Illinois Federal Court Determines if Damages Are Too Remote

Lian Skaf | The Subrogation Strategist

Foreseeability is a tort concept that tends to permeate several aspects of legal analysis, often causing confusion in litigants’ interpretation of, and courts’ application of, foreseeability to their cases. In Cincinnati Ins. Co. v. Progress Rail Services. Corp., 2020 U.S. Dist. LEXIS 73967 (C.D. Ill.), the United States District Court for the Central District of Illinois took on the task of analyzing a case dealing with foreseeability issues to determine if the defendant owed the plaintiff a duty and if the damages were so remote as to violate public policy. The court held that since the defendant’s actions contributed to the risk of harm to the plaintiff and the facts satisfied the four-prong duty test, the defendant owed the plaintiff’s subrogor a duty of reasonable care. It also held that the plaintiff’s damage claim did not open the defendant up to liability that would violate public policy.

In the case, an employee of defendant Progress Rail Services Corporation (Progress Rail) was operating a crane at Progress Rail’s Galesburg location on May 7, 2018. The employee struck an overhead power line while working, causing a power disruption to nearby businesses. The plaintiff’s subrogor, Midstate Manufacturing Company (Midstate), was one of the affected businesses, reporting that its Amada hydraulic punch was damaged. Midstate submitted a property damage claim to its carrier, Cincinnati Insurance Company (Cincinnati), who reimbursed it under its policy. Subsequent to its payment, Cincinnati filed suit against Progress Rail in Illinois state court. Progress Rail then removed the case to federal court and filed a motion to dismiss.

The court first considered the defendant’s argument that it owed Midstate no duty of care and, thus, the plaintiff failed to state a claim. The court initially determined whether the defendant’s actions contributed to the risk of harm to the plaintiff. If it did, then the court would weigh the four factors courts consider to determine of whether a duty runs from the defendant to the plaintiff: 1) reasonable foreseeability of the injury; 2) likelihood of the injury; 3) the burden of guarding against the injury; and 4) the consequences of bearing that burden.

Because the actions of Progress Rail’s employee caused damage to Midstate’s equipment, the court determined that the defendant’s actions contributed to the risk of harm to Midstate. Thus, the court moved on to weighing the four relevant factors.

The court found that the weight of the factors balanced in favor of the plaintiff. Looking at the foreseeability of the general character of the event or harm and not the precise manner of occurrence, the court found that the first factor favored the plaintiff. The court also held that the likelihood of injury was present since disrupting power could damage nearby properties. Finally, the court found in favor of the plaintiff for the final two prongs; stating that the burden of guarding against such injuries should have been inherent in the defendant’s work and there were no onerous consequences of imposing such a burden.

The court next analyzed the defendant’s position that the doctrine of remoteness should preclude the plaintiff’s claims. This public-policy-based doctrine is founded on the principle that, regardless of foreseeability, certain plaintiffs should not be able to recover from the defendant because their claimed harm is too remote. The doctrine is typically applied in cases where a third-party plaintiff has no property damage, but claims harm as a result of injury to another. Because the wide spectrum of plaintiffs that could make such claims would lead to “a crushing burden of litigation,” courts apply the doctrine to prevent an unreasonable burden on companies’ activities. Since the type of damage claimed in this matter would not lead to such a burden, the court disregarded this argument as well, dismissing the motion to dismiss in its entirety.

The analyses and holdings of this case are important for subrogation professionals to keep in mind when defendants attempt to make arguments based on either the extent of their duty or the doctrine of remoteness. The Cincinnati Ins. Co. case illustrates the limits of those defenses. This case shows that courts are unlikely to limit the scope of a defendant’s tort duty or restrict litigants’ rights based on public policy without strong justification. In a larger sense, the case is a good reminder that courts may be willing to impose strict limits to tort defenses and plaintiffs should push for those as much as possible.

Not All Damages Are Created Equal – the Proper Application of the Economic Loss Doctrine

Rahul Gogineni | The Subrogation Strategist

In William Lansing v. Doe, 2019 Ore. App. LEXIS 1564, the Court of Appeals of Oregon considered whether the Economic Loss Doctrine (ELD) applied to the plaintiff’s claims based on purportedly faulty construction work in a home. In determining that damage to persons or property is not a purely economic loss in the context of the ELD, the court concluded that the plaintiff could proceed with a negligence claim against a contractor that performed work on the home.

In William Lansing, a credit union that owned a foreclosed home hired CR Services, Inc. (CR) to repair and replace water-damaged drywall in the home. After the plaintiff purchased the home and discovered water-damaged drywall, the plaintiff filed suit against CR for failing to identify the original water leak and repair it prior to installing drywall over the piping. CR filed a motion to dismiss the claim, asserting that the plaintiff’s negligence claim was barred by the ELD. The trial court agreed that the ELD applied and dismissed the action. The plaintiff appealed the decision to the Court of Appeals of Oregon.

The ELD is a legal principle that precludes a party from bringing negligence claims for purely economic losses. The principle is most commonly used in the area of products liability. Specifically, if a failed product only causes damage to itself, most jurisdictions will limit a plaintiff to contractual remedies. Some jurisdictions have expanded the ELD to interpret a home as a product, and as such, apply the ELD where damage is solely to the home and not to other property or persons.

In William Lansing, Oregon’s Court of Appeals rejected the idea that the ELD can apply to the construction of a home. Specifically, it found that the ELD only applies to financial losses, which are purely economic losses. It further confirmed that, while injuries to persons or property may have a financial component, they are not purely economic losses. As the court determined that damage to property is not a purely economic loss, it concluded that the ELD did not apply and, therefore, reversed the trial court’s dismissal of the action.

This case serves as a good reminder that when dealing with a construction loss, a subrogation professional should understand the application of the ELD within the loss location’s jurisdiction. Absent that understanding, a subrogation professional may file the wrong type of claim, which can lead to dismissal of the action.

Illinois Appellate Court Clarifies What Is and Is Not an “Occurrence” in the Construction Defect Context

Marianne Bradley and Anthony Miscioscia | White and Williams LLP

On December 31, 2019, the First District Illinois Appellate Court issued its decision in Owners Insurance Company v. Precision Painting & Decorating Corporation, clarifying what does and does not constitute “property damage” caused by an “occurrence” in the construction defect context. 2019 IL App. (1st) 190926-U, 2019 Ill. App. Unpub. Lexis 2425.

The underlying case involved allegations of negligence, consumer fraud and breach of contract. In particular, the underlying homeowner claimants alleged that Precision Painting & Decorating Corporation (Precision), whom the homeowners had hired to perform certain exterior paintwork at their home, failed to conform to U.S. Environmental Protection Agency (EPA) regulations with respect to the presence of lead-based paint. In its contract, Precision had agreed to take special care with respect to containing lead dust while working on the homeowners’ property. Despite having agreed to do so, Precision (allegedly) took almost no precautions, resulting in significant contamination to the interior of the home.

Owners Insurance Company (Owners) had issued Precision a CGL policy, providing coverage for “property damage” caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Precision tendered its defense to Owners. Owners filed a DJ Action arguing that it owed no duty to defend as the homeowners had failed to allege any “property damage” caused by an “occurrence.” Specifically, Owners argued that, under Illinois law, damages resulting from an insured’s breach of contract are not recoverable under a CGL policy.

The trial court agreed, finding that no “accident” or “occurrence” was alleged. The trial court observed that the homeowners’ contract with Precision had specifically provided for various EPA-required precautions with respect to the use of lead-based paint. The trial court concluded that Precision’s failure to implement those precautions was not an “accident,” which in the trial court’s view, referred to something “unforeseen or untoward or disastrous.” Instead, the trial court characterized Precision’s conduct as nothing more than a foreseeable breach of contract.

Precision appealed, and the Appellate Court reversed and remanded. The Appellate Court found that the trial court’s focus on foreseeability was misplaced. It observed that: “[i]nstead of focusing on the foreseeability of the event itself (the release of lead-based particles), or even generally the damages (lead contamination),” Illinois case law instructs courts “to focus on what, specifically, was damaged, and whether the remediation of that damage fits within the general purpose of a CGL policy.” Id. at *12 (emphasis added). The Appellate Court emphasized that: “when the underlying lawsuit against the insured contractor alleges damages beyond repair and replacement, and beyond damage to other parts of the same project over which that contractor was responsible, those additional damages are deemed to be the result of an ‘accident.’” Id. at *14.

The Appellate Court was careful to contrast these so-called “beyond” damages with damages arising out of faulty workmanship, alone. It reiterated that it is well-settled under Illinois law that “there is no occurrence when a [contractor’s] defective workmanship necessitates removing and repairing work.” Id. at *14. This is true even when a contractor’s faulty workmanship results in consequential damages to any other part of the project for which the contractor has responsibility, as it remains part of the contractor’s work product. However, where damages extend beyond the scope of a contractor’s work product, the court concluded that those damages are more properly classified as unforeseeable accidents, and thus “occurrences.”

The Appellate Court found that Precision’s “work product” was limited to the exterior of plaintiffs’ house. Thus, any damage to the interior of the home, as well as to the surrounding land, was outside the scope of Precision’s project. Because plaintiffs had alleged damages “beyond repair and replacement, and beyond damage to other parts of the same project over which [Precision] was responsible,” plaintiffs had satisfactorily alleged “property damage” caused by an “occurrence.” The Appellate Court reversed and remanded in accordance with those findings.

If I Start Making Repairs, Does It Affect My Insurance Claim?

J. Ryan Fowler | Property Insurance Coverage Law Blog | November 8, 2019

One question I get asked by clients after a storm has damaged their home is: “Can I start making repairs?” This can be a difficult question as the real-world factors of cost, time, availability of materials, and labor are important considerations. It is also important to understand how repairs can affect your insurance claim as most residential insurance policies I deal with include what appear to be contradicting duties to mitigate and the duty to allow the insurance company to inspect.

In a recent Hurricane Harvey case, Stokley v. Allstate Texas Lloyds,1 the trial court addressed whether starting repair work waived the insured’s right to demand appraisal. In Stokley, the insured filed an insurance claim, ultimately filed a lawsuit, and then invoked appraisal. Allstate refused to submit to appraisal, making several arguments why appraisal was inappropriate—one of which was that the insured had already repaired some of the damage, the fence.

The court looked at the fact that only part of the property had been repaired and that the repaired property was only part of the claim, and ruled repair of the fence did not negate the benefits to be gained by appraisal of other property damage.

Whether repairs to damaged property will harm your insurance claim is a fact question that is case-specific. Some of the considerations should be:

  1. Are the repairs temporary or permanent?
  2. Are the repairs needed to make the home livable?
  3. What part of the property damage is being repaired?
  4. Can the areas being repaired still be inspected?

It is always a good idea to keep invoices/receipts to show the cost of the repairs and take pictures of the damage before repairing.

1 Stokley v. Allstate Tex. Lloyds, No. 2:19-cv-00197 (S.D. Tex Oct. 18, 2019).

Court Finds Animals Incapable of Vandalism or Malicious Mischief for Insurance Purposes (and all other purposes, too)

Alex Silverman | Property Casualty Focus | October 31, 2019

I am willing to go out on a limb and say that if asked whether an animal, say, a raccoon, is capable of committing malicious criminal acts, most humans would agree that the issue is beyond dispute. But, alas, most humans would be wrong (apparently it very much can be disputed). There is good news, however. The nation’s courts have been quietly tackling the issue, and, thankfully, they have been able to allay any fear of a raccoon uprising occurring in the near future. A federal court in Pennsylvania recently had occasion to address the issue, and it reconfirmed that animals are indeed incapable of committing “vandalism” or “malicious mischief,” both generally and for purposes of obtaining first-party insurance coverage. See Capital Flip, LLC v. Am. Modern Select Ins. Co., No. 2:19-cv-00180 (W.D. Pa. Sept. 19, 2019).

The Capital Flip case stems from a dispute between Capital Flip LLC and its insurer, American Modern Select Insurance Co. Capital Flip owned property in the Pittsburgh area insured under a “dwelling policy” issued by American Modern. In April 2018, Capital Flip discovered that raccoons (or, perhaps, one especially malicious raccoon) had entered the property and caused substantial interior damage. Capital Flip sought coverage for the damage under the American Modern policy, which covered specific “perils insured against,” including losses arising from “vandalism or malicious mischief.”

According to Capital Flip, the damage was covered because it resulted from “vandalism” or “malicious mischief” committed by the so-called culprit raccoon. American Modern denied the claim and advised Capital Flip that damage caused by animals cannot possibly constitute loss arising from “vandalism or malicious mischief” within the meaning of the policy. Unconvinced by this reasoning, Capital Flip commenced this action against American Modern, asserting claims for breach of contract and bad faith.

In its motion to dismiss, American Modern argued that Capital Flip’s claims failed as a matter of law because raccoons are incapable of committing “vandalism” or engaging in “malicious mischief.” But as noted, reasonable humans can apparently disagree in this respect. Indeed, Capital Flip reasoned, because the policy did not specifically define “vandalism” or “malicious mischief,” it was at least possible that these terms could encompass damage caused by animals. Alternatively, Capital Flip argued that the policy was ambiguous and must be construed in its favor given that these terms were undefined. At a minimum, Capital Flip asserted that this issue was unsuitable for resolution on a motion to dismiss because, unsurprisingly, no Pennsylvania court had ever decided whether an animal is capable of engaging in “vandalism” or “malicious mischief.”

After considering the parties’ arguments, the court declared for the first time in the history of the Commonwealth of Pennsylvania that animals are, as a matter of law, incapable of behaving in the manner required to implicate insurance coverage for “vandalism or malicious mischief.” While the policy did not define “vandalism” or “malicious mischief,” the court found Capital Flip’s reading of these terms to be untenable, and undermined by basic contract interpretation principles. As the court observed, the ordinary dictionary definitions of “vandal,” “mischief,” and “malicious” all require the subject to act with some level of conscious deliberation. The Pennsylvania penal code applicable to Criminal Mischief was similar in this regard. The court explained that accepting any contrary interpretation would require a determination that animals are capable of behaving in ways that simply defy the laws of nature. Refusing to accept such a reading, the court held that the terms “vandalism” and “malicious mischief” clearly and unequivocally presuppose conduct by a human actor.

Other courts have addressed whether damage caused by animals is included within the “vandalism and malicious mischief” coverage of an insurance policy. The Capital Flip court found that each of them has declined to interpret these terms as including animal behavior. Luckily for us humans, it appears that these courts found no evidence to suggest that animals are capable of forming the intent required to engage in the sort of willful conduct contemplated by the “vandalism or malicious mischief” language in insurance policies. Interestingly, in one such case, a New York court held that it only “reluctantly” concurred with other cases finding that coverage for vandalism or malicious mischief is limited to human acts. See Roselli v. Royal Ins. Co. of Am., 538 N.Y.S.2d 898 (Sup. Ct. Monroe Cty. 1989). The Roselli court may have been privy to information about animals these other courts were not, but it reached the same result nonetheless. The Capital Flip court also agreed with that result. Accordingly, it granted American Modern’s motion to dismiss, finding the sole premise of Capital Flip’s claims — that the dwelling policy covers damage caused by malicious raccoons — was legally unsustainable.

Having restored your understanding of nature and contract interpretation, we leave you with this poem by a New Mexico appellate court:

Alas, it is written in the law
That the animal with the paw
Does not have the mind
To do the damage of this kind.
And so, I’m sorry, the Plaintiff won’t get paid.
That’s how the contract was made.
This policy does not apply
When the [raccoon] runs awry.

Montgomery v. United Sers. Auto. Ass’n, 118 N.M. 742 (N.M. Ct. App. 1994).