This is an appeal from a declaratory judgment decision handed down by a trial court in Connecticut. The insurer was granted summary judgment at the trial level and the defendant appealed. The case is Merrimack Mutual Fire Insurance Company v. Ramsey, 2009 WL 3461481 (Conn.App.).
Ramsey visited the defendant (Laporta) as an invited guest in her apartment. Without provocation, Ramsey began stabbing himself and Laporta with a kitchen knife. Laporta was stabbed twenty-four times, with Ramsey using a second knife after the first one broke. Laporta filed a lawsuit against Ramsey, alleging numerous injuries and said that Ramsey suffered from a variety of mental and psychiatric disorders; so at no time did he have an understanding of the nature or wrongfulness of his conduct, nor did he intend to cause bodily injury.
At the time of this attack, Ramsey was insured under a homeowners policy issued by Merrimack to Ramsey's parents. Merrimack filed a declaratory judgment action, arguing that it had no duty to defend or to indemnify Ramsey because of a certain exclusion in the policy. The exclusion applies to injury arising out of sexual molestation, corporal punishment, or physical or mental abuse. The trial court agreed with the insurer and Laporta appealed.
Laporta claimed that the trial court misinterpreted the policy exclusion. She argued that the term "physical abuse" contains an implicit intentionality requirement and the court failed to consider Ramsey's intent; Laporta said that Ramsey did not intend or expect to harm her. The appeals court concluded that her reading of the policy exclusion was "plainly unreasonable". The policy exclusion expressly exempts coverage for bodily injury arising out of physical abuse and nowhere does the exclusion provide that a consideration of the abuser's intent is required. The only plausible interpretation of the Ramsey insurance policy is the natural and ordinary one accorded to it by the trial court. The stabbing of Laporta clearly constituted physical abuse within the language of the policy exclusion. The opinion of the trial court was affirmed.
Editor's Note: The language of an insurance policy is always subject to the interpretation of a court. And, if the terms of the policy are clear and unambiguous, then the language is accorded its natural and ordinary meaning. While any ambiguity will usually be construed in favor of the insured because the insurer drafted the policy, ambiguity in insurance policy language is not going to be created by a court regardless of the views of a claimant (or of the insured).
Negligent construction work of subcontractor results in an occurrence
The insurer in this case sought a declaration that the commercial general liability policy issued to a homebuilder did not cover a claim for damages caused by the negligence of a subcontractor. The case is Auto-owners Insurance Company v. Newman, 2009 WL 2851211 (S.C.). Note that, as of this writing, this opinion has not been released for publication in the permanent law reports; until so released, the opinion is subject to revision or withdrawal.
Trinity Construction completed the construction of a home for Newman. Shortly thereafter, Newman filed a lawsuit claiming negligence and defective construction arising out of the installation of stucco siding. Newman charged that the application of the stucco did not conform to industry standards and that this nonconforming application allowed water to seep into the home cause; this caused severe damage to the framing and exterior sheathing of the house.
An arbitrator issued an award to the homeowner in the amount of $55,898. The insurer for Trinity Construction sought a declaratory judgment that the damages awarded by the arbitrator were not covered by the policy. The trial court determined that the damages were covered because they resulted from an occurrence and because the insurer did not show that any exclusions applied. The insurer appealed and the case went to the Supreme Court of South Carolina.
The insurer contended that the defective installation of the stucco by a subcontractor was not an occurrence. The Supreme Court ruled that, although the subcontractor's negligent application of the stucco did not on its own constitute an occurrence, the continuous moisture intrusion resulting from the subcontractor's negligence was an occurrence. The moisture intrusion was an unexpected happening not intended by the insured, or in other words, an accident.
As to the insurer's claim that the damages were not unexpected since a construction professional would expect substantial moisture intrusion from defective stucco installation, the court said that it is simply unreasonable to believe that the insured expected or intended its subcontractor to perform negligently.
The decision of the trial court that the liability policy covered the damages awarded by the arbitrator to Newman was affirmed.
*Note: This is another court ruling that defective construction does not mean there is an absence of an occurrence with respect to coverage under a liability policy. Whether a defective construction property damage claim is the result of an occurrence depends on the facts of each situation.
Another subcontractor, defective workmanship and occurrence dispute
The Colorado Court of Appeals had the following sole issue for review in this case: whether the trial court erred in determining that the insurers for a subcontractor had no duty to defend its insured as a matter of law because there was no occurrence in the underlying construction defect litigation. This case is General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company, 205 P.3d 529 (2009).
Summit at Rock Creek Homeowners Association (HOA) filed a lawsuit against D.R. Horton (DRH) for alleged construction defects due to faulty workmanship in a housing project. DRH then filed a third-party indemnification complaint against its subcontractors, including Foster Frames. General Security insured Foster Frames and it defended the insured against the complaint, and then filed a fourth-party complaint against the subcontractors of Foster Frames, seeking indemnification if Foster Frames was found liable to DRH. This proceeding was stayed by the trial court.
General Security followed this by filing a complaint directly against the Foster Frames subcontractors' insurance companies, seeking relief for their failure or refusal to share in the costs of defense of Foster Frames. The trial court in this complaint granted summary judgment to the defendants, determining that the defendants were not obligated to assist in the defense of Foster Frames because the property damage due to faulty workmanship alleged by the HOA was not caused by an occurrence as defined in the insurance policies.
Upon appeal, the appeals court found that whether general allegations of faulty workmanship constitute an occurrence is a question that has been answered by split decisions from around the country. The court noted that the majority of jurisdictions have held that claims of poor workmanship, standing alone, are not occurrences (that is, not accidents) that trigger coverage under general liability policies. The minority position is that the damage resulting from faulty workmanship is an accident and thus, a covered occurrence so long as the insured did not intend the resulting damage.
The appeals court in this instance sided with the majority rule and said the rule relied on the necessary element of fortuity inherent in the ordinary meaning of the term "accident", and since an occurrence is defined as an accident in the insurance policies, if there is no accident, there is no occurrence. The opinion of the trial court was affirmed.
* Note: This case is another in the long line of cases determining if faulty workmanship is an occurrence and thus, a covered claim under the terms of a general liability policy. This case is very much worth reading due to the list of opinions representing both the majority position and the minority position. The reader can find sound legal reasoning for both sides of the argument over the faulty workmanship/occurrence dispute.
Repeated, related acts of embezzlement constitute one occurrence
The United States Court of Appeals for the Fifth Circuit was faced with a crime coverage issue arising out of embezzlement by an employee. The employee embezzled money from his employer over a period of years and the insured and the insurer disagreed over whether this was one occurrence or more than one occurrence. This case is Madison Materials Company, Inc. v. St. Paul Fire & Marine Insurance Company, 523 F.3d 541 (2008).
St. Paul and its predecessor, United States Fidelity and Guaranty Company (USF&G), issued an unbroken series of crime policies spanning ten years to the insured, Madison Materials; these policies protected Madison from employee theft. During this ten year period, the financial officer (Walker) embezzled money from the insured, amounting to a total theft loss of $1,469,148.
The insured notified the insurer of the theft immediately upon learning of the embezzlement. St. Paul examined the facts of the loss and offered to pay $350,000 to Madison; this amount was the limit of the insurance policy in effect at the time Madison discovered the theft. Madison sued St. Paul to recover the full amount of the theft and contended that Walker's myriad acts of theft over almost a decade constituted more than a single occurrence because the scheme spanned multiple policy periods. The district court ruled in favor of the insurer and this appealed followed.
The appeals court said that the dispute in this case turned on the meaning of "occurrence". Madison argued that the definition in the policy is ambiguous because it can be reasonably interpreted to exclude acts occurring outside of the policy period. And, according to Madison, this ambiguity entitled it to recover up to the policy limit for each of the ten successive policies issued by St. Paul, given that some acts of embezzlement occurred and caused loss to Madison during the term of each policy. The appeals court rejected the insured's argument.
The court reviewed the policy in effect at the time of the discovery of the loss and noted that it stated that "the most we will pay for loss in any one occurrence is the applicable limit of insurance shown in the Declarations". The court then reasoned, if Walker's prolonged embezzlement constituted a single occurrence, the most that Madison would receive is the policy limit of one policy, namely, $350,000. So, the decision would depend on the meaning of occurrence and the policy defined occurrence as "an act or series of related acts involving one or more employees". The court using Mississippi law as the basis of its decision, said that an occurrence is determined by the cause or causes of the resulting injury. Walker repeatedly committed related acts of embezzlement throughout the decade of St Paul's coverage, but there was only one cause of the injury sustained by Madison, namely, Walker's dishonesty. Therefore, as there was but a single cause of Madison's injury, and as the policy stated that multiple related acts are to be treated as a single occurrence, the court found that there was only one occurrence of employee dishonesty over the ten year period.
The insured than tried to argue that, even if this was one occurrence, the theft was a single occurrence of employee dishonesty in each policy period. The appeals court did not accept this idea. The court noted that the policy specifically includes multiple related acts in the definition of a single occurrence, and so, the insurer is liable for one occurrence, period.
Madison then urged the court to accept the idea that the policy wording was ambiguous because it failed to state expressly that an occurrence may span multiple policy periods. The court rejected this argument also. The court said that policy language is ambiguous only if it can be reasonably interpreted in more than one way and in this instance, the definition of occurrence and other language in the policy makes it clear that Madison may recover only once for an occurrence even if the occurrence spans several policy periods.
The judgment of the district court was affirmed.
* Note: This case helps to sharpen the definition and scope of the word "occurrence" as it appears in a crime policy. Many times, there is a question raised by insureds when employee theft occurs over several years as to what amount will be paid by the insurer, just as in this case. This decision from the Fifth Circuit makes the point that, at least under Mississippi law, multiple thefts over a period of time by an employee are considered related acts and by definition, are treated as one occurrence.
Note also for informational purposes, the court did cite decisions from other circuit courts that found similar definitions of occurrence to be ambiguous.
Computer damage, CGL coverage and the E&O policy
This case involves an attempt by the insured to force the insurer to defend the insured against a complaint alleging computer damage. The case is Eyeblaster, Inc. v. Federal Insurance Company, 2008 WL 4539497 (D.Minn.).
Eyeblaster is a worldwide company in the business of interactive advertising content delivery and management technology. Sefton filed a complaint against Eyeblaster alleging that the insured enticed him to visit a website by fraudulently misrepresenting the website. This resulted in Sefton's computer freezing up, lost data, and the appearance of numerous pop-ups, unanticipated toolbars, and an overall slowed computer performance that resulted in crashes.
The insured had a general liability policy and an E&O policy with Federal Insurance Company. After the insured forwarded the complaint to the insurer, Federal denied coverage under both policies. Eyeblaster filed a declaratory judgment action against Federal seeking summary judgment that Federal was obligated to defend Eyeblaster.
The district court began its analysis of the dispute by separating the general liability policy from the E&O policy.
Coverage under the general liability policy turned on whether the Sefton complaint alleged damage to tangible property as defined in the liability policy. The court noted that the complaint had allegations all related to damage to software and that the general liability policy clearly declared that tangible property does not include software. While Sefton may allege that his computer froze or processed so slowly so as to be essentially inoperable, those allegations all relate to the effect Eyeblaster's programs had on Sefton' computer software. There was no allegation of any actual damage to Sefton's hard drive. And so, because only software was damaged, there was no damage to tangible property and the allegations in the complaint were not covered under the general liability policy.
As for the E&O policy, the coverage there depended on whether Eyeblaster committed a wrongful act as defined in the policy. A wrongful act was defined as an error, unintentional omission or negligent act. The complaint alleged that Eyeblaster acted intentionally in placing its software on Sefton's computer. The court found that the policy language focuses on the act of the insured and since the insured specifically intended that its software would install itself in Sefton's computer, the definition of wrongful act was not met. The court found that the act of the insured was not covered under the E&O policy.
The court found in favor of the insurer.
* Note: This decision reinforces the point that software is not tangible property and so, the CGL form is not going to apply to a claim for property damage to software. As for the E&O policy, if coverage depends on the insured's committing a wrongful act and a wrongful act is defined in the policy as an unintentional or negligent act, the insurer has a strong case for denying coverage if the complaint against the insured alleges or supports an intentional act on the part of the insured.
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