Sources of Information Relevant to Trigger Duty to Defend
April 21, 2014
The United States Court of Appeals, Fifth Circuit, ruled last week that even if the report of a third party consultant could be considered, the insurer did not have a duty to defend. The case is Woodward v. Acceptance Indemnity Ins. Co., 2014 WL 1465363, Civ. No. 12-60561, Apr. 15, 2014.
Carl Woodward was contracted for the construction of a condominium project on the Mississippi Gulf Coast, and DCM Corporation was subcontracted by Woodward for the concrete work. DCM obtained a CGL policy from Acceptance Indemnity Insurance Company, which named Woodward as an additional insured. DCM worked on the project from January to October of 2006. The condominiums were completed in August of 2007 and sold that October.
One year later, a cross-claim was filed against Woodward alleging faulty construction and damage arising out of the construction, including the concrete. Woodward and its insurer commenced action against DCM's insurer alleging a breach of the duty to defend under its commercial general liability (CGL) insurance policy.
Under Mississippi law, the duty to defend is triggered when the allegations of a complaint reasonably bring a claim within the coverage of the policy. Whether or not the insurer owed the insured the duty to defend depends upon the plain language of the policy and the allegations in the underlying complaint.
The lower court ruled that Woodward's complaint alleged damages for construction in nonconformance to plans and specifications that arose out of DCM's completed operations. In the petition for rehearing, Woodward did not argue that the complaint itself made the necessary allegations (that the damage arose from DCM's ongoing operations), but relied instead upon the findings in the Rimkus Report, which Woodward argued created uncertainties that must be read in favor of a duty to defend.
Woodward had hired Rimkus to investigate how the concrete work on the balconies allegedly caused water damage to the condominium units. The Rimkus Report contained these findings, which Woodward relied upon on appeal: “DCM failed to comply with the construction drawings and industry standard; this error has created conditions conducive to water intrusion; water intrusion has caused and continues to cause water damage in the exterior walls of the balconies.” According to Woodward, the fact that the Rimkus findings do not indicate when the water damage occurred could suggest that the damage occurred during DCM's ongoing operations.
The court disagreed. It based its holding on recent decisions by the Mississippi Supreme Court, which addressed the interpretation of complaints to trigger an insurer's duty to defend. It also noted that where it had broadened the sources of information relevant for triggering a duty to defend, the new information was uncovered by the insurer's own investigation—not the insured's. Those precedents, said the court, never suggested it give a broad reading to a second set of allegations outside of the complaint.
Editor's Note: The Supreme Court of Mississippi distinguished the Rimkus Report from what the insurer learned from its own investigations. The court seemed to say that it will rely upon outside sources that consider what an insurer actually knows, rather than on “what arguably might be meant by an ambiguous explanation in an investigative report by the claimant.” The court did not go so far as to rule on how liberally an insurer should interpret a claimant's investigative report in deciding whether there is a duty to defend (that determination was unnecessary because the Rimkus Report did not claim the damage occurred from ongoing operations), but the decision might suggest that such reports will be considered with skepticism.