PA Superior Court Provides Clarification on Definition of CGL “Occurrence” When Property Damage Is Caused by Faulty Building Conditions

Konrad Krebs and Anthony Miscioscia | White and Williams | July 25, 2019

The standard for an “occurrence” under a commercial general liability (CGL) insurance policy has been addressed on several occasions by Pennsylvania courts when an insured has allegedly performed faulty workmanship on a construction project. Specifically, in Pennsylvania, a claim for damages arising from an insured’s performance of faulty workmanship pursuant to a construction contract, where the only damage is to property supplied by the insured or worked on by the insured, does not constitute an “occurrence” under the standard commercial general liability insurance policy definition. But what about the circumstance when the insured has failed to perform contractual duties where the claim is for property damage to property not supplied by the insured or unrelated to the service the insured contracted to provide? The Pennsylvania Superior Court recently addressed this question in Pennsylvania Manufacturers Indemnity Co. v. Pottstown Industrial Complex LP, No. 3489 EDA 2018, 2019 Pa. Super. 223, 2019 Pa. Super. LEXIS 729* (Pa. Super. 2019).

Pottstown Industrial Complex arose out of an underlying dispute between a landlord and a commercial tenant who had leased space to store its product inventory. The tenant alleged that the landlord was responsible under the lease for keeping the roof “in serviceable condition in repair.” Notwithstanding this responsibility, the tenant alleged that the landlord failed to properly maintain and repair the roof, resulting in leaks and flooding during four separate rainstorms, destroying over $700,000 in inventory. The tenant specifically alleged that the floods were caused by poor caulking of the roof, gaps and separations in the roofing membrane, undersized drain openings, and accumulated debris and clogged drains.

The insurer filed a declaratory judgment action, seeking a determination that there was no coverage under a commercial general liability policy issued to the landlord. Following a motion for judgment on the pleadings, the trial court entered an order in favor of the insurer, holding that allegations of inadequate roof repairs were claims for faulty workmanship and were not covered under Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006) and Millers Capital Insurance Co. v. Gambone Brothers Development Co., 941 A.2d 706 (Pa. Super. 2007).

In its opinion, the Superior Court reversed the decision of the trial court, holding that the tenant had alleged a covered “occurrence” under the commercial general liability policy.[1] The Superior Court noted that Kvaerner and Gambone only precluded the finding of an “occurrence” where a claim is for damage to property supplied by the insured, where the only property damage is the product or property that the insured supplied or on which it worked, or where the damages sought are for the insured’s failure to deliver the product or perform the service it contracted to provide. The Superior Court distinguished Pottstown Industrial Complex from Kvaerner and Gambone on the grounds that those cases only alleged damage to the property that the insured had worked on or supplied, while the Pottstown Industrial Complex underlying plaintiffs sought to recover for damage to their own property, stored on the ground of the insured’s facility, rather than damage to the insured’s faulty roof. The Superior Court held that this interpretation of the term “occurrence” was consistent with Kvaerner’s rationale that the term “occurrence” was not to be construed to “convert [a commercial and general liability policy] into a performance bond,” but rather, to provide insurance for the risk of “damage the insured causes to another person’s property.”

Substantial Damage, Substantial Structural Damage, Wind Damage, Flood Damage…. Damage Anyway!

Deborah Trotter | Property Insurance Coverage Law Blog | June 27, 2019

Hurricane Michael has left a familiar mark on the Florida Panhandle. Much like Hurricanes Katrina and Ike, Hurricane Michael brought devasting winds followed by wind and flooding and more wind. Battered homes and businesses are assessed in the aftermath in an attempt to determine the extent and cause of damage resulting from the multiple perils associated with a hurricane. This has proven to be no easy task after a major hurricane.

Typically, the first insurance adjusters on the ground in the aftermath of a hurricane are National Flood Insurance Program (NFIP) authorized adjusters. When there is potential of “substantial damage” to the insured building due directly from flood, including non-covered flood damage, the adjuster completes an Adjuster Preliminary Damage Assessment (APDA) form.1 The National Flood Insurance Claim Manual (Claim Manual) cites 44 C.F.R. § 59.1 (2018) in defining “substantial damage”:2

Substantial damage is damage from any origin where the cost to repair generally equals or exceeds 50 percent of the market value of the building at the time of the flood. The adjuster should know that some communities have adopted a percentage threshold less than 50 percent. For the purpose of claim handling, the adjuster should complete and submit an APDA when the estimated cost to repair flood damage approaches or exceeds 50 percent of the RCV of building.

As noted in the Claim Manual, communities may adopt a lesser threshold. Bay County Builder Services has prepared a Substantial Structural Damage Information Packet (Packet) for builders and residents seeking additional information, as well as a damage assessment. Just a quick look through the Packet demonstrates the difficulty and the need for an expert to determine the extent and cause of damage and more so, if repair is an option, the proper approach or repair method.

The Packet includes a Job Aid3 published by FEMA to assist in understanding “substantial structural damage” as it differs from “substantial damage” and how it relates to repairs:

How SSD Relates to Repairs

The IEBC, at minimum, requires any damage to be repaired by restoring it to the pre-damage condition (Sections 404.1 or 601.1). In some cases, the code requires not only repair of the damage, but also improvement of the building beyond its pre-damage condition. With respect to natural hazards, the IEBC “triggers” such improvements when damage is classified as either Substantial Damage or Substantial Structural Damage.

● Substantial Damage (SD), defined in terms of repair cost, requires the entire structure to be retrofitted to meet the requirements for new flood-resistant construction (Section 404.5 or 606.2.4). The IEBC’s SD provisions apply only in flood hazard areas.

● Substantial Structural Damage (SSD), defined in terms of capacity loss, requires evaluation and/or retrofit of certain structural elements other than the damaged elements, as explained further below.

It is possible for a building to sustain both SD and SSD in the same event, in which case both sets of requirements will apply. Even so, SSD is different from SD, despite the similar names.

Making the SSD Determination

Because SSD is defined in terms of capacity loss to structural elements, making the SSD determination requires an understanding of the building’s structural system, as well as the extent and meaning of the damage.

Policyholders whose homes or businesses have been substantially impacted by both wind and flood will benefit from a qualified expert who can determine both the extent and cause of damage to their structures. Not only will an expert aid in determining whether repair to a substantially damaged structure is reasonable and by which method, the expert will also aid in determining which insurance company is liable for damages, i.e., wind v. flood.

The Claim Manual4 provides the following guidance to the flood adjuster:

When adjusting wind/water losses, the adjuster should use established and proven investigative methods to document flood and wind damage to buildings and contents occurring during hurricane or storm events. “Wind/Water Investigative Tips” below can also be helpful.

For “substantial damage” and “slab” claims after Hurricanes Katrina and Ike, we found it necessary to engage the assistance of engineers and meteorologists to aid our clients in proving the extent and cause of their covered damage. A policyholder impacted by both wind and flood, which is usually synonymous with substantial damage, quickly finds that after the adjustment by both the wind and flood adjusters, there is still a huge gap in getting back to pre-loss condition. There is only one way that happens …. Damage anyway!
1 National Flood Insurance Claim Manual, Section 2: Claims Processes and Guidance, 1 Adjuster Preliminary Damage Assessment, June 2019.
2 Id.
3 FEMA, Job Aid, Public Assistance, Understanding Substantial Structural Damage in the International Existing Building Code, April 2017.
4 National Flood Insurance Claim Manual, Section 2: Claims Processes and Guidance, 52 Wind/Flood Loss, June 2019.

Contractors Beware Taking AOB Contracts For Restoration Work: New Policy Forms Restricting AOB Contacts Discussed By Recent Insurance Bulletin

Chip Merlin | Property Insurance Coverage Law Blog | June 24, 2019

Assignment of benefits contracts for property damage claims may be going the way of the dinosaur in Florida. A recent Florida Insurance Bulletin notes that the new statute allows insurance companies to issue policies preventing an assignment of benefits if insurers offer a premium discount.

The bulletin outlines what insurers must do:

Section 2 of the Act creates Section 627.7153, Florida Statutes, which provides standards for policies that restrict the assignment of benefits in whole or in part under a property insurance policy. The new language provides that an insurer may restrict assignments of benefits under a property insurance policy in whole or in part only if it meets all of the following requirements:

• The insurer must also contemporaneously offer to the insured or applicant a policy that does not restrict assignment;

• The restricted policy must be offered at a lower cost than an unrestricted policy;

• The policy restricting assignment in whole must be offered at a lower cost than a policy restricting assignment in part; and

• The restricted policy must include, on the face of the policy or the declarations page, a statutorily required disclosure.

Insurers wishing to make available a policy that restricts in whole or in part an insured’s right to execute an assignment agreement must file such forms or endorsements and rates with the OIR for approval. The OIR will make every effort to approve these new policy forms and rates as soon as practicable. Rate filings made for these restricted policies must provide actuarial support for the difference in rate between an unrestricted policy and a policy that restricts assignment in whole or in part.

So, this is my take on the truth of this new law and what is going to happen:

  1. The truth is that this legislation passed because of the scapegoat publicity of a few lawyers and law firms filing thousands of lawsuits. Their actions and greed changed the regulatory and political landscape.
  2. Good, reputable contractors will be harmed by the law.
  3. Insurers will gain more leverage to pay less than adequate amounts to properly and legally complete quality restoration work.
  4. Bad contractors and bad lawyers gaming the insurance claim process are hurt very badly by the new law.
  5. Policyholders may find fewer scamming contractors and lawyers doing shoddy work and taking their rights but will also be faced with personally fighting for the quality of the construction they deserve with insurance companies caught in a competitive downward spiral, paying for as little as possible.
  6. Some of the AOB lawyers creating this mess will still find ways to market for cases and game the system with obvious loopholes in the statute’s written language. The insurance lobbyists have made an annuity with this legislation and will still be making money fixing what they failed to properly write into law in the last legislative session.

The resources of the Florida Office of Insurance Regulation are not infinite. While all this AOB flurry of discord and legislative activity has been going on, insurers have been busy rewriting Florida property insurance policies to reduce what have been otherwise nationally standard insurance benefits. Citizens Property Insurance Company is the leading bad actor in this regard.

Since the citizens of Florida should not be harmed by supporting leaders within the Citizens Property Insurance Company that they have paid for and created, it is time to start looking for a lot more transparency about the behind the scenes lobbying efforts and wrongful actions being made by this entity. It is also time to demand that the leaders running Citizens stop harming the policyholders and citizens they are supposed to serve. The Florida Office of Insurance Regulation needs to be more of a watchdog for consumers rather than a lapdog for insurers when it comes to accepting new policy forms limiting and restricting coverage.

New York Court Holds That the “Lesser of Two” Doctrine Limits Recoverable Damages in Subrogation Actions

Michael DeBona | White and Williams | June 12, 2019

In New York Cent. Mut. Ins. Co. v. TopBuild Home Servs., Inc., 2019 U.S. Dist. LEXIS 69634 (April 24, 2019), the United States District Court for the Eastern District of New York recently held that the “lesser of two” doctrine applies to subrogation actions, thereby limiting property damages to the lesser of repair costs or the property’s diminution in value.

In New York Cent. Mut. Ins. Co., New York Central Mutual Insurance Company’s (New York Central) insureds, Paul and Karen Mazzola, suffered a fire to their home. After the fire, New York Central paid the Mazzolas $708,465.74 to repair the property. New York Central brought a subrogation action against TopBuild Home Services, Inc. (TopBuild), alleging that the fire was caused by negligent work performed by TopBuild. New York Central sought to recover the repair costs it paid to the Mazzolas. TopBuild conceded liability but disputed the proper measure of damages.

TopBuild filed a motion for partial summary judgment, arguing that under the “lesser of two” doctrine, New York Central could recover only the lesser of the costs to repair the property or the property’s diminution in value. TopBuild, therefore, asserted that New York Central was not entitled to the repair costs of $708,465.74 but, rather, could recover only the property’s decline in value following the fire – approximately $250,000.[1] In response, New York Central argued that New York’s “lesser of two” doctrine does not apply to subrogation actions because an insurance company cannot mitigate the payment it makes to its insured.

The Eastern District of New York found New York Central’s argument unavailing. The court found that a subrogating carrier must step into the shoes of its insured and, therefore, the carrier could not recover more than its insured was legally entitled. Accordingly, the court granted partial summary judgment for TopBuild, holding that, in subrogation actions, “the proper measure of damages for permanent injury to real property is the lesser of the decline in market value and the cost of restoration.”

New York Cent. Mut. Ins. Co. serves as a reminder that subrogating insurers step into their insured’s shoes. Thus, although insurers may issue a contract of insurance that allows an insured to collect replacement and/or restoration costs, insurers can recover the amount it paid its insured only if state law allows the insured to recover that amount from the tortfeasor had the insured sued the tortfeasor directly.

[1] Defendant’s expert determined the diminution in value to be $245,000 while the plaintiff’s expert determined that the diminution in value was $270,000. Because the only issue before the court was whether the “lesser of two” doctrine applied, the court did not need to resolve the party’s dispute as to the diminution in value.

Derek “The Dodger” Chaiken Does Drone Analysis of Property Damage Claims

Chip Merlin | Property Insurance Coverage Law Blog | June 8, 2019

Derek Chaiken is in the Merlin Law Group Los Angeles office. He is a Los Angeles Dodger fan and a student of drone usage during the property insurance claim process. Drones are no longer science fiction, but a fairly common part of modern property insurance claims adjustment. With stronger cameras and other advanced technical measuring devises, drone usage is an efficient tool all property insurance adjusters should use during the adjustment process.

I was visiting Derek in Los Angeles yesterday going over a new Malibu fire claim dispute. The insurance company hired a “consulting” firm to determine the amount of reconstruction cost of a totally destroyed custom home. The dollar amount of the total loss was determined to be less than 50% of the policy limit, which is simply unbelievable for those of us familiar with the extraordinary construction costs following the Malibu wildfires.

I was also thinking how helpful drone video of the remnants could be used to show the remaining portions of the building, the area of damage, the topography of the anticipated construction site and how the entire devastated neighborhood looked following the fire. Of course, these consultants had none of this completed and relied upon eye level photos and a satellite photograph of the loss site.

Derek and insurance defense attorney James Michael Shaw of Butler Weihmuller Katz Craig, recently gave a presentation at an America Bar Association event about drone usage and they noted the following:

Safety and economic considerations continue to drive drone usage in claim adjusting. Drones have become valuable resources to insurance companies when assessing catastrophic disasters, including floods or earthquakes, where access to areas can be restricted by civil authorities and/or is too dangerous for adjusters to enter. Drones usage should also theoretically lead to shorter claim adjustment times and improved customer services.

All property adjusters who want to better document the loss should be using drones as a normal part of their adjustment practice. Aerial views provide another aspect of the loss. The video cameras can quickly show the loss site and the entire neighboring area of damage. There is no downside of drone usage to policyholders whom all adjusters are duty bound to promptly determine the full measure of loss. Drones plus other longstanding adjustment practices simply make for a more efficient and thorough evaluation of loss.

The Butler firm has gone so far as to write an entire book on the topic of drone use in property insurance adjusting: Butler on Drones (Third Edition): A Practical Guide for InsurersHere is the link to obtain a copy.