Statements on Application—Warranties or Representations?

The insurer filed a declaratory judgment action to obtain a declaration that its policy of medical malpractice insurance was void ab initio. This case is Care Risk Retention Group v. Martin, 947 N.E.2d 1214 (2010).

In the summer of 2005, Dr. Martin operated on Floyd Burnett. Less than a month after the operation, Burnett suffered a massive coronary and died. In October 2005, Martin received a letter from an attorney who stated that he represented Floyd Burnett, deceased. The attorney requested a copy of the entire medical record for treatment of Burnett, copies of all tests ordered, all physical therapy records, and a copy of any itemized statement of services rendered to Burnett. Dr. Martin carefully scrutinized the attorney's letter but did not notify his insurer because he thought there was no merit to a claim and did not think the letter was a litigation letter.

In 2006, Martin applied for professional liability coverage from Care Risk. On the application, Martin answered the following question in the negative: are you aware of any acts, errors, omissions, or circumstances which may result in a malpractice claim or suit being made or brought against you? The policy also contained a warranty that stated: it is warranted to the insurer that the information contained herein is true and that it shall be the basis of the policy of insurance and deemed incorporated herein. Finally, Martin signed a statement of no known claims/losses that indicated that Martin had no knowledge or information relating to a medical incident that could reasonably result in a claim, and that he had no knowledge of any request for medical records that might result in a claim. Care issued a policy to Martin with a policy period of April 11, 2006 to April 11, 2007.

In July 2006, the Burnetts filed an action against Martin alleging that Martin had committed negligence and medical malpractice in his treatment of Floyd Burnett. Martine notified Care. The insurer offered a defense but issued a reservation of rights letter. The insurer then filed a declaratory judgment action alleging that Martin's material misrepresentations had rendered the policy void. The trial court concluded that Martin knowingly made false representations regarding the statement that he had no knowledge of any request for medical records that might result in a claim. Therefore, because a knowing false warranty rendered the policy void ab initio, the insurer had no contractual obligation to defend or indemnify Martin.

The Burnetts were allowed to intervene in the declaratory judgment action filed by the insurer and when the trial court ruled in favor of Care, the Burnetts appealed.

The appeals court noted that under Ohio law, statements by an insured fall into two classes—those that constitute warranties and those that constitute representations. If a statement is a warranty, a misstatement of fact voids the policy; if the statement is a representation, a misstatement by the insured will render the policy voidable if it is fraudulently made and the fact is material to the risk.

The Burnetts contended that Martin's statements were merely expressions of opinion or personal knowledge; such statements are not statements of material fact and so, are not warranties because the statements necessarily involve an insured party's interpretation of facts. The insurer argued that Martin surely knew of an incident in view of Burnett's death and this meant he had prior knowledge of the claim and his statements were material misrepresentations that voided the policy coverage.

The court found that the risk application did not indicate that Martin's statements were warranties and in fact, the application requests expressions of personal belief or opinion, rather than statements of facts. The court said that by asking the questions, the insurer was attempting to have Martin perform its role of assessing risk. Based on the circumstances before the court, it ruled that the trial court erred in rendering summary judgment in favor of the insurer. The statements by Martin in the application were representations, not warranties and there are genuine issues of material fact regarding Martin's alleged misstatements on the insurance application and other materials that were submitted to Care. The opinion of the trial court was reversed.

Editor's Note: The Court of Appeals of Ohio , Second District, finds that the insured's statements on an insurance application were not warranties and so, the policy could not be void ab initio as the insurer claimed. The court made a distinction between a warranty and a representation, with a misstatement of fact voiding the policy ab initio under a warranty, and a misstatement rendering the policy voidable under a representation.

The court also noted that, in the law of insurance, a representation is a statement made prior to the issuance of the policy and a warranty is a statement by the insured of a material fact. Most standard policies today use the representation language. For example, the CGL form states that the policy is issued in reliance upon the named insured's representations.

Insurable Interest in Real and Personal Property

The homeowner's insurer brought an action against the homeowner, the alleged purchaser of the home, and a second insurer seeking a declaratory judgment that it owed no duty to indemnify the alleged purchaser for losses occurring when the home was destroyed by fire. This case is Auto-Owners Mutual Insurance Company v. Mohammed, 959 N.E.2d 568 (2011).

Brandewie owns real property and leased a portion of it to Mohammed. Sometime in late 2007 or early 2008, Brandewie and Mohammed began discussing the possible sale of the property. Over time, the two made offers and counter-offers. During that time period, Mohammed made a lump-sum payment to Brandewie in anticipation that a contract would be successfully negotiated, and Brandewie added Mohammed as an additional insured under her homeowners policy with Auto-Owners Mutual. Mohammed contacted Nationwide seeking to insure the property also and Nationwide issued a homeowners policy to Mohammed. However, this policy was later terminated because the roof of the property was in poor condition.

In December 2008, the property was completely destroyed by fire. Brandewie notified Auto-Owners of the loss. Mohammed made a claim under the Nationwide policy and the Auto-Owners policy. Auto-Owners filed a declaratory judgment action seeking a declaration that it owed no duty to indemnify Mohammed. The trial court ruled that Mohammed had no insurable interest in the property because the land contract was not valid and so, she had no coverage. Mohammed appealed.

The appeals court agreed with the trial court that the parties did not enter into an enforceable land-installment contract. The court said that there was no acceptance of the offer and therefore, no meeting of the minds. And then, the court addressed the issue of insurable interest.

The court noted that an insurable interest in property arises when a person would profit by or gain some advantage by its continued existence and suffer some loss or disadvantage by its destruction. In this instance, the court decided that Mohammed had no ownership rights in the subject real estate since her only claimed interest in the property arises from a proposed contract that was never agreed to. However, notwithstanding Mohammed's lack of ownership rights in the real estate, she had an insurable interest in her personal property located in the residence and destroyed by the fire. And, both the Nationwide and Auto-Owners policies provided coverage for Mohammed's personal property.

The ruling of the trial court was affirmed with respect to the realty loss, but was reversed with respect to Mohammed's personal property claim.

Editor's Note: The Court of Appeals of Ohio , Second District, looked into the insurable interest question and separated the real property from the personal property. The claimant had no insurable interest in the real property because the facts showed that she had no ownership rights. She did have an insurable interest in her personal property and that meant no summary judgment could be upheld in favor of the insurers. The court felt that Mohammed had an interest in the preservation of her personal property and that she would suffer a loss by its destruction, and that was enough to create an insurable interest.

Additional Insured Dispute

The prime contractor for a construction project and its commercial general liability insurer brought an action for declaratory judgment against the construction manager and its insurer seeking a declaration that the prime contractor's insurance policy did not provide coverage to the construction manager as an additional insured. This case is Regal Construction Corporation v. National Union Fire Insurance Company of Pittsburgh, PA., 930 N.E.2d 259 (2010).

The City of New York engaged URS Corporation as the construction manager for a renovation project at Rikers Island . URS hired Regal Construction Corporation to serve as a prime contractor for general construction at the project, including demolition and renovation. The contract between Regal and URS required Regal to procure a general liability policy and name URS as an additional insured. Regal did this and URS was listed as an additional insured but only with respect to liability arising out of Regal's ongoing operations performed for URS.

During the process of demolition, LeClair, Regal's project manager, was walking through the facility. He stepped onto a floor joist that had recently been painted and slipped, resulting in a back injury. LeClair commenced a personal injury lawsuit against the city and URS. URS forwarded a copy of the complaint to Regal and its insurer, INSCORP, demanding a defense and indemnification based on the additional insured endorsement. INSCORP reserved its right to disclaim coverage and then instituted a declaratory judgment action seeking a declaration that URS was not entitled to coverage as an additional insured.

The Supreme Court granted judgment in favor of URS, concluding that LeClair's injury arose out of Regal's work. The decision was appealed.

The Court of Appeals of New York noted that the additional insured endorsement at issue here provides that URS is an additional insured under the general liability policy only with respect to liability arising out of Regal's ongoing operations. The court said that it interpreted the phrase “arising out of” in an additional insured clause to mean “originating from, incident to, or having connection with”. The phrase requires only that there be some causal relationship between the injury and the risk for which coverage is provided.

In this instance, the facts showed that Regal's employee, was walking through the work site to indicate additional walls that needed to be demolished by Regal's subcontractor when he slipped on a recently painted metal joist. Although Regal and INSCORP contended that LeClair's injury did not arise from Regal's demolition and renovation operations performed for URS, but that it was URS employees who painted the joist on which LeClair slipped, the focus of the inquiry is not on the precise cause of the accident, but on the general nature of the operation in the course of which the injury was sustained. Accordingly, the court said, the injury arose out of Regal's operations notwithstanding URS's alleged negligence, and fell within the scope of the additional insured clause of the insurance policy.

Here, the court found a connection between the accident and Regal's work as the injury was sustained by Regal's own employee while he supervised and gave instructions to a subcontractor regarding work to be performed. That the underlying complaint alleges negligence on the part of URS and not Regal is of no consequence. URS is entitled to a defense and indemnification according to the terms of the liability policy. The lower court's ruling was affirmed.

Editor's Note: Once again, a court was asked to determine the obligation of an insurer to defend and indemnify an additional insured for potential liability arising out of the operations of the primary insured. The Court of Appeals reviewed the facts of the incident and the language of the additional insured endorsement and found coverage for the additional insured. The court found some causal connection between the injury and the primary insured's ongoing operations and that provided the basis for coverage for the additional insured.

Ensuing Loss Discussion

The insured brought an action against the property insurer seeking a declaration that it was entitled to insurance coverage and money damages. This case is TMW Enterprises, Inc. v. Federal Insurance Company, 619 F.3d 574 (2010).

TMW, acting through its subsidiary, Shain Park Associates, bought a recently constructed condominium and retail building. TMW insured the property for $10 million with Federal Insurance under an all risk policy. There was an exclusion in the policy applying to loss or damage caused by or resulting from any faulty or defective design, plans, workmanship, repair, construction or renovation of part or all of any property on or off the premises. This exclusion then noted that it does not apply to ensuing loss or damage caused by or resulting from a peril not otherwise excluded.

In 2006, contractors hired by TMW began to renovate the building's exterior and they discovered that the original builder had improperly constructed the exterior walls, leaving them vulnerable to water infiltration. An, they observed that water had indeed entered the facility, weakening the structural integrity of the building by corroding its steel structure. Repair of this damage required TMW to remove the building's undamaged exterior masonry and TMW estimated the repair would cost several million dollars. TMW notified Federal of the damage but the insurer denied the claim. Federal attributed the damage to construction defects and wear and tear, both of which are excluded from coverage under the terms of the policy.

TMW filed a declaratory judgment action and the district court ruled in favor of Federal. This appeal followed.

The U.S. Court of Appeals, Sixth Circuit, noted that all parties agreed that the original builder improperly constructed the building's exterior and that this faulty workmanship caused the water infiltration. So far as Federal is concerned, that is all there is to that; the exclusion applies and there is no coverage. However, TMW argued that while faulty workmanship allowed water to seep into the walls, the intruding water nonetheless amounts to a peril not otherwise excluded because the water caused some of the damage and water-related damage is not otherwise specifically excluded. This makes the water an ensuing loss and thus, a covered loss.

The court said that there are two possible functions served by the ensuing loss clause, both of which serve to defeat TMW's argument. One is this: the clause means simply that what is not excluded is covered; the exclusions spell out when coverage does not apply and the exception reminds us that, if an exclusion does not apply, then coverage exists. The other possible function is this: the ensuing loss clause can fairly be construed as a causation-in-fact-breaking link in coverage exclusions, establishing that independent, non-foreseeable losses caused by faulty construction are covered; the clause applies in those rare cases where the reasonable damage expected to be caused by faulty workmanship leads to another peril that causes damage beyond that normally expected.

The court went on to state that while the faulty workmanship exclusion applies to loss or damage caused by or resulting from the construction defect, the ensuing loss provision clarifies that the insurer could not use the exclusion to avoid coverage for losses remotely traceable to an excluded cause. The clause establishes that chronologically later-in-time damages caused by a peril not otherwise excluded remain covered. However, in this instance, because defective wall construction naturally and foreseeably leads to water infiltration, the language of the exclusion ought to apply.

Editor's Note: This case is presented due to the court's analysis of the ensuing loss clause. Both the majority opinion and the dissent offer good reviews of the clause and its affect on property loss claims.