Court Finds No Coverage for Water Damage Loss Where Property Had Been Vacant for Less than 1 Month

Kevin Pollack | Property Insurance Coverage Law Blog | June 28, 2016

On June 9, 2016, The Washington Supreme Court held that an Essex Insurance Company property policy immediately cut off coverage for water damage after an insured property became vacant.1

In Lui, the policyholders owned a commercial building that sustained water damage after a pipe burst while the building was vacant. The policyholders’ insurance policy for the building purported to limit coverage for water damage in two ways based on vacancy found in a change of condition endorsement: (1) coverage was suspended if the building remained vacant for 60 consecutive days and, (2) at the inception of any vacancy, there would only be coverage for specified causes of losses (not including water damage).

The property became vacant in December 2010, after the policyholders’ tenants were evicted for failure to pay rent. The water loss occurred the following month after a frozen sprinkler pipe in the building broke, causing substantial water damage.

Although Essex had started adjusting the loss—and even began paying on the loss—once it learned that the property had been vacant at the time of the loss, Essex refused to pay anything further. In response, the policyholders sued Essex for the unpaid benefits believed to be owed under the insurance policy.

The policyholders argued that the Change of Condition Endorsement at issue was ambiguous, and therefore had to be construed in favor of coverage. The endorsement at issue read as follows:

VACANCY OR UNOCCUPANCY Coverage under this policy is suspended while a described building, whether intended for occupancy by owner or tenant, is vacant or unoccupied beyond a period of sixty consecutive days, unless permission for such vacancy or unoccupancy is granted hereon in writing and an additional premium is paid for such vacancy or unoccupancy.

Effective at the inception of any vacancy or unoccupancy, the Causes of Loss provided by this policy are limited to Fire, Lightning, Explosion, Windstorm or Hail, Smoke, Aircraft or Vehicles, Riot or Civil Commotion, unless prior approval has been obtained from the Company.

The policyholders’ argument was that the endorsement could be read to exclude coverage for water damage only after a continuous 60-day vacancy. Given the ambiguity, the policyholders argued that the court needed to construe the policy in favor of coverage for the loss that occurred less than a month after the property had become vacant. Although the trial court agreed with the policyholders, neither the Court of Appeal nor the Washington Supreme Court did.

The Washington Supreme Court found that:

Reading the endorsement’s two paragraphs together, the average insured would understand that the endorsement alters the underlying insurance policy to the extent that when a building becomes vacant, the policy provides limited coverage and, after a 60 consecutive day vacancy, the policy provides no coverage.

The Washington Supreme Court found that because the endorsement did not provide coverage for water damage once the property became vacant, there was no coverage for the loss.

Although most insurance policies contain endorsements or exclusions for properties that have been unoccupied or vacant for more than 30 or 60 days, the impact of this endorsement was to preclude many typical property loss claims the moment less than 31 percent of the building was being rented or used for its customary operations.

This case serves an important reminder that policyholders need to review their insurance policies if/when the properties being insured are or may become vacant. This is especially important for policyholders who lease their insured property for residential or commercial purposes.

Here, the endorsement specified there would only be coverage for the specified losses ”unless prior approval has been obtained from the Company.” A simple request to the insurer for water damage loss or other types of loss when the policy was purchased may have avoided the uncovered loss. While the premium may have gone up a little, for someone in the business of leasing out property, doing so could have avoided a six figure uncovered loss.

1 Lui v. Essex Ins. Co., No. 91777-9, 2016 WL 3320769 (Wash. June 9, 2016).


“Occurrence” May Include Intentional Acts In Montana

Tred R. Eyerly | Insurance Law Hawaii | June 15, 2016

The Montana Supreme Court found that policy language defining “accidents may include intentional acts.” Employers Mut. Cas. Co. v. Fisher Builders, Inc., 2016 Mont. LEXIS 269 (Mont. Sup. Ct. April 19, 2016).

Jerry and Karen Slack hired Fisher Builders to build a remodeled home located on the site of their home at Flathead Lake. The existing home was an aged vacation home. The County zoning regulations required the remodeled home to incorporate the existing structure. The permit issued to the Slacks required the existing deck to remain unchanged.

Fisher elevated the existing home structure on steel beams to pour a new foundation. Fisher began to dismantle the walls while the structure was resting on the beams, and found an infestation of carpenter ants. The ant-infested planks were cut out, apparently in order to salvage what usable materials he could from the remaining structure. The ant-infested boards were subsequently burned. Eventually, the deck collapsed.

The County visited the site and issued a cease and desist order. The construction permit was revoked because the existing structure had been destroyed. The Slacks appealed the revocation of their construction permit and eventually reached a settlement with the County that allowed them to construct a home, albeit a smaller one than had been previously approved.

The Slacks sued Fisher. Employers Mutual Casualty Company (EMC), Fisher’s insurer, defended under a reservation of rights. EMC also filed a declaratory judgment action, alleging there was no coverage. Fisher assigned his claims under the EMC policy to the Slacks. The trial court granted EMC’s motion for summary judgment, concluding that Fisher’s conduct was intentional and did fit within the meaning of “occurrence” under the policy.

The Montana Supreme Court reversed. Whether the insured intended or expected the injury stemming from an intentional act was an objective inquiry. The policy language defining “accidents” could include intentional acts if the damages were not objectively intended or expected by the insured.

Further, there were issues of genuine material fact. The Slacks contested the trial court’s determination that Fisher left parts of the home and deck unsupported, causing the deck to collapse, that Fisher “destroyed” the original structure by dismantling the walls, and that Fisher failed to retain a sufficient portion of the original structure in order to maintain the non-conforming use status. Therefore, further proceedings were necessary to resolve factual issues related to application of the coverage provisions of the policy.

How to Circumvent “No Damage for Delay” Clauses

J.P. Vogel | Texas Construction Law Blog | June 21, 2016

Most commercial construction contracts contain a “No Damage For Delay” Clause and most contractors mistakenly believe they are Kings X for any potential claims related to delay caused by an owner or original contractor. While nearly every commercial construction contract contains the same or similar provisions, it is important to keep in mind they all have different authors, which means typically no two clauses are ever drafted the same.

This is particularly important when it comes to “No Damage For Delay” Clauses as the actual breadth of the language and scope will set the tone for their enforcement or circumvention. There are several common law exceptions to “No Damage for Delay” clauses recognized in Texas, which may be neutralized or ignored by the particular language of a “No Damage for Delay” Clause.

Per the recent case Zachry Constr. Corp. v. Port of Houston Authority of Harris County, 449 S.W.3d 98 (Tex. 2014) the Texas Supreme Court recognizes the following 5 common law exceptions:

(1) the damage producing delay was not intended or contemplated by the parties to be within the purview of the provision;

(2) the damage producing delay resulted from fraud, misrepresentation, or other bad faith on the part of one seeking the benefit of the provision;

(3) the damage producing delay has extended for such an unreasonable length of time that the party delayed would have been justified in abandoning the contract;

(4) is not within the specifically enumerated delays to which the clause applies; and

(5) the damage producing delay was based upon active interference, or other wrongful conduct including arbitrary and capricious acts, willful and unreasoning actions, without due consideration, and in disregard of the rights of other parties. Id, citing Green International, Inc. v. Solis, 951 S.W.2d 384, 387-388 (Tex. 1997).

The most critical issue regarding these exceptions as discussed in Zachry is whether or not the “No-Damage For Delay” Clause is drafted either so specifically or globally for the express purpose of circumventing the common law exceptions. If a “No Damage for Delay Clause” specifically addresses the 5 common law exceptions, there is likely no way around its harsh effect. However, if a particular clause fails to address all or some of the 5 common law exceptions there is room for maneuverability to defeat its strict enforcement.

Oregon Negligent Construction Defect Claims Subject to 2-Year Statute of Limitations

Kevin Clonts | Rizzo Mattingly Bosworth PC | June 2016

On June 16, 2016, the Oregon Supreme Court issued an opinion holding that a two-year statute of limitations applies to negligent construction defect claims, subject to a discovery rule. In Oregon, negligent construction defect claims must therefore be brought within two years of when plaintiff knew or should have known of the defect, and per the statute of repose, no later than ten years after construction was completed.

In Goodwin v. Kingsmen Plastering, Inc., plaintiff homeowners filed a construction defect suit against a stucco contractor nearly ten years after construction was completed and, according to defendant, over two years after the alleged defects were discovered. Plaintiffs argued that the six-year statutory period applicable to actions “for interference with or injury to any interest of another in real property” controlled. Defendant argued that the two-year statute generally applicable to tort claims controlled, because that statute applies to “any injury to the person or rights of another, not arising on contract, and not especially enumerated in this chapter.” In support of its argument, defendant relied on a 2011 Oregon Supreme Court decision, which stated in dictum that the two-year statute applied.

The Oregon Supreme Court conducted an extensive analysis of the competing statutes of limitations, their constructions and histories, and concluded that the catch-all two-year tort statute controlled. In deciding that the two-year statutory period governed, the Oregon Supreme Court overturned a 2014 Court of Appeals case that held that the six-year statutory period applied to construction defect claims. Further, in deciding that the two-year statutory period was subject to a discovery rule, the court extended and clarified its prior decision applying a discovery rule to actions subject to the generally applicable two-year statute.

Pair of Cases Concerning Pay-if-Paid Provisions

Katherine E. Kohm | The Dispute Resolver | June 23, 2016

Within the last month, two decisions with two outcomes were issued concerning “pay-if-paid” provisions. Observe that a “pay-if-paid” provision is a true condition precedent in that a general contractor is not required to pay its subcontractor unless and until it receives payment from the owner.  A different result flows from a “pay-when-paid” provision which only allows the general contractor a reasonable time to pay the subcontractor after receiving payment from the owner, but the risk of non-payment from the owner is not shifted to the subcontractor.

In Midlantic Fire, LLC v. Ernest Bock & Sons, Inc., No. DC–8529–14, 2016 WL 3093075, at *1 (N.J.Super. Ct. June 3, 2016), the pay-if-paid clause stated:

Payment by Owner to the General Contractor for the work/materials invoiced by the Subcontractor/Supplier shall be a condition precedent to General Contractor’s obligation to pay Subcontractor/Supplier. Accordingly Subcontractor/Supplier agrees and understands that it shall bear the risk of non-payment by the Owner and shall be entitled to no compensation from the General Contractor in the event of non-payment by the Owner for its work/materials.
The plaintiff subcontractor installed a fire protection system in accordance with drawings and plans supplied by the defendant general contractor.  Subsequent to installation, the general contractor learned that the sprinklers interfered with structural supports that needed to be installed.  The subcontractor issued a change order, which was approved by the general contractor.  The subcontractor performed the changed work.  When the general contractor submitted the invoice for payment, the owner declined to pay because there was a “lack of communication [and] coordination” between the general contractor and subcontractor. The general contractor, citing the pay-if-paid provision, then refused to pay the subcontractor.   The plaintiff subcontractor prevailed at trial, and the defendant general contractor appealed the application of the pay-if-pay by law.

Applying Pennsylvania law, per the contract, the court affirmed in favor of the subcontractor because “courts are reluctant to enforce a conditional payment provision against an unpaid subcontractor that is not responsible for the condition giving rise to the payment defense” and because “parties to a contract have an implied duty not to frustrate conditions precedent to their performance” (citing Quinn Constr., Inc. v. Skanska USA Bldg., Inc., 730 F. Supp.2d 401, 420 (E.D.Pa.2010)).  Because the subcontractor had relied on the plans and drawings submitted by the general contractor and therefore because all coordination among subcontractors was the general contractor’s responsibility, the subcontractor was not responsible for the non-payment. Rather the defendant general contractor’s own error spurred the need for the change order and the owners refusal to pay the change order. As such, the pay-if-paid provision was inapplicable and the general was required to pay the subcontractor.

In A. Zahner Company v. McGowan Builders, Inc., No. WD 78063, 2016 WL 2994022, (Mo.App. Ct May 24, 2016), the pay-if-paid stated:

[Subcontractor] agrees that [the general contractor] will not be responsible to make any payment, progress or final, to [subcontractor] for any and all of the goods identified in this Purchase Order unless and until [general contractor] receives payment for such goods from the Owner of the project . . . . If Subcontractor is not paid within 45 days of when a pay application is submitted, Subcontractor may stop the Work of this Subcontract until payment is received . . . .
The trial court had concluded that the above provision was ambiguous because the “unless and until” language was a condition precedent to payment shifting the risk of non-payment to the subcontractor whereas the “stop the Work” sentences “eased the burden” of risk to the subcontractor.  The appellate court disagreed and instead held that the entire provision could be read harmoniously. That court held that altogether the provision simply “distributes financial risk between the parties and provides both [with] a measure of financial protection.”  In sum, the general contractor did not need to pay if owner did not pay.  As its recourse, the subcontractor did not need to continue work if it was not paid.  As such, the appellate court concluded that the pay-if-paid provision was applicable and remanded the case for fact-finding — whether the owner indeed did not pay the general contractor.