Pre-Suit Notice of Construction Defect Claims Constitutes a Suit

Alexandra V. Dattilo | Brouse McDowell | March 1, 2018

Insurers and policyholders continue to debate the age-old question vital to the determination of insurance coverage – what triggers the insurer’s duty to defend? States are complicating this question by enacting various statutes that provide individuals avenues to remedy disputes and claims outside of, or prior to filing a traditional suit or civil procedure. These statutes have created confusion and disagreements between the insurers and policyholders. Courts are now trying to help insurers’ clarify their obligations under their policies with respect to these statutes.

This issue was recently addressed by the Florida Supreme Court in Altman Contractors Inc. v. Crum & Forster Specialty Insurance Co., No. SC-16-1420, 2017 WL 6379535 (Fla. December 14, 2017). In Altman, the Florida Supreme Court evaluated whether the notice and repair process set forth in chapter 558 of the Florida state statute constituted a “suit” within the meaning of the commercial general liability policy issued by the insurer to the policyholder. Chapter 558, which is titled “Construction Defects”, sets forth certain procedural requirements before a claimant may file an action for a construction defect. The statute requires a claimant to serve a written notice of a claim on the contractor, subcontractor, supplier, or design professional, as applicable before a claimant may file an action for a construction defect.

In this case, Altman Contractors Inc. was the general contractor for the construction of a condominium and was insured by Crum & Forster Specialty Insurance Company on a general liability policy. Under the terms of the policy, Crum & Forster had a duty to defend Altman in any “suit,” as defined by the policy, arising from the project. The policy defined “suit” to mean “a civil proceeding in which damage because of ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ to which the insurance applies is alleged.” The policy further states that “suit” includes arbitration proceedings or any “other alternative dispute resolution” alleging the above-mentioned damages and which the insured must submit to or does submit to with the consent of Crum & Forster. The policy did not otherwise define “civil proceeding” or “alternative dispute resolution proceeding.”

The Florida Supreme Court answered the certified question in the affirmative, holding that the notice and repair process set forth in chapter 558 constituted a “suit” within the meaning of the commercial general liability policy. The Court went on to state that while “the chapter 558 process does not constitute a ‘civil proceeding,’ it is included in the policy’s definition of ‘suit’ as an ‘alternative dispute resolution proceeding’ to which the insurer’s consent is required to invoke the insurer’s duty to defend the insured.”

This case highlights just one issue that can arise when interpreting insurance policies. As case law and statutory law continue to evolve, make sure you re-examine your insurance policies to ensure you are adequately protected.

Don’t Expose Yourself to Fraud Allegations by the Insurer

Stephanie Poll | Property Insurance Coverage Law Blog | March 8, 2018

Following a devastating loss to one’s home, as is the case throughout California due to recent fires and mudslides, the process of contacting your insurer to begin the rebuilding or repair can be complicated and daunting. Many are quick to begin the rebuilding and repairs immediately or as soon as possible. However, there are requirements in working with your insurer to properly rebuild or repair. If an insured fails to follow appropriate protocols, the insurer can not only deny coverage, but do so on the basis of fraud.

Here are a few helpful tips to avoid this pitfall. Foremost, if you hire a public adjuster be certain he or she is in good standing and licensed. Next, do not begin the repair or replacement process without first contacting your insurer. You often need approval from the insurer to perform such repairs and replacements. Additionally, the insurer will almost always conduct its own visual inspection to assess the damage, determine what is necessary to repair, and how to begin the process.

While you may have to hold off on beginning the repair or replacement process, it is important and helpful to begin documenting the loss through photographs, videos, inventory and any other effective method. Should the conditions change later —which they inevitably will—that documentation is important evidence of the conditions immediately following the loss. Similarly, when photographing the damage and loss, it is also important to take reasonable steps to protect your property from subsequent damage. If such damage was preventable, the insurer may not cover the repair.

Failing to adhere to the proper protocols during this complicated process can lead the insurer to deny coverage either partially or in full. It’s important to know your rights and duties when embarking on the rebuild or repair of your home. Should your insurance company treat you unfairly, contact an experienced insurance professional to answer questions regarding your claim.

You Make A Better Wall Than A Window: Why Policyholders Can Rest Assured That Insurers Should Pay Legal Bills For Claims With Potential For Coverage

Graham Mills and Alan Packer | Newmeyer & Dillion LLP | March 7, 2018

Unfortunately, policyholders, such as manufacturers and contractors, routinely face the unnecessary challenge of how to access all of the insurance coverage which they have purchased. Frequently, the most pressing need is to get the insurance company to pay the legal bills when the policyholders have been sued. The recent Iowa federal district court opinion in Pella Corporation v. Liberty Mutual Insurance Company should help a policyholder in a dispute to require its insurance company to pay those legal bills sooner rather than later by highlighting that the duty to defend arises from the potential for coverage, and the insurer may not force the policyholder to prove the damage to obtain a defense.

In Pella, a window manufacturer purchased several years of insurance coverage from Liberty Mutual. Similar to many companies, Pella had many “layers” of insurance coverage in any given year. These layers collectively function like a tower. The general idea is that each layer provides a certain amount of coverage after the insurance policy below it had paid its money. The Liberty Mutual insurance policies provided excess coverage.

After the Pella window manufacturer made and sold its windows, it was sued in numerous lawsuits alleging that its windows were defective and that those defective windows caused a wide variety of damage to the structures in which they were installed. The window manufacturer tendered those lawsuits to its insurance companies in its tower of coverage, asking that the insurance companies pay its legal bills incurred in its defense. As to Liberty Mutual, the window manufacturer argued that the Liberty Mutual insurance policies were triggered, and so obligated to reimburse it, if a window was installed during the years that those policies provided coverage or if there was a mere allegation that a window was installed during the years that those policies provided coverage. Liberty Mutual opposed, arguing that the date of installation of the windows was insufficient to trigger the policies, and that the manufacturer was required to demonstrate the date that damage actually occurred to trigger a defense.

The key issue before the Pella Court in this decision was a simple one: which insurance policies, if any, issued by Liberty Mutual had an obligation to pay the window manufacturer’s legal bills? The answer to that question is critical and financially significant. Getting an insurance company to honor its obligations and start paying the legal bills as soon as possible is very important for a policyholder because of the cost of defending oneself in a lawsuit; often the key reason why an insurance policy is even purchased is to provide the policyholder with the right to call upon the insurance company’s financial resources to defend it should it be sued.

In a ruling that will be welcomed by policyholders, the Pella Court held that Liberty Mutual’s multiple insurance policies were triggered, and so obligated to pay for the window manufacturer’s defense, if one of two events occurred during the years in which those insurance policies provided coverage: (1) a window was actually installed during a year when the insurance policy provided coverage or (2) the window was alleged to be installed in the year that the insurance policy provided coverage. The Court agreed with the policyholder that once the windows were installed, property damage was alleged and “may potentially have occurred” from that point on, thus the policies on the risk from that point forward. The practical effect of this ruling meant that Liberty Mutual had to reimburse the window manufacturer for the defense fees and costs that it had paid.

While Pella was decided under Iowa law, the principles upon which it relied are similar to those applied under California law. Importantly, both California and Iowa law hold that an insurance company must provide a defense in response to a claim that is, or could be, covered by the insurance policy. The mere potential that the claim might be covered is enough for the insurance company to be obligated to pay for policyholder’s legal fees and costs.

Establishing that an insurance company must pay legal fees and costs as soon as possible allows a policyholder to save its own money. Why should a policyholder pay legal bills when it purchased an insurance policy as protection to ensure that it did not have to pay those bills? The answer is that a policyholder should not and, under Pella, the policyholder does not have to. Rather, the insurance company must start paying for that defense from a very early date. Pella confirms for policyholders the position that their insurance companies should pay legal bills earlier rather than later.

My Insurance Claim Was Denied Because My Water Leak Lasted Over a Period of 14 Days or More – Was the Denial Proper?

Marie Laur | Property Insurance Coverage Law Blog | March 13, 2018

Many property insurance policies have a provision that states something similar to the following: “we do not insure…for loss…caused by…constant or repeated seepage or leakage of water…over a period of 14 or more days.” Insureds may find their claims for water loss under their homeowners’ policy denied on the grounds that the leak was present for a period of two weeks or more. However, Florida courts have ruled that the first thirteen days of damage may be covered, due to ambiguity in the language of the policy.

In Hicks v. American Integrity Insurance Company,1 the court ruled that the policy language did not preclude coverage for damage caused during the first thirteen days of a leak. In Hicks, the insured was out of town when the leak occurred, and he did not discover it until he returned to the property weeks later. He filed a claim under his “all-risks” policy with American Integrity Insurance Company of Florida (“American Integrity”), but his claim was denied based on American Integrity’s expert opinion that the leak had been present for five weeks or more. The insured sued American Integrity for breach of contract. The insured provided a report prepared by a forensic general contractor that reflected the amount of damage that was believed to have been caused within the first thirteen days of the leak. The trial court ruled in favor of American Integrity, stating to the insured, “basically, you’re asking [this court] to say whether the policy covered the loss in the first 13 days…It might, but I’m not so sure that the time frame of these particular facts would allow for that determination.”2

The insured appealed the trial court’s determination, and the appellate court reversed, stating that an insurance policy excluding losses caused by constant or repeated leakage or seepage over a period of fourteen days of more did, “not unambiguously exclude losses caused by leakage or seepage over a period of thirteen days or less.” Since ambiguous language in insurance policies is interpreted in the light most favorable to the insured, it must be interpreted in favor of coverage for the loss. The appellate court further remarked that once an insured demonstrates that a loss is within the policy terms, the burden shifts to the insurer to prove that a loss arose from an excluded cause.3

The appellate court instructed the trial court to enter partial summary judgment in favor of the insured on the sole issue of coverage within the first thirteen days of the leak, with the extent of the damage to be determined at trial. The appellate court also determined that for damage occurring after the first thirteen days, the burden was placed on American Integrity to prove that specific damage was sustained after the thirteenth day, and therefore excluded by the language of the policy.

Similar determinations have been reached in factually similar cases. Insureds should read their policies carefully, as a denial for a loss may not be proper.
1 Hicks v. American Integrity Ins. Co., No. 5D17-1282 (Fla. 5th DCA Feb. 23, 2018).
2 Id. at 3.
3 Id. at 4.

Do Fires Cause Mudslides?

Jonathan R. McBride | CAT-Law Navigator

Most commercial and residential insurance policies contain exclusions for earth movement, flood or surface water. At first glance it may appear clear that these policies would not cover damage from a mudslide. However, as the recent mudslides in Santa Barbara County, California demonstrate, the answer may not be so clear. Those mudslides, which killed more than 20 people and damaged or destroyed hundreds of homes, followed the Thomas Fire that scorched almost three hundred thousand acres.

On January 29, 2018, the California Department of Insurance issued a formal notice to all property and casualty insurers to remind them that they had duty to cover the damage from the recent mudslides if it was determined that the efficient proximate cause of the mudslides was the recent Thomas Fire. The Notice was premised on the California Insurance Code §560’s adoption of the efficient proximate cause doctrine for determination of coverage under first party insurance policies. The notice also noted that California courts have stated that the efficient proximate cause test is the “preferred method of resolving first party insurance disputes involving losses caused by multiple risks or perils, at least one of which is covered by insurance and one of which is not.” Julian v. Hartford Underwriters Ins. Co., 35 Cal.4th 747, 753 (2005).  In Julien¸ the court recognized that when a loss was caused by a combination of covered and excluded risks, there was only coverage when the covered risk was the predominate or efficient proximate cause of the loss. Id. at 750. If the excluded risk was the predominate cause then there is no coverage. Id.

The notice also cited to Howell v. State Farm Fire & Casualty Co., 218 Cal.App.3d 1446 (1990). In Howell, the insured claimed damage from a landslide after a severe rain. Id. at 1449. The insured’s property was situated on a steep slope, and the vegetation had been destroyed by a fire that summer. Id. State Farm denied the claim based on exclusions for earth movement and water damage, but in the suit, the insured alleged that the fire was the proximate cause of the loss. Id. at 1451.

The trial court granted summary judgment in favor of State Farm, but on appeal, the Court of Appeals held that a property insurer could not contractually exclude coverage when a covered peril is the efficient proximate cause even when an excluded peril contributed to or was necessary for the loss. Id. at 1452.  In doing so, the court distinguished those situations where the covered and non-covered peril were concurrent causes with neither being the efficient proximate cause. Id. at 1457-58. In Howell, the insured’s consultant determined that because of the loss of vegetation on the slopes, the soil could not withstand the severe rainfall and the landslide occurred. Id. at 1449. The court held that the determination of whether the fire was the efficient proximate cause of the loss was a question of fact for the jury. Id. at 1459.

The formal notice issued by the Department of Insurance went so far as to conclude that, based on its preliminary evaluation of the information surrounding the mudslides, the Thomas Fire was the efficient proximate cause of the flooding, debris flow, mudslide and other similar events in Santa Barbara County following the fire. However, it did recognize that that only if it was determined that the fire or another covered peril was the efficient proximate cause would there be coverage. The notice concluded by warning that insurers should not deny claims without undertaking a diligent investigation into the cause of the loss.

Not surprisingly, as a result, insurers face added pressure to make coverage determinations that provide coverage for the damage caused by the mudslides. The link between the Thomas Fire and the mudslides has already resulted in at least one lawsuit against Southern California Edison Company. In the suit, residents of Santa Barbara County are suing Southern California Edison alleging it was responsible for the Thomas Fire and that the fire stripped hillsides of vegetation that could have prevented the mudslides.

While the formal notice places insurers on notice that there will be extra scrutiny on claims arising from the mudslides after the Thomas Fire or any similar event in California, it doesn’t change the law in California and it doesn’t mean insurers aren’t allowed to investigate each loss and make a case-by-case evaluation of the efficient proximate cause of the loss. There may be instances where the mudslide or other damage cannot be traced to the effects of the Thomas Fire or any other covered peril. In those instances, insurers would be free to rely on any applicable exclusions in the policy. In the end, it is always important to make a thorough investigation of the claim and hire experts if necessary to determine the efficient proximate cause of the loss.