Archive for May, 2014

Is Defective Construction an “Occurrence”? More States Are Answering Yes

Tuesday, May 27th, 2014

Last year, we examined the different approaches states have adopted to resolve whether defective construction by itself is an “occurrence” within the meaning of liability insurance policies.  See Is Defective Construction Work an “Occurrence”?  The Answer Isn’t So Concrete, Insurance Coverage Law Report (May 2013).  Since then, a number of states either have seen their highest courts depart from precedent by concluding that such claims satisfy the “occurrence” requirement, or have sought to pass legislation requiring liability policies to define “occurrence” to include faulty construction work.  Below is a summary of these developments, as well as a recommendation on how to address this trend.

The trendsetter appears to have been the West Virginia Supreme Court’s decision in Cherrington v. Erie Insurance Property & Casualty Co., 745 S.E.2d 508 (W. Va. 2013).  As previously reported on the Insurance Law Blog, that case involved a lawsuit arising out of defects at a newly constructed residential project.  Only the project itself suffered damage, and the builder’s liability insurer denied coverage on the ground that, among other reasons, allegations of defective construction do not constitute an “occurrence.”  This position aligned with several prior West Virginia Supreme Court decisions.  Ignoring precedent and stare decisis, the Cherrington court overhauled West Virginia law and held that the term “occurrence” in general liability policies includes defective construction.  The court reasoned that, by defining “occurrence” to mean “an accident,” all damages or injuries unintentionally caused by an insured fall within a liability policy’s insuring agreement.  The court supported its conclusion by noting that the “your work” exclusion implied damage to the insured’s work must be within the insuring agreement.  Otherwise, the exclusion would be meaningless.

Taking Cherrington’s lead, the North Dakota Supreme Court in K&L Homes, Inc. v. American Family Mutual Insurance Co., 829 N.W.2d 724 (N.D. 2013), also reversed course and held that defective construction may constitute an “occurrence” provided that the insured did not expect or intend the faulty work and resulting damage.  There, homeowners claimed their homes were damaged because of substantial shifting caused by improper footings and inadequately compacted soil under the homes’ footings and foundations.  After examining the standard general liability form’s drafting history and surveying cases nationwide, the court concluded that defective construction could qualify as an “occurrence” under the builder’s liability policy if the builder did not intend or expect the faulty work and the “property damage” was not anticipated or intentional.  Although the North Dakota Supreme Court previously had held that faulty or defective workmanship standing alone is not an “occurrence,”¹ the K&L Homes court explained its decision by noting that previous case law incorrectly distinguished between defective construction that damages only the insured’s work, and defective construction that damages a third-party’s work or property.  The court found there is nothing in the definition of “occurrence” which supports differentiating between the two types of damage.

Not to be outdone by its sister courts in West Virginia and North Dakota, the Alabama Supreme Court earlier this year reversed a decision less than six months old, and held that defective construction can qualify as an “occurrence” under a liability policy.  Specifically, in Owners Insurance Co. v. Jim Carr Homebuilder, LLC, the Supreme Court of Alabama held that an insured hired to build a house was not entitled to coverage for “property damage” or “bodily injury” (i.e., mental anguish) resulting from the insured’s defective construction.  No. 1120764, 2013 WL 5298575 (Ala. Sept. 20, 2013) (“Jim Carr I”).  On rehearing, the court withdrew its opinion in Jim Carr I and replaced it with a new decision that held defective construction could constitute a covered “occurrence” under a general liability policy if the damage was unintended.  Owners Ins. Co. v. Jim Carr Homebuilder, LLC, No. 1120764 (Ala. March 28, 2014) (“Jim Carr II”).  As the court explained, “the fact that the cost of repairing or replacing faulty workmanship itself is not the intended object of the insurance policy does not necessarily mean that, in an appropriate case, additional damage to a contractor’s work resulting from faulty workmanship might not properly be considered ‘property damage’ ‘caused by’ or ‘arising out of’ an ‘occurrence.’”  Because the policy did not define an “occurrence” in terms of the ownership or character of the property damage, the court concluded there was no basis for distinguishing between damages to the insured’s work and damage to third-party work.

New Jersey decided to take a different tack in addressing the “occurrence” issue.  On November 25, 2013, New Jersey State Assemblyman Gary Schaer introduced Bill No. A4510, which would have required liability policies issued, renewed, or delivered in New Jersey to define “occurrence” to include damages resulting from faulty workmanship.²  According to the bill’s interpretive statement, it required that “occurrence” be defined to address “both accidents and faulty workmanship” in order to remedy New Jersey case law that “varied in their holdings as to whether damage from faulty workmanship is accidental in nature and therefore within the definition of an occurrence.”³  Although the bill recently died in committee, its introduction demonstrates a continuing trend in states seeking to legislate the “occurrence” issue.  Laws addressing the “occurrence” issue are already on the books in Colorado, Arkansas, South Carolina, and Hawaii. See, e.g., Col. Code § 13-20-808; Ark. Code § 23-79-155; S.C. Code § 38-61-70; Haw. Stat. § 431:1-217.

The foregoing cases and proposed legislation demonstrate states’ willingness to compel liability insurers to cover risks they have not traditionally insured.  The foundation for this traditional rule is sound:  an insured can prevent damage to its own work simply by performing its work correctly.  In contrast, the reasoning behind compelling liability insurers to cover damage to an insured’s own work is shaky.  For example, courts concluding that defective construction work is covered under liability policies because there would otherwise be no reason for those policies to include the “business risk” exclusions ignore that construction defect claims often involve damage to an insured’s work and other third-party property.  The exclusions protect the insurer from having to insure uncovered damage (to the insured’s work) while preserving coverage for the covered damage (to the third-party property).  In other words, the “business risk” exclusions actually confirm that liability policies are not intended to cover damage to an insured’s work as opposed to suggesting that damage is covered in the first instance.

Despite the weak reasons courts and legislatures have cited to in compelling liability insurers to cover faulty workmanship,it is doubtful those courts and legislatures will revert back to leaving defective workmanship claims outside the realm of liability policies.  In that case, how should liability insurers respond?

Although case law and statutes declaring that defective construction qualifies as an “occurrence” within the meaning of liability policies generally leaves the policies’ “business risk” exclusions intact, we previously offered three potential responses in our earlier “Occurrence”? article:  (1) including more specific policy exclusions that eliminate coverage for “property damage” to an insured’s own work; (2) charging higher premiums for policies issued to entities engaged in the construction industry and/or issuing policies only in excess of significant self-insured retentions; or (3) refusing to issue policies to parties that perform construction work.  These options have drawbacks:  higher premiums would be passed along to project owners and developers (which would unnecessarily increase construction costs), significant self-insured retentions could limit the pool of insureds capable of performing construction work to only those that could absorb them (thus decreasing competition), and no longer affording liability coverage for construction projects may cause the construction industry to come to a screeching halt.

Absent a statute or declared public policy prohibiting insurers and their insureds from doing so, a fourth option could be that insurers specify in policies that defective construction is not an “occurrence.”  This would be the insurance equivalent of Newton’s third law (for every action, there is an opposite and equal reaction).

Limiting whether and to what extent faulty workmanship qualifies as an “occurrence” under liability policies would provide the greatest benefit to all involved:  not only would that preserve the intent of liability policies to respond only to third-party injuries caused by defective construction (such as a steel beam falling on a car or a crane collapsing onto an adjacent building), it would keep liability policy premiums down by ensuring damages to construction projects caused by faulty workmanship are addressed through traditional channels – namely, sureties.

¹  ACUITY v. Burd & Smith Constr., 721 N.W.2d 33 (N.D. 2006).

²  The proposed bill, however, noted that it was not intended to restrict or limit the “business risk” exclusions commonly found in liability policies.  In the ISO Form, the “business risk” exclusions include Exclusion j. (Damage to Property), Exclusion k. (Damage to Your Product), Exclusion l. (Damage to Your Work), and Exclusion m. (Damage to Impaired Property or Property Not Physically Injured).

³  Specifically, the bill cited to Pennsylvania National Mutual Casualty Insurance Co. v. Parkshore Development Corp., 403 Fed. App’x 770 (3d Cir. 2010) (applying New Jersey law and holding that a subcontractor’s faulty work that resulted in damage to the insured general contractor’s work was not an “occurrence”), and Firemans Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434 (N.J. App. Div. 2006) (holding that faulty workmanship was not “property damage” caused by an “occurrence” under a typical general liability policy).

Lights Out for Policyholders Seeking Business Interruption Coverage Due to Loss of Electricity

Monday, May 19th, 2014

Super Storm Sandy caused widespread power outages throughout the New York metropolitan area in late October 2012, rendering it impossible for many companies and firms to conduct business.  In Newman Myers Kreines Gross Harris, P.C. v. Great Northern Ins. Co., Civil Action No. 13-CV-2177 (S.D.N.Y. Apr. 24, 2014), a law firm with an office in New York, NY purchased a property insurance policy that included coverage for loss of business income and extra expense.  The policy provided coverage due to a business interruption “caused by or result[s] from direct physical loss or damage by a covered peril …” to the covered premises. On October 29, 2012, with the storm bearing down on New York City, the area’s electrical power servicer preemptively shut off the power to three utility service networks to preserve its equipment in the event of flooding.  The power interruption affected the law firm’s building, essentially closing it for five days. The firm filed a business interruption claim under its property policy, which the insurer denied because the law firm did not suffer a covered loss under the policy, and the law firm subsequently filed suit.

On the parties’ motion and cross-motion for summary judgment, the Southern District of New York held that preventive power outages rendering an office building unusable did not constitute “direct physical loss or damage” to the covered premises and, therefore, did not trigger coverage for loss of business income and extra expense under the property insurance policy.  The district court noted that a “direct physical loss or damage” to the covered premises was a condition precedent to coverage under the policy.

The law firm had argued that “direct physical loss or damage” did not require actual structural damage; rather, there only needed to have been a change to the covered premises from an initial satisfactory state into an unsatisfactory state caused by some external event.  The firm relied on case law from other jurisdictions, where courts applying other states’ laws found that an external event (such as an invasion of noxious or toxic gases, contamination of well water, and threat of imminent rockfall) rendering the premises unusable and uninhabitable constituted a “direct physical loss or damage” despite not being tangible, structural, or even visible. The district court distinguished those cases because each involved the closure of a building due to either a physical change for the worse, or a newly discovered risk to the physical integrity of the premises.  Conversely, the law firm’s building was closed after the decision was made to preemptively shut off power to preserve equipment at the power supply and distribution centers. The district court reasoned that the words “direct” and “physical” modified the phrase “loss or damage” and, therefore, connote a need for actual, demonstrable harm of some form to the premises in order to trigger coverage. The court found that the “forced closure of the premises for reasons exogenous to the premises themselves, or the adverse business consequences that flow from such closure,” did not constitute a “direct physical loss or damage” to the premises.  The district court held that the insured law firm failed to meet its burden of showing that the policy covered its losses and, therefore, granted the insurer’s motion for summary judgment and dismissed the case with prejudice.

The court’s holding reminds us that the phrase “direct physical loss or damage” in a property insurance policy should not be read so broadly as to include claims regarding mere loss of use of premises.  This case reinforces the requirement that there be a direct physical change for the worse to the premises, or a newly discovered risk to the physical integrity of the premises, in order to trigger loss of business income and extra expense coverage.  Without such “direct physical loss or damage” to the covered premises, the insured cannot meet its burden of proof to establish coverage.

Ahoy! – “Wear and Tear” and “Manufacturing Defect” Exclusions in Yacht Insurance Policies Upheld in Recent Decisions From the First and Eleventh Circuits

Friday, May 16th, 2014

Both the First and Eleventh Circuit Courts of Appeals have recently rejected arguments seeking to limit the application of “wear and tear” and “manufacturing defect” exclusions in yacht insurance policies. In Miele v. Certain Underwriters at Lloyd’s of London, — Fed. Appx. —, 2014 WL 998184 (11th Cir. March 17, 2014), the insured’s 32-foot vessel sank while docked because water entered through what a surveyor concluded was a “degraded and rotten” air conditioning hose, which cause was not disputed.  Underwriters denied coverage under the insured’s yacht insurance policy based upon an exclusion for “losses or damages arising (whether incurred directly or indirectly) from … the costs of repairs or replacing any part of Your Boat by reason of wear and tear, gradual deterioration ….”  In the insured’s suit against Underwriters, the United States District Court for the Southern District of Florida granted summary judgment to Underwriters.

On appeal, the insured argued that the exclusion was ambiguous and should be limited to excluding only the cost of replacing the air conditioning hose and not the cost of replacing the entire boat if a part failed and caused a sinking.  The Eleventh Circuit disagreed, concluding that the exclusion was unambiguous and broader than the insured argued.  In its view, the exclusion applied to all damages arising from the need to replace a single part due to wear and tear.   The Eleventh Circuit agreed with the district court’s reasoning that a vessel is nothing but a sum of all its parts and that the exclusion bars coverage for any single part or collection of parts where the damages are caused by wear and tear of any part.  In the case at hand, “the need to replace one part due to wear and tear indirectly gave rise to a need to replace all parts.”  Unfortunately for the insured, the fact that the entire vessel was damaged made no difference in the application of the exclusion.

The issue before the First Circuit in Ardente v. Standard Fire Ins. Co., 744 F.3d 815 (March 12, 2014) was whether balsa wood – incorporated in installation holes in a yacht – were a “hidden flaw inherent in the material” within the meaning of the latent defect exception to a yacht insurance policy’s manufacturing defect exclusion.  The exclusion barred coverage for “loss or damage caused by or resulting from defects in manufacture, including defects in construction, workmanship and design other than latent defects.”  The term “latent defect” was defined as “a hidden flaw inherent in the material existing at the time of the original building of the yacht, which is not discoverable by ordinary observation or methods of testing.”

The insured’s yacht sustained water damage to the hull, which was traced to water seeping into balsa wood surrounding installation holes and then spreading throughout the hull.  Normally, the material surrounding installation holes is solid laminate, which is water proof.  But here, the installation holes were surrounded by balsa wood, which is not water proof.  The insurer denied coverage for the damage on the ground that it fell within the manufacturing defect exclusion.  In the insured’s suit against the insurer, the United States District Court for the District of Rhode Island granted summary judgment to the insured on its breach of contract claim.  Because, in the district court’s view, “inherent” meant something that was characteristic of the material and a “flaw” was the opposite, there could be no such thing as an inherent flaw.  Finding that the phrase “flaw inherent in the material” was ambiguous, the district court therefore interpreted “latent defect” to include the flawed use of unflawed material.  According to the district court, “The use of balsa wood in these areas was a flaw in the construction of the yacht, even if it was not a flaw in the underlying material itself.”  Thus, the use of balsa wood – which normally absorbs water – was such a flawed use and therefore within the exception to the exclusion.

While recognizing that the policy’s definition of “latent defect” was “not a model of precision” and redundant (in that it simultaneously used the terms hidden, not discoverable, and inherent), the First Circuit disagreed that the term was self-contradictory.  The First Circuit found that the district court failed to give the term its plain, everyday meaning: flaws in the material used to build the boat that were not noticeable.  It found further that the district court’s remedy of the purported ambiguity was improper.  Although a canon of policy interpretation is to avoid surplusage, or redundant terms, that rule should not be applied, the First Circuit cautioned, if it renders the policy ambiguous.  In this case, the district court effectively changed the language of the exception to require a “hidden flaw in the yacht,” rather than in the material. Yet this interpretation did not address the perceived redundancy, which the First Circuit suggested could have been more appropriately remedied by striking the word inherent.  Ultimately, applying the plain meaning of the exclusion, the First Circuit directed that summary judgment be entered in favor of the insurer.

Texas Federal Court Dismisses Insurer in Case Alleging “Bad Faith” and Violations of the Texas DTPA

Monday, May 12th, 2014

On April 18, 2014, a federal district court in Texas granted summary judgment in favor of an insurer that had paid the policy proceeds demanded by the insureds, but nonetheless were sued for “bad faith.”  The court’s decision adds to a growing body of Texas case law weeding out unfounded first-party insurance “bad faith” lawsuits.

In Bell v. State Farm Lloyds, 2014 WL 1516254 (N.D. Tex. 2014), a hail and wind storm damaged the policyholder’s property in Midlothian, Texas.  The insureds submitted a property insurance claim and, five days later, the insurance company sent out an adjuster to inspect the property.  The policyholders, and their construction contractor, were unsatisfied by the adjuster’s estimate of the damage, and then sought a second opinion from a public adjuster.  However, the inspection by the public adjuster produced an estimate that was lower than the insurance company’s estimate.  Undeterred, the policyholders requested a re-inspection of the property.  A new adjuster from the insurance company conducted the second inspection, and the estimate was higher than the previous estimate.  Subsequently, the policyholders’ construction contractor sent out a “final invoice” for the same amount, as the policyholders agreed with the contractor’s estimate, and the insurer issued the requested payment.

The policyholders filed a lawsuit after receiving the payment, claiming that the insurance company had breached its contract, breached the duty of good faith and fair dealing, violated the Texas Deceptive Practices Act, the Texas Insurance Code § 541, and the Prompt Payment Act § 542, and committed fraud.  The court granted the insurer’s motion for summary judgment on each of the claims.  On the breach of contract claim, the court held that the insurer’s full payment of the amount stated in the final invoice “prov[ed] that there was no breach and that the Plaintiffs suffered no damages.”  The bad faith claim also failed because there was no evidence that the insurer, among other things, failed to properly investigate or timely pay the claim, or committed any “extreme act” giving rise to independent damages.  Because the claim for bad faith failed, the court found that the claim for unfair settlement practices also failed.  Similarly, because there was no evidence that the insurer had delayed in making the required payment, the claim under the Prompt Payment Act failed.  Finally, the court held that there was no merit to the fraud claim because the policyholders failed to establish that the insurer made any false representations.  Accordingly, the court entered judgment in the insurer’s favor.

Post-Heimeshoff Case Law Signifies Consistency in Applying ERISA Plan Limitations Provisions

Thursday, May 8th, 2014

As we reported back in December 2013, the U.S. Supreme Court recently ruled that a reasonable limitation of actions provision in an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) is enforceable even if the limitations period starts to run before the claim accrues.  Heimeshoff v. Hartford Life & Acc. Ins. Co., 134 S. Ct. 604 (2013).  Since Heimeshoff was decided, district courts throughout the county have dismissed claims for plan benefits under ERISA § 502(a) as time-barred based on such limitation of actions provisions.  These decisions include:

  • Freeman v. Am. Airlines, Inc. Long Term Disability Plan, No. CV13-05161-RSWL-AJWx, 2014 WL 690207 (C.D. Cal. Feb. 20, 2014) (dismissing plaintiff’s complaint after finding that a plan provision, requiring participants to commence actions for benefits “within two years of the date after the adverse benefit determination is made on final appeal,” was neither unreasonably short nor precluded from taking effect by any controlling statute);
  • Tuminello v. Aetna Life Ins. Co., No. 13 Civ. 938 (KBF), 2014 WL 572367 (S.D.N.Y. Feb. 14, 2014) (granting defendant summary judgment where plaintiff failed to commence action for plan benefits within the nine months permitted by the plan’s limitation of actions provision, which the court concluded was not “not an unreasonably short period of time within which to file suit”);
  • Kienstra v. Carpenters’ Health & Welfare Trust Fund of St. Louis, No. 4:12CV53 HEA, 2014 WL 562557 (E.D. Mo. Feb. 13, 2014) (concluding that a plan’s two-year limit to bring lawsuits controlled over Missouri’s ten-year statute of limitations);
  • Wilson v. Standard Ins. Co., No. 4:11-CV-02703-MHH, 2014 WL 358722 (N.D. Ala. Jan. 31, 2014) (declining to apply Alabama’s six-year statute of limitation for contract actions and dismissing plaintiff’s ERISA § 502(a)(1)(B) claim based on a three-year contractual limitations period that left plaintiff 18 months to bring suit after her claim accrued);
  • Simmers v. Hartford Life & Acc. Ins. Co., No. 11-C-1009, 2014 WL 107002 (E.D. Wis. Jan. 9, 2014) (refusing to apply Wisconsin’s six-year statute of limitations for breach of contract claims in an ERISA action, and noting that no circumstances were present which would require application of an alternative limitations period, such as the limitations period ending before the claim accrued or the claimant being prevented from timely filing suit due to a protracted appeals process); and
  • Barreiro v. NJ BAC Health Fund, No. 13-1501 (RBK/AMD), 2013 WL 6843478 (D.N.J. Dec. 27, 2013) (enforcing a limitations period requiring plan participants to bring action within three years after the end of the year in which medical services were received).

These decisions confirm the benefit conferred on plan administrators by Heimeshoff – namely, resolving a split among the circuit courts and ensuring greater consistency and predictability in the enforcement of ERISA plan limitation of actions provisions.  We expect future decisions will limit claims for benefits under ERISA to the time periods specified in benefits plans.

Virginia Federal Court Allows Recoupment by Insurer – Where Guilty Pleas Triggered Coverage Exclusions

Friday, May 2nd, 2014

In Protection Strategies, Inc. v. Starr Indemnity & Liability Co., Civil Action No. 1:13-cv-00763 (E.D. Va. Apr. 23, 2014), the United States District Court for the Eastern District of Virginia granted Starr Indemnity & Liability Company’s (“Starr”) motion for summary judgment on its claim for recoupment of all funds it had advanced to Protection Strategies, Inc. (“PSI”) for its defense of an investigation by the NASA Offices of the Inspector General (“NASA OIG”).  The court concluded that, in the wake of the guilty pleas by executives of PSI, the NASA OIG investigation triggered certain exclusions in PSI’s directors and officers liability insurance policy.

PSI, a global security management and consulting company that did business with NASA, purchased from Starr a form of directors and officers liability coverage that covered individuals and the company itself.  In January 2012, during the coverage period, PSI received a subpoena from the NASA OIG, and a search and seizure warrant relating to PSI’s alleged violations of various false statement and fraud provisions of the U.S. Criminal Code.  The NASA OIG subsequently executed a search of PSI’s headquarters.  Several months later, the U.S. Attorney for the Eastern District of Virginia sent a letter to PSI indicating that it was investigating PSI for civil liability in connection with its participation in the Small Business Administration (SBA) Section 8(a) program.

PSI notified Starr of the NASA OIG investigation and demanded payment of its defense costs.  Starr initially took the position that the investigation did not constitute a “claim” under the policy, which was rejected by the district court.  Thereafter, Starr issued a reservation of rights letter and began reimbursing PSI for the defense costs it incurred in indemnifying its officers, specifically four executives who were the primary targets of the NASA OIG investigation.  The NASA OIG investigation continued through 2012 and, in 2013, the four PSI executives entered guilty pleas, each stipulating that he knowingly and willfully defrauded the U.S. government.

PSI and Starr filed cross-motions for summary judgment.  Starr contended that the guilty pleas triggered four exclusions in the policy, and that it was entitled to recoup the amounts it had advanced for the defense fees.  Three of the exclusions were incorporated into the directors and officers liability coverage section of the policy, Exclusion 3(a) (“Profit Exclusion”), Exclusion 3(b) (“Fraud Exclusion”), and Exclusion 3(d) (“Prior Knowledge Exclusion”).  The fourth exclusion was based on the Warranty and Representation Letter attached to the policy, wherein PSI represented that “[n]o person or entity proposed for insurance under the policy referenced above has knowledge or information of any act … which might give rise to a claim(s), suit(s) or action(s) under such proposed policy.”  The letter further stated that, if any such “knowledge or information exists, then … any claim(s), suit(s) or action(s) arising from or related to such knowledge or information is excluded from coverage.”

In reviewing the evidence, the district court concluded that the policy’s exclusions applied and acted as a complete bar to coverage for the investigation of PSI and its officers.  The district court found that the personal profit and fraud exclusions “unambiguously” applied, as the guilty pleas established that the executives knowingly, intentionally and improperly gained an advantage and illegal remuneration because of their fraudulent activities.  The district court found that the guilty pleas also triggered the prior knowledge exclusion as the pleas showed that each of the officers had knowledge when the policy incepted of an ongoing scheme to defraud the government.  The district court further found that the exclusion in the warranty letter had been triggered as based on PSI’s “material misrepresentation” that no person had knowledge of facts that might give rise to a claim.  The district court concluded that, because the entirety of the defense costs advanced fell under the exclusions in the policy, Starr was entitled to recoupment.


Separated from Spouse, Separated from Coverage: Illinois Court Finds Phrase “Resides Primarily” in Spouse Definition Unambiguous and Enforceable

Friday, May 2nd, 2014

In Gaudina v. State Farm Mutual Auto. Ins. Co., 2014 Il. App. (1st) 131264 (March 28, 2014), an Illinois appellate court found that State Farm properly denied coverage to a motorist seeking coverage under his estranged wife’s policy because he did not reside primarily with her.

In Gaudina, a motorist was injured in an automobile accident.  He filed an underinsured motorist claim under his wife’s automobile policy, issued by State Farm.  The policy defined spouse to mean “your husband or wife who resides primarily with you.”  State Farm denied coverage because, at the time of the accident, the motorist did not primarily reside with his wife.  The motorist filed a declaratory judgment action against State Farm, and the trial court determined that State Farm properly denied coverage.

On appeal, the motorist argued that the policy’s “spouse” definition was ambiguous because: (1) the definition differed from who a reasonable person might consider to be a spouse based on dictionary definitions; (2) the phrase “resides primarily” was not defined in the policy; and (3) the policy did not specify when the spouse had to be residing primarily with the named insured.  The appellate court rejected these arguments and found the definition to be unambiguous.  The court determined there was no need to consult dictionaries to define “spouse” because that term was defined in the policy.  Additionally, the court noted that courts in Wisconsin and Ohio found the phrase “resides primarily” to be unambiguous and enforceable.  Lastly, the court ruled that it was clear, for a spouse to be covered by the policy, a husband or wife must fall within the definition of spouse at the time of the accident.

After finding the definition to be unambiguous, the court next examined the evidence to determine if the motorist qualified as a “spouse” who “reside[d] primarily” with the named insured at the time of the accident, as required by the policy.  The court concluded that he did not because he was separated from his wife and rented a townhouse where he stayed five to six times a week.  In addition, the motorist already had been out of the marital home since before his wife’s policy incepted through the date of the accident.  As such, the motorist was not entitled to coverage, and judgment in State Farm’s favor was proper.

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