Economic Loss Not Property Damage

Tred R. Eyerly | Insurance Law Hawaii | August 26, 2019

    The Fifth Circuit agreed with the district court that the insured subcontractor’s economic losses did not amount to covered property damage. Greenwich Ins. Co. v. Capsco Industries, Inc., 2019 U.S. App. LEXIS 23949 (5th Cir. Aug 12, 2019).

    Capsco Industries, Inc. was a subcontractor on the construction of a casino. Capsco subcontracted with Ground Control to install water, sewage, and storm-drain lines. Ground Control was terminated from the project by the general contractor for alleged safety violations and failed drug tests of its employees. Ground Control sued in state court against multiple parties, including Capsco, seeking payment for work on the project. The claims were dismissed on summary judgment because neither party had obtained the required certificates of responsibility from the state, making the parties’ contract void. The Mississippi Supreme Court agreed the contract was void, but reversed and remanded for further proceedings based solely on theories of unjust enrichment and quantum meruit.

    While the state case was on remand, Capsco’s liability insurers, Greenwich Insurance Company and Indian Harbor Insurance Company, filed a compliant for declaratory judgment in federal district court seeking a declaration that they did not owe a defense or indemnity to Capsco. The defendants were Ground Control, Capsco, the general contractor, and the casino owner. The latter two parties were dismissed. Ground Control counterclaimed for coverage of its claims against Capsco. The district court stayed proceedings until the state court litigation ended. 

    In state court, a jury awarded Ground Control over $825,000 in damages against Capsco, later reduced to $199,096 by remittitur. The district court then found the two insurers did not owe Capsco a duty to defend. 

    Subsequently, on summary judgment, the district court held that no indemnification was due and it entered final judgment. Ground Control appealed. Ground Control acknowledged that it had no evidence that would support indemnity during the period of Indian Harbor’s policy. Thus, its claim on the duty to indemnify applied solely to Greenwich.

    The Greenwich policy required the insured to pay for property damage, which the policy stated was either actual damage to physical property or the loss of its use. Purely economic losses were not included in the definition of property damage.

    Ground Control argued must of the work it performed under the void contract was to repair physical property. But the Mississippi Supreme Court limited Ground Control’s award to the value of what it expended in labor and supplies on the project. Ground Control claimed that under the void contract, it incurred expenses for labor and supplies to make repairs to physical property. There was no coverage for these expenses, however, unless the insured, Capsco, was legally obligated to pay those amounts “as damages because of . .  ‘property damage’ to which this insurance applies.” Capsco was obligated to pay the reasonable value of the services Ground Control provided. It was not paying for property damage or loss of its use; it was paying for labor and materials. Payment for work was a stop removed from paying for property damage that necessitated the work.

    Therefore, the district court was affirmed. 

Court Finds Animals Incapable of Vandalism or Malicious Mischief for Insurance Purposes (and all other purposes, too)

Alex Silverman | Property Casualty Focus | October 31, 2019

I am willing to go out on a limb and say that if asked whether an animal, say, a raccoon, is capable of committing malicious criminal acts, most humans would agree that the issue is beyond dispute. But, alas, most humans would be wrong (apparently it very much can be disputed). There is good news, however. The nation’s courts have been quietly tackling the issue, and, thankfully, they have been able to allay any fear of a raccoon uprising occurring in the near future. A federal court in Pennsylvania recently had occasion to address the issue, and it reconfirmed that animals are indeed incapable of committing “vandalism” or “malicious mischief,” both generally and for purposes of obtaining first-party insurance coverage. See Capital Flip, LLC v. Am. Modern Select Ins. Co., No. 2:19-cv-00180 (W.D. Pa. Sept. 19, 2019).

The Capital Flip case stems from a dispute between Capital Flip LLC and its insurer, American Modern Select Insurance Co. Capital Flip owned property in the Pittsburgh area insured under a “dwelling policy” issued by American Modern. In April 2018, Capital Flip discovered that raccoons (or, perhaps, one especially malicious raccoon) had entered the property and caused substantial interior damage. Capital Flip sought coverage for the damage under the American Modern policy, which covered specific “perils insured against,” including losses arising from “vandalism or malicious mischief.”

According to Capital Flip, the damage was covered because it resulted from “vandalism” or “malicious mischief” committed by the so-called culprit raccoon. American Modern denied the claim and advised Capital Flip that damage caused by animals cannot possibly constitute loss arising from “vandalism or malicious mischief” within the meaning of the policy. Unconvinced by this reasoning, Capital Flip commenced this action against American Modern, asserting claims for breach of contract and bad faith.

In its motion to dismiss, American Modern argued that Capital Flip’s claims failed as a matter of law because raccoons are incapable of committing “vandalism” or engaging in “malicious mischief.” But as noted, reasonable humans can apparently disagree in this respect. Indeed, Capital Flip reasoned, because the policy did not specifically define “vandalism” or “malicious mischief,” it was at least possible that these terms could encompass damage caused by animals. Alternatively, Capital Flip argued that the policy was ambiguous and must be construed in its favor given that these terms were undefined. At a minimum, Capital Flip asserted that this issue was unsuitable for resolution on a motion to dismiss because, unsurprisingly, no Pennsylvania court had ever decided whether an animal is capable of engaging in “vandalism” or “malicious mischief.”

After considering the parties’ arguments, the court declared for the first time in the history of the Commonwealth of Pennsylvania that animals are, as a matter of law, incapable of behaving in the manner required to implicate insurance coverage for “vandalism or malicious mischief.” While the policy did not define “vandalism” or “malicious mischief,” the court found Capital Flip’s reading of these terms to be untenable, and undermined by basic contract interpretation principles. As the court observed, the ordinary dictionary definitions of “vandal,” “mischief,” and “malicious” all require the subject to act with some level of conscious deliberation. The Pennsylvania penal code applicable to Criminal Mischief was similar in this regard. The court explained that accepting any contrary interpretation would require a determination that animals are capable of behaving in ways that simply defy the laws of nature. Refusing to accept such a reading, the court held that the terms “vandalism” and “malicious mischief” clearly and unequivocally presuppose conduct by a human actor.

Other courts have addressed whether damage caused by animals is included within the “vandalism and malicious mischief” coverage of an insurance policy. The Capital Flip court found that each of them has declined to interpret these terms as including animal behavior. Luckily for us humans, it appears that these courts found no evidence to suggest that animals are capable of forming the intent required to engage in the sort of willful conduct contemplated by the “vandalism or malicious mischief” language in insurance policies. Interestingly, in one such case, a New York court held that it only “reluctantly” concurred with other cases finding that coverage for vandalism or malicious mischief is limited to human acts. See Roselli v. Royal Ins. Co. of Am., 538 N.Y.S.2d 898 (Sup. Ct. Monroe Cty. 1989). The Roselli court may have been privy to information about animals these other courts were not, but it reached the same result nonetheless. The Capital Flip court also agreed with that result. Accordingly, it granted American Modern’s motion to dismiss, finding the sole premise of Capital Flip’s claims — that the dwelling policy covers damage caused by malicious raccoons — was legally unsustainable.

Having restored your understanding of nature and contract interpretation, we leave you with this poem by a New Mexico appellate court:

Alas, it is written in the law
That the animal with the paw
Does not have the mind
To do the damage of this kind.
And so, I’m sorry, the Plaintiff won’t get paid.
That’s how the contract was made.
This policy does not apply
When the [raccoon] runs awry.

Montgomery v. United Sers. Auto. Ass’n, 118 N.M. 742 (N.M. Ct. App. 1994).

Are Repair Costs Covered Damages Under a Liability Policy?

Larry P. Schiffer | Squire Patton Boggs | September 27, 2019

Liability policies cover sums an insured becomes legally obligated to pay to a third-party as damages for a loss. Typically, there is no coverage in a liability policy for expenses incurred by the insured to repair damage to the insured’s own property. Additionally, nearly every liability policy has an owned-property exclusion. In a recent case, the 5th Circuit addressed this subject and whether an exception to the owned-property exclusion applied.

In Eagle Water, L.L.C. v. Ash, No. 19-30056 (5th Cir. Sep. 26, 2019) (unpublished), the owner of a sewer system repaired that system following a localized collapse and sought to recover the cost of repair from its liability insurer. The insurer paid for property damage suffered by a homeowner when the sewer system backed up because of the collapse, but rejected the policyholder’s request to cover the cost for repairing the sewer system. As the court noted, without those repairs, there could have been additional backups or sewage spills.

The policy had the usual liability coverage grant providing coverage for “those sums that the Insured becomes legally obligated to pay as damages because of . . . property damage.” The policy also had the usual owned-property exclusion that precluded coverage for damage to property “owned by the Insured.”

After the insurer rejected the claim, the policyholder sued and the insurer moved for summary judgment. The district court granted summary judgment to the insurer reasoning that the repair costs were not covered by the liability insurance policy because those costs were not damages that the policyholder became legally obligated to pay.

In affirming, the circuit court held that the district court correctly determined that the policyholder’s sewer repair costs were not covered by its liability insurance policy. The court stated that when the policyholder paid to repair its sewer system, it was not compensating anyone for loss or injury, so the repair costs were not damages and not covered. Damages, held the court are money claimed by, or ordered to be paid to, a person as compensation for a loss or injury (citations omitted).

The appellate court rejected the policyholder’s argument that an exception to the owned-property exclusion should apply. That judicial exception, said the court, arises in situations where the costs expended are done so to prevent future harm to third parties. The court distinguished the operative case and noted that in that case the repairs were necessary to prevent imminent or immediate harm to third parties because actual damages had occurred. Notably, the court stated that concluding that an owned-property exclusion does not prevent coverage is not the same as concluding that coverage exists. The court concluded that no matter whether the owned-property exclusion applied, the policyholder’s repair costs were not covered by the policy, because those costs were not damages as defined by the liability policy.

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

Anthony L. Miscioscia and Konrad R. Krebs | 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.”

[1] “Occurrence” is defined as “an accident”

The New Water Damage Limitation and Other Non-Traditional Coverage Gaps

Chip Merlin | Property Insurance Coverage Law Blog | August 29, 2019

Public adjuster Guy Cohen and I discussed various issues of property insurance and adjustment at a recent lunch. He raised a very serious topic of coverage gaps being created in the small print of property insurance policies which Florida insurance regulators are allowing to be sold. He thinks that these coverage gaps are the most serious issues facing insurance consumers. He is not alone.

He provided me a number of samples. Here is one from Tower Hill:

This policy provides up to $10,000 of coverage due to Water Damage caused by accidental discharge of water from plumbing or appliance. All other Water Damage is excluded except Water Damage caused by water penetration into the house when the water penetration is a direct result of damage caused by wind or hail.

What are restoration contractors supposed to do when a significant water loss happens? A $10,000 limit does not do much for a policyholder when a major water loss occurs. While infrequent, I have seen homes completely destroyed from appliances which break, and water then pours throughout.

I remembered that the American Association of Public Insurance Adjusters (AAPIA) has made the issue of vanishing coverage and coverage gaps a major legislative and regulatory issue. So, I called AAPIA’s Holly Soffer about their agenda on this issue. I got an earful of information. She confirmed that there are many examples of insurance companies adding endorsements which remove standard coverages and limitations. She told me that AAPIA is supporting the efforts of Untied Policyholders in this arena.

I then discussed the issue with Amy Bach of United Policyholders. She told me that they are working with academics and the NAIC about the issue. Many of the insurers are filing forms which the various departments of insurance are not catching. These forms contain significant changes to standard policies. She told me that one endorsement excluded “wildfire” from the fire peril.

Propagandist insurers, especially the surplus and excess liens insurers, are using free market terms such as “consumer choice” and “custom coverage” to sell and justify these crazy policies. The surplus lines industry is even selling policies which make policyholders arbitrate claims far away from where the property is insured and include language that switches the applicable law to another state. Many of the endorsements effectively make the insurance being sold illegally less than what is required by federal mortgage regulations—both residential and commercial.

This has to stop. State legislatures, the NAIC, regulators and even federal banking regulators need to have a comprehensive plan to prevent this wholesale attack on what used to be standard and required property insurance coverages. I will write more about this burgeoning issue. I applaud Guy Cohen, AAPIA, and United Policyholders for raising the issue. I would suggest that like-minded contractors and public adjusters join us in this fight against coverage gaps caused by unfair endorsements with non-standard limitations and exclusions to traditional coverage.