Intentional Act is not an Accident

The liability insurer brought an action against the insured seeking a declaratory judgment that it did not have an obligation to defend or indemnify the insured. The issue revolved around an intentional act of punching the victim and whether the injuries were intended and thus, not an accident, not an occurrence. The case is State Farm Fire and Casualty Company v. Whiting, 2008 WL 2611996 (N.Y.A.D. 4 Dept.).

Whiting assaulted Lang while Lang was attending a party at Whiting's home. Whiting claimed that he intended to hit Lang since Lang was advancing toward him after shoving Whiting, and that he knew when he hit Lang that Lang could be hurt from the punch. When Lang sued, Whiting notified his insurer, State Farm, but the insurer filed a declaratory judgment action. The trial court ruled in favor of the insurer and the Supreme Court, Appellate Division upheld this ruling.

The appeals court ruled that an incident is an occurrence, that is, an accident, if, from the point of view of the insured, the incident resulting in injury was unexpected, unusual, and unforeseen. In this instance, the intentional punching of the victim did not accidentally or negligently cause the victim's injuries and so, there was no occurrence as defined in the policy. Based on this, the insurer had no obligation to defend or indemnify the insured.

Faulty Work of Insured Exclusion

In Tonicstar Limited v. Lovegreen Turbine Services, Inc., 2008 WL 2938864 (C.A.8 ( Minn. )), the liability insurer brought an action against the insured, seeking a declaratory judgment that the insurer had no duty to defend or indemnify the insured in a claim for damages brought by the owner of an oil refinery. The trial court granted the insurer's motion and this appeal followed.

Lovegreen services turbines, generators, and compressors. Flint Hills hired Lovegreen to overhaul a compressor. In connection with the work, a large container of cloth rags was used to wipe the compressor during the overhaul. After the work was completed, Flint Hills placed the compressor back into service and initially, it worked as designed. However, one week later, Flint Hills shut down the compressor because a charge pump at its refinery failed. When the compressor was inspected, a cloth rag and cloth fragments were found lodged inside the compressor. Flint Hills repaired the compressor itself and placed it back into service, but the compressor was out of service for five days. This caused Flint Hills to incur loss of business damages exceeding $6.5 million. A lawsuit followed and all of the insurers for Lovegreen agreed to pay their share of the claim against Lovegreen except Tonicstar. Tonicstar filed a declaratory judgment action against Lovegreen, arguing that there was no coverage for this claim based on several of the insurance policy exclusions.

The trial court granted the insurer's motion and found that exclusion D.2.f. applied; this exclusion states that the insurance does not apply to property damage to that particular part of any property that musts be restored, repaired, or replaced because the named insured's work was incorrectly performed on it. Lovegreen appealed and claimed that the trial court erred in three respects: the idea that keeping a rag out of the compressor was part of its work within the meaning of the policy; the conclusion that the cloth rag was abandoned or unused materials and so the loss of business damages should have been covered under the policy's products-completed operations hazard provisions; and the point that, even if the exclusion applied, it applied only to the repair work expenses and not to the loss of business damages.

The appeals court affirmed the rulings of the trial court.

The appeals court said that exclusion D.2.f. applies because the damage was due to the insured's work being incorrectly performed.

The cloth rags were part of the materials Lovegreen furnished in connection with the overhaul of the compressor, and they were used to wipe the compressor during the overhaul work; this made the cloths part of the work or operations performed by Lovegreen. As a consequence, leaving a cloth rag inside the compressor falls within the policy's definition of work. This, in turn, triggers exclusion D.2.f. because it indicates the Lovegreen's work was incorrectly performed, and the compressor required repair as a result.

Moreover, the court said, the $6.5 million in business interruption damages that Flint Hills suffered while the compressor was being repaired is excluded from coverage because the policy's definition of property damage encompassed not only physical injury to the property affected by the faulty work, but also the resulting loss of use of that property. So, the cost of repair and the loss of business damages were all part of the property damage that was excluded by D.2.f.

As for the argument that the products-completed operations hazard coverage allowed an exception to exclusion D.2.f., the policy stated that there was no products-completed operations hazard coverage for property damage arising out of the existence of tools, uninstalled equipment, or abandoned or unused materials. The trail court ruled that the cloth rag constituted abandoned or unused materials and the appeals court agreed. The cloth rag was material used in connection with the work of the insured and it should have been removed by the insured when the work was completed. The rag was abandoned at the work site by the insured and it was then later instrumental in causing an accident.

SIR and Subrogation against Third Parties

In this case, the insureds brought an action for breach of commercial insurance contract and for declaratory judgment against the insurer. The issue in question was whether a self-insured retention (SIR) was considered primary insurance for subrogation purposes. The case is Bordeaux, Inc. v. American Safety Insurance Company, 186 P.3d 1188 (Wash.App.Div 1, 2008).

Bordeaux developed the Bordeaux Condominiums in Washington . After the units were completed and sold, the condominium association (COA) filed a lawsuit against Bordeaux alleging extensive construction defects and property damage. Bordeaux tendered its defense to its insurers, American Safety and Steadfast Insurance Company; the American Safety policy was from 2000 to 2001, and the Steadfast policy ran from 2001 to 2002. Both insurers agreed to defend the insured under a reservation of rights. Both policies contained a self-insured retention provision that declared that the insurer would pay damages in excess of any self-insured retention amounts stated in the schedule.

The parties in the dispute agreed to mediation and the case was settled with American Safety agreeing to pay 60 percent of the total amount of the settlement and Steadfast paying the remaining 40 percent; this was after Bordeaux paid its SIR. American Safety told Bordeaux that it expected Bordeaux to pay an additional $100,000 toward the settlement to satisfy its SIR obligation, contending that the $105,399 that Bordeaux had already paid in defense costs merely satisfied Steadfast's SIR provision. American Safety said that it would withhold benefits under its policy until Bordeaux paid the $100,000.

In response to this, Bordeaux provided American Safety with copies of its expenses documenting the $105,399 in defense costs and claimed this satisfied its SIR obligation. The insurer rejected the claim and so, Bordeaux paid the COA the $100,000 to mitigate its damages. Then, American Safety paid its agreed share of the settlement. A lawsuit was then filed against contractors to obtain third-party settlements and this lawsuit was won by the insurers. Bordeaux then filed a lawsuit against American Safety for breach of contract and sought its $100,000 from the proceeds of the third-party settlements. The trial court granted Bordeaux's motion for summary judgment and American Safety appealed.

The appeals court declared that the fundamental dispute in the appeal concerned the nature and meaning of the SIR provisions in the policy. American contended that the SIR operates as primary insurance and so, its rights to subrogation against any third parties are superior to Bordeaux and it is entitled to recover third-party settlement funds before its insured. Bordeuax said that it was not its own primary insurer, that SIRs are not insurance, and so, it is entitled to recover the third-party funds and be made whole before the insurer. The court agreed with Bordeaux .

The court noted that the term ″insurer″ was defined in the Washington Insurance Code as ″every person engaged in the business of making contracts for insurance.″ Bordeaux did not fit this definition. Moreover, Washington courts over the years had rejected the argument that self-insurance constitutes insurance. Self insurance was not found to constitute insurance in any traditional form. The court said that in self-insurance, the insured chooses not to purchase insurance but rather retains the risk of loss; there is no shifting of the risk from the insured to a larger group, or an insurer.

The fact that Bordeaux chose to retain the risk of paying up to $100,000 for claims did not convert it into a primary insurer, and nothing in the American Safety contract gave it the right to subrogate for sums that it did not pay, such as SIRs. The appeals court held that the trial court properly ruled that the insured was entitled to be made whole before any third-party recovery funds were paid to the insurer.

Failure to Construct Home Pursuant to Plans Is Not Property Damage Caused by an Occurrence

An insured construction contractor brought an action against its insurer, alleging breach of contract. The case is Lyerla v. AMCO Insurance Company, 2008 WL 2955573 (C.A. 7 ( Ill. )).

Lyerla was hired to build a home according to the particular plans and specifications of the owners. The construction was to be completed by July 31, 2001 and Lyerla was obligated to cure any punchlist items within 20 days after receiving the list from the owners. On January 24, 2002, the owners sued Lyerla for breach of contract, alleging that he failed to construct the building pursuant to the agreed-upon plans; had failed to complete the punchlist items within the time frame provided by the contract; had failed to build the home in a workmanlike manner; had failed to fix defects as required; and had failed to pay the liquidated damages called for in the contract. The owners sought to recover costs they incurred completing Lyerla's work, as well as storage fees, finance charges, loss of work, attorneys' fees, and court costs. Lylerla tendered the lawsuit to AMCO and it denied coverage. Lyerla then settled with the owners for $53,000.

Lyerla sued the insurer to recover the payment and sought a summary judgment. The trial court granted summary judgment to the insurer. It concluded that the underlying complaint did not allege an occurrence or property damage was defined in AMCO's liability policy. Lyerla appealed.

The appeals court noted that AMCO's duty to defend turned on whether the underlying complaint against Lyerla alleged property damage that was caused by an occurrence, that is, an accident. If so, then the insurer's obligation to the insured is triggered unless a particular policy exclusion applies. The court acknowledged that in cases involving the interpretation of general liability policies like the one at issue in this case, a number of Illinois courts have reasoned that damage to a construction project resulting from construction defects is not an accident or an occurrence because it represents the natural and ordinary consequence of faulty construction; however, there was also some support for the position that negligently performed work or defective work could give rise to an occurrence. (Note: the court listed several informative cases from Illinois and from other states that discuss this issue.)

In this case, the court found that the owners did not allege a physical injury to tangible property. They only alleged that the work called for under the contract was performed improperly or incompletely; in other words what was alleged was faulty workmanship, not faulty workmanship that damaged property, and the cost or repairing or replacing the defective work is not property damage as defined on the policy.

The court also noted that Lyerla argued that the underlying complaint alleged property damage because the owners sought to recover storage fees and liquidated damages. Lyerla reasoned that by attempting to recover storage fees and liquidated damages, the owners alleged loss of use and therefore, property damage. But, the court said that liquidated damages are costs imposed on Lyerla pursuant to the contract for failure to complete the project on time. As for the storage fees, the court said that the policy makes clear that a loss of use shall be deemed to occur at the time of the occurrence that caused it, and since Lyerla's failure to complete the construction on time is not an occurrence within the meaning of the policy, the storage fees are clearly not property damage.

The trial court grant of summary judgment to AMCO was affirmed.

Anti-Concurrent Causation Exclusion Upheld

An insured country club brought a declaratory judgment action against the property insurer seeking determination that the insurer was required to cover a loss that occurred when the swimming pool was destroyed. The issues here involved the policy's water exclusion and the earth movement exclusion and the anti-concurrent causation exclusion. The case is Amherst Country Club, Inc. v. Harleysville Worcester Insurance Company, 2008 WL 2502983 (D.N.H.).

Heavy rainfall and flooding caused increased groundwater levels in much of southern New Hampshire and the water table in the pool area of the Amherst Country Club was unusually high. A maintenance worker at the club drained the water from the pool for its spring cleaning and once enough water had been drained from the pool, it floated up and out of the ground due to the hydrostatic pressure. This caused the pool to crack and break, destroying it. The club sought insurance coverage form its insurer for the loss.

The insurer denied coverage based on the water exclusion, the earth movement exclusion, and the anti-concurrent causation exclusion. Both the insurer and the insured then filed declaratory judgment actions.

The court found that the water exclusion and the earth movement exclusion unambiguously excluded the loss at issue in this case, but then went on to discuss the anti-concurrent causation exclusion language. The insured argued that the anti-concurrent causation clauses represented the latest effort of insurance carriers to avoid the effect of the efficient proximate cause test that New Hampshire adopted. The court then reviewed the New Hampshire Supreme Court's past rulings on anti-concurrent causation and said that there was little doubt that the Court would enforce the clause at issue in this case. The court ruled that under New Hampshire law, anti-concurrent causation clauses are enforceable.