It’s Rain, Not Flood, Why Isn’t My Water Damage Covered?

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | October 13, 2018

The photos from Hurricane Michael show catastrophic loss from not only the storm surge, up to fourteen feet in some areas, but from winds and rain as well. For those that live far enough inland where surge and flood was not an issue, but still sustained water damage from rain, you may think your homeowners policy will cover you. There is however an exclusion in most policies, commonly called the “wind driven rain exclusion” that insurers will use to disclaim coverage.

The “wind driven rain” exclusion will exclude or limit water damage to the interior of a building unless the wind caused an opening in the envelope of the building, leading to an entry point for the water. Common policy language provides:

We will not pay for any loss that is a consequence of loss or damage as described and limited in this section…The interior of any building or structure, or to personal property in the building or structure, caused by or resulting from rain, snow, sleet, ice, sand or dust, whether driving by wind or not, unless the building or structure first sustains damage from a covered cause of loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enters.

Obviously, you’re not leaving your windows open during a large storm, so you may think it’s obvious that the water entered via damage from a covered cause of loss. The most common denial letter I see for water intrusion, once the above wind driven rain exclusion is cited, is one for lack of maintenance, or faulty workmanship. The insurance companies are agreeing to insure the loss if the building first sustains damage from a covered loss, then states there’s no way the major windstorm caused this damage, this was obviously from an: old roof, roof that had reached its life span, faulting seals/installation/old windows doors, poor workmanship upon original installation of windows/roof/doors, and my favorite—lack of maintenance. These reasons are generally not covered causes of loss under the policy, so the insurer adds these to the denial letter in order to deny coverage via wind driven rain exclusion.

As always, read your policy to know what types of damages you are insured against. If you’re making renovations or repairs to your home, keep records of what was done when, perhaps memorialize with photographs the finished product so if you are ever faced with a denial letter for ‘lack of maintenance’ you can show definitively the property was well maintained. And don’t be afraid to ask your agent what the coverages and exclusions mean in your policy.

Critical Issues to a Determination of Coverage and Effective Reservation of Rights

Cheryl D. Shoun | Nexsen Pruet | October 9, 2018

Faced with cross motions for summary judgment in a declaratory judgment action seeking coverage determination, the United States District Court for South Carolina recently employed exacting scrutiny in its analysis of the policies, the reservation of rights letters and the parties’ respective positions. Stoneledge at Lake Keowee Owners Association, Inc. v. Cincinnati Insurance Company and Builders Mutual Insurance Company, 2018 WL 4689135 (September 28, 2018).

Plaintiff, a South Carolina non-profit corporation, manages Stoneledge at Lake Keowee, a horizontal property regime that includes 80 dwelling units. Alleging various construction defects, Plaintiff brought suit against, inter alia, Marick Homes Builders, LLC (“Marick”) and its principal, Rich Thoennes (collectively the “Insureds”), asserting they acted as the general contractor of certain units. Plaintiff also alleged the Insureds, along with IMK Development, LLC (“IMK”) and its principals, placed certain of the units into the stream of commerce. The causes of action included negligence, breach of the implied warranty of habitability, breach of the implied warranty of workmanlike service and breach of fiduciary duty. The case was divided into two separate actions; Phase I and Phase II. Plaintiff secured a verdict in Phase I, following which Plaintiff and the Insureds stipulated the amount of damages due Plaintiff for Phase II, eliminating the necessity of trial. Because Cincinnati Insurance Company (“CIC”) and Builders Mutual (collectively the “Insurers”), had issued commercial general liability (“CGL”) policies to the Insureds, they were parties to the stipulation. Plaintiff and Insurers agreed to proceed with this declaratory judgment action in which Plaintiff sought an order finding the Insurers responsible for payment of damages on Phase I and Phase II. The Insurers sought a determination they were not obligated to provide coverage based upon the standard “your work” exclusion; the policies did not provide coverage for any breach of contract or warranty claims; certain policies did not have coverage to the extent the “property damage” did not occur during the particular policy period as well as other grounds.

1. General South Carolina Insurance Law

As frequently addressed in this forum, insurance policies are subject to the general rules of contract construction. The language of the contract must be given its plain, ordinary and popular meaning. If terms are ambiguous or conflicting, they must be construed liberally in favor of the insured and strictly against the insurer. Despite the requirement of liberal construction in favor of an insured in the event of an ambiguity, the court may not rewrite a policy nor may it grant substantive rights when the meaning of the policy is clear.

2. “Your Work” Exclusion

Standard CGL policies exclude coverage for “property damage” to “your work” arising out of it or any part of it and included in the “products completed operations hazard.”

Here, Marick arrived on the project and completed work performed by a previous contractor. The original work resulted in certain water instruction issues. At trial, Marick was found responsible for Plaintiff’s damages resulting from water intrusion in Phase I. In the instant action, Builders Mutual used Marick’s liability as a basis for its contention that if Marick was found responsible for the Phase I work, that work must have been Marick’s and thus excluded from coverage. Plaintiff conversely alleged the “your work” exclusion did not apply to the water intrusion issues because they resulted from the work of the previous contractor and the damages were therefore covered. Because there was evidence of property damage to work performed by the first contractor before the engagement of Marick, Builders Mutual was not entitled to summary judgment on the “your work” exclusion.

3. Applicable Policy Periods

CIC argued it had no obligation to provide coverage under certain of its policies because they were not effective until after the underlying action began. As to another of its policies, it contested coverage alleging Marick was on notice of Plaintiff’s claims before the commencement of the policy term. While not definitively decided, because there was evidence before the court upon which the factfinder could reasonably conclude the Insureds did not learn “property damage” had occurred or had begun to occur until the commencement of the first policy period, CIC was not entitled to exclude coverage on that basis.

Although CIC’s assertion that the underlying action was initiated after the commencement of its subsequent policies was factually correct, Plaintiff argued and the court agreed, CIC failed to adequately disclose to the Insureds its intention to contend coverage was limited based upon the “known loss” provisions of its policies. Relying on Harleysville, the court concluded CIC did not provide proper notice of its intent to later litigate which policy periods applied nor did it inform the Insureds that a conflict of interest may have existed. Therefore, the court concluded CIC waived the right to contest coverage on the “known loss” exclusions.

4. Breach of Warranty Claims

The Insurers argued they had no duty to provide coverage for any claims “based upon contract” including breach of warranty claims founded upon the Insureds’ failure to replace or repair their defective work. The court agreed with the Insurers’ arguments that repair of faulty workmanship was not covered under the CGL policies. Again, however, relying on the reservation of rights letters, and the Harleysville standard under which such letters are analyzed, the court found the Insurers did not effectively reserve the right to challenge coverage for the claims based upon breach of warranty and repairs for defective construction.

In its reservation of rights letters, Builders Mutual indicated there may be coverage issues and further indicated the Insureds may want to associate their personal attorney, at their expense. Builders Mutual made nothing more than a broad statement that work product was not covered. CIC’s reservation of rights letters referenced several exclusions but failed to explain CIC’s position as to those exclusions. In its analysis of the reservation of rights letters, the court found that none of them adequately advised the Insureds of the need for allocation of covered and non-covered losses or a possible conflict of interest. Further, none of the letters advised of the Insurers’ intent to pursue a declaratory judgment action following an adverse verdict. Thus, the court found the Insurers failed to effectively reserve their rights to challenge coverage for the claims for breach of warranty and repairs.

5. Breach of Fiduciary Duty Claim

Insurers argued the breach of fiduciary duty claim was not covered inasmuch as neither IMK, nor Thoennes, a principal of IMK, were insureds under the applicable policies. This claim was particularly critical to Plaintiff as South Carolina recognizes a claim for breach of fiduciary duty against developers but no such claim has been allowed against contractors. The court made a detailed review of Plaintiffs’ several factual allegations in support of its claims that IMK was the alter ego of Marick and that IMK and Marick should be viewed as amalgamated. Because the record before the court on the cross motions for summary judgment did not include sufficient evidence to determine what rulings, if any, were made in the underlying action as to those theories, the court denied Insurers’ motions for summary judgment, seemingly allowing leave for a second visit of that issue upon supplementation of the record.

6. Allocation Between Covered and Non-Covered Damages

It was clear that at least a portion of the verdict against the Insureds was covered. Consequently, because the Insurers’ exclusions were found ineffective, the entire verdict was subject to the Insurers’ duty to indemnify.

While Builders Mutual’s reservation of rights letters expressly informed Insureds their work product was not covered, it failed to inform that it intended to litigate the damages attributable to non-covered faulty workmanship or dispute coverage as to the breach of warranty and breach of fiduciary duty claims. Further, Builders Mutual failed to inform that a conflict of interest may have existed or that Insureds should protect their interests by requesting an allocated jury verdict. CIC’s reservation of rights letters suffered similar deficiencies. As a result, the Phase II damages were determined to be subject to indemnity.

While the court directed close attention to a number of issues in its examination of the Insurers’ duties, it is clear the Harleysville opinion and the obligations it outlines for insurers, particularly as to reservation of rights letters, was a significant factor in the court’s analysis and resulting decisions. Stoneledge enforces the concept that the broad and general reservation of rights letters of old, with cut and paste references to policies, should be kept in the past. Rather, Stoneledge highlights the importance of thorough, detailed and precise reservation of rights letters, specifically detailing each coverage exclusion the insurer intends to assert and clearly setting forth what it views as obligations of the insured, such as securing a verdict allocating covered as opposed to non-covered damages. This opinion likewise emphasizes the significance of disclosing to an insured the insurer’s intention to pursue a declaratory judgment should it be faced with an adverse verdict.

Collecting For Immediate Remediation Costs

Paul LaSalle | Property Insurance Coverage Law Blog | October 7, 2018

Insurance policies ordinarily contain terms that provide that an insured must exhibit the damaged property for the insurance company’s inspection after a loss. The same policies also provide that an insured has a duty to mitigate damages to the property to prevent further damages. Does an insured breach the insurance policy by preventing the insurance company from assessing the full extent of damages if remediation work is performed at the property prior to the insurance company’s inspection?

The New Jersey Appellate Division recently addressed that scenario.1 In that case, two days after a fire, a public adjuster hired by the insured informed the insurance company of the fire and consequential property damage. Prior to the insurance company’s claim specialist’s inspection of the property to evaluate the property’s damages, he told the public adjuster to complete only minor repairs and work necessary to prevent further damage to the property, but not to perform remediation work. However, when the claim specialist inspected the property six days after the fire, he found that a remediation company hired by the property owner had completely gutted areas of the property to the wood-framing studs. Consequently, the insurance company asserted that it could not assess the extent of damage caused by the fire because of the limited inspection its claim specialist was able to conduct.

Unsatisfied that the amount the insurance company had paid was far less than the public adjuster’s estimated replacement value, the insured sued alleging breach of contract and demanded additional compensation for damage to the property. The trial court dismissed the suit finding that the insured failed to satisfy her evidentiary burden as to damages because she had remediation work done prior to the insurance company’s inspection.

Ultimately, the Appellate Division reversed the trial court and ruled that it was for the jury to determine the material dispute regarding the insurance company’s ability to determine the scope of the property’s fire damage and the amount of compensation that the insured was entitled to receive under the insurance policy.

This case illustrates the importance of fully documenting damages and preserving any damaged property until the insurer has had a chance to inspect.
1 Chen v. State Farm Fire & Cas. Co., No. A-2814-16T1, 2018 WL 3625108 (N.J. Super. Ct. App. Div. July 31, 2018).

California Court Holds No Coverage Under Pollution Policy for Structural Improvements

Brian Margolies | Traub Lieberman Straus & Shrewsberry | September 13, 2018

In its recent decision in Essex Walnut Owner L.P. v. Aspen Specialty Ins. Co., 2018 U.S. Dist. LEXIS 138276 (N.D. Cal. Aug. 15, 2018), the United States District Court for the Northern District of California had occasion to consider the issue of a pollution liability insurer’s obligation to pay for the redesign of a structural support system necessitated by the alleged presence of soil contamination.

Aspen’s insured, Essex, owned a parcel of property it was in the process of redeveloping for commercial and residential purposes.  The project required excavation activities in order to construct an underground parking lot, and as part of this process, Essex designed a temporary shoring system comprising tied-in retaining walls in order to stabilize the area outside of the excavation.  During the excavation work, construction debris was encountered requiring removal.  Aspen agreed to pay for a portion of the costs to remove and dispose the debris under the pollution liability policy it issued to Essex.

The litigation between the parties concerned unconfirmed debris located outside of the excavated area, which Essex believed caused the shoring system to fail.  While Essex did not seek coverage for locating and removing this debris, it nevertheless contended that it was entitled to coverage under its policy to redesign and reimplement the shoring system.  Aspen denied coverage for these costs on the basis that the debris outside of the excavated area was not a pollutant, and that in any event, the costs of redesigning the shoring system was not a “clean-up cost.”

The court declined to reach the issue of whether the debris qualified as a pollution condition,  instead focusing on the question of whether redesigning the shoring system qualified as a “clean-up cost,” defined by the Aspen policy in part as “reasonable and necessary expense … to investigate, abate, contain, treat, remove, remediate, monitor, neutralize or dispose of contaminated soil, surface water or groundwater or other contamination caused by a pollution condition … .”  While Essex argued that the shoring system was necessary to “contain” or “neutralize” the debris outside of the excavated area, the court disagreed, concluding that the purpose of the shoring system was to provide structural support for the construction project, not to address the debris condition.  As the court observed, “Although the redesign of the shoring system addressed the instability in the soil that was purportedly due to the debris, the revised shoring system neutralized instability, not contamination of the soil.”

Court Upholds Denial of Collapse Coverage Where Building Still Stands

Tred R. Eyerly | Insurance Law Hawaii | August 29, 2018

The Michigan Court of Appeals affirmed the trial court’s decision finding the policy’s collapse coverage did not apply. Cmty. Garage v. Auto-Owners Ins. Co., 2018 Mich. App. LEXIS 2680 (Mich. Ct. App. June 19, 2018).

The insured operated a truck repair business. In June 2016, the insured’s place of business sustained damage due to failure of several trusses providing structural support to the building’s roof. The failure was due to latent construction defects leading to an insufficient load bearing capacity. The roof began to sag while one of the walls bulged outward due to the sudden pressure overload. The insured hired a construction firm to install temporary shoring to support the roof and prevent further damage. All of the building’s walls remained standing and, although the roof sagged, it also remained intact. However, the building could not be safely occupied until repairs were completed.

The insured submitted a claim to Auto-Owners under a property casualty and liability policy. Collapse was covered under the Additional Coverage section of the policy. But the policy required the collapse to be “abrupt.” meaning an abrupt falling down or caving in of a building or any part of a building, rendering the building unfit for its intended purpose. The claim was denied on the ground that the damage was not a covered “collapse” under the terms of the policy.

The insured sued and cross motions for summary judgment were filed. The trial court concluded that the building had neither fallen down nor caved in, as it was still standing. Therefore, there was no collapse.

The appellate court affirmed. Although one of the walls of the building bulged outward and the roof sagged, they nonetheless remained intact. While the roof may have been in imminent danger of caving in were the shoring to be removed, the policy excluded from coverage any part of a building that was simply in danger of falling down or caving in.