No Coverage for Defects in Subcontrator’s Own Work

Tred R. Eyerly | Insurance Law Hawaii | February 11, 2019

    Damage to the concrete floor installed by the insured subcontractor was not property damage and thus not covered under the insured’s CGL policy. Kalman Floor Co. v. Old Republic Gen. Ins. Corp., 2019 U.S. Dist. LEXIS 3319 (D. Colo Jan. 8, 2019). 

    In 2007, Kalman Floor Co. was subcontracted to construct over 158,000 square feet of concrete flooring for a cold storage facility. The concrete floor was completed in late 2008. In late 2009, the contractor notified Kalman that pockmarks, or “pop-outs,” were visible on the concrete flooring. The only damage to tangible property in the facility caused by the pop-outs was the concrete flooring itself.

    On January 31, 2009, Old Republic issued a general liability policy to Kalman for one year. The policy excluded for damage to “your work,” defined as “work or operations performed by you or on your behalf.” Old Republic denied coverage for damage to the concrete floor. Kalman sued, seeking a declaration that the exclusions did not bar coverage. 

    Under Tenth Circuit law, as established in Greystone Const, Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272 (10th Cir. 2011), the term “occurrence” in a CGL policy encompassed unforeseeable damage to non-defective property arising from faulty workmanship. The policy was intended to protect the insured business from claims by third parties concerning personal injury or property damage resulting from accidents. In discovery, Kalman admitted the pop-outs in the concrete floor “did not physically injure or damage any tangible property other than the floor system it installed.” Thus, under the terms of the policy, property damage did not occur. 

    Consequently, Old Republic’s motion for summary judgment was granted and the case dismissed with prejudice.

Protective Safeguards Endorsements: Does Your Policy Have One?

Daniel Veroff | Property Insurance Coverage Law Blog | February 16, 2019

We see many commercial insurance claims denied because the insured did not maintain a particular “protective safeguard” required by the policy. For example, a policy may require burglar alarms, and exclude coverage for theft if alarms are not working at the time of a loss. Or, a policy may require fire sprinklers, and exclude coverage for fire loss if the property does not have any. Some provisions may even allow the insurer to deny coverage if the insured failed to have a contract in place for regular service of the protective safeguard, something often seen for Ansul systems in restaurants. Courts across the country have almost uniformly upheld the validity of these endorsements.1

These requirements seem straight forward enough, so why do we see so many claims denied? In nearly every case, the insured first learns about the protective safeguard requirement when the claim gets denied. How can this be?

The first thing we investigate is whether the agent made an error. Almost certainly, a question on the application was answered incorrectly, and that incorrect answer caused the endorsement to be added. If the agent made an error, it may be a simple claim against the agent for negligence.

However, in many cases the agent’s Errors and Omissions insurance limits are insufficient to cover the loss. In these cases, insureds often ask whether the insurer has liability coverage as well. Depending on the relationship between the agent and the carrier, the answer may be simple. But if the agent is “independent” and writes for multiple carriers, the answer likely requires a heavy factual inquiry only possible through litigation.

Insurers may be liable for other reasons as well. The carrier may have, for example, required the agent to apply for the insurance using a proprietary form that asks vague and ambiguous questions about the protective safeguard at issue. For example, many forms only ask if a property is “sprinklered,” even though many sprinkler systems only facilitate a safe exit for occupants and do not protect property. These systems do not satisfy the protective safeguard requirements.

In other instances, the insurance company may have received inconsistent information during the application process and failed to investigate the issue, creating the basis for a policy reformation based on mutual mistake. For example, an insurer may have inspected the property after the policy was issued and learned that the required protective safeguards were not present.

In even rarer situations, an insurer may have obtained information from third-parties that put them on notice of the lack of a protective safeguard system. For instance, Verisk, the successor company to the Insurance Services Office, inspects many buildings itself to create and sell Building Underwriting Reports, or “BURs,” to carriers. Carriers purchase these reports for many reasons, including as part of a routine audit of its policies. If the carrier obtained a BUR that showed the information entered by the agent was incorrect but chooses not to disclose that to the insured, a cause of action for fraudulent concealment might be viable.

Getting past a denial for failing to comply with a protective safeguard endorsement is often a difficult path that requires litigation and careful thought. Working with an attorney experienced on the issue is the best way to understand what options may exist for reversing the denial.
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1 See American Way Cellular, Inc. v. Travelers Property Casualty Co. of America (2013) 216 Cal.App.4th 1040, 1054-55 (citing cases).

Court Rules Sewer Backup Clause Does Not Include Internal Plumbing

Jason Cieri | Property Insurance Coverage Law Blog | February 13, 2019

Back in January 2017, I blogged about the landmark case of Pichel v. Dryden Mutual Insurance Company,1 where New York’s Third Department ruled that the insurance policy contained an ambiguity when differentiating between loss caused by backup to a sewer or drain and a loss caused by backup to an internal plumbing system.

The court stated:

“[T]hat water damage caused by a backup/overflow that originates from a pipe or clogged drain located within the insured’s property line comes from the insured’s plumbing system and is covered by the policy; conversely, if the cause of the backup/overflow is from outside the insured’s property boundaries – such as a clogged municipal sewer that forces water from outside the insured’s plumbing system to overflow – the sewer or drain exclusion is applicable.”2

While this is good case law for New York counties in the Third Department, other jurisdictions had yet to adopt the same reasoning—until now.

Recently, the Honorable Jack Libert in the Supreme Court, Nassau County, had this same issue before him.3 On December 6, 2016, Plaintiff, Hix Brix LLC, sustained a water loss to their basement when a pipe broke and clogged, causing water to back up into the basement. The insurer investigated the claim and paid money solely due to a water-backup endorsement, and without that endorsement the claim would be excluded under the “water” exclusion which read:

B. Exclusions
g. Water
(3) Water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump, or related equipment.

Also contained within the AmGuard policy was an exclusion for “frozen plumbing.” Due to the term “plumbing” being used within this exclusion, I asked the court to recognize a distinction between the terms “plumbing” and “sewers and drains” – the plumbing being on the plaintiff’s property and the sewers and drains being off premises.

The court ruled in favor of the insured noting that an ambiguity existed in the policy regarding the exclusionary clause. The court noted, “[t]he language excluding damage from ‘sewer, drain, sump pump or related equipment’ is not specific and clear with respect to internal plumbing.”

I leave you with a quote from British philosopher, Thomas Reid, who stated: “There is no greater impediment to advancement of knowledge than the ambiguity of words.”
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1 Pichel v. Dryden Mutual Ins. Co., 117 A.D.3d 1267 (N.Y. App. 3rd Dept. 2014).
2 Pichel at 1269.
3 Hix Brix v. AmGuard Ins. Co., No. 600249/18 (N.Y. Sup. Ct., Nassau County Sept. 27, 2018).

Freezing Exclusions: One Size Does Not Fit All

Edward Eshoo | Property Insurance Coverage Law Blog | February 12, 2019

“One size fits all” is a phrase used to describe pieces of clothing or accessories designed to fit all people. Over time, it has been used to refer to anything meant to apply in all circumstances.

Obviously, one size cannot fit all people. The same holds true when it comes to “freezing” exclusions in homeowner’s insurance policies. Not every freezing exclusion is the same. Compare the following two freezing exclusions.

The ISO “Homeowners 3-Special Form”1 excludes loss to the insured dwelling caused by discharge, leakage, or overflow from within a plumbing system or a household appliance caused by freezing unless the insured has used reasonable care to maintain heat in the dwelling or shuts off the water supply and drains all systems and appliances of water.

Allstate Insurance Company’s “Deluxe Plus Homeowners Policy Form AP337” excludes loss to the insured dwelling caused by discharge, leakage, or overflow from within a plumbing system or a household appliance caused by freezing, while the dwelling is vacant, unoccupied, being constructed, unless the insured has used reasonable care to maintain heat in the dwelling or shuts off the water supply and drains all systems and appliances of water.

Neither exclusion applies if the insured has used reasonable care to maintain heat in the dwelling or shuts off the water supply and drains all systems and appliances of water. And, the Allstate freezing exclusion applies only if the loss occurs while the insured dwelling is vacant, unoccupied, being constructed.

The historic low temperatures that recently hit Chicago and the Midwest has resulted in an influx of water damage losses as plumbing pipes break or burst due to a buildup in water pressure caused by freezing water in an adjacent section of pipe. The recent “polar vertex” reminded me of a prior water damage/frozen plumbing loss involving Allstate’s Form AP337. These were the facts.

The insured owned a single-family residential dwelling in the Chicago area. He lived there with his wife. It was their customary place of habitation. It contained their furniture, appliances, household goods, personal items, and other possessions of value and utility. It was their residence.

The insured and his wife also owned a farm in Indiana. They left their residence on a Monday morning in January to travel to their farm to check on the property. They were not intending on staying overnight; but, the weather was bad when they arrived (snow) and they stayed because of concerns with driving on the slick roads.

They returned home five days later and found water damage throughout their dwelling. The home was a little cold inside when they arrived. The insured checked the furnace and it was on. He did not touch the thermostat for the heat before leaving for his farm. It had been set at 68 degrees.

The insured reported the loss to his Allstate agent. Allstate retained an engineer to inspect the insured dwelling, who opined that adequate heat had not been maintained in the dwelling to prevent freezing. Allstate denied coverage for the loss. The denial letter cited to the freezing exclusion, though the letter offered no factual explanation why it applied to this water loss.

Suit was filed against Allstate for breach of contract. Allstate asserted the freezing exclusion as its sole defense, alleging that the insured dwelling was vacant and/or unoccupied at the time of the loss, and that the insured failed to maintain adequate heat in the dwelling to prevent freezing. After some initial exchange of discovery, I moved for summary judgment on the freezing exclusion.

In Illinois, as in most, if not all states, the insured bears the burden of proving that his or her loss falls within the insuring agreement of the insurance policy. Once the insured meets this burden, then the insurer must prove that the loss falls within a policy provision limiting or excluding coverage it if wishes to escape liability for a loss.2

The insuring agreement in its Form AP337 obligates Allstate to pay for sudden and accidental direct physical loss to the insured dwelling except as limited or excluded. The insured’s burden of proof in this case was straightforward and limited. He need only prove that he suffered a sudden and accidental direct physical loss, which he clearly had in the form of water damage to the insured dwelling. The burden shifted to Allstate to prove the applicability of the freezing exclusion. The arguments for why Allstate had not and could not meet this burden were as follows.

First, Illinois courts have defined “vacant” as meaning “generally empty or deprived of contents.”3Because furniture, appliances, household goods, personal items, and other possessions of utility were in the home at the time of the loss, the insured dwelling was not vacant.

Second, Illinois courts have defined “unoccupied” as meaning “no one was living in the dwelling or had actual use or possession of the dwelling at the time of the loss.”4 The insured and his wife owned the insured dwelling. They occupied it continuously since purchasing it. They lived there. It was their customary place of habitation. And, it was their residence. Therefore, the insured dwelling was not “unoccupied” at the time of the water loss.

Although the insured and his wife were away from it for five days, such temporary absence did not render the home unoccupied, as the insured and his wife intended to return home, and they never abandoned or relinquished possession of it during this five-day period.5

Third, the loss was not caused by a frozen pipe. The source of the water loss was a water supply pipe for the second-floor bathroom sink. The insured saw what appeared to be a small film of ice along the back of the vanity sink where the pipe exited. He did not see ice anywhere else in the home. After he turned the water off, the insured noticed that the copper shut-off valve was detached from the water supply pipe. While the insured was not required to prove the cause of the loss to sustain its burden under the insuring agreement, if the water damage resulted from a worn, defective, or deteriorated copper shut-off valve, then coverage would still be afforded for the water damage, as Form AP337 covers direct physical damage from the sudden and accidental escape of water from a plumbing system caused by wear and tear, latent defect, deterioration or mechanical breakdown.

Finally, and alternatively, even if the loss was caused by a frozen pipe and even if the home was vacant or unoccupied at the time of the loss, reasonable efforts were used to maintain heat in the insured dwelling, which the insured did by setting the thermostat for the heat at 68 degrees. However, Allstate’s position – that the insured failed to maintain adequate heat in the dwelling to prevent freezing – was contrary to the express language of the freezing exclusion, which only requires that the insured use reasonable care to maintain heat in the insured dwelling, and not that adequate heat be maintained to prevent freezing. In that regard, even when the temperature is set at a high degree like 68, pipes along exterior walls and in unheated locations still can freeze.

Not surprisingly, Allstate agreed to settle the case before the court ruled on the summary judgment motion. So, when confronted with a freezing exclusion, read it, understand what triggers its potential application, such as vacancy or occupancy, and make the insurer prove the cause of the water loss if there is any doubt as to the exclusion’s application, such as whether the loss was caused by freezing, or by another peril such as mechanical breakdown or latent defect.
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1 ISO Form HO 00 03 05 11.
2 Reedy Industries, Inc. v. Hartford Ins. Co. of Illinois, 306 Ill.App.3d 989 (5th Dist. 1999).
3 Lundquist v. Allstate Ins. Co., 314 Ill.App.3d 240, 245 (2nd Dist. 2000).
4 Thompson v. Green Garden Mut. Ins. Co., 261 Ill.App.3d 286, 291 (3rd Dist. 1994).
5 Gash v. Home Ins. Co., 153 Ill.App. 31 (4th Dist. 1890). See also Foley v. Sonoma County Farmers’ Mut. Ins. Co., 115 P.2d 1 (Cal. 1941).

Partial Flood Proofs of Loss Requesting Only Items In Dispute Are Losers In Flood Claims

Chip Merlin | Property Insurance Coverage Law Blog | February 4, 2019

Flood insurance claims governed by the National Flood Insurance Program are different. The requirements to get paid are strict and must be complied with. Many inexperienced attorneys and public adjusters prepare these claims improperly and the result is that policyholders do not get paid or paid as much as they otherwise deserve. Federal proofs of loss have to be completed fully, properly, and on time.

A case issued last week, Clark v. Wright National Flood Insurance Company,1 involved a situation where the policyholder filed a proof of loss for the undisputed amounts of a flood claim and a proof of loss for disputed items. This is not the way to file a flood insurance proof of loss. A flood proof of loss for all the amounts claimed has to be filed on a federal form, completely filled out and signed. It should have backup and documentation as well. We have discussed and warned about these requirements in:

  • A Warning Regarding Federal Flood Proofs Of Loss
  • What is Enough to Satisfy the Standard Flood Insurance Policy’s “Proof of Loss” Requirement?
  • National Flood Proof of Loss Deadline on Monday – Are You Sure the Proof is Right?
  • Proof of Loss Tips for National Flood Claims Involving Superstorm Sandy

In the reported decision, the federal judge hammered the policyholders and stated the following:

A NFIP participant cannot file a lawsuit seeking further federal benefits under the SFIP unless the participant can show prior compliance with all policy requirements.”…In case of a flood loss to insured property, the insured must satisfy several requirements before bringing a lawsuit….Foremost, the insured must provide a complete, sworn Proof of Loss (POL) within 60 days after the loss, “or within any extension authorized by FEMA.”…

In addition, the proof of loss must include documents supporting the claimed amount, including “[s]pecifications of damaged buildings and detailed repair estimates,” as well as “inventory of damaged property showing the quantity, description, actual cash value, and the amount of loss.”… These are strict requirements….Thus, an insured’s failure to provide a complete, sworn proof of loss statement with supporting documentation “relieves the federal insurer’s obligation to pay what otherwise might have been a valid claim.”

….stating the amount of an invoice and attaching an adjuster’s list of contents losses does not amount to stating the amount claimed under the policy…Plaintiffs did not seek payment for any portion of the items on the contents list in the proof of loss, nor did they sign and swear to the amount in the attached adjuster’s estimate, which would be required under the SFIP to claim those losses…The proof of loss does not even claim the $32,310 from the invoice, it merely states that this is the flood-related part of the invoice. Because the December 2016 proof of loss did not meet the requirements of the SFIP, Wright is excused from paying plaintiffs’ claim. (Citations omitted)

Filing flood insurance claims differs from almost any other form of insurance. The law has been interpreted strictly against policyholders and exacting preciseness seems more important than the validity of the claim under current federal law.