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.

Failure to Plead Plausible Claims Defeats Lawsuit

Barry Zalma | Zalma on Insurance | September 11, 2018

It is the obligation of every lawyer representing a plaintiff to plead plausible claims for relief or find the suit dismissed summarily. In Eileen Coonce v. CSAA Fire & Casualty Insurance Company, and Automobile Club Insurance Company; AAA Fire & Casualty Insurance Company, No. 18-7000, United States Court Of Appeals For The Tenth Circuit (September 4, 2018) the failure to plead plausible claims for relief resulted in dismissal by the trial court and affirmed by the Tenth Circuit.


On February 15, 2014, tenants living in a certain house in Broken Arrow, Oklahoma, returned home from dinner to find the ceiling in the living and dining areas had caved in. An engineering survey determined the nails used in construction had failed to hold. The home’s owner, Eileen Coonce, made a claim against an insurance policy (the Policy) issued for the house by CSAA Fire & Casualty Insurance Company, doing business as AAA Fire & Casualty Insurance Company. CSAA denied coverage.

After giving Coonce two opportunities to amend her complaint, the district court granted CSAA’s Fed. R. Civ. P. 12(b)(6) motion to dismiss for failure to state a claim. It held the Policy excluded coverage for the ceiling collapse, and because the Policy did not cover the collapse, there could be no bad-faith claim.


In Ashcroft vIqbal, 556 U.S. 662 (2009), the Supreme Court directed:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. A claim has factual plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the line between possibility and plausibility of entitlement to relief. (Emphasis added)

Iqbal‘s plausibility standard controlled the outcome of the appeal. Coonce argued her Second Amended Complaint pleads plausible claims. To the contrary, the Second Amended Complaint fails to allege any facts to overcome the Policy’s unambiguous exclusions and limitations of coverage, and therefore it fails to plausibly establish coverage under the Policy or a bad-faith denial of coverage.

Although the Policy undisputedly covers the dwelling, it explicitly does not cover losses “[i]nvolving collapse, except as provided in [paragraph] Collapse under Section I – Property Coverages.”   The Second Amended Complaint invokes paragraph E.8. to allege coverage under the Policy.

Paragraph E.8. first defines “collapse” for purposes of the Policy. It then establishes coverage for direct physical loss to covered property involving collapse of a building or any part of a building if the collapse was caused by one or more of the following: (1) The Perils Insured Against named under Coverage C; (2) Decay that is hidden from view, unless the presence of such decay is known to an “insured” prior to collapse; (3) Insect or vermin damage that is hidden from view, unless the presence of such damage is known to an “insured” prior to collapse; (4) Weight of contents, equipment, animals or people; (5) Weight of rain which collects on a roof; or (6) Use of defective material or methods in construction, remodeling or renovation if the collapse occurs during the course of the construction, remodeling or renovation.”

Thus, the Policy makes it clear losses due to a collapse are covered only in certain specified circumstances.

The parties disputed whether the ceiling cave-in qualified as a “collapse” under the Policy, with the district court declining to decide the question in favor of CSAA at the dismissal stage. We need not decide that issue. Even assuming the cave-in was a “collapse,” the Policy covers only a “collapse” caused by one or more of the listed circumstances. But the Second Amended Complaint does not contain any well-pleaded facts to show any of these circumstances would apply. To the contrary, the sole averment concerning the cause of the cave-in is that CSAA’s “engineering firm concluded that the ceiling collapsed because the nails did not hold.” This assertion undermines any inference paragraph E.8.’s limited coverage would apply.

In addition, as CSAA argues, the Policy also unambiguously declines to insure “loss . . . [e]xcluded under Section I – Exclusions,” and “loss . . . [c]aused by . . . [w]ear and tear, marring, [or] deterioration.” In turn, “Section I – Exclusions” denied coverage for loss caused by “[f]aulty, inadequate or defective” “[d]esign, specifications, workmanship, repair, [or] construction” or “[f]aulty, inadequate or defective” “[m]aterials used in repair, construction, renovation or remodeling . . . of part or all of [the] property.” The Second Amended Complaint does not contain any facts showing these exclusions do not apply.

Instead, as with Coonce’s “collapse” argument, the allegations tend to show the exclusions would apply.

In sum, to overcome the motion to dismiss, Coonce had to plead plausible claims. And in light of the Policy’s plain language, to make plausible a claim for coverage of the ceiling collapse, she had to include well-pleaded facts showing one or more of the paragraph 8.E. circumstances would apply and the other unambiguous exclusions would not apply. Because she failed to do so, and therefore failed to nudge her claims across the line from conceivable to plausible, the Tenth Circuit concluded her complaint must be dismissed.

As for the bad-faith claim, under Oklahoma law, tort liability arises only where there is a clear showing that the insurer unreasonably, and in bad faith, withholds payment of the claim of its insured. When a court concludes there was no breach of an insurance policy, it follows a company’s denial of coverage was not unreasonable. Because the Second Amended Complaint lacks well-pleaded facts showing coverage and a breach under the Policy, the district court also did not err in concluding Coonce did not state a plausible bad-faith claim.


Either the insured’s lawyers were incompetent and could not plead a plausible set of facts that would allow for coverage of the “collapse” or, more likely, there were no facts that plausibly allowed for coverage, the suit was destined to fail. Lawyers, although creative, will not state false facts in a pleading to get to trial. There was simply no coverage for Ms. Coonce’s loss and the best that could be said was she presented a fair try and probably should have accepted the trial court’s decision to save the appellate lawyers’ fees.

Construction Claim Notice Travesty -Hope On The Horizon?

Henry L. Goldberg | Moritt, hock & Hamroff LLP | September 20, 2018

Many of you who follow our Construction Law Alert know of the acronym I derisively coined on behalf of the industry, namely “COFED” (for “Contractor Forfeiture Enhancement Device”). It refers to the epidemic of wholly unfair and unnecessary contractual notice provisions in public (and increasingly) private sector construction contracts.

The term COFED has become synonymous with public owner disinterest in fundamental fairness in construction contracting and with the resulting contractor and subcontractor forfeiture of extremely valuable contract claims. Should a multi- million dollar claim be forfeited for want of an unnecessary 10 day or 30 day notice? Are these notices even used by contracting agencies?

The extent of outrageous COFEDs in construction contracts today had led to proposed reform legislation. I had the privilege of participating in the origination and drafting of the legislative bills designed to address this problem. The proposed new legislation would have outlawed COFEDs in public construction in New York.

The concept gained wide acceptance in Albany, with the bill passing unanimously in the Assembly and in the Senate by all but four votes! Regretfully, however, the passed bills were ultimately vetoed by Governor Cuomo after sitting on it for six months.

Such near legislative success (particularly for a first attempt!) was in large part due to a unified and truly statewide coalition of construction industry-based trade associations, which effectively mobilized in support of a legislative prohibition of COFEDs in public construction.

Now it appears that New York courts, which have been completely complicit in their strict enforcement of COFED-type notice provisions, may be beginning to reconsider the harshness of their prior decisions. Recently (6/15/18), a New York appellate court found the outrageous circumstances of a particular COFED unenforceable. This was after the lower (trial) court in the case had already dismissed the contractor’s case for its alleged failure to strictly comply with a

COFED requirement that all notices be verified (i.e. sworn to).

In this potentially landmark case, the public agency’s General Conditions had stated:

Any decision or determination of the Consultant, Owner or Owner’s Representative shall be final, binding and conclusive on the Contractor unless the Contractor shall, within ten (10) working days after said decision, make and deliver to the Owner a written verified statement of the Contractor’s contention that said decision is contrary to a provision of the Contract.

The public agency had challenged the claimant’s entitlement to additional payment for 56 specific change orders. It argued that the contractor completely waived its right to seek additional payment by violating the aforementioned COFED by failing to verify its claim.

Interestingly, both the contractor and the government’s court papers were “devoid of material factual disputes” regarding the actual performance of the contractor under the terms of the contract. The public agency simply argued that the plaintiff waived its rights to its claims by allegedly failing to strictly comply with the verification provision set forth in the public contract. Stripped to the essentials, the public agency shamefully sought to dismiss the claimant’s entire claim merely for its failure to submit its extra work request in “verified” form. In other words, because the contractor did not swear under oath to the validity of all of its claim, the entire claim was sought to be, and was, dismissed.

The trial court had also pointed out, as purported justification for its harsh decision, that NYC-based appellate courts had consistently dismissed contractor claims for extra work payments where a contractor failed to strictly comply with COFED-like notice and other reporting requirements.

In fact, the trial court pointed out in justification for its decision in this case that in yet another, earlier, New York appellate decision, the appellate court had faced the very same absence-of-verification issue and held that failure to “verify” all requests for additional payment constituted a waiver and resulted in a forfeiture of all rights by the contractor.

However, in the recent appellate decision of June 5, 2018 discussed herein, the contractor reasonably argued that it should not be severely penalized for simply failing to submit its notice to the agency in “verified” form. There was no allegation that the claim documents were in any way inaccurate.

Although reprehensible, the trial court’s original decision of May 8, 2017 was basically “correct” given the current obnoxious state of the law. The June 2018 appellate court’s reversal of the trial court’s decision appears to be an outlier, and inconsistent with prior holdings of the very same appellate court.

For its part, the appellate court’s June 5, 2018 decision was as interesting, as it was brief. It stated that:

It is undisputed that plaintiff failed to satisfy a condition precedent to recovering disputed costs for extra work on which defendant forced price reductions. Although contractor gave detailed written statements contesting [Owner’s] determinations of the fair and reasonable value of the extra work… it failed to give verified statements pursuant to the contract’s General Conditions.

The appellate court further noted that:

[The agency] does not argue that plaintiff failed to document the costs of the claimed extra work, to provide timely notice of its claims for extra work, or to provide timely notice of its objections to defendant’s rejections of, and price reductions on, the claimed extra work.

The appellate court also observed that the agency did not contend, other than in “conclusory terms,” that plaintiff’s failure to submit verified written notices was in any way prejudicial to it.

Finally, the appellate court pointed out that the cases upon which the public agency relied in court did not consider whether the failure to strictly comply with the condition precedent of verified notice should be excused to avoid a “disproportionate forfeiture” under circumstances where the noncompliance was de minimis and the defendant-public agency had shown no prejudice.

MH&H Commentary

It’s hard to explain why this intermediate appellate court “found its conscience” in this case. As stated, this very same appellate court has repeatedly enforced hyper- strict enforcement of COFED notice provisions. Was it simply unable to reconcile how far the pendulum had swung in favor of public agencies in their blind enforcement of COFED’s? The appellate court’s decision found the failure to verify the claim notices an inconsequential and de minimis noncompliance, with no resulting prejudice to the agency specifically alleged.

Under such extraordinary facts, and despite the well settled law, this particular intermediate appellate court, at this particular time, based on these facts, could not in good conscious enforce the COFED involved. Is this appellate decision establishing a “lack of prejudice” and/or a “de minimis/inconsequential noncompliance” exception to the enforcement of COFEDs? Will “disproportionate forfeiture” be a new litigated concept for consideration?

What the future holds for this sorry state of affairs, and this outlier case, remains to be seen. For now, the industry must continue its legislative reform efforts. COFEDs, after all, challenge the very survival of contractors and subcontractors. There is no assurance that other courts, or this court, will in the future do the right thing in confronting COFED abuse.

Have you lost a valuable claim against a public agency due to a COFED? Is the public agency against which you asserted a valuable claim, asserting a COFED as a bargaining tool for you to substantially waive your valuable rights? This appellate case raises the hope that in the right hands, and under the right circumstances, COFEDS can be successfully challenged.

Florida Court Clarifies That Pre-Suit Notice for Construction Defect Claims Tolls Statute of Repose

Richard J. Maleski and Joseph F. Rich | Cozen O’Connor | September 20, 2018

Florida imposes a statutory requirement to provide pre-suit notice to recovery targets when the potential claim involves construction defects. While the required notice tolls the statute of limitations for such claims, an open question remained regarding what effect the notice would have on the statute of repose. That is, what happens when pre-suit notice is given prior to the expiration of the statute of repose and the claimant then files a lawsuit after the expiration of the repose period? A new opinion from Florida’s Fourth District Court of Appeal helps clarify this issue and shows that the tolling also applies to Florida’s statute of repose.

In section 558.004, Florida Statutes, the legislature mandated that a claimant give pre-suit notice of a construction defect (or damages arising from a construction defect) to the responsible party at least 60 days before filing a civil action (120 days in the case of an association involving more than 20 parcels). If the claimant fails to abide by this pre-suit notice provision, the civil action may be stayed pending compliance with the provision. The statute clearly tolls the statute of limitations upon serving the pre-suit notice but does not mention what effect it may have on the statute of repose. In Florida, there is a 10-year statute of repose for claims arising out of improvements to real property and the pre-suit notice requirement for construction defect claims crosses over into areas covered by the statute of repose, although its ultimate effect on the tolling of claims was not previously defined.

In the recent case of Gindel et. al. v. Centex Homes et. al., No. 4D17-2149 (Fla. 4th DCA Sept. 12, 2018), the Fourth District Court of Appeal held that compliance with the pre-suit notice requirements of section 558.004, Florida Statutes, tolls the statute of repose in addition to the statute of limitations. In so holding, the court looked to the definition of “action” in Chapter 95, Florida Statutes, which governs statutes of limitations. The definition includes “a civil action or proceeding.” In Gindel, the court held that to only toll the statute of repose upon the filing of a lawsuit would render meaningless the “or proceeding” portion of the definition. The court further explained that because the pre-suit notice provision in section 558.004, Florida Statutes, is mandatory, the “proceeding” is instituted when the claimant complies with the initial requirement; i.e., the pre-suit notice provision. The court reasoned that to hold otherwise would penalize claimants for complying with the statutory requirements.

While this decision is favorable for claimants in construction defect actions, subrogation professionals should make themselves aware of the pre-suit obligations imposed by Chapter 558 and ensure timely compliance to preserve their subrogation rights on claims involving Florida’s statute of repose.

Insurance Companies Must Perform in Good Faith Regardless of Their Customer’s Imperfect Actions

Chip Merlin | Property Insurance Coverage Law Blog | September 21, 2018

Insurance companies routinely argue for immunity from their wrongful actions because acts of their customers are not perfect following a loss. Policyholders are not claims specialists. Policyholders generally are not in the insurance claims business much less the civil litigation business which the insurance industry is the number one participant by far.

In a third party “bad faith” case, the Florida Supreme Court yesterday reiterated these practical issues by stating:

To take the Fourth District’s reasoning to its logical conclusion, an insurer could argue that regardless of what evidence may be presented in support of the insured’s bad faith claim against the insurer, so long as the insurer can put forth any evidence that the insured acted imperfectly during the claims process, the insurer could be absolved of bad faith. As Harvey argues, this would essentially create a contributory negligence defense for insurers in bad faith cases where concurring and intervening causes are not at issue. We decline to create such a defense that is so inconsistent with our well-established bad faith jurisprudence which places the focus on the actions on the insurer—not the insured.1

It is unfortunate that we call these cases “bad faith” cases when they are really “lack of good faith” cases. Just read the ethical rules that historically called for insurance companies and their employees to act in the “utmost of good faith and fair dealing” with their customers.

My mother used to remind me that “Chip, two wrongs never equal a right.” The above-mentioned ruling emphasizes this idea. I often find myself reminding attorneys in my firm, as well as myself, that this is true regardless of what the other side is doing in a lawsuit, appraisal or insurance claim. Professionalism and ethical behavior call for honest, legal, proper and civil conduct regardless of how poorly a party on the other side behaves. Still, it is sometimes difficult to turn the other cheek, but it is also not proper for a professional to get walked over by those using improperly aggressive and unprofessional behavior.

I am writing, researching and preparing for a speech at the Georgia Association of Public Adjusters Association (GAPIA) Fall Meeting in Atlanta next week regarding insurance and public adjuster professionalism. My belief is that the most successful adjusters for insurers or pubic adjusters for insureds in the long run are extraordinary examples of consummate professionals. They know much more than others, are vested in becoming personally even better at what they do and are above the fray of any one claim.

These extraordinary performing claims handlers appreciate the other side and understand the other point of view. They look at the policyholder just as importantly a customer following the loss as before and that the insurance company is an important part and has an important societal responsibility of taking care of the policyholder and claimant’s problems promptly. They look at their personal insurance claims work as involving the public trust, do not game the system and look to act fairly, regardless of personal incentives and company objectives not aligned with honesty or fairness.

From the insurance company standpoint, claims educator Ken Brownlee CPCU wrote in Winning By The Rules:

Why, then, do so many insurers and their claims representatives treat third-party claimants and injured employees as if they were an enemy? Why do so many third-party claimants and employees seek attorneys to represent them in their claims against the insurer? Could it be that insurers have been treating these product users as if the insurer were in charge instead of the injured or damaged party?

If adjusters got back out on the streets and met with folks immediately after their accidents or losses, which is what used to occur forty of fifty years ago, the public might begin to trust the insurance industry again. It might not be so prone to sign up with those television-advertising attorneys. It might also reduce the number of lawsuits that have to be defended at great expense, because when the adjuster knows the claim is valid it would be quickly settled, and when the adjuster knew it wasn’t valid, the denial would be quick, authoritative, and well-documented.2

Little has been written about public adjusters and their obligations to the insurance industry, the public, and their clients. There are very fine public adjuster organizations now at state level promoting professionalism. NAPIA certainly has been stalwart in the growth of licensing the public adjusting profession. It has also been instrumental with The Institutes regarding certification for those seeking to be recognized for knowledge and expertise in their public adjuster profession.

Yet, I tell my Merlin Law Group lawyers to vet every case from every public adjuster. It is not just that we have an ethical obligation to do so. Some public adjusters do not tell their clients what they estimate the loss amount to be because they either overestimate the loss on purpose and do not want to create unrealistic expectations, or they are so poor at negotiating an exact estimate of loss that they leave fairness behind to collect their fee quickly, regardless of the consequence to the client policyholder.

Sometimes, both the public adjuster and insurance company adjuster play the Xactimate game of “who knows what the magic method is to control the Xactimate process” for determining loss. Sometimes, outcome-oriented engineering opinions from either side seem to be the critical suspect issue between the battling interests.

As lawyers for the policyholder, there is one way we now look at to build and repair damaged buildings, and that is legally. What are the contractor specifications to do the job? What is required for labor by the materials needed to be used to make the repair? What do the manufacturer’s specifications call for? What do laws require for safely performing the demolition and construction? What taxes and permits have to be paid? What professionals have to be hired to do the job legally and practically? What do Building Codes call for? What is required so that somebody inspects the job to ensure the people doing the job have done it right—meaning legally and to the specifications demanded?

I now often consult with and hire contract specification experts because there is so much gamesmanship and ignorance displayed by overworked adjusters and public adjusters that I cannot trust either side to get the construction scope and pricing right. I am finding myself saying to experts, “are you sure?” “Are you saying this just because you think I want to hear it?” “Please, do not embarrass me in front of a jury or judge—is this your honest and hard worked upon opinion?”

Again, two wrongs do not make a right! The insurance company is the long-term entity required to always investigate, evaluate and promptly settle or pay claims in good faith. I think that is the practical point of the Florida Supreme Court case from yesterday. Still, the rest of us also owe the public and our clients a duty to do our jobs as professionally as we can.


Thought For The Day

“Always place the best interests of your clients above your own direct or indirect interests.”
—True Blue Life Insurance Code of Ethics