No Duty to Indemnify Where No Duty to Defend

Tred R. Eyerly | Insurance Law Hawaii

    The Montana Supreme Court held that because there was no duty to defend the insureds’ intentional acts, the insurer had no duty to defend. Farmers Ins. Exch. v. Wessel, 2020 Mont. LEXIS 2617 (Mont. Dec. 22, 2020).

    The insureds’ property was accessed by Turk Road. Turk Road was also used by the neighbors to access their land. The insureds asked for permission to snowmobile across the neighbors’ property. Permission was denied because the property was in a conservation easement which prohibited motorised used. The insureds’ thereafter retaliated by not allowing the neighbors to use Turk Road. The neighbors then purchased an easement from another landowners to construct  a new driveway which did not traverse the insureds’ property. The insureds built snow berms and gates, felled trees, and created other obstacles to prevent the neighbors from using the new driveway. Physical threats were also made by the insureds.

    The neighbors sued the insureds for declaratory and injunctive relief. The complaint alleged that the insureds’ acts were intentional and purposeful.

    Farmers defended, but sued for a declaratory judgment on coverage. Farmers argued there was no “occurrence” because there was nothing accidental about the insureds’ conduct. The Montana Supreme Court affirmed the district court’s granting summary judgment agains the insureds on the duty to defend. 

    The district court also determined it was premature to decided whether Farmers had a duty to indemnify. The Supreme Court reversed. There was no coverage under the policy to give rise to a duty to defend. A conclusion that there was no duty to defend compelled the conclusion that there was no duty to indemnify.

Federal District Court Finds Coverage Barred Because of Lack of Allegations of Damage During the Policy Period and Because of Late Notice

Robert Dennison | Traub Lieberman

In American Bankers Ins. Co. of Florida v. National Fire Ins. Co. of Hartford, 2020 WL 5630017 (Sept. 21, 2020), the Northern District of California of the United States District Court had occasion to consider whether allegations in an underlying complaint triggered a duty to defend and a late notice defense to coverage.

The underlying actions were a suit against the City of Walnut Creek for damages from flooding allegedly caused by the City’s failure to develop and maintain its storm drains.The City settled the cases then sued its liability insurers who issued its coverage in the period 1968 to 1986 for indemnification of the amounts spent to defend and settle the cases.The published decision involved three Travelers’ policies issued to the City between 1968 and 1976, as to which Travelers sought summary judgment as to the lack of coverage in its policies.

The district court first found that the definition of an “occurrence” in the policies, in one policy “an event or a continuous or repeated exposure to conditions which causes injury to person or damage to property during the policy period” and in the other two “an accident, including injurious exposure to conditions, which results during the period this policy is in effect, in bodily injury or property damage,” fell within the rule of Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, that injury or damage during the policy period must occur in order for the policy to be triggered.The court agreed with Travelers that while there were allegations of flooding for many years, the only claims/allegations of property damage were for the period 2000 and later.Therefore the property damage coverage in the policies was never triggered.

Alternatively, the district court considered whether the City failed to give timely notice to Travelers, unduly prejudicing it.The policies required the City to give notice “as soon as practicable” and to forward to the insurer every demand notice or summons received by the City.The City stated that it did not know of the existence of the policies before it gave notice in 2017, fourteen years after the first suit was filed.The court stated that no evidence was provided as to the City’s diligence in looking for its insurance coverage.It also credited Travelers’ evidence that the City had given notice of a different suit in 1993 so the City was aware of at least one of the policies.

Mere delay is insufficient to bar coverage as under California law which requires the insurer to prove that it was prejudiced by the undue delay in order for coverage to be barred.Travelers argued that it was prejudiced by the inability to select defense counsel and because it was denied the opportunity to participate in settlement negotiations.The court cast doubt that the evidence was sufficient to show Travelers would have paid less for the defense or achieved a better result if it had controlled the defense, but it did find particularly significant that the insurer could not participate in settlement discussions.Based on that, it agreed that Travelers was substantially prejudiced by the delay, so coverage was barred on that grounds as well.

Eleventh Circuit Vacates District Court Decision Finding No Duty to Defend Faulty Workmanship Claims

Tred R. Eyerly | Insurance Law Hawaii

    The Eleventh Circuit vacated the district court’s grant of summary judgment to the insurer finding there was no duty to defend. Southern-Owners Ins. Co. v. Mac Contractors of Florida, LLC, 2020 U.S. App. LEXIS 23918 (11th Cir. July 29, 2020). 

    Mac Contractors entered into a contract with homeowners to serve as general contractor for the construction of a custom residence. Problems arose during construction and Mac eventually led the job site before completing the project. The home owners sued, alleging that Mac and its subcontractors had left the residence “replete with construction defects.” Damages were sought for having to repair and remediate all defective work performed by Mac. 

    Mac tendered under its CGL policy to its insurer, Southern-Owners. A defense was granted, but later withdrawn when Southern-Owners filed suit seeking a declaration that it owed no duty to defend or indemnify Mac. On cross-motions for summary judgment, the district court found in favor of Southern-Owners based on the exclusion for “Damage to Your Work.” The Eleventh Circuit vacated on appeal, concluding that the underlying complaint could fairly be construed to allege damages that fell outside of the exclusion. 

    On remand, the district court again granted summary judgment to Southern-Owners, this time concluding that the underlying complaint did not allege “property damage” within the meaning of the policy. The court reasoned that the underlying complaint did not allege any damage beyond the faulty workmanship or defective for, which did not qualify as “property damage” under Florida law. 

    Under Florida law, there was a distinction between “a claim for the costs of repairing or removing defective work, which was not a claim for ‘property damage,’ and a claim for the costs of repairing damage caused by the defective work, which was a claim for ‘property damage.'” United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871, 889 (Fla. 2007). Thus, faulty workmanship or defective work that damaged the otherwise non-defective completed project caused “physical injury to tangible property” within the plain meaning of the definition in the policy. But if there was no damage beyond the faulty workmanship or defective work, then there could be no resulting “property damage.”

    Here, the underlying complaint could be construed to create potential coverage under the policy. The complaint alleged that Mac used subcontractors for work on the residence and that the residence was “replete with construction defects” and various damage. It did not further allege which subcontractors performed which work or how the damage occurred. Given these ambiguities, the complaint’s allegations were broad enough to allow Mac to prove that one subcontractor negligently damaged non-defective work performed by another subcontractor. If Mac could establish that at least some of the damage arose in this way, there would be damage apart from the work itself and therefore “property damage.” Because there was a potential for coverage, the duty to defend was triggered. 

    The case was remanded for consideration of exclusions raised by Southern-Owners.

Insurer that Breached Duty to Defend Bears Burden on Allocation of Defense Costs

William Knauss, III | Wiley Rein

Applying Arizona law, the United States District Court for the District of Arizona held that an insurer that breached its duty to defend bears the burden of demonstrating that an allocation of defense costs between covered and non-covered claims is possible. Tapestry on Cent. Condo. Ass’n. v. Liberty Ins. Underwriters Inc., 2020 WL 4607248 (D. Ariz. Aug. 11. 2020).

The insured’s claims-made insurance policy included a contractual liability exclusion providing that the insurer “shall not be liable to pay any Loss in connection with any Claim . . . for any actual or alleged liability of any Insured under any contract or agreement, express or implied, written or oral[.]”  The exclusion also stated that it “shall not apply to the Insurer’s duty to defend and to pay Defense Costs.”  The insured was named in a lawsuit brought by two different plaintiffs alleging breach of three contracts. The insured sought coverage for defense expenses for the suit but did not pursue indemnity coverage.  The insurer maintained that the underlying Claim related to construction defects and denied a defense on the basis of an exclusion barring coverage for any Claim “arising from, or in any way related to any Construction Defect.”

In subsequent coverage litigation, the court held that the single lawsuit constituted two separate “Claims,” only one of which was subject to the construction defect exclusion.  The court determined that the second “Claim” thus triggered the insurer’s duty to defend.  The court then requested briefing on the issue of allocation of the insured’s defense costs between the covered claim and the uncovered claim.

Treating the issue as one of first impression under Arizona law, the court adopted the approach employed in “actions involving a breach of the duty to defend when some claims were covered and some were not by the policy’s indemnity provision.”  The court held that while the insured was required to document the defense costs incurred and their reasonableness, the insurer bore the burden of demonstrating that some apportionment of defense costs was possible, otherwise it was responsible for the entire amount.  The court held that the insurer’s burden of persuasion “as to whether those fees can be allocated and how they should be allocated is that of a preponderance of the evidence.”  The court found that while the insurer was able to demonstrate that a portion of the defense costs related solely to the non-covered claim, there was “uncertainty as to whether certain fees went to the defense of the noncovered versus the covered Claim[.]”  Consequently, the insurer was required to reimburse the insured for all fees and costs other than those that it established related solely to the non-covered claim because it failed to carry its burden as to the remainder.

Carrier Has Duty to Defend Claim for Active Malfunction of Product

Tred R. Eyerly | Insurance Law Hawaii

   Rejecting that the underlying claim was based solely on faulty workmanship, the Third Circuit held the insurer had a duty to defend allegations of a malfunctioning product. Nautilus Ins. Co. v. 200 Christina Street Partners LLC, 2020 U.S. App. LEXIS 22118 (3d Cir. July 16, 2020).

    The insureds were sued by homeowners in two separate suits alleging defects in the construction of their homes. Nautilus defended under a reservation of rights. Nautilus filed suit in District Court and moved for judgment on the pleadings. The District Court denied the motion, finding Nautilus had a duty to defend because the underlying claims sufficiently alleged product–related tort clams that could fall within the scope of coverage under the relevant policies.

    The Third Circuit affirmed. There was a distinction between a claim of faulty workmanship, for which the insurer did not have a duty to defend, and a claim of “active malfunction” of a product, for which an insurer did have such a duty. An active malfunction was sufficiently fortuitous as to constitute an “occurrence.”  

    Nautilus argued that the underlying claims stemmed from the insureds’ alleged faulty workmanship, so the defects alleged were not “occurrences.” Liberally construing the underlying complaints in favor of the insureds, however, the complaints alleged the use of faulty materials, and the active malfunction of products, such as windows and moisture barriers. These active product malfunctions constituted “occurrences” under the policies. Thus, the District Court properly held that Nautilus had a duty to defend the underlying cases.