California Court Rules Jury Must Resolve Dispute Between Homeowner and Subcontractor Insurer Over When Claim Occurred

Blake Robinson | Davis Wright Tremaine

The California Court of Appeal recently reversed a trial court’s dismissal of a lawsuit, concluding that because there was a dispute over when a homeowner’s claim “occurred” for purposes of an insurance policy, that dispute must be resolved by a jury.

Case Background

Guastello v. AIG Specialty Insurance Co.1 involved a dispute over whether a claim was covered by an insurance policy. The events in question began in 2003 and 2004, when a subcontractor built retaining walls in a housing development. Several years later, the plaintiff purchased a home in the development. Fast forward to 2010, when one of the retaining walls close to the plaintiff’s lot failed and caused significant damage to the plaintiff’s backyard perimeter wall, among other things.

The plaintiff obtained a default judgment of over $700,000 against the subcontractor. The plaintiff then filed a lawsuit against the subcontractor’s insurer, seeking payment on the judgment. The insurer filed a motion for summary judgment, seeking dismissal on the ground that the subcontractor only had a policy with the insurer in 2003 and 2004, but the property damage occurred in 2010.

In response to the motion, the plaintiff filed a declaration in which a geotechnical engineer stated that the retaining wall failed due to the subcontractor’s negligent construction. Significantly, the engineer stated that the damage to the retaining wall and surrounding area began within months of the construction’s completion, including through “continuous and progressive destabilization” of the area. The insurer, on the other hand, submitted evidence that no damage occurred until the retaining wall failed in 2010.

Ultimately, the trial court sided with the insurer, and the plaintiff subsequently filed an appeal.

Occurrence vs. Claims-Made

The appeals court noted that the subcontractor had an occurrence policy, which “provides coverage for damages that occur during the policy period, even if the claim is made after the policy has expired,” as opposed to a “claims-made” policy—which “provides coverage only if the claim is made during the policy period.” Accordingly, the key question was whether the damage that the plaintiff suffered occurred during the 2003-2004 policy period.

In answering that question, the appeals court relied on the “settled rule” that “when continuous or progressively deteriorating damage or injury first manifests itself, the insurer remains obligated to indemnify the insured for the entirety of the ensuing damage or injury.”

Ultimately, the court concluded that—based on the expert declaration—there was evidence from which a jury could find that the damage began occurring shortly after the retaining wall’s completion in 2003. Therefore, the Court of Appeal held that the trial court erred in dismissing the plaintiff’s claim on summary judgment, and the case was sent back to the trial court so a jury could resolve the disputed issue of when the damage began to occur.

Lessons in Insurance

As this case illustrates, both owners and contractors should be aware of the types of insurance policies that they and those with whom they contract have. Whether it is a claims-made or occurrence policy can sometimes make the difference between whether a claim is covered or not.


1   61 Cal.App.5th 97, 275 Cal.Rptr.3d 370 (2021)

The Legal Framework for Insurance Disputes in USA

Summer Craig and Susannah S. Geltman | Simpson Thacher & Bartlett

All questions

The legal framework

i Sources of insurance law and regulation

The regulation of insurance in the US is primarily performed by the states. In 1945, the US Congress passed the McCarran-Ferguson Act, which provides that ‘No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.’ Under the McCarran-Ferguson Act, federal law preempts state insurance law only if it specifically relates to ‘the business of insurance’.

The law of insurance in the US generally falls into one of two broad categories: (1) the regulation of entities that participate in the business of insurance; and (2) the regulation of the policyholder–insurer relationship. State law pertaining to the regulation of entities is generally comprised of statutes enacted by state legislatures and administrative regulations issued by state agencies, such as departments of insurance.

Each state also has statutory and common law applicable to the policyholder–insurer relationship. State statutes address a range of topics, including, among others, the disclosure obligations of the parties to an insurance contract, the nature of a policyholder’s notice obligations and the circumstances in which a victim of tortious conduct may sue a tortfeasor’s insurer directly. State common law is an important source of law for resolving disputes between policyholder and insurer. Practitioners must carefully assess potentially applicable law at the outset of a dispute, as insurance law (whether common law or statutory) varies by jurisdiction.

ii Insurable risk

In the US, the validity of an insurance contract ordinarily is premised on the existence of an insurable interest in the subject of the contract. An insurable interest may be defined as any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction or pecuniary damage. The insurable interest doctrine was first adopted by courts and has since been codified in state statutes. The purpose of the insurable interest requirement, as articulated by courts and commentators, is to discourage wagering and the destruction of life and property and avoid economic waste.

iii Fora and dispute resolution mechanics

Litigation of insurance disputes

The US judicial system is comprised of two separate court systems. The US itself has a system comprised of federal courts and each of the 50 states has its own system comprised of state courts. Although there are important differences between federal and state courts, they share some key characteristics. Each judicial system has trial courts in which cases are originally filed and tried, a smaller number of intermediate appellate courts that hear appeals from the trial courts and a single appellate court of final review.

Unlike state courts, which include courts of general jurisdiction that can address most kinds of cases, federal courts principally have jurisdiction over two types of civil cases. First, federal courts may hear cases arising out of the US Constitution, federal laws or treaties. Second, federal courts may address cases that fall under the federal ‘diversity’ statute, which generally authorises courts to hear controversies between citizens of different US states and controversies between citizens of the US and citizens of a foreign state. For diversity jurisdiction to exist, there must be ‘complete’ diversity between litigants (i.e., no plaintiff shares a state of citizenship with any defendant) and the ‘amount in controversy’ must exceed US$75,000.

Most insurance disputes are litigated in the first instance in federal or state trial courts. Federal courts commonly exercise jurisdiction over insurance disputes under the diversity statute. In this context, an insurance company, like any other corporation, is deemed to be a citizen of both the state in which it is incorporated and the state in which it has its principal place of business.

An insurance action that is originally filed in state court may be ‘removed’ to federal court based on diversity of citizenship of the litigants. In the absence of diversity of citizenship or some other basis of federal court jurisdiction, insurance disputes are litigated in state courts. The venue is typically determined by the place of injury or residence of the parties, or may be dictated by a forum selection clause in the governing insurance contract. The law applied to the dispute may likewise be dictated by a choice-of-law clause in the insurance contract or, in the absence of such a clause, determined by a court based on relevant choice-of-law principles.

Arbitration of insurance disputes

Some insurance contracts contain arbitration clauses, which are usually strictly enforced. The Federal Arbitration Act (FAA) and similar state statutes empower courts to enforce arbitration agreements by compelling the parties to arbitrate. If an insurance contract contains a broadly worded arbitration clause, virtually every dispute related to or arising out of the contract typically may be resolved by arbitrators rather than a court of law.

While all US states recognise the validity and enforceability of arbitration agreements in general, some states have made a statutory exception for arbitration clauses in insurance contracts. Complex legal issues may arise when an insurance contract obligates parties to arbitrate but applicable state statutory law prohibits the arbitration of insurance-related disputes. Although state laws that prohibit arbitration are generally preempted by the FAA, by virtue of the Supremacy Clause in the US Constitution, state anti-insurance arbitration statutes may be saved from preemption by the McCarran-Ferguson Act. As noted, the McCarran-Ferguson Act provides that state laws enacted ‘for the purpose of regulating the business of insurance’ do not yield to conflicting federal statutes unless a federal statute specifically relates to the business of insurance. Because the FAA does not specifically relate to insurance, courts have held that the FAA may be ‘reverse preempted’ by a state anti-insurance arbitration statute if the state statute has the purpose of regulating the business of insurance. As discussed in Section IV, courts are split regarding whether the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), an international treaty that mandates the enforcement of arbitration agreements, may be reverse preempted pursuant to the McCarran-Ferguson Act.

Where an insurance dispute is resolved through arbitration, the resulting award is generally considered to be binding, although there are grounds to vacate or modify an award under the FAA, similar state statutes and the New York Convention. The FAA describes four limited circumstances in which an arbitration award may be vacated by a court: (1) where the award was procured by corruption, fraud or undue means; (2) where there was evident partiality or corruption in the arbitrators; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown or in refusing to hear evidence pertinent and material to the controversy; or if by any other misbehaviour the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made. One area of legal uncertainty is whether a court may vacate an award based on an arbitrator’s ‘manifest disregard’ of the law. Although the manifest disregard standard is not listed in the FAA, some courts have ruled that an award may be vacated on this basis.

Partial Denial of Coverage: If They Raise It, Then You Can Appraise It

Francisco Garcia | Property Insurance Coverage Law Blog | August 8, 2018

Nearly every homeowner’s insurance policy issued in Florida provides a mechanism for resolving disputes between the insured and their carrier as to the amount of a loss: Appraisal.

The language of the appraisal clause can vary from carrier to carrier – some policies, for example, can require appraisal to be invoked within a certain period of time – so it is important to carefully review the specific policy provision any time a party demands a loss be submitted to appraisal. The process is commonly described as follows:

Appraisal. If you and we fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal. If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser. Each shall notify the other of the appraiser’s identity within 20 days of receipt of the written demand. The two appraisers shall then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the state where the residence premises is located to select an umpire. The appraisers shall then set the amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall be the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreement signed by any two of these three shall set the amount of the loss. Each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire shall be paid equally by you and us.

When properly invoked, participation in the appraisal process is mandatory and the amount of loss determined by the panel is binding.

Florida’s Fourth District Court of Appeals recently addressed whether appraisal can be compelled by a carrier after partially denying coverage for the loss. The case, People’s Trust Insurance Company v. Tracey,1 involved a claim for damage to an insureds’ roof and their home’s interior. The homeowners reported that the loss had been caused by wind from a tornado. Although the carrier generally acknowledged coverage for the loss, it limited its payment to only the interior damages and denied coverage for roofing system portion of the claim. Specifically, People’s Trust sent the insured a letter stating:


We have completed our investigation of your claim, and based upon what we were provided and what you reported, and additionally, based upon our claim investigation, there is generally coverage for your loss as a whole. However, and more specifically, our investigation revealed that the roof leak you reported stemmed from age-related wear and tear and deterioration; general mechanical breakdown or latent defect; and/or faulty, inadequate or defective maintenance of the roofing system – none of which are covered causes of loss. Therefore, in our opinion, the scope of covered damages would not include your roofing system because those damages were caused by uncovered or excluded causes, but would provide coverage for resulting ensuing damages to the interior of your home. Therefore, we believe our obligation is to repair only those damages to the interior of the home. If you are not in agreement with that assessment, the question of whether the scope of repairs should include the roof, can be resolved in appraisal.

In response to two proofs of loss submitted by the insureds, both of which exceeded the insurer’s payment and included repairs to the roof, People’s Trust demanded. The homeowners then filed suit against their insurance carrier for breach of contract and the insurer responded by moving to compel appraisal. People’s Trust maintained that the cause of the roof damage could be resolved in appraisal because it went to the amount of the loss. The insured successfully argued that the cause of the damage to the roof was a question of coverage and, therefore, solely within the purview of the court.

The trial court agreed with the insureds and denied People’s Trust motion to compel appraisal, without prejudice. The appellate court, however, reversed and remanded the case back to the trial court to compel the appraisal. In its reasoning, the appellate court explained that “when an insurer admits coverage and disputes the amount of loss, causation is to be determined by an appraisal panel.” Regarding the insured’s argument, the court emphasized that “[c]ausation is a coverage question for the court when an insurer wholly denies that there is a covered loss and an amount-of-loss question for the appraisal panel when an insurer admits there is a covered loss, the amount of which is disputed.”

This case further demonstrates the nuances of first-party property actions and how particular facts surrounding a claim can change the outcome of litigation. Based on Tracey, if an insurer denies coverage for a loss in its entirety it may not be able to avoid litigation by invoking appraisal – but if it only denies coverage for a portion of the claim, then you may have no other option than to participate in the appraisal process. If you believe that an appraisal provision has been improperly demanded or have questions about whether an insurance carrier may invoke appraisal under a policy, contact an experienced insurance professional for help.
1 People’s Trust Ins. Co. v. Tracey, No. 4D17-3945, 2018 WL 3559914 (Fla. 4th DCA July 25, 2018).

Is a Dispute Over General Contractor Overhead and Profit Appropriate for Appraisal?

Edward Eshoo | Property Insurance Coverage Law Blog | February 22, 2017

In Windridge of Naperville Condominium Association v. Philadelphia Indemnity Insurance Company,1 a federal district court in Illinois recently addressed the issue whether appraisal is appropriate to resolve a dispute over the need for a general contractor to perform repairs following a covered loss. There, hail damaged townhome buildings, requiring repairs. Philadelphia paid for losses it conceded were within the scope of the insurance policy’s coverage for hail damage. Philadelphia though declined to reimburse the Association for the overhead and profit charged by its general contractor in making the repairs. Philadelphia then refused to participate in an appraisal to resolve this dispute, prompting the Association to sue. The Association subsequently moved to compel appraisal, which the district court granted.

In seeking to avoid appraisal, Philadelphia argued that whether it must reimburse the Association for the overhead and profit charged by its general contractor in making the repairs is a coverage question not subject to appraisal. The district court disagreed. The Philadelphia insurance policy provided for appraisal if the parties disagreed as to the “amount of loss.” The district court reasoned that in calculating repair or replacement cost, it is necessary to assess what must be replaced or repaired, who is qualified to perform that work, and how much that work costs. That inquiry requires determining whether a general contractor is needed, in which case overhead and profit is part of the loss, or whether a single tradesman can do the work. The district court concluded that such determination is a question appropriate for appraisal.2

Insurers like Philadelphia routinely decline to appraise a dispute over general contractor overhead and profit, asserting in conclusory fashion that it involves a “coverage” question. Ten years ago, I wrote an article titled “Overhead & Profit: Its Place in a Property Insurance Claim,” which was published in Adjusting Today.3 As discussed in the article, the majority of courts have concluded that general contractor overhead and profit should be included in the cost of repair or replacement to arrive at an actual cash value estimate and settlement where the use of a general contractor is reasonably likely in repairing or replacing a covered loss, even if no general contractor is used or no repair or replacement is made.4

This is still the majority view today.5 Indeed, the district court in Windridge of Naperville implicitly recognized the majority view in its ruling. The district court noted that the policy’s “Loss Payment” and “Valuation” provisions obligated Philadelphia under certain circumstances to pay the cost of repairing or replacing the damaged property. The district court stated that if repairing or replacing the property requires a general contractor, then the cost of repair or replacement includes the industry-standard overhead and profit.6 No policy language suggested that if a general contractor is required, Philadelphia may decline to pay the overhead and profit component of a general contractor’s charges. According to the district court, the coverage question was clear: If a general contractor is required to repair or replace the damaged property, then Philadelphia must pay the overhead and profit components of the general contractor’s charges. The only disputed question is whether a general contractor is necessary to perform the repairs, or whether a single tradesman would suffice, which the district court concluded was a question appropriate for appraisal.7

So, when an insurer refuses to appraise a dispute over general contractor overhead and profit, know the reason for its refusal. On the one hand, if the insurer asserts that the insurance policy does not cover the cost of a general contractor’s overhead and profit, then that would be a coverage dispute for the court. On the other hand, if the insurer asserts that a general contractor is not needed to perform the repairs, which is the typical basis for declining appraisal, then that factual determination is appropriate for resolution by appraisal for the reasons stated by the district court in Windridge of Naperville. The nature and extent of the damage and the number of trades needed to make the repairs are key factors in determining whether use of a general contractor is reasonably likely.8 This requires consideration of the degree to which coordination and supervision of trades is required.9

Besides appraising the dispute over general contractor overhead and profit, the Association in the Windridge of Naperville suit also sought to compel appraisal to resolve a dispute over the cost of repairing physically undamaged sides of townhome buildings to remedy a mismatch with repaired damaged sides. The district court’s ruling on that issue will be addressed in my next blog post.
1 Windridge of Naperville Condominium Association v. Philadelphia Indem. Ins. Co., No. 16-3860, 2017 WL 372308 (N.D. Ill. Jan 26, 2017).
2 Windridge, 2017 WL 372308, at **2-3.
3 Adjusting Today is a newsletter published by Adjusters International, Inc.
4 The minority view is that the cost of a general contractor’s overhead and profit is compensable only if it is incurred in repairing or replacing damaged or destroyed property. Even when incurred, insurers routinely deny payment for general contractor overhead and profit, contending that the repairs were not complex enough to warrant the use of a general contractor.
5 See, e.g., Trinidad v. Florida Peninsula Ins. Co., 121 So.3d 433 (Fla. 2013).
6 At the hearing on the motion to compel appraisal, the parties’ counsel explained that it is industry custom for a general contractor making repairs to charge “10 and 10,” or 10% for profit and 10% for overhead, on top of the amounts the general contractor pays to the subcontractors.
7 Windridge, 2017 WL 372308, at **2-3.
8 Many insurance companies’ claim handling practice is to include general contractor overhead and profit in the cost of repair or replacement in order to arrive at an actual cash value estimate and settlement when three or more trades are involved in the repair.
9 See, e.g., Mt. Bethel No. 1 Baptist Church v. Church Mut. Ins. Co., 2015 WL 12591682 (W.D. La.).

Coverage for Direct Physical Loss Does Not Necessarily Include “Matching” or Require “Aesthetic Uniformity”

Heidi Hudson Raschke | PropertyCasualtyFocus | January 29, 2016

When a property insurance policy covers a multi-story building or multi-building property, and a portion sustains damage, there is often a question regarding the extent to which undamaged property should be replaced to ensure matching and/or aesthetic uniformity throughout the property.  In Great American Insurance Company of New York v. The Towers of Quayside No. 4 Condominium Association, 15-CV-20056 (S.D. Fla. Nov. 5, 2015), a District Court recently determined that the answer to this question is dependent on whether the requested repairs to undamaged property concern “any continuous run of an item or adjoining area.”

Quayside Gets a Wet Side

The insured property included a 25-story condominium building.  In February 2013, a release of water from a broken valve on an air conditioning unit caused water damage to drywall, carpeting, baseboards, insulation, and wallpaper in the east hallways of floors one through eleven.  Great American paid for the water damaged components on the east side of these floors, but Quayside asserted that repairing only what had sustained water damage did not fully compensate it for the direct physical loss caused by the water damage.

Quayside Wants Coverage For the Dry Side

Floors three through twenty-five were designed to have a uniform appearance.  The carpeted hallways of the east side of the building were separated from the carpeted west hallways by a tiled elevator lobby.  “Quayside sought coverage to repair or replace undamaged carpeting, wallpaper, baseboards, and woodwork in 1) the west hallways and elevator landings of the eleventh floor and floors below and 2) floors twelve through twenty-five. Quayside contend[ed] it is entitled to repair or replacement of these undamaged components because 1) it will otherwise not be possible to achieve aesthetic uniformity between the new carpeting, wallpaper, baseboards, and woodwork installed in the area that suffered water damage and the rest of the building and 2) the loss of aesthetic uniformity devalues the building and constitutes a loss to the building.”

The policy included a Difference in Conditions (“DIC”) Coverage Form that provided: “We will pay for your ‘loss’ to Covered Property from a Covered Cause of Loss.”  The policy defined “Covered Cause of Loss” as “direct physical ‘loss’ to Covered Property, except those causes of ‘loss’ listed in the exclusions.” Through its Specified Cause of Loss Form, the policy excluded coverage for consequential loss, which it defined as “Delay, loss of use, loss of market, or any other consequential loss.”

Great American moved for summary judgment seeking a declaration that Quayside is not entitled to coverage for replacement of undamaged building components.  Quayside argued that “the measure of recovery under the policy must be determined from the perspective of damage to the building as a whole, that the building as a whole suffered direct physical damage from water, and that the policy covers all costs necessary to restore the building to its pre-loss, aesthetically uniform condition.”

The Question Is Whether They Are Two Sides of a Continuous Run or Adjoining Area

The Court did not accept Quayside’s argument that it is necessarily entitled to matching or aesthetic uniformity, stating “the policy plainly only provides coverage for ‘direct physical loss,’ specifically excludes coverage for consequential loss, and makes no mention of ‘matching’ or ‘aesthetic uniformity’ at all.”  However, the Court held that “coverage for matching, for the purpose of achieving aesthetic uniformity, is appropriate where repairs concern ‘any continuous run of an item or adjoining area’ for materials such as wallpaper, baseboards, woodwork, and carpeting, [but] it is plain that matching is not otherwise required under the policy.”  (Quoting Ocean View Towers Ass’n, Inc. v. QBE Ins. Corp., No. 11-60447, 2011 WL 6754063, at *12 n.4 (S.D. Fla. Dec. 22, 2011).)

Applying this standard to the facts, the Court determined…

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