The last two years have seen a number of significant property insurance coverage decisions issued by courts throughout the United States. These opinions have addressed numerous issues that will likely be relevant in the analysis of first party property coverage decisions in the future, including the oft-discussed wind/flood distinction, consequential damages, ensuing loss, and the impact of a policyholder’s non-cooperation following a theft loss. Notably, the New York and California state courts have issued some influential opinions, while some Federal District Court opinions may prove to be persuasive and influential. This article will provide, in no particular order, a summary and discussion of these cases.
Northrop Grumman v. Factory Mut. Ins. Co., 538 F.3d 1090 (9th Cir. 2008), opinion amended, 2009 WL 861475 (9th Cir. Apr. 2, 2009)—This matter concerned a policyholder’s claim that a standard flood exclusion in an excess commercial policy did not apply to losses caused by storm surges related to Hurricane Katrina. The policyholder specifically contended that while the primary policy at issue stated that the flood exclusion applied “whether [the flooding was] driven by wind or not,” the excess policy lacked such language, thereby creating an ambiguity. In rejecting this argument, the United States Court of Appeals for the Ninth Circuit noted that a storm surge fell within the “ordinary” meaning of the term “flood” as “an overflowing or inundation of water over dry land.” Northrup Grumman, 538 F.3d at 1094. The court further held that the omission of the phrase “whether driven by wind or not” did not render the flood exclusion ambiguous, as the failure to include this phrase is “more indicative of a lack of specificity on [the insurer’s] part than an omission evidencing its intent to narrow its exclusion.” Id. at 1097. Accordingly, the Ninth Circuit reversed the trial court’s decision granting summary judgment in the policyholder’s favor.
Major v. Western Home Ins. Co., 169 Cal. App. 4th 1197, 87 Cal. Rptr. 3d 556 (4th Dist. 2009)—In this opinion affirming a punitive damages award in a bad faith case, a California appellate court analyzed whether the insurer could be held liable for such damages for the conduct of an independent claims adjuster, under the terms of a state statute providing that a corporation cannot be held liable for punitive damages for the conduct of an employee unless the conduct was authorized by a managing agent. In holding that the independent claims adjuster could be deemed a “managing agent” for purposes of the punitive damages statute, the court emphasized the fact that the adjuster exercised “substantial discretionary authority” with regard to the claims handling decision, with no day-to-day oversight exercised by the insurer. Major, 87 Cal. Rptr. 3d at 576.
Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York, 10 N.Y.3d 187, 886 N.E.2d 127, 856 N.Y.S.2d 505 (2008)—In this case, the New York Court of Appeals examined whether a policyholder could recover consequential damages for an insurer’s purported bad faith handling of a claim under a commercial business interruptions policy, which allegedly resulted in the collapse of the policyholder’s business. The trial court and intermediate appellate court held that the insurer was not liable for such damages, given a policy provision which excluded coverage for “consequential losses.”
In reversing the trial court’s order granting summary judgment to the insurer on such grounds, the Court of Appeals emphasized that “[t]he purpose served by business interruption coverage cannot be clearer—to ensure that [the policyholder] had the financial support necessary to sustain its business operation in the event disaster occurred.”
Bi-Economy, 886 N.E.2d at 131, 856 N.Y.S.2d at 509. Therefore, the court concluded that “the very purpose of business interpretation coverage would have made [the insurer] aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to [the policyholder] for the loss of its business as a result of the breach.”
Bi-Economy, 886 N.E.2d at 132, 856 N.Y.S.2d at 510. The court further held that the policy exclusion for “consequential losses” did not apply, as these losses “clearly refer to delay caused by third-party actors or by the ‘[s]uspension, lapse or cancellation of any license, lease or contract,’” rather than those “additional damages caused by an insurer’s injurious conduct.” Id. (quoting policy language).
The court therefore concluded that the policyholder should be allowed to pursue a claim of consequential damages, as such a claim “was reasonably foreseeable and contemplated by the parties.” Bi-Economy, 886 N.E.2d at 133, 856 N.Y.S.2d at 511.
Seaport Park Condominium v. Greater New York Mut. Ins. Co., 828 N.Y.S.2d 381 (A.D. 1 Dep’t 2007)—This case arose from an insurance claim for damage to a condominium building’s cooling tower. After the loss was reported, the property insurer retained an independent adjuster, who in turn retained an expert to examine the cooling tower and determine whether the damage was a covered loss. An initial inspection took place, which was attended by representatives of the policyholder as well as a representative from the company hired by the policyholder to replace the cooling tower. Following the inspection, the expert determined that a more detailed examination of the cooling tower was required. Accordingly, the parties attending the inspection agreed that the cooling tower would be removed and preserved for further inspection. However, the cooling tower was subsequently destroyed, resulting in the denial of the claim. The policyholder brought suit against the insurer with regard to the claim. The trial court denied the insurer’s motion to dismiss, concluding that an issue of fact existed as to whether the company retained to replace the cooling tower was contractually obligated to preserve the tower for further inspection.
In reversing the trial court’s decision, the Appellate Division of the New York Supreme Court held that the issue of whether this contractual obligation existed was irrelevant. Rather, the court emphasized that the insurance policy at issue contained language clearly obligating the policyholder to preserve damaged property if feasible and make it available for further inspection. As the policyholder had agreed to preserve the damaged cooling tower for further inspection, the court held that the disposal of the tower warranted denial of coverage.
Latha Restaurant Corp. v. Tower Ins. Corp., 831 N.Y.S.2d 411 (A.D. 1 Dep’t 2007)—In this opinion, the Appellate Division of the New York Supreme Court affirmed the trial court’s order granting summary judgment in an insurer’s favor and dismissing a commercial policyholder’s breach of contract action. The court’s determination was primarily based upon the fact that the policyholder’s “proof of loss statement included duplicative items, items in which it demonstrably had no insurable interest and a representation of loss attributable to…an expense it later admitted it never incurred.”
Latha, 831 N.Y.S.2d at 412. The court held that such an “overvaluation of insured property” created a “presumption of fraud” which “becomes conclusive where, as here, the insurer demonstrates that the difference between the amounts claimed in the proof of loss and the losses actually shown to have been sustained are grossly disparate and without reasonable explanation.” Id.
Most notably, the court held that the policyholder’s “attempt to attribute the gross disparity here at issue solely to its public adjuster is unavailing under agency principles,” as “the adjuster was acting within the scope of [the policyholder’s] authority when he submitted the claims,” and the “plaintiff signed the sworn proof of loss.” Latha, 831 N.Y.S.2d at 412.
Feinbloom v. American Intern. Ins. Co., Docket No. 276928, 2008 WL 1836563 (Mich. Ct. App. Apr. 24, 2008)—In this matter, the Michigan Court of Appeals analyzed the scope of a standard homeowners mold exclusion providing that no coverage under the policy would be provided for “‘any loss caused by rust, mold, rot, gradual deterioration or warping’” but established that coverage would be provided for “ensuing covered loss unless another exclusion applies.” Feinbloom, 2008 WL 1836563 at *2 (quoting policy language). The plaintiff policyholders contended that such language should be interpreted to provide coverage for mold that resulted from a covered loss: in the plaintiffs’ case, water damage following a flood.
The court held that such language is “clear and unambiguous” and “unequivocally states that all losses due to mold are excluded from coverage under the policy.” Feinbloom, 2008 WL 1836563 at *2. The court rejected the policyholders’ contention that such an interpretation of the policy would render the language providing coverage for “ensuing covered loss” meaningless. The court explained that, while the policy language established that mold damage was always excluded from coverage, the “ensuing covered loss” provision establishes coverage for other damage that may occur as a consequence of the mold, as long as such damage would not fall within another exclusionary clause. Accordingly, the court affirmed the trial court’s decision to grant judgment as a matter of law in the insurer’s favor.
Eckstein v. Cincinnati Ins. Co., Civ. Act. No. 5:05CV-043-M, 2007 WL 2894049 (W.D. Ky. Sep. 27, 2007)—In this case, the United States District Court for the Western District of Kentucky analyzed whether standard “ensuing loss” language in an exclusionary provision could be interpreted to provide coverage when the damage at issue is a covered loss but is nevertheless the result of an excluded risk. Although the court’s opinion does not cite the precise policy language at issue, such language likely mirrored policy language of cases cited in the opinion, excluding coverage for “[e]rrors in design, errors in processing, faulty workmanship or faulty materials, unless loss or damage from an insured Peril ensues and then only for such ensuing loss or damage.” Eckstein, 2007 WL 2894049, at *2 (citations and internal quotations omitted).
In requesting that the trial court reconsider its prior decision denying the defendant insurers’ motion for summary judgment on the coverage issues, the defendants contended that under such policy language, coverage for an “ensuing loss” would be provided only if the ensuing loss were the result of an intervening occurrence that occurred separately from the insured risk. Relying upon Sixth Circuit precedent, the court held that the policy language at issue was capable of more than one reasonable interpretation, including the interpretation that such language provides coverage for ensuing losses resulting from excluded risks. Accordingly, the trial court declined to reconsider its prior decision.
Savage v. American Family Ins. Co., 178 Ohio App. 3d 154, 897 N.E.2d 195 (10 Dist. 2008)—In this matter, an Ohio appellate court examined whether a trial court properly granted summary judgment in an insurer’s favor in a lawsuit arising from the insurer’s failure to pay a claim for theft of personal property. Although the insurer had not denied the claim at the time the lawsuit was filed, it had not issued payment due to the policyholders’ failure to produce tax returns that the insurer requested. This request was made in order to ascertain whether the policyholders could reasonably have acquired certain property in the years after the policyholders filed for bankruptcy.
Applying a standard cooperation clause that required the policyholders to “provide [the insurer] with documents [it] requests,” the Ohio Court of Appeals held that the insurer had no obligation to pay the claim until the policyholders had satisfied the condition precedent of providing the tax returns. Accordingly, the court affirmed the decision to grant summary judgment in the defendant insurer’s favor.
City of Hollister v. Monterey Ins. Co., 165 Cal. App. 4th 455, 81 Cal. Rptr. 3d 72 (6th Dist. 2008)—In this case, a California appellate court affirmed a trial court’s decision granting a declaratory judgment that a property insurer was estopped from relying upon a coverage provision requiring the policyholder to enter into a contract for the repair or replacement of the insured building within 180 days in order to receive coverage for the full replacement cost of the building. The court held that the trial court correctly based such a decision upon the determination that the insurer had improperly delayed its investigation and threatened to deny coverage, thereby rendering it “practically impossible, or at least unreasonably difficult,” for the policyholder to enter into a repair contract during the required period of time, given the risk that the policyholder could be liable for repairs that were not covered by the insurer. Hollister, 81 Cal. Rptr. 3d at 108.
Sher v. Lafayette Ins. Co., 988 So. 2d 186 (La. 2008)—In this matter arising from the extensive flooding in New Orleans following Hurricane Katrina, the Louisiana Supreme Court addressed whether a standard flood exclusion in a commercial property insurance policy could be deemed ambiguous and, therefore, construed in favor of the policyholder. In finding that the flood exclusion was ambiguous, an intermediate court held that the policy language failed to clarify whether the exclusion applied only to natural disasters or to both natural disasters and man-made events. In rejecting this conclusion, the Louisiana Supreme Court observed that “[t]he plain, ordinary and generally prevailing meaning of the word ‘flood’ is the overflow of a body of water causing a large amount of water to cover an area that is usually dry.” Sher, 988 So. 2d at 194. The court further noted that “this definition does not change or depend on whether the event is a natural disaster or a man-made one.” Id. In addition, the court observed that an interpretation of the flood exclusion to apply only to natural occurrences would be “per se unreasonable,” as “there is no indication within the four corners of the insurance contract that the parties intended to use such a restrictive definition of the word ‘flood,’ and because such a definition is not the plain, ordinary and generally prevailing meaning of the word.” Sher, 988 So. 2d at 195. Accordingly, while affirming much of the trial court’s judgment in the policyholder’s favor for breach of contract and bad faith claims handling, the court amended the judgment to eliminate damages for losses attributable to flooding.
Robert T. Horst is a founding partner of Nelson Levine de Luca & Horst, LLC. Mark H. Rosenbergis an associate attorney with Nelson Levine de Luca & Horst, LLC. John J. McHale is a senior supervisorof the Investigative Services Section of Erie Insurance.