Third Circuit Holds No Coverage for Faulty Workmanship Despite Insured’s Expectations

Brian Margolies | Traub Lieberman Straus & Shrewsberry LLP | November 20, 2018

In its recent decision in Frederick Mut. Ins. Co. v. Hall, 2018 U.S. App. LEXIS 31666 (3d Cir. Nov. 8, 2018), the United States Court of Appeals for the Third Circuit had occasion to consider Pennsylvania’s doctrine of reasonable expectations in the context of a faulty workmanship claim.

Hallstone procured a general liability policy from Frederick Mutual to insure its masonry operations. Notably, when purchasing the policy through an insurance broker, Hallstone’s principal stated that he wanted the “maximum” “soup to nuts” coverage for his company.  Hallstone was later sued by a customer for alleged defects in its masonry work.  While Frederick agreed to provide a defense, it also commenced a lawsuit seeking a judicial declaration that its policy excluded coverage for faulty workmanship. The district court agreed that the business risk exclusions applied, but nevertheless found in favor of Hallstone based on the argument that Hallstone had a reasonable expectation that when applying for an insurance policy affording “soup to nuts” coverage, it this would include coverage for faulty workmanship claims.

On appeal, the Third Circuit acknowledged that the reasonable expectations doctrine can overrule policy language when the insured is issued a policy different than what it specifically requested to purchase.  The court nevertheless reasoned that this doctrine did not apply to Hallstone, which generally asked for a broad policy, but not specifically a policy that would insure faulty workmanship claims – a coverage the court acknowledged does not exist.  The pointed out the absurdity of relying on the reasonable expectations doctrine to overcome the policy’s otherwise plain and unambiguous language, observing that “Hall’s claim that he expected Hallstone’s ‘maximum,’ ‘soup to nuts’ liability policy to include workmanship coverage is no more reasonable than if a purchase of auto insurance expected his policy to cover repairs if his car breaks down, even if he asked for ‘soup to nuts’ coverage.”

Construction Contractors Should Promptly Notify Insurers of a Potentially Covered Claim

Patrick Johnson | Construction Industry Counselor | November 15, 2018

Contractors always should put their insurers on notice of a potentially covered claim as soon as possible.  In many states, an insured typically will not be denied coverage for the late notice of a claim if there is no prejudice to the insurer, however, there are circumstances under which late notice alone can bar coverage.  A recent case before a New York appellate court demonstrates the importance of being aware that liability insurance policies subject to New York Insurance Law § 3420 law which were issued before January 17, 2009 are not subject to a requirement that an insurer may deny coverage for late notice of a claim only if the insurer was prejudiced by the late notice.   In  Lafarge Bldg. Materials Inc. v. Harleysville Ins. Co. of New York, 2018 WL 5659750 (N.Y. App. Div. Nov. 1, 2018), the New York appellate court rejected a construction contractor’s claim for coverage under an insurance policy due to late notice to its insurer.

This case followed the injury of a subcontractor’s employee at a construction site.  The commercial general liability policy issued to the subcontractor required the subcontractor to name the general contractor as an additional insured.  Subsequently, a personal injury action was commenced in March 2008.  Nine months later, the general contractor   tendered to the defendant insurer a letter requesting coverage.  The insurer declined to provide coverage on the grounds that the general contractor failed to provide notice “as soon as practicable” as required by the policy.  The general contractor filed suit against the insurer to challenge the declination of coverage.  The defendant insurer moved for summary judgment on the grounds that the notice was deficient and the New York Supreme Court, New York’s trial level court, agreed.

In the appeal that followed, the question before the New York appellate court was whether the general contractor’s notice to its insurer was timely based on the policy language that notice be given “as soon as practicable.”  The general contractor argued that it lacked knowledge as to whether it was covered under the policy, thus causing  the delay.  The appellate court disagreed, based on the fact that shortly after being served with the underlying personal injury complaint the plaintiff became aware of the occurrence and had in its possession the certificate of insurance outlining its status as an additional insured and identifying the insurer. The appellate court held that although the reasonableness of delay ordinarily presents questions of fact, the facts presented by the general contractor in support of the nine month delay were unreasonable as a matter of law as the insured failed to demonstrate that it lacked knowledge of the identity of the insurer and its additional insured status for over 8 months.

The policy in this case was issued prior to the amendment of N.Y. Ins. Law § 3420, effective January 19, 2009. Most notably, the amendment requires that an insurer show that it was prejudiced by a failure to provide notice in order to successfully disclaim coverage.  The appellate court held that the insurer was not required to show that it had been prejudiced by the untimely notice because the policy had been issued prior to the statutory amendment. Both construction companies and insurers are often faced with claims under policies that pre-date the amendment.  Prejudice requirements vary by state. In some states whether prejudice is required can depend on the type of policy and when it was issued. As demonstrated in the Lafarge case, it is important, particularly with older policies, that construction companies promptly place their insurer on notice of potentially covered claims to avoid any coverage disputes based on late notice.

Insurer Must Defend Insured Against Construction Defect Claims

Tred R. Eyerly | Insurance Law Hawaii | October 4, 2018

Finding various exclusions inapplicable, the Federal District Court ruled that the insurer owed a defense to the general contractor based upon Texas law. Mt. Hawley Ins. Co. v. Slay Engineering, 2018 U.S. Dist. LEXIS 139363 (W.D. Texas Aug. 15, 2018).

Huser Construction had a CGL policy issued by Mt. Hawley Insurance Company. Huser contracted to design and construct a municipal sports complex with the City of Jourdanton. The project consisted of four baseball fields, a softball field, parking lots and swimming pool. Huser subcontracted with Cody Pools, Inc. to design and build the swimming pool. Huser also subcontracted with Q-Haul, Inc. to perform earth work, grading and storm drainage work at the site.

After substantial completion of the project, a Huser employee noticed cracks in the pool and parking lot paving. Cody Pool began repair work, but the problem was not cured. The City later notified Huser of several alleged deficiencies involving the swimming pool structure, asphalt paving, concrete flatwork and curbing, and overall drainage. When repairs were not performed to the satisfaction of the City, it sued Huser alleging breach of contract and negligence.

Huser notified Mt. Hawley. Coverage was denied based on certain exclusions. Mt. Hawley then filed suit seeking a judgment that it had no duty to defend or indemnify Huser. Mt. Hawley relied upon the Your Work Exclusion which precluded coverage for “property damage to your work arising out of it or any part of it and included in the products-completed operations hazard.” The policy further stated that the exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” The policy included a separate endorsement that excluded coverage arising out of a breach of “express or implied contract, breach of express or implied warranty . . . regarding the formation, terms or performance of a contract.”

The parties both moved for summary judgment. The court rejected Mt. Hawley’s argument on the breach of contract exclusion. Merely because Huser may ultimately be liable for certain of the City’s economic losses under a breach of contract theory did not mean that all of the alleged property damage was causally attributable to Huser’s alleged breach of its contract with the City. The fact that all claims contained in the underlying suit have some relation to Huser’s contract with the city or that Huser was sued for breach of contract were not enough to trigger the exclusion. To accept Mt. Hawley’s argument, the facts alleged in the underlying suit would have to demonstrate that there were no other independent, coverage (non-excluded) “but for” caused of the alleged property damage.

The underlying suit alleged that “work performed by [Huser], its subcontractors and suppliers, was defective.” Therefore, the underlying suit alleged that entities other than Huser were responsible for the allegedly defective work and the resulting damage. Accordingly, the allegations left open the possibility that the property damage may have occurred even in the absence of a breach of contract or implied duty by Huser.

Mt. Hawley argued that the subcontractor exception to the Your Work Exclusion was irrelevant because it was overridden by the endorsement containing the Breach of Contract Exclusion. But it was not natural to interpret the Breach of Contract Exclusion to encompass all work incidentally related to the project regardless of the party that performed the work or the capacity in which it did so. The court rejected the sweeping interpretation asserted by Mt. Hawley and instead found that the policy should be interpreted such that the subcontractor exception to the Your Work Exclusion still had meaning. Therefore, Mt. Hawley had a duty to defend.

Mt. Hawley’s motion as to the duty to indemnify was also denied because it was premature to determine whether it had such a duty.

Policy Conditions and Substantial Compliance in Florida—There is a Pulse!

Deborah Trotter | Property Insurance Coverage Law Blog | November 18, 2018

A recent Florida appellate opinion addresses common issues regarding the death blow or failure to comply with policy conditions. It should be well-known that a material breach of a policy condition may be fatal to a claim and grounds for voiding the policy.

Many insurers seek to avoid paying a legitimate claim by invoking breach of policy conditions—usually, the failure to provide prompt notice, failure to submit to an examination under oath, and failure to submit a timely, sworn proof of loss. In Himmel v. Avatar Property & Casualty Insurance Company,1 the appellate court reversed two consolidated summary judgment motions in favor of Avatar issued by the trial court for breach of those policy conditions. The lower court found “that the undisputed evidence demonstrated that Appellant failed to submit for an EUO; failed to submit a sworn proof of loss; and failed to provide Avatar with prompt notice of the loss.” However, the appellate court found “that the lower court did not make a determination as to whether Avatar could reasonably require Appellant to submit to an EUO at a date and time that was not mutually convenient.” And further, that whether the proof of loss timely submitted by the insured’s public adjuster on a different form than provided by the insurer actually constitutes a material breach of the policy condition is a fact question for the jury, not the court. Below, is the appellate court’s well-reasoned analysis for each alleged fatal breach:

Analysis

1) EUO

We begin our analysis by addressing the trial court’s finding that Appellant breached the policy by failing to submit to an EUO. “An insured’s refusal to comply with a demand for an [EUO] is a willful and material breach of an insurance contract which precludes the insured from recovery under the policy.” Goldman v. State Farm Fire Gen. Ins. Co., 660 So. 2d 300, 303 (Fla. 4th DCA 1995). “If, however, the insured cooperates to some degree or provides an explanation for its noncompliance, a fact question is presented for resolution by a jury.” Haiman v. Fed. Ins. Co., 798 So. 2d 811, 812 (Fla. 4th DCA 2001) (quoting Diamonds & Denims, Inc. v. First of Ga. Ins. Co., 417 S.E.2d 440, 442 (Ga. Ct. App. 1992)).

Here, although it is undisputed that Appellant failed to appear for the scheduled EUO, the record evidence reflects that Appellant’s counsel repeatedly requested to reschedule the EUO to a mutually convenient date and time due to unavailability. Appellant attached to his response in opposition to Avatar’s motions for summary judgment evidence showing the efforts made to reschedule the EUO. Accordingly, Appellant presented evidence showing that he cooperated to some degree and/or provided an explanation for his noncompliance which in turn created a question of fact as to whether there was a willful and material breach of the EUO provision, thus precluding entry of summary judgment. See Lewis v. Liberty Mut. Ins. Co., 121 So. 3d 1136, 1136–37 (Fla. 4th DCA 2013) (whether insured’s refusal to attend EUO unless it was via telephone or at her attorney’s office constituted a willful and material breach was a fact issue precluding summary judgment based on insured’s failure to cooperate); Haiman, 798 So. 2d at 812.

2) Prompt Notice

We next address the trial court’s finding that Appellant breached the policy by failing to provide Avatar with prompt notice. “Notice is necessary when there has been an occurrence that should lead a reasonable and prudent [person] to believe that a claim for damages would arise.” Ideal Mut. Ins. Co. v. Waldrep, 400 So. 2d 782, 785 (Fla. 3d DCA 1981). Notice is said to be prompt when it is provided “with reasonable dispatch and within a reasonable time in view of all of the facts and circumstances of the particular case.” Laquer v. Citizens Prop. Ins. Corp., 167 So. 3d 470, 474 (Fla. 3d DCA 2015) (quoting Yacht Club on the Intracoastal Condo. Ass’n v. Lexington Ins. Co., 599 Fed. Appx. 875, 879 (11th Cir. 2015)).

Accordingly, “the issue of whether an insured provided ‘prompt’ notice generally presents an issue of fact.” Id.see also Gonzalez v. U.S. Fid. & Guar. Co., 441 So. 2d 681, 681 (Fla. 3d DCA 1983) (“What constitutes a reasonable time within which to give notice of an accident under the terms of a policy of insurance is ordinarily an issue of fact.”). But see Kroener v. Fla. Ins. Guar. Ass’n, 63 So. 3d 914, 916 (Fla. 4th DCA 2011) (notice of loss provided over two years after the date of loss did not constitute “prompt” notice as a matter of law).

In the present case, the policy requires Appellant to provide “prompt notice” of the loss. Accordingly, Appellant was required to provide notice within a reasonable time given all of the facts and circumstances surrounding the loss. Laquer, 167 So. 3d at 474. To that end, the summary judgment evidence reflects that Appellant provided Avatar with notice of the claim two days after the leak was first discovered and one day after the actual damage was discovered. The evidence also reflects that during those two days, Appellant was actively attempting to mitigate the damage by fixing the leak and removing the impacted flooring. Whether waiting two days before providing Avatar with notice was untimely in view of all of the facts and circumstances surrounding the loss was an issue of fact for the jury to determine.

3) Sworn Proof of Loss

Lastly, we address the trial court’s finding that Appellant breached the policy by failing to submit a sworn proof of loss. It is well established that an insured’s failure to submit a sworn proof of loss before filing suit is usually fatal to the insured’s claim. Kramer v. State Farm Fla. Ins. Co., 95 So. 3d 303, 306 (Fla. 4th DCA 2012). When an insured does submit a sworn proof of loss, however, the issue of whether the submitted document “substantially complie[s] with policy obligations is a question of fact” which precludes the entry of summary judgment. State Farm Fla. Ins. Co. v. Figueroa, 218 So. 3d 886, 888 (Fla. 4th DCA 2017); see also Schnagel v. State Farm Mut. Auto. Ins. Co., 843 So. 2d 1037, 1038 (Fla. 4th DCA 2003).

Here, it is undisputed that Appellant submitted a timely sworn proof of loss via his public adjuster. Although on a different form, the submitted sworn proof of loss contained substantially the same information as requested in the form provided by Avatar with the exception of any claimed personal property loss. Nonetheless, whether Appellant’s failure to include information about his personal property loss in the sworn proof of loss constituted a material breach of the policy was an issue of fact for the jury, not the trial court, to determine. See Schnagel, 843 So. 2d at 1038 (holding that where the insured provided some, but not all, of the insurer requested documents pursuant to the policy’s cooperation clause, the issue of whether the insured materially breached the policy was one for the jury to resolve).

As we see from the appellate court’s analysis, the evidence shows the insurer failed to provide the insured with support for declaring non-compliance and attempting to avoid properly paying the claim. The appellate court found that though the insured may not have adhered to the unsubstantiated and vague demands of the insurer, whether or not those arbitrary demands were reasonable or the insured’s failure to comply with those arbitrary demands were in fact a “willful and material” breach or a “material” breach of policy conditions are issues of fact for the jury to determine, not the court.

In this case, the appellate court held off the coroner and called for the defibrillator. Compliance with policy conditions is a serious matter. It is always a good idea to consult counsel and prevent fatal arguments. There is great guidance in this opinion to keep your claims healthy!
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1 Himmel v. Avatar Property & Casualty Ins. Co., Nos. 4D17-2724 and 4D18-0004 (Fla. 4th DCA October 17, 2018).

Court Finds That Limitation on Conditional Use Permit Results in Covered Property Damage Due to Loss of Use

Christopher Kendrick and Valerie A. Moore | Haight Brown & Bonesteel LLP | October 30, 2018

In Thee Sombrero, Inc. v. Scottsdale Ins. Co. (No. E067505, filed 10/25/18), a California appeals court held that a property owner’s loss of the ability to use his property as a nightclub, based on revocation of a city’s conditional use permit (“CUP”), constituted covered property damage.

In Sombrero, lessees operated a nightclub under the property owner’s conditional use permit from the City of Colton. A company hired to provide security negligently allowed admission to an armed patron, who shot and killed another patron. The City revoked the owner’s permit, and the owner was only able to negotiate the reinstatement of a limited permit, for use as a banquet hall only.

The property owner sued the security company claiming that “negligence” “lower[ed] the resale and rental value of the Property” and caused “lost income.” As damages, the owner sought “the reduction in fair market value of the Property” as well as “lost income.” According to the complaint, “[t]he property went from being valued at $2,769,231 … with its large occupancy and nightclub entitlement, to being valued at $1,846,153 after the modified conditional use permit allowing for private banquet use….” Since “[t]he difference in value is $923,078…. [Sombrero] is seeking negligence damages against [CES] … in the amount of $923,078, which represents the loss in value due to the modification of the conditional use permit.”

The security company defaulted, and the property owner brought a direct action against the security company’s insurer, Scottsdale. The Scottsdale policy covered liability for “property damage” caused by an “occurrence.” “Property damage” was defined as either (a) “[p]hysical injury to tangible property, including all resulting loss of use of that property,” or (b) “[l]oss of use of tangible property that is not physically injured.” “Occurrence,” was defined as “an accident.”

Scottsdale argued that the loss of the CUP was not a loss of use of tangible property but merely the loss of an intangible right to use property in a certain way. It also argued that the damages were for economic loss, not property damage. The owner argued, among other things, that it lost the use of tangible property due to the revocation of the CUP. It also argued that when an economic loss results from the loss of use of tangible property that is covered as property damage.

Although Scottsdale obtained summary judgment, the appeals court reversed. Noting first that establishing coverage for indemnity carries a higher burden of proof than the duty to defend, the court said that duty to defend case law is nonetheless relevant, because “[i]f a case holds that there is no duty to defend on facts similar to those here, it necessarily follows that there is also no duty to indemnify.”

The Sombrero court then stated that “[t]he 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.” The court disagreed with a Washington case cited by Scottsdale for the proposition that loss of a liquor license does not result in loss of use of tangible property, and noted that in Cunningham v. Universal Underwriters (2002) 98 Cal.App.4th 1141, the court based its determination of coverage on whether the tenant was ever in actual possession, pointing out that Sombrero was the owner and, therefore, necessarily had a possessory interest.

As to the economic loss argument, the Sombrero court stated that “[t]he correct principle, then, is not that economic losses, by definition, do not constitute property damage…. Rather, the correct principle is that losses that are exclusively economic, without any accompanying physical damage or loss of use of tangible property, do not constitute property damage.” And having said that, the Sombrero court also stated that diminution in value can be a proper measure of loss of use damages.

The Sombrero court went on to distinguish Kazi v. State Farm Fire & Cas. Co. (2001) 24 Cal.4th 871, which involved an easement, saying that “an easement is not tangible property.” Further, the Sombrero court distinguished the policy language at issue in Kazi, because the policy there did not cover the loss of use of property that was not physically damaged.

Finally, the Sombrero court took issue with Golden Eagle Ins. Corp. v. Cen-Fed, Ltd. (2007) 148 Cal.App.4th 976, where the court found no coverage when a bank sued over a landlord’s failure to maintain that prevented leasing of safety deposit boxes. Finding little ground to distinguish the result, the Sombrero court ultimately said the Cen-Fed claim was “for the diminution in value of its leasehold interest [as] a claim for economic loss, untethered to an interest in tangible property…. here, Sombrero’s claim for the diminution in value of its ownership interest, even though it was a claim for economic loss, was a claim for loss of use of tangible property.” Plus, the Sombrero court pointed out that Cen-Fed had involved a purely contractual theory, with the jury limiting its award to a breach of lease claim and resulting economic damage, but making no award for loss of use of tangible property.

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