Monthly Archives: November 2018

Ambiguous Insurance Application Language Leads to Bad Faith Award

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Marle Laur | Property Insurance Coverage Law Blog | November 25, 2018

A Nebraska court recently ruled that an insured was entitled to bad faith damages after the court found that an insurance application was ambiguous in its language.

In the case at hand, Eric Hayes (“Hayes”), the plaintiff and insured, owned a home in Nebraska. He used the detached garage of the home for his plumbing business, and he rented out the second and third stories of his home to a tenant. The home suffered a fire loss, and Hayes filed a claim with his homeowner’s insurer, Metropolitan Property and Casualty Insurance Company (“Metropolitan”). Metropolitan subsequently learned that Hayes was doing business out of his garage and was leasing out part of his home. However, Hayes had previously indicated on his insurance application that his residence was not used to conduct business and was not used as a rental property.

After its investigation, Metropolitan determined that Hayes had made material misrepresentations on his insurance application. As a result, Metropolitan denied Hayes’ claim and cancelled his policy. Metropolitan sent Hayes correspondence enclosing a check for all premiums Hayes had paid. Metropolitan also sent a check to Hayes’ bank to satisfy the mortgage on the home. The bank accepted the check.

Hayes’ brought suit against Metropolitan for breach of contract and bad faith practices. The U.S. District Court for the District of Nebraska ruled in favor of Hayes.

The Eighth Circuit affirmed the district court’s decision, finding that the application contained unclear language. Hayes also testified that he did not operate his business out of the garage, even though some business activities were conducted there. Additionally, the insurance form asked whether the residence was held exclusively for rental, which it was not. The case is Hayes v. Metropolitan Prop. and Cas. Ins. Co., Nos. 17-3005, 17-3064 (8th Cir. Nov. 9, 2018).

“An” Versus “Any”: When One Word Makes a Profound Difference in an Insurance Contract

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Jeff Collins | Jones, Skelton & Hochuli PLC |  November 14, 2018

A fundamental principle of insurance is that it provides a safety net for fortuitous events which may create liability against the insured. Equally fundamental is the principle that liability insurance policies do not insure foreseen, expected or intentional acts or omissions of an insured. With regard to a commercial general liability policy, these fundamentals are enshrined in the requirement of an “occurrence,” as used in the Insuring Agreement and defined by the policy, and in the exclusion for “expected or intended injury.” However, these principles are not always satisfied.

Unfortunately for insurers, there may be certain circumstances based upon specific policy wording in which there is coverage for an insured-employer for its vicarious liability arising out of the intentional and excluded conduct of its employees. This analysis, in Arizona and elsewhere, centers around a single word in the “expected or intended injury” exclusion. The standard exclusion states:

Expected Or Intended Injury

“Bodily injury” or “property damage” expected or intended from the standpoint of [the] [an] [any] insured. This exclusion does not apply to “bodily injury” resulting from use of reasonable force to protect persons or property.

The bracketed words [the] [an] [any] have been assigned significant importance in the case law, and are also at issue in cases examining other liability exclusions. Depending on which word is used in the exclusion, an employer-insured may be covered for the vicarious liability of an employee who acted with intent to cause “bodily injury.” This includes cases of clear intent to cause physical harm constituting assault, and this result is contrary to the fundamental insurance principle of protecting against only fortuitous risks.

The Arizona Court of Appeals addressed this issue in American Family Mutual Insurance Company v. White, 204 Ariz. 500, 65 P.3d 449 (App. 2003). In White, American Family issued a homeowners policy to its insureds, whose son was indicted on two counts of aggravated assault after assaulting the plaintiff.

In the civil litigation, the plaintiff alleged that the insureds were liable for negligent supervision of their son. American Family denied coverage for the claims based upon a “violation of law” exclusion, which excluded bodily injury “arising out of . . . violation of any criminal law for which any insured is convicted . . . .” (emphasis added). In White, the appellant argued that the severability clause mandates that an insurer determine the applicability of exclusionary clauses separately as to any insured asserting coverage. This clause states, in part, that the rights or duties assigned in the coverage apply “separately to each insured against whom a claim is made or ‘suit’ ‘is brought.” As such, the appellant claimed that the exclusion did not apply to the negligent supervision claim against the insureds because only their son was convicted of violating a criminal law.

The court held that the phrase “any insured” in an exclusionary clause means something more than the phrase “an insured.” For purposes of this analysis, “the” can be similarly treated as “an.” Specifically, the distinction is that [an] refers to one object, and [any] refers to one or more objects of certain type. Therefore, the court held that the phrase “any insured” in an exclusion bars coverage for any claim attributable to the excludable acts of any insured, even if the policy contains a severability clause. Had the phrase read “an insured,” the excludable conduct would had to have been attributable to each insured separately.

Arizona courts have not yet addressed this distinction in the context of the “expected or intended” exclusion in a vicarious liability situation. However, there is no indication that an Arizona appellate court would not apply the same rationale adopted in White to such an exclusion. This leads to the illogical conclusion that an insurer would have to prove that the employer-insured also acted intentionally to preclude coverage for a purely vicarious liability claim. Because the underlying merits of the vicarious liability claim do not rely upon proof of the employer’s mental state, that “intent” will never be at issue and there will always be coverage for the vicarious liability arising out of the non-fortuitous and intentional acts of an employee. Although the separate analysis of each insured’s state of mind may be logical in the context of other non-vicarious claims that require an analysis of the insured-employer’s separate actions (negligent hiring, supervision, retention or entrustment), it is not so in the context of a purely vicarious liability claim.

There is some indication from the White decision that common law may support application of the exclusion to exclude vicarious liability claims against the insured-employer. After conducting its policy-based analysis, the court held:

We also conclude that the negligent supervision claim against the Wildes is excluded because it derives from the claim against Travis, which is excluded. See Behrens v. Aetna Life & CAS., 153 Ariz. 301, 736 P.2d at 385 (1987) (finding that a claim for negligent entrustment or supervision could not exist apart from the excluded negligent operation of a boat).

White, 204 Ariz. at 508. (emphasis added). Based upon this language, the court left open the possibility of a similar challenge to cases involving vicarious liability claims arising out of excluded conduct. That would appear to be an uphill battle given that the primary holding of the court was based upon specific policy language (“any” versus “an”) and well-settled analysis in cases across the country. Also, the Behrens’ decision, cited in White, did not involve an analysis of the “any” versus “an/the” issue in conjunction with the severability clause.

Aside from the exclusion in addressing intentional acts, there is the potential coverage argument that the “bodily injury” was not caused by an “occurrence,” i.e. an accident. If the bodily injury was caused by the intentional acts of an employee, then it was not accidental. Therefore, it should be a logical extension that any claims arising out of that conduct, including vicarious claims, should not be covered as not qualifying for coverage under the Insuring Agreement. This analysis is independent of the applicability of the exclusion addressed above and was addressed by the United States District Court, District of Arizona, in National Fire Insurance Company of Hartford v. Lewis, 212 WL 6552596 (D. Ariz. 2012).

In that matter, National Fire issued a business owners’ liability insurance policy to a medical practice. The practice and individual physicians were sued based on allegations that a physician inappropriately viewed and touched patients under the guise of performing legitimate medical treatment, allegedly constituting assault and battery. Further, the practice and other physicians were allegedly vicariously liable for that tortious conduct. The court noted that none of the parties contended that the defendants intended or expected the tortfeasor doctor to do what he did. Thus, while the tortfeasor doctor may have intended his own actions, from the perspective of the other defendants, the actions were “undesigned, sudden and unexpected events” that met the definition of an accident. The court determined that “consequently, there has been an ‘occurrence’ under the terms of the business owner policies,” and the vicarious liability claim qualified for coverage under the Insuring Agreement.

National Fire is a District Court decision, and that portion of the court’s opinion is not premised upon any well-settled Arizona law interpreting whether an “occurrence” could be attributed to an insured-employer in a vicarious liability claim arising out of the intentional conduct of an employee. Thus, there is an argument that this issue remains unsettled in Arizona, and it should be examined by an Arizona state appellate court. Aside from being a co-conspirator, it is difficult to imagine a factual scenario in which an employer-insured intends for its employee to intentionally cause another harm so that the vicarious claim would be considered non-accidental and not covered.

The practical effect of White and National Fire is that coverage may be afforded under a liability policy for clearly non-accidental conduct. Although the “occurrence” analysis arises out of common law largely beyond an insurer’s control, an insurer can control this risk by changing one word in the “expected or intended injury” exclusion. Using “any” as opposed to “an” or “the” excludes all claims arising out of excluded conduct, and fulfills the insurance principle of protection only against fortuitous events.

Third Circuit Holds No Coverage for Faulty Workmanship Despite Insured’s Expectations

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Brian Margolies | Traub Lieberman Straus & Shrewsberry LLP | November 20, 2018

In its recent decision in Frederick Mut. Ins. Co. v. Hall, 2018 U.S. App. LEXIS 31666 (3d Cir. Nov. 8, 2018), the United States Court of Appeals for the Third Circuit had occasion to consider Pennsylvania’s doctrine of reasonable expectations in the context of a faulty workmanship claim.

Hallstone procured a general liability policy from Frederick Mutual to insure its masonry operations. Notably, when purchasing the policy through an insurance broker, Hallstone’s principal stated that he wanted the “maximum” “soup to nuts” coverage for his company.  Hallstone was later sued by a customer for alleged defects in its masonry work.  While Frederick agreed to provide a defense, it also commenced a lawsuit seeking a judicial declaration that its policy excluded coverage for faulty workmanship. The district court agreed that the business risk exclusions applied, but nevertheless found in favor of Hallstone based on the argument that Hallstone had a reasonable expectation that when applying for an insurance policy affording “soup to nuts” coverage, it this would include coverage for faulty workmanship claims.

On appeal, the Third Circuit acknowledged that the reasonable expectations doctrine can overrule policy language when the insured is issued a policy different than what it specifically requested to purchase.  The court nevertheless reasoned that this doctrine did not apply to Hallstone, which generally asked for a broad policy, but not specifically a policy that would insure faulty workmanship claims – a coverage the court acknowledged does not exist.  The pointed out the absurdity of relying on the reasonable expectations doctrine to overcome the policy’s otherwise plain and unambiguous language, observing that “Hall’s claim that he expected Hallstone’s ‘maximum,’ ‘soup to nuts’ liability policy to include workmanship coverage is no more reasonable than if a purchase of auto insurance expected his policy to cover repairs if his car breaks down, even if he asked for ‘soup to nuts’ coverage.”

Addressing the Defective Stucco Crisis

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Wally Zimolong | Supplemental Conditions | November 21, 2018

I received several emails regarding the expose by Caitlin McCabe and Erin Arvedlund in the Philadelphia Inquirer titled “Rotting Within.”  The story outlines the epidemic of defective stucco and other “building envelope” issues in Southeastern Pennsylvania that is causing homes to literally rot from within.  Having litigated several of these cases, they are frustrating for both the attorneys that handle them and the homeowners who must deal with the reality that their home is rotting away.  The story points to the multiple (and all too common) causes for the epidemic:  unskilled subcontractors, lack of oversight and care, and poor construction drawings.  The is no quick solution to the crisis and litigation regarding these defects is sure to proliferate.

However, there is one potential solution that the story does not cover and which could help alleviate some of the challenges homeowners face in recovering damages for their claims.  The Pennsylvania Legislature must act to change the insurance laws in Pennsylvania to make defective construction covered by a developer’s, contractor’s, and subcontractor’s commercial general liability policy (“CGL”).  Most homeowners and many attorneys incorrectly assume that defective construction is covered by insurance.  This assumption makes sense.  If someone operates a car in a negligent manner and hits your car and causes damage, the negligent driver’s insurance company with cover your loss.  In reality, Pennsylvania courts follows a minority of states that holds that generally speaking defective workmanship is not a “covered occurrence” under an insurance policy. (There are several exceptions to this rule and thorough discussion is beyond this blog post and would probably bore you.)

Why is coverage for defective workmanship so important (beyond the obvious reasons)? First, many contractors and subcontractors are small businesses with little to no assets.  Therefore, even when liability is clear, many times plaintiffs are faced with the prospect of a judgment but no ability to collect on it.  However, insurance policies contain an indemnification provision that require the insurance company to pay a judgment against its insured.  Second, most insurance companies take the position that because the claims are not covered by a policy they have no indemnification and, therefore, no obligation to pay a judgment against their insured.  This means insurance companies feel no pressure to settle a claim. The insurance companies believe they will not be required to pay a judgment anyway, so why settle.

Critics (including most contractors and home builders) will howl that making coverage of defective workmanship claims mandatory will increase the cost of insurance with the cost being passed on to the home buyer.  They are right.  But, I doubt the homeowners that have been impacted by this crisis would mind paying a few dollars more for a home knowing an insurance company would step up to the plate to cover their damages. (Plus,any additional cost would be negligible anyway when prorated over the a typical thirty year mortgage).

Until then, I hope the attorneys mentioned in the article that are prosecuting these claims get their clients the justice they deserve.

3 Key Factors for More Effective Online Articles

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Jeff Childs | Advise & Consult, Inc. | November 27, 2018

In today’s online world, more effective online writing is paramount in maximizing your efforts in not only writing articles, but to have those articles found online.  As a publisher of a nationwide construction defect and insurance dispute blog with about 12,000 readers I look at hundreds of headlines and read tens of articles each week looking for the best articles from around the country that will be of interest and benefit to our readers.  Our readers primarily consist of attorneys and insurance professionals dealing with construction defect and/or insurance dispute cases.

As I scan emails, websites and notifications I look for what catches the eye and will not waste my time or the time of our readers.  Our blog is a curation of articles on topics that our readers would be interested in at some point and can be a great resource for when research is needed on a specific topic.  We are all busy and have a hundred other things to see or do and a headline only has a fraction of a second to get the attention of potential readers.

One of the main purposes of writing articles is to attract attention – something that won’t happen very easily if the headline doesn’t attract readers.  The headline is the first and easiest factor for more effective online writing. I often see headlines that are just two or three words and gives the reader no real indication of what the article is about.  Other headlines I see are 20-30 words long and are pretty much a paragraph in and of itself. They may give the reader more of an idea of what to expect if they read the article, but still is not effective as a headline – especially as we talk more about online factors.

In the online world a headline must include a strong actionable keyword, should be grammatically correct, politically correct and about 50 characters long – or at least have the keyword in the first 50 characters.  Once you determine what your keyword is make sure that you use that exact same keyword in the first one or two lines of your first paragraph.  More on keywords in a minute.

Some other ways to use your headline to attract more readers is to use timely events, recent cases, specific location, and use name recognition when applicable.  Topics that can incorporate even more reasons for the reader to stop scrolling and give them a reason to read – just don’t let them overwhelm the main purpose of your article.

Readers are also drawn to usage of lists, specific cautions or instruction, and if your article is going to be too long – look at breaking it up into a series – it gives the readers something to look forward to and lets them know that this topic is important enough to expand on it.  We, as humans, don’t have a long attention span and an article that just goes on and on, will only turn off a reader, so a few shorter articles spaced over a few weeks is better than one really long article.

Once you have your headline (maybe you even write it after the article) and have a clear actionable keyword make sure that keyword is used in your article.  I have read many articles that give you the keyword in the headline but isn’t seen in the article or is changed to an abbreviation, tense, or some other change. Often an article will have more than one keyword, but the main keyword should be used between 1-2.5% and used throughout the article.  Overuse is called keyword stuffing and is frowned upon by not only readers but also the search engines trying to inventory and catalog your article.  If, for some reason, your article does need a keyword used more than the recommended amount – then change a few of the uses to commonly used abbreviations or acronyms. While some of the changes aren’t dramatic enough to confuse the readers, it will confuse the spiders that are looking at your headlines and articles.

Your keyword should also be one of which online readers will search for.  If your keyword is so general or so specific that readers won’t search for it or know what to search for your article will not get online traffic through the search engines.  If your keyword isn’t searchable online – is it important enough of a keyword to write an article on.  An article needs to be at least 300 words and not too much longer than 1,000 words so that the search engines (spiders) will look at your article and give it the attention that your article deserves rather than marked down by not playing by Googles rules.

These factors all matter – not only to your human readers – but to the spiders that read your articles.  There are hundreds of spiders that look all over the internet trying to inventory all of the websites and content.  These spiders look at websites that add more content to them than more static websites.  They look at the code that is created as you put your article online and if you don’t emphasize the headlines and sub-headlines, your keyword usage is confusing or not used properly, back links and other metadata factors not in proper alignment to the algorithms set by the spiders.

This is all known as Search Engine Optimization (SEO) and can be very complex and many companies do just this as it is always changing and can need very specific conformity or your efforts will be ineffective or even in some cases detrimental to the ranking of your website and the web pages associated with it.  It is much more complex that we are able to delve into in this article.

As we mentioned with headlines – if your headline is over the recommended 50 characters – it will be cut off by search engines and make it more difficult for your potential readers to not only find it, but then know if they want to read it if your keyword isn’t shown in that space.  It is essential that you write your articles more effectively for your human readers, but it is just as essential to keep in mind what the spiders want, what they look at, and how if effects who will be able to read your article.  After all, if only you and your mom read your article then why write and article, and if your article can’t be found easily online, then you don’t have an article – and then what would be the point?