February 2015 Dec Page
Article of the Month
The specter of punitive damages has worked to make multi-millionaires of many insurance criminals who convince insurers to settle rather than take a chance on a trial. Insurers pay claims they believe they do not owe because they are fearful of being assessed punitive damages in a bad faith action. The article of the month discusses defenses to the tort of bad faith, which should interest insurers and insureds alike.
See Defenses to the Tort of Bad Faith.
Earth Movement Exclusions
A declaratory judgment action was filed pertaining to coverage for property damage. This case is Essex Ins. Co. v. New Jersey Pan-African Chamber of Commerce & Industry, No. l-2320-08, 2013 WL 4515934 (N.J. Sup. Ct. Aug. 27, 2013)
Bangs owned property on which a condominium was being built. MLB Construction and Consulting, Inc., a general contractor, was hired by Bangs to build the condo. The property on which the condo was being built was adjacent to a building owned by the New Jersey Pan-African Chamber of Commerce & Industry (PACCI).
During the course of the project's excavation, the excavator exposed an area where a section of the PACCI building's wall did not extend down into the earth as far as the adjoining wall of Bangs' building. As a result, the PACCI wall collapsed, ultimately requiring demolition of the entire structure. PACCI filed a lawsuit, alleging that Bangs and MLB negligently dug beneath PACCI's building, removed soil, and undermined the foundation of the building. The lawsuit was turned over to the Essex Insurance Company. Essex initiated a declaratory judgment action seeking a judgment that it had no duty to defend or indemnify Bangs or MLB. The trial court granted summary judgment to the insurer and this appeal followed.
The Superior Court of New Jersey, Appellate Division, noted that the factual record is not in dispute. Rather, the issue on appeal involved the trial court's interpretation of the exclusions contained in the Essex policy upon which the insurer denied coverage. The policy language at issue excluded coverage for damage arising out of movement of land or earth.
The court said that the policy clearly and unambiguously excludes from coverage any losses from movement of land or earth, and the definition of “movement of land or earth” in the policy excludes the excavation activities complained of in the lawsuit. The lawsuit was, in fact, premised upon activities by Bangs and MLB involving the digging, removal, or movement of soil, which in turn caused the PACCI building's wall to collapse.
The court rejected the contention of the insureds that the exclusions at issue in this instance apply only to natural phenomena. The court said that the definition in the policy specifically includes earth movement emanating from, aggravated by, or attributable to any operations performed by or on behalf of any insured. The court ruled that the earth movement exclusion applied and the opinion of the trial court was affirmed.
Editor's Note: The New Jersey appeals court reviewed the policy language and found that the earth movement exclusion unambiguously excluded non-natural earth movement. The court cited case law demonstrating that a large majority of courts interpreting the same policy language hold that earth movement exclusions are not universally interpreted to encompass only naturally occurring earth movement, but rather, such exclusions are interpreted on a case-by-case basis in accordance with the specific exclusionary language.
Direct Physical Loss or Damage
This insurance coverage dispute arises out of a property insurance policy that covered direct physical loss or damage to the insured's property. This case is Gregory Packaging, Inc. v. Travelers Property Cas. Co. of America, Civ. No. 2:12-cv-04418, 2014 WL 6675934 (D. N. J. Nov. 25, 2014).
Gregory Packaging, a New Jersey firm, makes and sells juice cups and purchased a new juice packaging facility in Georgia. It bought a property policy from Travelers that applied to direct physical loss or damage to covered property caused by or resulting from a covered cause of loss.
Gregory needed to install machinery and equipment in its new building. It installed a refrigeration system at the facility that used anhydrous ammonia as its refrigerant. During the start-up process, ammonia was released from the refrigeration system into the facility. The ammonia severely burned an employee who was working at or near the site of the discharge. In addition, the facility was evacuated after the release. The building had to be remediated and this process took some time.
The insured filed a claim and the insurer denied coverage. The insured filed this action alleging that the ammonia release resulted in the loss of property and an interruption of business that qualified for coverage under its property policy with Travelers. The insurer countered that Gregory Packaging did not suffer physical loss or damage and so, there was no coverage.
The United States District Court, New Jersey, noted that Gregory Packaging moved for partial summary judgment on the sole issue of whether it incurred direct physical loss or damage to its property. The insured argued that an explosion occurred and this made the ammonia refrigeration system inoperable and rendered the plant uninhabitable, thus inflicting direct physical loss of and damage to its property. The insurer said that a physical loss necessarily involves a physical change or alteration to insured property requiring its repair or replacement, and the insured's inability to use the plant as it might have hoped or expected did not constitute direct physical loss or damage.
The court said that there is no genuine dispute that the ammonia release rendered the facility physically unfit for normal human occupancy or continued use until the ammonia was sufficiently dissipated. Moreover, the insured put forth substantial evidence that the ammonia discharge physically incapacitated the facility. The insurer did not put forth any contradictory evidence. The court then reviewed New Jersey law and Georgia law for any applicability in this dispute.
New Jersey courts have found that property can sustain physical loss or damage without experiencing structural alteration. Therefore, under New Jersey law, the district court found that the ammonia discharge was a direct physical loss because the ammonia physically rendered the facility unusable for a period of time. Under Georgia law, the courts there have held that direct physical loss or damage occurs when there is an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so. The district court found that Georgia law would thus also find a direct physical loss in this instance.
Based on its review of New Jersey and Georgia precedents, the U.S. District Court granted partial summary judgment to Gregory Packaging. However, the court also said that, regardless of the fact that Gregory Packaging suffered a direct physical loss, the insured still had to prove that the damage was caused by or resulted from a covered cause of loss.
Editor's Note: The U.S. Direct Court analyzed New Jersey law and Georgia law and other jurisdictions to find that courts considering non-structural property damage claims have found that buildings rendered uninhabitable by dangerous gases or bacteria did suffer direct physical loss or damage. Property can be physically damaged then without undergoing structural alteration when the property loses its essential functionality.
Meaning of Residence Premises
The insureds under a homeowners policy brought an action against the insurer alleging that the insurer wrongfully denied a claim for coverage of fire damage to the insured house. This case is Schuchman v. State Auto Property and Cas. Ins. Co., 733 F.3d 231 (7th Cir. 2013).
Schuchman purchased a parcel of land and when she bought this, a single house was situated on the southern end of the property. Ms. Schuchman moved into this house after the purchase. Later on, she moved two mobile homes onto her property. The house was assigned the mailing address of “109 West 14th Street”; one of the mobile homes was assigned the address of “1406 Madison Avenue”; the other mobile home was assigned the address “1408 Madison Avenue”. However, the entire contiguous tract of land is identified by a single Property Index Number and Schuchman pays property taxes based on the parcel as a whole.
Schuchman applied for a homeowners policy, listing the mailing address as 1408 Madison Avenue and the location of the property to be insured as 109 West 14th Street. State Auto Insurance issued the policy. Sometime before 2004, Schuchman and her husband moved two more mobile homes onto the property and moved from the West 14th Street house into these new mobile homes. They purchased a separate policy from a company other than State Auto to insure the trailers.
In 2010, a fire broke out at the 109 West 14th Street house, severely damaging the building and its contents. The insureds filed a claim with the insurer. State Auto agreed to pay for the damaged contents but denied coverage for the house on the basis that the home at 109 West 14th Street was not being used as the residence premises as that term is defined in the policy. The Schuchmans sued State Auto. The U.S. District Court granted summary judgment to the insurer and this appeal followed.
The United States Court of Appeals, Seventh Circuit, noted that the case turned on whether the Schuchmans resided on the residence premises (as defined) at the time of the fire. The parties involved in this case agreed that the insureds had to reside on the residence premises in order for coverage under the policy to be effective; and, they also agreed that the Schuchmans were not residing at the West 14th Street house at the time of the fire, but in one of the mobile homes. So, the critical question for the court was whether “residence premises” encompassed the mobile homes; if so, the insureds were residing on the residence premises and the fire damage to the house is covered by the State Auto policy.
The policy defined residence premises as the dwelling where the named insured resides or that part of any other building where the named insured resides and which is shown as the residence premises in the declarations. It also includes other structures and grounds at that location. The Circuit Court interpreted this to mean that the residence premises was not a building, but a location on which there may be multiple buildings, and that the insured may reside in any such building. Therefore, the court concluded, the residence premises in this case consists of the insured house and any other structures located at 109 West 14th Street.
The question then arose as to what other structures were within the location defined by 109 West 14th Street. The insureds contended that the address comprises the entirety of the single undivided and contiguous plot of land. The insurer countered that the mobile homes could not have been located on the West 14th Street premises because the insureds lived in a mobile home with the mailing address of 1408 Madison Avenue. The court said that the implicit premise of the insurer's argument is that the location defined by one mailing address cannot include within it a structure that has another mailing address, but the insurer offers no authority for this proposition. The court decided that a mailing address is ill-suited to the role of defining property lines, that is, the assignment of multiple postal addresses to structures on the same property did not and could not divide the parcel of land into separate lots as State Auto maintains.
Furthermore, the court said, the policy did not use a legal description of the property that clearly described the metes and bounds of the residence premises and this made the definition of residence premises ambiguous. If the policy had defined the premises by reference to a specific lot, this ambiguity could have been avoided, but that was not the case.
The court ruled that the Schuchmans were entitled to coverage for the fire damage to the 109 West 14th Street house. The opinion of the district court was reversed.
Editor's Note: The U.S. Circuit Court rules that the policy definition of residence premises in the homeowners policy was ambiguous, and that the claim by the insurer that a mailing address can be used to clearly differentiate the insured residence from another structure on the same property is not acceptable.
Sewer and Drain Backup Exclusion
The insured brought a class action lawsuit against the property insurer for breach of contract, bad faith, and fraud. This case is Porter v. Oklahoma Farm Bureau Mut. Ins. Co., 330 P.3d 511 (OK 2014).
In 2009, sewage entered into and damaged the home of Justin and Brandy Porter. The Porters sent the claim to their insurer, Oklahoma Farm Bureau Mutual. The insurer denied coverage and the insureds sued. The district court ruled in favor of the insurance company and the insureds appealed.
The Supreme Court of Oklahoma said that the issue before it was whether the district court erred in its ruling. The court said that the resolution of the issue turned on two questions: whether the homeowners policy is ambiguous when the policy covers loss to personal property caused by accidental discharge or overflow of water from within a plumbing system and then excludes coverage for loss to property resulting directly or indirectly from water that backs up through sewers or drains; then, if the policy is ambiguous, does the doctrine of reasonable expectations require the ambiguity to be construed in favor of coverage.
The insureds argued that a reasonable person reading the two provisions would find that the policy simultaneously includes and excludes coverage for raw sewage damage, and that the sewer or drain backup exclusion nullifies the term “overflow” in the accidental discharge coverage provision because the only means of ingress and egress in a plumbing system are through drains and sewers. The Porters claimed that the only way to reconcile the accidental discharge coverage provision with the sewer or drain backup exclusion is to limit the exclusion such that loss resulting from water that backs up through sewers and drains is excluded from coverage unless the water is discharged or overflows from within the covered plumbing system. The court rejected this contention.
The state Supreme Court said that the two provisions must be read together when the policy clearly and unambiguously provides distinct coverage for real and personal property. The court also rejected the insureds' argument that a plumbing system can overflow only through drains and sewers, holding that overflows can also occur through appliances. The court did not find the policy provisions ambiguous.
The insureds claimed that the existence of cases in which other jurisdictions interpreted similar policy language and found coverage for loss caused by sewer or drain backup proves that reasonable minds could find conflicting interpretations of the policy and so, the policy must be ambiguous. The court said that the mere existence of a split in authority does not render the policy provisions ambiguous.
The court ruled that the sewer or drain backup exclusion does not conflict with the accidental discharge coverage provision to create an ambiguity to be resolved in favor of coverage. Thus, this part of the district court's opinion was affirmed. However, the court was not finished.
The court stated that it cannot complete the analysis and determine if the loss is actually covered because the record lacks a key fact, namely the source of the loss. Did the loss stem from the plumbing system or the sewer? If from the plumbing system, the policy did provide coverage for loss to the real property. On the other hand, if the source was the sewer line, the loss to the insureds' real property is excluded. Thus, the court remanded to the district court to determine the source of the damage, specifically whether the source was the plumbing system or the sewer line.
Editor's Note: The Supreme Court of Oklahoma rules that the policy exclusion for sewer and drain backups did not create an ambiguity by nullifying coverage provisions. The fact that other jurisdictions disagreed with the court's interpretation did not create an ambiguity in the provisions for this court.