However, the case of the innocent coinsured—another person qualifying as an insured under the policy, who has no knowledge of, and no part in the fraudulent act—has not been so clear. The article of the month reviews policy provisions and court decisions pertaining to innocent coinsureds so as to enlighten readers on the past and current status of these coinsureds when it comes to recovery for an arson loss.

See Arson—Recovery by Innocent Coinsureds.

Protection and Indemnity Clause

In an employee's lawsuit against the employer under the Jones Act, the employer was granted leave to file a third-party action against liability insurers for breach of contract by failing to provide defense and indemnity under the protection and indemnity (P&I) clause in the employee's lawsuit to recover for injuries caused by the toppling of the employer's land-based crane. This case is Naquin v. Elevating Boats, L.L.C., 2016 WL 1138516.

In this insurance coverage dispute, Elevating Boats (EBI) appeals a summary judgment in favor of State National Insurance Company (SNIC). This appeal flows directly from a previous decision pertaining to an injury suffered by Larry Naquin. Naquin was using an EBI land-based crane to relocate a test block when the pedestal of the crane snapped, causing the crane to topple over. Naquin was severely injured and was unable to return to work.

Naquin sued EBI pursuant to the Jones Act and the jury concluded that Naquin was indeed a Jones Act seaman and that EBI's Negligence caused his injury.

The United States District Court for the Eastern District of Louisiana granted EBI leave to file a third-party complaint against its insurance companies, SNIC and Certain London Insurers. EBI complained that both insurers breached their insurance contracts by denying EBI's insurance claims arising from Naquin's accident and by failing to provide EBI with defense and indemnity. SNIC moved for summary judgment, asserting that EBI was not entitled to coverage under the P&I policy because coverage did not extend to Naquin's land-based incident. EBI responded that it was entitled to indemnity under the “any casualty or occurrence” language of the policy. The district court granted summary judgment to SNIC and this appeal followed.

The United States Court of Appeals, Fifth Circuit, said that it would consider only whether the district court erred in granting summary judgment to SNIC on the grounds that the P&I policy did not cover EBI's liability for Naquin's liability and that SNIC, thus, exhibited no bad faith in denying coverage. The court noted that the indemnity provision of the policy provided that the insurer would indemnify the assured for any sums that the assured, as owner of the vessel, shall have become liable to pay in respect of any casualty or occurrence during the currency of the policy.

SNIC asserted that the terms of the policy, specifically the “as owner of the vessel” language does not provide coverage for the land-based incident. EBI urged the court to accept a blanket reading of the policy that would provide coverage for any casualty or occurrence for which EBI might become liable. The court said that EBI's interpretation of the policy was unreasonable. The court ruled that the only way to give meaning to the provisions of the P&I policy is to construe the policy as limiting coverage to any casualty or occurrence that arises out of EBI's conduct as owner of the vessel.

The court went on to point out that there must be at least some causal operational relation between the vessel and the resulting injury in order for coverage to exist, and where the injury is done through nonvessel operations, the vessel must be more than the inert locale of the injury. In this instance, the court found that Naquin's incident in no way arose out of EBI's conduct as owner of the vessel. The land-based crane did not break on or even in close proximity to a vessel. Thus, EBI's attempts to craft a causal connection to a vessel are discharged, plainly and simply, by the underlying facts.

The court affirmed the district court's grant of summary judgment in favor of SNIC, concluding that it was EBI's actions as a platform operator or as a crane operator that caused the harm, and that does not make it a liability of a shipowner.

Editor's Note: The U.S. Fifth Circuit Court of Appeals rules that where there is no causal operational relation between the vessel and the resulting injury, there is no extension of coverage for the employer's liability under the P&I policy.

Failure to Conform Exclusion and Coverage for Advertising Infringement

The liability insurer brought an action against the insured manufacturer of flood vent products seeking a declaratory judgment that it had no duty to defend or indemnify the insured in an underlying action for false and misleading advertising and trademark infringement. This case is Selective Way Insurance Company v. Crawl Space Door System, d/b/a Crawl Space Door Systems, 2016 WL 740063.

Crawl Space Door (CSD) manufactures, distributes, and sells various flood vent products. In September 2013, Smart Vent Products, a CSD competitor, initiated a lawsuit against CSD alleging unfair competition, negligent misrepresentation, and trademark infringement. Selective Way Insurance agreed to defend CSD subject to a reservation of rights letter. In December 2014, Selective filed this lawsuit seeking declaratory judgment as to its duty to defend and indemnify its insured, CSD.

The United States District Court for the Eastern District of Virginia noted the CSD argument that Selective had a duty to defend and indemnify based on the personal and advertising injury liability provision in the Selective policy. The court also noted the policy definitions of personal and advertising injury included the disparagement provision and the use of another's idea in the named insured's own advertisement provision. These provisions are subject to various exclusions such as: quality or performance of goods, that is, failure to conform to statements; infringement of copyright, patent, trademark or trade secret (intellectual property exclusion); and, unauthorized use of another's name or product.

Selective argued that the allegations against CSD fit squarely within the failure to conform to statements exclusion. CSD countered that this exclusion does not apply because the complaint against it contains allegations that CSD falsely advertised and misrepresented not only its own products but also Smart Vent's products as well. The court said that the failure to conform exclusion is unambiguous and clearly bars coverage for injuries arising from a failure of CSD's products to live up to statements of quality and performance contained in its advertisements. The court found that the allegations in the underlying lawsuit clearly center on this failure. As a result, the failure to conform exclusion applies and bars coverage for the allegations against CSD.

The court also noted that Smart Vent contended that CSD intentionally infringed its incontestable trademark by, among other general allegations, using its registered trademark as a tag and a meta-tag in order to achieve a higher ranking and profile on Internet search engines. Selective said that coverage is barred by the infringement of copyright, patent, trademark or trade secret exclusion. The court said that in reading the exclusion narrowly, to the extent that the Smart Vent complaint alleges trademark infringement and unfair competition and negligent misrepresentation as the result of trademark violations, the exclusion does bar coverage for those claims.

In conclusion, the court ruled that the failure to conform exclusion and the intellectual property exclusion barred coverage of the claims against CSD. The motion by Selective Way for summary judgment was granted.

Editor's Note: The U.S. District Court rules that the failure to conform exclusion and the intellectual property exclusion unambiguously applies to claims against the insured, and so, the insurer had no duty to defend or indemnify the insured in the underlying action.

Faulty Workmanship

This case is an appeal from an order issued by the Court of Common Pleas of Allegheny County pertaining to the question of whether damages to a home were caused by faulty workmanship or mine subsidence. This case is Erie Insurance Exchange v. Costa Construction, 2015 WL 7111102. (Note that this is a non-precedential decision.)

The Sarbers contracted with Costa Construction for the construction of a single-family home. Following completion of the residence, the Sarbers moved in and then noticed defects in the home, including cracking in drywall, doors not closing properly, and uneven flooring.. The Sarbers filed a lawsuit against Costa and when the Sarbers presented the lawsuit to their insurer, Erie Exchange, the insurer denied coverage and filed a declaratory judgment action, asserting that the claims set forth against Costa were not covered by the insurance policy.

The Court of Common Pleas granted the motion by the insurer and this appeal followed.

The Superior Court of Pennsylvania noted the argument of the insured that summary judgment was not appropriate because facts could be developed that showed that the damage complained of was caused by an insurable and non-excludable occurrence, such as mine subsidence. The insurer countered that faulty workmanship and faulty repair caused damage to the residence and so, the damages are not covered under the terms of the insurance policy.

In determining the outcome of this appeals, the court first discussed the meaning of occurrence. The court said that the use of the word “accident” to define occurrence implies a degree of fortuity that is not present in a claim of faulty workmanship and so, in order to constitute an occurrence, the accident resulting in damage cannot be based on allegations of faulty workmanship. The court found that the Sarbers' complaint stated that it was the failure of Costa Construction to account for the condition of the land, including the existence of mine subsidence, that led to the defects in their home, specifically, that the insured constructed the home in a non-workmanlike fashion be developing a poorly designed construction plan and performing in a negligent manner in reference to the requirements of the contract and the condition of the land.

The court concluded that the language of the complaint did not trigger a responsibility for Erie to defend Costa. The court found that the complaint alleges several specific instances of faulty workmanship evidence by physical defects in the home. Moreover, the complaint unambiguously attributes the defects to the insured's non-workmanlike construction as well as the failure to construct the home in light of and with consideration to the particular characteristics of the lot on which the residence was built, that is, accounting for any mine subsidence that existed. Accordingly, the court ruled that the underlying complaint did not entitle the insured to coverage under the Erie policy.

The insured pointed out that the underlying complaint also indicated that some or all of the damage may have been caused by the actions of outside contractors and/or subcontractors. This would constitute an exception to the faulty work exclusion. However, the court said that the policy language is unambiguous and has the practical effect of equating work performed by subcontractors as the insured's work. Accordingly, faulty work or defective work performed by subcontractors does not entitle the insured to coverage under the policy.

The court concluded that the trial court properly granted judgment on the pleadings in favor of Erie since the allegations in the underlying complaint do not give rise to a duty to defend. The order of the trial court was affirmed.

Editor's Note: The Superior Court of Pennsylvania rules that the faulty work of the insured and the faulty work of subcontractors are not occurrences and so, the policy does not provide coverage.

Designated Premises Endorsement

The insured, who sold property on which a dam was located, brought an action against the general liability insurer seeking coverage in connection with an underlying lawsuit against the insured for negligence brought by a buyer following the dam collapse, causing injury and property damage. This case is C. Brewer and Company v. Marine Indemnity Insurance Company of America, 347 P.3d 163 (2015).

In 2006, a large portion of a dam in Hawaii collapsed, releasing over three million gallons of water, resulting in loss of life and property damage. The owners of the dam sued C. Brewer and Company complaining that Brewer sold them the property while aware of the dam's questionable structural stability. Brewer then filed a complaint in the circuit court seeking rulings regarding the obligations of the insurers that had issued various insurance policies to C. Brewer covering different time periods.

This particular case arises out of the policy issued to Brewer by James River Insurance Company, the insurer at the time of the dam collapse. The circuit court granted summary judgment in favor of James River and the insured appealed. The Intermediate Court of Appeals vacated and remanded. The insurer then sought certiorari, which was granted by the Supreme Court of Hawaii.

The Supreme Court of Hawaii noted the argument of James River that the policy had a designated premises endorsement and this limited coverage to liability arising out of the ownership, maintenance, or use of specifically identified premises. The dam was not listed as a designated premises and so, the insurer argued, there was no coverage. So the court said that the key question here is whether the language “arising out of the ownership, maintenance, or use of the designated premises” can be interpreted to encompass the use of C. Brewer's business headquarters to make negligent business decisions that caused injury and damage outside of the designated premises.

The court said that the phrase “arising out of” the designated premises requires that there be a causal connection between the injuries and the designated premises. Based on the facts, the court found that a causal connection could possibly be found between C. Brewer and the injuries that resulted from Brewer's allegedly negligent corporate decisions. In addition, the court said that a designated premises endorsement must be clear and unequivocal to convert a general liability policy to a premises liability policy in order to effectively limit coverage to injury or damage that occurs on undesignated premises; that was not the case in this instance.

The court concluded that the designated premises endorsement unambiguously provides coverage for injury and damage that bears a causal connection to the use of designated premises, regardless of where the injury occurs. Thus, the endorsement in this instance provides coverage for negligence claims against the insured arising out of the use of the business premises. The case was remanded to the circuit court with instructions to proceed consistent with the opinion of the Supreme Court.

Editor's Note: The Supreme Court of Hawaii rules that the designated premises endorsement did not in this case preclude coverage even though the dam that collapsed was not a designated premises. The endorsement must be clear and unequivocal to effectively limit coverage to injury or damage that occurred on undesignated premises and this endorsement did not do that.