The Insurance Services Office (ISO) has released a report from the National Equipment Register (NER) providing information on equipment theft in 2005. That report states that nearly 40 percent of all construction and agricultural equipment theft occurred in just five states: Texas; California; Florida; Missouri; and South Carolina . The study by NER noted that most equipment was stolen from nonowner premises or work-site locations (more than 70 percent, with less than 30 percent being stolen from the insured's premises).

The NER study found that theft was by far the most frequent risk to construction and agricultural equipment, compared with other risks such as fire, collision, vandalism, and water damage. And, the top four brands of equipment reported stolen to NER in 2005 were Caterpillar, Bobcat, John Deere, and Kubota.

NER based this report on its database of over 77,000 theft reports and ISO data. More information about NER is available at www.NERusa.com.

Defective Workmanship Is Not an Occurrence

An Iowa appeals court has ruled in a case pertaining to a claim based on defective work that the insured's general liability policy did not provide coverage or defense to the insured. This decision adheres to the state supreme court's ruling that Iowa follows the majority rule that defective workmanship, standing alone and resulting in damages only to the work product itself, is not an occurrence. This case is Continental Western Insurance Company v. Jerry's Homes, Inc., 2006 WL 228917 (Iowa App.).

In this case, Jerry's was the general contractor for Bent Tree Villas and hired independent subcontractors to do the building, excavating, designing, and engineering. Some time after the work was completed, the concrete streets, curbs, driveways, and sidewalks in the development began cracking. Bent Tree sued Jerry's, alleging breach of warranty, negligence, breach of fiduciary duty, and breach of contract. Jerry's tendered its defense to Continental Western. The insurer petitioned for summary judgment that it had no duty to defend or indemnify the insured because the complaint was based on defective workmanship, and defective workmanship is not an occurrence under the general liability policy. The district court granted the insurer's motion and Jerry's appealed.

The appeals court noted that Bent Tree alleged that defective workmanship was the proximate cause of the damage. And, based on this, the insurer argued it was entitled to summary judgment since defective work itself, regardless of who performs the work, is not an occurrence that is covered under a general liability policy. The court then noted the state supreme court ruling to that effect, and added that to rule otherwise would make the general liability policy more like a performance bond and make the insurer more like the guarantor of the insured's work. Furthermore, the court found no facts in the case to indicate that the insurer had a duty to cover the claim, even though the insured said that the damage could have been caused by a variety of things besides defective work. The decision of the trial court was affirmed.

Advertising Injury Coverage Depends on Actual Advertising Injury Offense

The insured was sued based on a claim of false advertising. After the insurer denied coverage, the insured filed a lawsuit against the insurer, and this case came before the district court on cross motions for summary judgment. The case is Acme United Corporation v. St. Paul Fire and Marine Insurance Company, Slip Copy, 2006 WL 297728 (W.D. Wis.).

The insured was one of the largest manufacturers of scissors and paper trimming products in the world. A primary competitor in the scissors industry filed a lawsuit against Acme based on false advertising, and claimed that Acme's false advertising was intended to divert trade away from the competitor. Acme turned the lawsuit over to St. Paul which denied coverage, stating that, while false advertising was alleged, the allegations did not involve an advertising injury offense. The insurer stated that in order for coverage to apply, Acme had to prove that allegations of advertising injury were caused by an advertising injury offense, which in this particular case would be written or spoken material made known to any person or organization that disparaged the competitor's product. This item was not part of the complaint against the insured.

The court noted that the competitor alleged that the advertisement stated that the insured's scissors were sharper and more durable than stainless steel, which is what the competitor used to make its scissors. The competitor said that this discredited its product. The court then looked to the insurance policy language and found that the definition of advertising injury was as follows: making known to any person or organization covered material that disparages the business, premises, products, services, work, or completed work of others. So, to the court, the issue became whether a disparaging advertisement had to identify a specific product brand or name a specific manufacturer in order to constitute an advertising injury offense.

The ads did disparage stainless steel scissors and trimmers. However, the court said, the ads did not constitute an advertising injury offense because, although they disparage a product, they did not disparage the business, premises, products, services, work, or completed work of others. The court stated that the one reasonable reading of the policy's definition of advertising injury offense was that the ads had to name another brand. For an ad to disparage the product of another entity, that product had to be identified as a product of the other entity. This was not the case with Acme's ads since the competitor's scissors and trimmers were not specifically named.

In summary, the court held that Acme did not even come close to identifying the competitor in its ads; only a category of products were identified. Therefore, since the ads did not disparage the competitor's product specifically, the definition of advertising injury offense in the insurance policy was not met, and the insurer had no duty to defend the insured. The insurer's motion for summary judgment was granted.

Pollution Exclusion Ruling in Texas

The insured brought an action against its insurer to recover the costs of defending a lawsuit based on injuries caused by exposure to chemicals. The chemicals escaped during transport by the insured. The district court entered judgment for the insurer, saying that the pollution exclusion applied. The insured then appealed. This case is Urethane International Products v. Mid-Continent Casualty Company, 2006 WL 242459 (Tex.App. Waco ). (Note that this opinion has not been released for publication in the permanent law reports and until it is, the opinion is subject to revision or withdrawal.)

In the underlying lawsuit, the Turners suffered personal injury and property damage while driving in Louisiana because of exposure to a chemical, MDI, that was being hauled on a truck in containers provided by the insured. MDI spilled because a lid and/or a gasket on the container was damaged, worn, and splitting and the lid could not be tightened properly. A lawsuit was filed and the insured turned it over to the insurer. The insurer initially denied coverage, but then later assumed the defense. The insured filed this lawsuit to recover its cost of defense prior to the time Mid-Continent assumed the defense.

Mid-Continent's defense against coverage rested on the pollution exclusion found in the general liability policy. In particular, the insurer claimed that paragraph f(1)(c) applied; this paragraph denies coverage for bodily injury or property damage due to the release of pollutants that are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by any insured. The court said that the focus of the dispute, then, was over just what this paragraph excluded from coverage.

The insured contended that the paragraph applied only to pollutants that are waste and that the phrase “as waste” applied to every part of the exclusion. And since MDI was not waste, the exclusion did not apply to this claim. The insurer disputed this viewpoint and contended that the “as waste” phrase applied only to pollutants being processed. The insurer argued that MDI was a pollutant and it was being transported and so, the fact that it was not waste was not the point; a pollutant was being transported and that allowed the exclusion to be applied.

The court noted that there was no dispute that coverage for the claim exists except to the extent that it is excluded by the pollution exclusion. After examining the pollution exclusion paragraph in question, the court decided that the phrase “as waste” was connected to all the terms in the same manner. If the exclusion was intended to apply only to chemicals that were processed as waste—as the insurer contended—the court felt that the particular paragraph would have been written as follows: pollutants that are or were at any time processed as waste, disposed of, transported, handled, stored, or treated by any insured…. The court found that it was just not logical to exclude the processing of something as waste, but not exclude the treatment of something as waste.

The court said that the interpretation of the paragraph offered by Mid-Continent was not unreasonable, but then, neither was the interpretation put forth by the insured. And, applying the rules of construction to interpret the policy in favor of coverage and against the insurer, paragraph f(1)(c) had to be construed as limited to pollutants that are included within the definition of waste. It was undisputed that MDI was not waste and that meant that the exclusion did not apply to the claim. The trial court's judgment was reversed and Mid-Continent was held to be obligated to defend the insured.

The States Take Preemptive Action

Three states have recently enacted legislation requiring insurers to notify insureds (other than by means of the policy language) that the fire or homeowners policies do not insure for certain types of claims, and therefore, no coverage will be provided. Of course, we can guess the specific type of claim the legislators have in mind. To date, the states that require notice to policyholders are: Delaware, West Virginia, and Rhode Island.

Arizona is considering a bill that would require businesses to notify customers if data containing customers' personal information has been compromised.

Credit Reports and FCRA

Thanks for this “heads up” from Lord, Bissell & Brock. The Ninth Circuit Court of Appeals has issued three rulings—August 4, 2005, October 15, 2005, and January 25, 2006 in the case of Reynolds v. Hartford Financial Services Group, 2006 WL171920 (F3d) . The FCRA (Fair Credit Reporting Act) requires that insurers must provide a consumer with an adverse action notice when the insurer denies, cancels, increases a charge for, or reduces the terms of coverage or amount of insurance either existing or applied for.

Heretofore, insurers have interpreted this to mean that notices of adverse action had to be sent when they already insured someone. In this suit, consumers argued that they were initially offered insurance at rates greater than the best available, yet received no notice.

The court issued an opinion favorable to the consumers, and found that the insurers had willfully violated FCRA and were liable for statutory and punitive damages. Then, in October, the dissenting opinion was that the insurers had not willfully violated the law.

Finally, this past January, the Ninth Circuit of Appeals simply turned the matter of willful violation over to the district court.

The article (go to http://www.lordbissell.com/newsstand_story.cfm?NSID=921 to read it) notes that although the Ninth Circuit comprises Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington, insurers should watch for similar actions in other circuits.

Identity Theft Update

A reminder, since it is income tax time again, that the information sent electronically to the IRS is an identity thief's dream: name, address, and social security number. Home computers are particularly vulnerable to spyware, so be sure an anti-spyware program is installed and available security features are installed. According to recent data, one in every 933 returns filed in the United States in 2003 was fraudulent.