No Coverage for Defects in Subcontrator’s Own Work

Tred R. Eyerly | Insurance Law Hawaii | February 11, 2019

    Damage to the concrete floor installed by the insured subcontractor was not property damage and thus not covered under the insured’s CGL policy. Kalman Floor Co. v. Old Republic Gen. Ins. Corp., 2019 U.S. Dist. LEXIS 3319 (D. Colo Jan. 8, 2019). 

    In 2007, Kalman Floor Co. was subcontracted to construct over 158,000 square feet of concrete flooring for a cold storage facility. The concrete floor was completed in late 2008. In late 2009, the contractor notified Kalman that pockmarks, or “pop-outs,” were visible on the concrete flooring. The only damage to tangible property in the facility caused by the pop-outs was the concrete flooring itself.

    On January 31, 2009, Old Republic issued a general liability policy to Kalman for one year. The policy excluded for damage to “your work,” defined as “work or operations performed by you or on your behalf.” Old Republic denied coverage for damage to the concrete floor. Kalman sued, seeking a declaration that the exclusions did not bar coverage. 

    Under Tenth Circuit law, as established in Greystone Const, Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272 (10th Cir. 2011), the term “occurrence” in a CGL policy encompassed unforeseeable damage to non-defective property arising from faulty workmanship. The policy was intended to protect the insured business from claims by third parties concerning personal injury or property damage resulting from accidents. In discovery, Kalman admitted the pop-outs in the concrete floor “did not physically injure or damage any tangible property other than the floor system it installed.” Thus, under the terms of the policy, property damage did not occur. 

    Consequently, Old Republic’s motion for summary judgment was granted and the case dismissed with prejudice.

Loss of Use can be “Property Damage” under Insurance Policies

Kevin Brodehl | Money & Dirt | February 10, 2019

General liability insurance policies normally cover “property damage.”  Physical injury to, or outright destruction of, property almost always fits within policy coverage.

But what about situations when the property is not physically injured at all, but the owner has lost important use rights associated with the property, such as the loss or alteration of a conditional use permit?

It all depends on the specific language in the insurance policy, as illustrated by a Court of Appeal opinion recently published by California’s Fourth Appellate District — Thee Sombrero, Inc. v. Scottsdale Insurance Company.

Background: insurance policy covers “loss of use;” property loses conditional use permit

Thee Sombrero, Inc. (Sombrero) owned commercial property in Colton, California.

The city issued a conditional use permit (CUP) authorizing the use of the property as a nightclub.  The CUP required city approval for the nightclub’s floor plan, and no modifications to the floor plan were allowed without city approval.

Sombrero’s tenant operated the nightclub.  Under the city-approved floor plan, the club had a single entrance door, equipped with a metal detector.

Crime Enforcement Services (CES) provided security services for the club.  CES obtained a corporate general liability policy from Scottsdale Insurance Company (Scottsdale).  The policy covered CES’s liability for “property damage,” which was defined as either “physical injury” to the property or “loss of use” of property that is not physically injured.

On June 4, 2007, one patron of the nightclub shot and killed another.  Investigation discovered that CES had created a second entrance to the club — a “VIP entrance” — that lacked a metal detector, and that the gun used in the killing got into the club through the VIP entrance.

The city revoked the CUP.  Sombrero eventually obtained a modified CUP allowing the property to be used as a banquet hall instead of a nightclub.

Sombrero sued CES for breach of contract and negligence, and obtained a default judgment in its favor for $923,078 — damages representing the diminution in value suffered by the property due to the lost CUP.

Sombrero then filed a direct action against Scottsdale under Insurance Code section 11580(b)(2) for breach of the insurance policy.

Trial court’s ruling: summary judgment granted for insurer

Scottsdale filed a motion for summary judgment, which the trial court granted.

The trial court held that Sombrero was essentially suing for “economic loss,” which was not the same thing as “lost use.”  Because the policy excluded coverage for mere economic loss, Scottsdale could not be liable, and the court entered judgment in Scottsdale’s favor.

Court of Appeal’s Opinion: insurer is on the hook

The Court of Appeal reversed the trial court’s judgment.

Looking to the language of the insurance policy, the court observed: “The loss of the ability to use the property as a nightclub is, by definition, a ‘loss of use’ of ‘tangible property.’  It defies common sense to argue otherwise.”

Sombrero did not simply lose the CUP, as Scottsdale contended.  The court noted that “the appropriate focus is not on the loss of the entitlement, but rather on the loss of use of tangible property that results from the loss of the entitlement.”  Here, the revocation of the CUP meant that Sombrero could no longer use the property as a nightclub.

The court also rejected Scottsdale’s argument that a “total loss of all uses” would be required to trigger coverage.  The court held “the reasonable expectations of the insured would be that ‘loss of use’ means the loss of any significant use of the premises, not the total loss of all uses.”

The court acknowledged that strictly economic losses like lost profits, loss of goodwill, and investment losses typically are not covered by a comprehensive general liability policy.  Losses that are “exclusively economic, without any accompanying physical damage or loss of use of tangible property, do not constitute property damage.”

But, those same items may be recovered from the insurer if they provide a measure of damages for a covered claim.  Here, diminution in value was an appropriate measure of damages for harm caused by the covered loss of use — the lost CUP.

Finally, the court emphasized that the language of the insurance policy will usually determine the outcome.  Where an insurance policy defines “property damage” more narrowly as “physical injury to or destruction of tangible property, including loss of its use,” the policy would not cover the loss of use of property that has not been physically damaged.


“Loss of use” can sometimes be covered as “property damage” under general insurance liability policies.  But it all depends on how the policy language defines “property damage.”

While strictly economic losses are generally not recoverable, economic losses may be recoverable if they provide a measure of damages for property damage that is covered by the insurance policy.

Ice Dammed If You Do, Ice Dammed If You Don’t

Michael Duonocore | Property Insurance Coverage Law Blog | February 8, 2019

This time of year, the northeast of the United States starts to feel insufferably cold, followed up by winter storms which can dump anywhere from an inch to three feet of snow at a time. The snow can be a welcomed arrival in winter as it brings snow days, sleigh riding and joy. It can also signal the beginning of a damming experience; ice damming that is.

You see, ice damming is a term for when snow on your roof starts to melt from either heat building up in your attic, the ambient temperature, or the sun. As the snow melts it slides down your roof and towards your gutters. However, the buildup of snow on the roof and in the gutter prevents the water from properly draining. Then as the sun fades and the temperatures drop again, all that water stuck around your gutters freezes, creating an ice dam. Now while an ice dam may look nice with its icicles hanging there glistening in the sun, it is causing a disaster to your roofing system.

As the ice dam phenomenon sits atop your roof, it can lead to roof leaks, ceiling collapses, and frozen and/or burst pipes. However, most notably, it leads to significant damage to your roofing shingles and gutters. As the water and snow melt and refreeze repeatedly, it expands and contracts the roofing shingles and moves your gutters off their original position. This can cause heavy and extensive damage to your home.

So, what do you do when you see ice damming on your roof? Well besides saying “ice dammit” there isn’t much you can do. Trying to chip the ice away will cause your shingles to break or become damaged. If you are lucky, it will get warm enough to melt the ice and snow and drain over and eventually out of your gutters. However, if you are unlucky, you simply must sit there and wait until spring.

If you notice damage either to your roofing system or interior of your home, make sure you contact your insurance agency. If you need further assistance, it is always a good idea to contact a licensed public adjuster to help navigate the insurance claims process.

Consequences of a Well-Pled Complaint

Deborah Trotter | Property Insurance Coverage Law Blog | February 1, 2019

The New York Supreme Court, Appellate Division, First Department “unanimously reversed, on the law, with costs, the motion denied and the claims reinstated,” the New York County Supreme Court trial judge’s order dated April 2, 2018, to the extent appealed from, which granted dismissal of Plaintiff D.K. Property, Inc.’s (“D.K.”) consequential damages (other than attorney’s fees) pled in its amended complaint.1 The dispute involves an “all-risk” commercial property policy issued by Defendant National Union Fire Ins. Co. of Pittsburgh, PA (“National Union”) and its denial of D.K.’s October 2014 claim for policy proceeds and benefits arising from damage to one of its buildings insured under the policy.

D.K. alleged in its complaint filed in February 2017 that National Union refused to pay or deny its claim, even after repeated inspections and documentation presented to support its claims, which it alleged amounted to a breach of contract and breach of the covenant of good faith and fair dealing. After being served the complaint, National Union filed a partial motion to dismiss D.K.’s demand for consequential damages for attorneys’ fees, costs, and expenses or disbursements alleging the complaint failed to contain allegations sufficient to support those claims. The trial court granted National Union’s partial motion to dismiss, without prejudice, to allow D.K. an opportunity to amend its complaint.

Plaintiff filed an amended complaint on July 14, 2017, containing greater detail in the allegations regarding National Union’s inadequate and unfair claim handling, unreasonable denial and requests, as well as the foreseeable attorneys’ fees, costs and expenses that National Union’s breach and conduct would reasonably require D.K. to incur to protect its rights. National Union again filed a partial motion to dismiss D.K.’s consequential damages demands alleged in its amended complaint.

Persuaded by a heightened pleading standard of specificity for consequential damages argued by National Union, the trial court dismissed the consequential damages demanded in D.K.’s count one of the amended complaint for breach of contract and count two for breach of the covenant of good faith and fair dealing, except for attorneys’ fees.2 See my colleague Jason Cieri’s post on April 11, 2018, concerning the trial court’s ruling.

D.K. appealed the trial judge’s ruling and argued that at the pleading stage, a claim for consequential damages, which do not flow directly from the breach does not require a detailed, factual description or explanation for why those damages are recoverable. The appellate court agreed with D.K. finding, “the motion court erred in dismissing the consequential damages claim, because plaintiff fulfilled the pleading requirement by specifying the types of consequential damages claimed and alleging that such damages were reasonably contemplated by the parties prior to contracting.3

The appellate court reasoned:

It is well settled law that on a motion to dismiss pursuant to pursuant to CPLR 3211(a)(7), the pleading is afforded a liberal construction, facts as alleged in the complaint are accepted as true, plaintiffs are afforded the benefit of every possible favorable inference, and the motion court must only determine whether the facts as alleged fit within any cognizable legal theory (see e.g. Leon v Martinez, 84 NY2d 83, 87–88 [1994]).

The complaint alleges that rather than pay the claim, defendant has made unreasonable and increasingly burdensome information demands throughout the three year period since the property damage occurred. Plaintiff contends that this was a tactic by defendant to make the claim so expensive to pursue that plaintiff would abandon it altogether. Plaintiff contends defendant’s investigatory process has taken so long and become so attenuated that the structural damage to the building has worsened. Among the consequential damages alleged are engineering costs, painting, repairs, monitoring equipment, and moisture abatement to address water intrusion, loss of rents, and other expenses attributable to mitigating further damage to the property.

Despite substantial documentation of the cause and extent of the damage to plaintiff’s building, not only by plaintiff’s engineer, but also an engineer that defendant hired, who inspected the building several times, defendant has persisted in demanding further, unnecessary monitoring, data collection, inspections, and reinspections. Although it has yet to pay the loss or deny the claim, defendant nonetheless sought to intervene as plaintiff’s subrogor under the policy when plaintiff sued the owner of the adjoining property. By doing so, defendant forced plaintiff to incur significant, unnecessary legal fees. A plaintiff may sue for consequential damages resulting from an insurer’s failure to provide coverage if such damages (“risks”) were foreseen or should have been foreseen when the contract was made (Bi-Economy Mkt, Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 192 [2008]). Although proof of such consequential damages will ultimately rest on what liability the insurer is found to have “assumed consciously,” or from the plaintiff’s point of view, have warranted the plaintiff to reasonably suppose the insurer assumed when the insurance contract was made, a determination of whether such damages were, in fact, forseeable should not be decided on a motion to dismiss and must await a fully developed record (see Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203 [2008]; see also Bi-Economy at 192). In other words, the inquiry is not whether plaintiff will be able to establish its claim, but whether plaintiff has stated a claim.4

The appellate court found D.K.’s amended complaint met the pleading requirements with respect to consequential damages, in both the first cause of action for breach of contract and in the second cause of action for breach of the covenant of good faith and fair dealing in the context of an insurance contract.5 And contrary to National Union’s claim, the appellate court found “[t]here is no heightened pleading standard requiring plaintiff to explain or describe how and why the “specific” categories of consequential damages alleged were reasonable and foreseeable at the time of the contract. (Panasia Estates Inc. v. Hudson Ins. Co., 68 AD3d 530, 530 [1st Dept 2009], aff’d 10 NY3d 200 [2008], citing Bi-Economy 10 NY3d at 192).”

In closing, the appellate court offered its guidance on issues raised, though not currently before it:

  • “An insured’s obligation to ‘take all reasonable steps to protect the covered property from further damage by a covered cause of loss’ supports plaintiff’s allegation that some or all the alleged damages were foreseeable (Benjamin Shapiro Realty Co. v. Agricultural Ins. Co., 287 AD2d 389, 389-390 [1st Dept 2011]”; and
  • In addressing National Union’s motion to dismiss plaintiff’s second count for breach of the covenant of good faith and fair dealing as duplicative of count one breach of contract, “[a]s noted by the Court of Appeals in Bi-Economy, a claim for breach of contract and one for bad faith handling of an insurance claim are not necessarily duplicative (id. At 191).”

The New York Court of Appeals has removed the spike strip thrust in the road in front of New York policyholder plaintiffs and provided them with an excellent road map for properly pleading consequential damages in New York—a great victory for policyholders, indeed!
1 D.K. Property, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., Index 650733/17 (New York Supreme Court, Appellate Division, 1st Dept. Jan. 17, 2019).
2 D.K. Prop., Inc. v National Union Fire Ins. Co. of Pittsburgh, 59 Misc.3d 714, 74 N.Y.S.3d 469, 2018 N.Y. Slip Op. 28097 (Supreme Court, New York County April 03, 2018).
3 Id. (emphasis added).
4 Id. (emphasis added).
5 Id.

Developer’s Failure to Plead Amount of Damages in Cross-Complaint Fatal to Direct Action Against Subcontractor’s Insurers Based on Default Judgment

Christopher Kendrick and Valerie A. Moore | Haight Brown and Bonesteel LLP | January 7, 2019

In Yu v. Liberty Surplus Ins. Corp. (No. G054522, filed 12/11/18), a California appeals court held that a developer’s failure to allege the amounts of damages sought in its cross-complaint rendered default judgments against a subcontractor void and, therefore, unenforceable against the subcontractor’s insurers in a direct action under Insurance Code section 11580(b)(2).

Yu, the owner, hired ATMI to develop a hotel. ATMI subcontracted with Fitch to perform stucco and paint work. Yu sued ATMI for construction defects and the developer cross-complained against its subcontractors, including Fitch, for breach of contract; warranty; indemnity, etc. Yu’s operative complaint prayed for damages “in an amount not less than $10,000,000, according to proof.” ATMI’s cross-complaint stated that it incorporated the allegations of Yu’s complaint “for identification and informational purposes only,” but “does not admit the truth of any allegations contained therein.” The cross-complaint also prayed for damages with respect to the various causes of action “in an amount according to proof.”

Fitch defaulted. ATMI then settled with Yu, including an assignment of rights against Fitch. Yu proceeded to prove up a default judgment against Fitch for $1.2 million, which was entered by the court.

Fitch’s insurers moved to vacate the judgment, arguing that ATMI had not stated an amount of damages in the cross-complaint sufficient to support a default judgment. That motion was denied on the ground that the insurers lacked standing to contest the validity of the default judgment. In an unpublished opinion the appeals court affirmed, while telling the insurers that they had an alternative remedy of denying any demand for payment and litigating the issue in a coverage action.

Yu then sued the insurers as a judgment creditor in a direct action under Insurance Code section 11580(b)(2). But the court in that action entered summary judgment for the insurers, ruling that the default judgment was void on its face because of the absence of a money demand in the cross-complaint.

The appeals court agreed. The court first pointed out that under Code of Civil Procedure section 425.10(a) in any complaint or cross-complaint “[i]f the recovery of money or damages is demanded, the amount demanded shall be stated.” The court cited exceptions to the general rule in cases involving personal injury or wrongful death, or when the plaintiff is seeking punitive damages. (Citing Code Civ. Proc., §§ 425.10(b); 425.11.) And in those cases, the plaintiff must still serve a separate written statement of damages (citing Code Civ. Proc., §§ 425.11 (compensatory damages), and 425.115 (punitive damages), before a default judgment may be taken. (Code Civ. Proc., §425.11(c).)

The Yu court explained that it is a matter of due process that the defendant must have notice of the specific relief sought, so that he or she can decide whether to appear and defend. Further, the Legislature has provided that a default judgment cannot exceed the amount demanded, or it is void. (Code Civ. Proc., §§ 580, 585; Greenup v. Rodman (1986) 42 Cal.3d 822, 826.)

There was no question that the developer’s cross-complaint failed to meet the requirements, but the Yu court also held that the allegation incorporating the underlying complaint by reference would not suffice either. The Yu court noted that neither statutes nor court rules establish any formal requirements for incorporation by reference, but common law contract principles require that: “(1) the reference to another document [be] clear and unequivocal; (2) the reference [be] called to the attention of the other party, who consented to that term; and (3) the terms of the incorporated documents [be] known or easily available to the contracting parties.” (Citing Kleveland v. Chicago Title Ins. Co. (2006) 141 Cal.App.4th 761, 765.)

After first pointing out that the alleged incorporation by reference was expressly “for identification and informational purposes only,” the Yu court then found the complaint’s allegation of damages “not less than $10 million” to be inconsistent with the cross-complaint’s allegation of damages “in an amount precisely unknown,” and “subject to proof.” Consequently, the incorporation by reference was not “clear and unequivocal,” nor was the precise amount “adequately called to the attention of the other party.” The Yu court ultimately faulted the developer for having failed to state any amounts in the cross-complaint:

“[W]e agree with the trial court’s assessment that ‘because the cross-complaint filed by ATMI specifically declined to state the amount of damages sought . . . , it seems contradictory to basic notions of due process and fairness to find that cross-defendants [the Fitch Entities] have been put on notice of their potential damages by virtue of an allegation in a complaint filed not against them, but against cross-complainant ATMI.’”

Finally, the Yu court rejected an argument that Fitch had entered a general appearance, saying this went to the issue of service or jurisdiction, but not the amount of damages required for a default judgment. Likewise, the Yu court rejected an argument that Fitch could have readily calculated the damages because it had performed the work, saying that was no substitute for adequate notice or due process.