A new case from Oregon deals with a recurring problem in construction defect litigation—the absence of clear dates in the complaint regarding when damage is alleged to have occurred. Frequently, a plaintiff will allege that defects in a construction project have caused property damage to other elements of the project, but the complaint is often silent as to when the damage allegedly began. We have long argued that, since the duty to defend exists if there is any “potential” of covered liability, there is a potential that damage happened before that project was completed, or at any time after completion, triggering all policies in that time frame. This implicates the policies in effect both during the course of operations and after operations are completed. This point is particularly important if some or all of the policies exclude liability falling within the completed operations hazard. This was the situation in Breese Homes, Inc. v. Farmers Insurance Exchange, 353 Or. 112 (2012). There, the court rejected Farmers argument that a claim was excluded by a “products/completed operations hazard” exclusion unless the insured could produce facts showing that damage in fact occurred prior to the completion of the project. The Oregon Supreme Court ruled that the duty to defend was governed by the complaint, which clearly encompassed the possibility that damage occurred prior to completion, and that the insured had no burden to establish any additional facts to support that potential.

While Breese involves a simple and straightforward application of established duty to defend law, the case provides helpful authority in countering the specious positions taken by many carriers on this issue.

We hope your business did not sustain any direct property damage.  Even if that’s the case, do not fail to consider that you may have insurance coverage for financial losses caused by the storm.

Continue Reading Superstorm Sandy: Financial Loss May Be Covered Even Without Property Damage

Two seminal New York cases have brought that state, along with potentially many more, into line with California’s position on the recovery of consequential damages.

The effects of Bi-Economy Market v. Harleysville, 886 N. E. 2d 127 (N.Y. 2008) and Panasia Estates v. Hudson Insurance Company, 886 N. E. 2d 134 (N.Y. 2008) are beginning to take shape in New York and beyond. The court in both cases allowed for the recovery of consequential damages for the insurers’ breach of their respective contracts even without bad faith conduct, holding that consequential damages beyond policy proceeds were foreseeable as a matter of law. Courts in many states have taken notice, and at least nine states have followed suit. California courts, however, have long recognized such recovery – the infamous Hadley v. Baxendale rule states that if the damages are within the reasonable expectation of the parties at the time of contracting they are recoverable.

Continue Reading New Developments in the Recoverability of Consequential Damages

At long last, the Supreme Court of California issued its opinion in State of California v. Continental Insurance Company (we have previously blogged about this important case here and here).  The Court’s unanimous opinion is a resounding win for policyholders and re-affirms California’s adherence to the “all sums” allocation method and, importantly, approves of the “stacking” of insurance policies in long-tail claims.

Continue Reading California Supreme Court Affirms “All Sums” Allocation and Policy Limits Stacking

Despite the financial and economic turmoil of the last several years – both nationally and globally – the insurance market has remained remarkably stable.  There have been surprisingly few insurance company failures, and premiums have remained at worst flat, and in most cases have seen year on year decreases.

As explained in a prior article I wrote, the soft market was largely the result of long term excess capacity in the market place – meaning insurers had to compete hard against each other to get clients’ business.  Another factor was the reinsurance market – the mechanism by which insurance companies insure the risks they take on and spread risk to a much wider pool.  For a number of years reinsurers have enjoyed relatively easy years, and have seen relatively few major catastrophic losses.

Continue Reading A Look at Pricing Trends in the Insurance and Reinsurance Industries

Even when carriers agree to defend an insured, policyholders and carriers can still get locked into disputes about who will provide such a defense.  Policyholders often want to choose their own counsel while a carrier has its own idea about who should defend the case.  The dispute in Travelers Property v. Centex Homes, C10-02757 (N.D. Cal. April 1, 2011) illustrates this problem and shows how a dispute over defense counsel can potentially lead the carrier to argue that the policyholder has breached its duty to cooperate and that such a breach relieves the carrier of both its duty to defend and indemnify under the policy.    

Continue Reading Harsh Result In Dispute Over Appointed Counsel

The California Supreme Court recently issued a decision in Century-National Ins. Co. v. Jesus Garcia, No. S179252, holding that California Insurance Code section 533, which bars coverage for intentional conduct, does not apply to coverage for innocent co-insureds.  The Court examined this issue in the context of a fire insurance policy.  The insureds, Jesus and Theodora Garcia, suffered substantial property damage to their home when their adult son – who was also an insured under the policy – set fire to his bedroom.  Century-National denied coverage for the Garcias’ claim citing the policy’s exclusion for claims based on the intentional acts or criminal conduct of “any insured.”  The trial court agreed and granted Century-National’s demurrer on the grounds that 1) the Century-National policy defined the term “any insured,” to include relatives of the insured who lived at the insured property; 2) courts generally interpret policy exclusions for intentional or criminal acts to exclude coverage for innocent co-insureds; and 3) Insurance Code section 533 expressly sets forth California’s public policy of denying coverage for willful wrongs. Continue Reading Section 533 Does Not Bar Coverage for Innocent Co-Insureds

How much of a typical large property claim (property, builders risk, business interruption, and extra expense losses in excess of $5,000,000) actually gets paid by insurance, and how long does it take to settle a large claim with an insurance company?  After 20 years of consulting on a variety of large property losses, I have my own ideas, but unlike smaller losses, for which statistics are regularly compiled, very little information is publicly available about large property claims.  This is partly because they are relatively infrequent, but primarily because the settlement process tends to be highly confidential and limited to a small set of experts and consultants.

I was recently asked to participate in a survey that attempts to bring more information to light about the large claim process.  The results of the survey confirmed what I have observed myself, that resolving large claims has become more difficult over the past 20 years, multiple claim disputes at various stages within any given claim process are common, insureds often incur expenses they believe are covered by their insurance but are not, and large claims are taking longer to settle.

The recent survey of independent insurance consultants and other insurance experts concluded that property insurance usually pays only about 75% to 85% of the final amount claimed (85% for physical damage, 75% for business interruption and 85% for extra expense), and even these figures are misleadingly high, because they are percentages of the final claim amount which has usually been reduced in earlier stages of the claim process.  The total of all economic damages associated with a large property loss that end up being paid by insurance is only 65% to 75%.

The survey responses also suggested reasons why settling these claims has become more difficult.  These most significant, from my experience, include:

  • There has been an increasing tendency for large projects/properties to be insured by multiple participating insurance companies, each with a seat at the settlement table, often making resolution more difficult;

  • With more insurance companies on a single risk, insurers may rely on outside claim managers with varying and often unclear authority, who add an additional layer of participants into the claim process;

  • Competitive pressures, soft insurance markets, and lower interest rates, have caused insurers to be even more recalcitrant about paying claims;

  • Claim adjusters within insurance companies do not have as much settlement authority as in the past;

  • Insurance companies have cut back on training of claims personnel and compensation has not kept pace with other insurer functional areas, leading to fewer employees with significant large-claim experience.

The survey results also reported that it takes significantly longer to settle large claims than in the past.  Almost a third of physical damage claims were not settled within six months of the property being repaired or replaced, and approximately 10% of physical damage claims took more than a year after repair or replacement to settle.  Business interruption/delayed opening claims were even more difficult to resolve.  According to the survey, 40% were not resolved six months after the end of the interruption or delay period and 14% were still unresolved one year after the end of the interruption/delay.

Regarding coverage disputes, the survey disclosed all sorts of reasons why some portion of the damages were not covered at all or were only partially covered by insurance.  In my experience, these disputes can occur in any of three general stages in the claim process:

1) The first I call the threshold stage, in which the parties seek to come to an agreement about the facts pertaining to the damages sustained, often after consulting outside causation and engineering experts.  Disagreements on causation for the loss can be extremely significant, depending on the policy’s causation exclusions.  The insured must be careful when submitting the claim to anticipate these exclusions.

2)  In the second stage, the insured often requires coverage expertise to determine what damage is covered and what is not.  With physical damage, these determinations are about the extent of the damage, necessary repair, and functional upgrades, as well as the meaning of coverage terms in the policy.  With extra expense, judgment is required to understand abnormal expenses as well as the meaning of policy language, especially when extra expense coverage is limited to amounts reducing the repair or delay period and the resulting business interruption loss.

3)  The business interruption/delay component of large losses are usually resolved well after the physical damage loss and requires further expertise because actual damages cannot be substantiated.  Assuming that there is agreement that there was a period of interruption or delay, the parties often disagree over what performance would have been had there been no loss event, the meaning of various “soft cost” definitions, and whether reasonable steps were taken to avoid or reduce the delay.

Of course, one very important aspect of the claim process should occur well before any loss occurs, when the insurance policy is purchased.  Careful review of coverage proposals and negotiation of coverage terms with an eye toward possible claim disputes is critical and can serve to avoid uncovered losses.

Given that a large property loss is a relatively infrequent occurrence, for most managers such a claim is often a first time experience where lessons are learned the hard way.  A better understanding of the claim process will help improve management practices.  It is not enough to buy property insurance and hope for the best.

Can an insurance company deny coverage to a homeowner who did nothing intentional because another insured under the policy committed a crime or intentional tort?  The California Supreme Court heard argument on this issue last week in Minkler v. Safeco Insurance Co. of America, which involved allegations that a homeowner, Betty Schwartz, negligently failed to stop her adult son, David, who was Minkler’s baseball coach and lived with Betty, from sexually molesting Minkler when he was a teenager.  Continue Reading California Supreme Court To Decide Interplay Between Severability-of-Interests Clause And Intentional Acts Exclusion

A district court in California recently found that an insurer was not liable where its insured sought coverage under its Commercial Umbrella policy for loss it suffered as a result of the manufacture of a defective product.  Ruling in favor of the insurer on partial summary judgment, the Northern District Court held that there was no “property damage” or “loss of use” under the policy where the defective product was incorporated into another product, but did not contaminate or otherwise created a dangerous product and where the resulting product was not wholly unusable.

In Silgan Containers Corp. National Union Fire Insurance Co. of Pittsburgh, PA, Silgan sued its insurer, National Union, for coverage of a claim involving its manufacture of a defective product.  Silgan manufacturers steel and aluminum containers with pull-tabs used as packaging for food products.  In 2004, one of its customers, Del Monte, began receiving complaints that the pull-tab cups were malfunctioning.  Del Monte notified Silgan of the issue and after investigation, Silgan determined that there were various factors involving both design and manufacture contributing to the container defect.  Del Monte then notified Silgan that it would no longer accept its products.  Del Monte disposed of all rejected cups manufactured by Silgan, including cups that had already been filled with fruit by Del Monte and sought to recover over $6.5 million in costs from Silgan. 

Silgan sought coverage for the claim under two insurance policies.  One, a Commercial General Liability policy with Zurich, provided coverage up to $1.5 million in liability after a $250k deductible.  The other, a Commercial Umbrella policy with National Union, provided coverage up to $25 million for certain occurrences that cause property damage.  Zurich eventually accepted coverage of the claim.  National Union, however, denied coverage on the basis that there was no physical injury to the fruit contained in the defective fruit cups, and thus no property damage.  Under the National Union policy “physical injury” is defined as “physical injury to tangible property, including all resulting loss of use to that property” or “loss of use of tangible property that is not physically injured.”
 
Silgan brought suit in district court for coverage of the remaining $4.6 million.  Both parties brought cross-motions for partial summary judgment seeking a determination regarding coverage of the Del Monte claims. 

Silgan argued that the loss of fruit contained within the discarded containers qualified as property damage under the policy.  National Union argued that the loss arose from Silgan’s breach of its contract with Del Monte, not from any physical injury or loss of use.  In support of its argument, Silgan cited to several cases which have held that physical injury occurs where a defective product is physically incorporated into another product and results in rendering the larger product potentially dangerous.   National Union cited to a 2004 California case, F&H Const. v. ITT Hartford Ins. Co. of Midwest, which held that the “mere incorporation of a defective but functioning [product] that might fail in the future [does] not constitute ‘property damage.’”  118 Cal. App. 4th 364 (2004).  The F&H court adopted the plain meaning definition of “physical injury” and stated that it should be interpreted as “damage to tangible property causing an alteration in appearance, shape, color or in other material dimension.”  Silgan alternatively argued that the second definition of “physical injury” involving “loss of use” was applicable.

Applying California law, the district court granted partial summary judgment in favor of National Union.  The court was persuaded by the court’s reasoning in F&H.  Silgan had not argued that there was any physical damage to the fruit, but rather the defect of the cans rendered the fruit unusable.   Further, this was not a case, like those cited by Silgan, where the item incorporated resulted in contamination of the larger product or rendered it otherwise potentially dangerous. 

The court was similarly not persuaded by Silgan’s “loss of use” argument, citing to the ninth circuit’s recent decision in Sony Computer Entertainment America Inc. v. American House Assir. Co.,  which held that where an insured’s defective property did not render the product it was incorporated with wholly unusable, there was no claim for loss of use. 532 F.3d 1007 (2008).  The court found the same circumstances to be present here, where there had been no showing that the fruit within the defective cups was unusable.  Instead Del Monte, in an exercise of its business judgment, had decided against selling or repackaging the fruit. 

The court went on to state that even if coverage applied under the policy’s definition of “property damage,” certain exclusions in the policy would preclude coverage for at least a portion of the claim. 

The Court’s reasoning and holding appear erroneous.  Property damage includes “loss of use” of property, and Del Monte suffered the loss of use of the fruit product even if the fruit itself was not physically injured.  There is no requirement that the other product be “contaminated” or “potentially dangerous.”  Loss of use alone—with no physical damage—is clearly sufficient to constitute “property damage.”  Such claims are potentially subject to the “impaired property” exclusion, but only if the product could be restored to use simply by replacing the insured’s product.  Here, however, simple replacement of the lid alone was clearly not viable and the claim should have been covered. (This requirement of the “impaired property” exclusion was discussed in an earlier blog entry- here.)