Inferior Product Installation and Property Damage Claim

The Supreme Court of Vermont had to decide whether the installation of a product that was inferior in quality and different in color from the product required by contract constituted property damage as defined in the CGL form. The case is Down Under Masonry v. Peerless Insurance Company, 2008 WL 1747904 ( Vt. ).

The Cranes hired Down Under to construct a garage with a studio apartment adjacent to their house, Down Under subcontracted with Moore to install shingles on the roof of the new garage. Moore , without any involvement by Down Under, purchased and installed shingles that were not in accord with the contractual requirements; the shingles were inferior in quality and different in color. The Cranes filed a lawsuit against Down Under and Down Under turned the lawsuit over to its insurer, Peerless.

Peerless defended its insured under a reservation of rights. The trial jury found the insured in breach of contract and in violation of the Consumer Protection Act. Following this verdict, Peerless withdrew its defense and refused to indemnify Down Under because, the insurer claimed, the damages awarded by the jury were not covered under the terms of the CGL policy. Down Under filed a declaratory judgment action and the trial court granted summary judgment to Peerless. This appeal followed.

Down Under claimed that the trial court committed reversible error in several respects. Down Under argued that the court erred by: relying on a policy exclusion for contractually assumed liabilities in determining there was no coverage for a subcontractor's error under the policy; finding no property damage where a subcontractor's use of the wrong shingles caused injury to the appearance and value of the property; and denying the existence of a coverable occurrence under the policy where a subcontractor violated the express terms of the contract without Down Under's knowledge.

The court found Down Under's first argument unconvincing. The court pointed out that the trial court did not rely solely on the exclusion in determining that Peerless was not liable to indemnify the insured, but instead focused on what it determined to be a lack of a coverable occurrence. The Supreme Court agreed with the trial court's position.

As for the second argument by the insured, the court ruled that there was no support in the record for that argument. The policy defined property damage as physical injury to tangible property or the loss of use of tangible property that is not physically injured. In this situation, neither physical injury nor loss of use occurred. The facts showed that there was no physical defect in the shingles used by the subcontractor, and that the Cranes were able to use the new garage. The shingles may have been inferior in quality and not the correct color, but that was not property damage as defined in the CGL form. The court added that to find that the aesthetic impact on property value caused by the installation of inferior shingles equates to property damage would extend coverage beyond the contemplation of the parties as it was expressed by the plain language of the CGL policy.

Finally, the court found it unnecessary to decide whether the actions of the subcontractor amounted to an occurrence because, even if there were an occurrence, the claim does not satisfy the property damage prerequisite for indemnification. The opinion of the trial court was affirmed.

Scope of Employment While in Transit

A court of appeals in Ohio addressed the issue of uninsured motorists coverage for an employee who was injured while in transit to a worksite. The case is Fahlbush v. Crum Jones, 2008 WL 1837267 (Ohio App. 1 Dist.) Note that this is a slip copy.

Fahlbush had gone to his assigned jobsite but learned that he could not work there because a required inspection had not been performed. He attempted to contact his dispatching supervisor for further instructions, but he could reach no one. Fahlbush then decided to drive to the nearest company jobsite but an accident occurred and he was injured. Fahlbush filed for workers compensation, which was granted, and then he brought a declaratory judgment action against the company's auto insurer seeking uninsured motorists coverage.

The trial court granted summary judgment to Fahlbush and this appeal followed.

The insurer contended that summary judgment was precluded because material issues of fact existed regarding whether Fahlbush was actually going to work. The insurer contended that Fahlbush gave conflicting stories about whether he was able to contact his employer, and that he had never traveled to another jobsite without being specifically assigned by a supervisor. The appeals court said that these issues were immaterial to the key point of whether Fahlbush was in the course and scope of employment when the accident occurred. Coverage under the auto policy applied to active members of the organization. The phrase “active member” was not defined in the policy but Fahlbush had at least two things in favor of his being considered an “active member” at the time of the accident. First, the Ohio Industrial Commission ruled that he was in the course and scope of employment when he was injured; and second, since the policy itself did not define the term, the ordinary meaning prevails, and this meaning would include Fahlbush since he was a member of the organization (his company) and he was engaged in company activity (working).

The judgment of the trial court was affirmed.

Additional Insured Issue in New York

A general contractor, as an additional insured under the subcontractor's CGL form, brought a declaratory judgment action to determine the insurer's duty to defend and indemnify it in an underlying personal injury lawsuit. The trial court ruled in favor of the insurer, the Supreme Court, Appellate Division, modified the ruling, and the case ended up before the Court of Appeals of New York . The case is Worth Construction Company v. Admiral Insurance Company, 2008 WL 1899978 (N.Y.). Note that this decision is uncorrected and subject to revision before publication in the New York Reports.

Clayton Park Development, owner of real property, retained Worth Construction as the general contractor for the construction of an apartment complex. Worth subcontracted with Pacific Steel for the construction of a staircase and handrailings. As part of the contract, Pacific named Clayton Park and Worth as additional insureds on its CGL form.

Pacific installed the stairs and then turned the project back to Worth for walls to be erected. Once the walls were erected, Pacific planned to return and affix the handrailings. After the stairs had been installed but before the walls had been raised, Murphy, employed by another subcontractor, sustained injuries when he slipped on fireproofing that had been applied to the stairs by yet another subcontractor. Murphy commenced a personal injury action against Clayton and Worth. Because the complaint alleged that Murphy was injured on the staircase installed by Pacific (although Pacific had nothing to do with the fireproofing), Worth forwarded the complaint to the insurance carrier for Pacific and demanded defense and indemnity as an additional insured. The insurer did not respond and Worth commenced the declaratory judgment action.

The additional insured endorsement on Pacific's CGL policy read as follows: who is an insured is amended to include as an insured the person or organization shown in the schedule as an insured but only with respect to liability arising out of Pacific's operations or premises owned by or rented to Pacific. Worth contended that the simple fact that Murphy slipped on the staircase established as a matter of law that his accident arose out of Pacific's work (operations) because the staircase was part of the materials that Pacific was utilizing to fulfill the contract. The Court of Appeals disagreed.

The court said that facts showed that Pacific had no responsibility for the fireproofing material and that it was not even on the jobsite at the time of the accident. The staircase was merely the situs of the accident and so, it could not be argued that there was any connection between the accident and the risk intended to be covered by Pacific's policy. In other words, there was no connection or causal relationship between Pacific's operations and the injury, no liability arising out of Pacific's operations. The order of the trial court was reinstated.

Supreme Court of New Hampshire Addresses a Faulty Work Claim

In this case, a roofing contractor brought an action against its CGL insurer to recover the costs of defending a lawsuit alleging negligent roof replacement. The case is Webster v. Acadia Insurance Company, 934 A.2d 567 (N.H. 2007).

A school district hired Webster to perform work on the roof of its middle school. Specifically, Webster was to remove the existing outermost roof membrane, replace any damaged insulation, and install a new standing, seamless metal roof membrane. This type of roof membrane is fastened to the building using metal clips and is not bolted to the ceiling beams (purlins). After the work was completed, the school discovered structural deficiencies with the roof and buckling of the purlins. The school district filed a lawsuit against Webster claiming negligence, negligent misrepresentation, breach of express warranty, professional negligence, and respondeat superior. Webster notified the insurer and requested a defense and indemnity for any liability. The insurer denied coverage based on lack of any allegation of property damage, and several exclusions that would apply in any event. Webster filed a declaratory judgment action, the trial court sided with the insurer, and this appeal followed.

On appeal, Webster asserted the following: the allegations regarding damage to the purlins constitute property damage; the closure of the gym due to the buckling of the purlins constituted a loss of use; and no exclusions applied. The insurer argued in response: there was no occurrence under the terms of the policy; the complaint does not allege property damage or loss of use; and the impaired property exclusion would prevent coverage in any case.

The Supreme Court noted that the complaint raised claims beyond the defective roof replacement; it contained allegations of actual damage to the purlins, in that the purlins had an alteration in appearance and shape (buckling and separation from the building frame). This was a claim for actual damage to property separate and distinct from the insured's work which was the metal roof membrane. So, the policy definition of property damage was satisfied.

As for the requirement of an occurrence, the court said that the damage to the purlins was unexpected from the standpoint of the insured, especially given that its work did not include the purlins. Thus, the definition of an occurrence was satisfied.

The impaired property exclusion was not applicable in this case, the court said, since its purpose is to preclude coverage for loss of use claims arising from faulty work when there is no physical injury to the property. However, there was actual physical injury here (to the purlins), so the impaired property exclusion need not be addressed.

The decision of the trial court was reversed and the case was remanded.

What the States are Doing

Connecticut has passed a law that provides that insurers have to offer an actuarially sound premium discount to homeowners who install permanent storm shutters or impact-resistant glass in order to mitigate losses from hurricanes and other severe storms.

Delaware has joined other states in prohibiting insurers from using an applicant's credit report or score as the sole basis upon which to deny coverage.

Louisiana mirrors the action of Connecticut in reference to mitigation of losses from hurricanes. Insurance companies have to provide an actuarially justified discount, credit, rate differential, adjustment in deductible, or any other adjustment to reduce the insurance premium for insureds that build or retrofit a structure to reduce the amount of loss from a windstorm or hurricane.

Maryland offers several items to consider. A new law states that an insurer that issues, sells, or delivers a homeowners policy shall offer in writing to provide coverage for loss caused by or that results from water that backs up through sewers or drains; this is based on the loss not being caused by the negligence of the insured. The state also says that clauses in homeowners, fire, farmowners, and dwelling insurance policies that limit coverage for additional living expenses as a result of a covered loss to a period of less than twelve (12) months are void and enforceable. Finally, the state provides that, with respect to certain policies of personal insurance and private passenger motor vehicle liability insurance, the issuance of a new policy by an insurer to replace an expiring policy issued by that same insurer is considered a renewal.

A Utah law provides that each resident owner of a motorboat has to maintain a minimum limit of liability of 25/50/15 or $65,000 combined single limits. This is for motorboats operated on state waters.