Intentional Acts, Accidents, and General Liability Coverage

In this case, a contractor's employee demolished a part of the claimant's house when the job was to only demolish a carport. The issues here were: was this act an occurrence, and if so, do any of the business risk exclusions in the CGL form apply to preclude coverage for the property damage claim? The case is Bituminous Casualty Corp. v. Kenway Contracting, 2007 WL 1790685 ( Ky. ). Note that this opinion is not final and shall not be cited as authority in Kentucky as of this printing.

The Turners owned a single story residential structure with an attached carport and desired to convert the structure for commercial use. They hired Kenway Contracting to handle the job. Kenway was to demolish the carport, remove the concrete pad beneath the carport, and remove the old asphalt driveway; the one story residential structure was not to be touched. McComas, a Kenway employee, came on the scene to do the work and started it even though no details of the demolition work were discussed with him. McComas proceeded to demolish the carport and half of the residential structure before Kenway officials arrived at the job site and stopped him.

The Turners filed a lawsuit and Kenway turned the claim over to its insurer, Bituminous Casualty. The insurer declined coverage and Kenway filed a declaratory judgment action. The trial court entered summary judgment for Kenway and the insurer appealed. The appeals court affirmed the ruling and the case then went to the Kentucky Supreme Court.

As a prelude to its ruling, the Supreme Court noted that the insurer's responsibility under a comprehensive insurance policy is not measured by its intent; but rather, the insured is entitled to all coverage he may reasonably expect under the terms of the policy. Moreover, as it relates to exclusions in a CGL form, only an unequivocal, conspicuous, and plain and clear manifestation of the insurer's intent to exclude coverage will defeat the insured's expectations.

The insurer argued that the employee was acting within the scope of his employment so he was an insured, and he intentionally knocked down the residence. The resulting damage was neither unintended nor unexpected from the standpoint of the insured employee. Therefore, there was no accident and so, no occurrence. The court said that the claim of liability was not against the employee, it was against Kenway. So, what must be considered is whether the damage was intended or expected from the perspective of the employer. And, citing the majority rule, the court said that “if injury was not actually and subjectively intended or expected by the insured, coverage is provided even though the action giving rise to the injury itself was intentional and the injury foreseeable”. The damage to the residence was unexpected and unintended by the employer; it was not the plan, design, or intent of the insured employer. The conclusion was that the event was an accident, an occurrence.

Next, the insurer argued that certain exclusions—the business risk exclusions—applied to prevent coverage. The court noted that the purpose of the business risk exclusions in CGL policies is to allocate the risk between the insured and the insurer as it relates to damages arising out of the insured's business; the business risk exclusions are intended to distinguish between contract liability and tort liability.

As for the specific exclusions cited by the insurer, the court found them to be ambiguous in that more than one reasonable interpretation could be applied to them. So, in keeping with the principle that an ambiguous policy is to be construed against the drafter, the court decided that none of the exclusions cited by the insurer operated to prevent coverage. The decision of the lower court against the insurer was affirmed.

Choice of Law Issue in Louisiana

A case from Louisiana deals with the choice of law issue and concerns a Colorado resident who was in New Orleans at the behest of his employer, a Delaware corporation with its principal place of business in Maryland, and who was injured in a car accident by an Illinois resident. The case is Fenkel v. St. Paul Mercury Insurance Company, 2007 WL 4182158 (La.App. 5 Cir.). This opinion has not as of this writing been released for publication in the permanent law reports; until so released, the opinion is subject to revision or withdrawal.

Fenkel sued numerous insurers seeking compensation for his injuries. The other driver's insurer, settled as did the employer's primary auto liability insurer. Fenkel sought further recovery in a Louisiana court from his own personal auto insurer and the excess insurer of the employer. These insurers argued that, under Colorado law and under Maryland law, they were not liable. Fenkel argued that under Louisiana law, the insurers would be liable. The trial court ruled in favor of the insurers and an appeal was made.

The appeals court noted that the issue in this case was what laws applied, and when it came to conflicts of laws, Louisiana courts were governed by the civil code which declared that the law of the state whose policies would be most seriously impaired if its laws were not applied to the issue takes precedence. Based on the facts of this case, the insurance policy belonging to Frankel was written and delivered in Colorado and Frankel is a Colorado resident; this means that neither party contemplated that another state's laws would apply to a claim involving Frankel. Moreover, the policy purchased by Frankel's employer was purchased and delivered in Maryland . Louisiana , by contrast, had very little interest in the matter. Frankel did not live there; the employer had no autos garaged in Louisiana and had no offices there; and the tortfeasor was a resident of Illinois . The only contact Louisiana had with the event was that the accident occurred there.

Considering all these circumstances, the appeals court concluded that the trial court was correct in applying the laws of Colorado and Maryland to the claim. And under the laws of those states, no coverage was available and Frankel was not entitled to any recovery. The ruling of the trial court was affirmed.

Emotional Distress Claims and the Definition of Bodily Injury

In Ryder v. USAA General Indemnity Company, 2007 WL 4259945 ( Me. ), the insureds sought a declaratory judgment that emotional distress from witnessing a child's death was a separate bodily injury, making the per accident limit of underinsured motorist (UIM) coverage applicable. After the trial court ruled in favor of the insurer, the case went to the Supreme Judicial Court of Maine as a matter of first impression.

That court noted that nineteen-month old Daisy Ryder was struck and killed by a vehicle driven by Donath moments after she had exited her mother's parked car. The mother witnessed the accident, as did her son, then age two-and-a-half. At the time of the accident, Donath was insured under a Progressive Northern Insurance Company policy with liability limits of $50,000 for each person and $100,000 for each accident. The Ryders had a policy with USAA and had split uninsured/underinsured motorist limits of $50,000 for each person and $100,000 for each accident. The Ryders sought declaratory judgments against USAA and Progressive to establish the amount of coverage available under both the Donath policy and Ryder policy.

The Progressive policy defined the $50,000 each person limit as including not only the total of all claims made for bodily injury to a person, but also all claims of others derived from such bodily injury, including but not limited to, emotional injury or mental anguish resulting from the bodily injury of another or from witnessing the bodily injury to another. The USAA policy applied to bodily injury sustained by any person in any one auto accident, and defined bodily injury as bodily harm, sickness, disease, or death.

Progressive eventually settled with the Ryders but the claim against USAA continued, with the trial court ruling that the Ryders were entitled only to the $50,000 per person coverage limit and not the $100,000 per accident coverage. This appeal followed.

The court acknowledged the definition of bodily injury in the USAA policy and that the insurer contended that the term was not ambiguous, that bodily injury was restricted to corporeal or physical injuries. The court also acknowledged that the majority of the jurisdictions that have considered the matter have held that bodily injury encompassed only physical harm. However, the court said that the grammatical structure employed by USAA in its definition made it unclear whether “bodily” was intended to modify all of the nouns that followed it, that is, the words “sickness” and “disease” were not necessarily modified by the word “bodily”. And since, sickness and disease are not restricted to physical maladies and may include a condition of the mind, the definition of bodily injury in the USAA policy therefore extends coverage to sicknesses and diseases that are not corporeal.

The court concluded that the USAA policy provided UIM coverage in connection with a negligence claim for bystander distress, but only if the claimant has suffered serious emotional distress that constitutes a diagnosable sickness or disease. In this instance, the Ryders could recover from USAA but they had to prove they suffered serious emotional distress from the accident. The judgment in favor of the insurer was vacated and the case was remanded to the lower court for further proceedings.

Property Damage Occurrence, Business Risk Exclusions, and Additional Insureds

A case from the Supreme Court of Montana provides useful information on that state's judicial thinking on the subjects of when property damage occurs and whether the business risk exclusions apply to additional insureds. The case is Swank Enterprises, Inc. v. All Purpose Services, 154 P.3d 52 ( Mont. 2007).

The plaintiffs, Swank Enterprises and St. Paul Insurance Company, filed a declaratory judgment action against Continental Western seeking affirmation that Continental had a duty to defend and indemnify Swank for a settlement paid to the City of Libby on Swank's behalf by St. Paul . The district court entered summary judgment against Continental and the opinion was appealed.

Swank and the City of Libby entered into a contract for the construction of a water treatment plant. Swank then subcontracted with All Purpose Services to paint the filter tanks and pipes at the treatment plant. Swank was named as an additional insured on the general liability policy of All Purpose (Continental supplied this policy). All Purpose finished the work in early 1998, but it was later discovered that All Purpose had used an improper type of paint. The tanks and pipes all had to be stripped and repainted and the treatment plant was shut down for the duration of the repair work. The city sued Swank for the costs associated with the repainting. Swank tendered defense of the claim to Continental based on Swank's status as an additional insured. Continental declined coverage and Swank sued.

Continental defended its position on the business risk exclusions in the general liability policy that All Purpose had in 1978. Swank said that because the improper paint was applied during the coverage period of the 1997 policy and that its exclusions applied. But, since these exclusions applied only to the named insured, it, as an additional insured, was not subject to the exclusions.

When the case got to the Supreme Court of Montana, the court had to decide which policy applied to the claim and whether that policy's exclusions applied to all insureds and not just to the named insured. The court noted that all parties agreed that the loss of use of the treatment plant occurred in 1998, after the 1997 policy had expired. But the question was: since the application of the defective paint occurred during the 1997 policy period, did the property damage occur at that time or when the results of that application occurred?

The court concluded that the actual damage occurred when the defective paint was applied. The court reasoned that the City was not actually damaged until the plant was shutdown in 1998. Moreover, physical injury refers to a physical and material alteration resulting in a detriment and the application of improper paint during the 1997 policy period caused physical injury since it physically and materially altered the treatment center's tanks and pipes. The application of the paint reduced the value of the pipes and tanks to the city and this was a detriment. The court ruled that the fact that the discovery of the problem did not occur until after the 1997 policy period was of no consequence. The court said that a physical injury can occur even though the injury is not manifested during the policy period as long as it can be determined, even retroactively, that some injury did occur during the policy period.

After deciding that the 1997 policy was the applicable one, the court looked to the exclusionary language on that policy. The court found that the exclusions applied to “you”, that is, the named insured. The policy did list Swank as an additional insured and provided coverage for Swank for liability arising out of All Purpose's operations performed for Swank; and, the policy contained a severability of interest clause, so that the insurance coverage applied separately to each insured. So, since the coverage applied to both All Purpose and Swank but the exclusions applied only to the named insured (you), Swank had coverage for the claims made by the city. The court said that exclusions are to be narrowly construed and such a view dictated that the exclusionary language was applicable only to the named insured in this instance.

The ruling of the district court was affirmed.