Coverage under homeowners policy for fungus damage ruled ambiguous
A woman bought a homeowners policy for her 70-year-old home. The policy did not cover "(1) a loss consisting of or caused by…rust or other corrosion, mold, wet or dry rot or (2) a "loss to (covered) property consisting of or caused by collapse." An exception to the collapse exclusion in the "additional coverage" section provided coverage for "a) the entire collapse of a covered building structure; b) the entire collapse of a part of a covered building structure; and c) direct physical loss to covered property caused by (a) or (b) above." This coverage was limited to a collapse that was "a sudden and accidental direct physical loss caused by one or more of the following: b) hidden decay of the building structure; (and) . . . f) defective methods or materials used in construction, repair, remodeling or renovation, but only if the collapse occurs in the course of such construction, repair, remodeling or renovation." The term "collapse" did not include "settling, cracking, shrinking, bulging or expansion."
After a window fell out of a living-room wall, the woman contacted a professional wood preservation firm. (The woman also noticed that the floorboards in a corner of the living room were giving way.) The firm found that the woman's home had been damaged by a fungus known as Poria (Meruliporia incrassata).
The woman submitted a claim to her carrier. It acknowledged the claim in a reservation of rights letter and retained its own experts to inspect the damage. They also determined that the damage was caused by infestation of the Poria fungus.
The woman hired a remediation and abatement service to remove the fungus. A week later, the insurer rejected her claim, citing the exclusion for "rust or other corrosion, mold, wet or dry rot." The woman then sued the insurer.
A trial court granted summary judgment in the insurer's favor, based on two conclusions: (1) the broad exclusion for losses due to wet or dry rot included the fungal infestation that had caused the woman's claimed damages and (2) the insurance for collapse upon which the woman sought coverage for her claim did not extend to the "imminent collapse" of a portion of her home.
In appealing the ruling, the woman made two principal arguments. First, she said she was entitled to coverage under her policy's "collapse" provisions irrespective of the cause of such collapse-and even if the court found the Poria fungus fell within the exclusion for "wet or dry rot." Second, she argued that the Poria fungus did not fall within the policy's exclusion for wet or dry rot. In support of that argument, she relied upon the testimony of an expert she retained, claiming that his assessment would have raised a triable issue of fact but for the trial court's erroneous ruling granting summary judgment to the insurer.
The insurer contended that "well settled principles of policy construction establish that the 'wet or dry rot' exclusion is dispositive of (the woman's) claim without regard to the separate coverage ground based on collapse." The insurer also said the plain meaning of "wet or dry rot," to a layperson, includes the fungus that damaged the woman's home. Next, the insurer said that even if the woman's collapse claim were considered, recent action of the state Supreme Court established that (her) evidence demonstrated nothing more than a condition of "imminent collapse" and thus was not sufficient to provide a basis for coverage.
Was the policy ambiguous? "It appears clear to us that a layperson's understanding of the term 'wet or dry rot' embraces damage or decay caused by a fungus," the court said. "Since Poria is admittedly a fungus, we would have no trouble concluding that the Poria fungus that damaged (the woman's) home fell within the policy exclusion for 'wet or dry rot.' But that is only true if we read the terms of that exclusion in isolation. When read in the context of the entire policy, however, such clarity disappears."
The court continued that the collapse exclusion-and its exception in the policy's additional coverage section for loss caused by "hidden decay," a term that the court implied sounded a lot like "dry rot"-also was relevant to the resolution of claim.
"The use of the term 'dry rot' in the exclusion and the use of the term 'hidden decay' in the provision for 'additional coverage' lead to a confusing contradiction," the appeals court said. "Such contradiction creates an ambiguity with respect to coverage involving a claim of collapse."
The appeals court said that the trial court erred in relying on the wet or dry rot exclusion to summarily find that there was no coverage under the … policy. "Whether (the woman) can demonstrate the existence of coverage under the provisions of the collapse exception involves factual questions that remain to be resolved. The trial court did not actually reach these issues and we are not satisfied that the record before us is sufficient to enable us to resolve them as a matter of law."
The case was remanded to the trial court for further consideration.
Jordan vs. Allstate Insurance Co., No. B164112 (Cal.App. Dist.2 03/18/ 2004) 2004.CA.0002372 (www.versuslaw.com).
GC's contract with project owner bars GC's insurer from subrogating against GC's sub
A law firm in Louisiana contracted with an architect to design an office building and with a general contractor to build it. Later, the general contractor arranged to have a subcontractor install the building's stucco finish.
During construction, the building and its contents were damaged by normal rainfall. The subcontractor admitted that it improperly installed a metal lathe system which enabled water to infiltrate the building's interior, damaging property including walls and carpets. The subcontractor replaced the stucco at its expense.
The general contractor initially bore the expense of the consequential damages that resulted from the water leaks. Its CGL insurer later reimbursed the general contractor for these expenses, then it subrogated against the subcontractor and its insurer. A trial court ruled against the insurer, which appealed the ruling.
The construction contract between the building's owner and the general contractor was a standard form drafted by the American Institute of Architects. The provisions pertinent to the subrogation action are as follows:
"Unless otherwise provided, the owner shall purchase and maintain… property insurance in the amount of the initial Contract Sum… for the entire Work at the site on a replacement cost basis without voluntary deductibles…. This insurance shall include interests of the owner, the Contractor, Subcontractors and Sub-sub- contractors…. Property insurance shall be on an all-risk policy form and shall insure against the perils of fire and extended coverage and physical loss or damage including, without duplication of coverage, theft, vandalism, malicious mischief, collapse, false work, temporary buildings, and debris removal including demolition occasioned by enforcement of any applicable legal requirements."
"Waivers of Subrogation. The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect's consultants, separate contractors described in Article 6, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other perils to the extent covered by property insurance obtained pursuant to this Paragraph…or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary."
In the appeal, the general contractor's CGL insurer argued that the contract's waiver of subrogation did not apply to its efforts to seek recompense for four reasons. First, the general contractor, not the owner, purchased its insurance, and the waiver of subrogation did not apply to claims by the contractor against its own subcontractors.
The court replied that the waiver in the AIA contract clearly "operates as a waiver of rights of the owner and the contractor against subcontractors and other workers on the project for property damage to the extent that such damages are covered by insurance. By these terms, the waiver of subrogation provisions are reciprocal, with no exception for claims by the owner or contractor against their own subcontractors."
The insurer also contended the subrogation clause did not apply because the damages were not caused by a fire or other "peril." It also argued that a "peril" was dramatic in nature as opposed to such an everyday event as a rainstorm. Finding no definition for "peril" in the AIA contract, the court turned to Black's Law Dictionary, which defined it as an "exposure to the risk of injury, damage, or loss." Ordinary rainstorms caused the loss, the court said, holding that each rainstorm constituted a peril within the meaning of the contract's waiver of subrogation clause.
The insurer also argued that it was not subject to the waiver of subrogation clause because it had provided a "liability" policy to the general contractor, rather than a "property" policy. The court said, however, that the insurer's policy covered and paid for the property damage at issue, so it provided "other property insurance applicable to the work."
The carrier also argued that the subcontractor voluntarily replaced the defective stucco installation and such action constitutes "a waiver of the waiver of subrogation." The court rejected this assertion. "Waiver occurs when there is an existing right, a knowledge of its existence and an actual intention to relinquish it, or conduct so inconsistent with the intent to enforce the right as to induce a reasonable belief that it has been relinquished." Steptore vs. Masco Const. Co., Inc., 93-2064, p. 4 (La.8/ 18/94), 643 So.2d 1213, 1216.
The trial court's ruling against the insurer was affirmed.
Gray Insurance Co. vs. Old Tyme Builders Inc., No. 2003 CA 1136 (La.App.Cir.1 04/02/2004) 2004.LA. 0000495 (www.versuslaw.com).
Readers may e-mail Don Renau at drenau@thepoint.net.
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