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

The context was that Betty Schwartz, the insured, and her son David Schwartz, also an insured as a relative resident of the policyholder's household under Betty’s homeowners’ policy, were sued by Scott Minkler. Minkler alleged David, Minkler’s little league coach, sexually molested David over several years. Minkler asserted multiple causes of action against David, including sexual battery, intentional infliction of emotional distress, negligence, and negligence per se. Minkler also asserted a single cause of action for negligent supervision against Betty.  Minkler alleged David molested Minkler in Betty's home, Betty knew her son was molesting Minkler, but Betty nonetheless failed to take reasonable steps to stop her son from doing so.

The homeowners’ policies over the pertinent years contained an intentional acts exclusion that provided: “Personal Liability [coverage] ... do[es] not apply to bodily injury or property damage: (a) which is expected or intended by an insured or which is the foreseeable result of an act or omission intended by an insured... .”  (There was no sexual molestation exclusion in the policies.) The court noted that “an” insured means more than the insured seeking coverage. However, Minkler contended the severability clause rendered the intentional acts exclusion ineffective where there was a claim one particular insured was liable for negligent supervision of another insured, and not just variously or derivatively liable for that other insured’s conduct.

Because the court found the severability clause applied to the entire policy and not just the limits of liability, the court found the intentional acts exclusion ambiguous.  Under California law, if the terms and conditions of a policy are ambiguous, then the ambiguity must be resolved in a way that preserves the insured’s reasonable expectations.  Here, the court concluded Betty’s reasonable expectation was that the policy would cover her separately for her independent acts or omissions as long as her own conduct did not fall within the intentional acts exclusion.  Therefore, coverage was not excluded by the intentional acts exclusion.  

The court noted the majority of other states have found similar severability clauses apply only to policy limits.  The court also “stressed” that their reasoning and conclusion was based on the specific circumstances and policy language before the court.

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.

On competing cross-motions for summary judgment on the application of the various Mold Exclusions, the Court expressly rejected the claimant’s argument that if the efficient proximate cause of the loss is a covered peril, then the efficient proximate cause doctrine per se requires coverage regardless of any other potentially applicable exclusions. The Court was “persuaded” by the Insurers argument that a properly worded Mold Exclusion can operate to exclude “mold damage” irrespective of the application of the “efficient proximate cause” doctrine, even if the efficient proximate cause is a covered peril. At the Insurers urging, the court adopted the holding from the California Court of Appeals decision in DeBruyn v. Super. Ct. , 70 Cal. Rptr. 3d 652, 658-659 (2008) that when a policy “‘plainly and precisely communicates an excluded risk to a reasonable insured’ * * * the efficient proximate cause doctrine [does] not operate to cover the loss. * * * [I]nsurers ‘may limit coverage to some, but not all, manifestations of a given peril, as long as a reasonable insured would readily understand from the policy language which perils are covered and which are not.’” In so holding, the District Court went on to note that the “efficient proximate cause” rule “merely brings about ‘a fair result’ within the reasonable expectations of the parties.”

With respect to the language at issue in this case, the District Court held, in relevant part, that the “[mold] however caused” language in one of the insurers Mold Exclusions “is clear. It communicates to a reasonable insured that mold damage is excluded, even if it was caused by a covered peril.” With respect to the other insurers Mold Exclusion, the Court agreed (ostensibly based upon the “anti-current causation” language), under the same rationale, that it applied irrespective of the “efficient proximate cause” doctrine as well, but found that the Exclusion’s “resulting loss” exception potentially had application, and that was “an issue not before the Court.” The Court’s holding with respect to the later Exclusion is not a model of clarity.

As we all know, the “efficient proximate cause” rule is a very insured friendly doctrine. Washington Courts have not been shy to apply the rule ad nauseam to find coverage regardless of the express policy language. Having the District Court put the brakes on its application and look to the particular language of an exclusion that has application later in the chain of causation is a step in the right direction, and an encouraging result for property insurers in Washington. That being said, it is hard to predict what Washington State Court’s or the Ninth Circuit might do with the decision.

The claim arose in 1995/1996 after the insured (Griffin Dewatering) fixed a manhole connection to the District’s main sewer line. Following the repair, sewage backed up into the a residence resulting in extensive damage. Griffin notified its insurer, who denied the claim on the basis of the policy’s Total Pollution Exclusion. During a meeting in May 1997, the insurer orally promised Griffin, in order to get the renewal business on the policy, that it would cover any “future” liability claims based on the release of sewage, even though the policy’s pollution exclusion excluded coverage for such claims.  

In 1999, the District settled the homeowners’ claim and sued Griffin and its insurer. The insurer again denied coverage for the claim. In 2000, the insured filed a bad faith complaint against the insurer based on breach of the insurance contract, but not breach of any oral promise. Shortly thereafter, the insurer agreed to defend its insured against the District’s lawsuit and settled the District’s claim against the insured. The insurer advised Griffin that the insurer would relinquish its right to seek reimbursement and would pay what the insured had incurred to date in seeking coverage, roughly $9,000.

In the meantime, there was little law on application of the pollution exclusion to incidents like this. That changed in August 2003, when the California Supreme Court issued MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, in which the court held the pollution exclusion in a commercial general liability policy was limited to “conventional environmental pollution.” In MacKinnon, a landlord’s spraying of pesticide was found to not be excluded by the policy’s absolute pollution exclusion.

In Griffin’s bad faith case, in October 2005, the trial court concluded the pollution exclusion did not apply, the insurer had breached the contract, and the insurer’s denial was unreasonable as a matter of law because the scope of the total pollution exclusion was “unsettled” when coverage was denied. The case went to the jury which found for Griffin in the amount of $1 million in “Brandt” fees and costs incurred obtaining benefits due under the policy, and $10 million in punitive damages.

On appeal, the court candidly stated it had struggled with the case but ultimately determined the insurer had acted reasonably under the circumstances, and that the insured in any event had not been damaged as its defense costs and the District’s claim had been paid by the insurers.

As to whether the insurer’s conduct was in bad faith, the court noted there is the question of whether the insurer objectively acted reasonably, and the question of whether there was a genuine dispute (which the court did not address). The court dismissed the suggest that the rule of bad faith differed in first and third party context, holding that reasonableness is the standard in both. The court further explained that an insurer can take a position that benefits its own interest, as long as that position is not unreasonable.

The appellate court gave no weight to the May 1997 oral promise as a basis for recovery because Griffin had never alleged a cause of action based on breach of an oral promise although it had several opportunities to do so.

The claim arose in 1995/1996 after the insured (Griffin Dewatering) fixed a manhole connection to the District’s main sewer line. Following the repair, sewage backed up into the a residence resulting in extensive damage. Griffin notified its insurer, who denied the claim on the basis of the policy’s Total Pollution Exclusion. During a meeting in May 1997, the insurer orally promised Griffin, in order to get the renewal business on the policy, that it would cover any “future” liability claims based on the release of sewage, even though the policy’s pollution exclusion excluded coverage for such claims.  

In 1999, the District settled the homeowners’ claim and sued Griffin and its insurer. The insurer again denied coverage for the claim. In 2000, the insured filed a bad faith complaint against the insurer based on breach of the insurance contract, but not breach of any oral promise. Shortly thereafter, the insurer agreed to defend its insured against the District’s lawsuit and settled the District’s claim against the insured. The insurer advised Griffin that the insurer would relinquish its right to seek reimbursement and would pay what the insured had incurred to date in seeking coverage, roughly $9,000.

In the meantime, there was little law on application of the pollution exclusion to incidents like this. That changed in August 2003, when the California Supreme Court issued MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, in which the court held the pollution exclusion in a commercial general liability policy was limited to “conventional environmental pollution.” In MacKinnon, a landlord’s spraying of pesticide was found to not be excluded by the policy’s absolute pollution exclusion.

In Griffin’s bad faith case, in October 2005, the trial court concluded the pollution exclusion did not apply, the insurer had breached the contract, and the insurer’s denial was unreasonable as a matter of law because the scope of the total pollution exclusion was “unsettled” when coverage was denied. The case went to the jury which found for Griffin in the amount of $1 million in “Brandt” fees and costs incurred obtaining benefits due under the policy, and $10 million in punitive damages.

On appeal, the court candidly stated it had struggled with the case but ultimately determined the insurer had acted reasonably under the circumstances, and that the insured in any event had not been damaged as its defense costs and the District’s claim had been paid by the insurers.

As to whether the insurer’s conduct was in bad faith, the court noted there is the question of whether the insurer objectively acted reasonably, and the question of whether there was a genuine dispute (which the court did not address). The court dismissed the suggest that the rule of bad faith differed in first and third party context, holding that reasonableness is the standard in both. The court further explained that an insurer can take a position that benefits its own interest, as long as that position is not unreasonable.

The appellate court gave no weight to the May 1997 oral promise as a basis for recovery because Griffin had never alleged a cause of action based on breach of an oral promise although it had several opportunities to do so.

The Ninth Circuit stated that summary judgment was properly granted in favor of Stonebridge because Mr. Woodworth was at least acting as a “crew member” during the entire flight, whether or not he was controlling the plane at the time of the crash. Although the term “crew member” was not defined, the court noted that a reasonable layperson’s definition of the term comported with the federal regulatory definition under 14 C.F.R. § 1.1, which defines crewmember as “a person assigned to perform duty in an aircraft during flight time.” The court went on to state, “[a]s the flight instructor and the only pilot certified to fly the twin-engine aircraft, Mr. Woodworth had duties related to the operation of the aircraft and was a “crew member” for purposes of the exclusion.” Thus, the insurance company was not required to prove that Mr. Woodworth was actually controlling the airplane at the time of the crash in order to apply the exclusion.

In affirming the trial court’s order granting summary judgment in favor of Farmers, the Oregon Court of Appeals addressed the meaning of the products-completed operations hazard in the context of a claim for water intrusion arising from defective construction, in turn affirming a number of key legal concepts in Oregon relating to insurance coverage. As to the exclusion, the court held that the “products-completed operations” hazard unambiguously includes all damages arising away from premises owned or rented by the insured and arising out of the insured’s work, unless one of the exceptions relating to ongoing operations applies. “Your work”, defined to include work done on the insured’s behalf, was interpreted as plainly including work performed on the insured’s behalf by subcontractors. Significantly, the Court of Appeals rejected an argument that the subcontractor exception in the separate “your work” exclusion expressed an intent for the policy as a whole to cover damages caused by the work of subcontractors, holding that an exception to one exclusion does not modify other aspects of the policy. Because the insured presented no evidence as to the timing of the water damage, the insured failed to meets its burden of proof to present any evidence indicating the applicability of the exception for damages taking place during ongoing operations.

In so holding, the Court of Appeals affirmed a number of key concepts. The court confirmed that, under Oregon’s rules for interpretation of insurance contracts, extrinsic evidence is irrelevant to determining the rights and obligations of the parties to an insurance contract, which is based solely on the terms of the policy. The Court further confirmed that the insured bears the burden of proving the applicability of an exception to an exclusion. Perhaps more significantly, the Court of Appeals held that the insured had the burden to submit proof that the property damage took place during ongoing operations. Although determined in the context of an exception to an exclusion, this holding will likely be useful in asserting that the insured also bears the burden of affirmatively submitting evidence as to the timing of the property damage for purposes of triggering the coverage grant, which is often a significant issue in water intrusion cases. Finally, the Court of Appeals confirmed that insureds cannot attempt to create ambiguity in an insurance contract by presenting evidence of an insurer’s claims handling practices and that the doctrine of waiver does not apply to exclusions in insurance contracts.

The New Jersey Supreme Court has become the latest court to hold that an exclusion that applies to the intentional acts of "an" insured bars coverage for claims by "any" insured, including the claims of parents whose negligent supervision allegedly failed to prevent their son from sexually assaulting a neighbor's child.  In Villa v. Short, A-7-07 (N.J. June 10, 2008), the court ruled 4-2 that an exclusion for the criminal or intentional acts of an insured "plainly excludes coverage for all insureds when any insured commits an intentional or criminal act."  The court declined to find ambiguity in the policy based on the effect of a severability of interests clause Iwhich requires that each insured's rights be considered separately by the insurer).

Two dissenting justices argued that the insured's interpretation of the exclusion was reasonable, as evidenced by courts in other states that have held such exclusions not to apply to claims against "innocent insureds," and that the language must therefore be deemed ambiguous and should be interpreted in favor of coverage for the insured.

The tragic nature of the njuries in cases of this sort place great moral pressure on courts to contort insurance policies to provide funds where none may otherwise exist to compensate the victims of criminal acts.  Increasingly, however, courts are resisting pressure to find coverage for "negligent" crimes and are looking beyond the headings in a plaintiff's complaint to determine whether the facts warrant coverage or not.