Monthly Archives: August 2020

Don’t Let the Distance Destroy Your Communication — Lessons Learned from Arbitration by Zoom

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Brenda Radmacher | Forum on Construction Law

Is “Remote Arbitration” an oxymoron? Or is it the wave of the future?  While most of the ADR rules allow for video presentation of evidence in an arbitration, there is little guidance on full hearings being conducted through remote procedures. In the past, parties have agreed to present one witness via videotape or videoconference where the witness was not able to travel to the venue of the hearing. However, most parties, lawyers and neutrals have been reticent to agree to fully remote proceedings.  With the continued restrictions required by the COVID 19 pandemic, parties, lawyers, and arbitrators are all starting to look at the need to embrace remote proceedings.

So What’s the Big Deal About Remote Arbitration?

Most lawyers handling dispute resolution and litigation count on the use of their keen communication skills to present persuasive arguments to the trier of fact in a lawsuit.  In arbitration, the neutral (or panel) is the target of the communication. Lawyers are known for using skill in how to examine a witness to elicit the facts and information needed to present their client’s case. Also, the timely use of an exhibit is key – with the technological advances, some of the best trial lawyers have become quite adept in using video clips, charts, and visual images to effectively communicate information and facts, as well as to engage the tier of fact.  However, the successful lawyer also will use various forms of communication other than the presentation of evidence through witnesses, exhibits, and written briefs. Body language and non-verbal cues are critical to the trial lawyer. In addition, the lawyers in an arbitration often “read” the room – both the neutral and the other parties and counsel present to see how various factual and legal arguments are landing, and the reaction can cause a change in strategy, tone, or emphasis.

Non-verbal communication plays an integral part in effective communication.  “In fact, experts have argued that 70 percent of communication is non-verbal and that includes workplace communication.” Body language can tell you how urgent or serious an issue is. Eye contact and posture can convey confidence or sometimes lack of it. Gestures and movements can show enthusiasm or communicate more than the words express.

“One study from Columbia University found that gesticulation helps a speaker communicate effectively with an audience. Researchers explained that someone who gesticulates actually helps convey the fullness of the message they’re trying to deliver. They’re speaking on two levels at once!” “Business Insider also revealed some rather telling facts on verbal communication. Those stats showed that content is only valued at 7% in a presentation. This was verified in Science of People’s research as well. We can’t stress it enough – it’s not what you say, rather, how you say it.” While this may or may not be fully accurate, it is telling that much of our effective communication is not just the words and content of your presentation but how you communicate it that will bridge the gap, even across a video screen.

This is why many lawyers are wary to arbitrate via remote processes – it loses the “feel” of the proceeding where the human interchange and interaction communicates so much more in person across a conference room table than through a screen.

However, with the status of the corona virus pandemic, the future of dispute resolution clearly will be dependent upon the use of remote proceedings, and the well-informed practitioner should come to the proverbial table with an approach to make the most of the remote process.

Four Key Considerations For An Effective Remote Arbitration

As more cases are presented through remote arbitration (potentially jury trials in the near future), there are several considerations that practitioners should keep in mind to ensure the most effective representation of their clients. Of course, reams have been written about communication skills and styles, but there are four key considerations for a remote arbitration proceeding to consider: (1) understanding your audience; (2) getting the evidence to your arbitrator; (3) controlling the room; and (4) managing the technology.

1. Understanding Your Audience

While it is important to know your arbitrator’s background, most counsel are not vetting the neutral’s ability to use technology or how the neutral will be able to engage in the process over video or control the process and witnesses.  This is a difficult skill to assess. However, many arbitrators have been working diligently to come up to speed on the technology and have familiarized themselves with the various platforms.  Once more arbitration occur, some neutrals will likely further distinguish themselves in their abilities to manage remote arbitration hearings.

Don’t let the age or background of a neutral be your guide, however.  There are many younger neutrals who are not adept in using the remote programs and older neutrals who are tech savvy and have every cutting edge device available.

Regardless, it is imperative to know and understand who your arbitrator or panel is and the work with your neutrals to ensure that they feel comfortable with the process, the platform, and the related technology needed, such as the right video camera(s).  Before you begin a remote hearing, if the arbitrator does not ask for it, request a joint session to practice on the platform, including ensuring that the arbitrator understands and knows how to control the process and that all can access and view the exhibits effectively. You may wish to have a technology person available for the practice and the remote hearing itself to assist the arbitrator.

2. Getting the Evidence to the Arbitrator

Be sure that you have worked with the arbitrator to have all of the proper procedures and rules in place to allow for an effective remote hearing as well as to ensure that you can get the necessary evidence to your arbitrator.

Do the Rules Provide For What You Need?

Each of the main arbitration providers’ arbitration rules have some rules that address – at least in part – virtual hearings. However, the perceptive practitioner will review the rules and scheduling order carefully to ensure that the evidence needed can be effectively presented. Notably, there is little formal guidance currently for a full merits hearing by internet or other remote presentation.

JAMS Rule 22(a) acknowledges that an arbitrator may vary procedures so long as they are reasonable and appropriate. Rule 22(g) authorizes an arbitrator, at his or her discretion, or upon the parties’ agreement, to conduct the hearing through virtual platforms, stating: “(g) The hearing, or any portion thereof, may be conducted telephonically or videographically with the agreement of the Parties or at the discretion of the arbitrator.” Like JAMS, the American Arbitration Association is mindful of maintaining the efficiency of arbitrations while securing the parties’ rights to be heard and to present their cases (See, R-32(a), AAA Commercial Arbitration Rules and Mediation Procedures). Rule 32(c) gives the arbitrator the right to “allow for the presentation of evidence by alternative means including video conferencing, internet communication, telephonic conferences and means other than an in-person presentation” but also requires that “[s]uch alternative means must afford a full opportunity for all parties to present any evidence that the arbitrator deems material and relevant to the resolution of the dispute and, when involving witnesses, provide an opportunity for cross-examination.”

Neither the International Institute for Conflict Prevention & Resolution (“CPR”) the International Chamber of Commerce (“ICC”), the London Court of International Arbitration (“LCIA”), nor the Singapore International Arbitration Centre (“SIAC”)  provide any specific rules for full merits hearings by video. There are not specific rules for how such video hearings should proceed in any of the ADR providers’ rules; therefore, counsel should seek a scheduling order with specific details on how the proceedings are to be conducted including the split of time, presentation of witness testimony and hearing timetables, production of exhibits, and opening and closing statements.

Getting the Witness Testimony Clearly Communicated

Many practitioners are concerned about the ability to test the credibility of witnesses in a videoconference format. However, this issue can be overcome with careful preparation of the witnesses, and having clear rules in the scheduling order addressing where and how witnesses can be presented (ensuring there is no coaching or others in the room).  In fact, many arbitrators assert that credibility issues are not as critical as many lawyers may believe. The arbitrator will still be able to observe the witness during video testimony and observe facial expressions and reactions. In fact, as stated by arbitrator Wayne Brazil, “We can see initial reactions to questions, reluctance to respond, indirection, indecision, circularity, obfuscation — as well as forthright, straight-on answering (which, we’ve learned, sometimes can pose the greatest threat to making accurate findings). Given these facts of videoconferencing life, the real question is this: How much is an arbitrator’s ability to assess credibility compromised, really, when he or she watches a witness testify, live, on a big screen, instead of watching the witness testify a few yards away in person?”

Instead, when it comes to witness testimony, you must ensure that you are preparing your witness to testify to the arbitrator – but instead of looking at the small screen of the questioning lawyer, the witness needs to be trained to look at the camera on his screen.  When reviewing an on-screen exhibit, the witness should also be trained to periodically look up at his or her camera to respond to the question. One tip is to advise witnesses to imagine the arbitrator is ‘in the camera” and to focus on that instead of the small box of the questioning attorney.

Who Has Control – Remote Exhibits

One of the most important issues that is a difference for many practitioners is the handling of exhibits in a remote proceeding.  Depending on the agreement of the parties, the exhibits can be exchanged in advance between the parties and a set provided to the arbitrator electronically for use during the hearing, or the exhibits can be uploaded onto the remote proceeding site.  If the exhibits are exchanged in advance, a set will also need to be provided to the witness in advance; it is recommended that they be placed in a sealed envelope to be opened by the witness on screen once under oath.

If the exhibits are presented “live,” the question of how to maneuver through the document can be handled by giving the witness “control” of the screen and mouse to scroll through to specific portions of the document. To do this effectively, counsel will need to have carefully pre-prepared the documents and have a separate copy either in hard copy or on a second screen to ensure a crisp and clear presentation of the information to the arbitrator.

Cross-examination and introduction of exhibits that were not pre-planned will be a bit more challenging in a remote setting.  However, having a set of potential exhibits pre-marked can address this issue. For rebuttal, one good option is to have anticipated potential exhibits saved on your desktop and carefully described/labeled with your prepared cross-examination.  Counsel should practice in advance of the hearing uploading the exhibits and while asking questions.  If appropriate, particularly for document-intensive cases, like many construction cases, having a paralegal or tech assistant participate and upload your exhibits will make the process more streamlined and prevent counsel from distractions of trying to find the right exhibit.

3. Issues Raised By Who Is “In The Room”

One other question to consider before you proceed with the arbitration hearing is how to maintain the confidentiality of the process and who will be allowed to be in the videoconference and when. Will witnesses be held in a “waiting room” and be admitted when their time slot is ready?  Will counsel have pre-set times for when witnesses will be called? Will witnesses be called out of order? These issues will require a discussion of counsel and the arbitrator to resolve these issues in advance.

4. Technology- Choose the Platform

What platform will be used is another consideration that will need to be agreed upon early on. This will allow counsel sufficient advance time to practice and be familiar with the platform. In addition, you can work with your witnesses to practice, particularly with how to work with the exhibits and how to readily find sections on the documents in response to questions posed.

One key issue is to anticipate and plan for technology hiccups.  Have a designated person for trouble-shooting on standby to jump in and have a ready text message to bring them into the call. In addition, be sure that the arbitrator and counsel provide and exchange contact information and the arbitrator should also be provided contact information for all witnesses in case of connection issues.  You also may want to consider having a fall back of what to do if there is a problem with connection for any particular witness – will you have them dial in only or require webcam access? Thinking through and having a backup plan will give you more peace of mind and take away the distractions during the hearing.

Overall, conducting a remote arbitration is not the most ideal scenario, but effective lawyers can prepare their witnesses, ensure clarity and credibility of their cases and presentations by being aware of use of non-verbal communication to support their cases, and pre-planning and preparing exhibits carefully and having a plan in place for maneuvering through exhibits to ensure that the information you want the arbitrator to see, understand, and digest.  In addition, paying careful attention to the technical details and discussing how the witnesses will be presented will allow for a smoother process where the more confident counsel’s case can be effectively presented to the arbitrator.

Property Valuations In Uncertain Times

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Adam Levine | Ostrow Reisin Berk & Abrams

Valuation plays a critical role in real estate, from appraisals for residential mortgages to the sales of commercial real estate. But the COVID-19 crisis and resulting economic uncertainty pose some challenges for valuation experts across the country.

Limited physical access

Site visits have long been an integral part of the valuation process, but stay-at-home orders blocked access to many properties earlier this year throughout the country.

Fannie Mae and Freddie Mac have recognized this hurdle by temporarily permitting exterior-only and desktop appraisals for eligible mortgages. Banking regulators allowed certain commercial and residential loans to close without having an appraisal completed, though appraisals have been required within 120 days of closing.

Savvy valuators quickly turned to technologies, like Google Earth, Street View and drones, to help fill in the gaps created by the inability to physically access properties. They are also taking advantage of online databases of municipality property assessment records to obtain necessary information.

Lack of comparable sales

Under the comparable sales method, valuators look at the sales prices of similar properties in recent transactions, making adjustments for differences between those properties and the subject property. It is debatable whether pre-COVID-19 sales can be considered comparable with post-pandemic sales, though. Moreover, deal volume for certain types of properties has fallen in many areas.

Valuators are looking beyond comparable sales and considering individual circumstances on a more granular level. This approach acknowledges that generalities are of limited value when COVID-19 may have different effects on different properties in the same neighborhood.

Tumultuous conditions

Essential data inputs for valuations are shifting constantly, sometimes daily. Unemployment numbers have been at historical highs, while interest rates have been at notable lows.

Businesses that were healthy months earlier have boarded up threatening the continued vitality of neighborhoods and increasing expected vacancy rates. Struggling tenants may have fallen behind on monthly payments. Governments are not only mandating rent relief, but also providing financial support to prop up troubled companies. Plus, operating costs may be higher to comply with health and safety concerns, as well as to adapt property use and features for changes in demand.

Valuators must address all these factors in their reports. But users of those reports must understand the limitations and consider obtaining fresh appraisals when fewer uncertainties exist.

Heart of the matter

2020 has not been kind to the values of many types of properties. But it is always better to have an accurate, data-based assessment of value than rosy, speculative estimates that do not pan out.

Construction Calamity: Risk Transfer Tips for Contractors After a Catastrophic Loss

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William S. Bennett | Saxe Doernberger & Vita

From structural collapses to fires, the construction industry has experienced a number of high-profile catastrophes over the past decade. These disasters test the mettle of even the most experienced risk professionals and the strongest insurance programs. Issues can arise in all facets of the company’s contracts and insurance policies, and dealing with the aftermath is an extensive and demanding process that can involve many players.

As overwhelming as the task may seem, however, it is possible for general contractors to get through the disaster with minimal uncovered exposure if proper steps are taken. By understanding some of the exposures a general contractor faces after a catastrophic loss and implementing key risk transfer strategies from the outset of a project, risk professionals can minimize the impact of a loss on the company in the short and long term.

Understanding Possible Risk Exposures

When a catastrophic loss occurs, contractors face a wide array of potential exposures. Unfortunately, many large catastrophic losses involve serious bodily injuries and even loss of life. If such a tragedy occurs, the general contractor can reasonably expect to be named in a flurry of personal injury and wrongful death lawsuits. Depending on the scope of the project and the area associated with the loss, the catastrophe may also prompt a wide range of bystander claims, from dust inhalation to emotional distress.

The contractor can also expect claims from nearby businesses for business interruption losses. Generally, these will be based on either being forced to shut down after the loss or experiencing reduced foot traffic as a result of the dangerous state of the building.

In addition to private claims, there may also be significant liabilities to the municipality. These can include costs for security measures for the project site to prevent unauthorized entry or the addition of new infrastructure to change traffic flow. If the municipality cannot pass these costs directly to the owner or contractor immediately, it will certainly seek to do so in a later claim.

There will also be massive first-party losses from the project itself, including extensive repairs. In more extreme situations, the building may be a complete loss, requiring demolition of the existing structure before the owner either walks away or starts rebuilding.

Determining the cause of the loss will be another major component. This includes the collection and preservation of evidence, which will be necessary both for addressing any liability lawsuits and for dealing with insurers whose available coverage may be shaped by the investigation. The plaintiffs’ lawyers, and potentially the municipality, will likely insist that certain protocols be put in place to preserve components of the building that may inform the investigation.

Key Risk Transfer Strategies

Companies can use several risk transfer strategies to help control the range of exposures that may result from a catastrophic construction loss, including:

Give Notice Immediately

Worker and civilian safety should, of course, be the first priority for the construction company’s risk manager after a catastrophic loss. From there, you should immediately think about facilitating risk transfer. This means providing notice of the loss to every potentially implicated insurance company to which you have a connection. This is the simplest and most proactive step you can take to cross a potential future issue off your list.

Communicate with your broker immediately. Some coverages have explicit, time-sensitive notice requirements. Often found in excess liability policies, crisis-related coverage extensions can be a valuable source of quick cash in the wake of a significant loss—typically around $200,000 to $500,000. This generally covers costs associated with securing the site, providing medical services to injured victims, and engaging with consulting services such as public relations and crisis management. Frequently, these provisions will have very short notice periods—sometimes as little as 24 hours. Your broker should be able to help you identify what coverage is available in your policies and assist you in the notice process.

Even if you are unsure whether a particular policy could be connected to the loss, it is better to give precautionary notice than risk giving late notice, especially in a state where late notice is a strong defense against coverage. Try to imagine if there is any scenario—no matter how unlikely—where the policy could be implicated and, if there is, submit precautionary notice as soon as possible. For example, if your project experienced a crane collapse, consider whether someone could have hacked into the crane’s operating system and contributed to the collapse, potentially triggering your cyber policy. Is it possible there was an operator error that could have criminal implications? If so, perhaps your crime policy is a potential target. If you cannot rule it out with certainty, you should strongly consider giving precautionary notice.

Tender to Every Potentially Involved Subcontractor

The liability insurance model for the project will be a determining factor in the complexity of managing the liability arising from the loss. The claim will be infinitely simpler to manage if the project is insured under a contractor-controlled insurance program (CCIP), owner-controlled insurance program (OCIP) or even a project-specific general liability policy issued to the owner and general contractor. Although there will still be some finger-pointing among the insureds due to the likely presence of some uncovered liability, in this scenario, there will be ample opportunity for cooperation, as all parties will seek coverage from the same insurer. This is not to say that this will make the process easy, but it will likely prevent, or at least simplify, one massive component of the process: the inevitable declaratory judgment action for additional insured coverage.

If the project is insured under a traditional risk transfer model, this will likely be a messy process. At the outset, it will not be clear who is responsible for the loss. Everyone, including the subcontractors’ insurers, will seek to blame someone else. The additional insured tenders are vitally important in this process and should be made promptly to any subcontractor who could have some responsibility for the loss. Depending on the scope of the loss, many subcontractors could be involved, dictating dozens of tenders. The more insurers you can involve in the process, the more sources you will be able to call on at the eventual settlement tables. Ideally, your contracts will require additional insured coverage without any requirement of contractual privity on a primary and non-contributory basis, dictating that the subcontractors’ insurers must pay before your own policy. Collecting certificates with current and consistently updated policy information for all subcontractors will also help to facilitate this process.

It is crucial to remember that, if there is even a possibility for coverage under a subcontractor’s policy, that insurer is obligated to defend the claim in full. This means even seemingly baseless allegations made regarding a particular subcontractor’s role could give rise to a complete duty to defend the entire case against you. In some instances, that question may even be determined through extrinsic evidence, meaning your own knowledge of a subcontractor’s potential liability could be used to invoke a duty to defend, even without pleadings implicating them. The burden is on the defending insurers to determine how to allocate the costs, based on their “other insurance” language.

If you are fortunate, you may get some of these insurers to accept your tender and pick up your defense from the initial tender. However, the majority of these subcontractors will likely deny your tender, at least initially. Some of these may warrant responsive letters, but it is highly likely that the scope of the loss and the number of denials will warrant a declaratory judgment action to clarify the scope of coverage available from each policy. Considering that each subcontractor will likely have one or two excess policies in addition to their primary general liability policy, this can mean a lawsuit with dozens of insurer defendants. Contractors should work with their own insurers to try to develop an arrangement in which the insurer either undertakes or funds the insured to undertake this action, as it directly benefits the contractor’s insurer.

Focus on the Builders’ Risk Policy

On the first-party side of the loss impact, the builders’ risk policy will be the main focus. A good builders’ risk policy from an insurer with a collaborative approach can be vital to minimize the impact of the loss. Some insurers are more cooperative than others in this process. With respect to coverage under these policies, there are several coverage provisions that can have a tremendous impact for your company:

All Risks. The policy should be written to cover all risks of direct physical loss rather than specified perils. This limits the insured’s burden of proof to showing there was a loss and shifts the burden to the insurer to prove it was the result of some specified excluded cause.

LEGIII Faulty Work Exclusion. LEGIII refers to the third iteration of the London Engineering Group policy forms’ faulty workmanship and/or design exclusions. Under this exclusion and accompanying exception, when defective work or design cause damage, the insured is entitled to coverage for the resulting damage and for the repair of defective work itself, provided the defective work is repaired according to the original -standards, without any improvement.

Extra Expense. Typically sublimited, this feature varies somewhat among forms, but generally provides coverage for the extra costs necessary to maintain the course of construction after the loss with minimal impact.

Expediting Expense. Similar to extra expense, this feature typically provides coverage for extra costs necessary to get a delayed project back on its pre-loss schedule.

Protection of Property/Sue and Labor. Protection of property typically covers costs associated with securing the site after a loss to prevent further loss and/or minimize any potential additional impact of a loss event. This is typically sublimited.

Soft Costs/Delay in Completion. Varying in scope, these common provisions can cover costs aside from those directly associated with the physical loss. Common covered costs include interest on extended loans, additional insurance premiums and additional real estate taxes. Coverage typically takes effect after a waiting period (often 30 days), which begins the day of expected project completion. From a contractor’s perspective, an owner-placed builders’ risk policy should contemplate this coverage, as it will likely reduce claims brought by the owner.

Valuation Provision. The insured should look for a policy that values the loss based on the actual cost to rebuild or, alternatively, the cost to rebuild immediately before the loss. Actual cash value provisions can significantly limit the available coverage.

Demolition and Debris Removal. While demolition is typically considered part of the general cost to rebuild, debris removal is generally a separate sublimited coverage extension. The policy should explicitly contemplate debris removal, and not limit demolition.

Work with Your General Liability Insurer to Bucket Costs

As the general contractor, your own general liability insurer will be a vital resource in the risk transfer process. Even if you can convince a subcontractor’s insurer to accept an additional insured tender from first tender, that will likely still be months after the loss occurs. By that point, there will likely already be numerous lawsuits filed against you, the city will be demanding additional infrastructure to secure the site and prevent further issues, and evidence collection and preservation will already be underway. You will be looking to your own insurer to fund these costs.

Communicate with your general liability insurer early and often. Many of the costs early in the process can be fairly attributed to your defense. The standard ISO CG 00 01 general liability policy form covers “all expenses [the insurer] incurs” and “all reasonable expenses incurred by the insured at our request to assist us in the investigation or defense of the claim or ‘suit.’” Crucially, under this language, if the insurer is not incurring the cost itself, such costs are to be incurred only at the insurer’s request. Before you incur them, consider how to present a compelling case to your insurer that these early costs are defense expenses. Evidence preservation will prevent spoliation claims. Site security will prevent people from entering an unsafe building and potentially becoming additional plaintiffs. If the insured can obtain coverage for these costs as defense expenses, the insurer will likely pay them.

The Importance of Planning Ahead

Ultimately, there are far too many risk transfer considerations at play after a catastrophic loss to highlight here. However, the most valuable actions a contractor can take to facilitate risk transfer after a catastrophic loss must take place far in advance through careful scrutiny of contract language, policy language and loss procedures. Any party facing a significant degree of responsibility for a catastrophic loss will be overwhelmed by the sheer volume of issues to address on a daily basis. It is imperative to keep the big picture in mind and institute a plan to maximize all of the available avenues of risk transfer available. Doing so can get the company through the aftermath of the loss with minimal out-of-pocket exposure. 

This article was featured in the June Issue of Risk Management Magazine.
Reprinted with permission from Risk Management Magazine. Copyright 2020 RIMS, Inc. All rights reserved.

Insured’s Lack of Knowledge of Tenant’s Growing Marijuana Means Coverage Afforded for Fire Loss

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Tred R. Eyerly | Insurance Law Hawaii

   The California Court of Appeals reversed the trial court’s grant of summary judgment to the insurer regarding a claim for fire loss. Mosley v. Pacific Sec. Ins, Co., 2020 Cal. App LEXIS (Cal. Ct. App, May 26, 2020).

    The Mosleys rented their property to Pedro Lopez. Six months later, the property was damaged by fire. Lopez had tapped a main power line into the attic to power his energy-intensive marijuana growing operation. The illegal power line caused the fire.    

    Pacific Specialty Insurance Company (PSIC) insured the property under an HO-3 Standard Homeowners policy. Paragraph E of the policy provided,

We do not insure for loss resulting from any manufacturing, product or operation, engaged in:

  1. The growing of plants; or
  2. The manufacture, production, operation or processing of chemical, biological, animal or plant materials. 

    PSIC denied coverage for the loss, determining it was excluded from coverage under Paragraph E. The loss resulted from Lopez’s growing marijuana. The Mosleys sued PSIC for breach of contract. The parties filed cross-motions for summary judgment. The trial court denied the Mosleys’ motion, granted PSIC’s motion, and entered judgment for PSIC.

    On appeal, it was undisputed that the fire that damaged the property “result[ed] from” Lopez’s re-wiring the property’s electrical system in order to power his marijuana growing operation. But the parties disputed whether this meant the damage “result[ed] from “the growing of plants.”

    California courts broadly interpreted the term “resulting from” in a policy. The appellate court determined there was a “minimal causal connection” between Lopez’s growing marijuana, the fire and the resulting loss. Therefore, the loss resulted from an operation engaged in the growing of plants, which Paragraph E excluded from coverage. 

    The Mosleys argued that, even if Paragraph E excluded the loss, the policy was void because it provided less coverage than Insurance Code section 2070 provided. Under section 2070, policies had to be at least as broad and favorable to the insured as that provided in section 2071, Section 2017 stated that an “insurer shall not be liable for loss occurring . . . while the hazard is increased by any means within the control or knowledge of the insured.” The trial court found that PSIC was not liable for the loss because Lopez’s marijuana growing operation, as well as the electrical alterations he made to the property increased a hazard “within the control or knowledge” of the Mosleys. 

    An insured increased a hazard “within its control” only if the insured was aware of the hazard or reasonably could have discovered it through exercising ordinary care. No authority suggested that a landlord-insured was strictly liable for a hazard created by the insured’s tenant even if the insured was unaware of the hazard. 

    It was undisputed that the Mosleys did not know about Lopez’s marijuana growing operation or his altering the property’s electrical system. Whether Lopez’s conduct was “within the control” of the Mosleys was a fact issue for the jury to decide because the record was silent as to what, if anything, the Mosleys reasonably could have done to prevent or discover Lopez’s marijuana growing operation.

    To the extent PSIC’s interpretation of the policy rendered the Mosleys strictly liable for Lopez’s conduct, the policy was void under section 2071. By holding the Mosleys responsible for the damage Lopez caused, irrespective of the Mosleys’ knowledge of his conduct or their responsibility for it, the policy subjected the Mosleys to increased liability – and less favorable coverage that was not “substantially equivalent” to coverage provided under section 2071. The trial court’s order granting summary judgment to PSIC was reversed and the order denying the Mosleys’ motion for summary judgment was affirmed. 

    The court’s holding that the phrase “results from” requires only a minimal causal connection” may become beneficial to policy holders in COVID-19 claims. The causal connection between the coronavirus (a covered cause) and business interruption losses arguably exists. The coronavirus is the cause of the insured’s physical loss or damage and the resulting business interruption loss. 

Sinking Floor Does Not Meet Strict Definition of Collapse

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Tred R. Eyerly | Insurance Law Hawaii

    The court determined that the sinking of the insured’s floor caused by termites and rot deterioration did not meet the homeowners policy’s definition of collapse. Stewart v. Metro. Lloyds Ins. Co., 2020 U.S. Dist. LEXIS 111527 (S.D. Tex. June 24, 2020).

    Beatrice Stewart, the homeowner, heard a loud bang one night as she lay in bed. The next day, she found that the floor near her bathroom and hallway had sunk and the house was sitting lower. She admitted the house never completely fell down. Upon investigation, Lloyds found that rot in the floor joists and subfloor decking were caused by a combination of termite damage and exposure to moisture. Lloyds denied the claim. 

    Stewart sued. Lloyds argued the policy required an “entire collapse” of the building or any part of a building, which did not occur here. The policy defined “collapse” as “an abrupt falling down or caving in of a building or any part of a building.” The record did not show that any part of Stewart’s floor caved in.

    Nor did the undisputed evidence show an “entire” collapse. At oral argument, Steward argued that the word “entire” applied only to the collapse of a building but not to the collapse of part of a building. The court found this was an unreasonable interpretation. The word “entire” modified “collapse,” which applied to the phrase “of a building or any part of a building.” The policy covered damage caused by collapse to “any part of a building” only when there had been an entire collapse. 

    The evidence showed that part of the floor sank and some floor joists underneath the house broke or cracked; some walls were not plumb with the floor and had cracks; and some doors were off their hinges. This damage was similar to sinking and cracking that was not an entire collapse. Therefore, Lloyds’ motion for summary judgment was granted.