Hurricane Damage versus Faulty Workmanship

A motion for summary judgment was made by a third-party defendant. The issue pertained to whether the property damage was caused by a hurricane or by faulty workmanship. This case is Cedar Ridge, LLC v. Landmark American Insurance Company, 2014 WL 295068.

Cedar Ridge filed a complaint against Landmark seeking to recover damage sustained by the Riverlands Shopping Center pursuant to an insurance policy issued by Landmark. Cedar Ridge claimed the damages were a result of Hurricane Isaac. Landmark denied Cedar Ridge's insurance claim, asserting that emergency mitigation work caused additional damage to Riverlands. As a basis for the denial, Landmark invoked a policy exclusion that applies to faulty, inadequate, or defective workmanship, repair, construction, renovation, remodeling, grading, and to faulty, inadequate, or defective materials used in repair, construction, renovation or remodeling.

After the hurricane, Cedar Ridge had contracted with Roof Tech to perform emergency mitigation work. Landmark filed a complaint against Roof Tech, asserting that, in the event that Landmark is held liable for any claims asserted by Cedar Ridge, Rood Tech is liable to Landmark for the damage it caused to the property as a result of its defective workmanship and improper installation of tarps of the roof following the hurricane. Roof Tech filed this motion for summary judgment.

The U.S. District Court noted that a third-party plaintiff's demand is sustainable if at all on one of two alternate premises. Either it should prevail on its own third party claim against the third-party defendant, or it should do so through subrogation. The latter theory of recovery is not at issue here because Landmark has not disputed Roof Tech's assertion that Landmark has not made any payment to Cedar Ridge and subrogation can only take place upon payment. Accordingly, the court turned its attention to whether Landmark has its own third party claim against Roof Tech.

The court said that where a third party demand does not allege that the third party defendant is a warrantor of the third party plaintiff, or is liable to the third party for all or part of the principal demand, the third party demand fails to state a cause of action. Here, Landmark's third part demand can only appropriately assert that Roof Tech is bound to reimburse Landmark should Landmark be found liable on Cedar Ridge's main demand. This demand is premised on hurricane damage, rather than on an allegation that Roof Tech performed faulty repairs relative to the hurricane damage. Therefore, if Cedar Ridge's policy does not apply to any damages caused by Roof Tech's allegedly faulty work, then Roof Tech is entitled to summary judgment.

The parties dispute whether a genuine issue of material fact exists as to whether any damages caused by Roof Tech's work are a covered loss under the policy. The court said that it agreed that the plain language of the policy indicates that an exclusion applies to any damage caused by Roof Tech's allegedly faulty work. Admissible evidence shows that faulty repairs, including faulty short-term mitigation repairs, are subject to a policy exclusion and Landmark did not come forward with any admissible evidence to the contrary. So, the court concluded that there is no genuine issue of material fact and that the policy exclusion does apply to Roof Tech's allegedly faulty work. The court decided that the principal demand in this case, as set forth by Cedar Ridge's complaint, did not encompass the damages allegedly caused by Roof Tech, and there is no subrogation claim pending before the court. Accordingly, the court found that Landmark's third-party complaint against Roof Tech was baseless.

Roof Tech's motion for summary judgment was granted.

Editor's Note: In this case, the United States District Court, Eastern District of Louisiana, had to decide if the faulty workmanship exclusion on the policy of the named insured applied to a third party that had performed work on the named insured's property. The court did find that if admissible evidence showed that faulty repair work was performed by the third party, the exclusion would apply.

Letter of Intent and Written Contract Requirement

Don Malecki, a contributing editor for the FC&S Bulletins, wrote in his recent blog about whether a written contract and agreement, with reference to insurance coverage, are synonymous. Don cited some cases that pertained to this subject.

In American Guarantee and Liability Insurance Company v. Lexington Insurance Company, 517 Fex.Appx. 599 (2013), the United States Court of Appeals, Ninth Circuit, addressed an appeal from the district court's holding on cross-motions for summary judgment that Lexington Insurance Company did not have a duty to defend BBI Construction in a lawsuit brought by an employee of RCM Fire Protection.

The circuit court noted that the insurance policy that Lexington Insurance issued to RCM extended coverage to additional insureds where required by written contract. The court decided that the letter of intent between BBI and RCM satisfied this requirement. The court found that there was no genuine issue of material fact as to whether the letter was a binding contract to furnish documents evidencing general liability coverage naming BBI as an additional insured. Moreover, BBI qualified as an additional insured under the insurance policy because the employee's injuries arose out of RCMs ongoing operations performed for BBI. The ruling of the district court was reversed.

Of some interest was the concurring opinion by another jurist. The concurring judge said that while he concurred in the judgment, he disagreed with the reasoning of the majority.

In the concurring opinion, the judge said that the letter of intent was not supported by consideration, so it cannot be the written contract required for additional insured coverage. The judge pointed out that the letter of intent is generally intended to be “a nonbinding expression in contemplation of a future contract”. Moreover, a letter of intent is bereft of consideration and since a basic principle of contract law is that an agreement cannot be an enforceable contract unless it is supported by consideration, the letter of intent was not a written contract.

Another case is Naylor v. Navigators Insurance Company, 2013 WL 990943. Before the United States District Court for the Southern District of California, was a motion for summary judgment filed by the insurer. The sole issue raised was whether Naylor qualified as an additional insured under the general liability policy.

Naylor was the general contractor on a construction project in 2004 and 2005. Coast Contracting and Development was a subcontractor. Gemini Insurance Company insured Coast and the policies contained a blanket additional insured endorsement extending coverage to “any person or organization for whom you are performing operations when you and such 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”.

After an incident and lawsuits, Naylor filed this action seeking coverage under the Gemini policies as an additional insured. The gist of Naylor's claim is that he was wrongfully denied coverage as an additional insured, and the insurer argued that Naylor failed to present evidence of a written contract or agreement between Naylor and Coast that would satisfy the additional insured requirement.

The court noted that neither side disputed the core requirement that a party seeking additional insured status must enter into a written contract or agreement with the insured for coverage. Gemini contended that there was no evidence of a contract or agreement; there was no document stating that Coast would name Naylor as an additional insured. Naylor claimed that a letter and facsimile form the requisite agreement. Having reviewed the arguments presented by the parties, the court concluded that Gemini was not entitled to summary judgment.

The court said that the additional insured endorsement expressly requires a written contract or agreement, and although the words “contract” and “agreement” are often used interchangeably, an agreement has a wider meaning and contains no implication that legal consequences are or are not produced. In the court's view, there was at least a genuine issue of fact as to whether Naylor and Coast exchanged the letter and facsimile mentioned by Naylor in a manner evincing the parties' mutual assent to add Naylor as an additional insured, thereby satisfying the written agreement requirement. Therefore, there existed a factual dispute as to Naylor's status as an additional insured and a summary judgment cannot be granted.

The court also discussed the certificate of insurance that was issued to Naylor.

Gemini argued that the certificate of insurance cannot be part of a written agreement. The insurer said that under California law, a certificate of insurance is merely evidence that a policy has been issued. The court said that were it to view the certificate in a vacuum, it would agree that, as a matter of law, the certificate does not constitute a written agreement to make Naylor an additional insured. However, the court did not view the certificate in a vacuum. Naylor presented evidence that he requested a copy of the general liability policy naming him as an additional insured and that he subsequently received both the certificate and endorsement. Naylor argued that this written exchange evinces intent to comply with his request to be an additional insured on the Gemini policy.

Don ended his blog with the prediction that as insurers challenge the limitation of the term “contracts” when the term “agreements” is not included in the additional insured endorsement, this is going to become a fertile area for litigation with a likely result of mixed decisions that will make it impossible to formulate a consensus of some kind.

Don also noted that, given that the term “agreement” is said to be broader than the term “contract,” it appears that it would be advantageous for insurers to provide coverage to additional insureds as required by written agreement and not to restrict additional insured coverage to written contracts.

Policy Interpretation

This case consists of an argument between two insurers over commercial construction coverage, and the coverage issue turns on the interpretation of an exclusion. The case is American Empire Surplus Lines Insurance Company v. National Fire Insurance Company of Hartford, 2013 WL 1194866.

American Empire and two other insurers were, at the time of this lawsuit, defending ARCI in a construction defect lawsuit. American Empire sought in this case a declaration that First Specialty was also obligated to defend ARCI. First Specialty argued that its obligation to defend ARCI was precluded by the part of the relevant policy entitled “construction of residential property exclusion with exception for apartments.”

The United States District Court for the Southern District of Texas noted that the parties disagreed as to the last portion of the exclusion that stated no coverage exists and no duty to defend is provided for property damage “which occurs after the conversion of the apartment into a condominium, town home or multi-family dwelling.” American Empire asserts that the phrase “which occurs” refers to bodily injury, property damage, and personal and advertising injury. Based on this interpretation, American Empire holds that First Specialty has excluded only injuries and damages that occurred after the conversion of the apartments into condominiums; therefore, because the alleged construction defects occurred before conversion, First Specialty would not have excluded coverage for the defects alleged in the lawsuit against ARCI. First Specialty, in contrast, said that “which occurs” refers to claims and since the claims for construction defects were made after the conversion to condominiums, those claims are outside First Specialty's coverage.

The court said that in interpreting a contract, the primary concern is to give effect to the true intent of the contracting parties. In this process, the court said, the sentence that contains the disputed language must be read in light of the policy and the endorsement.

The sentence preceding the sentence with the disputed language excludes coverage for “any and all claims” and then goes on to make clear that no coverage exists for claims for bodily injury, property damage, and personal and advertising injury. To the court, the operative words here are variations of “excludes” and “claims”. So, there is every reason to conclude that the next sentence follows the same structure, using “exclude” and “claims” as the operative words.

When the first sentence so clearly states that it is “claims” that are excluded from coverage, it would be strange if the next sentence also focused on excluding bodily injury, property damage, and personal and advertising injury. In short, the first sentence excludes broad categories of claims. The second sentence then adds another specific category of excluded claims—those arising after the conversion of the apartments to condominiums. The court went on to state that it would make little sense that First Specialty would be worried about bodily injury, property damage, and personal and advertising injury caused by ARCI's roofing, sheet metal, and chimney flashing work that might occur after conversion. What property damage that might occur after conversion could ARCI be responsible for, asked the court?

Moreover, the court said, First Specialty's reading of the exclusion is more logical due to the time line. The disputed language was drafted at a time when First Specialty was entering into an agreement with ARCI for coverage on a construction project. ARCI's part of the project was underway and First Specialty sought to exclude coverage as to the period after conversion of the apartments into a different kind of living unit.

The court said that is was conceivable that claims for occurrences could be made post-conversion. For example, claims could be made that, in connection with the conversion to condominiums, buyers had been the victims of misleading advertising and that ARCI's original work had resulted in the property being in some respect deficient. Such potential claims represented a future contingency for which First Specialty would not wish to be liable. The court concluded that, although the draftsmanship of the exclusion was less than perfect, the logic of what First Specialty was doing is clear enough. It is impossible to believe that ARCI, at the time the endorsement was issued, had a different understanding.

First Specialty's motion for summary judgment was granted.

Editor's Note: The U.S. District Court had to interpret an exclusion that it called “poorly drafted.” In doing so, the court relied on its view of the logic employed by First Specialty and the intent of the parties as to what coverage would be provided. First Specialty intended to cover the exposures facing ARCI only while ARCI was in the process of working on the conversion of apartments into condos and not after that conversion. This intention led to the wording of the disputed exclusion, and poor drafting aside, the court accepted the intention of the parties as the correct interpretation.