Collapse of Underground Storage Cave Not Covered

Tred R. Eyerly | Insurance Law Hawaii

    The Eighth Circuit faced unusual facts in determining that the collapse of a cave serving as a storage facility was not covered under the policy. Westchester Surplus Lines Ins. Co. v. Interstate Underground Warehouse & Storage, Inc., 2020 U. S. App. LEXIS 83 8th Cir. Jan. 3, 2020).

    Interstate operated an underground storage facility in a cave that formerly housed a limestone mine. In 2014, Interstate experienced a series of “dome-outs,” in which layers of rock destabilized, detached, and collapsed from above into the cave.

    Interstate’s policy with Westchester included coverage for collapse of a “building” caused by “building decay.” Westchester sought a declaratory judgment that Interstate’s loss was not covered. The district court granted summary judgment for Westchester because the cause of the loss was not “building decay” within the meaning of the primary policy.

    When Interstate constructed its facility, a limestone slab from the middle zone of the Bethany Falls limestone provided a natural ceiling. The rubble zone was above this natural ceiling. To ensure that the slab of limestone from the middle zone did not detach and fall into the facility, Interstate inserted steel bolts through the natural ceiling, through the rubble zone, and into the more stable layers of rock above the rubble. 

    For purposes of the appeal, Westchester accepted that Interstate’s facility was a “building” within the meaning of the policy. The appeal turned on whether the collapse that damaged the “building was caused by “building decay.” So the dispositive question was whether decay in the rubble zone was “building decay.”

    The Eighth Circuit was not convinced that the bolting process transformed the rubble zone and other earth around the bolts into part of the “building.” Rather, the bolts reinforced the facility’s natural ceiling, much like pilings beneath a large building provide support to that structure. 

    The court concluded that the rubble zone above the natural ceiling of Interstate’s facility was not part of the “building.” Because the decay that caused the dome-outs occurred within the rubble zone, the dome-outs were not caused by :building decay” within the meaning of the policy. Therefore, the judgment of the district court was affirmed. 

Coverage for Faulty Workmanship Denied

Tred R. Eyerly | Insurance Law Hawaii

    The court found there was no coverage for the insureds’ alleged negligent failure to construct a building. Evanston Ins. Co. v. DCM Contracting, 2020 U.S. Dist. LEXIS 63977 (N.D. Ga. Feb. 28, 2020).

    Turning Point Church sued DCM Contracting for faulty workmanship on a construction project. Turning Point sent a demand letter to DCM on August 18, 2017 and filed suit in December. Evanston did not receive notice of Turning Point’s claims and the lawsuit until May 15, 2018. 

    Evanston filed suit for a declaratory judgment and moved for summary judgment. The court first considered the late notice. The policy required notice “as soon as practicable” DCM was also required to provide copies of demands, notices, or legal papers to Evanston. Here, DCM did not give notice to Evanston until nine months after receipt of Turning Point’s demand. A phone communication with DCM’s agent between August 2017 and May 2018 was insufficient. DCM provided no documents, including the summons and complaint, to the agent. DCM waited five months to forward the underlying lawsuit. This was a breach of the policy.

    There was also no occurrence. The underlying lawsuit sought damages to repair DCM’s work and economic losses. Any claims of economic loss by Turning Point did not constitute property damage. 

    Accordingly, summary judgment was awarded to Evanston. 

Resulting-Loss Exception Does Not Restore Coverage For Faulty Workmanship

Larry P. Schiffer | Insurance and Reinsurance Disputes Blog

The faulty workmanship exclusion precludes coverage where the claimed damage is caused by or resulting from an act, error or omission (negligent or not) that relates to the design, specifications, construction, materials or workmanship.  Can coverage nevertheless be restored by the resulting-loss exception to the exclusion?  The Tenth Circuit recently addressed this question.

In Rocky Mountain Prestress, LLC v. Liberty Mutual Fire Insurance Co., No. 19-1169 (10th Cir. Jun. 2, 2020), a subcontractor sought insurance coverage under the property owners’ builders risk policy for the cost of regrouting concrete pillars and columns that the subcontractor had installed.  The insurer denied coverage on multiple grounds, including that the loss was excluded by the policy’s exclusion for faulty or defective workmanship.  The subcontractor brought this action seeking damages and coverage.  The district court granted summary judgment to the insurance company.  On appeal, the Tenth Circuit affirmed.

In affirming, the circuit court rejected the subcontractor’s restoration of coverage theory.  Essentially, the subcontractor argued that because the faulty workmanship exclusion had an exception, that exception restored coverage because of the necessary ambiguity.  The exception provided that “if an act, defect, error or omission as described above results in a covered peril, [the insurer] covers the loss or damage caused by that covered peril.”  Basically, the subcontractor was arguing that the resulting-loss exception restored coverage because covered peril is defined as a risk of loss or damage that is not caused or limited by an excluded peril.  This, according to the subcontractor, made the provision circular and ambiguous and, therefore, the provision should be construed in favor of coverage.

The court pointed to many other court decisions construing similar language that concluded the resulting-loss exception restored coverage only when the excluded peril leads to a loss from an independent non-excluded peril (citations omitted).  In other words, there has to be two causes of a loss, one excluded and one not excluded. One example is where acts taken during construction cause a fire.  The fire is a covered peril and, therefore, there is coverage.  But when there is only one cause of the loss–in this case the faulty workmanship–the exclusion applies and the resulting-loss exception does not restore coverage.

As the circuit court noted, “the exception cannot be allowed to swallow the exclusion.” The court concluded that the “resulting-loss exception to a defective-workmanship exclusion does not provide coverage for the costs of repairing or replacing defectively designed or constructed parts of a structure; rather, the exception only restores coverage for damages sustained when the defective workmanship becomes the cause of additional, separate damage.”

Interpreting Insurance Coverage and Exclusions: When Sudden means Sudden and EIFS means Faulty

Ben Volpe | Higgins, Hopkins, McLain & Roswell

EIFS, or Exterior Insulation and Finish System, is an integrated exterior insulation and synthetic stucco system, praised for its energy efficiency.[1] However, EIFS has come to be well known in the construction defect world as placing homes at risk due to a lack of a built-in moisture management system. Before long, insurance companies recognized the risk and began explicitly excluding coverage for EIFS-related damage. However, EIFS exclusions have not always been so clearly set forth in some policies, causing insurance coverage litigation.

Recently, a Greenwood Village couple, Mark and Susan Mock, lost this fight.
Built in 1994, the Mocks’ home was constructed with an EIFS system. The Mocks carried a homeowner’s insurance policy through Allstate, which covered “sudden and accidental loss” to property, but excluded coverage for “planning, construction or maintenance” issues. Such “planning, construction or maintenance” exclusions included “faulty, inadequate or defective designs.”

A few months after a hailstorm, the Mocks discovered moisture-related damage to their home’s EIFS system. They reported the damage to Allstate, but Allstate would not cover it, reasoning that the damage to the EIFS system was excluded as a design and/or construction failure, and thus not covered as a “sudden and accidental” loss. The experts who evaluated the damage concluded it was the result of inherent flaws in the EIFS systems common in the 1994 timeframe, which involved long term moisture intrusion behind the cladding and no means for the water to escape.
The Mocks subsequently sued Allstate for 1) entry of a declaratory judgment; 2) breach of contract; 3) common law insurance bad faith; and 4) improper denial of claim under C.R.S. § 10-3-1115.[2] Allstate moved for summary judgment.

The District Court Case: When Sudden means Sudden

At the district court level, the Mocks made several arguments for denial of Allstate’s summary judgment motion, only two of which the court analyzed.
First, the Mocks argued Allstate’s policy was ambiguous. That is, because the policy expressly covered sudden and accidental loss to property without defining “sudden and accidental,” the terms should be construed against the insurance company and in favor of the insured to mean “unexpected and unintended.”[3] Because the damage to their home was “unexpected and unintended,” the Mocks argued, the loss should be covered.[4] In making this argument, the Mocks relied on Hecla Min. Co. v. N.H. Ins. Co., 811 P.2d 1083, 1090 (Colo. 1991), which defined “sudden and accidental” in certain pollution policy exclusions to mean “unexpected and unintended.”
However, here, the district court found Hecla’s definition of “sudden and accidental” to be inapposite.

Hecla holds that “a pollution exclusion clause in a commercial liability insurance policy which provides coverage for a ‘sudden and accidental’ event is inconsistent with that policy’s definition of an ‘occurrence’ as an accident including ‘continuous or repeated exposure to conditions.’” Because of that inconsistency, Hecla held that the word “sudden” in that context was ambiguous and defined it to mean “unexpected and unintended,” so as to ensure consistency in the policy.[5] In other words, Hecla was about defining ambiguous terms in an insurance policy to be harmonious with one another, ensuring none are rendered meaningless.[6]

Upon finding Hecla does not apply here, the district court defined “sudden,” according to its plain meaning, which, according to the Merriam-Webster dictionary, implicates something that happens abruptly or hastily. Thus, the court rejected the Mocks’ attempt to construe “sudden” as “gradual or continuous” to fit the fact pattern of a slowly deteriorating EIFS stucco system.[7]

Second, the Mocks argued that a factual dispute existed with respect to whether the EIFS system suffered a design flaw or a construction flaw. The district court summarily dismissed this argument, relying on the experts’ reports, which consistently opined that the EIFS system was damaged as a result of long-term water intrusion, not a “sudden” incident.[8]

The Appeal: When EIFS means Faulty

On appeal, the Tenth Circuit Court of Appeals did not address the district court’s analysis surrounding coverage for “sudden and accidental” loss. Instead, the Court of Appeals affirmed summary judgment based on the faulty construction or design exclusion.[9]

The Tenth Circuit’s opinion, therefore, focused on the experts’ opinions that the damage to the Mocks’ home flowed from inherent flaws with EIFS stucco systems. The issue with respect to whether EIFS systems met building codes at the time of construction in the 90s is a legal issue—the court said—and thus not a material dispute of fact to be analyzed on summary judgment.

The Tenth Circuit concluded that “[t]he undisputed facts show that the manufacturer’s design of the EIFS system caused water infiltration and damage.”[10]

Conclusion

When considering installing EIFS systems, construction professionals should beware—not just of EIFS exclusions in their insurance policies—but also of potentially ambiguous language in those policies that courts will construe as excluding EIFS-related damage.


[1]https://www.eima.com/eifs/benefits.

[2]See Mock v. Allstate Ins. Co., 340 F. Supp. 3d 1087 (D. Colo. 2018).

[3] Id. at 1090.

[4] Id.

[5] Id.

[6]See Martinez v. Am. Fam. Mut. Ins. Co., 413 P.3d 201, 203 (Colo. App. 2017).

[7] Mock, 340 F. Supp. 3d at 1090-91.

[8] Id.

[9] Mock v. Allstate Ins. Co., No. 18-1407, 2020 U.S. App. LEXIS 642 (10th Cir. Jan. 9, 2020).

[10] Id. at *8.

Florida Court Holds Insurer Not Required To Plead Exclusions As Affirmative Defenses To Preserve Defenses To Coverage

Kelly N. Hallisey | Phelps Dunbar

A Florida appellate court held that under a named perils policy, an insurer need not plead a policy exclusion as an affirmative defense in order to present evidence that an insured’s damage was the result of a non-covered cause of loss. Citizen’s Prop. Ins. Corp. v. Kings Creek South Condo, Inc., No. 3D18-661, 2020 Fla. App. LEXIS 3493 (Fla. 3d DCA Mar. 18, 2020).

An insured made a claim for wind damage to its property under a named perils insurance policy. The insurer denied the claim as the damage was not caused by wind but was instead a result of multiple causes of loss not covered by the policy. The insured filed a breach of contract action. During the trial, the insurer attempted to present evidence that the damage was caused by improper maintenance, but the insurer objected, arguing that the insurer was relying on the policy’s Existing Damage Exclusion, which the insurer did not plead as an affirmative defense. The trial court agreed and granted a directed verdict in favor of the insured. The insurer appealed.

The appellate court focused on the definition of affirmative defense and the fact that the insured’s policy was a named perils policy. The appellate court explained that when an insurer presents an affirmative defense, it is advising that there would be coverage if not for the pled exclusion. The appellate court held that the insured had the burden to prove that a covered cause of loss caused damage to its property under the named perils insurance policy, so the insurer was simply presenting evidence that the damage was caused by non-covered causes of loss to rebut the insured’s evidence of a covered cause of loss. Accordingly, the appellate court reversed and remanded, finding that the insurer did not need to plead the exclusion as an affirmative defense.