The insured sought redress from the insurer based on multiple claims brought against the insured. This case is Aquarius Well Drilling v. American States Insurance Company, 2012 WL 6048993.

Aquarius is a corporation engaged in the well drilling and well testing business. In May 2007, Mount Shasta Title ordered a well test from Aquarius on a piece of property. Aquarius tested the well and reported the findings to Mount Shasta but did not offer any express opinions on the condition of the well. At some point after the well was tested, the Manleys purchased the property.

In 2011, the Manleys filed a lawsuit against Aquarius alleging that Aquarius was negligent in testing the well and that this negligence failed to show that the well was not a water well and the it did not produce 12+ gallons of water per minute. The Manleys claimed that when the well stopped working in 2009, it constituted interference with their use of the property. Aquarius tendered defense of the lawsuit to its insurer, American States. The insurer rejected the tender and declined to defend Aquarius. The insured then filed this action.

The insured said that the insurer breached its express obligations under the policy by refusing to defend Aquarius. Aquarius said that the Manleys' complaint constituted an occurrence, triggering the insurer's duty to defend because Aquarius did not intend for the unintended consequences of the well testing. The insurer said that the well testing was intentional and it does not qualify as an accident, that is, an occurrence. The U.S. District Court noted that California courts interpret an accident to mean an unintentional, unexpected, chance occurrence; an accident refers to the nature of the act giving rise to liability, not the insured's intent to cause harm. Thus, said the court, where an insured intended all of the acts resulting in harm, even if the insured did not intend to cause the injury, the event does not constitute an accident for insurance coverage purposes. There is no accident when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.

The court ruled that even if the insured's alleged errors were the result of simple negligence, the acts of testing and reporting the results of those tests were still deliberate and willful acts, and the Manleys' reliance on the tests was foreseeable. Therefore, there was no accident.

The insured also contended that, because the well report comprised an objective test result and because it did not report or express opinions on the condition of the well, the Manleys' loss of use claim was unintended consequences constituting an accident; this triggered a duty to defend on the part of American States. The district court found this argument to be meritless.

The court said that whether the well testing was done negligently or not, regardless of the unintended consequences, the insured's conduct alleged to have given rise to the claimants' injuries is necessarily non-accidental, not because any harm was intended, but simply because the conduct could not be engaged in by accident. Aquarius could not have engaged in the well testing by accident, so whether it was aware that the results of the well report were inaccurate or not is immaterial in determining whether American States had a duty to defend.

The court ruled in favor of the insurer and said there was no possibility of coverage and so, no duty to defend.

Editor's Note: It is interesting that California law, as seen by the United States District Court, does not distinguish between a deliberate act and a deliberate result. Many courts do make that distinction.

Infringed Patents Claim Is Not a Claim for Property Damage

The insured brought an action against its insurers seeking a declaratory judgment that the insurers were obligated to defend it in an underlying lawsuit. This case is Wilson Works v. Great American Insurance Group, 2012 WL 5205725.

Walhonde Tools filed a lawsuit against Wilson Works alleging patent infringement, tortious interference with business relations, and conspiracy to interfere with business relations. This was based on Wilson Works' alleged manufacture, sale, and marketing of tools that infringe on Walhonde Tools' patent. Wilson Works argued that the infringement was an accident, that in fulfilling custom orders, it was deceived by its clients into manufacturing infringing tools, and it sought coverage from its insurers. When the insurers declined coverage, the insured sued. The district court ruled in favor of the insurers and this appeal followed.

The appeals court found that the policies at issue provided coverage for property damage caused by occurrences. The court ruled that patent infringement is not damage to physical property and does not meet the definition of property damage. Also, tortious interference with a competitor's business relations does not constitute an occurrence. Therefore, the claims against Wilson Works are affirmatively excluded from coverage. The ruling of the district court was affirmed.

Editor's Note: This ruling by the U.S. Court of Appeals, Fourth Circuit, restates the fact that patent infringement is not property damage as defined in the commercial general liability policy. As for the claim of tortious interference with business relations, the court found that the claim as stated did not constitute an accident, an occurrence. Tortious interference is seen as an intentional tort on the part of the insured and an intentional tort necessarily excludes occurrences.

Reasonable Expectations Coverage Subject to Issue of Material Facts Existence

The insured filed an action against its property insurer for a declaratory judgment as to coverage for the sinking of a barge at the insured's marina. This case is New Hampshire Insurance Company v. RRK, Inc., 736 S.E.2d 52 (2012).

In 2007, Rudy Lee and Kelly Lee (as RRK, Inc.) purchased a floating barge and two strings of docks situated on the banks of the Ohio River in Huntington, West Virginia. The barge, which was permanently moored, contributed to the support of a restaurant marina and apartments. RRK bought insurance coverage from New Hampshire Insurance Company.

Several weeks after purchasing the insurance coverage, RRK received a copy of the policy; neither partner read the policy. The content of the mailed policy differed from a 17-page fax that the insured had earlier received from its local insurance agent, Insurance Systems. The policy included a wear and tear exclusion while the fax did not. Also, the fax did not list the property to be covered by the policy, that is, the two docks, the barge, and its contents, while the policy listed only coverage for the two docks. The policy was renewed in 2008 and in 2009 and again, no one read the policy. The renewal again failed to list the barge as covered property and it also contained the wear and tear exclusion.

In 2009, the barge sank and RRK filed a claim with New Hampshire. The insurer denied coverage, saying that the barge and its contents were not listed in the policy as covered property; however, after an investigation of the situation, New Hampshire determined that the barge and its contents were part of the covered property. The insurer still denied coverage, though, based on the wear and tear exclusion. RRK filed a lawsuit against New Hampshire alleging breach of contract and bad faith. The insurer removed the case to the federal court which, in turn, remanded the case to state court. The state court granted partial summary judgment to the insured and the insurer appealed.

The Supreme Court of Appeals of West Virginia noted that the trial court found that RRK had a reasonable expectation of coverage for the barge and contents. The record demonstrated without question that RRK was repeatedly assured that the barge and the contents were covered property. The appeals court agreed that the repeated assurances of coverage created a reasonable expectation that the barge and contents would be covered by the insurance contract. So, the court turned to the issue of whether the wear and tear exclusion was valid.

The insurer argued that the wear and tear exclusion was conspicuous in the actual policy, so the reasonable expectations doctrine would still not provide coverage. RRK argued, however, that because the wear and tear exclusion was not placed in the 17-page fax, it was not placed in such a way as to bring the exclusion to RRK's attention. RRK asserted that the fax suggested the nonexistence of any such exclusion and so, it was reasonable for RRK to rely on the fax as to coverage and it would be inequitable to enforce the wear and tear exclusion.

The court decided that both parties in this case failed to show, as a matter of law, whether the wear and tear exclusion should apply. The court found that under the unique facts of this case, a substantial question of fact exists and so, summary judgment is precluded with regard to the applicability of the exclusion. The appeals court decided that the circuit court erred by granting summary judgment on this point and reversed that ruling. The case was remanded for proceedings consistent with this opinion.

Editor's Note: The holding of the West Virginia court honored the spirit of the reasonable expectations doctrine, that is: the objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though a painstaking study of the policy (by the insured) would have negated those expectations. However, the court continued, coverage granted to the insured by the reasonable expectations doctrine is subject to the existence of relevant material facts and in this instance, that existence precluded a summary judgment in favor of the insured.

Additional Insured and Bad Faith Claim

This declaratory judgment action concerns an insurance coverage dispute between an additional insured and the insurer. The case is Allied Property and Casualty Company v. Bed Bath & Beyond, Inc., 2013 WL 425085 (N.D. Ga.).

Napa Home & Garden was a vendor of Bed Bath and Beyond (BBB) and supplied the Gel Fuel Products at issue in the underlying lawsuits filed against BBB. Napa contractually agreed to indemnify BBB with respect to claims for bodily injury and property damage resulting from the Gel Fuel Products and named BBB as an additional insured under two general liability policies issued by Allied to Napa.

In 2011, BBB tendered the underlying lawsuits to Allied for defense and indemnification. The insurer denied coverage and refused to pay any of the defense costs. Allied then filed a declaratory judgment action seeking a declaration that it was not obligated to provide a defense or indemnification to BBB.

The insurer contended that BBB, as an additional insured under the policies, is not the holder of the policies and so, may not recover under the law. BBB countered that an additional insured has the same benefits of coverage as a named insured and therefore, qualifies as a holder, entitled to bring a claim under the statute. The court found that the insurer failed to show that BBB as an additional insured is not entitled to bring a claim for bad faith. The court said that the statute generally allows an insured to recover bad faith damages and attorney fees against the insurer if the insurer in bad faith refuses to provide coverage on a covered loss. Moreover, the term “holder of the policy” that appears in the statute refers to the insured, which includes an additional insured. It is undisputed that BBB is an insured as an additional insured under the policies. Accordingly, the court said, BBB is entitled to bring a bad faith claim against the insurer of the named insured, that is, Allied Property and Casualty Company. The court further noted that permitting an additional insured to raise a bad faith claim is consistent with case law recognizing that an additional insured has the same coverage benefits under an insurance policy as the named insured.

The motion of the insurer was denied.

Editor's Note: The United States District Court, Northern District of Georgia, reaffirms the status of an additional insured with respect to filing a bad faith action against an insurer. An additional insured is not to be considered a third party, that is, someone that is a stranger to the insurance contract between the named insured and the insurer. As the court noted, an additional insured has the same coverage benefits as a named insured and permitting an additional insured to raise a bad faith claim is consistent with case law.

General Contractor Not an Additional Insured

The sub-subcontractors commercial general liability insurer brought an action seeking a declaratory judgment that the insurer was not obligated to defend or indemnify the general contractor in an underlying tort action brought be the sub-subcontractor's employee. This case is Westfield Insurance Company v. FCL Builders, Inc., 948 N.E.2d 115 (2011).

FCL is a general contractor that was hired to work on a construction project. FCL subcontracted out the steel fabrication and erection for the project to Suburban Ironworks. Suburban in turn subcontracted the steel erection to JAK. JAL employed Anwar Oshana.

FCL's contract with Suburban required Suburban to perform all structural steel work and required Suburban to obtain a certain amount of commercial general liability insurance that would cover Suburban and its employees and FCL. The contract also mandated that any subcontractors that Suburban might further subcontract with must also maintain the same level of liability insurance and include FCL as an insured under the policy.

JAK was therefore contractually required to purchase an insurance policy that would cover itself, Suburban, and FCL in the event of a mishap on the steel erection job. JAK purchased as policy from Westfield and the policy contained an endorsement that read as follows: who is an insured is amended to include as an additional insured any person or organization for whom you are performing operations when you and such a person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.

About a month into the job, JAK's employee, Oshana was severely injured when he fell off a steel beam. He filed a lawsuit against FCL and Suburban alleging the breach of various duties of care regarding job site safety. FCL turned to Westfield for defense and indemnification. The insurer refused, asserting that FCL did not qualify as an additional insured under its policy. Westfield filed a declaratory judgment action.

Westfield argued that the plain language of the additional insured endorsement only extended coverage to entities that had an agreement in writing with JAK for them to be added to the policy as additional insureds. Westfield asserted that, because JAK only had a contract with Suburban, FCL could not be an additional insured. FCL maintained that it met the requirements of the provision due to the fact that the JAK-Suburban contract incorporated by reference the terms of the Suburban-FCL contract that contained the provision requiring FCL to be an additional insured on the policy. Moreover, FCL noted that it had received a certificate of insurance that listed FCL as an additional insured under JAK's policy with Westfield.

The circuit court ruled in favor of the insurer and the FCL appealed.

The appellate court noted that the sole issue before it is whether FCL qualifies as an additional insured under Westfield's policy. The court said that the additional insured endorsement required two conditions to be met in order for an entity to qualify as an additional insured: the entity must be one for whom JAK is performing operations; and, JAK and that entity must have agreed in writing in a contract or agreement that the entity be added to the policy as an additional insured. The court ruled that the second condition was dispositive.

There was no evidence in the record that JAK had agreed in writing with FCL for FCL to be an additional insured. The policy explicitly and unambiguously required a direct written agreement to that effect in order to cover anyone other than JAK under the policy. Because no such written agreement ever existed between FCL and JAK, FCL cannot be an additional insured and Westfield is not obligated to furnish FCL with a defense or indemnification.

Westfield's contractual obligations to its insureds are controlled by the insurance contract and the additional insured provision in this case unambiguously limits Westfield's obligations to only JAK and Suburban. Regardless of whether JAK and Suburban had agreed that FCL should be an additional insured, the fact is that JAK and FCL did not agree in writing on this point. The terms of the FCL-Suburban contract and the Suburban-JAK contract are consequently irrelevant to whether Westfield is obligated to cover FCL as an additional insured.

As for the certificate of insurance that FCL received, this did nothing to modify Westfield's obligations under its contract with JAK. The certificate expressly conferred no rights on the certificate holder and it does not alter the insurer's liability in any way.

The court ruled that FCL is not an additional insured under JAK's policy and Westfield was not obligated to defend or indemnify FCL. The opinion of the circuit court is affirmed.

Editor's Note: This decision by the Appellate Court of Illinois, First District, Second Division makes the point that an additional insured endorsement will be read as it is written. The endorsement in this case required a written agreement between the named insured and the entity that wanted to be added as an additional insured on the liability policy. That did not exist and so, the general contractor lost its bid to be covered as an additional insured.