California appeals court rules that two business risk exclusions did not preclude liability coverage for water intrusion damage to an insured’s work prior to completion, in what it called an “issue of first impression.” Rain penetrated tarps used by a subcontractor to protect roofless modular units it agreed to build and deliver damaging the interiors. The subcontractor’s insurer denied coverage based on Exclusions j(5) (“that particular part of real property on which you . . .are performing operations, if the ‘property damage’ arises out of those operations”) and j(6) (“[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it”), which the court saw as inapplicable. Concludes that the use of (1) “are performing operations” indicates Exclusion j(5) applies to damage caused “during physical construction activities” and not more broadly to any damage before construction is complete; and (2) “that particular part” limited the scope of Exclusion j(6) to the particular component of work the insured performed incorrectly (the “plastic tarps [that] failed to keep the water out”) and not to its other work (the modular structure). The California Supreme Court denied petitions for review on December 13, 2017.
A subcontractor’s insurer was compelled to defend a general contractor (GC) against construction defect claims years after a housing project was completed despite an additional insured endorsement that provided coverage “only with respect to liability arising out of your [i.e., the subcontractors’] ongoing operations performed for [the GC].” The insurer argued that the subcontractor’s operations were completed before any units were sold (i.e., before any homeowners could have observed or been damaged by alleged defects). According to the court, the homeowners’ property damage “arose out of” the subcontractor’s “ongoing operations” (construction activities) or, alternatively, a course of continuous and repeated property damage might have commenced while the subcontractor was still on-site, even though there was no claim and the damage did not manifest until after operations were completed. Under either theory, the court said, the insurer had a duty to defend.
Florida Supreme Court finds Chapter 558 construction defect notices may give rise to a duty to defend. Under the general liability policy at issue, the duty to defend only applied to a “suit,” defined as “a civil proceeding. . .includ[ing] . . . [any] alternative dispute resolution proceeding. . .to which the insured submits with [the insurer’s] consent.” The pre-suit process in Chapter 558 was not a “civil proceeding” but did qualify as an “alternative dispute resolution proceeding,” the court said, and would constitute a “suit” that the insurer was required to defend if it consented to the insured’s participation. Tony Miscioscia recently covered the Altman decision in an article available here.
DEFENSE COST REIMBURSEMENT
Massachusetts appeals court rules that an insurer had no duty to reimburse defense costs incurred by an insured that unjustifiably refused to give up control of the defense of underlying asbestos and chemical exposure claims. Recognizes that by agreeing to defend without a reservation of rights, the insurer was entitled to control the defense and to appoint defense counsel. Rejects claims by the insured that its refusal was proper due to conflicts of interest with its insurer, e.g., over the approach to the underlying cases and its desire to defend its reputation. “Here, [the risk insured against] solely concerned claims of ‘bodily injury or property damage’. . .and nothing more. Protecting [the insured’s] reputation was not something [the insurer] was required to insure or defend.”
California appeals court upholds application of vertical exhaustion to policyholder’s SIRs in Stringfellow Acid Pits environmental coverage case. Calling it “something of a hybrid case,” distinguishes California precedent for horizontal exhaustion in the progressive loss context on the basis that the “applicable policies were not neatly divided into a primary level and an excess level.” The policies at issue were excess of a retention and contained “ultimate net loss” and excess “other insurance” provisions that are not limited to lower-layer insurance, the court said, and thus do not support a “rising bathtub” approach. Finds Montgomery Ward & Co., Inc. v. Imperial Cas. & Indem. Co., 81 Cal. App. 4th 356 (Cal. Ct. App., 2nd Dist., 2000) (concluding SIRs are not primary insurance and horizontal exhaustion does not apply) “more apropos” even though the insured “covered most of its retentions” by procuring other lower-layer policies. A petition for review is pending before the California Supreme Court.
NEW YORK INSURANCE LAW SECTION 3420
Court of Appeals addresses Insurance Law Section 3420, which applies to policies “issued or delivered” in New York, ruling that the term encompasses policies issued outside New York to non-New York policyholders if the policyholder “has a substantial business presence and creates risks in New York.” Although not at issue in the decision, the ruling apparently applies to Section 3420(d)(2) requiring insurers to issue prompt disclaimers for bodily injury claims arising in New York or risk a waiver of defenses based on policy conditions or exclusions. The decision may extend the prompt disclaimer requirement to policies issued outside New York to non-New York policyholders, contrary to previous practice. Three judges dissented arguing that the court misinterpreted the statute and relevant precedent.
NUMBER OF OCCURRENCES
Illinois appeals court rules that numerous asbestos injury claims against an insured-manufacturer of conveyor systems for coal plants arose from a single “occurrence” for purposes of determining the applicable limit of liability. Finds that the losses were caused by the continuous manufacture and sale of conveyor systems that used asbestos-containing products and gaskets, and not the installation and maintenance of each system which was customized (i.e., not mass produced). Looks to Illinois cases addressing number of “occurrences” in the context of an insured’s deductible responsibility: “[I]f an insured’s conduct is a single occurrence for purposes of establishing the applicable deductible, it should be the same for purposes of setting the limits of the insurer’s liability.”
William Powell Company v. OneBeacon Insurance Company, No. 2017-0411, 2017 Ohio LEXIS 2242 (Ohio Nov. 1, 2017)
Ohio Supreme Court declines to review rulings in asbestos products coverage case. Leaves intact an intermediate appeals court decision that (1) each claimant’s exposure to asbestos was an “occurrence” including under pre-1968 policies that did not define the term; and (2) the “aggregate limits” of lost or incomplete multi-year policies issued before 1965 annualized (but that a single such limit applied to “stub” policies in effect for 13 and 14 months). In finding multiple “occurrences”, the appeals court applied a “triggering event” analysis (which looks to the event(s) that triggered the insured’s liability to calculate the number of “occurrences”) and determined that the exposures were from different products used in different ways and at different times and locations and thus did not involve the “same general conditions” for purposes of the policies’ “deemer clause” (which provided that “all bodily injury and property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence”).
Missouri Supreme Court in a case of first impression unanimously holds that a form of absolute pollution exclusion in a general liability policy is unambiguous and applies to underlying toxic tort claims alleging exposure to lead and other harmful emissions from an insured’s smelting facility in Peru. Finds lead in particulate form is clearly excluded as a pollutant. Rejects the insured’s argument that the policy bars coverage for its “essential business materials” and is therefore ambiguous: “The only exposure the [claimants] had to [the insured’s] lead products was via its release of toxic substances into the environment. . . .‘That its toxic or hazardous materials are valuable products if [the insured] properly contains them does not make them any less ‘pollutants’ when they are abandoned and released into the environment.’”
Court of Appeals disavows the “Bellefonte Rule” in a closely-watched reinsurance case. Holds that New York law “does not impose either a rule, or a presumption, that a limitation on liability clause necessarily caps all obligations owed by a reinsurer, such as defense costs, without regard for the specific language employed therein.” Daryn Rush and Ellen Burrows recently covered the Global Reinsurance decision in an article available here. [White and Williams represents Century Indemnity Company in the case]
TRIGGER OF COVERAGE
New Jersey Appellate Division endorses application of a “continuous trigger” to liability claims involving progressive property damage in the construction defect context. Focuses on the “trigger” end point and holds that manifestation occurs when the “essential nature and scope of the property damage first becomes known, or when one would have sufficient reason to know of it.” Proof of manifestation cannot be “merely tentative,” according to the court, nor must it be “definitive or comprehensive.” Rejects the insured’s proposal to extend the cut-off date until expert or other proof links the damage to the insured’s faulty conduct: “[U]sing a date of initial manifestation that is common to all parties – regardless of which contractor or subcontractor may be ‘at fault’ for the occurrence – promotes efficiency and certainty.”