See Sprinkler Leakage Insurance.

Requirements for the Duty to Defend to Apply

This is an insurance coverage dispute between the insurer and its additional insured. The case is Milwaukee Mutual Insurance Company v. Centex Real Estate Corporation, 2013 WL 4085068.

Centex was sued by a homeowners association for negligence and breach of warranty relating to a design and construction project. Milwaukee Mutual had a policy with Valley Waterproofing that listed Centex as an additional insured and Centex sought coverage under that policy. The insurer filed a complaint seeking a declaration that it had not duty to defend or indemnify Centex. The insurer asserted that the policy did not apply because the underlying complaint did not seek damages, there were no allegations of property damage or occurrence (as those words are defined in the policy), and there were no allegations of property damage during the policy period.

Milwaukee Mutual said that the underlying plaintiff did not seek damages because of property damage, but sought recovery based on economic loss. However, Centex noted that the underlying complaint sought costs not only associated with repair work, but also costs for repairing collateral damage to property. The court ruled that there was a claim for alleged damages as defined in the policy.

The insurer also alleged that there was no claim for property damage as defined and no occurrence as defined in the policy. However, the court said that, although somewhat vague, the underlying complaint does allege physical injury to tangible property as required by the policy. Moreover, the allegation of negligent construction (if proven), qualifies as an occurrence within the meaning of the policy and under the law.

The final argument by the insurer was that the underlying complaint did not allege, and there is no evidence that, property damage occurred during the policy period. The court agreed with this argument. The court noted that Minnesota courts apply the actual injury or injury-in-fact rule when determining whether damage occurred within the policy period. Under this rule, coverage is triggered when the damage actually occurs, rather than when the wrongful act occurred. This means that, in this case, the damage to the project must have occurred during the policy period; it was not enough that the underlying work occurred during the policy period.

The court found that the underlying complaint contained no basis to conclude that the damage occurred during the policy period. No dates were mentioned and there was no indication as to when the construction occurred, let alone when the damage occurred. This absence of such evidence is dispositive of the case said the court.

In sum, neither the underlying complaint nor the record supports a finding that the additional insured (or the named insured) performed the work at issue within the policy period. Under these circumstances, the court ruled that Milwaukee Mutual had no duty to defend and no duty to indemnify Centex.

Editor's Note: This ruling by the United States District Court, Minnesota, confirms the point that unless the insuring agreement in the liability policy is met, there is no coverage; there is no need to go further and examine whether any exclusions apply. The insuring agreement states that the insurance applies only if “property damage” is caused by an “occurrence” (both as defined in the policy) with the property damage occurring during the policy period. In this instance, there was no showing that the property damage occurred during the policy period, and so, the insuring agreement was not met and there was no duty to defend or indemnify on the part of the insurer.

Absolute Pollution Exclusion and the Duty to Defend

The insured brought a declaratory judgment action against its insurer after the insurer denied a duty to defend in an underlying action that alleged environmental damage resulting from the insured's mine and mill operations. This case is Doe Run Resources Corporation v. Lexington Insurance Company, 719 F.3d 868 (2013).

Doe Run operated a mine and mill that extracted and crushed ore containing lead and other materials. In 2006, Nadist, a neighboring landowner, sued Doe Run alleging environmental property damage resulting from the operations. More than three years later, Doe Run tendered defense of the lawsuit to its insurer, Lexington Insurance Company. When the insurer denied coverage on numerous grounds, the insured commenced this declaratory judgment action to enforce Lexington's contractual duty to defend Doe Run. The district court ruled in favor of the insurer and this appeal followed.

The Eighth Circuit noted that Lexington's CGL form broadly insured Doe Run against liability for property damage caused by an occurrence. However, the form also contained an absolute pollution exclusion that applied to bodily injury or property damage that “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 letter tendering defense to Lexington asserted that the metals and other materials that were generated or used by the insured do not qualify as pollutants and that the law makes clear that materials a company uses or sells and that are in the industrial environment where the company routinely works are not pollutants. The court did not accept this idea.

The court said that the allegations in the underlying complaint fit squarely within the language of the pollution exclusion. The general fact allegations reflected a complaint for relief from environmental property damage. Moreover, each of the tort causes of action were entirely premised on allegations that Doe Run is liable for causing the release or discharge of hazardous wastes, toxic substances, and contaminants. This language mirrored the language of the absolute pollution exclusion.

The insured then argued that the pollution exclusion did not apply as a matter of law. The insured claimed that it was in the business of producing lead concentrate and when purchasing the policy, Doe Run would reasonably believe that its product would not be excluded as a pollutant. The court did not accept this argument.

The ruling of the district court was affirmed.

Editor's Note: The United States Court of Appeals, Eighth Circuit, ruled that the absolute pollution exclusion was applicable to the facts in this case.

The insured argued that its lead concentrate was its primary product and that as such, in its eyes, it is not a pollutant. The insured said it was entitled to characterize the concentrate in a manner consistent with its daily activities absent specific policy language to the contrary, and since the policy did not identify the lead concentrate as a pollutant in its pollution exclusion, this made the exclusion ambiguous. The court said this was a minority position and has been rejected by other jurisdictions.

Additional Insured, an Umbrella Policy, and an SIR

An assignee sued the insurer claiming coverage as an additional insured under an umbrella policy. This case is Lewark v. Davis Door Services, 175 Wash.App. 1068 (2013). (Note that this is an unpublished opinion.)

Public Storage contracted with Davis Door Service to perform work at its facilities. The agreement included a provision that required Davis Door to maintain a commercial general liability policy that insured Public Storage while it was performing work. Davis Door took out a commercial general liability policy and an umbrella liability policy with American States.

Davis Door performed repair work on a door at Public Storage. Later, Lewark attempted to open the door and injured her back. She sued Public Storage and Davis Door. Lewark settled with Davis Door and then sued Davis Door and American States as assignee of Public Storage. Public Storage asserted that it was an additional insured under the umbrella policy issued to Davis Door, that the insurer acted in bad faith by failing to inform Public Storage of available coverage and benefits, and that the insurer failed to defend or indemnify it.

Public Storage argued that it was an additional insured, that the policy covered the loss, and that American States violated its duty of good faith by failing to notify Public Storage of its policy benefits. American States countered that Public Storage was not an additional insured and that the umbrella policy was not triggered in this instance. The trial court sided with the insurer and this appeal followed.

The Court of Appeals of Washington stated that even if Public Storage is an additional insured, the umbrella insurance policy did not cover the loss in this instance. The court explained that in an other insurance provision, the umbrella policy explicitly stated that it only applies excess over other insurance. Public Storage carried its own insurance policy with a $1,500,000 per occurrence limit. That policy contained a $500,000 self-insured retention, such that the insurer would only make payments for damages that exceeded $500,000. There was no evidence to suggest to the court that the underlying claim in this case reached that threshold.

Public Storage argued that, despite the fact that its insurance was not exhausted, the umbrella coverage applies because the self-insured retention is not insurance. The argument was based on the premise that self-insurance provisions are not insurance because traditional insurance involves risk shifting while self-insurance involves risk retention. It thus claims that its self-insured retention is not insurance and does not need to be exhausted before the umbrella policy kicks in.

The appeals court answered that self-insured retentions are not insurance. However, in this instance, the court noted that it is immaterial whether the self-insured retention itself is insurance because it is undisputed that Public Storage owns a primary insurance policy that mandates the self-insured retention. The other insurance provision is triggered since it explicitly states that American States is only responsible for losses above both the amount paid by another insurer and the amount of any deductibles or self-insured retentions. It is unreasonable to interpret that provision as requiring coverage in this case. Coverage was not triggered because Public Storage's losses were not in excess of its primary insurance and self-insured retention.

Because there was no available coverage and no available benefits, the appeals court affirmed the ruling of the trial court.

Editor's Note: Self-insured retentions (SIRs) continue to be looked upon as insurance by some parties but the Court of Appeals of Washington affirms its position that SIRs are not really insurance. But, as the court pointed out, in this instance, that fact is not relevant since the umbrella policy issued by American States explicitly stated that the insurer would pay its share of the loss that exceeded the sum of the total amount that all such other insurance would pay for the loss and the total of all deductible and self-insured amounts under all such other insurance. The umbrella policy clearly included the SIR in its excess coverage language.

The Auto Exclusion and Negligent Supervision

The commercial general liability insurer brought an action against the automobile insurer seeking a declaration that it had no obligation to defend or indemnify the insured in the underlying action, such that the auto insurer had no right to contribution from the general liability carrier. This case is First Specialty Insurance Corporation v. Pilgrim Insurance Company, 990 N.E.2d 86 (2013).

Pinto had been diagnosed with dementia. Pinto's family contracted with R. Squared Enterprises to provide nonmedical support services to Pinto. R. Squared assigned Pereira to work with Pinto. Pereira drove Pinto to a restaurant for lunch in an auto owned by Pinto's wife. While at the restaurant, Pereira consumed alcohol and allegedly became intoxicated. She thereafter drove negligently and crashed into a tree. Pinto suffered serious injuries. Pinto's family sued R. Squared on grounds of negligence and negligent hiring, training, supervision, or retention. First Specialty held a general liability policy for R. Squared and disclaimed coverage. Pilgrim Insurance had an auto policy for R. Squared and provided defense. The case was settled within Pilgrim's $1 million policy limit.

First Specialty Insurance Corporation (FSIC) filed a declaratory judgment action seeking a declaration that it had no obligation to defend or indemnify R. Squared and that Pilgrim had no right to contribution or subrogation. The trial court ruled in favor of FSIC and this appeal followed.

The appeals court noted that as an insurer's duty to defend is broader than its duty to indemnify, it only needed to consider here whether FSIC was obligated to defend R. Squared. The court pointed out that the general liability policy issued by FSIC contained an exclusion that was designed precisely to exclude coverage for any negligent supervision claims that might be raised when an auto was involved in the occurrence. The auto exclusion in the FSIC policy stated that the auto exclusion “applies even if the claims against the insured allege negligence in the supervision of others by that insured if the underlying claim involves an auto that is owned or operated by any insured.”

The only reasonable construction of this provision, said the court, is that it refers generally to any insured. Thus, for each defendant in the underlying litigation, the court had to determine whether, according to the complaint, that defendant negligently hired or supervised another insured person who owned or operated the auto involved in the accident. If so, that claim of negligence is unambiguously excluded from coverage under the FSIC policy.

The direct claim for negligence against Pereira obviously fell within the auto exclusion. Moreover, any claims seeking to impose vicarious liability on R. Squared for Pereira's negligence are also excluded as they are not separate and distinct from the use or operation of an auto. As for negligent hiring and supervision, these claims clearly fall within the auto exclusion's paragraphs. And, because all of the claims in the underlying complaint were excluded under FSIC's policy, the trial court ruling was proper. The judgment in favor of FSIC was affirmed.

Editor's Note:

The auto exclusion in the FSIC general liability policy clearly prevented coverage for the use of the auto for the parties that were insured under the policy, namely, the driver (employee) and the named insured (R. Squared). The auto exclusion also clearly applied to claims against any insured that alleged “negligence or other wrongdoing in the supervision, hiring, employment, training, or monitoring of others by that insured”. Since the claim against R. Squared involved the negligent hiring and supervision of Pereira, the auto exclusion was also applicable in this instance.