Source: https://www.insurancelawhawaii.com/insurance_law_hawaii/2011/09/index.html
Timestamp: 2019-04-23 11:51:03+00:00

Document:
Gordon Ito, Commissioner of the Hawaii Insurance Division, will be the guest speaker at the Hawaii State Bar Association's Insurance Coverage Litigation Section's meeting on Friday, October 7, 2011.The meeting will be from 12:00 p.m. to 1:00 p.m. at the offices of Cades Schutte, 1000 Bishop Street, 10th Floor. Please feel free to join us.
After suffering hurricane damage and having repairs made, the insured sought to assign rights under its policy to the contractor performing the remediation work. The anti-assignment provision, however, prevented the contractor's recovery under the policy. Paramount Disaster Recovery, Inc. v. Axis Surplus Ins. Co., 2011 U.S. Dist. LEXIS 98272 (S.D. Texas. Aug. 31, 2011).
Hurricane Ike damaged the insured's shopping center. Paramount was hired to perform remediation work to protect the properties from additional damage. The insured then filed a claim with Axis for hurricane-related damages. The insured subsequently attempted to assign all insurance proceeds payable to it under the policy to Paramount.
Your rights and duties may not be transferred without our written consent except in the case of death of an individual insured . . . .
The court determined the provision would be enforced precluding the assignment of any rights and duties under the policy without Axis's consent.
Next, the court considered whether anti-assignment provisions were enforceable under Texas law. A review of Texas decisions indicated that Texas courts had consistently enforced anti-assignment clauses in insurance policies. Therefore, the anti-assignment clause in Axis's policy precluded the assignment to Paramount absent Axis's written consent. Axis was entitled to judgment as a matter of law.
The court determined there was no coverage for water intrusion based upon a comprehensive Exterior Insulation and Finish Systems (EIFS) Exclusion. Nat'l Am. Ins. Co. v. Gerlicher Co., LLC, 2011 Okla. Civ. App. LEXIS 79 (Okla. Ct. App. Aug. 29, 2011).
Gerlicher purchased a commercial building constructed by general contractor Pinion Construction, Inc. Gerlicher then leased the building to the United States Fish & Wildlife Service. Subsequently, the Fish and Wildlife Service noted water intrusion, high humidity, and mold in the building.
An expert report suggested three sources. First, water was trapped between two vinyl wall barriers, preventing evaporation. Second, a brick row ledge sloped towards the wall instead of away from the wall system. Third, the EIFS system at the windows had deteriorated caulking and holes along the wall system, allowing moisture to enter.
Gerlicher sued Pinion for breach of implied warranty and negligence. National American agreed to defend Pinion under a reservation of rights and then sued Gerlicher for a declaratory judgment. The trial court granted National American's motion for summary judgment.
The appellate court found the EIFS exclusion was determinative. It clearly excluded "coverage for damages that arise out of any work that you do . . . related to an EIFS system . . . . This includes any damage to a building or structure caused by the intrusion of water or moisture through an EIFS system . . . ." Consequently, the damages alleged by Gerlicher were excluded under this provision.
Nevertheless, Gerlicher argued the "efficient proximate cause" doctrine prevented summary judgment. The doctrine applied when at least two identifiable caused combined to form a single property loss, and one was covered under the policy while the other one was excluded under the policy. If the cause which was determined to have set the chain of events in motion, the efficient proximate cause, was covered under the policy, the loss would likewise be covered.
Here, however, the exclusion barred application of the efficient proximate cause doctrine. The only reasonable construction of the exclusion was that when more than one cause was involved in a loss that included EIFS, whether directly or indirectly, there was no coverage regardless of whether the causes acted concurrently or in any combination with EIFS.
In yet another recent construction defect case, the Illinois Court of Appeal found for coverage. See Milwaukee Mut. Ins. Co. v. J.P. Larsen, Inc., 2011 Ill. App. Ct. LEXIS 872 (Ill. Ct. App. Aug. 15, 2011).
Weather-Tite, Inc. hired Larson as a subcontractor to apply sealant to windows installed by Weather-Tite in a condominium building. The windows subsequently leaked and caused water damage. The homeowner's association sued Weather-Tite for breach of express and implied warranties. Weather-Tite filed a third-party complaint against Larsen alleging that, if it was liable to the association for breach of warranty, Larsen was liable for contribution as a joint tortfeasor. Weather-Tite and Larsen both tendered defenses to Milwaukee Insurance. The tenders were denied and Milwaukee Insurance filed suit to determine rights under the policy.
Cross-motions for summary judgment were filed by all parties. The trial court granted Milwaukee Insurance's summary judgment motion as to Weather-Tite, but granted Larsen's cross-motion against Milwaukee Insurance.
On appeal, the appellate court considered whether the underlying pleadings alleged facts demonstrating "property damage" resulting from an "occurrence" within the terms of the policy. The association alleged that, due to faulty construction, the condominium common elements, individual units, and the owners' personal property were damaged. The complaint also alleged that "apart from the property damage, the association will have to make repairs to correct the design and/or construction defects." Further, in the breach of warranty counts, the association alleged Weather-Tite's faulty workmanship caused losses to individual unit owners.
These breach of warranty counts were imputed against Larsen in Weather-Tite's third party complaint.
The court determined "property damage" was alleged. The damages alleged were not intangible and were more than merely the repair or replacement of the faulty window caulking and sealant. Further, the allegations in the third-party complaint repeatedly stated that Larsen negligently completed the job for which it was hired. Milwaukee Insurance argued the claims arose from breach of contract and did not constitute an occurrence. However, allegations based in contract could invoke a duty to defend as long as the damage was not to the actual property the insured was working on but, rather, to other property.
Finally, damage to something other than what the insured worked on constituted an "occurrence" under a CGL policy. The association's complaint alleged the installation of a faulty window system resulted "in significant and continuing water leakage into the common elements and residential units." Moreover, "property damage" imputed to Larsen through its negligent workmanship included personal property and water damage throughout a building not constructed by Larsen.
Therefore, an occurrence was plead. The appellate court affirmed the trial court's ruling that Milwaukee Insurance had a duty to defend Larsen.
The California Court of Appeals considered the reach of a pollution exclusion in a first party property policy. See The Villa Los Alamos Homeowners Assoc. v. State Farm Gen. Ins. Co., 2011 Cal. App. LEXIS 1079 (Cal. Ct. App. Aug. 17, 2011).
A prior case from the California Supreme Court was instructive. In MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635 (2003), the court determined that a standard pollution exclusion in a CGL policy was intended to exclude coverage for injuries resulting from events commonly regarded as environmental pollution. As a result, the court rejected a broader, literal interpretation,thereby foreclosing coverage for any injures arising from various harmful substances. Here, the court of appeals determined a similar interpretation should apply to pollution exclusions in first party policies.
In 2006 the Association contracted with Cal Coast Construction to scrape the acoustical ceilings and stairways to search for possible asbestos. Cal Coast disturbed asbestos contained in the ceilings, releasing asbestos fibers into the air. Cal Coast was cited by the County and removed from the project. The County ordered the Association to perform a comprehensive abatement of the building. A contractor was hired to perform cleanup.
. . . 1. the presence, release, discharge or dispersal of pollutants, meaning any solid, liquid, gaseous, or thermal irritant or contaminant, including vapor, soot, fumes, acids, alkalis, chemicals and waste . . . ."
State Farm denied coverage and the Association paid $650,000 to fully clean and abate the building. The Association sued and the trial court granted summary judgment to State Farm.
On appeal, the court first looked to the drafting history of the pollution exclusion and its interpretation in the CGL context. The exclusions in first and third party policies were virtually identical. Accordingly, there was no reason to reject MacKinnon's holding that the pollution exclusion was aimed at environmental pollution, and instead adopt a dictionary-based, literal language approach to deciding whether there was coverage.
Moreover, State Farm's policy included both first and third party coverage with pollution exclusions in each. To interpret the pollution exclusion differently depending on whether first party or third party coverage was implicated under a claim that could trigger either section of the policy did not make sense. Therefore, the court determined that a reasonable insured would expect both exclusions to apply to environmental pollution.
Nevertheless, the accidental release and airborne dissemination of asbestos fibers amounted to what was commonly regarded as "environmental" pollution. Damage to the Association's property was caused by a "release" of asbestos into the air. "Release" was a defined mechanism within the terms of the pollution exclusion. Consequently, judgment was properly entered in favor of State Farm.
Thanks to Robert Thomas (www.inversecondemnation.com), my Damon Key blogging colleague, for forwarding this case.
The insurer argued it had no duty to defend the assignee of a policy because it was not a named insured. While the trial court agreed, the Appellate Court of Illinois reversed. Illinois Tool Works, Inc. v. Commerce and Indus. Ins. Co., 2011 Ill. App. LEXIS 881 (Ill. Ct. App. Aug. 16, 2011).
The Enssles owned property in Boulder, Colorado, which was leased to Binks Manufacturing Company in 1959. Binks manufactured electrostatic coating application equipment and related industrial products. In 1998, plaintiff Illinois Tool Works purchased Binks' operations. After Binks dissolved, plaintiff continued to lease and use the Enssles' property until 2003.
In 2003, the Enssles sued plaintiff, alleging that Binks' and plaintiff's business activities caused soil and water contamination. The Enssles contended that plaintiff was assigned the lease and thereby assumed all the obligations under the lease. The lease required that tenants indemnify the Enssles and hold them harmless from any liabilities arising from the tenants' conduct.
The Binks' liability insurers refused to defend plaintiff in the Enssles' lawsuit. Under the purchase agreement, the Binks had assigned to plaintiffs all rights under its liability policies. Plaintiff also argued it was a successor to Binks, entitling it to coverage. On cross-motions for judgment on the pleadings, the court found the insurers had no duty to defend plaintiff.
The appellate court reversed. First, nothing in the pleadings demonstrated that plaintiff sought anything beyond the scope of the Binks' rights under the policies, i.e. anything more than a defense for occurrences during the policy periods. Therefore, the insurers' scope of coverage was not increased by the assignment.
The insurers, however, argued they never consented to the assignment of the policies. The court first noted that the insurers had failed to indicate where in the record the assignment provisions were located. The court, therefore, refused to consider the insurers' argument that plaintiff failed to comply with the policy's consent provision.
Moreover, notwithstanding the existence of an anti-assignment or consent provision, a policy could be assigned after a loss without notice to or consent of the insurer. An assignment after loss was not the assignment of the policy but the assignment of a claim or debt - a chose in action. Here, the chose in action came into existence when the contamination of the property occurred, i.e., when the loss for which Binks had arguably bought coverage came about. Once the injury or loss occurred, the chose in acton was established and assignable without the consent of the insurer.
Consequently, the insurers had a duty to defend plaintiff.
In a January decision, the South Carolina Supreme Court found no coverage under a CGL policy for construction defects. On rehearing and after considering numerous amici briefs, the court withdrew its initial opinion and determined there was coverage for progressive property damage caused by faulty workmanship. Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Ins. Co., 2011 S.C. LEXIS 277 (S.C. Aug. 22, 2011).
Crossmann constructed multiple condominium projects from 1992 through 1999, using subcontractors. In 2001, the homeowners filed suit against Crossmann after discovering construction defects and resulting problems in the units. Crossmann settled with the homeowners for $16.8 million.
Crossmann then sought coverage for the damages arising out of the lawsuit from Harleysville, but coverage was denied. Suit was filed and the parties stipulated to the facts and amount of damages. Only coverage and allocation questions were presented to the trial court. The parties stipulated that damage resulting from water intrusion was "property damage," that the damage progressed until repaired, and that the parties would not argue the applicability of any policy exclusions.
The trial court ruled that the progressive damage that resulted from the subcontractor's negligent work was caused by an "occurrence." The trial court also ruled that Harleysville was jointly and severally liable and not entitled to a set-off based on other insurer's pre-trial settlements with Crossmann.
The Supreme Court affirmed in part, reversed and remanded in part. First, the court affirmed the trial court's finding of coverage based on an "occurrence." Negligent or defective construction resulting in damage to otherwise non-defective components could constitute "property damage," but the defective construction itself did not. Various exclusions, however, could preclude coverage in some instances.
Next, the court decided that pro rata or "time on the risk" was the proper method for allocating damage among various insurers, not joint and several liability. The joint and several analysis could make one policy responsible for the entire loss caused by a progressive injury. Under "time on the risk," each triggered policy had to indemnify only for the portion of the loss attributable to property damage that occurred during its policy period.
Notably, South Carolina is now back on the construction-defects-can-arise-from-an-occurrence side of the ledger.
The federal district court was bound by a prior decision from the Kentucky Supreme Court in deciding construction defects did not qualify as an "occurrence" under a CGL policy. See State Auto Ins. Co. v. Thomas Landscaping & Construction, Inc., 2011 U.S. Dist. LEXIS 88176 (E.D. Ohio Aug. 9, 2011).
After Thomas Construction built a custom home for Michael Roland, Roland filed suit alleging the home was not built according to his specifications. Specifically, Roland alleged that Thomas Construction failed to build the home within the acceptable standards of the home building industry, failed to meet the standard of care implied in its contract, failed to provide workmanship and materials within acceptable standards, and breached its warranty to repair or replace. Thomas Construction tendered the suit to State Auto, who denied coverage.
State Auto then filed for a declaratory judgment and moved for summary judgment. No opposition was filed by Thomas Construction. Applying Kentucky law, the federal district court followed the Kentucky Supreme Court's decision in Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W. 3d 69 (Ky. 2010). Only fortuitous harm was covered under Kentucky law. Simply focusing on the builder's lack of intent to build a faulty house was not enough. If a builder had control over the building of a home, one could not logically argue that substandard construction by the builder was a fortuitous, accidental event. Therefore, under Cincinnati Ins. Co., a claim for faulty workmanship, in and of itself, was not an "occurrence" because the workmanship did not involve the fortuity required to constitute an accident.
The facts here were similar to those in Cincinnati Ins. Co. Consequently, State Auto did not owe a duty to indemnify and its motion for summary judgment was granted.
The cost of removing and replacing cracked flanges to prevent future leakage was not covered as an ensuing loss under a builder's risk policy in RK Mechanical, Inc. v. Travelers Prop. Casualty Co. of Am., 2011 U.S. Dist. LEXIS 83958 (D. Colo. Aug. 1, 2011).
The insured, RK Mechanical Inc., was a subcontractor hired to install plumbing for a residential construction project. RK was an additional insured on the general contractor's policy with Travelers. RK installed approximately 170 CPVC flanges on the project. Subsequently, two of the flanges cracked, allowing water to overflow and causing water damage to the project. Travelers was notified of the flange failure and resulting water damage.
RK subsequently removed and replaced the two cracked flanges and began water remediation. Travelers paid for the cost of the water damage due to the cracked flanges.
RK then examined all of the flanges installed in the project and discovered many were cracked and/or showed signs of potential failure. RK removed and replaced the cracked flanges. RK tendered a claim and demand for indemnity to Travelers for these repair costs. Travelers denied the claim. RK then sued for breach of contract and declaratory relief. The parties filed cross motions for summary judgment.
3. We will not pay for "loss" caused by or resulting form any of the following. But if "loss" by a Covered Cause of Loss results, we will pay for the resulting "loss."
d. faulty, inadequate or defective . . . materials, workmanship or maintenance.
The court agreed that the costs to remediate and repair property damaged by the water and caused by the cracked flanges fell within the ensuing loss provision. The court disagreed, however, that each of the remaining flanges posed a risk of loss that was covered as an ensuing loss.
An ensuing loss provision did not cover loss caused by the excluded peril; it covered loss caused to the property wholly separate from the defective property itself. Here, it covered the escaping water, not the cracked flange. Therefore, the cost of correcting the defect was not an ensuing loss.

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