuit with prejudice, arguing that it was not obligated to provide coverage because ISCO failed to provide notice of the underlying lawsuit within 90 days after the end of the policy period, as required by the policy. The trial court granted the motion and dismissed the lawsuit with prejudice.

Appellate Court Affirms Dismissal With Prejudice

ISCO appealed the trial court’s dismissal with prejudice, and the appellate court affirmed.

On appeal, ISCO argued that the dismissal was improper because the “notice-prejudice rule” applied to the policy such that Great American could only deny coverage based on late notice if it was prejudice by the late notice. The appellate court rejected this argument, holding that the notice-prejudice rule was inapplicable to Great American’s policy. The appellate court acknowledged that, in Ferrando v. Auto-Owners Mutual Insurance Co., 781 N.E.2d 927 (Ohio 2002), the Ohio Supreme Court held that the notice-prejudice rule applied to an uninsured motorist policy that required the insured to provide “prompt notice” of claims. However, the appellate court found that Ferrando was inapplicable because Great American’s policy was a directors and officers liability policy (not an uninsured motorist policy like in Ferrando) and Great American’s policy required the insured to provide notice of claims by a specific deadline, within 90 days after the policy period (not just “prompt notice” like the policy in Ferrando).

ISCO also argued that the trial court’s dismissal was improper because ISCO had renewed the policy and thus had an expectation of continuous and seamless coverage, so long as it provided notice of the underlying lawsuit within a reasonable time. The appellate court rejected this argument because the plain language of the policy required ISCO to report a claim within 90 days after the end of the policy period, not just within a reasonable time. The appellate court noted, “It is well-established in Ohio, and indeed universally, that contracts, including insurance policies, ‘are to be interpreted so as to carry out the intent of the parties, as that intent is evidenced by the contractual language.’”

Certificates Of Insurance May Confer Coverage

Brett M. Hill | Construction News and Notes

Certificates of insurance are a common tool used in the construction industry to provide proof of insurance coverage. The legal effect of certificates of insurance has been a source of debate in Washington. Insurance companies have argued that certificates of insurance are “informational only” and do not alter the terms of the applicable insurance policy. Insurance companies have taken the position that if a certificate of insurance provides for coverage that is different than what the policy provides, the insurance company is only bound to provide what the policy provides.

The Washington State Supreme Court weighed in on this issue in an opinion issued on October 10, 2019, and held that an insurance company is bound by the terms of its certificate of insurance – even if it conflicts with the policy. In T-Mobile USA, Inc. v. Selective Insurance Company of America, Selective’s agent issued a certificate of insurance to “T-Mobile USA, Inc., its subsidiaries and affiliates” and stated that those entities were “included as additional insured” under the policy. The certificate of insurance was issued by Selective’s agent when T-Mobile’s contractor purchased an insurance policy from Selective for a cell tower project. The contractor’s agreement for the project was with T-Mobile Northeast – not T-Mobile USA. The contract between T-Mobile Northeast and the contractor stated that T-Mobile Northeast would be an additional insured. The Selective insurance policy stated that any third party would automatically be an additional insured if the contractor was required to name the third party as an additional insured. The contract did not provide that T-Mobile USA would be an additional insured.

A property owner damaged by the cell tower project sued T-Mobile USA. T-Mobile USA tendered the claim to Selective. Selective denied the claim because the contract between the contractor and T-Mobile Northeast did not require the contractor to name T-Mobile USA as an additional insured.

T-Mobile USA sued Selective and argued that Selective was bound by the terms of its certificate of insurance issued by its agent, which stated that T-Mobile USA was an additional insured. Selective argued that the certificate of insurance did not confer coverage and it was only bound to provide coverage as required under the policy. Selective also pointed to various general disclaimers in the certificate of insurance that the certificate does not amend, extend, or alter coverage under the policy and that the certificate does not confer rights to any certificate holder that is contrary to the policy.

The Washington State Supreme Court held that Selective was bound by the actions of its authorized agent. Its agent had apparent authority to issue the certificate of insurance. The general disclaimers in the certificate of insurance did not supersede the specific language in the certificate that conferred additional insured coverage to T-Mobile USA specifically.

Comment: This case is a victory for contractors and owners in Washington. Most contractors and owners have been relying upon certificates of insurance as proof of insurance. This case provides some certainty to owners and contractors – based on the facts presented in this case – that the insurance company may be bound to provide coverages provided in the certificate of insurance even if it is different than the terms of the insurance policy.  It is important to note that in this case the agent was delegated authority by Selective to execute “policies” and “certificates of insurance.”  Contractors and Owners should still, in best practices, confirm coverage under the applicable insurance policy.