Is There A Court More Fun Than The Seventh Circuit?
In recent years, the Seventh Circuit has emerged as a beacon of sanity in the morass of federal insurance jurisprudence (well, yes, there was Eljer butr everyone makes a mistake occasionally). As among the judges on the court, Posner and Easterbrook are particularly interesting to read. So it is with pleasure that we commend to your consideration a savage new opinion from Judge Easterbrook saving a policyholder who had the effrontery to challenge the scope of the "your work" exclusion in a recent Indiana case.
The dispute at issue in Westfield Ins. Co. v. Sheehan Construction Co., No. 08-3463 (7th Cir. April 29, 2009) arose out of the now familiar scenario of a lawsuit brought by property owners whose homes had acquired moisture and mold as a result of defective workmanship by the insured’s subcontractors. In this case, Sheehan Construction settled the claims for $2.8 million and assigned its coverage rights to the homeowners. In the interim, the contractor’s general liability insurer had brought an action for declaratory relief in Indiana seeking a declaration that the claims were subject to the “your work” exclusion.
The Westfield coverage was notable in that its “your work” exclusion did not contain the endorsement that has been contained in standard CGL policies since 1986 stating that, “This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” The only issue, therefore, was whether the property damage had arisen out of “work or operations performed by you or on your behalf.”
Justice Easterbrook concluded that the “on your behalf” language clearly extended to work performed by subcontractors.
In a footnote, the Seventh Circuit also approved the action of the federal district court in dismissing the testimony of a former insurance adjuster who stated that he would have paid Sheehan’s claim where this “expert” conceded on the stand that he knew nothing about Indiana law and was merely opining with respect to legal issues that were properly the province of the judge.
The Seventh Circuit rejected the insured’s argument that various Indiana cases supporting this limited construction of coverage for faulty workmanship claims were “out-dated” observing with some asperity that judicial decisions do not come “stamped with expiration dates.”
The court observed that the policy was intended to indemnify a contractor for losses caused by construction machinery that damaged adjacent property or for an injury to a passer by as by a misplaced nail. On the other hand, the court held that such policies were not meant to indemnify a contractor for negligent work. In such circumstances, “The moral hazard would be considerable: the prospect of indemnity would lead the general contractor to save money by hiring sub-standard contractors, then turning to the insurer to fix the customer’s home.”
Justice Easterbrook concluded by chastising the insured’s lawyers who, even after losing in the district court in Indiana, had argued in their briefs to the Seventh Circuit that Westfield’s denial of coverage was in bad faith for which punitive damages should be awarded. The court questioned how an insurer could exhibit bad faith by taking a position that not only followed the policy language but had been endorsed by a lower court.
The Seventh Circuit concluded that the insured’s arguments were no more than a strategy “to strong arm a settlement by in terrorem claims rather than to vindicate its legal entitlements. Lawyers should think carefully about the message that their contentions convey to this court, as well as the effect they may have on the other litigants.”
