Second Circuit Reverses Summary Judgment Award, Citing Conflict Among New York Intermediate Appellate Courts Concerning The Meaning Of "Collapse"
Dalton v. Harleysville Worcester Mut. Ins. Co., 557 F.3d 88 (2d Cir. 2009)
In Dalton, the Second Circuit Court of Appeals ruled that the trial court erred in interpreting a first party policy's additional coverage for "collapse" as being confined to cases involving "total or near total destruction." Noting that there was disagreement among the intermediate appellate courts of New York as to whether a building must have suffered "near or total destruction" to be covered or whether coverage could arise due to a mere "substantial impairment of the structural integrity," the Second Circuit concluded that the policy's collapse language was capable of two reasonable interpretations. Because of this ambiguity, coverage was allowed where hidden decay had substantially undermined the structural integrity of the insured's property but had not yet caused it to fall. The Second Circuit also rejected the insurer's argument that, to be covered, the loss or damage must result from a "sudden" destructive force. The court noted that the policy covered loss or damage caused by "hidden decay," which was inconsistent with a requirement that the loss occur suddenly.
"All-Risk" Policies Are Not Maintenance Contracts
MarkWest Hydrocarbon, Inc. v. Liberty Mut. Ins. Co., 558 F.3d 1184 (10th Cir. 2009)
In Mark-West, The Tenth Circuit Court of Appeals ruled that the costs incurred by an insured to comply with corrective action orders issued by the government following the failure of a bypass valve in a natural gas liquids pipeline are not covered by a demolition and increased cost of construction endorsement in all-risk property policy. While the question of coverage was largely decided on the basis of an exclusion for corrosion, the court's decision goes farther, explaining why a finding of coverage would be improper in light of the underlying purpose of "all-risk" insurance, which is to cover fortuitous losses. In particular, the court emphasized that "to read the policy as covering [the insured's] costs of complying with safety regulations would be to convert the parties' policy against unforeseen fortuities into a maintenance contract," which would have the unintended result of "misallocate[ing] the ordinary costs of doing business from the company to the insurer."
Dwelling Is "Vacant" And "Unoccupied" Despite Overnight Stays Once Every Two Weeks For Extended Period Of Time
Vushaj v. Farm Bureau Gen. Ins. Co. of Mich., 773 N.W.2d 758 (Mich. App. 2009)
Interpreting a standard vacancy provision providing that coverage was unavailable for loss occurring "while a described building, whether intended for occupancy by owner or tenant, is vacant or unoccupied beyond a period of 30 consecutive days," the Michigan Court of Appeals ruled that the terms "vacant" and "unoccupied" were commonly understood to mean that a dwelling was routinely characterized by the presence of human beings. Although the insured argued that the dwelling was "occupied" because his father typically spent one night every other week at the premises for two years, the court looked at the numbers from the opposite viewpoint, noting that the insured's father slept elsewhere approximately 678 times over the course of the two year period. The court concluded that the use of the dwelling 52 times in two years did not constitute a dwelling routinely characterized by the presence of human beings. The court was also unpersuaded by the insured's argument that the presence of furniture kept the building from being "vacant" because it was not completely empty. Also figuring prominently in the court's interpretation was the overall purpose of the vacancy provision—nowhere to be found in the printed terms thereof—which the court found was to protect the insurer from the increase in hazard that accompanies unoccupied structures.
Foreclosure Proceedings Do Not Constitute "Increase In Hazard" Under Tennessee Law
U.S. Bank, N.A. v. Tennessee Farmers Mut. Ins. Co., 277 S.W.3d 381 (Tenn. 2009)
The policy in U.S. Bank contained a standard mortgage clause providing in part, that "[t]he mortgagee will...notify [the insurer] of any change of ownership or occupancy or any increase in hazard of which the mortgagee has knowledge." The benefits of the insurance policy under such clauses run to the bank holding the mortgage on the property. The bank foreclosed on the home, but failed to notify the property insurer of the foreclosure proceedings, during which the home was destroyed by a fire. The insurer subsequently denied the bank's claim, contending that the commencement of the foreclosure was an "increase in hazard," that the bank knew of the increase in hazard, and that coverage was invalidated by the bank's failure to notify the insurer of the commencement of the foreclosure. The Tennessee Supreme Court reversed the lower appellate court's decision granting summary judgment to the insurer, holding: "[w]e conclude that the Bank was not required to give notice to [the insurer] of the initiation of foreclosure proceedings, and therefore, the lack of notice does not invalidate coverage in this case.... We do not agree that by its plain meaning the phrase 'increase of hazard' includes the commencement of foreclosure proceedings."
Loss Of Function Due To Blackouts Constitutes "Physical Damage"
Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 968 A.2d 724 (N.J. Super. A.D. 2009), cert denied, 976 A.2d 385 (2009)
Following what appears to be a growing trend, the New Jersey Superior Court Appellate Division broadly construed the term "physical damage" in an all-risk policy to include loss of function and loss of use even though the loss was largely unaccompanied by actual physical loss or damage. Plaintiffs, all supermarket operators, brought an action against their insurer for loss of business and food spoilage resulting from the blackouts occurring in the northeastern United States and parts of Canada over a four day period in 2003. Reversing the trial court award of summary judgment in favor of the insurer, the Appellate Division concluded that "A 'Services Away from Covered Location Coverage Extension' extended coverage for consequential loss or damage resulting from an interruption of electrical power to plaintiffs' supermarkets where that interruption is caused by physical damage to specified electrical equipment and property located away from the supermarkets." The Appellate Division found that the term "physical damage" in the policy was ambiguous, that the trial court's construction of the term was both too narrow and inconsistent with the reasonable expectations of the insured and, contrary to the finding of the trial court, that there was physical damage within the meaning of the policy, because the electrical grid shut down due to a physical incident and was physically incapable of performing its essential function.
Fifth Circuit Finds Storm Surge Not Covered Under Louisiana Law Even if Peril Falls Within Policy's Definition of "Wind/Hail"
Arctic Slope Regional Corp. v. Affiliated FM Ins. Co., 564 F.3d 707 (5th Cir. 2009)
In Arctic Slope, the Fifth Circuit Court of Appeals held that, under Louisiana law, an all-risk commercial property policy's flood exclusion precluded coverage for damage caused by a hurricane storm surge, even if coverage for storm surge fell within the policy's definition of the covered peril "wind/ hail." After storm surge damaged the insured's property, and the insured acknowledged that winds were not responsible, the insurer denied coverage under the policy's exclusion for damage from floodwaters "whether driven by wind or not." The insured conceded that the exclusion encompassed storm surge damage, however, it contended that the loss nevertheless fell within a policy provision defining coverage for wind/hail damage as including "loss or damage caused when water, in any state...is carried, blown, driven, or otherwise transported by wind onto or into said location." The district court granted summary judgment in the insurer's favor and the Fifth Circuit affirmed, finding that even if storm surge falls within the definitions of both an excluded peril (flood) and a covered peril (wind/hail), the policy is not ambiguous when read as a whole because it explicitly states that it covers all risks of direct physical loss or damage "except as excluded under this policy." The Fifth Circuit concluded that the exclusion for storm surge as a flood event cannot be overridden by its possible inclusion as a wind/hail event. The Fifth Circuit also confirmed the enforceability under Louisiana law of the policy's anticoncurrent causation clause. The Fifth Circuit found that the clause was not ambiguous, and operated exactly as it was intended under a storm surge scenario. Citing its prior construction of similar or identical clauses under Mississippi law, the Fifth Circuit explained that the policy wording left no interpretive leeway to conclude that recovery could be obtained for wind damage that occurred concurrently or in sequence with the excluded water damage.
Mississippi Supreme Court Reinterprets The Anti-Concurrent Causation Clause
Corban v. United Services Automobile Assoc., 20 So.3d 601 (Miss. 2009)
The Mississippi Supreme Court, in a unanimous decision, held that a homeowner's insurer may be liable for a portion of the plaintiffs' more than $1 million estimated cost for storm damages to their home from Hurricane Katrina. The decision addressed two important issues regarding post- Katrina claims. In favor of insurers, the decision approved a lower court and prior federal decisions that held that a "water damage" exclusion precludes coverage for hurricane-driven water (also known as "storm surge.") However, the Supreme Court, contrary to two decisions of the United States Court of Appeals for the Fifth Circuit (Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419 (5th Cir. 2007) and Tuepker v. State Farm Fire & Cas. Co., 507 F.3d 346 (5th Cir. 2007)), determined that the "anti-concurrent causation" clause in the policy in question was ambiguous and did not preclude coverage for hurricane losses due to wind damage that happened in sequence with water damage. The court reasoned that, based on the record, the wind and flood acted sequentially and not concurrently, causing different damage and resulting in separate losses. The court further explained that the "anti-concurrent causation" clause would only apply to exclude coverage if the wind and water perils "contemporaneously converged, operating in conjunction to cause loss."
Eleventh Circuit , Interpreting Florida Law , Finds That A Latent Defect Could Be A Manufacturer's Defect Or A Defect In Design
French Cuff, Ltd. v. Markel American Ins. Co., 322 Fed.Appx. 669 (11th Cir. 2009)
The insured filed a breach of contract claim against its insurance carrier based upon the carrier's denial of coverage for property damage to the insured's catamaran sailing vessel. The insurer contended that the loss was the result of a design or manufacturing defect (both excluded under the policy) and not loss arising out of a "latent defect" (which was specifically covered under the policy). The insured countered that, even if the defects at issue were manufacturer's defects or defects in design, they were also "latent defects," and thus covered under the "latent defect" exception to the manufacturer's defects or defects in design exclusion. Both parties filed competing summary judgment motions. The district court granted the insurer's motion and the insured appealed. The Eleventh Circuit reversed, finding that, under the plain language of the policy, the manufacturer's defects or defects in design exclusion does not apply if the manufacturer's defect or defect in design that caused the loss was also a latent defect.
First Circuit Finds Bad Smell Can Constitute Property Damage Under CGL Policy
Essex Ins. Co. v. Bloomsouth Flooring Corp., 562 F.3d 399 (1st Cir. 2009)
The First Circuit Court of Appeals, applying Massachusetts law, held that unpleasant odors from carpeting installed by an insured that permeated a building constituted physical injury to property under a CGL policy. Specifically, the First Circuit found that odors can constitute physical injury to property under a CGL policy if the odor is "permeating or pervasive." The First Circuit found that the odors were physical because they infiltrated the building and, according to the court, the infiltration qualified as "physical loss."
New Jersey Appellate Division Determines That Property Policy Covers Code Upgrades To Undamaged Parts Of Damaged Building
DEB Assoc. v. Greater New York Mut. Ins. Co., 970 A.2d 1074 (N.J. Super. A.D. 2009)
In a case of first impression, the New Jersey Appellate Division found that an insurer must pay for costs associated with bringing undamaged portions of a building up to code standards after a windstorm damaged only one floor of the building. After a local code official inspected windstorm damage on the seventh floor of the building and discovered that the walls throughout the building had not been secured to the structure with appropriate steel fasteners, the official refused to issue a certificate of occupancy unless the owner brought the wall-to-floor connections on all eight floors up to code. Greater New York Mutual refused to provide coverage for the code upgrades, prompting the insured to file a declaratory judgment action. The trial court granted summary judgment to the insured and the Appellate Division affirmed, finding that a "clear causal connection" existed between the covered damage and the additional work ordered by the official because the windstorm damage on the seventh floor caused the authorities to look for and ultimately seek to remedy similar hazards elsewhere in the building.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
