See Crime Causes of Loss.

Coverage for Faulty Work Claims

The insurer brought a declaratory judgment action seeking a determination that it had no duty to defend or indemnify the insured subcontractor in an underlying action arising out of the insured's allegedly faulty masonry work on walls to units in a condominium complex. This case is Frankenmuth Mutual Insurance Company v. Hodsco Construction, 2016 WL 3267313.

Kimball Hall was a residential real estate developer and started development of a 154-unit town home complex in Illinois. Kimball Hall subcontracted with several firms including Hodsco. Hodsco was hired to build masonry and concrete-block demising walls for the individual units.

After the units were built, the homeowners association discovered numerous defects in the construction and it filed a lawsuit against several subcontractors, including Hodsco. Hodsco was insured by Frankenmuth. The policy required Frankenmuth to defend and indemnify Hodsco if the claim arises within the policy period; moreover, the policy had two exclusions that are relevant to this declaratory judgment action: the contractual liability exclusion and the damage to property exclusion. The insurer filed a declaratory judgment action before the United States District Court, N.D. Illinois, Eastern Division.

Frankenmuth stated three main reasons why it does not have a duty to defend Hodsco: the damages alleged by the association fall outside the scope of covered losses; the policy exclusions affirmatively bar coverage; and, even if there is a duty to defend, the association does not have standing to sue. The court decided to address each argument in turn.

The court noted Frankenmuth's argument that the damages fall outside the scope of property damage because the contractual exclusion, combined with a potential policy exclusion, categorically excludes the damage alleged in this case from the scope of the broader definition of property damage used in the insurance policy. In addition, the insurer said there was no occurrence because the damage occurred as a result of Hodsco's alleged negligent roof construction, not some external event. The court said that if it gave the contractual language its plain and ordinary meaning (as it must), then the import from the definitions is that the event is an accident if the actor causing the event did not intend to cause the event or could not otherwise foresee that the event would occur.

The insurer said that because the scope of the damage is confined to Hodsco's allegedly faulty work, Hodsco should have foreseen that its faulty work would cause the damage; in other words, the insurer claimed that a loss can only be an accident if it is caused by some third party and not by the insured. The court declared that the insurer was correct only to the extent that the damage was confined to Hodsco's construction since a party cannot by accident negligently construct a product. In this instance, the complaint lodged by the association does not suggest that Hodsco expected that its defective construction would cause the level of property damage that is at issue. The complaint alleges only that Hodsco's faulty masonry work caused near-catastrophic water damage inside the residences. Thus, the court concluded, construing all contractual terms and allegations in favor of Hodsco, the allegations are potentially sufficient to fall within the coverage of the policy, in that Hodsco's actions did cause an occurrence as defined in the policy.

Frankenmuth argued that even if the complaint alleged an occurrence, any damage occurred after the policy period ended. The court said that this argument is sound as it relates to the sudden, unwanted water accumulation within the homes, but the underlying allegations of injury did not stop with leaking water. Rather, the complaint alleges that some or all of the defects caused sudden and calamitous water infiltration and/or mold growth within the interior spaces of the homes. The court found that the complaint alleges that the mold damage potentially occurred shortly after Hodsco finished its work, and the insured only has to show that the facts in the complaint fall potentially within the policy's coverage to trigger Frankenmuth's duty to defend. The insured did this in the opinion of the court.

As for the exclusions cited by the insurer, the court ruled that the contractual exclusion did not apply since the exception to that exclusion required the insurer to cover property damage for which Hodsco is liable if Hodsco would be liable in the absence of the contract or agreement, and in this instance, that is what happened. The damage to property exclusion contained an exception that required Frankenmuth to cover property damage that occurred because Hodsco or its contractors or subcontractors performed their work on the property incorrectly, provided that the damage falls within the products/completed operations hazard. This meant to the court that the insurer had to cover the damage to completed property that became damaged at some point after Hodsco finished its work. The complaint against Hodsco alleged that the defects that Hodsco caused started to cause damage to the property some time after Hodsco finished its work. Thus, the allegations against the insured would constitute property damage to a completed operation and that falls within the exception to the damage to property exclusion.

In conclusion, after disposing of all the arguments put for the by the insurer, the court ruled that Frankenmuth owed a duty to defend Hodsco.

Editor's Note: The U.S. District Court, N.D. Illinois discusses the meaning of “accident” and “foreseeability” and makes some pertinent points in its ruling on a faulty workmanship claim. The court noted that a general liability policy does not cover an accident of faulty workmanship, but rather faulty workmanship that causes an accident. The court also discussed the contractual exclusion and the damage to property exclusion in this extensive opinion.

Allocation of Defense Costs

This case concerns the scope of an insurer's obligation to cover the litigation expenses of its insured. The case is High Point Design, LLC v. LM Insurance Corporation, 2016 WL 426594.

The underlying action began on July 1, 2011 when High Point Design filed a complaint against Buyer's Direct seeking a declaration that High Point had not infringed a slipper patent Buyer's Direct owned and that the patent was invalid, unenforceable, or both. Buyer's counterclaimed against High Point and some retail stores, alleging infringement of its patent and trade press.

High Point was a named insured on a series of general liability policies issued by LM Insurance. High Point notified LM of the counterclaim and tendered it to LM for coverage and defense. The insurer declined defense and indemnity. So, High Point hired two law firms to defend it and the defense costs totaled about $1.6 Million. After the case against High Point and the co-defendants had ended, High Point sued the insurer, seeking damages and compensation for the defense costs it had incurred.

The United States District Court for the Southern District of New York noted that the sole legal question before it was the proper treatment of costs incurred during a joint defense. Both the insured and the insurer disagreed whether defense expenses in the underlying action that redounded to the benefit of both High Point and its co-defendants were entirely recoverable or should be divided pro rata between the benefiting parties.

The court found that case law on the proper apportionment of defense costs among insured and non-insured defendants was scattered and rather sparse. However, said the court, the law was clear to it that the party seeking to allocate expenses bears the burden of proving what amount of allocation is appropriate once the insured has made a prima facie showing that certain amounts were spent in its defense. Moreover, New York case law provided instructions about how to allocate defense costs among covered and non-covered parties; the amount that should be allocated to the non-covered parties, and thus not recouped from the insurer, are any additional expenses that would not have occurred but for the inclusion of the non-covered defendants.

The court found that High Point and LM Insurance had entered into a contract that included a duty to defend High Point and so, the insurance contract required LM to pay High Point's defense costs, nothing more and nothing less. High Point had an initial burden to provide prima facie proof that a particular expense was incurred in its own defense. After that prima facie showing is made, LM will have the burden of showing that all or a specific part of that expense was an additional expense that would not have been incurred but for the presence of the co-defendants.

Editor's Note: The U.S District Court was faced with a situation where the insured and several non-insureds were co-defendants and where defense costs were spent to the benefit of both the insured and the non-insured parties. So, the question facing the court was whether the insurer should have to pay all of the defense costs? The insurer wanted to pay only those defense costs that benefitted its insured. The court said that once the insured proved that defense costs were paid, it was up to the insurer to show what percentage of those costs was paid in defense of its insured.

Property Damage Claim Based on Noise

This case involves a homeowners liability policy. The case is Keeley v. Travelers Home and Marine Insurance Company, 2016 WL 3405493.

The Keeleys lived in a condominium and their unit was directly above a unit owned by Curcio. The Keeleys installed a hard surface floor in their unit even though the condo bylaws required unit owners to get prior written consent of the unit owner below before installing hard surface flooring.

After some three years, Curcio began to complain about noise that she attributed to the hard surface flooring. Curcio then sued the Keeleys, claiming that the installation of the hard surface flooring interfered with her use of the unit. The Keeleys forwarded the complaint to their insurer, Travelers. The insurer denied coverage and the Keeleys sued.

The United States District Court, W.D. Washington, noted that the insurer denied coverage based on there being no property damage or occurrence within the meaning of the policy. Travelers argued that there was no physical injury to, or destruction of, or loss of use of tangible property. The court said that property in a thing includes the unrestricted right of use, enjoyment, and disposal. Anything that destroys one or more of these elements of property to that extent destroys the property itself. In this instance, Curcio described the noise as unbearable, clearly identifying a restriction on her enjoyment of her unit. Therefore, the court concluded, there was property damage.

Travelers also argued that Curcio did not claim damages within the meaning of the policy and that the policy does not cover lawsuits seeking only non-monetary remedies. The court said that Curcio's complaint seeks injunctive relief, attorney fees, and such other and further relief as the court deems appropriate. The court held that this last catchall phrase is one that would permit an award of monetary damages and so, the complaint did allege damages such that the Travelers policy applied to the claim.

The last argument put forth by Travelers was that there was no occurrence. The court focused on what a reasonable person in the Keeleys' position knew or should have known, and decided that the harm resulting from the installation was not truly an unexpected, independent, and unforeseen happening, that is, was not an accident. Thus, there was no occurrence within the meaning of the policy.

Based on the lack of an occurrence, the court ruled that the insurer's motion to dismiss was granted.

Editor's Note: The U.S. District Court examines a homeowners policy and the complaint filed against the insured and decides: the loss of unrestricted right of use and enjoyment constitutes property damage as defined; the phrase “other additional relief as may seem just and equitable” in the complaint permits an award of monetary damages; and that the insured's subjective knowledge does not govern when it comes to the meaning of an occurrence. In this case, the court said that the insured knew or should have known the consequences of his actions and so the harm resulting from the action was not truly an unexpected, independent, and unforeseen happening, that is, not an occurrence.