House guests suffered serious injuries after their host left her car running overnight in an attached garage, and the house filled with carbon monoxide. The insurer denied coverage based on the motor vehicle exclusion in the homeowners policy. The dispute went to the Supreme Court of Connecticut. This case is New London County Mutual Insurance Company v. Nantes, 303 Conn. 737 (2012).

The insurer brought a declaratory judgment action against its insured seeking a declaration that the homeowners policy does not cover injuries suffered by two guests of the insured. The insurer left her car running in the garage overnight, the guests suffered injury, and the insurer said that the policy excluded coverage for injuries arising out of the use of a motor vehicle. The trial court ruled in favor of the insurer and this appeal followed.

The court noted that the trial court reasoned that Connecticut precedent demonstrates that the link between bodily injury and the use of a motor vehicle lies in the phrase “arising out of”. And, the state courts have held that “arising out of” means “was connected with”, “had its origins in”, “grew out of”, “flowed from”, or “was incident to”. The facts in this case proved to the trial court that although Nantes may not have been driving the car at the time that the injuries were sustained, the injuries did indeed arise out of the use of the motor vehicle because they were connected with, had their origins in, grew out of, flowed from, or were incident to Nantes' use of the vehicle when she drove the car home.

In reviewing the trial court's opinion, the Supreme Court of Connecticut declared that the opinion was correct since the phrase “arising out of” is clear and unambiguous; case law in the state explicitly defines it. Moreover, the court said, the word “use” denotes the employment of an auto for some purpose of the user. One may use an auto without personally operating it; for example, one can park the car. In this instance, the fact was that Nantes ' use of her car (parking it in the garage) was connected to or created a condition that caused the injuries to the guests. This was enough to bring the bodily injury claims within the motor vehicle exclusion.

The ruling of the trial court was affirmed.

Editor's Note: There are many court rulings on the meaning of “arising out of the use of” a motor vehicle (albeit, most of which pertain to claims under an auto policy). In this case, the Supreme Court of Connecticut emphasized the point that the insured does not have to be actually driving the car at the time of the accident for the “arising out of the use” phrase to be applicable. If there is anyway that the injuries can be said to be connected with, have the origins in, grow out of, flow from, or be incidental to the use of a car, the injuries will be deemed to be arising out of the use of the car. As for the word “use”, the court did not limit the meaning to actually driving the car; the employment of the auto for some (any) purpose of the user is sufficient.

(Just as an aside, the court also said that the common law of Connecticut does not recognize the doctrine of concurrent causation.)

Economic Loss Doctrine

In answering the question of whether the economic loss doctrine extends to tort claims brought by homeowners against contractors for poor workmanship, the Kansas Supreme Court offered an in depth analysis and discussion of the doctrine. This case is David v. Hett, 2011 WL 6849658 (Ks.).

The Davids accepted a bid from Hett for the excavation, basement, and concrete work required by the Davids in the construction of their home. Three years after the work was completed, the Davids began experiencing unusual settling in the home's garage and basement areas. They sued Hett for, among other things, breach of contract and negligence. The trial court held that the economic loss doctrine prevented the Davids from bringing a tort action under circumstances governed by contract. The court also held that the doctrine supplied an additional bar to the plaintiffs' fraud claims. The appeals court agreed with the trial court and the case went to the Kansas Supreme Court.

The Supreme Court accepted the appeal only to decide whether the economic loss doctrine barred any negligence claims.

The court noted that the economic loss doctrine is a creation of modern product liability law. It is described generally as “a judicially created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic losses”. In one sense, the court said, the economic loss doctrine is a well-recognized tort concept, but a review of the case law across various jurisdictions shows it has proven difficult to define because there are a number of permutations. The court then described rulings from the United States Supreme Court, California, Colorado, Illinois, Washington, Rhode Island, Wisconsin, Minnesota, and the U.S. 6th Circuit Court of Appeals. In summary, the court found that the doctrine is viewed differently in various jurisdictions. Some apply it more restrictedly to commercial settings, while others extend it more broadly as an effort to preserve distinctions between contract law and torts. More recently, some courts have limited the doctrine's reach when an independent duty can serve as the basis for a tort claim.

The court then turned to how Kansas views the doctrine.

Long-standing case law in Kansas recognizes that homeowners may sue a construction contractor in tort, in contract, or both, depending on the nature of the duty giving rise to the claim. To determine the nature of the claim in this case, the court said, the pleadings have to be examined. In the petition, the Davids allege the Hett negligently performed the work by failing to perform the agreed upon excavation, basement, and concrete work according to the plans, specifications, and drawings presented to Hett.

However, the court noted, nowhere in the record did it find where the Davids specifically asserted that any independent duty was imposed on Hett to perform his work in a particular manner; and, this specification is a critical element upon which an alleged tort must be based if a negligence claim is to survive in this case. Therefore, lacking any specific findings that the Davids supported their negligence claims by citing any independent duty owed by Hett that was breached, the court ruled that the case had to be remanded to the district court to determine whether the claim arose in tort or contract.

To summarize, the Kansas Supreme Court held that the court of appeals and the district court erred in applying the economic loss doctrine to bar negligence claims brought by the homeowners arising from the performance of residential construction services. The case was remanded to the district court to determine whether the Davids allege any breach of a common law or statutory duty that would form the basis of a negligence claim against Hett.

Editor's Note: This case is presented mainly to promote the analysis and discussion of the economic loss doctrine made by the Kansas Supreme Court. The Court reviews the case law on the subject from various jurisdictions, and makes the point relevant to this case that the economic loss doctrine should not bar claims by homeowners seeking to recover economic damages resulting from negligently performed residential construction services.

Chinese Drywall Ruling

The general contractor sued his subcontractor's commercial general liability and umbrella insurers seeking to recover the costs of remediation of damage to homes resulting from sulfur gasses from defective Chinese drywall used by the subcontractor. This case is Dragas Management Corporation v. Hanover Insurance Company, 2011 WL 3468371 (E.D.Va.).

Dragas built housing developments and hired Porter-Blaine, a local drywall contractor, to install drywall in all of the units. Some of the drywall procured and installed by Porter-Blaine was manufactured in China . This Chinese drywall contained levels of elemental sulfur approximately three hundred seventy-five times greater than representative samples of domestic drywall. As a result, it caused property damage to the homes by damaging and corroding metal components, wiring, and electronics.

Dragas discovered the problem in early 2009 and requested Porter-Blaine remediate all of the damage and replace the drywall. Porter-Blaine refused and Dragas undertook the remediation at its own cost. Dragas then filed a demand for arbitration against Porter-Blaine seeking recovery of the cost of remediation. Dragas won the arbitration dispute and converted the arbitration into a judgment. Porter-Blaine at the time carried both general liability and umbrella liability insurance coverages. Both policies carried an absolute pollution exclusion.

Dragas filed a lawsuit against the insurers seeking to enforce the arbitration award but the insurers argued that the pollution exclusion precluded any coverage for the claims. The insurers argued that the pollution exclusion was non-ambiguous and clearly prevented coverage for the damage. Dragas countered that the exclusion was ambiguous and unreasonable, and that there was insufficient evidence of any dispersal, discharge, or release of pollutants.

As to the ambiguity of the pollution exclusion, the U.S. District Court noted that this case was not the first to present this issue for determination as regards the pollution exclusion under Virginia law, and in all of the cases, no court has ever found the pollution exclusion to be ambiguous. Dragas said that the past rulings did not speak to whether the pollution exclusion extends to all pollution or only to traditional environmental pollution, and in this case, the type of harm is different than normal environmental pollution. The court said that Virginia law makes no distinction between traditional and non-traditional pollution when no such distinction exists in the insurance policy. Therefore, the court would not break with the weight of precedent, and held that the pollution exclusion in the instant policies is not limited to traditional environmental pollution; the absolute pollution exclusion is not ambiguous.

The court also ruled that the sulfur gases from the drywall were a pollutant. The insurers argued that the sulfur gases were a pollutant because they were a contaminant as evidenced by the damage they inflicted on the homes. Dragas, emphasizing the drywall, argued that drywall is a naturally occurring substance that can often contain sulfur, so it is not a pollutant because it is used every day around the country to build houses. The court agreed that drywall itself is not a pollutant, but said that the focus here should be on the sulfur gases that came from the drywall, not the drywall itself. The facts showed that the sulfur gases caused extensive damage and this met the definition of a “contaminant” which meant that the gases from the drywall were a pollutant as defined in the policies.

The final issue about whether there was any dispersal or discharge or release of pollutants was addressed by the court by noting that the policies did not defined these terms. Therefore, the court looked to the dictionary and found that each of the terms carried some element of movement. The facts of the case showed to the court that this was a clear case of dispersal, discharge, or release. While there was no certainty as to the exact process by which the elemental sulfur moved from the drywall into the atmosphere in gas form, it is clear that somehow it did so move. When all of the parties agree here that the source of the sulfur was the drywall and that the sulfur gases caused the damage, the court saw no need to go through the academic exercise of determining the exact method of mobility when it is clear that the sulfur, somehow, moved out of the drywall and into the air.

The court ruled that the pollution exclusion was not ambiguous and that the sulfur gases were a pollutant that dispersed into the atmosphere causing the property damage. Recovery for Dragas' remediation costs were barred by the pollution exclusions in the policies.

Editor's Note: This is one of many cases that have arisen due to the Chinese drywall debacle. In this case, the insurance policies contained an absolute pollution exclusion with the wording that there is no coverage for bodily injury or property damage “which would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants at any time”. The U.S. District Court found this absolute pollution exclusion to be unambiguous and applicable to the damage claims.

Flood Coverage and Proof-of-Loss Requirements

The insured filed an action against the insurer alleging breach of the flood insurance policy. This case is Jacobson v. Metropolitan Property & Casualty Insurance Company, 2012 WL 695537.

Between 2004 and 2006, Jacobson experienced seasonal flooding nine times. These floods destroyed some of his property. In 2007, Jacobson took out a flood insurance policy from Metropolitan. Two claim requirements and two exclusions contained in the policy are relevant to this claim.

The policy requires the insured to give prompt written notice to the insurer of a flood loss to insured property. The policy also requires that the insured send a proof of loss within 60 days after the loss to the insurer, listing specifications of damaged holdings and detailed repair estimates. The two exclusions are as follows: the policy does not insure a loss directly or indirectly caused by a flood that is already in progress at the date and time the policy term begins; and, the policy does not insured for loss to property caused directly by earth movement.

In the summer of 2007, another flood occurred and Jacobson lost another fifty feet of land. Jacobson did not notice any damage to his home until late 2007 and he finally made his claim to the insurer in early 2008. Metropolitan notified Jacobson that the policy required that he provide the proof of loss. Jacobson partially complied but failed to designate a specific amount of damages, instead listing the value of the loss as “undetermined”. Metropolitan rejected his claim on the basis of the incomplete proof of loss. Jacobson then sued the insurer in district court. The district court ruled in favor of the insurer and this appeal followed.

The U.S. Court of Appeals noted that Jacobson's argument rested on the idea that the flood policy must be interpreted like any private insurance contract, thus allowing him the benefit of a more liberal interpretation of the proof-of-loss requirement with which he failed to comply. The court the said that, while it has not specifically addressed the interpretation of the flood policy proof-of-loss requirements, many of its sister circuits (and the U.S. Supreme Court) have done so and have uniformly held that those requirements must be strictly construed and enforced. The court ruled that where federal funds are implicated, like as here with a flood policy, the person seeking those funds is obligated to familiarize himself with the legal requirements for receipt of such funds.

The holding of the district court was affirmed.

Editor's Note: The Second Circuit Court of Appeals made a clear distinction in this case between a private insurance policy between an insurer and an insured, and a policy such as the flood policy wherein private parties make demands on the public fisc (funds). Protection of public funds requires that those who seek these funds act with scrupulous regard for the requirements of law.

The court found that every circuit court to address the requirements of recovery under a flood policy had held that an insured's claim cannot be paid unless he has timely submitted a complete proof-of-loss that is signed and sworn to. Here, Jacobson failed to comply with the policy requirements and so, his claim was rightly rejected.