National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

In this case, Chugach Support Services, Inc. (“Chugach”), a general contractor, entered into a subcontract with Security Resources International (“SRI”) for SRI to provide certain services.  The subcontract required SRI to secure, maintain, and file proper and acceptable evidence of insurance with Chugach.

SRI did not obtain the required insurance, but subsequently SRI signed and accepted a proposal for work by Ohio Casualty’s insured, R-Custom Excavation (“R-Custom”).  That proposal did not contain insurance requirements.  After executing the SRI/R-Custom agreement, SRI requested R-Custom to provide certificates of insurance naming SRI and Chugach as additional insureds on R-Custom’s Ohio Casualty CGL policy, which it appears R-Custom did.

In response to an underlying lawsuit, Chugach took the position that it was an additional insured under R-Custom’s Ohio Casualty policy and entitled to a defense and indemnity under that policy as to the underlying lawsuit.  Ohio Casualty then brought this action for a declaratory judgment that under its policy issued to R-Custom, Ohio Casualty had no duty to defend Chugach and SRI or indemnify them for the money they paid as a result of the underlying suit.

After considering and disregarding Chugach’s assertions that the Ohio Casualty policy’s additional insured provisions were ambiguous, the District Court found that for Chugach to be an additional insured under that policy, “you,” meaning the named insured R-Custom, not someone else, would have had to be “required” to name Chugach as an additional insured in a written contract or written agreement.  R-Custom had no written agreement with Chugach (and no written agreement with SRI that contained any insurance requirement). The District Court then found Chugach’s further argument that the certificate of insurance issued by a broker can be the “written agreement” required under the policy to be manifestly unreasonable.  The District Court held that a certificate of insurance does not contain all the elements of a “written contract” or “written agreement” under Washington law.  Instead, the certificate of insurance expressly disclaimed any promise of coverage.  On its face, the certificate stated that it is issued as a matter of information only and confers no rights upon the certificate holder, and does not amend, extend, or alter the coverage afforded by the policy.  By its own terms, it does not “agree” to anything except the existence of a policy. An insurance certificate, under Washington law, therefore, is only evidence of the existence of a policy, and it follows that, as a matter of law, it cannot satisfy the requirements of a written contract or written agreement.

The District Court thus granted summary judgment in favor of Ohio Casualty, entitling it to a declaratory judgment that under its policy issued to R-Custom, Ohio Casualty had no duty to defend or indemnify Chugach and SRI for the money they paid as a result of the underlying suit.

In the ensuing coverage action, Birmingham argued that the allegations of trespass created a duty to defend because they allege that “the trespasses have caused damage . . . in an amount to be proven at trial” and interference with the right to quiet enjoyment and use of the property. Birmingham argued that the complaint should be liberally construed to include to include a trespass that causes property damage. The court found that the argument “requires the court to go beyond liberal construction . . . because there are no allegations . . . suggesting that the Birminghams caused any physical injury or destruction to tangible property.” Only a bare allegation of trespass was not enough to trigger the definition of “property damage.” The court found that the allegations were not ambiguous simply because some types of trespass could cause property damage. Since there was no actual claim for physical injury, the court denied that there was any ambiguity to construe in favor of a defense. The court rejected the argument that coverage for personal injury applied because there was no allegation that an invasion of a property right was done by or on behalf of the land lord of the property.

The exclusion on which American Family relied provided that the insurance does not apply to “property damage” arising out of “your work” or “your product” in connection with any “multi-unit residential building.” The policies at issue defined “multi-use residential building” as “a condominium, townhouse, apartment or similar structure, each of which has greater than eight units built for the purpose of residential occupancy.” While there was no dispute whether the exclusion did or did not apply to certain of the buildings at FountainCourt, the plaintiffs took the position that the exclusion did not apply to certain of the remaining buildings because they were “mixed use,” meaning the buildings contained condominiums and townhomes. The plaintiffs asserted that the exclusion’s phrase “similar structure” did not include the mixed-use buildings at issue, and also argued that the exclusion was ambiguous because it was as reasonable to include mixed-use buildings in the definition of “multi-unit residential building” as it would be to include them.

The court found that the exclusion precluded coverage for any building having greater than eight units regardless of which type of unit it contains. Important to the court’s finding was the exclusion’s requirement that the structure be “built or used for the purpose of residential occupancy.” As each unit was built to be used as a residence, the fact that the units were “mixed ownership,” that is, some being townhomes and some condominiums, did not affect the application of the multi-unit exclusion.

The court also rejected the plaintiffs’ argument that the exclusion’s application depended on whether the owners of at least nine residential units in a building have the same rights, or incidents of ownership. The court pointed out that, if such an interpretation were correct, it would be possible for owners of units within a multi-unit structure to avoid the application of the exclusion simply by changing the incidents of ownership to reduce the total number of residential units that share common incidents of ownership in order to fall below the nine unit threshold of the multi-unit exclusion. The court found that the exclusion unambiguously applied to units that are “built or used for residential occupancy” and a that structure that contained more than eight residential units when built triggers the exclusion even if some units are later converted to other uses or modes of ownership. Thus, the court found that the exclusion applies to any building that is similar in structure to a condominium, townhouse or apartment that is built to include more than eight residential units no matter how the individual units in the structure are legally owned.
 

Shilo had contracted with the insured, James Grant, to install various granite components in its hotel. However, Shilo initiated arbitration proceedings after it determined that the granite tub surrounds had not been properly installed. The arbitrator agreed that much of Grant’s work was “defective and faulty” and that water intrusion had occurred, but he also found the evidence insufficient with respect to the scope of water intrusion. The arbitrator awarded Shilo damages for the cost to remove and replace the improperly installed granite.

After converting the arbitration award into a judgment, Shilo filed a Writ of Garnishment in an attempt to collect insurance proceeds from Maryland Casualty Company, which had insured Grant. However, upon Maryland Casualty’s Motion for Summary Judgment, the Court agreed that the only damages awarded to Shilo in the arbitration fit within the exclusion for property damage to “[t]hat particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.”

Although Shilo has filed a notice of appeal to the Ninth Circuit and, therefore, the ultimate result in this case could change, the District Court’s decision serves as a reminder of the importance of distinguishing between mere construction defects on one hand and actual damage caused by construction defects on the other. Where no resulting damage is proven, the coverage terms and exclusions of many general liability policies may be sufficient to defeat coverage. Moreover, even when resulting damage is proven, coverage may be limited to the cost to repair the resulting damages. Because correcting defects is often more expensive than repairing damages, this limitation can be significant and should not be overlooked.

Because the lawsuit did not allege that Mt. Hood was a board member or subsidiary of the HOA, Travelers argued that Mt. Hood did not qualify as an insured. Mt. Hood claimed that since the complaint alleged that Mt. Hood controlled the board and the HOA for a period of time, Mt. Hood was effectively on the board. The court rejected this argument. Following Oregon law, the court determined that it could only consider the complaint and the policy when analyzing the duty to defend. The court found that in reviewing the complaint, it was clear that there was no allegation that Mt. Hood itself was a member of the board, even if it did control the actions of the board. The court focused on the allegation in the complaint that Hanna had been elected as the sole board member. The court granted Travelers motion to dismiss as to Mt. Hood’s claims.

With respect to Hanna, Travelers argued he was not an insured because the claims were filed against Hanna outside the policy period as required by the policy. Travelers argued that because the suit was not brought within the policy period, there was no coverage. The court found, however, that because the policy only required that a “claim” for monetary damages be brought against the board member within the policy period, the demand for money damages prior to the complaint qualified as a “claim” under the policy. Travelers also argued that an exclusion for damages arising out of construction defects applied. The court found that the policy’s coverage for “breach of duty,” and the allegations in the complaint, were broad enough, such that claims for damages other than solely construction defects could be recovered. The court, therefore, rejected Travelers motion to dismiss the claim for breach of the duty to defend Hanna.