Interesting perspectives on the insurance industry

By Christine Barlow

FC&S Online

The FC&S editors answer this Question of the Month:

"Auto policies have named insureds for coverage purposes, but they also can have other insureds. For example, family members and other persons occupying the covered auto can be insureds. This usually causes no problems for the insured or the insurer.

"However, when it comes to uninsured motorists coverage, there is an issue that arises often. When the named insured rejects uninsured motorists coverage, as allowed by state law, how does that affect other persons who are insureds under the terms of the policy? Is this rejection by the named insured binding on all insureds?"

Faulty work, property damage, occurrence

A Michigan Court of Appeals has discussed the question of whether faulty work that resulted in a claim for property damage was an occurrence as defined in the insured's general liability policy. The case is Prokes v. Auto-Owners Insurance Company, 2008 WL 4367523 (Mich. App.). In this case, the plaintiff appealed an order granting summary judgment to the defendant that found the defendant did not have to indemnify or defend the plaintiff because the damage claimed in the lawsuit was not caused by an occurrence. The facts are as follows.

Casey and his wife discovered a water intrusion in the third-level office of their newly constructed home. The leakage became more extensive and eventually leaked down to the second-level great room, staining the walls and causing mold. After hiring a troubleshooting team, the Caseys discovered that their water problems were a result of missing flashing and shingles from the roof, as well as an improperly constructed drainage system on their roof walkout. Their insurer paid to have the problems fixed. The insurer then subrogated against the general contractor that built the home; the contractor then filed a third-party complaint against all of the subcontractors which included WTC. WTC did the waterproofing of the basement (which was not damaged in any way).

WTC submitted the claim to Auto-Owners which initially undertook the defend WTC, but eventually withdrew its coverage stating that any occurrence as defined in the insurance policy did not occur during the policy period. Prokes, as the former owner of WTC, subsequently settled the third-party complaint for $6,500 and he sued the insurer to recover this amount plus attorney fees. The trial court granted summary judgment to the insurer and this appeal followed.

The appeals court noted that the policy defined an occurrence as an accident, and the common meaning of that word is "an undersigned contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected." Furthermore, the court said that when determining whether property damage was caused by an accident, it had to consider (from the standpoint of the insured) the insured's injury-causing act or event and its relation to the resulting property damage.

The trial court used this same reasoning and said that the defective workmanship of the insured cannot constitute an accident/occurrence. The appeals court said that this point needs to be clarified. Faulty workmanship that results in property damage to the property of others can be an accident/occurrence. When an insured's defective workmanship results in property damage to the property of others, an accident exist within the meaning of the general liability policy; but, when the damage arising out of the insured's defective workmanship is confined to the insured's own work product, the insured is the injured party, and the damage cannot be viewed as accidental within the meaning of the liability policy.

Ultimately, after clarifying this point, the appeals court affirmed the decision of the trial court based on other facts of the case. The insured's work did not damage his own work and it did not damage other property. The damage was to the second and third levels of the home and the insured only waterproofed the basement. Therefore, the complaint of property damage was not the result of any of WTC's actions. The liability policy was not applicable at all and the insurer was not required to indemnify or defend WTC.

Tear out provisions in homeowners policy

The issue in Guadiana v. State Farm Fire and Casualty Company, 2008 WL 4078767 (D.Ariz.) -- a slip copy -- was whether the homeowners policy covered the costs of tearing out and replacing part of the structure after damage was discovered. A United States Magistrate found in favor of the insured and the insurer appealed.

The insured's home sustained water damage when the plumbing leaked. The leak was due to water pipe deterioration and the only feasible method of repairing the plumbing system was to replace all the pipe. The insured claimed that State Farm was obliged, under the terms of the homeowners policy, to pay the costs incurred in tearing out and replacing that part of the structure necessary to replace the entire piping system. State Farm insisted that it was only obligated to pay the costs necessary to access the portion of the pipe that was leaking.

When the dispute went to the magistrate, she recommended that the district court deny the insurer's motion to dismiss for failure to state a claim. State Farm appealed this finding and said that the magistrate failed to harmonize the policy exclusions with the tear out provision and thus, incorrectly created coverage where none existed. The district court reviewed the policy provisions and did find that the policy excluded coverage for loss to property caused by continuous or repeated seepage or leakage of water from a plumbing system that occurs over a period of time. However, the policy continued, if loss to covered property is caused by water not otherwise excluded, the policy will cover the cost of tearing out and replacing any part of the building necessary to repair the system.

The facts of this case showed that the damage was caused by a sudden release of water and not a continuous or repeated leakage; therefore, this was a covered loss. And, this covered loss triggers the tear out provision. As noted, that provision requires the insurer to tear out and replace any part of the building necessary to repair the system. If Guadiana could establish that the system that caused the covered loss includes all the pipes in her house and that it was necessary to replace all the pipes to repair that system, State Farm is obligated to pay the tear out costs necessary to replace all the pipes, even those not leaking. Once a covered loss occurs, the insured is covered for the cost of accessing the problem, and in this instance, the problem was the entire piping system due to its defect. The recommendation of the magistrate was upheld by the district court.

Texas Supreme Court and the injury-in-fact trigger

The Texas Supreme Court has ruled that property damage under the terms of the general liability policy occurs when actual physical damage to the property occurred, not when the damage was or could have been discovered. This case is Don's Building Supply, Inc. v. OneBeacon Insurance Company, 2008 WL 3001187 (Tex.). In this case, the United States Court of Appeals for the Fifth Circuit certified two questions to the Texas Supreme Court: When does property damage occur under Texas law, and is an insurer's duty to defend triggered where damage is alleged to have occurred during the policy period, but was inherently undiscoverable until after the policy expired?

Don's Building Supply (DBS) sells and distributes a synthetic stucco product known as an exterior insulation and finish system (EIFS). This siding was installed on various homes from 1993 to 1996. From 2003 to 2005, various Texas homeowners filed lawsuits against DBS alleging that the EIFS was defective and not weather-tight, allowing moisture to seep into wall cavities behind the siding; this in turn caused wood rot and other damages. The homeowners argued that these damages actually began to occur on the occasion of the first penetration of moisture behind the EIFS, which they say was within six months to one year after the application of the EIFS. The homeowners sought to avoid the statutes of limitations for their claims by pleading the discovery rule, arguing that the damage was hidden from view by the siding's undamaged exterior, and was not discoverable or readily apparent to someone looking at that surface until after the policy period ended.

OneBeacon initially provided a defense to DBS but then filed a declaratory judgment action in federal district court seeking a ruling that it had no duty to defend and indemnify under the terms of the liability policy. The court agreed with OneBeacon that the duty does not arise until the damage becomes identifiable. DBS appealed to the Fifth Circuit and that court certified the coverage trigger-date questions to the Texas Supreme Court.

The Texas Supreme Court admitted that it had not before addressed this issue. Therefore, it examined court rulings from other jurisdictions and from in-state appeals courts in order to arise at an answer. The court found that many courts adopted the actual injury or injury-in-fact approach; other courts, including several Texas appellate courts, followed a manifestation rule that imposes a duty to defend only if the property damage became evident or discoverable during the policy period. Still others followed an exposure rule that found coverage if the plaintiff is exposed to whatever agent ultimately results in personal injury or property damage during the policy period. And finally, other courts adopted the multiple trigger rule in addition to a rule that looks to the date of the alleged negligent conduct rather than the date of the actual injury to the claimant.

OneBeacon supported the manifestation rule and urged the court to accept this, as had many Texas courts to date. However, the Supreme Court said that the policy before it made no provision for such a rule. The policy in straightforward wording provided coverage if the property damage occurs during the policy period. Such language did not provide that the duty to defend is triggered only when the injury manifests itself during the policy term, or that coverage is limited to claims where the damage was discovered or discoverable during the policy period. And, the policy language also did not support adoption of an exposure rule. The policy links coverage to damage, not damage detection. The policy asks when damage happened, not whether it was manifest, patent, visible, apparent, obvious, perceptible, discovered, discoverable, capable of detection, or anything similar. Occurred means when damage occurred, not when discovery occurred. In this case, the court said, property damage occurred when the home in question suffered wood rot or some other form of physical damage.

Therefore, the court held that property damage occurred when actual physical damage to the property occurred; the date that the physical damage is or could have been discovered is irrelevant under the policy in question. The Texas Supreme Court adopted the injury-in-fact trigger of coverage. (Note, however, that the court also said that it did not attempt to fashion a universally applicable rule for determining when an insurer's duty to defend a claim is triggered; such determinations are to be driven by the contract language, language that may vary from policy to policy.)

As for the question about the duty to defend where damage is alleged to have occurred during the policy period, but was undiscoverable until after the policy expired, the court ruled that, based on the answer to the first certified question, the duty to defend DBS in this case depends on whether the pleadings allege property damage that occurred during the policy period. Under the actual injury rule (when injury happens) applicable to this particular policy, a claim against DBS that any amount of physical injury to tangible property occurred during the policy period and was caused by DBS's allegedly defective product triggers OneBeacon's duty to defend; this duty to defend is not diminished because the property damage was undiscoverable until after the policy period ended.

Board member as employee

After an adjacent property owner filed a complaint against a water system board member, that member filed a third-party complaint against the water system, the system's insurer, and the board member's homeowner policy carrier. The trail court granted summary judgment to the water system, its insurer, and the homeowner insurer. This was appealed. The case is Adams v. Frost, 2008 WL 3854363 (La.App. 2 Cir.).

This case began as an altercation that occurred at a well between Frost, a water board member, and Adams, the owner of the property adjacent to the water system's property. Frost was performing manual labor on the pipes at the time and Adams, angered over a property line dispute, confronted him. Adams punched Frost, knocking him out. When Frost regained consciousness, Adams began making threatening statements. Fearing for his life, Frost struck Adams with the wooden handle of either an ax, sledgehammer, or mallet several times. Adams filed a lawsuit and Frost sought coverage under the water system's liability policy and under his own homeowners policy. The insurers denied coverage and were upheld by a trial court.

The primary issue before the appeals court was whether the trial court incorrectly determined that the commercial liability policy did not afford coverage to Frost, in that Frost cannot be classified as an employee of the water system. The court also had to decide if the trial court erred in determining that the homeowner insurer had no duty to defend Frost because the acts in question were committed by Frost intentionally and willfully, and thus, were excluded from coverage.

The water system representative testified that Frost was not an employee and did not receive a salary from the water system. However, the appeals court found that Frost was a board member and at the time of the incident, he was performing volunteer manual labor on the water system's pipes located on property owned by the water system. So, even though Frost was not exercising his duties as a board member when the altercation ensued, the manual labor he performed on the water system's property qualifies as acts coming within the usual duties of an employee. The appeals court found that Frost clearly could be classified as an employee of the water system under the terms of the liability policy due to the facts of the situation.

As for the homeowners policy, the court noted that State Farm saw Frost's actions as intentional and willful. Frost said that he was acting in self-defense. Based on this and the facts of the incident, the appeals court stated that there was an issue of material fact about whether Frost was acting in self-defense. Therefore, the trial court was wrong in granting summary judgment to the homeowner insurer.

The trial court judgment was reversed and the matter was remanded to that court for further proceedings.

Damaged driveways as other structures

A case from the Hurricane Katrina files arises now, Shelter Mutual Insurance Company v. Simmons, 2008 WL 4189585 (C.A.5 (Miss.)). This is a slip copy and not selected for publication in the Federal Reporter.

Shelter Mutual issued a homeowners policy to Simmons for the home in Columbia, Mississippi. Hurricane Katrina caused damage to the home and the brick driveway. Simmons sought coverage for the damage to the driveway in the amount of $82, 857. After submitting this claim, a dispute arose between the insured and the insurer regarding which section of the homeowners policy provided coverage for the driveway repair. The insureds argued that the dwelling section of the policy provided coverage, while the insurer argued that the other structures section provided the coverage. The reason for the dispute was that the policy limits for other structures was less than the claim; the dwelling coverage limit was greater.

Shelter Mutual filed a declaratory judgment action to determine the appropriate coverage section. The district court held that coverage for the driveway damage fell under the other structures section of the policy and granted summary judgment to the insurer. The insured appealed.

The court examined both the coverage A, dwelling insuring agreement, and the coverage B, other structures insuring agreement. Coverage A was for the dwelling, including building structures attached to it, but only if that dwelling is used principally as a private residence. Coverage B was for loss to other structures that are permanently attached to the residence premises, but not attached to the dwelling. The policy did not define any of the relevant terms, and the appeals court noted that the trial court relied on the ordinary meanings of the terms.

Simmons argued that the district court erred by failing to consider the purpose of the homeowners policy and failing to evaluate the provisions of the policy as a whole. They allege that other defined terms in the policy, such as residence premises, indicate a broad meaning for dwelling under coverage A that would include the driveway. However, the court, relying on the dictionary, found a dwelling to be a building or construction used for a residence, a house in which a person lives. The key phrase here for the court was the requirement that a dwelling be habitable. The Simmons cited no authority from any jurisdiction for the idea that the plain and ordinary meaning of a dwelling includes something more than a habitable structure. A driveway clearly is not a habitable structure.

The ruling of the district court was affirmed.

Employee or not: That is the question

This case is an unpublished opinion from New Jersey, but it is a good example of what courts look at when the question of employment and workers compensation arises. The case is Flores v. Paragon Construction & Restoration, L.L.C., 2008 WL 4191025 (N.J.Super.A.D.).

Bredbenner, a contractor specializing in custom metal work, operated through his company, Paragon. Flores was employed as a full-time employee, working from approximately April through November of each year, after which he returned to his native country, Mexico. In 2003, Flores returned to the United States and contacted Bredbenner seeking work. Bredbenner picked up Flores and returned to Bredbenner's home where Flores did some yard work. The next day, Bredbenner loaded his truck with a twenty-foot piece of copper gutter that he planned to install at a friend's house. According to Bredbenner, Flores offered to help him with the work; Flores testified that Bredbenner requested him to accompany Bredbenner to the work site. While engaged in the installation of the gutter, Flores fell off a ladder, breaking his arms, a leg, and his nose. Flores sought workers compensation benefits.

The trial court ruled that Flores was entitled to workers comp benefits. However, Bredbenner's company, Paragon, did not carry workers compensation insurance. So, Bredbenner appealed the ruling.

Bredbenner claimed that the work was voluntary on the part of Flores and that the employment was only casual employment for which workers compensation benefits are unavailable. But, the facts of the case led the appeals court to disagree with this. Bredbenner instructed Flores as to what to do and how to do it; he supplied the materials; and Bredbenner controlled the situation. There was no question on the part of the court that Bredbenner and Flores were in an employer-employee relationship.

The court went on to state that the conclusions of the trial court were soundly based on existing statutes and precedent. It quoted state law which defines an employee as a natural person who performs services for an employer for financial consideration, and casual employment is defined as employment the occasion for which arises by chance or is purely accidental. And it cited previous decisions wherein an employment relationship was characterized by such elements as the employer's supervisory power, his right to control the activities of the employee, his right to terminate the relationship, his payment to the employee of regular wages for services, and his provision of tools and equipment and facilities. The facts in this situation met these points.

A determination of Flores' status at the time of the accident was complicated by the lack of a contract of employment between him and Bredbenner, by the fact that his prior employment had been seasonal in nature, and by the circumstance of his injury within two days of being hired. Nonetheless, the appeals court regarded the evidence presented to be sufficient to establish an employment relationship between Flores and Paragon. The decision of the trial court was affirmed.

In a passing note, the court also rejected Bredbenner's claim that his homeowners policy should cover the claim since Flores was a domestic employee. The policy offered a definition of domestic employee and the description did not fit the activities Flores was engaged in when he was injured.