Court ruling on the meaning of "collapse," "occurrence"Article added by David Thamann on November 4, 2009
David Thamann

David Thamann

Joined: October 06, 2008

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The New York Supreme Court, Appellate Division, First Department, has recently weighed in on the meaning of "collapse" as the term appears in a commercial property policy. This case is Rapp B. Properties, LLC v. RLI Insurance Company, 885 N.Y.S.2d 283 (2009).

The plaintiff in this case sought indemnification for damage to its building's south wall as a result of collapse (a covered cause of loss); the complaint cited damage consisting of severe cracking, bulging, splaying, and displacement of the exterior brick façade. The insurer denied coverage and said that the damage was not a collapse as defined in the policy. The policy defined collapse as: an abrupt falling down or caving in of a building or any part of a building with the result that the building cannot be occupied for its intended purpose; moreover, a building that is in danger of falling down or caving in is not considered to be in a state of collapse and a building that is standing is also not considered to be in a state of collapse even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage, or expansion. Based on this definition, the insurer filed a motion for summary judgment.

The trial court ruled against the insurer and this appeal followed.

The appeals court noted that the plaintiff's managing partner, Rappaport, testified that the building and its south wall were still standing three months after the damage was first observed. This testimony, the court said, standing alone suffices to belie any claim that the wall's collapse was abrupt within the meaning of the policy definition. Also, the plaintiff's architect testified that the displacement of brick masonry units meant that there was an imminent risk that the wall would completely collapse. The court pointed out that an imminent collapse is clearly excluded from the definition of collapse.

Based on its reading of the definition of collapse and the facts of the situation, the appeals court ruled that there was no collapse within the meaning of the policy.

The meaning of occurrence

A court of appeals in Ohio has recently addressed the question of what constitutes an occurrence. This case is Celina Insurance Group v. Yoder & Frey, Inc., 2009 WL 2986380 (Ohio App. 6 Dist).

Yoder & Frey auctions consigned farm machinery and at three separate auctions during 2003 and 2004, the company auctioned three skid loaders that had been consigned to it by a client, Palladino. Prior to the sale, Palladino had signed an agreement representing that he was the owner of the equipment and that the equipment was free of encumbrances. Quarrick Equipment Company purchased the three skid loaders and the learned that the skid loaders were believed to have been stolen; the loaders were impounded as evidence. Quarrick filed a complaint against Yoder & Frey seeking compensation for the loss of the loaders.

Yoder & Frey sought defense and indemnification from its insurer, Celina, and Celina filed a declaratory judgment action. The trial court granted summary judgment to Yoder & Frey and the insurer appealed.

The appeals court took note of Celina's argument that the sale of the stolen skid loaders did not constitute a covered occurrence within the meaning of the term since an occurrence was defined as an accident, and it was not an accident that Yoder & Frey sold the items; the insurer argued that the sale was intentional, not accidental. However, the court said that while the sale was intentional, the insured had no intention of accepting stolen property for consignment and had no intention of selling stolen property. The fact that the skid loaders were stolen was, from the insured's perspective an unexpected happening without intention or design. The event in this case was an occurrence and the judgment of the trial court against the insurer was affirmed.

The meaning of occurrence in a crime policy

In this case, the insured under a commercial crime policy filed a breach of contract action against its insurer following a denial of a claim for loss due to employee theft. On cross-motions for summary judgment, the trial court granted the insurer's motion and denied the insured's motion. The decision was appealed. This case is S&K Motors, Inc. v. Harco National Insurance Company, 213 P.3d 630 (2009).

S&K Motors, doing business as Pinnacle Mazda, had an employee, Casino, who it was discovered had been stealing money from the dealership for months. After being discovered, Casino admitted that on seven occasions he had stolen amounts totaling $21,590. Based on his promise to not steal again, Casino was retained by Pinnacle as its employee. However, it soon became clear that Casino was stealing again. Pinnacle finally fired him and reported a loss of $71,305 to its insurer, Harco.

Harco agreed that all of Casino's thefts occurred during the policy period and that the coverage on the policy was $250,000 per occurrence with a $5,000 deductible. However, Harco denied any coverage for the claim since Pinnacle had recovered some money from Casino and the insurer said that the amount Pinnacle recovered exceeded the amount of the covered claim. The dispute went to court and after the trial court had ruled in favor of the insurer, the insured appealed.

Upon appeal, Harco argued that the amount Pinnacle recovered from Casino exceeded the covered loss and fully compensated Pinnacle for its loss. Moreover, the insurer argued that the termination provision in the crime policy pertaining to coverage terminating as to any employee as soon as the named insured learns of the theft, meant that an occurrence of employee theft ends when coverage for that employee terminates; in other words, an occurrence cannot include acts that take place after the discovery of the employee's theft. Pinnacle did not dispute that the policy did not cover the portion of its loss sustained after it discovered the theft, but disputed Harco's contention that the covered portion of its loss is a separate loss under the policy. In other words, the insured said that the total amount stolen by Casino over several months was only one loss from one occurrence, and the amount recovered from Casino did not fully compensate Pinnacle.

The appeals court noted that the policy defines occurrence as including the combined total of all separate acts, whether or not related, committed by an employee. Therefore, Casino's separate acts of theft during the policy period constituted a single occurrence. Although the coverage terminates as to a dishonest employee upon the insured's discovery of the theft, no words in the definition of occurrence provide that this end to coverage also ends an occurrence.

Harco further argued that the obvious intent of the termination provision in the crime policy was to shift the risk of theft back to an insured employer when that employer elects to continue employing a worker known to be stealing. To this, the court said that there was no disagreement that Harco bears none of the risk of paying for loss incurred after Pinnacle discovered Casino's thefts. But, interpreting the policy term "occurrence" to encompass all of Casino's acts of theft does not thwart the policy's intent to shift the risk of loss to the insured. The amount Harco is required to pay under the policy now is the same as what it would have paid if Pinnacle had fired Casino on the spot and immediately reported its loss to Harco. The court saw no distinct and separate loss under the policy, the insured incurred a single loss.

Harco also made much of the fact that Casino agreed to repay funds that he stole and the Pinnacle did in fact recover some money from Casino. Harco argued that these funds must be marshaled to repay the prediscovery thefts only and may not be applied to the portion of Pinnacle's loss incurred after it discovered Casino's theft. The court said this missed the fact that during the period Pinnacle was receiving money from Casino for repayment, he was still stealing to the tune of $44,715. So, in fact, Pinnacle made no net recovery during the period that Harco describes as a second occurrence. The fact was that Pinnacle incurred a single loss based on a single occurrence and has not been fully compensated for that loss. Thus, Harco is not entitled to reimbursement under the language of the policy and may not benefit from Pinnacle's third-party recovery. The ruling of the trial court was reversed and remanded for entry of summary judgment in favor of the insured.

As an aside, Harco argued that it was prejudiced by late notice. However, the court said that in Washington , the insurer must perform under its insurance contract unless it can show actual and substantial prejudice due to the late notice. Harco presented no such evidence and the court dismissed this point.

Circuit Court rules a sole proprietor can be an employee

Following a single-vehicle accident that resulted in the death of a trucking company proprietor, the company's commercial vehicle insurer brought an action against the driver of the truck, seeking a declaratory judgment that it did not owe him a duty to defend or indemnify in a state court action brought by the proprietor's family. The district court awarded summary judgment to the family and the insurer appealed. This case is Ooida Risk Retention Group, Inc. v. Williams, 579 F.3d 469 (2009).

Tony Moses was the sole proprietor of Slim Shady Express, a commercial motor carrier. At the time of the accident, Moses' tractor-trailer was being driven by Williams and Moses was asleep in the truck's sleeper berth. Williams lost control of the rig and overturned it, with the result that Moses was killed. The family of Moses filed a lawsuit against Williams and he presented the complaint to the vehicle insurer, Ooida. The insurer filed the declaratory judgment action and then appealed the verdict against it.

The appeals court noted that the arguments in this appeal initially relied on differing assumptions about who is an insured under the terms of the policy. Ooida contended that the insured is Slim Shady Express and that Moses was an employee of the named insured. The family argued that Williams, as the party against whom its claim is asserted, is the insured. The court said that the words "the insured" in the policy did not refer to all insureds. Rather, the term was used to refer to each insured as a separate and distinct individual apart from any and every other person who may be entitled to coverage thereunder. In other words, the court found that the term "the insured" referred to the specific individual seeking coverage and not to all insureds collectively, or in this case, "the insured" is Williams.

Establishing that Williams was the insured in this case, the appeals court then turned to the possible applicability of the policy exclusions.

The court took up the fellow employee exclusion. This exclusion applied to coverage for bodily injury to any fellow employee of the insured arising out of and in the course of the fellow employee's employment. Now, because Moses is the party to whom the injury occurred, in order for the fellow employee exclusion to apply, the court said that both Williams and Moses had to be considered employees. It was established by the facts in the case that Williams was a statutory employee. As for Moses, the court looked to the language of the Motor Carrier Safety Act wherein an employee was defined as an operator of a commercial motor vehicle who directly affects commercial motor vehicle safety in the course of employment. The court interpreted this definition as broad enough to include owner-operators such as Moses; thus, the court ruled that a sole proprietor operating a motor vehicle can be an employee under the federal motor carrier regulations.

The appeals court ruled that Moses was a statutory employee under the law and the fellow employee exclusion applied to negate Ooida's duty to defend in the underlying lawsuit. And, because Ooida had no duty to defend or to indemnify under the terms of the policy, the district court ruling was reversed and summary judgment was granted to Ooida.

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