To the extent insurers are willing, an alternate employer endorsement is a good way to protect entities that are involved in special employer situations; that is, where one entity borrows the employee of another entity and desires protection in the event the borrowed employee is injured while under the direction and control of the entity that has borrowed that employee. What complicates these kinds of relationships is that it is not always clear who is considered an employer of one or more leased, borrowed, or lent workers, because the answer hinges on a number of variables.

The article of the month discusses these variables with accompanying court decisions. Also discussed is the alternate employer endorsement introduced by the National Council on Compensation Insurance (NCCI) for use in conjunction with the standard workers compensation and employers liability policy.

See Alternate Employer Endorsement.

Material Misrepresentation Case

The auto insurer brought an action seeking a declaratory judgment that the insured's failure to disclose on the insurance application that a 15-year-old resided in her home and was involved in an auto accident was a material misrepresentation, rendering the policy voidable. This case is Jones v. Safeway Insurance Company, 2015 WL 5157597.

While driving his mother's car, teenager William Busby crashed into Tarlton's car, which in turn, collided with a car driven by Jones. William's mother had not disclosed in her insurance application to Safeway Insurance Company that William resided in her home. Without this knowledge, Safeway issued the auto policy. When the claim was presented to Safeway, the insurer filed a declaratory judgment action seeking to render the auto policy voidable based on a material misrepresentation.

The Circuit Court granted summary judgment to Safeway and this appeal followed.

The Supreme Court of Mississippi noted that the longstanding, well-established law in the state renders voidable a policy issued as a result of material misrepresentation. In this instance, the court went on, there can be no doubt that the circuit judge properly voided the policy issued by Safeway. The application required the mother to warrant that she had provided the names of all residents of her home over the age of fourteen. She admittedly failed to do so by failing to disclose sixteen-year-old William, to whom she even gifted a car covered by the policy. Because the parties to the contract characterized this assertion as a warranty, its materiality need not be questioned, and the circuit judge properly voided the insurance contract because the statement was not literally true.

The court also noted that the misrepresentation was material because, without a 209 percent increase in the auto policy rate, Safeway would not have issued the policy.

The ruling of the circuit court was affirmed.

Editor's Note: The Mississippi Supreme Court applied precedent and upheld the principle that an insurance company may void a policy when the insured made material misrepresentations during the application process. When the insurer in this case found out about the misrepresentation, it sought to have the policy declared void and the court upheld the insurer's position.

Meaning of Accident

The insured homeowner brought an action against the insurer for breach of insurance policy and bad faith after the insurer refused to defend the homeowner in an underlying trespass and negligence action brought by the homeowner's neighbor. This case is Albert v. Mid-Century Insurance Company, 236 Cal.App.4th 1281 (2015).

The insured purchased a homeowners policy from Mid-Century and the policy was in force when the insured's neighbor sued the insured for damage caused to his property when the insured erected an encroaching fence and pruned nine mature olive trees. When the claim was presented to Mid-Century, the insurer denied coverage and this lawsuit was initiated.

The Superior Court, Los Angeles County, ruled in favor of the insurer and this appeal followed.

The Court

of Appeal, Second District, noted the coverage provided by the homeowners policy and also noted the exclusions. One of the exclusions was for intentional acts whereby coverage was denied for property damage caused by, arising out of, or as the result of an intentional act by or at the direction of the insured. The court said that this exclusion applies even if an insured mistakenly believes he or she has a right to engage in certain conduct.

The insured asserted that the fence she erected was within her property line and said the trees were boundary trees that essentially straddled the property line. She claimed that in good faith she believed the trees were hers and that whether her conduct was accidental was a triable issue of fact. The insurer countered that the claims against the insured all arose from the insured's nonaccidental conduct and so, the policy excluded coverage.

The court said that the policy covers property damage resulting from an occurrence and the policy defined an occurrence as an accident. Under California law, accident in an insurance policy refers to the conduct of the insured for which liability is sought to be imposed on the insured. An intentional act is not an accident within the plain meaning of the word. The court also stated that an accident is never present when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.

In this instance, the insured posits that although she deliberately hired a contractor to trim the trees, the actual damaging cutting was not an intended consequence and so, her actions should be deemed an accident. The court decided that it was completely irrelevant that the insured did not intend to damage the trees because she intended for them to be pruned. The court found that the trimming of the trees was no accident and the insured failed to carry her burden to show that the claims against her may fall within the scope of the policy.

The judgment of the Superior Court was affirmed.

Editor's Note: The Court of Appeal decided that when an insured intends the acts resulting in injury or damage, it is not an accident merely because the insured did not intend to cause the injury; the insured's subjective intent is not relevant. In this instance, the insured's act in deliberately hiring a contractor to trim trees was held not to be an accident. She intended to have the trees cut and even though she may not have intended the trees to be cut so much as to damage them, her act was held to be intentional. The court upheld the exclusionary language in the policy.

Entrustment to Others Issue

The insurer filed an action seeking a declaration that it has no obligation to indemnify the insured for damage to his premises caused by a tenant's dishonest or criminal acts. This case is United Specialty Insurance Company v. Barry Inn Realty, 2015 WL 5244664.

Barry acquired the premises in 2004 or 2005. Barry and Castelliano entered into a five-year lease for the premises. Under the terms of the lease, Castelliano was to use and occupy the premises for a restaurant and for no other purpose. In 2013, the police raided the place and discovered that the premises was being used to grow marijuana.

In constructing the marijuana operation, Castelliano removed or modified a number of building components and installed a sprinkler system and illegal wiring. The extreme humidity necessary to grow marijuana caused significant damage throughout the building and required the demolition and replacement of interior building components. Barry submitted a claim for property damage to the insurer, United Specialty. Rather than pay the claim, the insurer filed this action, seeking a declaration that it had no duty to indemnify Barry for the damage because of the policy exclusion barring coverage for damage caused by the dishonest or criminal acts of someone to whom Barry entrusted the premises.

The United States District Court for the Southern District of New York noted that the decision pertaining to coverage turns on whether Barry entrusted the premises to Castelliano. The court said that the term “entrustment” must be given its ordinary meaning, such as the average policyholder of ordinary intelligence would attach to it. It is well established under New York law, said the court, that entrust means that the insured surrendered or delivered or transferred possession of the premises with confidence that the property would be used for the purpose intended by the owner and as stated by the recipient. The controlling element is the design of the owner rather than the motive of the one who obtained possession.

The court also said that an entrustment exclusion in an insurance policy applies to persons whose status is created or accepted by the insured as the result of a consensual relationship between the parties. The exclusion does not apply where a property recipient's status is solely self-generated, that is, an insured has not entrusted property to a recipient where there is deceit from the outset, not only as to intent, but also as to identification of the recipient.

In this instance, the court said, entrustment is manifest in the course of dealings between Barry and Castelliano. Negotiation of the lease took place over a three-month period. The lease itself is fourteen pages in length and contains various negotiated terms and conditions. This suggested to the court a measured and deliberate decision by Barry to permit Castelliano to occupy the premises. In short, the insured's actions demonstrate that he acted with care and deliberation in agreeing to accept Castelliano as a tenant and in entering into the lease.

Because Barry had a consensual relationship with Castelliano and accepted his status and identity, it was immaterial to the court that Castelliano abused Barry's confidence and had an undisclosed intent to use the premises to grow marijuana. It is the intent of the insured that controls and it was clear from the facts that Barry intended to surrender, deliver, or transfer possession of the premises to Castelliano and that it was done with confidence that the premises would be used for the purpose intended by Barry. It was clear to the court that Barry entrusted the premises to Castelliano and no reasonable jury would conclude otherwise.

The court ruled that the policy did not provide coverage for the damage sustained as a result of the marijuana operation. The insurer's motion for summary judgment was granted.

Editor's Note: The U.S. District Court discusses the meaning of “entrustment” under New York law and finds that the insured did indeed entrust the premises to Castelliano. Therefore, the entrustment exclusion in the policy applied and the damage done by Castelliano was not covered by the policy.

Total Residential Exclusion

In this declaratory judgment action, Atain Specialty Insurance Company moves for summary judgment on the grounds that, as a matter of law, the insurer does not owe a duty to defend or indemnify. This case is Atain Specialty Insurance Company v. North Bay Waterproofing, 2013 WL 1819609.

The insurer issued three general commercial liability policies covering calendar years 2005, 2006, and 2007. Each policy insures North Bay for liability arising from its waterproofing work. Attached to the policies is an endorsement, total residential exclusion, that excludes coverage for property damage arising from any work in connection with any condominium, townhouse, single family dwelling, or other residential or tract housing project.

In 2010, STRS brought claims for property damage against North Bay and others in connection with work performed in the construction of an apartment complex in California. When the claim was presented to Atain, the insurer filed this action, arguing that it is entitled to summary judgment because the work of North Bay falls within the scope of the total residential exclusion.

The United States District Court for the Northern District of California noted that the crux of the dispute here is over the meaning of the words “work or operations in connection with any condominium, townhouse, single family dwelling, and other residential or tract housing project”. The parties do agree that the subject property in the underlying complaint does not qualify as a condominium, townhouse, or single family dwelling. However, Atain argues that the subject property fits under the “other residential or tract housing project” phrase of the exclusion; the insured disagrees.

The court looked at the description of the subject property and found it to fit the term “residential”. The property is known as The Boulders at Fountaingrove and contains 124 residential dwelling units, a leasing office, a pool, a gym, and a community center. The website describes the property as beautifully and intelligently planned residences where occupants can live a life without compromise.

The counter argument is that despite this description, the property is, for purposes of the insurance policies, commercial because the residential exclusion language does not explicitly include apartments and the project documents refer to the project as commercial.

The court said that the first argument is foreclosed by the clear terms of the exclusion. The phrase “other residential or tract housing project” envisions that structures not included in the list of specific examples will nevertheless within the scope of the total residential exclusion. The court dismissed the second argument by simply declaring that such an argument would render the terms of the exclusion meaningless. In short, the court ruled that the exclusion clearly and explicitly excludes coverage for residential projects and the plain meaning of residential in the exclusion includes within it structures like the subject property.

The court ruled that Atain does not have a duty to defend North Bay and it granted summary judgment to Atain.

Editor's Note: The U.S. District Court examined the specifics of the property in question and compared it with the wording of the exclusion. The exclusion referred to residential projects and the property in question clearly fit that description and so, coverage was excluded.