U.S. Court of Appeals Rules on When Property Damage Occurs

This case arises from defendant Mid-Continent Casualty Company's refusal to defend and indemnify the plaintiffs, VRV Development, L.P., Marken Management, and Kenny Marchant. The case is VRV Development, L.P. v. Mid-Continent Casualty Company, 630 F.3f 451 (2011).

VRV entered into a contract to develop lots in Dallas County for Goodman Family of Builders. During the development process, VRV purchased a CGL policy from Mid-Continent. VRV, Inc. was designated as the named insured and its form of business was identified as a corporation; Kenny Marchant was covered under the terms of the policy as VRV's executive officer. Effective January 1, 2005, VRV converted into a Texas limited partnership, VRV, L.P. The CGL policy with Mid-Continent was renewed from May 25, 2005 until May 25, 2006, but VRV, Inc. continued to be designated as the named insured and the form of business continued to be identified as a corporation. There is no evidence that Mid-Continent was informed of VRV, Inc.'s conversion into VRV, L.P. VRV, L.P. did not renew its CGL policy after May 25, 2006.

VRV, Inc. had hired subcontractors to design and build retaining walls on residential lots during the development process in Dallas County . The retaining walls at issue in this case were located within the property lines of four individual homeowners. A homeowner's inspection conducted sometime between May and July 2006 identified a crack in a retaining wall. In January and March 2007, after periods of heavy rainfall, the retaining walls collapsed, damaging the four homeowners' backyards and undermining support for a public utility easement owned by the City of Dallas . The VRV was sued for negligence and breach of contract. VRV demanded defense and indemnity from Mid-Continent, but the insurer rejected the demands.

The district court held that VRV was not entitled to defense and indemnity because only VRV, Inc. and not VRV, L.P. was insured under the CGL policy. However, the court of appeals said that even if VRV, Inc.'s rights to defense and indemnity transferred by operation of law to VRV, L.P., the plaintiffs in the underlying case do not allege a covered occurrence of property damage during the effective period of the CGL policy. The court said that the complaints against VRV or its subcontractors alleged negligently designed and built retaining walls during the policy period, that is, between May 25, 2004 and May 25, 2006. However, the actual damage to the walls was first discovered between May and July 2006 and the collapse of the walls occurred in January and March 2007. In short, the allegations do not pertain to a covered occurrence of property damage during the effective period of the CGL policy.

The court of appeals held that, under Texas law and precedent, it must focus on the actual physical damage to the property and not the time of the negligent conduct or the process that later results in the damage. Here, the homeowners' backyards and the City's easement were actually, physically damaged not by the negligent design and construction of the retaining walls, nor by the continuous exposure to the walls between May 2004 and May 2006, but rather by the collapse and failure of the walls in January and March 2007. This was a case in which potentially covered property damage occurred only after the policy period.

Because the underlying plaintiffs have not alleged a covered occurrence of property damage during the effective period of the CGL policy, they have not triggered Mid-Continent's duty to defend. And, without evidence of a covered occurrence of property damage, there is no possibility that the insurer will ultimately have a duty to indemnify VRV. The insurer was entitled to summary judgment.

Editor's Note: Sometimes, the question arises as to when property damage occurs. The majority of jurisdictions that have ruled on this issue hold that property damage occurs when it is discovered or when it manifests itself. The United States Court of Appeals, Fifth Circuit, affirmed the majority position and since the actual property damage did not occur during the policy period, the insurer had no duty to defend or indemnify the insured.

Absolute Pollution Exclusion Upheld by U.S. District Court

The plaintiff, Rockhill Insurance Company, filed a motion for summary judgment pertaining to a claim against the insured for injuries and damages relating to the emanation of hydrogen sulfide gas from a landfill. This case is Rockhill Insurance Company v. Coyote Land Company, Inc., 2011 WL 499991 (N.D.Fla.).

Numerous property owners and residents of Santa Rosa County, Florida sued Coyote for negligence, private nuisance, trespass, and injunctive relief. The plaintiffs alleged that Coyote's negligent operation of its landfill was causing off-site air, groundwater, soil and odor pollution and resulting damages; specifically, the allegations included injury from exposure to excessive levels of hydrogen sulfide and objectionable odors. The insured had a general liability policy issued by Rockhill and the policy included a total pollution exclusion endorsement stating that the insurance does not apply to bodily injury or property damage that would not have occurred but for the discharge, dispersal, seepage, migration, release, or escape of pollutants at any time. However, the policy did include site specific pollution liability coverage, providing claims-made coverage except for prior or pending claims. The insurer moved for summary judgment based on the pollution exclusion.

The district court found that the undisputed facts established that hydrogen sulfide is a hazardous air pollutant known to cause death, injury, or serious adverse effects on human health or the environment. Therefore, the policy's total pollution exclusion bars coverage for the claims in the underlying lawsuit. Additionally, the court said, the site specific pollution liability coverage excludes coverage for prior or pending claims, and the complaint in the underlying lawsuit notes that a prior lawsuit against Coyote dealt with the very same pollution condition, giving the insured clear notice and foreseeability of the claim prior to the beginning of the policy issued by Rockhill.

The court found that the insurer identified evidence demonstrating the absence of a genuine issue of material fact and so, it is entitled to judgment as a matter of law. The insured came forth with no evidence to avoid the entry of summary judgment and the court saw no undisputed evidence from which reasonable minds might draw differing inferences to create a question of fact. Rockhill owed no duty to defend or indemnify Coyote.

Editor's Note: The absolute pollution exclusion in this instance was upheld by the U.S. District Court as being clear and unambiguous; the allegations against the insured, when measured up against the exclusionary language could not be sustained.

It seems strange that a landfill would try to rely on a standard CGL policy that included a total pollution exclusion endorsement for coverage for pollution-related claims; a specialty type insurance policy would have better served the insured.

Material Misrepresentation and Future Claims

This case required the Superior Court of New jersey to decide whether a material misrepresentation made by a claimant seeking benefits during an insurance examination will forever bar coverage of future claims submitted under any subsequent policy issued by the same insurer. This case is Giambanco v. Sherrer, 2010 WL 5173829 (N.J.Super.A.D.).

In an earlier claim, Giambanco suffered injuries in an auto accident while a passenger in Hujber's auto. At that time, Giambanco used his brother's name, date of birth, and social security number rather than his own, claiming he was in a self-imposed witness protection program and feared for his safety if his whereabouts were discovered. His deception was uncovered prior to final adjudication of his claims.

In this current claim, the insurer moved for summary judgment based on the concealment or fraud provision in the auto policy. The trial court granted summary judgment to the insurer and this appeal followed.

Giambanco claimed that he had been completely truthful in the inquiry surrounding the current accident and refuted the insurer's contention that the policy language precluded any current recovery. The insurer, Clarendon National Insurance Company, argued that the concealment or fraud clause should be applied to the current claim since that provision had been invoked to bar Giambanco's past claim. The appeals court took note that the concealment or fraud clause mandates forfeiture by an insured who has intentionally concealed or misrepresented any material fact or circumstance in connection with any claim under the policy. The court said that it was not aware of any reported opinions explicitly addressing the circumstances as in this case; however, because the law disfavors forfeitures, the court said that such a clause should be construed if possible to sustain coverage.

The insured claimed that the temporal interpretation sought by the insurer strains credulity and that he had been punished for his misrepresentations following the earlier accident, but the benefits now sought must be allowed because he had made no misrepresentations in the course of this current claim. The insurer argued the unambiguous policy clause denies coverage any time a claimant conceals or misrepresents any material fact in connection with any benefits, and that once a claim is fraudulently made, the policy provides no more insurance coverage. The insurer asserted further that the forfeiture of coverage is absolute and it logically follows that all subsequent claims are precluded as to that person.

The appeals court agreed with the insurer that the policy clause does not limit denial of coverage solely to those claims occurring under the policy where the claimant misrepresents himself. However, the court went on, it did not subscribe to the proposed expansion of the fraud clause, extending its reach into perpetuity, such that an insured will forever be prevented from seeking coverage. The court decided that the barring of benefits does not attach to individual claimants, but rather the bar applies “under the policy”, meaning the period of the policy during which the accident occurred.

Giambanco's misrepresentation following the earlier accident would attach to possible claims he might make during that policy period. However, once the period ends, a new policy begins. Thus, the court decided, if his second claim was in all respects honestly presented and validly made under a new policy for a subsequent policy period, the fraud clause is not triggered and the insurance contractual obligations remain intact. The trial court's opinion was reversed and remanded.

Editor's Note: The insurer relied on the language in the fraud clause that spoke to fraudulent statements in connection with “any accident or loss for which coverage is sought” to deny coverage for the insured. The New Jersey court relied on the phrase “for which coverage is sought under this policy” to find coverage for the claimant. The court would not extend the fraud provisions in one policy to include subsequent claims under subsequent policies. This decision complies with the court's stated intent to construe policy language in favor of coverage for the insured if possible.

Information from the States

Kansas has banned local governments from charging accident fees. In many states, some cities and towns have passed ordinances charging a fee for emergency response services after a traffic accident. At least thirteen states have reacted to this action from local governments by passing laws that prohibit or restrict municipalities from charging accident fees. Note that the standard personal auto policy does not pay for accident fees and were it not for state action on this matter, the insured would have to pay such fees out of pocket.

The Insurance Journal reports that the Ohio Supreme Court has ruled that a cancer patient may pursue an emotional distress claim that alleges a faulty diagnosis let undetected cancer spread. The defendants in this case said that damages could not be granted for the claim since the growth or spread of cancer was not recognized in Ohio as a physical injury. However, the state Supreme Court said that the claim is based on physical injury and may be pursued as part of a medical malpractice lawsuit.

Arkansas has amended its code to require that a commercial general liability insurance policy offered for sale in the state contain a definition of occurrence that includes the phrase “accidents, including continuous or repeated exposure to substantially the same general harmful conditions, and property damage or bodily injury resulting from faulty workmanship”. It seems the state has taken a stand on the question of whether faulty workmanship is an occurrence.

Louisiana has amended its statutes to provide that, in the event a commercial lines insurance policy is cancelled by an insured, any unearned portion of premium paid and commission shall be computed on a pro rate basis.

In Gulbransen v. Progressive, 241 P.3d 183 (2010), the New Mexico Court of Appeals determined that underinsured motorists coverage must be offered for both bodily injury and property damage.