Hurricane damage and insurance coverageArticle added by Christine Barlow on August 25, 2009
Christine Barlow

Christine Barlow

Erlanger, KY

Joined: October 06, 2008

My Company

FC&S Online

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Hurricanes cause enormous damage to the areas hit by them. Katrina, Gustav, Ike are all names associated with huge amounts of losses and a myriad of insurance claims. Every year has its hurricane season and, regardless of the name of the hurricane or where it makes landfall, insurance coverage is one of the most critical items to be examined.

In most of the coastal states, damage caused by windstorm is covered by the states' windstorm or beach pools. Flood-related damage falls to FEMA and its National Flood Insurance Program. But, how do the standard homeowners' policies or commercial property policies apply in this situation? What about business interruption and other consequential losses? How is debris removal to be paid for, and how are property policy deductibles to be applied?

These and other questions routinely surface during hurricane season, as property owners and business owners affected by storms try to sort through the aftermath.

"Vacant" meaning discussed in Oklahoma case

The insured owned two houses in Midwest City, Oklahoma and both were damaged by fire. Both were insured by the same insurer -- but under two separate insurance policies. The insurer denied coverage for both houses, claiming that the homes were vacant or unoccupied and had been for more than 30 days prior to the fires. The insured filed a lawsuit asserting claims for bad faith and breach of contract. This case is Kirkes v. Guideone Mutual Insurance Company, 2009 WL 395254 (W.D.Okla.).

When the coverage dispute got to the district court, the court said that its initial task was to "determine if the term 'vacant' is ambiguous". The district court, in trying to determine the meaning and possible ambiguity of "vacant," noted that the key test is whether the word is susceptible to two interpretations on its face; the test is applied from the standpoint of a reasonably prudent layperson, not from that of a lawyer. The court found that vacant can mean entirely empty or abandoned or it can mean that no one is using it as a residence. This meant to the court that the term is ambiguous and is to be strictly construed against the insurer; the word has to be limited to the situation when the home has been abandoned and is entirely empty. In this case, the one house was still used as a home since furniture was still there and it was (and will be used in the future) as a guest house. The insured had not intended the house to be empty or abandoned and so, was entitled to coverage for the loss.

As for the second house, the insured did not argue that the house was anything other than vacant. Her argument in this instance was that the cause of loss was not the vacancy, but was a fire. The court was impressed with the argument and said that the plain language of the policy appears to require the loss to be caused directly or indirectly by the vacancy in order for the exclusion to be applicable. Here, there was no evidence that vandalism/arson happened because of the vacancy; the house was damaged by a fire that could have just as easily occurred when the occupants were out to dinner and a movie.

The district court ended up by ruling in favor of the insured.

Defective workmanship equals an occurrence?

In this case, the plaintiff, General Security Indemnity Company of Arizona, appealed the trial court's order granting summary judgment in favor or six insurance company defendants. The case is General Security Indemnity v. Mountain States Mutual Casualty Company, 2009 WL 4000053 (Colo.App.). Note that this opinion has not been released for publication in the permanent law reports.

The appeals court said that the sole issue for review is whether the trial court erred in determining that the defendants, who insured Foster Frames' subcontractors, had no duty to defend Foster Frames as a matter of law because there was no occurrence alleged in the underlying complaints of the construction defect litigation. A review of the complaints showed that the claims asserted lay in tort, contract, and breach of warranty; they alleged general defects and poor workmanship that caused property damage.

The appeals court noted that the general liability policies applied to property damage caused by an occurrence which is defined as an accident, including continuous or repeated exposure to substantially the same harmful conditions. The court also noted that whether defective workmanship can constitute an occurrence for purposes of claims coverage is an issue of first impression in Colorado. Accordingly, the court looked to other jurisdictions for guidance in the matter.

A majority of those jurisdictions hold that claims of poor workmanship, standing alone, are not occurrences that trigger coverage under general liability policies similar to those at issue in this case. (Court rulings were reviewed from Illinois, Pennsylvania, South Carolina, and the 2d Circuit). A minority of jurisdictions hold 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. (Cases from Utah, Florida, Kansas, Tennessee, Texas, and Wisconsin were reviewed.).

The Colorado Court of Appeals was persuaded by the majority rule because it relies on the necessary element of fortuity inherent in the ordinary meaning of the word "accident." The ruling of the trial court was affirmed.

Personal and advertising injury claim and the failure to pay rebates

Sigma Tech Sales, Inc. v. Travelers Indemnity Company, 2009 WL 413514 (S.D.Fla.) is a declaratory relief action centering on whether the insurance policy's coverage for advertising injury applies to a lawsuit filed against Sigma Tech. Sigma Tech was sued by Office Depot for breach of contract, negligent misrepresentation, and fraudulent misrepresentation after Sigma Tech allegedly failed to fund rebates that it had offered on products sold to Office Depot. Sigma Tech argued that Office Depot's complaint alleges injuries suffered because of Sigma Tech's advertising, and the insurer disagreed, arguing that the claim amounted to an alleged breach of contract which is excluded from coverage under the general liability policy.

When this case came before the United States District Court, the court found that the basis for the case arose from Sigma Tech's sale of electronic products along with a vendor rebate program to Office Depot. In reliance on the contract with Sigma Tech, Office Depot advertised vendor rebates on its products to its customers; Office Depot claimed that the contract required Sigma Tech to fund rebates to be paid by a separate rebate processing company to the customers of Office depot. For whatever reason, the rebates were not funded by Sigma Tech and Office Depot was forced to pay the rebates without reimbursement from Sigma Tech. A lawsuit followed and Sigma Tech sought coverage from its insurer, Travelers Indemnity, which refused to provide any coverage.

The district court said that Florida law governed the interpretation of the applicable insurance policies, and this required the court to construe the policies based on the express language of the contract. Along with this, the court noted a three part test to decide whether Sigma Tech allegedly committed an advertising injury: the suit must have alleged a cognizable advertising injury; the infringing party must have engaged in advertising activity; and there must have been some causal connection between the advertising injury and the advertising activity.

The policy language defined an advertising injury as either publishing material that slanders or libels an organization or disparages an organization's goods, products, or services, or copyright, title, or slogan infringement. The lawsuit by Office Depot did not allege either type of injury. In fact, Sigma Tech's activity did not even amount to advertising since it did not call anything to the attention of the public; that is, there was no dissemination of information to the public in general by Sigma Tech concerning the rebates. Moreover, Sigma Tech's failure to fund the vendor rebates (its activity) was a misrepresentation and not an advertising activity. Finally, the court noted, even if there were an advertising injury, the exclusion in the insurance policy for advertising injury arising from a breach of contract precludes coverage.

Based on the court's reading of the policy and the facts of the situation, it found there was no duty on the part of the insurer to defend or indemnify Sigma Tech.

Own property exclusion and defective work

The insured, a home builder, brought a breach of contract action against its insurer, asserting that the commercial general liability policy provided coverage for the cost of replacing a defective roof on a house that the insured built. This case is Historical Home Designs, Inc. v. Central Mutual Insurance Company, 2009 WL 279329 (Ga.App.).

Historical Home Designs constructed a home in Atlanta which was completed in May 2002. Historical subcontracted the construction and installation of the slate roof to Jemenez Roofing. In June 2002, Historical conveyed the property by quitclaim deed to Ross, the president and owner of Historical. Ross lived in the home for almost two years and Historical even rented a room in the house as an office for Ross.

In 2004, Historical entered into a contract with Benson to sell the house even though Ross actually owned the house at that time. The home inspector for Benson discovered that the slate roof was defectively constructed, so Historical agreed to remove and reinstall the slate roof in a good and workmanlike manner. Ross then conveyed the property to Historical which conveyed it to Benson.

After this, Historical filed a claim under its policy to recover the costs it incurred to replace the defective roof. The insurer denied the claim citing the own property exclusion which excludes coverage for property damage to property owned, rented, or occupied by the named insured. Ross was considered by the insurer to be the same person as Historical Home design since he met the definition of an insured. A lawsuit was filed and the trial court ruled in favor of the insurer. This appeal followed.

The insured argued on appeal that "you" in the own property exclusion means Historical only and not Ross. The appeals court agreed; nevertheless, the court found that the plain language of the exclusion bars coverage for the claim at issue here.

The court said that the installation of the defective roof occurred prior to completion of the construction of the house and while the house was under construction, it was owned by Historical. So, the own property exclusion precludes coverage for the loss. Even if the relevant inquiry is whether Historical owned, rented, or occupied the property at the time the loss was discovered or the roof was replaced, the court found that the own property exclusion would still bar coverage. To the extent that Historical maintained an office at the property through its president (Ross), Historical occupied the property and the exclusion applies to such circumstances. So, Historical owned the property when the home was constructed, and rented or occupied the house thereafter, and this meets the language of the exclusion.

The judgment of the trial court was affirmed.

Policyholder duty to protect insurer's subrogation claim

The Supreme Court of Kentucky accepted discretionary review in this auto insurance case to consider whether an insured's failure to bring suit against the tortfeasor within the limitations period violates an insurance contract provision whereby the insured undertakes to do nothing to prejudice the insurer's right to subrogation. This case is Gilbert v. Nationwide Mutual Insurance Company, 275 S.W.3d 690 (Ky.).

A tractor trailer owned by Prime and operated by Baldanza went out of control as it rounded a curve, tipped over and fell on a car owned by Gilbert and operated by Schindler. Schindler escaped with relatively minor injuries but the car was totally destroyed. The auto insurer for Prime (Reliance) indicated to Gilbert that Reliance accepted the liability and would handle both the bodily injury claim and the property damage claim. Based on this, Gilbert did not initiate a claim under her auto policy with Nationwide.

Eventually, Gilbert had to bring a lawsuit against Prime for the damages and also then made a collision damage claim under her policy with Nationwide. The insurer refused to pay and a lawsuit against Nationwide was filed. The trial court ruled that Gilbert's claim against Prime was barred by the two-year statute of limitations applicable to tort actions arising from the use of a motor vehicle. And, the claim against Nationwide was foreclosed by a policy provision requiring Gilbert to do nothing to prejudice Nationwide's subrogation rights; Gilbert had prejudiced those rights by allowing the lapse of her property damage claim against Prime. The appeals court affirmed the ruling and the Supreme Court then decide to hear the case.

The Supreme Court noted Nationwide's contention that by allowing her property damage claim against the tortfeasor to lapse, Gilbert effectively destroyed the subrogation rights of the insurer, and thus, breached the contract provision. However, the court said that a requirement on the insured to do nothing to prejudice the insurer's subrogation rights does not impose on the insured an affirmative duty to initiate a lawsuit on the insurer's behalf. If the insurer had wanted to create an affirmative duty for the insured to pursue any claim against a third-party tortfeasor before the running of the statute of limitations, then it would have been simple for the insurer to write such an obligation into the insurance policy. The insurer bears the principal burden of protecting its subrogation rights.

The Court also said that the insurer's potential subrogation right is not allowed to interfere with the insured's interest in a prompt settlement with the tortfeasor. The right of subrogation is protected by the requirement that the insurer be given notice of the proposed settlement which the insured has agreed to accept and an opportunity to intervene if it so desires. Here, Nationwide had prompt notice of the loss but it neither opted to intervene in the apparent agreement between Gilbert and Reliance, nor took any steps to protect its subrogation rights. Gilbert satisfied her contractual duty by providing Nationwide with notice and this satisfied her duty not to interfere with the insurer's ability to protect itself.

The findings of the lower courts were reversed and the case remanded.

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