Insured’s Failure to Challenge Trial Court’s Application of Exclusion Makes Appeal Futile

Tred R. Eyerly | Insurance Law Hawaii

    The Texas Court of Appeals affirmed the trial court’s granting of summary judgment to the insurer because the appeal failed to challenge the exclusion under which the insurer found no coverage. Sosa v. Auto Club Indemn. Co., 2022 Tex. App. LEXIS 6520 (Tex. Ct. App. Aug. 30, 2022).

    Sosa’s house was damaged during Hurricane Harry on August 26, 2017. Sosa filed a claim with Auto Club. She reported that two feet of floodwater had entered her home, her roof was missing shingles and was leaking, and she had sustained interior damage. An adjuster estimated the cost to prepare the roof damage was $1,191.96, less that her deductible. Auto Club determined that any remaining damage was caused by flood water, which was expressly excluded from coverage. 

    On November 11, 2020, Sosa filed suit against Auto Club for breach of the policy. Among other things, she argued the adjuster spent minimal time at her home inspecting and was inexperienced. In its answer, Auto Club asserted Sosa’s claim was time-barred by the statute of limitations. Sosa then filed an amended complaint and changed the date of the loss from August 26, 2017, to June 28, 2019. 

    Auto Club filed a motion for summary judgment, primarily arguing the suit was time-barred by both the statute of limitations and the two-year limitations period in the policy. The trial court granted summary judgment to Auto Club.

    On appeal, Sosa primarily agued hat her loss occurred in June 2019, not during Hurricane Harvey in 2017. Therefore, the lawsuit filed in November 2017 was not time-barred. She did not challenge the summary judgment order on the ground that her claimed damages were covered under the policy. Her appellate brief did not mention flood or surface water.  

    Sosa did not ague that the trial court erred by granting summary judgment on the ground that her policy excluded coverage for her damages because they resulted from flood or surface water. This ground independently supported summary judgment in Auto Club’s favor because Auto Club was not liable for damages expressly excluded under Sosa’s homeowner’s policy. Therefore, any other error about which Sosa complained on appeal was harmless in light of the unchallenged ground. 

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Nevada Rules Insured Has Burden to Prove Exception to Exclusion

Michael Lowry | Wilson Elser

On October 28, 2021, the Nevada Supreme Court joined 26 other state supreme courts, holding the insured has the burden to prove an exception to an exclusion. The question before the court was if an insurance policy provides coverage, but that coverage is then modified by an exclusion, who has the burden to demonstrate an exception to the exclusion? Can an insured use extrinsic evidence to meet that burden? These issues routinely arise in coverage disputes.

The underlying action arose from Nevada’s construction defect litigation and concerned whether there was a duty to defend. Nevada adopted the majority rule that since the insured bears the initial burden of establishing coverage, the insured also should bear the burden of proving an exception to an exclusion applies. The court also concluded that the insured may rely on extrinsic evidence because “the duty to defend must be determined at the outset of litigation based upon the complaint and any other facts available to the insurer” at the time the insured tendered the defense.

Policy Clauses, Exclusions and Endorsements: Language Matters

Heather Howell Wright and Alexander G. Thrasher | Buildsmart

The Ninth Circuit Court of Appeals just reminded policyholders that while coverage exclusions are to be read narrowly, they must also be read comprehensively.

In Engineered Structures, Inc. v. Travelers Property Casualty Company of America, Engineered Structures, Inc. (ESI) obtained a builders’ risk insurance policy from Travelers Property Casualty Company of America (Travelers) to insure against the risk of loss during ESI’s construction of a fueling station. During construction, an underground fuel storage tank floated in a wet excavation hole before it could be installed completely. Travelers determined that ESI (or its subcontractors) caused the loss by not putting enough ballast water into the storage tank to prevent flotation during rain. Travelers denied coverage for the loss under the policy’s exclusion for loss due to “faulty, inadequate or defective . . . [d]esign, specifications, workmanship, repair, construction, renovation, remodeling, grading or compaction.” ESI sued Travelers and asserted claims, including breach of contract and bad faith.

The district court focused on the term “workmanship” in the exclusion and found the term ambiguous because it was not clear whether “workmanship” applied to losses caused by a flawed product (the storage tank itself) or to losses caused by a flawed process (the installation of the storage tank). Because the exclusion was ambiguous, the trial court construed it in favor of coverage and decided the exclusion only applied to flawed products and thus did not preclude coverage for loss caused by a flawed process in the tank installation. The trial court granted summary judgment in favor of ESI on the breach of contract claim but granted summary judgment in favor of Travelers on the bad faith claim. Both parties appealed.

On appeal, the Ninth Circuit reversed the district court’s grant of summary judgment in favor of ESI. The Ninth Circuit found the district court erred by focusing on the term “workmanship” and disregarding the term “construction,” which the court described as an unambiguous term that was used consistently throughout the policy to refer to the “‘process’ in completing the covered project.” The court also found that the district court “merely ‘assume[d] insufficient ballast was in the [storage tank] at the time of the loss’” and remanded for further proceedings to determine whether the loss was caused by “faulty, inadequate, or defective” construction.

In dicta, the Ninth Circuit also addressed a policy provision on “resulting loss or damage,” which provides: when an “excluded cause of loss . . . results in a Covered Cause of Loss,” Travelers “will pay for the resulting loss or damage caused by that Covered Cause of Loss.” ESI argued the provision means only the defect itself is excluded from coverage, but all other damages are covered. Travelers contended that no coverage was provided because all loss was caused by the faulty construction that allowed the tank to float in the excavated hole.

While acknowledging that interpretation of the clause would be decided by the district court, the Ninth Circuit opined that the positions argued by Travelers and ESI were “untenable.” The court rejected Traveler’s position because the provision did not contain an anti-concurrent causation clause, so the exclusion could not bar coverage for all of ESI’s loss where faulty construction was only one factor among several that caused the loss. The court further explained that ESI’s interpretation was flawed because it would require ignoring policy language that excludes coverage for “any cost incurred to tear down, tear out, repair or replace any part of any property to correct the fault, inadequacy or defect.”

While this Ninth Circuit ruling is unpublished and fairly narrow in its application to the interpretation of builders’ risk policies, its criticism of the district court opinion provides helpful guidance to policyholders (and their counsel) in construing insurance policies. First, policyholders should consider the meaning of every word in an insurance policy. Second, policyholders should consider how the interpretation of each of those words affects whether, or the extent to which a loss may be covered by a policy. Third, courts generally interpret each word in a policy within the context of the policy as a whole and may not find interpretations of terms in isolation persuasive. While applicable facts and law may vary, policyholders should be mindful of a particular jurisdiction’s approach to policy interpretation when developing a coverage claim.

Property Insurer Wrongly Denies You Coverage? Victor Jacobellis and Chip Merlin Discuss How Exceptions to Exclusions Win Coverage

Chip Merlin | Property Insurance Coverage Law Blog | June 14, 2019

Victor Jacobellis left his job in San Francisco representing insurance companies to join Merlin Law Group and help policyholders obtain insurance coverage benefits. He asked me to speak with him about exceptions to exclusions of coverage which are often overlooked and lead to wrongful denials of coverage. The photo above shows yours truly speaking with Victor Jacobellis in Napa, California at the National Association of Public Insurance Adjusters Annual Conference on this important insurance topic.

This blog has over 30 posts regarding ensuing loss provisions. Here are some of the highlights:

Whipped Cream, Honey and Covered Ensuing Loss Delights

Herb Albert and the Tijuana Brass produced an album, Whipped Cream and Other Delights, which has been on my mind lately. While a number of my less academic colleagues would simply be interested in the album cover and the music– –my insurance coverage nerd personality drove me to research insurance coverage cases involving whipped cream or honey.… Continue Reading

Wear and Tear Exclusions Versus Depreciation For Resulting Damage To Worn and Torn Older Parts of a Structure

Buy Bill Wilson’s book! This is the least I can say after quoting him about “resulting” or “ensuing” loss provisions following “wear and tear” exclusionary language. I am certain his book helped a judge understand how the coverage works. Here is what he says: Wear and Tear Exclusions Just about all that needed to be… Continue Reading

Recent New York Case Involving An Exception To An Exclusion

At times property insurance policies require a flow chart to navigate through in determining whether a particular loss is covered. If a policy exclusion applies, then the policyholder would not be entitled to coverage for a loss. However, some policies have exceptions to exclusions, which can bring a loss, or a portion of a loss,… Continue Reading

Snow is Causing Roofs to Fall — Is There Coverage After the Insurer’s Engineer Says the Roof was of Faulty Design?

Snow is falling all over the United States. So much that roofs are falling from the weight of snow and ice. Can you imagine the policyholder outrage if the insurance company’s engineer says the roof was designed wrong and coverage is denied on that basis? This was the scenario in Driscoll v. Providence Mut. Fire… Continue Reading

Defective Construction and Ensuing Loss Provisions

A public adjuster called with a common situation—a property loss occurred during repair and the insurance company had initially denied the claim, saying that the loss was from defective construction. The smart public adjuster thought the property damage caused in part by defective construction could lead to coverage under an ensuing loss provision. The policyholder… Continue Reading

Ensuing or Resulting Loss, and the Burden of Proving Causation Explained Simply

I am always looking for “an edge.” Just something to get a better chance of winning for my client–like all good litigators. This morning’s post, Chinese Drywall Losses Covered Under First Party Property Insurance Policy, mentioned how going to a NAPIA Conference can give a policyholder’s advocate that type of “edge.” Let me explain how… Continue Reading

I often call ensuing loss clauses the “Lazarus clauses” of property insurance policies. This is because insurers may claim that a loss is not covered citing an exclusion but fail to note the broad grants of coverage afforded by the ensuing loss provisions which are extraordinarily important to making the insurance product work as intended. Victor Jacobellis made the following slide for our presentation:

During our speech, I highlighted and stressed that all public adjusters should read Bill Wilson’s weekly blog posts about insurance coverage. In Claim Declination and Reservation of Rights Letters, Wilson noted:

My experience has been that claim denials that cite exclusions while ignoring exceptions to the exclusions, as in the last two examples, are very common. Often the exception is placed at the end of a series of exclusions, so one reason for the frequency of these types of improper denials could be simply overlooking them, not that this is a valid excuse.

The practical tips from the speech were as follows:

  1. Read the entire policy. This cannot be stressed enough.
  2. Do not accept coverage denials as being correct just because the insurance company cites lots of reasons for the denial.
  3. Do not overlook all the important exceptions to coverage found in the policy.
  4. Critically reevaluate each limitation for additional grants of coverage for in other parts of the policy. (Again, you have to read the entire policy to find them.)
  5. Use the research function of this blog, search FC&S, IRMI and other treatise material regarding the language the insurer is relying upon.

If all else fails, do not hesitate to call Victor Jacobellis or one of the other Merlin Law Group attorneys dedicated to helping policyholders denied or delayed insurance benefits.