Defective Workmanship Not an Occurrence

The plaintiff appealed from a judgment denying its motion for summary judgment against an insurer for a claim of property damage. This case is Allied Roofing, Inc. v. Western Reserve Group, 2013 WL 1749707.

This case arises from work performed by Beish under a subcontract agreement with Allied Roofing. The subcontract provided that Beish would remove runner roofing from a damaged roof at a building in Columbus, Ohio and replace it with new rubber roofing. As part of the job, Beish had to remove and reinstall air conditioning units. At some point during the process of removing and reinstalling the air conditioning units, the coils became twisted, causing the coolant to leak out. The damage to the units was discovered when they were turned back on after Beish completed his work. Allied Roofing reimbursed the building owners for the damage, incurring costs of $10,148.

Allied Roofing then filed a lawsuit against Beish and his insurer, Western Reserve seeking to recover the costs of remedying the damages. The insurer filed a motion for summary judgment, alleging that the damage was not covered by Beish's general liability policy. The trial court granted the insurer's motion and this appeal followed.

The Court of Appeals noted that the policy provides that the insurer will pay all sums to which the insured becomes legally obligated to pay as damages for property damage caused by an occurrence. The insurer claimed that the damage to the air conditioning units did not constitute an occurrence as defined in the policy. Allied Roofing disagreed.

The court said that the Supreme Court of Ohio addressed the question of what constitutes an occurrence under a commercial general liability insurance policy in Westfield Insurance Company v. Custom Agri System,, Inc., 133 Ohio St.3d 476 (2012). The Supreme Court decided that a central concept in the realm of insurance coverage was the doctrine of fortuity and the idea that commercial general liability policies cover truly accidental property damage, not damages arising from processes controlled by the insured and that could be anticipated. The Supreme Court concluded that claims of defective construction n or workmanship brought by a property owner are not claims for property damage caused by an occurrence under a general liability policy.

The appeals court said that the parties involved in this particular lawsuit stipulated that, as part of Beish's work, he had to remove and reinstall air conditioning units located on the roof. Furthermore, Beish was negligent in failing to ensure that the coils did not become twisted, damaging the units. Thus, the court decided, the claim is one of defective workmanship in performing his obligations under the contract, and pursuant to the Westfield decision, such a claim did not constitute property damage caused by an occurrence. The claim fell outside the grant of coverage under the terms of the insurance policy.

The ruling of the trial court was affirmed.

Editor's Note: This is one more case in the ongoing dispute over whether faulty workmanship by a contractor is an occurrence covered by the CGL form. The Ohio Supreme Court and the Court of Appeals, Tenth District, hold the opinion that claims of defective workmanship are not occurrences and so, are not covered under the CGL form. With this ruling and with the Westfield ruling, the courts fall into the camp that holds that defective workmanship is a business risk that is a normal, frequent, or predictable consequence of doing business, and a risk that a business can and should control or manage, that is, a risk not covered by the CGL form.

Physical Evidence of Loss and Coverage Dispute

The insured filed a lawsuit against its insurer after the insurer denied a claim for lost jewelry. This case is National Grange Mutual Insurance Company v. Elegant Slumming, Inc., 59 A.2d 928 (2013).

Elegant Slumming is a jewelry store specializing in selling precious jewelry, gold, platinum, gemstones, and fashion jewelry. Sometimes when merchandise arrived at the store, the packages would be placed under a wrap desk. In June, 2010, Elegant Slumming received two packages containing jewelry worth $141,640. The employee placed the packages under the wrap desk. Later that day, while closing the shop, the employee cleaned out the trash, including the trash located near the wrap desk. Days later, the owner of the store realized that the packages were gone and the assumption was that the employee had thrown the packages out with the trash.

The insured submitted a claim to the insurer, which denied coverage. The insurer stated that the policy excluded coverage for loss or damage to property that is missing but for which there is no physical evidence to show what happened to it. The insured filed a lawsuit and the trial court ruled that coverage under the terms of the policy only requires some evidence of what happened to the missing property, and found in favor of the insured. The insurer appealed.

The insurer claimed that the trial court erred in finding that the insurance policy requires only “some evidence” rather than “physical evidence” to show what happened to lost property. The Supreme Court of Delaware found that the trial court did err in concluding that mere verbal testimony satisfies the physical evidence require, ruling that “to find that a requirement of physical evidence is satisfied exclusively by testimonial evidence would be contrary to the plain and ordinary meaning of the term. Physical evidence means any article, object, document, record, or other thing of physical substance”. However, the Court's analysis did not end there.

The Court said that its holding that testimonial evidence, by itself, did not constitute physical evidence did not change the facts that the policy language at issue is an exclusion and that the burden is on the insurer to demonstrate that the exclusion applies in this instance. The Court said that Elegant introduced the purchase order invoices, the shipping receipts for the jewelry, photographs of the wrap desk area where the packages were placed and photos showing the close proximity of the trash bins to this area. These items represented physical evidence in the eyes of the Supreme Court, and these items, together with the testimonial evidence presented by the insured, did show what happened to the lost property. The insurer then failed in its duty to show that the exclusion applied.

The ruling of the trial court was affirmed.

Editor's Note: The opinion of the Delaware Supreme Court started out by agreeing with the insurer that mere testimonial evidence did not equate with the policy requirement of physical evidence in order to show a covered loss. However, the Court then pointed out that the insured did present certain physical evidence of the existence of the jewelry and this, along with the testimony of the insured, was enough “physical evidence” to show how the loss occurred. Since the insured did prove a loss to covered property occurred, the burden of proof shifted to the insurer to show that the policy exclusion as worded prevented coverage. The insurer failed to do this in the eyes of the courts and so, the loss was covered.

Release Allowed Driver to Not Be Held Legally Responsible

The auto insurer brought a declaratory judgment action seeking a declaration that it would not be held liable for any damages incurred in connection with an auto accident. This case is North Carolina Farm Bureau Mutual Insurance Company v. Smith, 2013 WL 2169577.

Smith was operating a motor vehicle owned by his then-wife when he crashed into another vehicle occupied by the Savages. The Savages filed a lawsuit against Smith, his wife, and his parents since Smith allegedly resided with his parents at the time of the accident; the Savages claimed that Smith was an insured under a Farm Bureau auto policy held by his father since he resided with his parents.

In 2008, the Savages entered into an agreement with Smith and his insurer (Allstate) entitled “Release, Covenant Not To Execute and Settlement Agreement”. The Savages agreed, in consideration of the sum of $50,000, never to attempt to collect any sum from Smith except to the extent allowed in the agreement, never to seek to execute except to the extent allowed in the agreement, and never to seek to collect any such judgment out of the personal or real assets of Smith.

In 2011, Farm Bureau, the parents' insurer, filed a declaratory judgment action seeking a declaration that it would not be held liable for any damages incurred by the Savages in connection with the auto accident. Farm Bureau argued that Smith was not covered under his parents' policy, and that even if he were covered, coverage was barred because of the settlement agreements executed by the Savages which included covenants not to execute. The trial court granted summary judgment to Farm Bureau and this appeal followed.

The Court of Appeals of North Carolina noted that the Farm Bureau policy provided that the insurer will pay damages for which any insured becomes legally responsible because of an auto accident. So, assuming that Smith was an insured under the policy of his parents, the critical issue was whether Smith can be held legally responsible for the Savages' damages in light of the covenants executed by the Savages. The court decided, after a careful examination of the covenants, that the Savages were precluded from executing on any judgment obtained against Smith.

The court said that when an insurer's obligation under a policy is to pay all sums that the insured shall become legally obligated to pay, and when the insured under that policy is given a release by the injured parties of the nature set forth in the covenants (that is, where the parties covenant that no judgment shall be executed against the insured), the insurer's obligations under the policy are extinguished by the execution of the covenant. As such, for purposes of the Farm Bureau policy, Smith can no longer be held legally responsible by the Savages.

The opinion of the trial court was affirmed on the grounds that the covenants bar the Savages from recovering against Farm Bureau.

Editor's Note: This seems to be a case where the injured parties received some advice from someone that was not appropriate. When signing a release, an injured party needs to read the agreement and be sure that the offending party is not totally released from any and all legal responsibility for causing the injuries. Courts will in most cases honor the terms of releases and settlement agreements.

Joint Tenancy Does Not Limit Ownership Interest of Insured

The insured brought an action against his insurer seeking additional benefits under his homeowners policy after the property was destroyed by fire. This case is Georgia Farm Bureaus Mutual Insurance Company v. Franks, 739 S.E.2d 427 (2013).

Franks purchased property and got a homeowners insurance policy from Georgia Farm Bureau. The policy listed Franks as the only insured. The policy also stated that “even if more than one person has an insurable interest in the property, Georgia Farm Bureau will not be liable in any one loss to the insured for more than the amount of the insured's interest at the time of the loss.”

After the closing, Franks executed a warranty deed, conveying the property to himself and to his domestic partner, Morrison as joint tenants with survivorship and not as tenants in common. Then, when the homeowners policy was renewed, Franks told his agent that Morrison was on the deed as a co-owner and asked whether Morrison needed to be added to the policy as an insured. The agent said this was not necessary.

In 2010, the house was completely destroyed by fire. Franks filed a claim and the insurer issued checks to Franks and to cover two secured loans. The insurer told Franks that because the insured property was owned by Franks and Morrison as a tenancy in common with the right of survivorship, Franks' insurable interest in the property was only one-half. Based on this calculation, the insurer paid Franks only one-half of the difference between the policy limits and the amount paid to discharge the secured debts. Franks sued and the insurer filed an application for interlocutory review and filed for a summary judgment. The trial court denied the motion and this appeal followed.

The Court of Appeals of Georgia noted that it was well settled that having title or an ownership interest is not the sole basis for having an insurable interest. The test of insurable interest in property is whether the insured has such a right, title, or interest therein, or in relation thereto, that he will be benefitted by its preservation and continued existence, or suffer a direct pecuniary loss from its destruction or injury by the peril insured against. Thus, Georgia law defined an insurable interest in property as “any actual, lawful, and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage or impairment.”

The insurer conceded that Franks had an insurable interest in the property but contended that the measure of his ownership interest, being less than sole and undivided, limits his recovery to a fraction of the policy limits. The insurer said that as a matter of law, the amount of Franks' interest was 50 percent of the value of the dwelling, less debt secured by the property. The court said that, although ownership is shared, the title and interest are not divided into fractional shares. So, even though Morrison had the same rights as Franks to use and possess the property, Franks' title and interest in the insured property was undivided. The insurer's argument was rejected by the court.

The court continued that, once any insurable interest is shown to exist, it is the policy that determines the amount the insured is entitled to recover. This policy provided that the insurer would not be liable in any one loss for more than the amount of the insured's interest in the property. However, the phrase “the amount of the insured's interest” was not defined in the policy, and since Franks' ownership interest, though shared, is not fractional, but is rather, undivided, Franks is entitled to the total amount of recovery, not 50 percent.

The ruling of the trial court was affirmed.

Editor's Note: The Georgia Court of Appeals combined Georgia statutes and the policy language to make the point that the policy did not limit the insured's recovery to half the difference between the policy limits and the amount paid to discharge secured debts. The fact that the insured owned the property with his domestic partner as joint tenants did not limit the insured's ownership interest in the property to 50 percent as the insurer claimed.