This case is an insurance coverage dispute brought by the insured against the insurer. The issue revolves around whether the damage to the insured property resulted from “sinkhole collapse” as that term is defined in the insurance policy. This case is Amitie One Condominium Association v. Nationwide Property & Casualty Insurance Company, 2010 WL 5071190 (M.D.Pa.).

Amitie is the homeowners association for property insured under a policy written by Nationwide. The insured property suffered damage from subsidence of the underlying soil. The insured sought coverage for the damage and the insurer denied coverage, asserting that the damage fell within the ambit of an exclusion for direct losses caused by earth movement. Amitie claimed that an exception to that exclusion allowed coverage for a loss resulting from sinkhole collapse and in this instance, the exception applied.

The United States District Court noted that the Nationwide policy is an all risk policy and applies to direct physical loss or damage to covered property from any covered cause of loss. However, this coverage is limited by the exclusions listed in the policy. This particular policy did exclude loss by earth movement and the court found that the exception for sinkhole collapse did not apply in this instance. The policy defined sinkhole collapse as “the sudden sinking or collapse of land into underground empty spaces created by the action of water on limestone or dolomite. The facts in this case showed that the sinking or collapse of the covered property was not sudden. Therefore, based on the exception to the exclusion not being applicable, the court granted summary judgment to Nationwide.

Editor's Note: The U.S. District Court in this case made a distinction between earth movement (an excluded cause of loss) and sinkhole collapse (a covered cause of loss) based on part of the policy's definition of “sinkhole collapse” that required such a collapse to be sudden. The facts showed here that the collapse of the land was not sudden and so, the earth movement exclusion applied to prevent any coverage for the loss.

Statutory Employee Falls under Employers Liability Exclusion

The issue in this case is whether the insurer is required to defend and indemnify the insured for a claim based on injury to a worker. This case is Key Construction, Inc. v. Colony Insurance Company, 2011 WL 2728138 (N.D.Tex.).

KCI served as the general contractor for the construction of a Wal-Mart store in Kansas . KCI subcontracted work to A&D which then listed KCI as an additional insured under its general liability policy with Colony Insurance. An employee (Jimenez) of A&D fell off a roof while working on the job and died. His widow and minor children filed a wrongful death action against KCI and others. KCI made a timely demand on Colony to defend the lawsuit but the insurer denied coverage. After paying $70,000 to settle the lawsuit, KCI filed a declaratory judgment action against Colony seeking coverage for the loss.

The United States District Court said that in order to determine the coverage question, it must resolve a threshold legal issue: whether an employee of a subcontractor who sustains injury while on the job is deemed to be the employee of the general contractor. If so, there is no coverage due to the employers liability exclusion. The court then looked for guidance to state law pertaining to workers compensation. (The law in this instance was the Georgia workers comp statutes).

Under Georgia 's workers comp law, principal contractors are deemed to be statutory employers of persons employed by their subcontractors. This makes the principal contractor liable for the payment of workers compensation benefits to the injured employees of subcontractors where the injury occurs on or about the premises on which the principal contractor has undertaken to execute work or which are otherwise under his control or management. In other words, the principal contractor stands in the place of the subcontractor as to any employee of the subcontractor, thus in effect, making the employee an employee of the principal contractor.

KCI argued that the definitions of “employers” and “employees” under the state workers comp law apply only in the context of imposing liability for workers compensation benefits. However, the court found that this interpretation is in direct conflict with Georgia case law. The court determined that Jimenez was the statutory employee of KCI, he was injured on the job, and so, the employers liability exclusion on the general liability policy issued by Colony precludes coverage for the claims made against KCI.

Editor's Note: This decision followed a simple trajectory. Both parties in this case agreed that Georgia had the most significant relationship to the coverage dispute, so Georgia law was the guide. Georgia WC law provided that the general contractor stands in the place of the subcontractor as to any employee of the subcontractor; thus, any employee of the subcontractor is an employee of the general contractor. The employers liability exclusion in the general liability policy prevents coverage for bodily injury to an employee of the insured arising out of and in the course of employment by the insured. The worker was injured while in the course of employment. The exclusion acts to prevent any general liability coverage for the insured for the bodily injury claim made against it.

Breach of Contract and Faulty Workmanship Claims

This case came before the district court via the insurer plaintiff's claim for declaratory judgment that it is required to neither defend nor indemnify its insured in a lawsuit brought against the insured based on the following: breach of contract; breach of the covenant of good faith and fair dealing; breach of express warranty; breach of implied warranty of fitness; negligence; and failure to obtain a state contractor's license. This case is Employers Mutual Casualty Company v. Draily Construction Company, 2011 WL 2582551 (W.D.Mo.).

Drailey entered into a contract with ZZZ to serve as the general contractor on a hotel construction project in New Mexico . Drailey subcontracted certain aspects of the project to Mimbela Construction and Mimbela subcontracted the roof work to Roof Toppers of El Paso. Roof Toppers failed to install the roof properly and after the hotel opened for business, leaks in the roof were discovered and tiles fell off. ZZZ filed a lawsuit against Drailey and Drailey sent the complaint to its insurer, Employers Mutual. The insurer filed a declaratory judgment action declining coverage or defense.

The dispute between the insured and the insurer centered on the following issues: whether the underlying lawsuit alleges an occurrence as defined in the general liability policy; and whether various exclusions apply.

The United States District Court, using Missouri law as the guide, said it was clear that under the law, pure contract claims do not constitute occurrences or accidents under a general liability policy. In this instance, only one of ZZZ's claims—negligence—is not explicitly contractual in nature. Accordingly, the claims for breach of contract, breach of warranty, and breach of covenant of good faith and fair dealing are not subject to coverage under Drailey's liability policy as a matter of law. As for the negligence claim, the court said that further examination suggests that this is not truly a negligence claim, but rather a contract claim by another name. The court found that contractual language was used in the complaint against the insured, citing as examples the following: “failing to construct the roof in accordance with the plans and specifications”, and “failing to construct the roof in accordance with industry standards and workmanship”.

The court went on to state that there had to have been an accident to trigger coverage and Roof Toppers did not accidentally install the roof; it did so intentionally but poorly. Moreover, the court found that Drailey expressed concerns about the quality of work from Roof Toppers during the project and so, it was now not possible for Drailey to argue that the problems were unforeseen. In other words, the insured foresaw or expected the damages and this means there was no occurrence as defined.

As for the exclusions, the court found that the insurer did not carry its burden to show that any exclusions applied in order to prevent coverage. However, since the court found no occurrence necessary to trigger coverage, the court granted the insurer's motion for summary judgment.

Editor's Note: There are several points from the court to note pertaining to this case.

First, the insuring agreement has to be met before any contemplation of the exclusions. Here, the insurance coverage, as required by the insuring agreement, depended on damage being caused by an occurrence and since the insured was aware of the poor workmanship of the roofer—the facts showed that the insured foresaw or expected the damages—this means there was no occurrence as defined in the policy; thus, no occurrence, no coverage.

Second, pure contract claims, such as breach of contract and breach of warranty, are not subject to coverage under the general liability policy.

Third, it is not the function of the general liability policy to serve as a performance bond or as a warranty of goods or services. The policy does not contemplate coverage for losses that are normal, frequent or predictable consequences of the business operations of the insured.

Communicable Disease Not a Covered Claim under BAP

The question facing the Supreme Court of Texas in this case was whether the transmission of a communicable disease from the driver of a motor vehicle to a passenger is a covered loss under a business auto policy (BAP). This case is Lancer Insurance Company v. Garcia Holiday Tours, 2011 WL 2586878 ( Tex. ).

Garcia Holiday Tours operated a commercial bus company in Texas . It contracted with the Alice Independent School District to provide a bus and driver for a field trip. During the trip, several members of the high school band observed the driver coughing, and upon the return from the trip, the driver was hospitalized after being diagnosed with an active case of tuberculosis (TB). The passengers were tested for TB and several tested positive for latent TB. These passengers then sued the driver and the bus company, asserting that they were negligently exposed to the disease as a result of being confined on the bus with the infected driver. Garcia tendered the complaint to its insurer, Lancer, but the insurer refused to defend the claim, maintaining that the claim was not covered by the auto policy.

Left to defend itself, the insured proceeded to trial where a jury found it was liable. The award was over $5 million to the passengers. After judgment, the bus company and the driver sued Lancer seeking a declaration of rights under the BAP. The passengers, now judgment creditors of the insureds, also joined in the lawsuit against the insurer. The trial court ruled in favor of the insured, the court of appeals reversed the summary judgment, and this appeal to the Texas Supreme Court followed.

The insurer conceded that the bus was a covered auto, the claims involved an accident, and there was bodily injury. However, the insurer maintained that the accident and the injuries did not result from the use of the bus, as the policy requires, but rather from other causes, such as the use of a contagious bus driver. Lancer argued that the risk of being exposed to an infectious disease and contracting the disease is a general liability risk, not an auto liability risk. The insurer contended that the nexus between the passengers' injuries and the bus's use is insufficient to invoke the policy's coverage.

The insured and the passengers responded that the policy generally provides coverage for passenger injuries so long as the bus is being used as a bus. They contended that the term “use” is broadly defined in case law to extend coverage well beyond vehicular accidents or collisions. They said that because the bus was being used to transport the passengers at the time of the injuries, a sufficient nexus exists between that use and their injuries.

The Supreme Court noted three factors to consider when focusing on the coverage question: consider if the accident must have arisen out of the inherent nature of the auto as such; consider if the accident must have arisen within the natural territorial limits of an auto, and the actual use must not have terminated; and consider if the auto must not merely contribute to cause the condition that produces the injury, but must itself produce the injury.

Using this three part test, the court found that the bus was not instrumental in producing the injuries; the bus was the mere physical situs of the exposure to the infected person. The bus did not generate the TB bacteria or make it more virulent. Exposure to the disease might have occurred in any number of other enclosed, air-conditioned locations, such as a classroom or theater because the instrumentality causing the disease is the infected person, not the infected person's surroundings or the act of using the covered vehicle. The court concluded that the exposure of the passengers to a communicable disease was not a risk covered by Lancer's auto policy because the injury resulted from causes other than the use of the covered vehicle. The bus itself was not a substantial factor in causing the passengers' injuries.

The ruling of the appeals court was reversed and judgment rendered that the passengers, bus company, and the driver take nothing on their indemnity claim against the insurer.

Editor's Note: Disputes over coverage based on the “use” of a covered auto are plentiful. Some argue, as the insured did in this case, that “use” should be broadly interpreted and that mere use of the vehicle as transportation establishes a sufficient causal connection in order for a claim to be covered. Others respond that when the vehicle merely furnishes a place for an accident or injury to occur, when the vehicle itself did not cause the injury, the causal connection is too remote to invoke coverage under the auto policy.

The Texas Supreme Court sided with the latter argument and listed several cases from around the country and several legal commentaries to bolster its opinion.