Archive for the ‘Property Coverage’ Category

New Jersey Legislature Passes Superstorm Sandy Bill of Rights

Monday, March 31st, 2014

By Ryan Chapoteau, Sedgwick New York

We previously reported on the New Jersey legislature’s attempt to pass reform bills as a response to Superstorm Sandy.  Although New Jersey Assembly Bill A3710 died when referred to the Financial Institutions and Insurance Committee, the legislature recently passed Senate Bill S1804 (combined with S1306), which details how the state can distribute Superstorm Sandy federal aid relief, and established a Bill of Rights for Superstorm Sandy victims.

In relevant part, the Bill of Rights helps to ensure that victims of Superstorm Sandy can seek compensation from multiple recovery programs as well as through any applicable insurance.  If a victim is not wholly compensated through their insurance carrier, the Bill of Rights can apply to a governmental recovery program to aid in the victim’s effort to be made whole for any losses resulting from the storm.  According to this law, the State cannot deny applicants seeking aid merely because they have other applications pending for financial relief.  Now, victims have multiple avenues to be compensated for the damage occurred by Superstorm Sandy.

In June 2013, we reported on the 12 new insurance reform bills bassed by the New York State Assembly in response to Superstorm Sandy. 

Interrupted by Sandy

Friday, March 28th, 2014

By Benjamin E. Shiftan, Sedgwick San Francisco

In Johnson Gallagher Magliery, LLC v. The Charter Oak Fire Insurance Company, 2014 WL 1041831 (S.D.N.Y. Mar. 18, 2014), the United States District Court for the Southern District of New York, granting a motion for partial summary judgment, held that a law firm was not entitled to certain lost business income caused by Superstorm Sandy.

The law firm leased office space at 99 Wall Street in New York City.  The building was supplied electricity from the Consolidated Edison of New York Bowling Green Network.  On the evening of October 28, 2012, due to the looming storm, the office space at 99 Wall Street was evacuated.  The next night, on October 29, 2012, ConEd preemptively shut down the Bowling Green Network to prevent major customer and network damage.  When Superstorm Sandy hit, flooding damaged the Bowling Green Network equipment.  The Bowling Green Network was re-energized on November 3, 2012, but 99 Wall Street did not actually receive electricity until November 11, 2012.

The law firm filed a claim with its business casualty insurer, The Charter Oak Fire Insurance Company, for, amongst other things, lost business income.  Charter Oak denied the claim, citing the water exclusion in its policy.  In the ensuing insurance coverage litigation, Charter Oak filed a motion for partial summary judgment which asserted that the policy’s water exclusion barred coverage for the law firm’s lost business income when that loss was due to the interruption of electrical service by way of the Bowling Green Network, which had suffered water damage.

The Southern District of New York ruled that Charter Oak was not obligated to pay for business losses that the law firm sustained during the time period when the Bowling Green Network was shut down, from October 29, 2012 through November 3, 2012.  The court held, in part, that the water exclusion applied to business losses stemming from the shutdown of the Bowling Green Network, which suffered water damage that prevented the re-energizing of the network until November 3, 2012.  In so ruling, the court relied on deposition testimony from a ConEd senior engineer who confirmed that there was extensive water damage to the Bowling Green Network.

Homeowners Beware: Fraud in Claims Process Can Lead to Judicial Sanctions in Bad Faith Action

Thursday, March 13th, 2014

By Beth E. Yoffie, Sedgwick Los Angeles

A federal court for the Southern District of Texas has sanctioned a pro se litigant for making fraudulent misrepresentations to his homeowner’s insurer following a fire, and for bringing a bad faith action against the insurer.

In Alexander v. State Farm Lloyds, 4: 12-CV-490, 2014 WL 549389 (S.D. Tex. Feb. 11, 2014), Tony Alexander sued State Farm Lloyds (“State Farm”) for breach of contract, violations of the Texas Insurance Code, violations of the Texas Deceptive Trade Practices Act, and bad faith.  He sought more than $1 million under the policy’s Dwelling Coverage as well as $77,000 for the cost of additional living expenses, personal property damage, and securing of the residence.  He did so despite concealing material facts and making misrepresentations to State Farm during the claims process.

Mr. Alexander abandoned the case three days into the jury trial after his fraudulent conduct had become apparent.  Following that, State Farm moved for sanctions to be levied against him.  Mr. Alexander retained counsel, who argued that he could not be sanctioned because his “foolishness” had taken place before he had filed the lawsuit.  Counsel asserted that Mr. Alexander had not lied during the trial, and so had not displayed contempt for the judicial process.  The court disagreed.

Mr. Alexander’s decision to file suit was itself contemptuous.  The court found that he was a sophisticated individual, given he had worked in the finance industry, possessed an advanced degree, and previously operated multiple businesses; and, that he had connived to use the judicial system as a continuation of his lawless efforts to exploit the July 24, 2005 fire to squeeze additional money from State Farm.

The court concluded that, although Rule 11 did not permit sanctions on the facts before it, attorney’s fees could be awarded to State Farm under Texas Rule 13 and Chapter 10 of the Civil Remedies and Practices Code.  Accordingly, it awarded attorney’s fees to State Farm.

Fourth Circuit Holds that Contingent Business Interruption Endorsement Does Not Extend to Indirect Suppliers

Monday, March 10th, 2014

By Mari C. Spears, Sedgwick Washington, D.C.

On February 20, 2014, the United States Court of Appeals for the Fourth Circuit held that a contingent business interruption endorsement did not extend coverage to claims arising out of a business interruption caused by an indirect supplier.  Millennium Inorganic Chemicals Ltd. v. National Union Fire Insurance Co. of Pittsburgh, PA, 13-1194, 2014 WL 642993 (4th Cir. Feb. 20, 2014).

Millennium Inorganic Chemicals Ltd. and Cristal Inorganic Chemicals Ltd. (collectively, “Millennium”) was in the business of processing titanium dioxide, a compound often used for its white pigmentation, at its processing facility in Western Australia.  Millennium’s titanium dioxide processing operation was fueled by natural gas through the Dampier-to-Bunbury Natural Gas Pipeline (the “DB Pipeline”), Western Australia’s principal gas transmission pipeline.  Millennium purchased the gas under a contract with Alinta Sales Pty Ltd (“Alinta”), a retail gas supplier, which had purchased the gas from a number of natural gas producers, including Apache Corporation (“Apache”).  Millennium’s contract for the purchase of natural gas was solely with Alinta.

On June 3, 2008, an explosion occurred at Apache’s Varanus Island facility, causing its natural gas production to cease.  As a result of the explosion, Millennium’s gas supply was disrupted, and it was forced to shut down its titanium dioxide manufacturing operations for a number of months.

On June 5, 2008, Millennium tendered its claim to National Union Fire Insurance Company of Pittsburgh, PA and ACE American Insurance Co. (the “Insurers”), seeking contingent business interruption (“CBI”) coverage for losses incurred when the titanium dioxide manufacturing operation was shut down.  The policies included a CBI Endorsement that insured Millennium against certain losses resulting from the disruption of the supply of materials to Millennium caused by damage to certain “contributing properties.”  The term “contributing properties” was defined as “the insured’s prime suppliers of materials, parts and services.  If the insured depends upon one or, at most, a few manufacturers or suppliers for the bulk of materials and supplies necessary to conduct its business operations, then these suppliers are said to be “contributing properties.”  The Endorsement further defined “contributing property” by reference to the policy schedules, which indicated that covered locations “must be direct suppliers of materials to [Millennium’s] locations.”

The Insurers denied Millennium’s claim on the ground that Apache was not a direct supplier to Millennium as required under the policies.  Millennium subsequently sued the Insurers in the U.S. District Court for the District of Maryland, contending that the Insurers wrongfully denied Millennium’s claim for coverage under the CBI Endorsement.

The district court concluded that coverage under the policies extended only to “direct contributing properties”; however, the district court also held that none of the evidence “speaks to the specific meaning the parties intended by the use of the word ‘direct.’”  The district court ruled that the term “direct” was ambiguous in the context of an entity that provides a direct physical supply of material to the insured, but has no direct contractual relationship with the insured.  Accordingly, the district court, construing the term in favor of the insured, held that Apache qualified as a “direct” supplier to Millennium, and Apache’s natural gas production facility was a “direct contributing property” within the meaning of the policies “because Apache’s facility physically provided a direct supply of natural gas to Millennium’s premises, despite the fact that Apache and Millennium had no direct contractual relationship.”

On appeal, the Fourth Circuit reversed the judgment of the district court and remanded the case for entry of summary judgment in favor of the Insurers on the ground that neither Apache nor Apache’s facilities on Varanus Island could be considered a “direct contributing property” of Millennium.  The Fourth Circuit held that the term “direct” meant “proceeding from one point to another in time or space without deviation or interruption,” “transmitted back and forth without an intermediary,” or “operating or guided without digression or obstruction.”  It was undisputed that Millennium received its gas from Alinta, and Alinta, not Apache, had the sole ability to control the amount of gas directed to Millennium.  It also was undisputed that Millennium received its gas by way of the DB Pipeline, and that the DB Pipeline was neither owned nor operated by Apache and Apache relinquished both legal title and physical control over the gas when it entered the DB Pipeline.  Therefore, the court concluded that the relationship between Apache and Millennium, if any, was clearly interrupted by “an intermediary,” Alinta, who took full physical control of Apache’s gas before delivering indistinguishable commingled gas to Millennium.

“FAIR” is Fair: California Policyholders Not Entitled to Recovery Beyond Specified Policy Limits for Fire Losses

Friday, March 7th, 2014

By Michael A. Topp, Sedgwick San Francisco

Recently, the California Court of Appeal held that recovery under a standard California fire policy is limited to the specified policy limits, even if the actual cash value of the loss exceeds those limits.

The California FAIR Plan Association (the “FAIR Plan”) was established by the California legislature in 1968 to make available “basic property insurance” to property owners who are unable to procure such insurance through normal channels from an admitted insurer.  The FAIR Plan is an involuntary joint reinsurance association of all insurers authorized to write property insurance in California.  The governing statutes require the FAIR Plan to provide insurance for the peril of fire which is equivalent to, or more favorable than what is contained in, the standard form fire insurance policy set forth in Insurance Code § 2071.

In St. Cyr v. California FAIR Plan Assn., ___ Cal.App.4th ___, 2014 WL 346074 (2d Dist. Jan. 31, 2014), the plaintiffs were policyholders who lived in high fire risk areas and whose homes were destroyed in a wildfire.  Despite having been paid the full amount of their policy limits for destruction of their properties, the policyholders sued the FAIR Plan for breach of contract, bad faith, and unfair business practices.  Specifically, the policyholders argued that, although standard fire policies require payment for actual cash value of dwelling loss and the actual cash value of their homes exceeded their policy limits, the FAIR Plan limited payment to the policy limits.

The court rejected the policyholders’ argument based on the express language of Section 2071, and sustained the trial court’s dismissal of the action.  The court noted that the statutorily-required policy language provides that fire coverage is afforded “to the extent of the actual cash value of the loss,” but also that coverage is provided “to an amount not exceeding _____ dollars.”  Thus, the stated limit of insurance “fixes the maximum amount due under the policy.”  The court also noted that, under Insurance Code § 2051, which specifies the “measure of indemnity” under an “open” policy, loss payment is determined based on the lesser of the policy limit or the cost to repair and/or replace the damaged property.  Therefore, “[a]s appellants were paid the full amount of their policy limits, they were paid the amount due.”

It should be noted that, under California Insurance Code § 10102(e) and (f), a policy issued as “guaranteed replacement cost coverage” may not limit coverage to a specified amount.  The policy at issue in the St. Cyr case was described by the court as “bare bones” coverage, and did not implicate Section 10102.


5th Circuit Says the Issue is Liability, Not Damages

Tuesday, March 4th, 2014

By Daniel Pickett, Sedgwick New York

In Carl E. Woodward, L.L.C. v. Acceptance Indem. Ins. Co.,  2014 WL 535726, No. 12–60561 (5th Cir. Feb. 11, 2014)  the 5th Circuit Court of Appeals held that, when analyzing coverage under an additional insured endorsement that excludes completed operations, the focus of the inquiry is when the additional insured’s liability arose, not when the damage occurred.

In Woodward, Pass Marianne contracted with a general contractor, Woodward, for the construction of condominiums on the Mississippi Gulf Coast.  Woodward subcontracted with DCM for the concrete work.  Pass Marianne sold the condominiums to Lemon Drop Properties and, a year after purchasing the condominiums, Lemon Drop brought suit against Pass Marianne and Woodward asserting claims for rescission, breach of contract and gross negligence. Pass Marianne filed a cross-claim against Woodward alleging faulty construction of the condominiums.

The claims were eventually arbitrated and one of the significant issues in the arbitration was the fault of DCM.  After Pass Marianne asserted its cross-claims, Woodward demanded that DCM’s commercial general liability carrier, Acceptance Indemnity Corporation, provide a defense and indemnity.  Acceptance denied the tender.  As a result, Woodward and its insurer filed suit against Acceptance.  The Acceptance policy provided that Woodward was an additional insured, but only with respect to liability arising out of DCM’s ongoing operations performed for Woodward. Additionally, the additional insured endorsement excluded coverage for property damage occurring after all work to be performed by or on behalf of Woodward at the site had been completed.

Woodward and its insurer moved for summary judgment. The district court held that Acceptance had a duty to defend and Acceptance appealed.  On appeal, the 5th Circuit focused on the portion of the additional insured endorsement that excluded coverage for property damage occurring after all work had been completed.  While noting that Mississippi’s highest court had not addressed the issue, the 5th Circuit concluded that, under the terms of the endorsement, claims for liability can be brought after ongoing operations are complete, but the underlying liability cannot be due to the completed operations. The court explained “that liability for construction defects, while created during ongoing operations, legally arises from completed operations.”  Accordingly, the court reasoned that the issue was not whether DCM failed to comply with plans and specifications during ongoing operations, but whether Woodward’s liability arose out of those ongoing operations. “It did not. Woodward’s liability for breach of contract, if any, flows from defects in the completed construction project.”

Accordingly, the court held that, even if it accepted the district court’s factual finding that damage had occurred during ongoing operations, the liability for such damages arose out of completed operations for which Woodward was not an additional insured under the policy.  As a result, Acceptance had no duty to defend Woodward.


Eye on Insurance: A Look Back at 2013 and Forward to 2014

Monday, February 3rd, 2014

2013 was a year characterized by continued pressure on the financial sector, a new regulatory landscape and further challenges for the insurance industry branching into emerging risks and economies. The lawyers in our London office authored this update which reviews the key developments and trends for various classes of business during 2013, together with commentary on what we can expect from 2014.

To view and download a PDF copy, click here.

Washington Insurance Law: 2013 Year in Review

Tuesday, January 21st, 2014

2013 was a particularly eventful year in Washington insurance law. This paper, authored by Sedgwick Seattle’s Robert Meyers, summarizes the holdings of several notable Washington insurance decisions that were filed in 2013.  Download a copy of the paper here. 

In June 2013, Bob gave a webinar on The State of Bad Faith in Washington.   The WA program, and the others in our bad faith series, are are available for on demand viewing.  Please click here to request a link.

What’s in Store for New Jersey in 2014? Super Bowl XLVIII and Legislation Addressing the “Occurrence” Issue in the Construction Defect Context

Friday, January 3rd, 2014

By Stevi A. Siber-Sanderowitz, Sedgwick New York

The New Year might bring more to New Jersey than just the Super Bowl.  Indeed, on November 25, 2013, the legislature introduced a bill before the New Jersey State Assembly, which, if enacted, would require general liability policies (in policies issued, renewed, or delivered in New Jersey) to contain a definition of “occurrence” which includes damages resulting from faulty workmanship.  The introduction of A4510 is part of a growing trend in state legislatures that seek to resolve the “occurrence” issue by passing laws in a purported effort to clarify the term “occurrence” when determining coverage for construction defect claims.

A4510 provides that a commercial liability insurance policy delivered, issued, executed, or renewed in New Jersey must contain a definition of “occurrence” that includes: (1) an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and (2) property damage or bodily injury resulting from faulty workmanship.

As we’ve previously explained (Is Defective Construction an “Occurrence”?  The Answer Isn’t So Concrete), the definition of “occurrence” in the construction defect context is a thorny issue.  Courts have varied in their holdings as to whether damage from faulty workmanship is accidental in nature and therefore an “occurrence.”  See, e.g., Penn. Nat’l Mut. Cas. Ins. Co. v. Parkshore Dev. Corp., 403 Fed. App’x. 770 (3d Cir. 2010) (holding that a subcontractor’s faulty work that resulted in damage to the insured general contractor’s work was not an “occurrence”); Westfield Ins. Co. v. Custom Agri Sys., Inc., 979 N.E.2d 269 (Ohio 2012) (holding that defective construction work itself is not covered because it is not the result of an “occurrence,” but that the resulting damage may be covered because it was fortuitous and unintended); Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) (finding coverage for damage to a building’s foundation, sheetrock, and stone veneer allegedly caused by the builder’s defective construction of a house’s foundation).  By requiring a definition of “occurrence” that addresses both accidents and faulty workmanship, A4510 intends to reduce confusion by resolving coverage issues arising from courts’ varying interpretations of those issues.

Keep in mind, however, that if enacted, A4510 would not necessarily obligate insurers to provide coverage for construction defects.  As the bill notes, it is not intended to restrict or limit the business risk exclusions commonly found in general liability policies (e.g., “your work” and “your product” exclusions), which might preclude coverage for faulty workmanship on other grounds.

Insured May Retain Rights to Insurance Proceeds for Covered Losses Predating Foreclosure

Tuesday, December 10th, 2013

By Jeffrey Dillon, Sedgwick New York

In Peacock Hospitality, Inc. v. Association Casualty Ins. Co., — S.W.3d —, 2013 WL 6188597 (Tex. App-San Antonio Nov. 13, 2013), a Texas appellate court overturned a summary judgment ruling in favor of an insurer, Association Casualty Insurance Company, on the grounds that an insured may retain its rights under a property insurance policy for losses predating foreclosure, and an insurer does not have the right to enforce a covenant in an insured’s deed of trust divesting the insured’s rights under the policy to its mortgagee.

Association Casualty’s insured, Peacock Hospitality, Inc. (“Peacock”), sued for the alleged underpayment of a claim for water damage under its property insurance policy.  However, subsequent to the loss and the payment of the insurance claim, Peacock’s mortgagee had foreclosed on the subject property.  Association Casualty argued that, as a result of the foreclosure, Peacock did not have a cause of action under the policy and, pursuant to its deed of trust with the mortgagee, Peacock divested any rights it may have had under the policy upon foreclosure.

The appellate court ruled that an insured may retain certain rights under its insurance policy in the event a foreclosure occurs after a covered loss.  A loss-payable clause in the policy provided that Association Casualty would pay the mortgagee for covered losses even if the mortgagee had initiated foreclosure proceedings on the insured building.  The court noted that loss-payable clauses in insurance policies protect mortgagees’ security interests, but only to the extent of the insured’s indebtedness under the deed of trust.  Thus, the court reasoned, when the proceeds of a foreclosure and the covered losses from a pre-foreclosure loss fully satisfy a mortgage debt, the mortgagee no longer has a right to further insurance proceeds for the pre-foreclosure loss.  In that event, the insured is entitled to the remaining insurance proceeds and may bring an action against the insurer for underpayment, because any excess value in the property at the time of the loss is the property of the insured.  Because the court could not ascertain the extent to which the proceeds of the foreclosure and the covered losses for the pre-foreclosure loss satisfied Peacock’s debt, it found that a genuine issue of material fact existed regarding whether Peacock had a cause of action under the policy.

The court further noted that, although the insured had divested its rights under the policy to the mortgagee upon foreclosure, because the insurer was neither a party to nor a third-party beneficiary of the deed of trust, it was not entitled to rely on the covenants in that contract to defend against Peacock’s claims.


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