Theft claims based on shortage of an insured's physical propertyArticle added by Kelly Maheu on August 17, 2009

Kelly Maheu

Joined: October 06, 2008

My Company

Theft claims based on shortage of an insured's physical property as determined by an inventory computation present difficult problems. The main problem is establishing the cause of the shortage without depending solely on the use of inventory computations, because the commercial crime policy excludes coverage for a loss that can be shown only by such computations.

The inventory shortages exclusion came into use in the 1950s and was designed to protect the insurer from claims based on mistakes or falsified computations in claims involving employee fidelity policies. Today, there are many differing interpretations of the inventory shortage exclusion, with some courts strictly applying the exclusion and others being more liberal in their interpretation. The strict approach would permit the use of inventory computation to only corroborate other direct evidence of both the loss and the amount of loss. The liberal approach modifies the interpretation so that inventory computations are allowed if the fact of loss has been established by other evidence and the inventory computation is being introduced merely to prove the amount of loss. How the exclusion is interpreted depends upon the jurisdiction in which the case is heard.

Washington Court rules on timing of property damage

The Court of Appeals of Washington, Division 3, had to decide when property damage occurred in order to rule whether or not the insurance policy was in force. This case is Walla Walla College v. Ohio Casualty Insurance Company, 204 P.3d 961 (C.A. Wash. 2009).

In 1991, Walla Walla College had underground storage tanks installed at a gas station owned by the college. The college hired 3-D Tank to do the installation. Ten years later, it was discovered that approximately 10,000 gallons of gasoline leaked from one tank into the ground; this was due to a 56-inch opening in the bottom of the tank. A scientific study showed that the physical damage to the tanks started immediately after completion of the installation or possibly during the installation, and was ongoing throughout its life until failure. The college incurred expenses and loss of revenue as the result of the remediation effort required to clean up the pollution caused by the gasoline leak. Walla Walla sought coverage under its policy with Ohio Casualty, the policy that was in effect in 1991, asserting that the policy covered the losses because the tanks were improperly installed.

The insured brought a declaratory judgment action against the insurer seeking a declaration that the policy in effect at the time of the installation of the underground tanks covered property damage that occurred when one of the tanks subsequently ruptured. The trial court ruled in favor of the insurer and this appealed followed.

The Washington Appeals Court saw the main question before it as this: did property damage occur when the tank was improperly installed in 1991, or did property damage occur 10 years later when the tank ruptured and leaked? The insured asserted that the defective backfill caused a continuous process of damage to the tank, but the appeals court declared that a process began, but property damage did not occur until the tank failed and this was after the Ohio Casualty policy had expired. The court found that while a process may have started at the time of the installation, there was no actual property damage until the tank failed. So, since there was no genuine issue of material fact indicating that property damage occurred during the policy period, the ruling of the trial court was affirmed.

Carbon monoxide constitutes a pollutant

The commercial general liability insurer sought a declaration that the absolute pollution exclusion obviated any duty to defend or indemnify the insured in a lawsuit filed against the insured for personal injuries due to a carbon monoxide leak. This case is Nautilus Insurance Company v. Country Oaks Apartments, 2009 WL 1067587 (C.A.5 Tex.).

Country Oaks Apartments purchased a commercial general liability policy from Nautilus Insurance. Sometime during the policy period, some workers accidentally blocked the vent to the furnace in several Country Oaks apartments and as a result, carbon monoxide that otherwise would have been dispersed into the outside atmosphere was dispersed into the apartment of Kelly Schenks. She was pregnant at that time and when the baby was born, the little girl was born with a number of health difficulties. Schenks sued Country Oaks and the insured tendered the case to Nautilus. The insurer refused to defend, contending that it owed no duty to defend or indemnify due to the policy's absolute pollution exclusion. Nautilus filed a declaratory judgment action to determine its obligations. The district court ruled in favor of the insurer and this appeal followed.

The appeals court stated that the case presented purely legal questions: Is carbon monoxide a pollutant within the meaning of the policy, and if so, did it discharge, disperse, release, or seep into the apartment, causing injury?

The insured contended that carbon monoxide is not a pollutant as defined in the liability policy. Country Oaks said that carbon monoxide is a gas but it is not an irritant or contaminant; it is a naturally occurring substance in the environment. However, the court said that it has explicitly rejected the argument that a substance must generally or usually act as an irritant or contaminant to constitute a pollutant under the pollution exclusion. The court cited previous rulings that the plain meaning of irritant is a substance that produces a particular effect, not one that generally or probably causes such effects. In sum, carbon monoxide is a pollutant within the meaning of the general liability policy's absolute pollution exclusion.

As for the question whether the carbon monoxide was dispersed, discharged, or released, the answer depends on the facts of the case. The insured contended that the discharge or release of a pollutant, as defined by the pollution exclusion, requires a more robust event than the normal emission of carbon monoxide from a home appliance; in other words, a discharge as described in the pollution exclusion would require a release into the environment in general. However, the court stated that the pollution exclusion does not say this. As long as a pollutant is emitted through one of the enumerated mechanisms (discharge, dispersal, seepage, migration, release, or escape) and causes bodily injury, the exclusion applies to bar coverage for the claim. In fact, in terms of movement, the pollution exclusion requires only that the pollutant be discharged, dispersed or released, and here, the requisite movement clearly occurred because the carbon monoxide at issue accumulated only after being discharged from Schencks' furnace.

The insured employed a final argument and said that the injury-producing event in this case was not the released or discharge of carbon monoxide, but rather its improper confinement in Schencks' apartment due to the obstructed vent. To this argument, the court responded that the exclusion applies to bodily injury that would not have occurred in whole or in part but for the discharge.... Thus, by its terms, the exclusion applies to bar recovery for every "but for" cause of injury that satisfies the exclusion's other requirements. The blocked vent caused the discharge that caused the injury; the two causes cannot be separated; they are both "but for" causes and so, the exclusion is triggered.

The decision of the trial court was affirmed.

Blood spatter is compensable as an injury

In this case, the workers compensation insurer appealed from an opinion and order of the administrative law judge holding the insurer responsible for medical fees incurred by a claimant who underwent screening protocol after blood from a patient splattered into his eyes. The cite is Kentucky Employers Safety Association v. Lexington Diagnostic Center, 2009 WL 11441573 (Ky.). Note that this opinion is not final and shall not be cited as authority in any courts of Kentucky.

This appeal to the Kentucky Supreme Court resulted from a medical fee dispute between an employer and its workers compensation insurer. A healthcare worker was splattered in the face and eye with blood in the course of employment, and the issue was whether the employer or the insurance carrier bears liability for the expense of OSHA-required prophylactic testing. The case went to the court of appeals which agreed with the workers comp board that the injury was a compensable one and that the carrier was liable. The Supreme Court then took the case.

As for the facts in this dispute, the worker needed a series of five office visits that included test for blood borne pathogens, for a total cost of $700. The carrier paid for the first two visits and part of the third, but resisted further payment, stating that its policy was to pay for an initial test and one follow-up. The carrier asserted that an exposure has the potential to harm but does not constitute an injury until such time as objective medical findings show that it produced a harmful change in the human organism. The court noted that being splattered in the face and eye with foreign blood or other potentially infectious material is a traumatic event for the purposes of Kentucky law. Moreover, Kentucky law defines injury as any work-related traumatic event arising out of and in the course of employment that is the proximate cause producing a harmful change in the human organism. And, the court of appeals for its decision relied on authority in the state that held that contact with blood and other bodily fluids constitutes a physical injury under state law; that blood splattered into the worker's eye caused a temporary change in the human organism; and that the purpose of the protocol was to determine if a permanent change occurred.

The Supreme Court said that state law views a sudden accidental exposure to a substance that produces a harmful change as being an injury. This event was a single traumatic event that produced a harmful change (the introduction of foreign blood into the worker's eye), regardless of whether subsequent objective medical findings showed the presence of an infection or other harmful change. Thus, Kentucky law entitles the affected worker to reasonable and necessary medical treatment for the cure and relief from the effects of an injury, and this includes treatment for the injury's immediate effects as well as treatment to help determine if it produced harmful changes not evident immediately or to address such changes. The decision of the court of appeals was affirmed.

TCPA ruling in Ohio

A court of appeals in Ohio has added its voice to the continuing coverage disputes about whether the CGL form applies to claims based on alleged violations of the Telephone Consumer Protection Act (TCPA). This case is Motorists Mutual Insurance Company v. Dandy-Jim, Inc., 2009 WL 1346728 (Ohio App. 8 Dist.).

The TCPA protects the privacy interests of individuals by placing restrictions on unsolicited automated telephone calls and unsolicited faxed advertisements. Dandy-Jim was sued for allegedly violating TCPA by sending unsolicited fax advertisements to individuals. After receiving notice of the lawsuit, Dandy-Jim tendered the claim to its insurer, Motorists Mutual. The insurer then filed an action for declaratory judgment seeking a declaration that it did not have a legal or contractual obligation under the terms of the general liability policy to provide coverage or a defense to the insured.

The insured claimed that Motorists was obligated to defend under the advertising injury provision of the liability policy; this applied to injury arising out of the oral or written publication or material that violates a person's right of privacy. Motorists argued that no coverage existed under the advertising injury provision of the policy. The trial court sided with the insured and Motorists appealed.

The appeals court said that it must determine whether the claimants' claims are covered claims of advertising injury under the policy; in other words, did the sending of unsolicited faxes in alleged violation of the TCPA constitute oral or written publication of material that violates a person's right to privacy? The court then noted that Ohio recognizes that the right of privacy includes both the right of seclusion and the right of secrecy. A person asserting the privacy right of seclusion asserts the right to be free from disturbance by others; a person claiming the privacy right of secrecy asserts the right to prevent disclosure of personal information to others. The court also noted that the TCPA protects a person's privacy interest in seclusion.

Motorists contended that there is no coverage for the claims because the TCPA protects only against intrusions against an individual's right to seclusion, while the advertising injury coverage provides coverage only for intrusions against the secrecy aspect of the right to privacy. The appeals court said that it does not matter what kind of privacy interest the TCPA is meant to protect; rather, what matters is whether the policy provides coverage for TCPA-based claims that allege invasion of one's right of privacy in terms of seclusion. And since the plain and ordinary meaning of privacy also refers to freedom from unauthorized intrusion, the policy also potentially covers one's right to be left alone. Accordingly, oral or written publication of material that violates a person's right of privacy could pertain to a violation of one's right of privacy in terms of secrecy and also to a violation of one's right of privacy in terms of seclusion.

Motorists next argued that the coverage was not triggered because the material faxed did not violate the claimants' right to privacy; Motorists contended that the content of the faxed material, not just the sending of the fax, must violate the right to privacy. And since the content did not contain any objectionable material, then the publication did not fall within the definition of advertising injury. The court stated that the content was indeed objectionable. One of the stated objectives of the TCPA is to protect individuals from receiving unsolicited faxed advertisements; in other words, the act presumes that all advertising, so long as it is unsolicited, is an offensive intrusion into the recipient's solitude. The unsolicited faxed advertisement itself is the material that is objectionable and offensive.

The insurer also contended that no advertising injury coverage was triggered because publication requires disclosure to a third person and this did not happen in this instance. The court responded that an invasion of privacy claim based upon seclusion does not require that its factual underpinning include an allegation of publication to a third person. Moreover, faxed advertisements are an act of publication in the ordinary sense of the word. So, by faxing advertisements to the claimants, Dandy-Jim published the ads by communicating information to the public and distributing copies of the ads to the public.

The final argument of the insurer was that there was no violation of the right of privacy because a claimant had to establish something beyond a mere inconvenience and Dandy-Jim's few faxes were insufficient to do so. The appeals court disagreed. Since the TCPA presumes that all unsolicited advertising is an offensive intrusion into the recipient's solitude, even a single unsolicited advertising fax is sufficient to establish a violation of an individual's right to privacy.

In sum, the claimants have alleged conduct that potentially constitutes an advertising injury as defined in the policy and Motorists has a duty to defend Dandy-Jim against the allegations. The decision of the trial court was upheld.

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