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.

Direct Physical Loss By Tenants Is Excluded Under Policy’s Dishonest or Criminal Acts Exclusion

Christina Phillips | Property Insurance Coverage Law Blog | October 2, 2018

Is loss or damage caused by a tenant covered under an all-risk insurance policy? Like most issues addressed in the Merlin blog posts, the answer is: it depends on the facts and the policy language.

The Sixth Circuit in KVG Properties, Inc. v. Westfield Ins. Co., 2018 WL 3978211 (6th Cir. Aug. 21, 2018) recently addressed this issue under a factual situation becoming more and more prevalent. Unbeknownst to KVG, it’s commercial tenants were growing marijuana in the property. Ultimately, the tenants were caught during a raid by the U.S. Drug Enforcement Agency. KVG immediately moved to evict the tenants and gain possession of the property. In its eviction proceedings KVG alleged that the tenants were “illegally growing marijuana.” The tenants were evicted and KVG obtained control of the property. However, the tenants had caused extensive damage to the property to accommodate their marijuana operations. The tenants had removed walls, changed duct work, cut holes in the roof, and severely damaged the HVAC systems. It was alleged the tenants had caused nearly $500,000 worth of damage.

KVG ultimately filed a claim against its insurer, Westfield. Westfield denied the claim based on the Dishonest or Criminal Acts Exclusion. In relevant part, the exclusion provides that Westfield will not pay for loss or damage caused by or resulting from any “[d]ishonest or criminal act by you, any of your partners, members, officers, managers employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose.”1 Summary judgment was granted for Westfield. KVG appealed.

On appeal, the Sixth Circuit concluded that the property had sustained physical damage, caused by some risk (or risks) of direct physical loss. The Sixth Circuit then turned to whether the loss and damage was excluded as a result of the Dishonest or Criminal Acts Exclusion. The court focused its inquiry on the core question of whether the tenants committed a criminal act within the meaning of the policy. Dismissing KVG’s argument that Westfield could not invoke the exclusion unless the tenants had been convicted of a crime, the Sixth Circuit affirmed the lower court’s grant of summary judgment. It found there was no dispute that the tenants were engaged in illegal, criminal conduct. In that regard, the Sixth Circuit noted that KVG admitted as much in its eviction proceedings when it stated that the “tenant illegally grew marijuana.” The appellate court also noted that the raid by the DEA was part of a criminal investigation. As such, the Sixth Circuit concluded that Westfield had proven that the Dishonest or Criminal Acts Exclusion applied to bar coverage.
1 KVG did not argue and thus the Court did not address whether the exclusion should apply to someone who obtains “entrustment” by false pretenses.

Collecting For Immediate Remediation Costs

Paul LaSalle | Property Insurance Coverage Law Blog | October 7, 2018

Insurance policies ordinarily contain terms that provide that an insured must exhibit the damaged property for the insurance company’s inspection after a loss. The same policies also provide that an insured has a duty to mitigate damages to the property to prevent further damages. Does an insured breach the insurance policy by preventing the insurance company from assessing the full extent of damages if remediation work is performed at the property prior to the insurance company’s inspection?

The New Jersey Appellate Division recently addressed that scenario.1 In that case, two days after a fire, a public adjuster hired by the insured informed the insurance company of the fire and consequential property damage. Prior to the insurance company’s claim specialist’s inspection of the property to evaluate the property’s damages, he told the public adjuster to complete only minor repairs and work necessary to prevent further damage to the property, but not to perform remediation work. However, when the claim specialist inspected the property six days after the fire, he found that a remediation company hired by the property owner had completely gutted areas of the property to the wood-framing studs. Consequently, the insurance company asserted that it could not assess the extent of damage caused by the fire because of the limited inspection its claim specialist was able to conduct.

Unsatisfied that the amount the insurance company had paid was far less than the public adjuster’s estimated replacement value, the insured sued alleging breach of contract and demanded additional compensation for damage to the property. The trial court dismissed the suit finding that the insured failed to satisfy her evidentiary burden as to damages because she had remediation work done prior to the insurance company’s inspection.

Ultimately, the Appellate Division reversed the trial court and ruled that it was for the jury to determine the material dispute regarding the insurance company’s ability to determine the scope of the property’s fire damage and the amount of compensation that the insured was entitled to receive under the insurance policy.

This case illustrates the importance of fully documenting damages and preserving any damaged property until the insurer has had a chance to inspect.
1 Chen v. State Farm Fire & Cas. Co., No. A-2814-16T1, 2018 WL 3625108 (N.J. Super. Ct. App. Div. July 31, 2018).

Underlying Assertion of Negligent Misrepresentation Is Not Necessarily an Occurrence

Nora Valenza-Frost | PropertyCasualtyFocus | September 14, 2018


Courts sometimes struggle with the issue of whether property damage arising in the context of a contractual relationship, particularly in construction contracts, constitutes an “occurrence” under a standard commercial general liability (CGL) policy. Generally, but not always – and it varies from jurisdiction to jurisdiction – courts regard contractual breaches as non-accidental conduct, and/or apply the so-called “business risk” exclusions (such as the standard CGL “Your Work” exclusion), in finding no coverage. Lexington Ins. Co. v. Chicago Flameproof Wood Specialties Corp., No. 17-cv-3513 (N.D. Ill. Aug 10, 2018), a recent decision from a federal court in Illinois, is illustrative.

Lexington Insurance Company (“Lexington”) issued a CGL policy to Chicago Flameproof and Wood Specialties Corporation (“Chicago Flameproof”). The policy provided that Lexington would pay sums that Chicago Flameproof “becomes legally obligated to pay as damages because of bodily injury or property damage” that is “caused by an occurrence that takes place in the coverage territory” and that “occurs during the policy period.”

A framing contractor, required by contract to use fire-retardant-treated lumber meeting International Building Code (IBC) requirements, procured lumber from Chicago Flameproof to be used for the exterior walls of four buildings. The framing contractor contracted with Chicago Flameproof to buy D-Blaze lumber, but instead, was provided non-IBC-compliant lumber. As a result, the framing contractor was ultimately instructed to remove and replace the non-compliant lumber and sued Chicago Flameproof for negligently or fraudulently misrepresenting the type of lumber it was providing, resulting in damage to the exterior walls, wiring, and Tyvek insulation on the buildings, among other things (the “Underlying Actions”).

Chicago Flameproof sought coverage from Lexington, but Lexington challenged coverage and filed a declaratory judgment action, arguing that its duties to defend and indemnify were not triggered “because the claims against Chicago Flameproof do not involve property damage, were not the result of an occurrence, and were otherwise excluded by the policy’s business risk exclusions.” The parties moved for summary judgment, agreeing that no factual dispute existed and the only issue was the interpretation of the CGL policy, a question of law.

The court disagreed with Lexington’s argument that there was no “property damage” as the framing contractor sought to hold Chicago Flameproof “liable for physical injury to tangible property.” The court also disagreed with Lexington’s argument that the damage alleged was “nothing more than economic injuries stemming from the repair and replacement of the non-compliant lumber,” as there were “allegations of physical alterations to property other than the insured’s product” caused by the removal process which could fall within the definition of “property damage.”

However, the court acknowledged that, “for property damage to be covered by the CGL policy, it must be caused by an ‘occurrence.’” Illinois courts find an “occurrence” in the insurance context to mean:

An unforeseen occurrence, usually of an untoward or disastrous character or [a] … sudden, or unexpected event of an inflicting or unfortunate character…. However, even if the person performing the act did not intend or expect the result, if the result is the rational and probable consequence of the act, or, stated differently, the natural and ordinary consequence of the act, it is not an accident for liability insurance purposes.

Chicago Flameproof argued that the Underlying Actions satisfy the “occurrence” requirement “because they assert negligent misrepresentation and because Chicago Flameproof did not expect or intend the injuries to other building materials.” The court disagreed, and focused on the conduct alleged: Chicago Flameproof “failed to exercise reasonable care when it represented that it had D-Blaze lumber in stock and when it did not inform [the framing contractor] that its orders could be fulfilled.” Although couched in negligence terminology, the thrust of the complaints “is that Chicago Flameproof engaged in deliberate conduct – the shipping of the wrong lumber and the concealment of that fact – that caused the alleged property damage.”

The court reasoned that, even though Chicago Flameproof’s delivery of the lumber was allegedly intentional “does not necessarily mean that it expected or intended the collateral injuries to the exterior walls, wiring, and insulation…. Chicago Flameproof could have and should have reasonably anticipated that such injuries could result from supplying” the wrong lumber, which had to be torn out of the buildings. “These damages are the natural and ordinary consequence of knowingly supplying a non-compliant product and thus do not potentially fall within the CGL policy’s coverage.”

In concluding, the court stated that, although the Underlying Actions contain “one count for negligent misrepresentation, mere inclusion of a negligence theory does not – and cannot – by itself satisfy the occurrence requirement. Nowhere in the complaint are there allegations of an unforeseen or accidental event that produced property damage.”

This case is a helpful reminder that liability insurance cannot be used as a warranty for an insured’s failure to fulfill contractual undertakings, and that even if couched in a complaint as “negligent” conduct, when assessing an insurer’s duty to defend and indemnify under a CGL policy, careful consideration should be paid to the cause of the alleged damages when determining if there is an “occurrence.”

Mold/Remediation: Michigan Appellate Court Addresses Duty Owed Homeowner by Insurance Company and Cleanup Contractor

Walter G. Wright and Claire Maddox | Mitchell Williams | September 12, 2018

The Court of Appeals of Michigan (“Court”) in an August 21st opinion addressed an issue regarding the duty and liability of Farmers Insurance Exchange (“Farmers”) and U.S. Disaster Services LLC (“U.S. Disaster”) owed to an insured homeowner in addressing flood damage. See Abraham v. Farmers Insurance Exchange, No. 335353, 2018 WL 3998728 (Mich. Ct. App. August 21, 2018).

The damage caused by interior flooding included significant mold growth.

The daughter of the homeowner (“Plaintiff”), reported flood damage in her mother’s home to the insurance company (Farmers). Farmers recommended using U.S. Disaster to mitigate the damage caused by the flooding. U.S. Disaster began working on the home after the Plaintiff signed a “Work and Direct Payment Authorization” document.

U.S. Disaster conducted remediation services. In the course of doing so it discovered mold in the subfloor. In response to this discovery the Court notes:

. . . the contract between the homeowner and U.S. Disaster provided that U.S. Disaster “will undertake best efforts to clean and remove only mold and mildew it discovers.” However, when the mold was discovered, U.S. Disaster employees did not attempt to “clean and remove any mold” other than to spray the subfloor with an antimicrobial chemical, an action which U.S. Disaster concedes, is at best, a means to prevent mold from spreading, not to eliminate or contain it. After spraying, U.S. Disaster ceased work and left the premises never to return.

The Plaintiff testified that she overheard a phone call between Farmers and U.S. Disaster in which Farmers told the employee of U.S. Disaster to leave the subfloor in place and not complete remediation.

U.S. Disaster conceded that after discovering the mold, it stopped working and recommended that the Plaintiff hire an environmental consultant.

The trial court granted summary disposition to Farmers and U.S. Disaster. In reviewing the trial court’s decision, the Court stated it must address three questions:

  1. Whether Defendant owed a duty to the Plaintiff
  2. Whether there is a question of fact that this duty was violated
  3. Whether any claim was extinguished by release

The Plaintiff argued Farmers:

  1. owed her a duty to hire a qualified mitigation company to mitigate the water damage,
  2. warn her of the risks associated with mold and advise her to leave the home, and
  3. not to direct or control the scope of U.S. Disaster’s work.

The Court rejected all three arguments. It held the Plaintiff failed to establish any evidence which held the insurance company to such duty, failed to establish U.S. Disaster was not qualified, and failed to state a specific claim in relation to her testimony about overhearing the two Defendants.

The Plaintiff also argued that U.S. Disaster owed her a common law duty to take reasonable precautions to assure that their work did not harm her or make an existing hazard more dangerous. A common law duty analysis balances factors such as relationship of the parties and the foreseeability of harm.

The Court agreed that U.S. Disaster owed the Plaintiff a duty for two reasons:

  1. The duty was to undertake the best efforts to clean and remove any mold
  2. The harm was foreseeable, and U.S. Disaster admitted understanding the risk mold poses

Therefore, given the relationship and foreseeability of harm, U.S. Disaster was held to owe Plaintiff a duty to perform its work so as not to create any new harm or worsen already existing risk of harm.

U.S. Disaster also argued that the case should be dismissed because the Plaintiff signed a release. The Court rejected that argument for three reasons:

  1. There is a question of fact as to when the release was signed and what was known at the time;
  2. There is, at minimum, a question of fact as to whether Plaintiff signed the release as her mother’s attorney-in-fact or in her individual capacity;
  3. There is no evidence in the record that the release was signed in exchange for some consideration

The Court affirmed the grant of summary disposition to Farmers Insurance and reversed the grant of summary disposition to U.S. Disaster.

copy of the opinion can be found here.