Down To Cases

The insurer appealed to the Pennsylvania Superior Court, which reversed and noted "compelling public policy reasons" to deny coverage. "In effect, the courts are being asked to help provide insurance for heroin dealers," this court said. "The legislature…has already determined the inherent danger of heroin….It should not be the public policy…to insure the sale of such a…dangerous and illegal narcotic." The Superior court also cited the "inferred intent doctrine," which previously had been applied to infer intent to harm on those involved in the sexual assault of minors.

In his appeal of this decision to the state Supreme Court, the insured raised one issue, which was whether the Superior Court erred in extending the concept of inferred intent to cases other than those involving sexual assault of minors. The Supreme Court held that it did, but nonetheless said the Superior Court reached the correct result in determining that public policy precluded the carrier from having any duty to defend or indemnify.

Minnesota Fire and Casualty Co. vs. Greenfield, No. 68 MAP 2003 (Pa. 08/19/2004) 2004.PA.0003203 (www.versuslaw.com).

Sewer-backup exclusion applies to more than just water damage

Raw sewage from a sewer backup flowed into the basement of a California tailor shop, causing property damage. The incident resulted from a presumed break in a sewer pipe about 20 to 25 feet from the basement. Solid matter collected at the point of the break, causing a blockage. Pressure from the resulting sewage backup caused a plastic cap on a clean-out pipe in the basement to fail. The shop's insurer declined to pay for the damages, citing, among other things, an exclusion for "water that backs up from a sewer or drain." The shop sued the insurer.

The exclusion notwithstanding, the trial court concluded the loss was covered because it resulted from a discharge of the "pollutants" in the sewer water rather than from the water itself. While the insured's commercial property policy had a special causes of loss form containing a pollution exclusion, the exclusion had an exception for "specified causes of loss." One of those causes was the "accidental discharge or leakage of water or steam as the direct result of the breaking or cracking of any part of a system or appliance containing water or steam." The trial court decided the sewer-pipe break and the failure of the clean-out cap constituted accidental breaks in the sewer system, causing a discharge of water-and pollutants. The insurer appealed.

The appeals court said it would not expect water in a sewer to be free from waste, contaminants and other noxious substances commonly referred to as sewage. A layperson reading the policy would assume that water backed up from a sewer would contain both water and contaminants, the court said.

The tailor shop also argued that the loss was covered notwithstanding the sewer-backup exclusion because the "efficient proximate cause" of the loss was the breaking or cracking of a system carrying water, a covered risk. Under the efficient proximate cause theory, a loss caused by combined covered and excluded risks is covered if the covered risk is the efficient, or predominating, proximate cause of the loss.

The appeals court held that the efficient proximate cause theory did not apply, however, because neither of the perils could have caused the loss independently. The clean-out cap would not have failed, the court said, without the pressure from the clogged sewer pipe.

The tailor shop also argued that the words "backs up" in the exclusion applies to water that moves in a reverse direction. It said there was no evidence the water reversed its flow, so a loss caused by an overflow from water backed up in a sewer line is covered. The appeals court disagreed, stating the dictionary definition of "back up" was "to accumulate in a congested state." The term also means "to rise and flow backward or overflow adjacent areas" such as "water checked by an obstruction." These definitions accurately described what happened in this case, the court said.

The tailor shop also argued that the sewer-backup exclusion didn't apply because the term "sewer" referred only to the public part of a sewer line. The shop said the part of the line that was within its premises was part of the insured's plumbing system. However, the appellate court found no policy language that qualified the term "sewer" by dividing it into parts, and hence no evidence that the sewer-backup exclusion should be so construed.

The appellate court reversed the trial court and held that the sewer-backup exclusion encompasses loss or damage caused by sewage and pollutants contained in sewer water. Therefore the loss was excluded.

Penn-America Insurance Co. vs. Mike's Tailoring, No. C046333 (Cal. App. Dist.3 01/11/2005) 2005.CA. 0000258 (www.versuslaw.com).

Agent-client relationships have limits

An antique business was covered by an insurance policy that excluded coverage for "flooding and rising water." In June 2001, during a tropical storm, the business suffered extensive water damage to its contents and inventory. The insured submitted a claim, which the insurer ultimately denied, based on the recommendation of an independent adjuster. The insured then sued the insurer, the adjuster and its agency. The insured's petition asserted claims for breach of contract, violations of the Deceptive Trade Practices Act, negligence and breach of fiduciary duty. The insured settled with the insurer and adjuster, and then proceeded against the agency. After a trial court ruled in favor of the agency, the insured appealed.

In regard to the breach of contract claim, the agency contended there was no enforceable contract between it and the insured, and that the only contract in this case was the one between the insured and the carrier. The insurance policy showed the agency was not a party to the contract. Nor did the court find other evidence of a contract between the agency and insured. Therefore, on this issue, the court granted summary judgment to the agency, and the appeals court upheld the decision.

The insured also alleged the agency was negligent for:

1) Failing to cover the insured's inventory and contents, while representing to the insured for many years that they were covered.

2) Not advising the insured either that such additional coverages were available at extra cost, or that they were not available but that the insured could self-insure them.

3) Representing that the insured had such coverage for the inventory and contents when the agent knew or should have known that the insured didn't have coverages for foreseeable and foreseen occurrences like the storm that damaged the insured's property.

The appeals court said that under Texas law, an agent owes the following common-law duties to a client when procuring insurance: 1) to use reasonable diligence in attempting to place the requested insurance, and 2) to inform the client promptly if unable to do so. The agent has no legal duty, the court said, to extend insurance protection to a customer merely because the agent knows of the customer's need for additional insurance, especially in the absence of evidence of prior dealings in which the agent customarily has taken care of the customer's needs without consulting him.

The appeals court said the negligence claim was based on the allegation that the agent had a duty to inform the insured that damages to the building contents caused by rain were not covered unless a covered loss led to the damage of the building. The agency's motion for summary judgment alleged it owed no duty to explain the terms of the insurance policy to the insured or to advise him on other, alternative policy coverages. In his deposition, the insured testified that no one at the agency misrepresented to him that the contents of his building would be covered under the circumstances that transpired.

The appeals court said that the insured was never "led wrongly to believe that (his) policy provided protection against a particular risk that was in fact excluded." There was "no evidence that (the agency) had customarily taken care of (the insured's) insurance needs without first consulting him." The higher court continued, "The fact that the policy did not cover the contents of his building in the event of rain damage, as (the insured) believed it would, is no evidence that (the agency) breached its duties to (the insured)."

Citing another case, the appeals court said, "If a breach of due care can be proved without a more concrete showing than a subsequent failure of coverage, agents would be rendered 'blanket insurers.'" The court ruled that the trial court had properly concluded that the agency had not negligently breached the common-law duties it owed the insured.

In regard to the agency's alleged violation of the Deceptive Trade Practices Act, the court cited an earlier case: "In the absence of some specific misrepresentation by the insurer or agent about the insurance, a policyholder's mistaken belief about the scope or availability of coverage is not generally actionable under the DTPA." [Sledge vs. Mullin, 927 S.W.2d 89, 94 (Tex. App.-Fort Worth 1996, no writ.)] For the same reason, the court added, a claim based solely on mistaken belief would fail under the state's insurance code.

The appeals court next turned to the fraud allegation. The insured claimed the agency fraudulently represented that the plaintiff's inventory and property was insured in its condition above for "all risks" except for flood or rising water and employee theft.

To prove a fraud claim, the court noted, a plaintiff must show that (1) the defendant made a representation to the plaintiff; (2) the representation was material; (3) the representation was false; (4) when the defendant made the representation, it knew the representation was false or made the representation recklessly, as a positive assertion, and without knowledge of its truth; (5) the defendant made the representation with the intent that the plaintiff act on it; (6) the plaintiff relied on the representation; and (7) the representation caused the plaintiff injury.

In the trial court, the agency denied making a material misrepresentation. In support, it attached the insured's deposition testimony in which he admitted that no one at the agency had lied or made a misrepresentation to him. Therefore, the appeals court affirmed, the agency met the necessary burden of proof to defeat the fraud claim.

The insured also alleged breach of fiduciary duty, claiming it enjoyed a special relationship with the insurance agency and that the agent had fiduciary duties as well as duties of trust and loyalty to the insured.

In its motion for summary judgment, the agent contended that it had no "special relationship" with the insured. The appeals court agreed for two reasons:

"First, an insurance carrier owes its insured the duty of good faith and fair dealing because the contract between them is the result of unequal bargaining power and, by its nature, allows unscrupulous insurers to take advantage of their insureds. However, the 'special relationship' created does not extend to those who are not parties to the insurance contract."

Second, the appeals court said, there was no evidence of a contract giving rise to a special relationship. Even though there was a long-standing relationship between the agency and the insured, "there is no evidence in the record to warrant the extension of (the agency's) duties beyond that of any other insurance agent."

The appeals court affirmed the trial court's ruling dismissing all charges against the agency.

Choucroun vs. Sol L. Wisenberg Insurance Agency-Life & Health Division, Inc., No. 01-03-00637-CV (Tex. App. Dist.1 12/09/2004) 2004.TX. 0009119 (www.versuslaw.com).

Readers can get in touch with Don Renau via e-mail at drenau@thepoint.com.