Wildfire Considered One Occurrence Despite Damaging Numerous Properties

Christina Phillips | Property Insurance Coverage Law Blog | November 29, 2018

A recent decision by the Supreme Court of Wisconsin1 might predict how other courts would analyze coverage under commercial general liability insurance policies for wildfires. In May 2013, a fire broke out on forest land owned by Lyme St. Croix Forest Company. The fire burned nearly 7,500 acres over the course of three days and damaged real and personal property owned by various individuals and businesses.

The fire was alleged to have begun within a piece of logging equipment owned by Ray Duerr Logging, LLC (“Duerr”). At the time of the fire, Duerr was insured by Secura under a commercial general liability policy with a $2 million aggregate limitation. The policy also contained a logging endorsement, the per-occurrence limit was reduced to $500,000 for property damage due to fire arising from logging or lumbering operations. Secura believed that the $500,000 policy limit applied, rather than the $2 million aggregate limit and filed a declaratory judgment action.

The Supreme Court of Wisconsin was presented with determining whether the fire was a single occurrence for purposes of the CGL policy, or whether there was a new occurrence each time the fire crossed a property line. The court began by looking at the policy language, which defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court then looked to the “cause theory” which provides “where a single uninterrupted cause results in all of the injuries and damage, there is but one ‘accident’ or ‘occurrence.’ ” If the cause and results are so simultaneous or closely linked in time and space as to be considered by the average person as one event, then only a single event has taken place.

In concluding that the fire was a single occurrence, the court noted that the fire burned continuously for three uninterrupted days in a discrete area caused by a single precipitating event. The court believed that the average person would consider this one event regardless of how many properties lines the fire crossed. In that regard, the Supreme Court of Wisconsin believed that the number of properties damaged by the fire was irrelevant – whether one person, or multiple persons owned the 7,500 acres did not determine the number of occurrences.

Additionally, the Wisconsin Supreme Court disagreed with the court of appeals determination that there was an occurrence each time the fire – fueled and expanded by the consumption of new materials – spread to a new piece of real property and caused damage. The Wisconsin Supreme Court held that such a conclusion would result in an unfathomably large number of occurrences, an interpretation which would cause an unreasonable result under the policy. As such, the Wisconsin Supreme Court concluded there was a single occurrence, subject to the $500,000 policy limit.
1 Secura Ins. v. Lyme St. Croix Forest Co., LLC, 918 N.W. 2d 885 (WI. Oct. 30, 2018).

Contractors Versus the Insurance industry—AOB’s Are Under Attack

Chip Merlin | Property Insurance Coverage Law Blog | December 3, 2018

The National Association of Public Insurance Adjusters held its mid-year meeting last week and the topic of assignment of benefits, commonly referred to as AOB’s, was on the agenda. Lisa Miller, an insurance lobbyist and regulator I have come across for over twenty-five years was the speaker on the topic.

Miller is a very bright and an excellent communicator. When Lisa Miller speaks about what the insurance industry has on its legislative agenda, I listen carefully. I would suggest Florida roofers and contractors do so as well. Here is a little about her background:

As a former deputy insurance commissioner, Lisa represents and advises property insurance companies representing 25% of Florida’s six million personal and commercial residential policies. She served as lead advisor to Florida’s Property and Casualty Insurance Fraud Task Force and serves as regulatory consultant to investors who are entering Florida’s insurance market. Lisa is the exclusive insurance lobbyist and technical consultant for the Florida Realtors association with 140,000 members in all Florida counties.

She made several points about AOB’s which my notes reflect as follows:

  1. AOB’s were not historically required for restoration contractors to get paid by insurance companies. They are a recent phenomenon being promoted by a small group of law firms to the restoration insurance industry.
  2. AOB’s have led to a significant increase in first party property insurance lawsuits. She showed me statistics after her speech which indicated at least a quarter of all first party property insurance lawsuits are being brought by restoration contractors and roofers.
  3. Premiums are rising as insurance companies face many needless lawsuits. She claims she has many examples of lawsuits being “leveraged” by the restoration contractors and their lawyers to pay amounts greater than what is legitimately owed. She has examples of some law firms who do shoddy legal work or who represent contractors with repetitive shoddy construction practices.
  4. AOB’s allow some contractors to rip off policyholders duped into the belief they will get quick quality work done and a quick claims handling by the contractor. Instead, those policyholders find they get no or little work done and are outside parties to a lawsuit owned by the contractor and their lawyers. I expect that she will have a number of policyholders testify about this occurrence at upcoming hearings in the Florida legislature.
  5. The Florida Attorney’s Fees statute protecting policyholders was never intended to protect parties not part of the insurance contract.

Here is what she says, in part, on the topic in her blog:

The hustle is real and it’s happening every day in Florida.

Under an Assignment of Benefits (AOB) contract, unsuspecting homeowners are being duped into signing away all their insurance policy rights to a third-party repair or renovation contractor. When the contractor submits their often inflated claim to the insurance company and the insurer refuses to pay it – the contractor sues, aided by lawyers able to game Florida’s one-way attorney fees and bad faith laws to collect all their attorney fees.

It’s a vicious and costly game, where insurance companies settle frivolous lawsuits only because it’s cheaper than going to trial. AOB abuse has created an additional $1 billion of inflated insurance claims over recent years – costs eventually passed along to all homeowners through higher rates. And the problem is getting worse.

Last year, I went to Tallahassee to speak with legislators about this issue and even ended up testifying about this and other issues. In Tallahassee, I also met with several longstanding and reputable restoration contractors about all the hassles they now have with insurance companies which did not exist fifteen years ago. I agree. The insurance industry property claims departments have changed a lot since I started working in this field in 1981. Computers and big data drive claims processes with many claims processes all geared towards one goal—pay less on claims. There is a war going on in the field between restoration contractors and the property insurance claims industry. We see it every day and for every alleged “bad” example by restoration contractors, I and other Merlin Law Group attorneys are told horrendous stories by former insurance adjusters of how they are forced to underpay claims.

Our firm does represent contractors. We are not one of those mill law firms that teaches gamesmanship to contractors about how to leverage AOB’s so that insurers are in a no-win situation. A number of my attorney colleagues that do so are also horrible litigators and have had numerous significant sanctions against them. Those instances will be used by Lisa Miller and the insurance industry in their fight against AOB’s.

A number of public adjusting firms actually represent restoration contractors. Yet, other public adjusters are furious with the restoration industry and have provided me factual instances of those contractors working with those same shoddy attorneys as runners. Whether the newly elected Florida Attorney General Ashley Moody or local state prosecutors will do something about these actions wait to be seen. To the extent they are prosecuted or indicted, I can guarantee those instances will also be shown by Lisa Miller and the insurance lobby as a need for AOB reform.

How all this will play out is anybody’s guess. But, the sweeping Republican victory does not bode well for the restoration construction industry and the future of AOBs in Florida. The insurance industry is in bed with Florida Republican leaders who have stated that AOB reform is a priority for them.

I hope those republicans and other leaders remember how important it is to support reputable contractors to get paid to do a first-rate job. Cheap, illegal and improper construction is easy to do and hide—at least for a while. I made the following comment last week and believe those making public policy should reflect on it and allow good contractors a means to enforce their ability to make a living against an insurance industry hell bent on reducing claims payments anyway they can:

Contractors are a core group that help restore our communities after catastrophes. Those contractors that come from far away communities and do quality work just as they do in their own communities are very important because there is no way local contractors can do all the work demanded following a large scale catastrophe. Professional restoration contractors that build with quality methods, materials, and pursuant to all local building codes are not the enemy and should be congratulated for their entrepreneurialism and willingness to work a long way from friends and families.

I really do not like going to Tallahassee in the winter and watch legislation being made. It is like watching sausage being made, at best. But, it looks like Tallahassee will be an inevitable place for me, again. I would suggest those good and reputable Florida restoration contractors and roofers prepare for a fight because you have one on your hands.

Thought For The Day

The American legislative process isn’t well suited to large and complex measures.
—George J. Mitchell

Pollution Exclusion Does Not Apply To Concrete Settling Dust

Tred R. Eyerly | Insurance Law Hawaii | October 24, 2018

Applying Virginia law, the federal district court determined that the pollution exclusion did not bar coverage. Allied Prop. & Cas. Ins. Co. v. Zenith Aviation, Inc., 2018 U.S. Dist. LEXIS 14727 (E.D. Va. Aug. 29, 2018).

Zenith Aviation, Inc. hired Abby Construction Company to install an elevator at its warehouse. A wet saw was used to cut away concrete, but Abby did not use any water with the wet saw. This created a significant amount of concrete dust to leave the warehouse. Surrounding businesses contacted the fire department because they thought the dust was smoke from a fire. The concrete dust settled inside Zenith’s building, damaging airplane parts stored in the warehouse.

Allied issued to Zenith a commercial insurance policy. Zenith submitted a claim for its loss. The policy’s pollution exclusion barred coverage for the discharge, dispersal, etc. of “pollutants” unless the escape of a “pollutant” was not “caused by any of the ‘specified causes of loss.'” But if the discharge . . . of ‘pollutants’ results in a ‘specified cause of loss,’ we will pay for the loss or damage caused by that ‘specified cause of loss.'” “Pollutants” included any irritant or contaminant, including smoke, chemicals and waste. Finally, “specified causes of loss” were defined as “fire; lightening; explosion; windstorm or hail; smoke . . .”

Cross motions for summary judgment were filed. Allied acknowledged that Zenith suffered a “direct physical loss” that would be covered but for the pollution exclusion. Allied argued that the concrete dust meet the definition of a “pollutant” since it was an “irritant or contaminant.” Zenith contended that cement was not a pollutant and Allied had offered nothing to suggest it was.

The court agreed that concrete dust was a pollutant since it could function as both an “irritant” and a “contaminant.” There was no genuine issue of fact concerning whether the concrete dust “contaminated” Zenith’s products and machinery.

Zenith then argued that the dust was a “specified cause of loss” in the form of “smoke.” The court found the applicable definition of “smoke” as used in the Pollution Exclusion to be unclear, with more than one reasonable definitions. Zenith argued “smoke” could mean a cloud of fine particulate matter. Allied submitted that “smoke” meant “the gaseous products of burning materials” and “suspension of particles in a gas.” With two reasonable definitions, the court construed the ambiguity in favor of the insured. “Smoke” referred to any visible suspension of particles in a gas, including the concrete dust suspended in the air in Zenith’s warehouse.

Allied then argued that even if the concrete dust was “smoke,” it did not “cause” a loss when it merely settled on the airplane parts, contaminating them, because the concrete in the air did not “result in” the dust on the inventory and machinery since it was the dust.

The exceptions to the Pollution Exclusion required a causal nexus between a specified cause of loss and the pollutant. The facts reflected: (1) Abby Construction used a wet saw without water to cut concrete; (2) the saw “released” concrete solids into the air; (3) the dust, rather than falling immediately to the ground, carried into a cloud of particulate, resulting in “smoke;” and (4) the particulate from the cloud of smoke ultimately settled on Zenith’s products and equipment, contaminating them and causing the loss.

Therefore, Zenith’s loss resulted from the dispersal or migration of a pollutant onto its inventory and machinery, and that dispersal or migration was caused by a visible gaseous suspension of the concrete particulate in the air, i.e., smoke. The “dispersal” or “migration” of the concrete dust onto Zenith’s products was therefore “itself caused by” the smoke from which it settled, and therefore the loss fell under the exception to the pollution exclusion. Further, the “discharge, dispersal, seepage, migration, release or escape” of the concrete dust from the wet saw “resulted in” smoke, a specified cause of loss, which then caused Zenith’s loss.

Allied argued that “smoke” could not simultaneously be both the “pollutant” and the “specified cause of loss.” But the fact that the particles that contaminated Zenith’s products and equipment were the same as the particles that were a constituent part of the “smoke” did not mean that there was no causal separation between the “pollutant” that was dispersed and the “specified cause of the loss” that dispersed it or resulted from it.

Therefore, the court believed that the Supreme Court of Virginia would conclude that the Pollution Exclusion did not apply and that there was coverage under the policy for Zenith’s alleged losses.

Ambiguous Insurance Application Language Leads to Bad Faith Award

Marle Laur | Property Insurance Coverage Law Blog | November 25, 2018

A Nebraska court recently ruled that an insured was entitled to bad faith damages after the court found that an insurance application was ambiguous in its language.

In the case at hand, Eric Hayes (“Hayes”), the plaintiff and insured, owned a home in Nebraska. He used the detached garage of the home for his plumbing business, and he rented out the second and third stories of his home to a tenant. The home suffered a fire loss, and Hayes filed a claim with his homeowner’s insurer, Metropolitan Property and Casualty Insurance Company (“Metropolitan”). Metropolitan subsequently learned that Hayes was doing business out of his garage and was leasing out part of his home. However, Hayes had previously indicated on his insurance application that his residence was not used to conduct business and was not used as a rental property.

After its investigation, Metropolitan determined that Hayes had made material misrepresentations on his insurance application. As a result, Metropolitan denied Hayes’ claim and cancelled his policy. Metropolitan sent Hayes correspondence enclosing a check for all premiums Hayes had paid. Metropolitan also sent a check to Hayes’ bank to satisfy the mortgage on the home. The bank accepted the check.

Hayes’ brought suit against Metropolitan for breach of contract and bad faith practices. The U.S. District Court for the District of Nebraska ruled in favor of Hayes.

The Eighth Circuit affirmed the district court’s decision, finding that the application contained unclear language. Hayes also testified that he did not operate his business out of the garage, even though some business activities were conducted there. Additionally, the insurance form asked whether the residence was held exclusively for rental, which it was not. The case is Hayes v. Metropolitan Prop. and Cas. Ins. Co., Nos. 17-3005, 17-3064 (8th Cir. Nov. 9, 2018).

A Short Fable About Property Insurance

Joshua Stein | Joshua Stein PLLC | November 20, 2018

A man in Monsey named Moshe bought a townhouse. He bought homeowner’s insurance for the townhouse. The man’s daughter moved into the townhouse. The man never lived there. For 10 years, premiums were paid on the homeowner’s policy. Then a pipe broke in a wall, causing great damage. The man filed a claim on his 10-year-old homeowner’s policy. The insurance company denied coverage.

Why? When the man applied for homeowner’s coverage, he told the insurance company in the application that he was going to live in the townhouse. It would be his primary residence. But it turned out not to be. He lived somewhere else. His daughter lived in the townhouse. Her occupancy didn’t count as his occupancy. So the man’s insurance application contained a misrepresentation. As a result, 10 years later, when a loss occurred—the broken pipe—the insurance company denied coverage.

The man sued. He lost at trial. He appealed. He lost on appeal. Both the trial and the appellate courts ruled in favor of the insurance company. (You can read the appellate decision at https://tinyurl.com/insure88.) The courts decided that the homeowner’s insurance policy was invalid from the very beginning—worthless and meaningless—because of the inaccuracy in the man’s application for coverage. It didn’t matter that the broken pipe in the wall had nothing to do with the inaccuracy.

This outcome should not surprise anyone familiar with insurance law. When an insurance application contains an inaccuracy, this gives the insurance company an opening to say it would never have issued the insurance policy had it known the truth. Here, the company successfully argued that it issued the homeowner’s policy in the mistaken belief that the policyholder lived in the townhouse, i.e., it was owner occupied. The fact that it wasn’t changed the risk profile entirely, because people will take better care of their own house than someone else’s. The insurance company would not have issued the policy at all had it understood the greater risk because the house was not owner-occupied. At least that’s what the law of insurance says, and the courts confirmed in this case.

The fact that the homeowner’s insurance policy had been in effect for 10 years, and premiums had been paid for all that time, didn’t change the result. (In contrast, it probably would have changed the result if the misrepresentation had occurred in an application for a life insurance policy.) Presumably the homeowner’s insurance company had to refund 10 years’ worth of premiums because the homeowner’s policy turned out to provide as much insurance protection as a roll of toilet paper. The reported appellate case doesn’t mention a refund, though.

The fable of Moshe in Monsey teaches important lessons for anyone who applies for insurance. The insurance application requires obsessive accuracy. If anything in it is wrong, this might entirely invalidate the insurance, as happened here. One might think one is “getting away with something” by misstating facts—intentionally or otherwise—in an insurance application. But the insurance company will probably get the last laugh, at a time when it’s too late to do anything about it.

When buying automobile insurance, for example, one might save a few dollars by saying a car spends most of its time in the relatively collision-free suburbs, whereas it really spends most of its time driving around, or parked, on the collision-rich streets of Brooklyn. The insurance company might go ahead and issue a piece of paper that looks like an insurance policy. If the holder of that policy has a significant claim, though, the policy might vanish, just as Moshe’s policy in Monsey did, based on the policyholder’s misrepresentation about the location of the car.

One also needs to think about changes in facts, and how they might affect existing insurance coverage. Suppose Moshe initially did live in the insured townhouse. At some point in the 10-year life of his insurance policy, maybe in the middle of a renewal year, he decided to move to Brooklyn. Was he supposed to tell the insurance company right away that the townhouse would now no longer be owner-occupied? The logic of this court decision suggests he should in fact have notified the insurance company at some point. How many people would think of doing that? How many people would realize that, for insurance purposes, having their daughter live in their townhouse is very much not the same as actually living there?

Similar issues and concerns arise when a real estate or other company buys insurance. The company might think it is “getting away with” something by giving the insurance company facts that aren’t quite accurate, or by not reporting later changes that make previous facts inaccurate. That strategy will very likely backfire at the time when the company needs its insurance most—when the company needs to submit a significant claim.