Georgia Court Finds Contamination Clause Ambiguous in Meth Lab Claim

Ashley Harris | Property Insurance Coverage Law Blog | October 28, 2018

A federal court in the Northern District of Georgia recently found that State Farm’s contamination clause was ambiguous regarding its application to a meth lab claim.

In Cochran v. State Farm Fire & Casualty Company,1 the Plaintiffs owned a rental property in Atlanta, Georgia. While the rental dwelling policy was in effect, the Drug Enforcement Administration executed a search warrant at the rental property, seizing a clandestine methamphetamine laboratory with an estimated yield of 260 kilograms of crystal methamphetamine. The agents processed approximately 200 gallons of hazardous liquid methamphetamine solution, approximately seven pounds of finished crystal methamphetamine, and approximately two additional gallons of liquid methamphetamine in a pot on a propone stove next to the kitchen.

Following the raid, the DEA informed Plaintiffs that the property was not safe to enter due to the presence of toxic and/or hazardous materials because of the meth lab. Testing revealed methamphetamine levels well over the allowable exposure limit mandated by the EPA, thus the property was uninhabitable following the loss.

Plaintiffs immediately submitted a claim to State Farm for the damages to their rental property. State Farm denied the claim based upon its contention that the hazardous methamphetamine residue constitutes “contamination” within the meaning of the policy, and that, therefore, the loss was not covered.

Plaintiffs filed suit, contending that the loss was a result of vandalism, a covered peril under the policy. On cross-motions for summary judgment, the issue before the trial court was whether the loss resulted from “vandalism” or “contamination.” The court found that the language of the policy regarding coverage for the loss was ambiguous.

Even after applying the canons of construction, the court was unable to resolve the ambiguity as a matter of law and left the question of coverage to the jury.

The Order also highlights that a majority of courts considering similar policy provisions in relation to both meth lab and marijuana grow operations have found the contamination clause does not apply to preclude coverage.

While this federal trial court order did not resolve the issue for the State of Georgia, this order, along with out-of-state appellate opinions cited in the trial court order, provide strong persuasive arguments for policyholders in this unfortunate situation.
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1 Cochran v. State Farm Fire & Cas. Co., No. 1:17-cv-00984 (N.D. Ga. August 22, 2018).

“Abrupt Falling Down of Building or Part of Building” as Definition of Collapse Found Ambiguous

Tred R. Eyerly | Insurance Law Hawaii | October 10, 2018

The federal district court predicted the California Supreme Court would find the definition of collapse, calling for the abrupt falling down or caving in of a building or part of a building, to be ambiguous. Hoban v. Nova Cas. Co., 2018 U.S. Dist. LEXIS 139116 (N.D. Cal. Aug. 15, 2018).

The insureds’ bowling center had two roof trusses that helped support the roof. The truss failures caused the building ceiling, overhead monitors, and disco ball to drop approximately six to ten inches, and also caused ceiling tiles and a layer of insulation to fall from the ceiling. A general contractor, named Tom Powers, and the county building inspector inspected the damage. The building inspector immediately ordered the business closed until necessary repairs could be completed. Powers was hired to shore up the roof support system to prevent a complete collapse. Thereafter, the insureds were able to re-open the bowling alley.

The insureds’ policy with Nova covered an abrupt collapse. This was defined as the 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 could not be occupied for its intended purpose. After hiring a structural engineer, Nova denied coverage, deciding the roof did not collapse and the building was still standing.

The insureds sued and motions for summary judgment were filed by both parties. There were no California cases interpreting the exact language of the policy on collapse. The court therefore determined that the policy language was ambiguous because there was more than one reasonable interpretation of its intended meaning. One reasonable meaning of “caving in” was Nova’s understanding that the building must completely collapse to the ground. However, a building could “cav[e] in . . . with the result that the building . . . cannot be occupied for its intended purpose” by having its roof or ceiling fall an appreciable distance, even if the building as a whole did not completely collapse to the ground.

Further, coverage that applied to the “abrupt” collapse of either “a building” or “any part of a building”  suggested the policy was intended to cover a partial collapse of part of the building, so long as it occurred abruptly, not only a total or complete collapse. Moreover, specifying that the collapse must render the building or part of the building so that it “cannot be occupied for its intended purpose” would be unnecessary and redundant if the policy required the building or any part of a building to have collapsed to the ground.

Because the policy language was ambiguous, California law required it be interpreted in favor of the insured. Therefore, the court granted the insureds’ motion for summary judgment.

Nova also moved for summary judgment on the insureds’ claim for breach of the covenant of good faith and fair dealing. The court granted Nova’s motion because its decision that there was no coverage for collapse was based on a genuine dispute about coverage.

Narrowly Interpreted Exclusion Leads to Coverage

Marie Laur | Property Insurance Coverage Law Blog | October 20, 2018

Insurance policies are to be interpreted in the light most favorable to the insured. Narrowly interpreting policy language can help find coverage for an insured, as was the case in Tuscarora Wayne Insurance Company v. Hebron.1

In Tuscarora, a Pennsylvania appellate court reversed a trial court’s decision and found that an insurance policy exclusion for “ongoing business operations” did not bar coverage for a fire loss. Hebron, a vehicle dismantling facility, suffered a loss when a fire occurred when one of Hebron’s truck drivers was pumping gas into a truck on the loading dock outside the facility. The fire damaged the facility, and Hebron filed a claim under its commercial liability policy issued by Tuscarora Wayne Insurance Company (“Tuscarora”).

Tuscarora denied coverage for the fire loss, citing the policy exclusion that included, “property damage arising out of [vehicle dismantling], regardless of whether such operations are conducted by you or on your behalf or whether the operations are conducted for yourself or for others.” However, vehicle dismantling was not defined by the policy.

Tuscarora sought a declaration from the court that it was not liable for the damages resulting from the fire because of the policy exclusion. The trial court granted summary judgment for Tuscarora. The trial court reasoned that refueling the truck used to transport vehicles to Hebron’s facility to be dismantled was “incidental to the vehicle dismantling business.” Therefore, the claim was subject to the “ongoing business operations” exclusion.

Hebron appealed, and the appellate court reversed the trial court’s ruling. The appellate court found that the trial court confused the facts of the case; the fuel from the dismantled vehicles was pumped into holding tanks on the loading dock and was then pumped into another holding tank or Hebron vehicles. The appellate court also found that the trial court’s ruling did not interpret the policy in favor of the insured. Since the fire did not occur during vehicle dismantling as stated in the exclusion, the appellate court ruled that Tuscarora was required to defend and indemnify Hebron for the loss under the terms of the policy.
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1 Tuscarora Wayne Ins. Co. v. Hebron, Inc., No. 1591 MDA 2017, 2018 PA Super 270 (Pa. Super. Ct. Oct. 3, 2018).

Despite Modern Trend, Ohio Supreme Court Does Not Reconsider Prior Precedent – Finds Inadvertant Defective Work by Subcontractor can Never be a Fortuitous ‘Occurrence’

Clifford Shapiro | Barnes & Thornburg LLP | October 15, 2018

The Ohio Supreme Court ruled on Oct. 9, 2018, that property damage caused by a subcontractor’s faulty workmanship can never be an accidental “occurrence” within the meaning of the Commercial General Liability (CGL) insurance policy, and is therefore not covered. Ohio Northern University v. Charles Construction Services Inc., Case No. 2017-0514 (2018). In reaching this conclusion, Ohio’s highest court followed its own precedent instead of applying the reasoning used by the vast majority of courts that have reached the opposite conclusion in recent years.

Ohio Northern University (ONU) hired Charles Construction Services to oversee construction of an $8 million University Inn and Conference Center. Charles Construction obtained a general liability policy from Cincinnati Insurance Company. After the project was completed, the University discovered extensive water infiltration and other damage to the building. The University sued Charles Construction for breach of contract, and Charles Services filed third-party claims against several subcontractors. Cincinnati initially agreed to defend Charles Construction in the litigation under a reservation of its rights, and then obtained a trial court ruling finding that it had no duty to defend. The Appellate Court reversed, and the Ohio Supreme Court agreed to review the Appellate Court’s decision at Cincinnati’s request.

The Ohio Supreme Court reversed, finding that Cincinnati owed no duty to defend or to indemnify Charles Construction. The analysis in the decision is based entirely on the court’s 2012 decision in Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St.3d 476, 979 N.E.2d 269 (2012). In that case, the court held that “property damage caused by a contractor’s own faulty work” is not “fortuitous” and therefore is not an accidental “occurrence.”

The court viewed the issue in Charles Construction to be “nearly identical,” and therefore applied its reasoning in Custom Agri. Using that analysis, the court held that: “Property damage caused by a subcontractor’s faulty work is not an ‘occurrence’ under a CGL policy because it cannot be deemed fortuitous. Hence, the insurer is not required to defend the CGL policy holder against suit by the property owner or indemnify the insured against any damage caused by the insured’s subcontractor.”

The Ohio Supreme Court acknowledged that its decision is contrary to several recent decisions. Those decisions include the Tenth Circuit’s decision in Black & Veatch Corp. v. Aspen Insurance (UK) Ltd., 882 F.3d 952 (10th Cir. 2018) (predicting that the highest New York court would hold that resulting damage from faulty subcontractor work constitutes an “occurrence”), the New Jersey Supreme Court decision that changed New Jersey law in Cypress Point v. Adria Towers,2016 WL 4131662 (2016) (holding that the term “accident” in the CGL policy encompasses unintended and unexpected harm caused by negligent conduct, and that consequential harm caused by negligent work is an accidental “occurrence”), and the Iowa Supreme Court decision that changed Iowa law in National Surety Corp. v. Westlake Investments, 880 N.W.2d 724 (Iowa 2016) (discussing in detail the history and evolution of the CGL policy to change and clarify Iowa law by holding that “defective workmanship by an insured’s subcontractor may constitute an occurrence under the modern standard-form CGL policy containing a subcontractor exception to the ‘your work’ exclusion.”)

The decision issued by Ohio’s highest court does not reconsider the court’s reasoning in Custom Agri or address the legal analysis that is now used by most other courts that have carefully considered (and, in several cases, reconsidered) this issue in recent years. Instead, the Ohio Supreme Court applied its prior decision in Custom Agri without discussion of the important changes to the policy terms that most courts have concluded require a different conclusion. According to the court: “Regardless of any trend in the law, we must look to the plain and ordinary meaning of the language used in the CGL policy before us.” The court added: “When the language of a written contract is clear, we may look no further than the writing itself to find the intent of the parties.”

Contrary to the court’s explanation, its analysis in Custom Agri, and now Charles Construction, actually fails to apply the terms of the modern day CGL insurance policy. Instead, these decisions apply an outdated judicial gloss not found in the insurance policy itself to conclude that inadvertent faulty workmanship can never be “fortuitous” or “accidental.” This reasoning is rooted in analysis that was used by courts and commentators before the CGL policy terms were materially changed, including in 1986. Those changes modified the exclusions to clarify that the CGL policy provides coverage for certain kinds of property damage caused by inadvertent faulty workmanship. In other words, the coverage grant in the modern day CGL policy specifically anticipates that coverage can exist for property damage caused the accidental “occurrence” of faulty workmanship. The CGL policy exclusions then define and narrow the scope of the insurance coverage that is actually provided when property damage is caused by faulty workmanship. In particular, due to the “subcontractor exception” in the “your work” exclusion, the modern day CGL policy specifically anticipates and provides insurance coverage for a general contractor when property damage is caused by the faulty work of its subcontractors. This is especially true where (as in Charles Construction) the property damage arises after operations are complete and the damage is to something other than the subcontractor’s defective work itself.

The Ohio Supreme Court’s decision is contrary to the clear trend in the law on this issue, a trend that is based on more careful analysis of the current CGL policy terms. It is most unfortunate that the Ohio Supreme Court elected not to use the Charles Construction case as an opportunity to reconsider and to correct the faulty reasoning and analysis in the court’s 2012 Custom Agri decision. For more analysis of the important “occurrence” issue, please see the 50 state survey of case law discussing this issue that was prepared by the Barnes & Thornburg Construction Law Practice Group. It can be accessed here.

It’s Rain, Not Flood, Why Isn’t My Water Damage Covered?

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | October 13, 2018

The photos from Hurricane Michael show catastrophic loss from not only the storm surge, up to fourteen feet in some areas, but from winds and rain as well. For those that live far enough inland where surge and flood was not an issue, but still sustained water damage from rain, you may think your homeowners policy will cover you. There is however an exclusion in most policies, commonly called the “wind driven rain exclusion” that insurers will use to disclaim coverage.

The “wind driven rain” exclusion will exclude or limit water damage to the interior of a building unless the wind caused an opening in the envelope of the building, leading to an entry point for the water. Common policy language provides:

We will not pay for any loss that is a consequence of loss or damage as described and limited in this section…The interior of any building or structure, or to personal property in the building or structure, caused by or resulting from rain, snow, sleet, ice, sand or dust, whether driving by wind or not, unless the building or structure first sustains damage from a covered cause of loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enters.

Obviously, you’re not leaving your windows open during a large storm, so you may think it’s obvious that the water entered via damage from a covered cause of loss. The most common denial letter I see for water intrusion, once the above wind driven rain exclusion is cited, is one for lack of maintenance, or faulty workmanship. The insurance companies are agreeing to insure the loss if the building first sustains damage from a covered loss, then states there’s no way the major windstorm caused this damage, this was obviously from an: old roof, roof that had reached its life span, faulting seals/installation/old windows doors, poor workmanship upon original installation of windows/roof/doors, and my favorite—lack of maintenance. These reasons are generally not covered causes of loss under the policy, so the insurer adds these to the denial letter in order to deny coverage via wind driven rain exclusion.

As always, read your policy to know what types of damages you are insured against. If you’re making renovations or repairs to your home, keep records of what was done when, perhaps memorialize with photographs the finished product so if you are ever faced with a denial letter for ‘lack of maintenance’ you can show definitively the property was well maintained. And don’t be afraid to ask your agent what the coverages and exclusions mean in your policy.