Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

This last weekend, a heavy rainstorm pummeled Los Angeles for two days, causing additional damage to already compromised structures. The local mountains are now capped with snow, and the debris from the wind and rainstorms are clogging up the storm drains. The National Weather Service has issued a special weather statement for Southern California from December 15 through December 17th warning that "...strong and potentially damaging offshore winds are possible Thursday night through early Saturday afternoon. The winds are estimated to be the strongest Friday morning, and then once again Friday evening through Saturday morning. Wind speeds are predicted to range from 25 mph to 40 mph with gust to 65 mph."

Southern Californians may be disturbed to find out that storm damage to interiors of structures not caused by "direct force" of a storm may not be a covered loss. Many property insurance policies exclude rain damage to a building’s interior and furnishings unless rain entered as a result of "direct action" of a storm on the building’s roof or walls, such as a hole in the roof or walls. In Diep v. California Fair Plan Ass’n (1993) 15 CA4th 1205, 1210-1211, the Court decided that under such an exclusion, there is no coverage for storm damage to the interior where a section of the roof had been removed for repair. The rain entered because the workers removed the roof, not because of the storm.

Fortunately, under Tento Int’l, Inc. v. State Farm Fire & Cas. Co. (9th Cir. 2000) 222 F.3d 660, 662, 664, there may be coverage for insureds in that situation where a policy does not exclude losses resulting from third party negligence, such as a roofing contractor. If the storm damage to the interior was a result of a roofing contractor’s negligent failure to provide temporary covering on a roof, then the damage may be covered. At a time where Mother Nature is unkind to Southern California, knowing what your insurance policy may or may not cover can help in the claims process.

An example of the typical wind-driven rain policy limitation/exclusion is:

We will not pay for loss or damage to the interior of any building or structure, or the property inside the building or structure, caused by rain, snow, sleet, sand or dust whether driven by windstorm or not, unless the direct force of Hurricane, other Wind, or Hail damages the building or structure causing an opening in the roof or wall and the rain, snow, sleet, sand or dust enters through this opening.

Courts across the United States have given the limitation/exclusion various interpretations. In Florida Windstorm Underwriting v. Gajwani, the Florida trial court entered judgment in favor of the insureds for coverage. The insurer appealed and argued there was no evidence that a windstorm damaged the exterior of the building allowing the water to enter. In Gajwani, the parties basically agreed that the water entered by seeping through existing openings to reach the interior of the building. The Florida Third District Court of Appeal upheld the policy limitation/exclusion and rejected the insured’s argument that it was against public policy to allow the Florida Underwriting Association (Citizens’ predecessor) to exclude such damage.

This policy limitation/exclusion is not only asserted in hurricane claims, it arises in different loss situations across the country. The question often arises whether a windstorm was the direct cause of loss. For example, in Granchelli v. Travelers Insurance Company, the Appellate Court in New York State interpreted whether a windstorm was the direct cause of damage to the interior of The Palace Theater in Lockport, New York. (I recall attending movies at The Palace Theater as a kid; Lockport, N.Y. is my hometown). The policy in the Granchelli case insured against direct loss “by windstorm or hail.” In February 1985, the theater sustained water damage to the interior of the property causing approximately $116,000, in damages. A windstorm had blown open a door on the roof, and subzero air entered the building, causing a pipe to freeze and burst, resulting in the water damage. The insurer denied coverage on the ground that the theater’s loss was not a direct loss caused by the windstorm within the meaning of its policy. Burst water pipes was an excluded cause under the policy.

The trial court granted the insurer’s motion for summary judgment and found that, while the windstorm was a link in the chain of events leading up to the loss, it was too remote to be the direct cause of the loss. The appellate court disagreed, holding that direct loss is equivalent to proximate cause. The court concluded that the burst water pipe could have been proximately caused by the windstorm. The court overturned the judgment for the insurer and remanded the case to the trial court.

Unrepresented policyholders may often think that their property insurance policies should be commonsense. If the interior of their insured building is damaged, it should be covered. As this brief explanation of the wind-driven rain exclusion and direct windstorm damage requirement reveals, it is not always that easy. If insureds discuss their claims with insurers before having the claims reviewed by their own professionals, the insurers’ one-sided conclusions can have detrimental consequences on the coverage case. The term “opening” is not often defined in policies, and there can be situations where water enters through an “opening” that may not even be visible to the untrained eye.

As discussed many times in the Property Insurance Coverage Law Blog and the Condominium Insurance Law Blog, property insurance policies contain a maze of detailed exclusionary and limiting provisions. Policies of insurance are filled with legal buzz words that present a gauntlet of challenges for the policyholder to navigate through in a coverage case. Being aware of this fact and using the appropriate damage consultants is often critical for policyholders to put together the damage claim in support of coverage.

Many policyholders are surprised to find out a raccoon is living or nesting in their attic or roof. They usually learn of their unwanted tenants only after the creatures have damaged their home. The following picture is an example the type of damage that raccoons can cause to a roof.

This type of damage is far too common and is a gateway to even more damage, including ensuing water and wind damage. Policyholders should make sure their policies cover this type of loss.

Insurance companies consistently use Vermin Exclusions when denying these types of claims. Fortunately for policyholders, many policies fail to define the term “vermin.”

Vermin is defined in Webster’s Unabridged Dictionary as:

1. any of a number of small animals with filthy, destructive, troublesome habits as flies, lice, bedbugs, mice, rats, and weasels;
2. any bird or animal that kills game;
3. (a) a person who is vile, worthless, or objectionable; (b) such persons collectively.

Because the term “vermin” is not more specifically defined in many policies, an insured is entitled to the most favorable definition of the term.

In Marks v. Trinity Universal Ins. Co., 531 So.2d 516, 517 (La. Ct. App. 1988), the trial court concluded the term “vermin” in the policy’s Vermin Exclusion was ambiguous. The court relied on a factually similar Texas case where the damage was caused by a squirrel. Jones v. American Economy Ins. Co., 672 S.W.2d 879 (Tex.App. 5 Dist.1984). The Texas court concluded the term vermin is susceptible of more than one interpretation and is ambiguous. Having made this determination, the Texas court then construed the exclusion in favor of the insured and held “vermin” does not include a squirrel under the terms of the policy. The trial court in Marks expressly adopted the rationale of the Texas court and concluded a raccoon is not a vermin under the policy exclusion.

The American Association of Insurance Services (AAIS) drafts policy language for insurance companies to write into their policies. The AAIS responded to findings of ambiguity in the Vermin Exclusion and, in 2007, amended its Vermin Exclusion by specifically defining the term “vermin” to mean “an animal of a type that is prone to enter or burrow into or under a structure to seek food or shelter, including raccoons.”

AAIS’s response is detrimental to policyholders. If you are not aware of which Vermin Exclusion is contained in your policy, you need to find out. Adding this type of coverage is inexpensive compared to the major perils of wind and water.

UPDATE: Thanks to Neil Hall for pointing out the Allstate ad:

In Henri’s Food Products v. Home Insurance Co., 474 F. Supp. 889 (E.D. Wis. 1979), a warehouse owner ran into a contamination problem. The warehouse stored many items, from food products to chemicals. The Food & Drug Administration (FDA) conducted several tests on the products kept in the warehouse and determined that some of the food products had a chemical residue on them. Further tests showed that some of the chemicals kept within the warehouse had vaporized and permeated the warehouse.

The insurance policy stated,

Perils Insured Against…Smoke, meaning thereby only sudden and accidental discharge of smoke from other than industrial operations or agricultural smudging.

There was no argument that the chemical vapors were due to industrial operations or agricultural smudging, and as the Court pointed out,

The issue [was] whether vapor is within the common meaning of the word smoke.

Much like the case in last week’s blog, this court was unable to find any law on which to base its definition of “smoke,” so it turned to the dictionary.

Based upon this research and the Court’s own understanding of the word “smoke,” plaintiff’s suggestion that the vapor involved here was smoke, and thus within the policy coverage, must be accepted.

The warehouse owner prevailed, but this case, together with my blog from last week, illustrates how differently courts can rule. As always, keep in mind that this court applied Wisconsin law and the laws in other states may vary. Check back next week for another breakdown of the All-Risk Policy.

One common issue that arises when this exclusion becomes relevant is how to define smoke, vapors or smog. Does the term smoke include harmful vapors? Do vapors differ from smoke, especially if they cannot be seen? A clear illustration of this is found in K & Lee Corp. v. Scottsdale Insurance Co., 769 F. Supp 870 (E.D. Pa. 1991).

In this case, employees of a wholesale grocery warehouse noticed a chemical smell and a chemical substance dripping from the floor above which was not under their control. Much of the inventory was destroyed by this chemical contamination and the grocery warehouse filed an insurance claim. The policy specifically stated that smoke damage was covered. However, the issue for the court was:

Whether coverage for ‘smoke’ damage encompasses contamination by chemical vapors.

Because it was unable to find any case law to provide direction on how to interpret the term “smoke,” the court turned to the dictionary and stated,

While smoke may result from some chemical reactions, the common usage of the term refers to the products of combustion and, more importantly, to matter that is visible.

Unfortunately for the grocery warehouse, the chemical vapors were invisible, so the court denied coverage for the claim.

Invisible chemical vapor is not ordinarily and commonly understood to be ‘smoke.’

Not all courts have reached the same conclusion. Laws vary in different jurisdictions. Next week, I will discuss a case that found vaporized chemicals fit within the definition of smoke.

As one court put it,

The purpose of the standard wear and tear exclusions in an All-Risk policy is to remove from coverage the repair and replacement of property that deteriorates or has defects occurring over time.

Commonwealth Ins. Co. v. Stone Container Corp., 2002 WL 31833862 at *6 (N.D. Ill. 2002).

The case of Murray v. State Farm Fire & Casualty Co., 219 Cal. App. 3d 58, 268 Cal. Rptr. 33 (1990), illustrates how the wear and tear exclusion works. The Murray’s discovered a crack in the foundation of their home that resulted from a broken water pipe some 23 inches below the concrete slab floor. The Murrays filed a claim with State Farm, but we unable to recover the amount of damages they felt were necessary to fix the broken pipe and cracked foundation. They filed suit, and State Farm argued the loss was not covered because the pipe broke due to deterioration. Both the Murrays’ and State Farm’s experts agreed that the pipe did deteriorate over the course of approximately a year.

The Murrays’ homeowners policy excluded coverage for the following:

e. leakage or seepage of water or steam unless sudden and accidental from a:…plumbing system, including from or around any shower stall or other shower bath installation, bath tub or other plumbing fixture. If loss is caused by water or steam not otherwise excluded, we will cover the cost of tearing our and replacing any part of the building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which the water or steam escaped.

f. wear, tear, marring, deterioration, inherent vice, latent defect, and mechanical breakdown…

As the experts agreed, the court had a fairly easy decision to make. The court noted that,

[A]ny different decision would convert their homeowners’ insurance policy into a maintenance agreement, contrary to the fundamental rule of construing insurance policies which requires that contracts of insurance…be viewed in the light of their general objects and purposes.

Keep in mind that this court applied California law in reaching its decision, and the law may differ in other jurisdictions.

Florida’s Fourth District Court of Appeals was recently faced with this question in the case Certain Interested Underwriters at Lloyd’s v. Chabad Lubavitch of Greater Ft. Lauderdale, Inc., No. 4D10-762, 2011 WL 2200756 (Fla. 4th DCA June 8, 2011). A building owned by Chabad Lubavitch was damaged when a crane fell on it during Tropical Storm Barry. At the time of loss, Chabad Lubavitch had two policies on the damaged building. The first, which is involved in the case, was an “all risk” policy issued by Lloyd's. It contained the following “Windstorm or Hail Exclusion” provision:

We will not pay for loss or damage:

1. Caused directly or indirectly by Windstorm or Hail, regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage; or

2. Caused by rain, snow, sand or dust, whether driven by wind or not, if that loss or damage would not have occurred but for the Windstorm or Hail.

But if Windstorm or Hail results in a cause of loss other than rain, snow, sand or dust, and that resulting cause of loss is a Covered Cause of Loss, we will pay for the loss or damage caused by such Covered Cause of Loss. For example, if the Windstorm or Hail damages a heating system and fire results, the loss or damage attributable to the fire is covered subject to any other applicable policy provisions.

The other policy covered only wind damage (“the wind policy”). Prior to making a claim under the all risk policy, Chabad Lubavitch made a claim under the wind policy for the storm damage and received the policy limits.

Chabad Lubavitch then made a claim under the all risk policy with Lloyd’s for the same storm damage. Lloyd’s filed a complaint for declaratory judgment, seeking a determination that the all risk policy’s windstorm exclusion excluded the loss since it was caused by the wind in the storm. Chabad Lubavitch countersued for breach of contract because of Lloyd’s failure to pay the claim filed under the policy. Both parties moved for summary judgment. Lloyd’s’ argument before the trial court was based on the theory that Chabad Lubavitch’s submission of the claim under the wind policy constituted an admission that the loss was caused by wind.

Chabad Lubavitch countered that the crane striking the building was the cause of damage, not wind. Chabad’s argument focused on the exception within the windstorm exclusion provision, which stated that “if the Windstorm or Hail results in a cause of loss other than rain, snow, sand or dust, and that resulting cause of loss is a Covered Cause of Loss, we will pay for the loss or damage caused by such Covered Cause of Loss.” According to Chabad Lubavitch, the crane striking the building was “a cause of loss other than rain, snow, sand or dust,” resulting from wind.

The trial court concluded that the windstorm exclusion was ambiguous and should be construed strictly against Lloyd’s to cover the damage to Chabad Lubavitch’s building. Lloyd’s appealed that ruling to the Fourth District Court of Appeal. The Fourth District Court of Appeal concluded that the trial court erred in finding that the windstorm exclusion was ambiguous. The Court noted that the windstorm exclusion unambiguously provides that if a loss or damage is caused by a windstorm, the loss is not covered, regardless of any other cause or event that contributes to the loss. Contained within the exclusion is the exception to the exclusion (the ensuing loss provision), which provides that if a windstorm “results in a cause of loss other than rain, snow sand or dust, and that resulting cause of loss is a Covered Cause of Loss,” the loss will be covered.

The Fourth District held that the plain language of the ensuing loss provision means that if a windstorm sets in motion another cause, which is not excluded by the policy, and that intervening cause results in a covered loss, the windstorm exclusion does not apply and the loss would be covered by the policy.

Lastly, the Court noted that the parties could not agree what caused the crane to fall. The Court held that the factual determination is essential because the exclusion could only apply if the crane fell from its perch because of the wind, aided only by gravity and not some other intervening cause. For this reason, the Fourth District remanded the case to the trial court to resolve that factual issue.

This case reveals the importance of policy interpretation, and also how the facts determine coverage in first party property insurance claims. Small factual changes potentially result in drastically different outcomes in a coverage evaluation.

In the end, “it’s all about the facts Jack.”

In Fisher v. Certain Interested Underwriters at Lloyds, 930 So. 2d 756, (Fla. 4th DCA 2006), the Fishers had dwelling coverage that was “all-risk” and personal property coverage, under the same policy, that was “named peril” coverage. The insuring language of the personal property coverage provided that the homeowners were insured for “direct physical loss” to their personal property caused by various listed perils, including accidental discharge or overflow of water or steam from within a plumbing system.

After returning home from a month-long vacation, the Fishers found that a water pipe had leaked under the foundation of their home, leading to mold damage to their personal property. The insurance company denied coverage, claiming that the personal property did not have direct contact with the discharged water, so it was not a “direct physical loss.”

While the parties argued about whether or not the “all-risk” provisions carried over to the personal property coverage, the Court recognized that,

The specific provision requires that the damage be a “direct physical loss” caused by a “named peril.” In this case, the mold damage resulted from the discharge of water – a named peril. The real question we must answer is whether this damage is a “direct physical loss” or merely a consequence of the named peril.

In concluding that the damaged personal property was covered under the policy, the Court stated,

The discharge of water set into motion a sequence of events proximately resulting in mold damage to the homeowner’s personal property….We live in a day and age where mold is a damage commonly resulting from the discharge of water. It makes little sense to construe the policy so narrowly that the consequential mold damage from the discharge of water is not covered. To do so would require us to turn a blind eye to what common sense dictates.

Fortunately for the homeowners, common sense prevailed and thwarted the insurance company’s attempt to assert a mold exclusion where one didn’t exist. This case goes to show that mold, even if not specifically covered in “named peril” policies, may still be covered in some circumstances.

As always, keep in mind that this case applied Florida law, and the law varies in different jurisdictions.

In Bowers v. Farmers Insurance Exchange, 991 P. 2d 734 (Wash. Ct. App. 2000), Ms. Bowers rented her property to new tenants. Prior to the new tenants, the house was well-maintained and in good shape. A few months into the lease, the Ms. Bowers became suspicious of the activities taking place in her rental home and called the police. A marijuana grow operation had been set up in the basement. The extreme heat in the basement allowed for the rapid growth of mold throughout the house. Ms. Bowers filed a claim with her insurer. The insurance company denied the claim, reling on policy language which stated,

We do not cover direct or indirect loss from…wear and tear, marring, deterioration, inherent vice, latent defect, mechanical breakdown, rust, mold, wet or dry rot…

The policy did, however, provide coverage for vandalism, which was not defined. Using a definition from Webster’s Dictionary, the court ruled that the marijuana grow operation was vandalism to the house which caused the mold damage.  The court held:

When the insured can identify an insured peril as the proximate cause, there is coverage even if subsequent events in the causal chain are specifically excluded from coverage….Here, there can be no reasonable difference of opinion regarding the cause of Ms. Bowers’ loss. It was the tenants’ acts, which in an unbroken sequence produced the result for which recovery is sought. We conclude that the tenants’ acts are the efficient proximate cause of the owner’s loss.

This case highlights the importance of determining the proximate cause of mold damage to determine whether or not you have a valid claim. If a covered peril causes the mold to grow, you may be able to collect payments to repair the mold damage.

Keep in mind that the above case used Washington law, and laws vary in different states. Be sure to check in next week for another look at the all-risk policy. 

Mold exclusions often contain language like:

This policy does not apply to any loss or damage caused by or resulting from the actual or threatened existence, growth, release, transmission, migration, dispersal or exposure to mold, spores or fungus.

As phrased, this exclusion may lead one to believe that any and all damage stemming from mold would be excluded. While many times mold damage will be excluded, there may be other avenues for recovery under the policy. Before looking at those other avenues, I want to first begin with a case in which coverage was denied.

In Merrimack Mutual Fire Insurance Company v. McCaffree, 486 S.W. 2d 616 (Tex. App. 1972), the insureds faced a mold problem in their shower stall. The shower stall lacked a shower pan and consequently, the water from the shower leaked onto the wood underneath the shower stall. Of course, the water caused the wood to rot and the growth of fungus and mold. The insurance policy contained an exclusion that read:

This insurance does not cover…loss caused by inherent vice, wear and tear, deterioration, rust, rot, mold or other fungi, dampness of atmosphere, extremes of temperature, contamination, vermin, termites, moths or other insects…

The court ruled that denial of coverage was appropriate, reasoning that “since the damage or deterioration to the property was admittedly directly caused by fungi, and to some extent by termites, such would bring it clearly within the exclusion of the contract.”

The court based its decision largely on the fact that mold – along with termites – was the direct, or proximate, cause of damage. Keep in mind, though, that this case applied Texas law and that the laws are different in every state.

Mold exclusions are relatively straightforward, but many of you may be wondering what happens when mold damage is the result of some other damage. Great question. The answer is: It depends – if the “other damage” is a covered peril, then the policyholder may be in luck. Next week I will write about a case that found mold damage was covered even though the policy at issue contained a mold exclusion.

Policyholders are sometimes faced with the option of purchasing an “All Risk” insurance policy that would, by its name, suggest that it covers all risks. In his book Delay Deny Defend, author, professor and expert Jay M. Feinman writes about how an “All Risk” insurance policy does not necessarily cover all risks:

In the insurance business, all risks does not mean all risks, the presence of a hurricane deductible does not mean that damage caused by a hurricane above the deductible amount is covered, and even if damage is caused by a risk covered by the policy, it may not be covered. Under an all-risk policy an insurance company does not cover damage from any source. In its underwriting, the company determines that risks of a certain kind are too great to be covered under the standard premium, or perhaps to be covered at all, so it excludes them from coverage with special provisions.

As an example, Mr. Feinman uses a standard homeowner’s insurance policy, commonly referred to as the HO-3. The HO-3 usually has nine different types of exclusion such as the following:

• Damage caused by earth movement;
• Power failure;
• War;
• Nuclear Hazard;
• Loss caused by freezing of a plumbing system;
• Loss caused by settling;
• Loss caused by smog; and/or
• Loss caused by birds, vermin, rodents or insects.

Naturally, an insurance policy that is called an “All Risk” policy but does not actually cover all risks because exclusions preclude coverage for many different types of risks might be at odds with a homeowner’s expectation of coverage. Such a name might be considered by some to be misleading. A policyholder might think this misrepresentation – an “all Risk” policy that does not cover all risks -- could be grounds for a bad faith claim against the insurer. However, as Mr. Feinman explains in his book, courts have allowed insurance companies to sell “All Risk” policies that do not cover all risks under one condition:

What the insurance company gives it can only take away if it does so specifically and unambiguously in the policy. This is an application of the ancient maxim of interpretation know in lawyer’s Latin as contra proferentem, interpreting a documents “against the one who proffers” it: Because the drafter of a document is in the best position to write it in a way that says what it means, he should suffer the consequences if it is not clear. Thus “all risks” includes all risks except to the extent that certain risks have been specifically excluded.

For homeowners shopping for the right policy for their property, it is important to keep in mind that although an “All Risk” policy grants broad coverage, the exclusions take away some of that coverage. It is imperative for homeowners review the proposed policy and all of its exclusions and endorsements so that the homeowner has a fair understanding of what is covered and what is not covered. This might help fend off unpleasant surprises if the homeowner suffers a loss that is not covered.

For more of Mr. Feinman’s evaluation of “All Risk” policies and other important topics that play an important role in today’s insurance industry, please refer to his book Delay Deny Defend.

I. The Burdens

Historically in Texas, the insured bore the burden to prove that the loss was excluded. See Lyons v. Millers Cas. Ins. Co. of Texas, 866 S.W. 2d 597 (Tex. 1993); Hardware Dealers Mut. Ins. Co. v. Berglund, 393 S.W. 2d 309 (Tex. 1965); Paulson v. Fire Ins. Exchange, 393 S.W. 2d 316 (Tex. 1965). However, this all changed in 1991 when the Texas Legislature enacted Article 21.58 of the Insurance Code, which now sets the required burden of proof and pleading under insurance contracts. Article 21.58 was codified into § 554.002 of the Insurance Code in 2003, and amended in 2005 to include health maintenance organizations.

Sec. 554.002. BURDEN OF PROOF AND PLEADING. In a suit to recover under an insurance or health maintenance organization contract, the insurer or health maintenance organization has the burden of proof as to any avoidance or affirmative defense that the Texas Rules of Civil Procedure require to be affirmatively pleaded. Language of exclusion in the contract or an exception to coverage claimed by the insurer or health maintenance organization constitutes an avoidance or an affirmative defense. (Emphasis added).

The plain reading of the statue puts the burden of proof and pleading for exclusions on the insurer, and Texas courts have consistently ruled accordingly. Central Mut. Ins. Co. v. KPE Firstplace Land, LLC, 271 S.W. 3d 454, 456 (Tex. App.- Tyler 2008);Lone Star Heat Treating Co., Ltd. v. Liberty Mut. Fire Ins. Co., 233 S.W. 3d 524, 526 (Tex. App.- Houston 2007); Crocker v. American Nat. General Ins. Co., 211 S.W. 3d 928, 931 (Tex. App.- Dallas 2007); Arrellano v. State Farm Fire and Cas. Co., 191 S.W. 3d 852, 856 (Tex. App.- Houston 2006). Should there be an exception to an exclusion, the burden will shift back on the insured to prove the exception to the exclusion. Telepak v. United Services Auto. Ass’n, 887 S.W. 2d 506 (Tex. App.- San Antonio 1994, writ denied).

Furthermore, Texas Rule of Civil Procedure 94 expressly requires that an insured shall never be required to allege the double negative that a loss is not within an exception.

In pleading to a preceding pleading, a party shall set forth affirmatively accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, waiver, and any other matter constituting an avoidance or affirmative defense. Where the suit is on an insurance contract which insures against certain general hazards, but contains other provisions limiting such general liability, the party suing on such contract shall never be required to allege that the loss was not due to a risk or cause coming within any of the exceptions specified in the contract, nor shall the insurer be allowed to raise such issue unless it shall specifically allege that the loss was due to a risk or cause coming within a particular exception to the general liability; provided that nothing herein shall be construed to change the burden of proof on such issue as it now exists. (Emphasis added).

See also Venture Encoding Service, Inc. v. Atlantic Mut. Ins. Co., 107 S.W. 3d 729 (Tex. App.- Fort Worth 2003).

II. Concurrent Causation

Despite the apparent clarity of the statute and contemporary case law, some courts have held on to the traditional approach of requiring the insured to prove coverage exclusions, often when dealing with the complexities of concurrent causation. See Wallis v. United Services Auto. Ass'n, 2 S.W. 3d 300 (Tex. App.- San Antonio 1999). Some of this confusion may be attributable to the fact that the Texas Supreme Court published the case of Lyons v. Millers Cas. Ins. Co. of Texas in 1993, after the Texas Legislature enacted Article 21.58 (later § 554.002) in 1991. Although Lyons was published in 1993, that case resolved issues of law that arose when the case was heard at the appellate level in 1990, before Article 21.58 was law. This leaves the Lyons case in the same pre § 554.002 classification as the other cases that set the concurrent causation doctrine.

What is the concurrent causation doctrine? When two or more events combine to cause a loss, courts take different approaches to determine if the loss is covered under an insurance policy. Texas courts use the concurrent causation doctrine, which holds that as long as one of the causes was a covered cause of loss, the loss will be covered under the policy. In an all-risk policy, the insured would only need to prove a fortuitous loss, and the insurer would need to prove that all causes of loss are excluded under the policy. Unfortunately, coverage only gets you in the door; it doesn’t determine how much you will recover.

Many courts have been holding on to the traditional concurrent causation rules set forth in case law that predates § 554.002. Cases like Wallis almost without fail cite back to Lyons and other pre § 554.002 cases without giving any regard to the legislative intent set forth in § 554.002. Respectfully, these courts, like the one in Wallis, err in the reasoning that the doctrine of concurrent causation is not an affirmative defense or avoidance issue. On the contrary, § 554.002 expressly states that, “Language of exclusion … constitutes an avoidance or an affirmative defense.” Causation will either be (a) a covered cause of loss, or (b) an excluded cause of loss. To the extent that an insurer claims a particular cause of loss is excluded, the insurer is required by § 554.002 to prove that exclusion. In Wallis, despite the erroneous finding mentioned above, the court still determined whether the insured had met its burden of proving the loss was covered and that the insurer had proved its exclusions. At no point did the court ever expect the insured to plead and prove a double-negative -- that the exclusion did not apply. Other courts that have continued the traditional rule of requiring the insured to prove the double-negative, that a loss is not excluded, have also relied on pre § 554.002 cases to support that basis. See Travelers Personal Sec. Ins. Co. v. McClelland, 189 S.W. 3d 846 (Tex. App.- Houston 2006).

By relying on case law that predates Article 21.58 and § 554.002 and not giving due consideration to the Legislature’s clear intent to require that each party bear their own burden of proof, Texas judges have given the insurance companies an uneven playing field. There is no rational policy reason for giving insurance companies this advantage of requiring the insured to prove both coverage and lack of exceptions in concurrent causation cases, and now is the time to stop.

The insurance company issued a fire insurance policy. However, the policy had an exclusion for loss caused by explosion. The insurance company position was the following:

1. That the building insured was substantially destroyed and fell as the result of an explosion, and not as the result of fire, and the said building was substantially destroyed and fell before the fire mentioned in the plaintiff's declaration, whereby the said policy, by the terms thereof, immediately ceased to be in force, and was not in force at the time of the fire mentioned in the plaintiff's declaration.

2. And for a further plea the defendant says that the building insured was totally destroyed as the result of an explosion, prior to the fire mentioned in the plaintiff's declaration, and the loss of the said building was not due to or caused by the fire as alleged in the plaintiff's declaration, but was due and caused by an explosion,

The Court noted the relevant policy language:

The insurance was ‘against all direct loss or damage by fire, except as hereinafter provided.’ The policies are expressly made subject to ‘stipulations and conditions printed on the back’ of the policies. One of the ‘stipulations' ‘printed on the back’ of the policies is that the company ‘shall not be liable for loss caused directly or indirectly by invasion * * * or (unless fire ensues, and in that event, for the damage by fire only) by explosion of any kind.’ ‘If a building or any part thereof fall, except as the result of fire, all insurance by this policy on such building or its contents shall immediately cease.

As usual, facts make the difference:

A witness for the defendant from a window in a house perhaps a block away saw the effects of the explosion, saw the place when it went up in the air.’ She did not ‘know what was going on inside of the building before’ the explosion; she knew ‘there wasn't any fire there that you could see from the outside. And if there was any fire there to amount to anything, you could see it through the blinds and the doors.’ It was about 3 a. m. ‘I was sitting looking out of the window, not looking at anything particularly, and I heard the noise and saw the building go up in the air, and afterwards immediately a dense smoke came up from there.’ A charge on the theory ‘that fire was observed at the same time with the explosion, and thereafter,’ was not without support in the evidence. There was testimony as to charred pieces of timber having been blown from the house through a window of another house by the explosion, and other circumstances from which the jury might have inferred that there was a fire in progress in the house before the explosion which fire caused the explosion, there being no positive evidence that there was in fact no fire in the building just prior to and at the time of the explosion.

I suppose that a house that literally blew up could be an explosion. Significantly, there was some evidence that the jury could find a fire pre-existed the explosion and therefore the burden of proof was on the defendant to prove that the exclusion applied. Burdens of proof can often be the determinative factor in winning or losing the case.

Here, the burden was squarely on the insurer with the Court applying longstanding principals:

The insured having alleged that the damage and loss were caused by fire, under such circumstances as to render the defendant liable, and the defendant having pleaded that the building was destroyed by an explosion which is included in the exceptions from liability, it was incumbent upon the plaintiff to show a loss by fire, which showing put upon the defendant the burden of proving the exception from liability averred in the plea. If the plea was not proven the plaintiff could recover upon showing a destruction of the building by fire. And the plaintiff could recover for the entire loss, even if the loss was facilitated by an explosion; provided the explosion was an incident to a pre-existing fire, and the plaintiff was not responsible for the fire in such a way as to bar recovery.

Sometimes, a little smoke before the explosive fire is a good thing.

The sinkhole issue was noted as follows:

The idea of creating a state sinkhole "facility" was floated Thursday at an Office of Insurance Regulation symposium in Orlando on the state’s property insurance crisis.

Insurance Commissioner Kevin McCarty said the event, featuring mostly insurance industry officials, will help his office draft recommendations for state leaders on improving the affordability and availability of property insurance.

McCarty and insurance company executives said premiums aren’t keeping pace with expenses for many insurers because of backup coverage costs and a dramatic increase in claims costs, including expenses for sinkhole claims. Citizens collected $19.6 million in premiums specifically for sinkhole coverage in 2009 but paid out $97 million in sinkhole claims and expenses. Most of the sinkhole claims were for minor cracks in walls and driveways, according to the state-backed insurer.

John Auer, president of American Strategic Insurance in St. Petersburg, said a government program covering sinkholes is “by far the best way to go.”

“I know a lot of other companies feel similarly,” Auer said, adding that sinkholes are hard for insurers to cover because of the disagreement among architects and engineers about what is a sinkhole or not.

Auer also said that sinkhole costs are so high that they “could take some companies down before the rate can catch up with it."

This sounds an awful lot like the debate regarding coverage of mold related losses which took place nearly a decade ago. First party coverage for mold related losses is extremely limited or excluded under most property insurance policies. As Jason McCaul noted in
Plain Meaning or Fuzzy Interpretation? The Future of First-Party Property Coverage for Mold:

[B]etween 2001 and 2005, insurance companies quietly amended homeowner’s policies by adding endorsements that exclude coverage for mold damage. According to David Dybdahl, a noted expert in the field of insurance and risk management, insurance companies “blasted through more policies than anything in history -- faster than terrorism, asbestos or pollution. They quietly excluded [mold damage coverage] from everyone's policies, and they got away with it.

McCaul provided some background into the financial reasons mold losses are now often not covered:

The new millennium ushered in many unanticipated events: high speed Internet access, a Boston Red Sox World Series Championship, and an unprecedented rise in mold litigation. The statistics are staggering: in 1998, only 129 mold-related insurance claims were filed nationally. By 2001, this number had skyrocketed to 9,563. Despite this rapid surge in mold claims, the financial impact on insurers was minimal at first. In 2000, Texas insurers were settling most mold claims for a few thousand dollars. However, as attention to what some were calling “the next asbestos” grew, the potential dangers of mold spread across headlines and into the national consciousness. “Lurking, Choking, Toxic Mold” was the cover story in the August 2001 edition of the New York Times magazine. And for readers of the Washington Post, the attitude toward mold was no less threatening: the attention-grabbing headline “Exorcizing a Mold Monster” surely had homeowners thinking about whether their property or health was at risk.

As concern over mold swept across the nation, the eye of the inevitable legal storm that would pit homeowners against insurers over coverage for mold damage was forming in the most appropriate of places – Dripping Springs, Texas. There, homeowner Melinda Ballard had sued Farmers Insurance Group (“Farmers Insurance”) for failing to adequately reimburse her for the extensive mold damage to her eleven thousand square-foot home. Ballard accused Farmers Insurance of intentionally delaying its investigation of her claim in an effort to avoid payment. While Farmers Insurance stalled, toxic mold multiplied in Ballard’s home to the point where virtually nothing in the house was salvageable and the house itself was no longer habitable. Although Ballard was partially a dispute over coverage, the central issue was whether Farmers Insurance acted in bad faith in its handling of the claim. The jury’s verdict in June 2001 not only found that Ballard had been covered, it also heavily penalized Farmers Insurance for bad faith: Ballard was awarded $6.2 million for her property damage claims, $17 million for her bad faith claim, and $8.9 million in legal fees. While a Texas appellate court later reduced the
$32 million award considerably, the jury’s decision sent property insurers scrambling to look for ways to lawfully deny coverage for future mold claims. Thus, from the ashes of Ballard, the mold exclusion was born. (emphasis added and citations deleted)

Regardless of other reasons, severe and frequently encountered perils will not be covered unless the rates accurately reflect the risks of loss.  Sinkhole losses are expensive to properly repair. The frequency is primarily concentrated in a very small geographic area. I predict that, similar to mold coverage, only those willing to pay significant premiums with high deductibles or those with very large financial interests in property will have sinkhole coverage in the future. Just like mold, the insurance industry seems bent on either leaving markets with mandatory sinkhole coverage in areas where they often occur or simply not covering the risk.

This scenario is often repeated just after destructive hurricane seasons as insurers try to increase premiums to make up for the catastrophe losses. As I noted several years ago in, Do we build or flee in the face of catastrophic frequency and severity?:

Frequency and severity of loss have everything to do with our current insurance situation. The catastrophic frequency and severity of hurricanes from 2004 to 2006 was off the charts. And, the severity of loss (the average amount paid per claim) was extraordinary as well. Combined, these lead to historic losses in a relatively small catastrophe prone area. Like bookies looking for the sure bet, insurance companies are simply looking to place bets where fewer losses occur. As these private insurers flee the coasts, state insurers of last resort are left to fill the void, in some instances with less than satisfactory results. The long term answer is not easy and will not be cheap. People are determined to continue living close to beaches and water. Recognizing and accepting this fact, we must start to deal with the upfront cost of building more structurally sound and "hurricane resistant" structures.

Unlike hurricanes, sinkholes losses, similar to mold losses, occur on a fairly regular basis. Many trades and businesses depend on sinkhole claims because the losses are so prolific. Similar to mold coverage, those in the business will probably be blamed as the entities killing the goose with the golden sinkhole egg. The insurance industry seems to have made up its mind. From what I have read about the methodology regulators are using in their investigation on this issue, you don't need to be a weatherman to know which way the wind is blowing.

In Malley, the homeowner had a standard Texas Dwelling Policy Form—3, insuring the house he owned in Beaumont, Texas. The house was damaged by plumbing leaks in the foundation during a 1999 freeze. Allstate denied Plaintiff’s subsequent mold claim, asserting that the policy contained an exclusion for mold damage. Plaintiff asserted that there was coverage under the “ensuing loss” provision, because it resulted from a covered event.

The policy stated:

We do not cover loss caused by:
.....
(2) rust, rot, mold or other fungi.
.....
We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of 349*349 glass which is part of the building if the loss would otherwise be covered under this policy.

The District Court noted that the Texas Supreme Court had not the construed “ensuing loss” provision in a policy like the one in this case, so it had to make an educated guess as to how the Texas Supreme Court would rule. However, the District Court pointed out that Texas state intermediate courts have interpreted “to ensue” as meaning “to follow as a consequence in chronological succession; to result, as an ensuing conclusion or effect.” Citing another Texas case, the Court stated that:

Ensuing loss caused by water damage refers to water damage which is the result, rather than the cause, of settling, cracking, bulging, shrinkage, or expansion of foundations, walls floors, [and] ceiling.

Applying this analysis, the Court concluded that mold damage resulting from earlier water damage, as claimed by the Plaintiff, would not be covered. “The ‘ensuing loss’ caused by water damage would refer to water damage which is the result, not the cause, of mold damage.”

The Court decided that if it were to interpret the “ensuing loss” provision so as to allow mold coverage under the circumstances in this case, it would “very nearly destroy the exclusions.” And an interpretation rendering the exclusionary clause inoperative makes “no sense.”

In short, according to the U.S. District Court for the Eastern District of Texas, if you have a mold exclusion in your insurance policy, an “ensuing loss” provision will not negate that exclusion.

Ms. Page’s all-risk policy included a general exclusion for mold, but the personal property damage section specifically noted that losses resulting from plumbing leaks were covered. State Farm argued that because the Court had previously held that an “ensuing loss” provision in the standard policy does not provide coverage for mold contamination caused by water damage that is otherwise covered under the policy, the Court should rule in its favor. Fiess v. State Farm Lloyd’s, 202 S.W.3d 744 (Tex. 2006).

However, the Court disagreed with State Farm’s interpretation of Fiess. The Court stated that even though the ruling in Fiess was broad, it could not conclude that the Fiess decision prohibited coverage for all mold damage no matter the cause, as State Farm claimed. The Court pointed out that it specifically mentioned that the Fiesses failed to preserve a claim for mold caused by plumbing and air conditioning leaks.

The Texas Supreme Court stated that although the mold exclusion did not apply to the personal property provisions of the policy--because loss caused plumbing leaks was specifically included--it did apply to coverage for damage to the dwelling because that was specifically excluded.

This case just goes to show you that interesting rulings that may seem counterintuitive at first brush are usually backed by persuasive logic and reasoning. We may not always agree with a court’s decisions, but at least we get the opportunity to review why the court ruled the way it did.

In Bayou City Prop. v. American Econ. Ins. Co., No. 09-1720, 2010 U.S. Dist. LEXIS 51753 (S.D. Tex., May 25, 2010), the Plaintiff had purchased coverage for employee dishonesty to cover instances of theft. On April 3, 2008, the Plaintiff was a victim of theft and vandalism: computer files were permanently deleted and tangible items were stolen, but there were no signs of forced entry. A property manager for the Plaintiff was the last person seen in the office before the theft and he did not return to work after the night of the incident. Plaintiff concluded that the property manager was responsible for the theft.

Although the Plaintiff purchased employee dishonesty coverage for instances of theft, that coverage did not extend to independent contractors. The parties agreed that the property manager/thief was an independent contractor. Independent contractors fell under the policy’s exclusion for general dishonesty. The court noted the policy’s exclusion for general dishonesty “exclude[d] coverage for dishonest acts by someone who was entrusted with the property affected by the dishonesty. Coverage, thus, depends on whether [the property manager] was entrusted with [the Plaintiff’s] office property.”

Defendants argued that the Plaintiff entrusted the property manager as evidenced by the Plaintiff giving the property manager the keys to the office building and passwords to the computers. Plaintiff argued that entrustment is akin to a bailment, which it claimed requires exclusive possession. Plaintiff argued that the office was not entrusted to the property manager because several people had keys and passwords.

The Court quickly dismissed the Plaintiff’s argument, concluding that the law recognizes sole and joint bailments. The Court then went on to define entrustment as “confid[ing] something to another something of significance – an authority or object – for one’s own purposes or coincident purposes with the other person. It can be limited or limitless.”

The Court concluded that by giving the property manager access to and control over the office, the Plaintiff “commended its contents to [the property manager] for the joint work of [the Plaintiff] and [the property manager]. That others were similarly entrusted does not negate [the Plaintiff’s] entrustment of [the property manager].” Because the Court determined that the Plaintiff had entrusted the property manager with its property, any theft by the property manager was not covered under the policy.

If the Plaintiff had hired someone permanently to manage the property, instead of relying on an independent contractor to do the job, this outcome might have been avoided.

So, how about a review of that exciting "Volcanic Activity" provision in the basic, broad, and special CP forms? If the recent Hard Rock Casino advertisement series about "you know who you are" has any truth, those still reading this post know they are the true insurance coverage nerds everybody in the office consults when a hard coverage issue arises.

The basic and broad "causes of loss" form covers "volcanic activity" with the following language:

11.Volcanic Action, meaning direct loss or damage resulting from the eruption of a volcano when the loss or damage is caused by:

a. Airborne volcanic blast or airborne shock waves;
b. Ash, dust or particulate matter; or
c. Lava flow.

All volcanic eruptions that occur within any 168-hour period will constitute a single occurrence.

This cause of loss does not include the cost to remove ash, dust or particulate matter that does not cause direct physical loss or damage to the described property.

The FC&S notes that: 

Volcanic action coverage also was previously available only on an optional basis by endorsement. As a basic cause of loss under the ISO commercial property program, it covers damage from the above-ground effects of a volcanic eruption—airborne blast and shock waves, ash, dust, particulate matter, and lava flow. It does not include, as detailed in the earth movement exclusion, the removal cost of volcanic ash or dust that has not physically damaged insured property, nor the seismic effects of a volcanic eruption.

Coverage under this cause of loss applies to any volcanic eruptions occurring within a seven day period (168 hours). Under the original versions of the form (prior to the 1988 revisions), this period was three days.

The special form policy covers all the "risks" of direct physical loss unless excluded. While it then excludes volcanic eruption, the form then excepts the exclusion for "volcanic activity" to provide this coverage:

(5) Volcanic eruption, explosion or effusion. But if volcanic eruption, explosion or effusion results in fire or Volcanic Action, we will pay for the loss or damage caused by that fire or Volcanic Action.

The bottom line is that many ash claims will likely be denied because insurers claim that the volcanic activity or ash did not result in any "physical damage." If you happen to have that problem, "you know who you are" and who you need to call.

Have a great day!!

What is a waiver in Texas? It is an intentional relinquishment of a right actually known, or intentional conduct inconsistent with claiming that right; estoppel prevents one party from misleading another to the other’s detriment or to the misleading party’s own benefit.

If the insurance adjuster does not identify the coverage issue when presented with it and leads the insured into believing that he/she is insured for the loss, and in reliance on it, the insured makes business decisions that result in more of a loss from additional damages to the property or additional out of pocket expenses, has the insurance company waived the exclusions or is it estopped from denying coverage?

In Texas, the Supreme Court explained the law on waiver and estoppel:

If an insurance contract covers certain risks but the policy contains exclusions or limitations of coverage, when the insured makes a claim for loss from a covered risk, the insurer must assert any applicable exclusion or limitation to avoid liability. Ulico Casualty Company v. Allied Pilots Association, 262 SW 3d 773, 778(Tex. 2008); citing to Employers Cas. Co. v. Block, 744 SW 2d 940, 943-44 (Tex. 1988).

Earlier decisions in Texas are consistent with the analysis above. Republic Ins. Co. v. Hope, 557 SW2d 603 (Tex. Civ. App. 1977); T.I.M.E., Inc. v. Maryland Casualty Company, 157 Tex. 21, 300 S.W.2d 68, 73 (1957); Camden Fire Ins. Ass'n v. Moore, 206 S.W.2d 104, 107 (Tex.Civ.App. Galveston 1947, writ ref. n. r. e.).

In Hope, the insured was a builder for 20 years and was in the process of building a home when vandals stole thousands of dollars worth of equipment. Republic argued the vacancy provision, stating the property was not occupied for 90 days, so theft and vandalism were excluded causes of loss. The Court reasoned that when several instruments form one overall contract, the court will assume in its construction of the contract that the parties honestly intended the terms of the various instruments should be effective to accomplish their purposes, and will reconcile apparently conflicting provisions to give effect to all of them, if possible. The Court construed the instruments in question to provide plaintiffs Builders' Risk coverage on the structure of the house at an increasing value as construction progressed until thirty days after construction was completed. Having construed the insurance policy as an “all risk” policy, in failing to plead the vacancy exclusion, the court held Republic waived the vacancy exclusion.

Pollution or Contamination

We do not cover any loss, directly or indirectly, regardless of any cause or event contributing concurrently or in any sequence to the loss, caused by the discharge, dispersal, seepage, migration or release or escape of pollutants. Nor do we cover the cost to extract pollutants from land or water, or the cost to remove, restore, or replace polluted or contaminated land or water. A "pollutant" is any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and "waste." A "contaminant" is an impurity resulting from the mixture of or contact with a foreign substance. "Waste" includes materials to be disposed of, recycled, reconditioned or reclaimed.”

Gradual or Sudden Loss

We do not cover any loss caused by gradual deterioration, wet or dry rot, warping, smog, rust or other corrosion. In addition, we do not cover any loss caused by inherent vice, wear and tear, mechanical breakdown or latent defect. However, we do insure ensuing covered loss unless another exclusion applies.

Faulty, Inadequate or Defective Planning

We do not cover any loss caused by faulty, inadequate or defective:

a. Planning, zoning, development, surveying, siting;
b. Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
c. Materials used in repair, construction, renovation or remodeling, grading or compaction; or
d. Maintenance; of part or all of any property whether on or off the residence. However, we do insure ensuing covered loss unless another exclusion applies.

These are the provisions many insurers are relying upon to deny Chinese drywall claims under property insurance policies. So, the decision is very important and will have to be followed closely. Everybody can expect more claims to be filed citing this decision. The reasoning was interesting and relied, in part, upon the deposition of the insurance company’s corporate representative. The Court noted the following deposition testimony in its Judgment:

Q: I said, given your experience in working with insureds and how they might interpret or understand the policy, do you think that a person would read this and think that they would need to buy additional coverage to cover Chinese drywall?

A: It would depend on the person. If I read it, I would know it. I'm a person. There's other persons that may not.
…

Q: Do you agree that the burden is on the insurer to show that a damage is excluded?

MR. FRANK: Was that the end of it?

MR. CASEY: Yes.

MR. FRANK: Objection to the extent it calls for a legal conclusion. If you know, you can go ahead and answer.

A: I am pretty sure that that's the way - I mean that we usually, if we feel something is not covered, we document why and explain it. That would be what we would do.

…

Q: Were the damages to the Fingers’ drywall itself direct or indirect?

A: We found no damages to the drywall.

Q: And were the damages to the Fingers' metallic components direct or indirect?

A: We found those are a direct result of the gases emitted or given off by the drywall.

…

Q: Did Audubon investigate as to whether the drywall was installed correctly or incorrectly?

A: No.

Q: Is there a reason why they didn't investigate?

A: It wasn't germane to the issue.

Q: Why not?

A: The question was whether the drywall was causing the problem itself, not whether it was hung correctly.

In a footnote, the Court explained the basic premise  of coverage under an all-risk policy:

"Generally, an 'all risk' insurance policy creates a special type of coverage extending to risks not usually covered under other insurance, and recovery under an "all risk" policy will, as a rule, be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage."

Louisiana law differs from other jurisdictions regarding the pollution exclusion cited above. The Court easily found that it did not apply (even the insurer agreed, but because it found it failed to include the endorsement in that policy) as, under Louisiana law, the pollution exclusion could not apply to defective building materials in a home:

The [pollution] exclusion does not, and was never intended, to apply to residential homeowners claims for damages caused by substandard building materials. Doerr v. Mobil Oil Corporation, 2000-0947 (La. 12/19/00), 774 So.2d 119, 134; State Farm Fire Ins. Co. v. MLT Construction Co., 2002-1811 (La. App. 4th Cir. 6/4/03), 849 So.2d 762, 770. The Louisiana Department of Insurance determined that a "pollution incident" under a pollution exclusion in homeowners' policies only refers to an incident which causes "environmental damage," or "injurious [to the environment, not the claimant] presence in an upon the land, the atmosphere, or any watercourse or body of water of solid, liquid, gaseous or thermal contaminants, irritants or pollutants." (See Advisory Letter No. 97-01 Commissioner of Insurance, State of Louisiana (June 4, 1997)).

…The fact that Chinese drywall releases various gases into the home is not sufficient to qualify as a "pollutant" under the pollution exclusion, which this Court interprets consistent with Doerr v. Mobil Oil…Audubon acknowledged in its response to Plaintiffs' Motion for Partial Summary Judgment that its pollution exclusion was inapplicable and Audubon amended its Answer accordingly.

Turning to the Gradual or Sudden Loss exclusionary language, the Court relied upon testimony as well as case law generally indicating that the clause does not apply in the homeowner's Chinese drywall claim. Some may find the Court's reasoning is strained and applicable only to Louisiana cases, as many insurers and experts claim that the drywall destroys itself:

The GSL Exclusion is designed to exclude expected losses. Wilson, Bill, ed. Forms & Substance-Coverage Concerns, Quirks and Solutions, Independent Agent, May 2004 at p. 12. Coverage is required here because "the purpose of the policy is to secure an indemnity against accidents which may happen, not against events which must happen." Boudreaux v. Verret, 422 So.2d 1167, 1172 (La. App. 3rd Cir. 1982); Gulf Transp. Co. v. Fireman's Fund Ins. Co., 83 So. 730, 733 (Miss. 1920).

…The Fingers' losses relate to the drywall off-gasing, not by wear, tear and/or gradual deterioration…. Both Audubon's expert, Dr. Zdenek Hejzlar, and the Fingers' inspector, AI Mallet, agree that the Fingers' damages are caused by the sulphurous gases emitting from the Chinese drywall…

…Audubon suggests that the phrase "rust or other corrosion" bars coverage. This position is rejected because the plain language of the GSL exclusion refers to: "any loss caused by....rust or other corrosion."… The exclusion is intended to apply where corrosion, rust or the like is the cause of the property damage; it is not designed to preclude coverage when the rust or corrosion is the damage itself. Trus Joint MacMillan v. Neeb Kearey, 2000 WL 306654 (E.D. La. 2000). Here, the corrosion caused to the metals in the Fingers' home by the sulphurous gases released by the Chinese drywall is the loss, not the cause of the loss, indicating the corrosion language of the Gradual or Sudden Loss exclusion does not bar coverage….

..The GSL exclusion also refers to losses caused by an "inherent vice" or "latent defect." Audubon's insurance policy does not define these terms. Black's Law dictionary defines a latent, inherent, or hidden defect as: "a product imperfection that is not discoverable by reasonable inspection." See Black's Law Dictionary, 481 (9th ed. 2009). Again, the Louisiana jurisprudence, which is rooted in Maritime law, focuses on inevitable losses due deterioration of the thing. See ARNOLD COUCH ON MARITIME INSURANCE (11th ed) § 778. The inherent vice or latent defect exclusion applies to "a loss due to any quality in the property that causes property to damage or destroy itself that results from something within the property itself as opposed to some outside force." FC&S Online, Processors Coverage Form, Insurance Services Office Non filed 1M Coverage, December 2005, http://www.nationalunderwriterpc.com. First party policies typically exclude damages due to an inherent vice or latent defect in order to prevent the insurer from having to compensate the insured for property that "has its own shelf life and will eventually wear out or break down because of intrinsic quality or nature." Eugene Wollan, Risks Not Taken, John Liner Review 86, (Fall 2006). Here, there is no evidence that the Chinese drywall is damaging or destroying itself, indicating the "inherent vice" or "latent defect" language from the GSL exclusion does not apply. Audubon's expert report likewise does not evidence any damage to the drywall itself.

Remember the noted testimony that the insurer did not investigate to see if the drywall was installed properly and that other people could interpret the policy differently? The Court apparently thought this was important and noted that the insurer’s own expert did not consider the drywall defective when considering the Faulty, Inadequate or Defective Planning exclusion:

Chinese drywall is not defective within the meaning of the FIDP exclusion…Again, Audubon did not provide a useful definition of this exclusion in its contract. Interpreting the plain language of the Audubon policy, the Chinese drywall "defect" is not one that renders the drywall unable to perform the purpose of drywall. …Indeed, it has not been alleged that the subject drywall would be defective in all geographies. The Chinese drywall here can still act as an aesthetic or "finishing" material for a home. Rather, the damage that the Chinese drywall causes is based upon a quality distinct from these roles. Audubon agrees.

I previously posted in FC&S Says Ensuing Loss Coverage Applies to Chinese Drywall Claims that:

“The insurance industry is probably calling and writing the editors of the FC&S Bulletin because the June 2009 edition correctly notes that Ensuing Loss Damage is covered under the ISO form policies for typical Chinese Drywall losses. I recently noted various coverage issues related to Chinese Drywall. A number of these cases are coming to our office because insurers are not affording first party coverage.

This trial court never had to reach the issue of the ensuing loss provisions because the insurer had no more defenses. It was a moot point.

As certain as the sun will rise in the East tomorrow morning, there will be an appeal of this decision. Whether it will be affirmed is about as questionable as whether I will rise and get in my five mile run or just stay in bed and enjoy the Easter weekend.

Truth be told, certain business interruption claims are hard to quantify. Policyholders should be aware of the accounting methodologies employed in the calculation of a business loss to avoid presenting the ubiquitous “speculative” claim that could be easily denied under the consequential (or remote) loss exclusion.

In Florida, courts have held that in order to recover under the business interruption policy, an insured must prove that it sustained damage to property, that the damage was caused by a covered loss, that there was an interruption to the business (“suspension of operations”) which was caused by the property damage, and that there was an actual loss of business income during the period of time it took to restore the business and that the loss of income was caused by the interruption of the business and not by some other factor or factors. See, Dictiomatic, Inc., v. U.S. Fidelity & Guar. Co., 958 F. Supp. 594 (S.D. Fla. 1997), citing Ramada Inn Ramogreen, Inc., v. Travelers Indemnity Co., 835 F.2d 812 (11th Cir. 1988).

In Dictiomatic, the court denied the insured’s business interruption claim as a matter of law after it found, as a matter of fact, that the insured failed to prove it would have realized business income (selling hand-held electronic translators) which was lost solely as a result of Hurricane Andrew. The insured also failed to establish that it would have enjoyed income during the time of restoration, sufficient to pay normal operating expenses or to generate profits.

In my opinion, the policyholder’s demise in Dictiomatic was most likely the result of improper calculation of the actual business loss, since the numbers presented to the court were perceived as inflated and contradictory. Surely, a more thorough review of the evidence before it was presented to the trial court could have avoided a judgment after the insured’s case in chief and potentially resulted in an opportunity to challenge the carrier’s case. If there is one thing to be learned from the “hand-held electronic translator” business, it is to be careful and accurate in presenting a claim for business interruption.

The story delves right into the insurance coverage problem:

Joey Roche never set out to be a leading voice in educating homeowners on protecting their investment.

But in the more than two years since 15,000 gallons of raw sewage spewed into his newly purchased house in Oregon City, he's ended up instructing more than a few people on how to steer clear of his own fate.

"Looking back, I, of all people, should have known better," Roche said. "I'm a licensed general contractor. So I figure if this could happen to me, it could happen to anyone."

He's far from alone in assuming that the insurance policy he bought to protect his vintage 1940 house in the city's historic Canemah neighborhood would cover any contingency.

In fact, it covered almost nothing. And even the $10,000 he collected from State Farm Insurance to pay to clean up the muck came through a previous purchase of a separate endorsement -- an addition to his policy -- that if not for his contractor's background he might never have thought to ask about.
...

But whether it's a freak sewage backup, flooding, landslide or earthquake, a majority of homeowners probably assume the insurance policy they've taken out to cover such contingencies will pay off in time of need, Roche and others say.

Often, that's simply not the case.

"I get calls every single day from people who are outraged to find out that they simply aren't covered for things they thought they were," said Ron Fredrickson, who manages the Oregon Insurance Division's consumer advocacy unit. "In the end, unfortunately, there's usually not much I can do for them."

I think that State Farm agents must get some of the best "how to be likeable" training in the insurance business. I say this because as I pointed out in Is the State Farm Policy Really Worth Anything? the policy they sell does not really offer broad coverage and after all those commercials suggesting that State Farm will be there for you after the disaster, it simply is not true. Joey Roche had State Farm coverage. He got paid a fraction of his loss, but he loves his agent who sold him the coverage.

"Roche praised his State Farm agent for making good on everything the policy provided.

"Unfortunately and to our ultimate chagrin," he added, "it just didn't cover very much."

To be Fair And Balanced, standard homeowners forms, like most property forms in current use, exclude all loss "caused directly or indirectly by any of the following . . . water which backs up through sewers or drains or which overflows from a sump." Newer homeowners forms expand the exclusion to include "water-borne material which backs up through sewers and drains." It also adds "which overflows or is discharged." And, "a sump pump or related equipment" now accompanies a sump. The bottom line: most insurance companies only cover this occurrence under endorsements that offer little extra coverage.

In Rodin v. State Farm Fire & Casualty Co., 844 S.W.2d 537 (Mo. App. 1993) the insureds argued that damage done to their dwelling was caused by sewage, not by water. Tree roots in the outside sewer system caused sewage to back up into the homes of the Rodins and their neighbors. Rodin described the eight inches of effluent that entered his basement as an odorous, viscous, black liquid with solid matter floating in it. He added that the liquid definitely was not water. However, the court stated that the plaintiffs’ argument that the policy excluded only water damage overlooked the totality of the exclusion. The Court noted that the loss that would not have occurred in the absence of the water backing up through sewers or drains, regardless of other causes acting "concurrently . . . with the excluded event to produce the loss." Therefore, whether the loss was caused by water or pollutants contained in the sewage acting concurrently with water, it was excluded under State Farm's policy.

What a stinking mess and unexpected uninsured event from the policyholder's standpoint.

The article correctly noted the generally accepted difference between a structure that is "vacant" and one that is "unoccupied."

“Vacant” or “Unoccupied”?

Courts have long defined “vacant” in insurance policies as meaning empty of inanimate objects — as opposed to “unoccupied,” which they have defined as being void of human habitation. For example, in Myers v. Merrimack Mut. Fire Ins. Co., 788 F.2d 468 (7th Cir. 1986), an apartment building was deemed “vacant” and not merely “unoccupied” in regard to a fire loss. The court found that the loss was excluded where apartments in a building, except for some stoves and refrigerators, were entirely empty for approximately 18 months, lacking both tenants and inanimate objects. (emphasis added)

A very interesting discussion in the article concerned seasonal businesses:

One area that conjures up questions about the meaning of “vacancy” stems from insureds with seasonal businesses. For instance, insureds with motels, restaurants, and shops along the Maine coastline may close their businesses during the off season. Contents, such as equipment, furniture, and other personal property can stay, but all perishables are removed. Properties are winterized by draining pipes and shutting off water and heat.

Carriers know these properties are seasonal and accept the risks. Therefore, in the event of a loss, would these property types be deemed vacant by the policy language on a commercial property policy?

The Insurance Services Office (ISO) CP 00 10, Building and Personal Property Coverage Form states that a building is vacant unless 31 percent of its square footage is used by the building owner to conduct customary operations. As the customary operations of seasonal businesses are to rent rooms and service customers, and those customary operations are not being performed in the months they are closed, the buildings would meet the definition of “vacant” set out in the policy, and those provisions would apply.

I had never thought about that coverage issue as it applies to seasonal businesses. I find unusual but very important topics are routinely discussed in the FC&S and that is why I find the product so important to adjusters and coverage counsel.

The damage was caused by water backing up through the sewer and subsequent flooding from Hurricane Ivan. The physical damages caused by each event were not able to be segregated. The insurance company denied the claim citing fairly common exclusionary language:

B. EXCLUSIONS

1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
* * *

g. Water
(1) Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not.
(2) Mudslide or mudflow;
(3) Water that backs up or overflows from a sewer, drain or sump;
(4) Water under the ground surface pressing on, or flowing or seeping through:
(a) Foundations, walls, floors or paved surfaces;
(b) Basements, whether paved or not; or
(c) Doors, windows or other openings.

The endorsement purchased provided for the following:

II. Additional Coverages
The following Additional Coverages are added;
…
f. Back Up of Sewers and Drains
We will pay for loss or damage to Covered Property caused by a back up from a sewer or drain or an overflow from a sump within the building at the described premises.

The most we will pay for each location under this Additional Coverage is $ 5,000 for the sum of all expenses arising from back up or overflow during each 12 month period of the policy.

Exclusion B.1.9.(3) does not apply to this Additional Coverage

The Court pointed out the interpretation dispute between the parties:

Significantly, this language removes Exclusion B.1.g.(3) of the basic policy as a bar to coverage for damage caused by sewer and drain back-up and makes no effort to restate the language that bars coverage on the ground of concurrent causation by another excluded cause of loss. This omission fosters a measure of ambiguity unlikely to appear until the insured files a claim, confident in the notion that the endorsement he purchased rendered all aspects of the former exclusion void only to find that the insurer interprets his coverage far more narrowly. That ambiguity becomes evident upon consideration of Exclusion B.1.g.(3) in its entirety:

B. EXCLUSIONS

1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
g. Water
* * *

(3) Water that backs up or overflows from a sewer, drain or sump;

 …Based on this language, the insured might reasonably conclude that the coverage he purchased eliminates both the specified limitation in subsection g.(3), concerning sewer and drain back-up, as well as the preliminary language in section B.1., concerning concurrent causation. Nevertheless, the insurer might concur only as to subsection g.(3) and, as Penn National did here, deny coverage on the basis of the concurrent cause language.

Ruling for the policyholder, the court noted the unfairness of applying the subject exclusion in this case:

In view of the evident linguistic joust between these controlling provisions of Penn National's policy, we find a significant indicator of the parties' intent--and the insured's expectations--in the fact that the insured paid an added premium for the coverage the Penn Pac Endorsement purports to unlock because the basic policy, in which the concurrent cause language appears, would otherwise exclude coverage. Thus, the insured purchased additional coverage ostensibly to make up for deficiencies in the basic policy only to find its claim denied not by virtue of any limitation on the coverage it bought but because ancillary language in the basic policy barred coverage for another excluded loss. Such a result strikes us as a variant of the "sleight of hand" we rejected in Betz, allowing an insurer to create the appearance of coverage using an amendatory endorsement tailored to cover a stated risk only to deny coverage when that risk comes to fruition by citing language not suggested by the endorsement…. Given that the concurrent causes of loss, flooding and sewer and drain back-up, were ineluctably linked by the effect of a hurricane on the municipal drainage system, we find this point particularly salient. No insured would purchase extra coverage for an added premium in the expectation that its claim under that coverage would be denied because the covered cause of loss, i.e., sewer and drain back-up, was itself caused by an excluded cause of loss, i.e. flood, when the two would naturally occur together. Nevertheless, the interpretation Penn National urges would validate just such an unseemly result and in so doing undermine the reasonable expectations of the insured.

The decision is very important for policyholder attorneys when attempting to avoid the effect of the anticoncurrent clause if the policy has an endorsement because the court specifically distinguishes this situation from cases where the clause concerns only coverage within the basic policy:

Unlike the courts of other jurisdictions on whose holdings Penn National relies, we have found the Endorsement and Exclusion provisions ambiguous to the extent that they fail to provide a clear indication of the continuing role of the concurrent causation language of Exclusion section B.1. after the insured's purchase of the extra cost Endorsement. Indeed, our construction, based on the express language of the Penn Pac Endorsement, finds little basis for the continued viability of the concurrent cause exclusion to sewer and drain back-up under the policy. By contrast, in each of the cases Penn National cites, Brief for Appellant at 22-33, the respective courts upheld concurrent cause provisions. See Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419 (5th Cir. 2007); Noran Neurological Clinic, P.A. v. Travelers Indem. Co., 229 F.3d 707 (8th Cir. 2000); Front Row Theatre, Inc. v. American Mfrs. Mut. Ins. Co., 18 F.3d 1343 (6th Cir. 1994); [**29] Assurance Co. of Am., Inc. v. Jay-Mar, Inc., 38 F.Supp.2d 349 (D. N.J. 1999); Executive Corners Office Building v. Maryland Ins. Co., 1999 U.S. Dist. LEXIS 23444 (D. N.D. 1999); B&W Heat Treating Co. v. Hartford Fire Ins. Co., 23 A.D.3d 1102, 803 N.Y.S.2d 870, 2005 N.Y. App. Div. LEXIS 12729 (App. Div. 2005). Nevertheless, to the extent these decisions apply different language in differently structured policies, every one is distinguishable.

Of controlling significance is the fact that in every such case, without exception, the respective courts interpreted concurrent cause exclusions as they appeared in the insurers' basic policies, determining only whether a cause of loss otherwise covered by the basic policy was excluded from coverage when it occurred concurrently with a cause of loss excluded in the basic policy. None of those cases addresses the modifying language of an extra-cost endorsement on the language of the basic policy, the ambiguity that it created or the reasonable expectations of an insured in light of that ambiguity. Thus, those courts did not confront the linguistic interplay we address here. Consequently, they were able to find the language of the concurrent cause exclusion unambiguous as it applied to claims made under the basic policy. Given the language they considered and the circumstances to which they applied it, we might well have reached the same conclusions. Nevertheless, those scenarios are not before us. Accordingly, we do not find these cases Penn National cites apposite to our disposition.

This case is useful for policyholders seeking coverage when they have purchased additional coverage through endorsements but the insurer is trying to apply basic form exclusions.

First, I am merely paraphrasing the lecture. Order the video from NAPIA to fully appreciate the concepts.

Second, I will be discussing some case law regarding these issues over the next several weeks. Judges, not lecturers, decide what is and is not covered. Real life results and case examples are important.

Still, Eshoo made the following notation in his lecture regarding how the all risk policies work when faced with structural losses allegedly caused by a defective product, such as Chinese drywall:

A resulting loss is covered even if a defective product is a "but for" cause of the loss. The intent of the exclusion and exception is to exclude only that portion of the loss attributable to the defective product. In other words, losses that are defective products are not covered, while those losses that result from the defective product are covered.

The exclusion and exception, read together, operate to eliminate the conduct or defect from consideration in analyzing the cause of resulting damage; only the actual risk causing the resulting physical damage is subject to the coverage analysis.

To the extent that cause is neither excluded nor excepted in the applicable policy, coverage exists for the damage which resulted from the defective product.

This is an excellent phrasing of how the "ensuing loss" provision works. I suggest that others seeking coverage adopt it rather than some of the convoluted discussions by courts.

The factual and legal burden of proof to demonstrate that a loss occurs within the language of an all risk policy was properly described as follows:

An insured seeking to recover under an "all risks" insurance policy merely has the burden of proving only that direct physical loss or damage occurred to covered property while the policy was in force.

Once the insured establishes a loss apparently within the terms of an "all risks" policy, the burden shifts to the insurer to prove that the loss arose from a cause which is excluded.

The insured is not required to disprove any excluded cause of loss.

...

Exclusion clauses are generally considered contrary to the fundamental protective purpose of insurance. Thus, the courts give a strict interpretation to exclusion clauses, as opposed to the liberal interpretation afforded coverage protections.

I will analyze these principals in greater detail later as they relate to Chinese drywall and how other defective building materials contribute to losses covered under all risk policies. But, the phraseology of the concepts is excellent and should be adopted by all consumer advocates.

I indicated in a comment to a post, Nationwide Insurance Commercial Customers Should Check Their Policies for Dependent Property Lost Income Coverage:

Even if the Nationwide Underwriters reduce the Coverage, it may have no impact on customers of Nationwide since they have not been getting paid for it in the past. Maybe they will have to start paying it more as a result of greater awareness by public adjusters, adjusters, and customers.

Nationwide has made many changes to its policy forms limiting coverage. For example, many Nationwide commercial policyholders now have to fight much harder to get paid for water damage because of small wording changes to its policy which other insurers do not have in their policy.

In my opinion, insurers should not be advertising about "full protection" when their policies are not providing for it or their adjusters are not trying to make that happen after the loss occurs.

As the Liebel case demonstrates, Nationwide residential policyholders are having the same problem. But it is not just with Nationwide. I raised this point in Is the State Farm Policy Really Worth Anything?:

What is the value of insurance if it does not pay for insured losses? Imagine if you had a significant accidental water damage to your home or business, do you know whether your insurance company has your back? Will it really be there to help you? Don’t count on it. Today, modern insurance companies are re-writing their insurance policies to limit what is covered and excluding many losses that used to be covered under all-risk policies. State Farm, as an insurance industry leader, is leading the charge of making an insurance product that no consumer should trust as providing the amount of coverage the insurance product afforded 25 years ago. It is always important to remember that Policyholders Buy Insurance for Peace of Mind and Not Economic Advantage and that concept is being defeated as carriers try to gain economic advantage by changing small print in the policy that may have significant consequences discovered by the policyholder only after disaster happens. To be Fair And Balanced with State Farm, I could have substituted Allstate, Nationwide and USAA into the title.

It is apparent that most policyholders are being sold a defective insurance product. It promises coverage on a broad basis, but there is no peace of mind that many catastrophes will be covered. The following case is just another example of this fact. Until Departments of Insurance wake up to the idea that a minimum all risk policy needs to be mandated in the same manner the standard fire policy was early in the last century, the all risk insurance product will continue to erode from what it first covered over fifty years ago.

On February 14, 2003, Liebel noticed a wide gap between the floor and the wall in her living room. Over the following two and a half weeks, Liebel's living room floor began to sag and bend, and then every room of the home detached from the walls, and a wide crack formed in the middle of the living room. It turned out that the crack was caused a ruptured water line under Liebel's home, and the escaping water caused the soil beneath the home to erode, causing the foundation to settle, and the damage to Liebel's home. Liebel sought coverage for the damage under her all-risk homeowner's insurance policy with Nationwide.

Nationwide was not on Liebel’s side. Nationwide denied coverage for the damage, alleging that the loss was specifically excluded by the following exclusions in the policy:

1. We do not cover loss to any property resulting directly or indirectly from any of the following. Such a loss is excluded even if another cause or event contributed concurrently or in any sequence to cause the loss.

a) Earth Movement and Volcanic Eruption. Earth movement means: earth movement due to natural or unnatural causes, including mine subsidence; earthquake; landslide; mudslide; earth shifting, rising or sinking (other than sinkhole collapse). Volcanic eruption means: eruption; or discharge from a volcano.
* * *
3. We do not cover loss to property described in Coverages A and B resulting directly from any of the following:
* * *
e) Continuous or repeated seepage or leakage of water or steam over a period of time from a heating, air conditioning or automatic fire protective sprinkler system; household appliance; or plumbing system that results in deterioration, rust, mold, or wet or dry rote [sic]. Seepage or leakage from, within, or around any shower stall, shower tub, tub installation or other plumbing fixture, including their walls, ceilings or floors, is also excluded.

Liebel argued that the loss was covered based upon the following provision of the policy:

If loss caused by water or steam is not otherwise excluded, we will cover the cost of tearing out and replacing any part of the building necessary to repair or replace the system or appliance. We do not cover loss to the system or appliance from which the water or steam escaped.

f) (1) wear and tear, marring, deterioration;

If any items f)(1) through (7) cause water to escape from a plumbing, heating, air conditioning or automatic fire protective sprinkler system or household appliance, we cover loss caused by the water not otherwise excluded. We also cover the cost of tearing out and replacing any part of a building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which the water escaped.

Under exclusions 3.a) through 3.f), any loss that follows is covered unless it is specifically excluded.

In deciding the case, Florida’s Fourth District Court of Appeal explained the classic rules of insurance policy interpretation. In Florida, insurance contracts are interpreted according to the plain language of the policy. However, if the terms of a policy are amenable to two or more reasonable interpretations, one that provides coverage and one that does not, the policy is considered ambiguous. Ambiguous coverage provisions are interpreted against the insurer that drafted the policy and in favor of the insured. Further, the Court noted ambiguous “exclusionary clauses are construed even more strictly against the insurer than coverage clauses.” The Court also noted the failure of a policy to define a certain term does not make the policy ambiguous; when the insurer has not defined a term, the common definition prevails.

Applying these rules to the policy, the Fourth District held that the plain and unambiguous language of the policy’s earth movement exclusion excluded from coverage the damage to Liebel’s home. The policy specifically excluded “loss to any property resulting directly or indirectly” from “earth movement due to natural or unnatural causes.” “Earth movement” included “earth shifting, rising, or sinking.” Liebel, 2009 WL 3189332 at *4. As the loss to Liebel's home was caused by the shifting of earth under the home, which was caused by earth shifting from unnatural causes, the water line rupturing, the loss was specifically excluded from coverage.

However, the Court agreed with Liebel's contention that the cost of repairing the water line was covered by the policy. Because the policy stated that it did not cover damage caused by water from a plumbing system that was otherwise excluded, but then stated that it covered the cost of repairing a system that caused water damage, the policy was ambiguous because there were two reasonable interpretations of the provisions.

Specifically, one may interpret the “otherwise excluded” language to preclude coverage for all damages caused by a matter otherwise excluded, including the cost of tearing out and replacing any part of Liebel's home necessary to repair the ruptured water line. In contrast, a reasonable person could interpret the Policy to exclude from coverage the damage caused by earth movement, but include the cost of repairing the water line that caused the loss, as it is a plumbing system that caused water damage due to its deterioration from wear and tear.

Liebel, 2009 WL 3189332 at *6. Following the principle that ambiguities in insurance contracts are construed in favor of the insured, the Court held that the cost of tearing out the floor and repairing the water line was covered by the policy. The Court noted that this finding was supported by the principle that an all-risk policy covers a loss unless that loss is specifically excluded; the policy did not specifically exclude the cost of repairing a plumbing system from coverage, it only specifically excluded damage caused by earth movement.

As I have mentioned in previous posts, there are a few insurers that consistently provide the coverage and customer service they promise

The survey also confirms what those of us in the property insurance industry already knew, Allstate is not living up to its advertised promises or its customers’ expectations.

Admittedly, the Consumer Reports article did not discuss whether some customers were partially to blame for their dissatisfaction with their insurers. Even the best insurance is truly beneficial only when the right coverage is purchased. Likewise, even if a consumer does not have access to the top three insurers, by carefully reviewing the policy with an understanding of the relevant terms and exclusions, he or she can buy great coverage. Some previous posts (Spring Storms and Tornadoes in Mississippi Serve as a Reminder: Review and Update Your Policy for Overlooked Benefits; Three Factors Homeowners Must Consider When Updating their insurance for hurricane season) have explained the terms and necessary coverage.

Their final advice cannot be overstated:

Read your policy and any other correspondence. Ask your agent to explain anything you don't understand.

One section I routinely read from the FC&S Bulletins are the Question and Answers posed to the editors from subscribers regarding loss situations with coverage questions. Two recent discussion regarding the “acts or decisions” and “governmental authority” exclusionary clauses help show how the anti-concurrent language should not be so broadly read in conjunction with other exclusions to prevent coverage.

The first question involved:

…the commercial property policy's exclusion 3.b., wherein losses "caused by or resulting from acts or decisions, including the failure to act or decide" are not covered.

The insurer is denying coverage for damage caused to an insured's apartment building when police forced entry into the building to apprehend a suspected criminal, causing some $5,000 damage to the structure.

We referred the insurer to the Q&A regarding seizure of property by governmental authority (see Coverage Applies to Property Damaged by Police Chasing Fugitive), at which time the company responded that exclusion 3.b. applies and no coverage would be afforded.

It occurs to us that this exclusion is being misused to reject coverage in this case, notwithstanding the "concurrent causation" issues.

The answer was quite to the point and demonstrated how important the lead in language is to a proper reading of most anti-concurrent clause situations:

…exclusion 3.b. is one of the concurrent causation exclusions. These exclusions are meant to avoid coverage when a previously unexcluded cause of loss (a bad decision) joins with an excluded cause of loss (flood) and the claimant is able to make the argument that it was the unexcluded (and therefore covered) cause of loss that led to the damage. Claimants did successfully make the argument in court that it was actually the negligence (a then unexcluded cause of loss) of the water authority in not opening a dam early enough that caused damage to insured property, and not the resulting flood (an excluded cause of loss). It was results such as this that prompted additions of the "concurrent causation" language.

The above would be an example of the acts or decisions exclusion at work. However, as is plainly clear from the lead-in language to the concurrent causation exclusions, if an excluded cause of loss (such as an act or decision) results in a covered cause of loss (which your insured's damage otherwise would be under the special causes of loss form) then coverage applies. Since there is no exclusion otherwise applicable, coverage is available in this situation. (emphasis added)

The governmental authority clause referred to in the question posed the following:

The insured is a health clinic covered under the commercial property open perils form. Recently, a man who was trying to evade capture by the police ran into the clinic and proceeded to take hostages. Eventually, he was forced to surrender by the police who used tear gas and gunfire. In the process of capturing the fugitive, damage was done to both the building and personal property of the health clinic.
The insurance company is denying coverage under exclusion B.1.c. of the CP 10 30 04 02 form. This exclusion avoids coverage for loss or damage caused directly or indirectly by "seizure or destruction of property by order of governmental authority….

The answer by the editors again indicated that exclusionary language should not be so over-broadly interpreted to avoid indemnity for the loss:

The exclusion of loss caused by order of governmental authority is not so broad as to exclude this type of loss. The aim is to exclude coverage for the intentional destruction of property by governmental authority because of some hazard that the property presents, such as when the government orders the destruction of vegetables that are infected with the Mediterranean fruit fly.
In the case you present, the destruction done by the police was incidental to the capture of the fugitive. Bullets that damaged equipment were intended to control the fugitive—they were not fired because the equipment posed any danger to people or property. One would not expect the police officer in charge to state that he or she ordered the destruction of property. For these reasons, the insured has coverage under the policy. A New Jersey court has held, however, that damage done to an apartment by the police in conducting a search warrant was properly excluded under the governmental authority exclusion.

Perhaps, if the New Jersey policyholder had done some homework and selected a policyholder counsel that invested in such resources as those published by the FC&S, the case might have been won.

Let me give you the Reader’s Digest version of this analysis. The relevant policy language is fairly standard in most homeowner policies. The language regarding “collapse” caused by a “windstorm” is significant to this claim. “Collapse” is usually excluded under many insurance policies. However, it is then granted back as an additional coverage because it is “excepted” out of exclusions. This exception to the exclusions only happens if the “collapse” is caused by certain causes. One of those causes is “windstorm.” If a “hurricane” is a “windstorm,” and hurricanes are a combination of wind and flood, the logical reading of the policy is that hurricanes that cause complete destruction will provide coverage because the collapse language excepts the damage out of the “flood” exclusion.

Here is the relevant language from a standard State Farm policy:

SECTION I – ADDITIONAL COVERAGES

* * *

11. Collapse. We insure only for direct physical loss to covered
property involving the sudden, entire collapse of a building or any
part of a building.

Collapse means actually fallen down or fallen into pieces. It does
not include settling, cracking, shrinking, bulging, expansion,
sagging or bowing.

The collapse must be directly and immediately caused only by one
or more of the following:

a. perils described in SECTION I – LOSSES INSURED,
COVERAGE B – PERSONAL PROPERTY. These
perils apply to covered building and personal property for
loss insured by this Additional Coverage;

* * *

SECTION I - LOSSES INSURED

COVERAGE A – DWELLING

We insure for accidental direct physical loss to the property described in
Coverage A, except as provided in SECTION I - LOSSES NOT
INSURED.

COVERAGE B – PERSONAL PROPERTY

We insure for accidental direct physical loss to property described in
Coverage B caused by the following perils, except as provided in
SECTION I – LOSSES NOT INSURED:

* * *

2. Windstorm or hail. This peril does not include loss to property
contained in a building caused by rain, snow, sleet, sand or dust.
This limitation does not apply when the direct force of wind or hail
damages the building causing an opening in a roof or wall and the
rain, snow, sleet, sand or dust enters through this opening.

** *

SECTION I - LOSSES NOT INSURED

 1. We do not insure for any loss to the property described in
Coverage A which consists of, or is directly and immediately

caused by, one or more of the perils listed in items a. through n.
below, regardless of whether the loss occurs suddenly or gradually,
involves isolated or widespread damage, arises from natural or
external forces, or occurs as a result of any combination of these:

a. Collapse, except as specifically provided in SECTION I
ADDITIONAL COVERAGES, Collapse.(emphasis added)

* * *

2. We do not insure under any coverage for any loss which would not
have occurred in the absence of one or more of the following
events. We do not insure for such loss regardless of: (a) the cause
of the excluded event; or (b) other causes of the excluded event; or
(c) whether other causes acted concurrently or in any sequence
with the excluded event to produce the loss; or (d) whether the
event occurs suddenly or gradually, involves isolated or
widespread damage, arises from natural or external forces, or
occurs as a result of any combination of these:

* * *

c.Water Damage, meaning:

Flood, surface water, waves, tidal water, tsunami, seiche, overflow of a body of water, or spray from any of these, all whether driven by wind or not;

* * *

3. We do not insured under any coverage for any loss consisting of one or more of the items listed below. Further, we do not insure for loss described in paragraphs 1. and 2. immediately above regardless of whether one or more of the following: (a) directly or indirectly cause, contribute to or aggravate the loss; or (b) occur before, at the same time, or after the loss or any other cause of the loss:

* * *

c. Weather Conditions

However, we do insure for any resulting loss from items a., b., and c. unless the resulting loss is itself a Loss Not Insured by this Section.

* * *

Although a loss caused by “collapse” is listed under subsection (1) of “Losses not
Insured,” that portion of the policy tells the insured that coverage will be afforded if the
contingencies of the policy’s additional coverage for “collapse” are triggered. That
additional coverage is triggered if the “collapse” involves the sudden entire collapse of a
building or a part of a building. The policy’s “collapse” coverage must also be caused by
certain enumerated actions. In the case of a policyholder that has been “slabbed,” it is undisputed that their property was reduced to a slab, or that the insured dwelling sustained a “collapse,” as that term is defined in the policy. It is also undisputed that the “collapse” of such an insured home was caused by one of the required events listed in the policy, a peril described in Section 1 – “Losses Insured, Coverage B – Personal Property.” According to the policy, State Farm’s “collapse” coverage is triggered by a “windstorm.” In this case, the loss was caused by a “windstorm” event, Hurricane Katrina. State Farm’s insured is, therefore, entitled to rely upon the policy’s additional coverage for “collapse” as an alternative theory to obtain benefits.

It is important to note that the “water damage” exclusionary language is found under Subsection (2) of the policy’s “Losses not Insured.” The introductory language of Subsection (2) contains State Farm’s notorious, “anticoncurrent causation” clause. The policy’s “collapse” provision is grounded under Subsection (1)’s “Losses not Insured” language, and the authority to add the coverage back in is found there.

As Subsection (1) contains different lead-in language, with a much different level of exclusionary authority, it does not make sense for the policy’s Subsection (2) lead-in language to apply to a “collapse.” Essentially, the provisions conflict, creating an ambiguity with respect to the additional “collapse” coverage. Courts routinely hold that conflicting language must be interpreted in the policyholder’s favor. Accordingly, the lead-in language of Subsection (2) and its resulting “water exclusion” cannot be used to defeat coverage in any way.

Importantly, the policy must be read as a whole, and all policy provisions must be harmonized. The additional coverage for “collapse” allows coverage for a “windstorm,” not just for “wind.” Yet, if State Farm (or any other insurer) is allowed to apply the anti-concurrent causation language and/or its “water damage” exclusion to the additional “collapse” coverage, the coverage for “windstorm” would be illusory and meaningless. See York Ins. Co. v. Williams Seafood of Albany, Inc., 544 S.E.2d 156 (Ga. 2001) (explaining, under Georgia law, that an insurer cannot rely upon an exclusion contained in a separate section of the policy as a way to defeat coverage for an additional coverage provision, when the applicability of the exclusion would render the additional coverage meaningless).

Further, if the “water damage” exclusion and the “anti-concurrent causation” clause were to apply under the circumstances of a “slabbed” structure, there would be no need to have the additional coverage for “collapse” caused by “windstorm.” The provision would be meaningless and illusory.

A “windstorm” typically implicates and involves some type of water damage when the windstorm is a hurricane. Similarly, in this instance, the coverage obligation for “windstorm” creates, at best from State Farm’s view, an ambiguity when looking at the exclusionary language at hand. State Farm chose its words carefully, recognizing that a “windstorm” is different than loss caused from “abnormally fast wind.”

If State Farm and other insurers wanted to exclude “collapse” from the flood waters of a hurricane and keep the “collapse” language from “excepting” out the “anti-concurrent” loss language, it should have written the policy in that manner. I think nobody thought about how the “collapse” peril as an exception to the exclusions would apply to a hurricane with storm surge. I predict the ISO and other carriers writing their own standard forms will change the language in the future just to prevent policyholder attorneys from noting this claim to coverage.

I am certain our draft brief can be improved upon. For others who make this argument, please send us whatever you write.

Underwriters sought declaratory judgment in the U.S. District Court for the Southern District of Texas, arguing it had no duty to indemnify the Laws' claim based on the theft exclusion in the policy. The Laws counter-sued, seeking declaratory judgment that their claim was covered under the vandalism exception to the theft exclusion. The District Court granted the Laws' motion, finding coverage under the ingress/egress exception to the theft exclusion, and awarded the Laws $177,150.00. The Fifth Circuit Court of Appeals reversed.

On appeal, the Laws' argued that the damage was covered by the vandalism provision of the policy as well as the ingress/egress exception. The Court of Appeals looked to Texas law to decide the issue. Under Texas law, the Court was required to interpret the contract in a manner that gives effect to every provision and to the "intention of the parties as expressed in the instrument." Words not defined are to be understood "according to their plain and ordinary meaning. Any ambiguity is construed in favor of the insured.

The policy defined vandalism as "willful and malicious damage to, or destruction of, the described property," but specifically excluded damage caused by or resulting from theft. The policy did, however, provide an exception for the theft exclusion if the loss was caused by "the breaking in or exiting of burglars."

Focusing on the policy's language defining vandalism, "willful and malicious" (emphasis added), the Court concluded that the interpretation of the provisions turned on the purpose for which the damage was done. The Court then reasoned that vandalism was damage done for no purpose other than to destroy property. Thus, incidental damage done in furtherance of a thievery was not vandalism. Because the damage to the air-conditioning units was done to steal the copper coils, it was not done solely to damage the property, and was not covered under the vandalism provision.

The Court then turned to the policy's "breaking in or exiting" exception to the theft exclusion. Again, the Court found no ambiguity and interpreted the policy's language according to its plain meaning. In Texas, “breaking in” is commonly understood by Texas courts as burglary. Texas Penal Code Ann. § 30.02 (2008) provides, in pertinent part, that a "burglar" is one who, without the owner's consent,

"(1) enters a habitation, or a building (or any portion of a building) not then open to the public with intent to commit a felony, theft, or an assault; . . . (3) enters a building or habitation and commits or attempts to commit a felony, theft, or an assault."

The Court rejected the Law’s argument that the air conditioning units’ casings were fixtures, and since fixtures were covered under the policy, the damage to the casings was covered. The Court concluded that the plain meaning of the policy's "breaking in or exiting" language was intended to cover damage by burglars gaining entry into the interior of the building. Because the damage did not occur while the thieves entered or exited the building itself, the thieves were not burglars. Thus, unfortunately for the Laws, the Court concluded that the parties did not intend to extend the policy's "breaking in or exiting" exception "to include damage caused by rooftop thieves to freestanding air-conditioning units." Accordingly, the Court reversed the district court's judgment and held that the air-conditioning unit damage was not covered under the policy.

You can read the full opinion by clicking here.

While following up on Saturday's Post, "Fireworks are Loved by Americans--and Insurance Companies Seeking Not to Pay Fourth of July Fires," where I quoted Barry Zalma at length for the proposition that insurance companies often advertise one product but sell another, I came across a related article on the LexisNexis Insurance Law Center written by Stempel. His article, March Madness Makes It "Official: State Farm Embraces the Reasonable Expectations Doctrine and Rejects Linguistic Literalism, is a must read for those trying to prove that even the industry leader recognizes what it advertises is not what it sells. This is the point I was trying to make in my post, "Is the State Farm Policy Really Worth Anything?"

I felt the following paragraphs best sum up Stempel's points:

"...State Farm's television advertising has moved from warm-and-fuzzy image polishing to consistently more concrete promises that the company will provide insurance that meets the policyholder's reasonable expectations and will give the policyholder treatment that goes beyond mere fairness or accommodation. Although the company's marketing mavens probably never set foot in court or attended law school, they have in effect embraced the reasonable expectations concept as well as the standard of good faith and fair dealing that requires an insurer to give equal or better consideration of the policyholder's interests rather than favoring the insurer's interests. The company has now made these commitments to the world at large. It logically should have a hard time should it make contrary arguments in court.

...

...the State Farm ads go beyond the company in that they lay down a gauntlet for the entire insurance industry, one that suggests that insurers should not say one thing to market their products and then say inconsistent things when trying to avoid providing coverage or paying a claim. At the very least, lawyers, judges, and juries should not let them get away with it. Beyond this, it seems that insurers themselves recognize that they are not selling mere words on parchment. They are selling risk management products designed to accomplish a particular purpose. In light of this reality, one might expect to see at least a little restraint among insurers in their attempts to take a hyper-literal approach to policy text (particularly exclusions that are supposed to be strictly construed against insurers) when it serves their purpose. For example, perhaps State Farm may not want to push the envelope so much in arguing that the anti-concurrent causation clause in its policies allows it to escape a considerable amount of responsibility for hurricane-related damage to policyholder property."

I hope the jurists and their clerks faced with deciding insurance coverage cases read Stempel's article and contemplate how the insurance industry is using the "letter of the contract" to defeat the promise they sell.

Another great lesson from one of our country's finest teachers of insurance law. I suggest every attorney have two books of Stempel's in their library: Litigation Road: The Story of Campbell v. State Farm (West 2008), and Stempel on Insurance Contracts, Third Edition (Aspen Publishers).

So, it should come as no surprise to find an old insurance coverage case, Heron v. Phoenix Mut. Fire Ins. Co., 180 Pa. 257 (Pa. 1897) where a fire insurance policy sold to Fred Heron in the late 19th Century had the following exclusionary language:

"This entire policy...shall be void. . . if the hazard be increased by any means within the control or knowledge of the insured, . . . or if (any usage or custom of trade or manufacture to the contrary notwithstanding) there be kept, used or allowed on the above described premises, benzine, benzole, dynamite, ether, fireworks, gasoline, greek fire, gunpowder exceeding twenty-five pounds in quantity, naphtha, nitroglycerine, or other explosives, phosphorus, or petroleum or any of its products of greater inflammability than kerosene oil of the United States standard (which last may be used for lights and kept for sale according to law, but in quantities not exceeding five barrels, provided it be drawn and lamps filled by daylight or at a distance not less than ten feet from artificial light)."

I would wager that poor old Fred was just like the rest of us today. My bet would be he never read that insurance policy or thought about how those rascally insurance scriveners would find ways not to pay for a fire loss if one occurred. I suspect Fred Heron was more concerned about his Fourth of July celebration. The devastating facts were recited by the Court:

"For the purpose of celebrating the 4th of July of that year, plaintiff bought a lot of assorted fireworks which were delivered at his residence on the morning of the 3d, and were shortly afterwards, with his knowledge and approbation, placed in the parlor for use on the following evening. In some unexplained way they took fire on the afternoon of the same day, and caused the damages for which this suit was brought."

It is clear that over a hundred years ago the judges would consider not enforcing unfair language in insurance contracts if they could find a logical way to do so. Avoiding forfeiture of a valid contract after purchase has been a major theme of our jurisprudence. Insurers have every incentive to sell insurance with agents promising security and then write fine print substantially reducing the benefits the consumer thought he or she purchased.

I strongly suggest reading Barry Zalma's "Fraud By Insurers" published on the Lexis Insurance Law Center. Zalma, an insurance defense lawyer, apparently agrees with me on this point when he wrote:

"Ostensibly legitimate insurers are attempting to limit their exposure by giving a policy a common name like “homeowners” that leads the insured to believe that liability coverage is provided for defense and indemnity of an accident, including continuous or repeated exposure to substantially the same general harmful conditions that occur within the policy period, as provided by the standard ISO homeowners policy. Then, with an endorsement hidden in the back of the policy in small print without any warning, the endorsement changes the definition of “occurrence” to words that eliminate most coverage unless it happens within and is reported to the insurer during policy period. It is, in effect, selling the insured a bowl of sweet and healthy blueberries and delivering, in a sealed package, toxic mushrooms.

In an editorial in the June 15, 2009, issue of Zalma’s Insurance Fraud Letter...Barry Zalma writes: “insurance sellers, buyers, counsel, and claims staff must refuse to attempt to enforce such policy provisions unless the following questions are answered in the affirmative:

• Is the new wording conspicuous and clear?

• Was it called to the attention of the prospective insured?

• Was the insured asked to acknowledge in writing that the coverage provided is less than that provided by the standard ISO CGL form?

• Was the insurance agent or broker warned, in writing, of the modification of the form and the fact that it provides less coverage than an ISO CGL?

• Was the insured and the agent or broker asked to acknowledge and have the insured acknowledge in writing that they understand and accept the modification?

• Was the premium significantly reduced in light of the reduction in coverage?"

Mr. Zalma warns that “The insurer that acts to deceive, unlike the insured who acts to deceive, can be held to pay extracontractual damages for the tort of bad faith while the insurer can only collect contract damages from a deceptive insured.” Sandy Burnette and members of the Defense Research Institute must be upset that an insurance colleague recognizes that insurers commit fraud everyday when denying claims based on devious small print exclusions and that they should be held accountable for extracontractual damages when doing so.

Turning back to the legal discussion in the old insurance case, we find that the concerns of judges long ago are not that different than of today:

"We have never gone to the length that other courts have in construing away express provisions or stipulations as to forfeiture. While some hold that it is permissible to use the articles prohibited by the general printed clause, provided they are such as naturally pertain to the stock of goods or property described in the written part of the policy, this court has refused to go so far. In Birmingham Fire Ins. Co. v. Kroegher, 83 Pa. 66, where petroleum was kept for sale in a country store in violation of a printed clause very similar to that above quoted, this court said: "If the question were whether this kind of oil was an article of merchandise ordinarily included in the stock of a country store, or if it were only an inquiry as to the increase of risk, it might well be referred to the jury. But it is nothing of the kind: it is an express stipulation that petroleum or its products shall not be kept on the premises, and if it be so kept the policy is void. It matters not that it was part of a customary stock of goods, for by express contract it was excluded." ...In Birmingham Fire Ins. Co. v. Kroegher...a qualification was suggested ...which the learned trial judge in this case sought to carry to a length not warranted by any of our cases. It was there said by Mr. Justice GORDON: "It is probable that this provision would not apply to the oil used in lighting the premises, for such a use has, in these days, become a necessity for all buildings in the country in which light is required during the night." ...our Brother DEAN, speaking for the court, said: "If the fact were that the use were a necessary one in conducting the business, then it must be presumed the intent of the parties was to insure the subject of the contract as it then was, and as it would continue to be during the life of the policy, notwithstanding the printed condition."

Unfortunately for the Fourth of July reveler, Fred Heron, this court was not sympathetically inclined:

"...These cases rest on the necessary and contemplated use of the property, and cannot be supported on any other ground. They furnish no warrant for the advanced position taken by the plaintiff in this case. There is no ground for a presumption that the parties here contemplated even the temporary presence of fireworks in the insured building in the face of an express contract to the contrary."

So, how many of you waiting to celebrate tonight with fireworks know for certain whether there is an "increase of hazard" provision in your insurance policy that may exclude a fire loss?

Need an example of how the small print is killing the so called, “all-risk” concept of insurance? See the recent California case of Freedman v. State Farm Ins. Co., 173 Cal. App. 4th 957 (Cal. App. 2d Dist. 2009). Here are the facts:

“In or about 2000, the Freedmans' home was repiped, and an upstairs bathroom was remodeled, including the replacement of drywall to cover the new piping. On or about August 12, 2005, “extensive water leakage was discovered in the upstairs bathroom wall. One wall was discolored and wet. The drywall fell apart on touch and mold was seen on pieces of the wall. The tile floor was wet and the ceiling immediately downstairs was wet and soft.” When the drywall was removed, it was discovered that a nail that had been used to hang the drywall had penetrated entirely through a pipe. “The pipe was corroded around the points of entry of the nail, and water was release[d] through that area of corrosion.” A damage restoration company discovered mold both upstairs and downstairs. On or about August 15, 2005, the Freedmans submitted a claim to State Farm. State Farm conducted an inspection and, on or about August 25, 2005, denied the claim.” (emphasis added)

Now, I bet most State Farm policyholders are wondering, “Is there any type of pipe breakage where water leaks that would be covered?“ I would ask that question as well because once you read what State Farm does not cover, most policyholders probably wonder if “all-risk” means anything. State Farm’s website conspicuously avoids advertising or discussing all the exclusionary language it relies upon to deny claims. However, I did find this promise and statement by State Farm on its website:

“We protect the roof over your head and everything under it, especially your sense of security.

State Farm® has been writing homeowners insurance for over 60 years. Today, we insure about 15 million homes.

We offer broad protection that you can trust, plus affordable rates, and outstanding service.

The State Farm Homeowners Insurance Policy offers protection for your dwelling, as well as your personal possessions and personal liability.”

The lesson to policyholders and the purchasers of insurance is that the small print is reserved for the policy because most would not purchase the product if it accurately advertised accidental losses would not be covered. While not close to all the exclusions found in the State Farm policy, the exclusionary language cited by the Court in the Freedmans’ State Farm policy was:

“Paragraph 2 of Section I—Losses Not Insured provides: “We do not insure for any loss to the property described in Coverage A which is caused by one or more of the items below, regardless of whether the loss occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these: … g. wear, tear, marring, scratching, deterioration, inherent vice, latent defect or mechanical breakdown; … h. corrosion, electrolysis or rust … .”

Paragraph 4 of Section I—Losses Not Insured provides: “We do not insure under any coverage for any loss which is caused by one or more of the items below, regardless of whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these: … c. Water Damage, meaning: … (4) continuous or repeated seepage or leakage of water or steam from a: … (c) plumbing system … .”

Paragraph 5 of Section I—Losses Not Insured provides: “We do not insure for loss described in paragraphs 2., 3. and 4. immediately above regardless of whether one or more of the following: (a) directly or indirectly cause, contribute to or aggravate the loss; or (b) occur before, at the same time, or after the loss or any other cause of the loss:… a. conduct, act, failure to act, or decision of any person, group, organization or governmental body whether intentional, wrongful, negligent, or without fault;… b. defect, weakness, inadequacy, fault or unsoundness in:… (2) design, specifications, workmanship, construction, grading, compaction; … of any property (including land, structures, or improvements of any kind) whether on or off the residence premises … .”

Many State Farm policyholders reading these exclusions probably worry that anything that accidentally breaks down will not be covered. State Farm and its competitors should make customers aware of how much is not covered, rather than advertise its affordable rates and those syrupy feel good advertisements. The true nature of the insurance company is determined by the coverage sold and the performance of the claims department. Those advertisements have nothing to do with what truly happens in the field on a day to day basis. Just ask the Freedmans.

The Court upheld State Farm’s denial for a number of reasons which I quote below:

“…the Freedmans' policy exclude third parties' negligent conduct and defective workmanship whenever they interact with an excluded peril…Corrosion and continuous or repeated seepage or leakage of water are excluded perils under the Freedmans' policy…Thus, the Freedmans' policy excludes contractor-negligence-induced corrosion and contractor-negligence-induced continuous or repeated seepage or leakage of water…The Freedmans have introduced no evidence that contractor negligence caused their loss in any way apart from the nail's role in triggering corrosion and a water leak…Accordingly, the Freedmans' loss is not covered…

…

…the Freedmans contend that the exclusion is “ambiguous” because it does not say how long a leak must last in order to be “continuous” or how many times the leak must stop and start in order to be “repeated.” The argument fails because it does not purport to show that the application of the exclusion to the stipulated facts of this case is in any way unclear. The parties stipulated that the water that damaged the Freedmans' home leaked “through [the] area of corrosion” around the nail through the pipe. Given the small size of the hole(s) through which the water leaked, and given the extensive amount of water damage (“One wall was discolored and wet. The drywall fell apart on touch and mold was seen on pieces of the wall. The tile floor was wet and the ceiling immediately downstairs was wet and soft.”), the leak must have lasted a sufficiently long time, or stopped and started sufficiently many times, to count as “continuous” or “repeated” under any reasonable construction of those terms…

…the Freedmans argue that the exclusion applies only to “normal deterioration of the plumbing system,” not to leaks “caused by some force other than deterioration.” We disagree because the policy language is inconsistent with the Freedmans' interpretation. The policy excludes “coverage for any loss which is caused by [continuous or repeated seepage or leakage of water from a plumbing system], regardless of whether the event occurs suddenly or gradually, involves isolated or widespread damage, [or] arises from natural or external forces.” …The policy thus expressly provides that leaks are excluded regardless of whether they are caused by natural forces such as normal deterioration or external forces such as a nail driven through a pipe.

…the Freedmans argue that application of the exclusion here would violate the efficient proximate cause doctrine, because contractor negligence is a covered peril and was the efficient proximate cause of their loss. We have already discussed and rejected that argument…

III. The Mold Coverage

The Freedmans argue that because their policy includes an endorsement relating to mold, the damage caused by mold is covered. We disagree.

The mold endorsement provides limited coverage for losses caused by “fungus,” which is defined to include “any type or form of fungi, including mold or mildew.” Within the specified limitations, such losses to the Freedmans' dwelling are covered if they were “caused by or directly result[ed] from” either a specified peril under the personal property coverage or a peril not otherwise excluded.

…the mold damage to the Freedmans' dwelling was caused by the water leak, which was caused by corrosion, which was caused by the nail through the pipe. As we have explained…ante, contractor-negligence-induced corrosion and contractor-negligence-induced continuous or repeated seepage or leakage of water are excluded perils…” (emphasis added)

The Freedman result is exactly the type of denial I referred to in a speech I gave fifteen years ago. At an American Bar Association National Institute on Coverage, I delivered a paper entitled "Does this Insurance Policy Cover Anything? An Insured's Perspective of the Late Twentieth Century All-Risk Policy.” I suggested that the anti-concurrent causation language and re-writing of exclusions rendered the all-risk coverage illusionary. Many scoffed at my suggestion that the exclusionary causation language adopted by many insurance companies invited creative findings of excluded causes "directly, indirectly, in any sequence, or as part of or a result of a loss," so that a loss would be denied or threatened to be denied. This is exactly what is happening and is the result I feared.

I am delivering a presentation at the Annual Convention of the National Association of Public Insurance Adjusters this week. In preparation, I spoke with a colleague, Jonathon Wilkofsky who will be part of a panel in the educational discussion. Jonathon was the NAPIA Co-Person of the year with me in 2007. In our discussion, Jonathon complained that he was being forced to request the New York Department of Insurance to decertify newly written exclusions as against public policy in a number of instances. His perception is the same as mine-insurers are significantly limiting the amount of coverage with small, but significant, changes in policy language that most, including regulators, would not appreciate until after a loss occurs.

Are there insurers that offer better protection? Yes. Policyholders should ask their agents that question and should seek alternatives from truly independent agents. After all, if you have a great rate from your insurer, but you collect less or not at all, how truly affordable is that type of insurance? Can you say it has the value that provides peace of mind or a sense of security? I suggest reading Chubb Calls Competitors Cheap And Unfair to obtain one example of a company that generally offers more coverage to commercial and residential policyholders.

I suggest that those with Chinese drywall problems read "Solving the Chinese Puzzle of Contaminated Drywall: Owners and Builders Seek Redress for Defective Drywall Installed in Homes" as a basic reference for the expected coverage issues.

Tens of thousands of residential structures are affected, as well as  condominiums, apartments and commercial structures. Homeowner’s and commercial "all-risk" policies may have a number of triggers for damage, but the primary exclusions which may affect coverage are noted in this article:

"There are a number of exclusions, however, that can make the coverage for defective drywall claims problematic. For example, losses caused by the following perils are typically excluded:
• Wear and tear, marring, deterioration
• Inherent vice, latent defect, mechanical breakdown
• Smog, rust, mold, wet or dry rot
• Release, discharge or dispersal of contaminants or pollutants
• Settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls floors, roofs or ceilings."

The discussion of the exclusions suggests that the authors believe homeowners all-risk policies will face significant coverage issues:

"Deterioration’ is a gradual decline or reduction in a property’s value resulting from a decline in physical condition. It can be caused by action of the elements or by ordinary wear and tear. A ‘latent defect’ is customarily one that cannot be discerned by a normal inspection of the property by its owner and must be identified by an expert’s investigation. It could be argued that this type of exclusion is applicable to the defective drywall claims, since the material appears normal to the layperson but can be identified as defective by a consultant’s investigation or by analysis of its composition. ‘Inherent vice’ is a condition in an insured property that has the potential to cause damage to portions of the property other than the part containing to portions of the property other than the part containing the inherent vice.

The Chinese drywall, it may be argued, exhibits this property since gases emitted from the drywall have been alleged to cause corrosion of metals, including the wiring, plumbing and air conditioning coils in homes where it has been installed. In some cases, the pollution exclusion in a homeowners policy may arguably apply to the release of harmful gases from the drywall that are damaging plumbing, wiring, heating and air conditioning systems, appliances, computers and electronic equipment. Even the odor may be regarded as a release of a pollutant or contaminant, although it is not clear that the incorporation of pollution exclusions in property damage policies was intended to apply to releases that are contained within the insured structure and involve non-industrial materials. Counterarguments can be made that the pollution exclusion should apply only to releases of hazardous materials that impact the environment, but not to damage to the structure, building materials or furnishings within a structure.

Some homeowners policies also contain exclusions for construction defects. This exclusion is included with the thought that an alternative course of action is available to the homeowner: an action for breach of warranty against the contractor and subcontractors that built the home. Even where this exclusion is not included in the policy, some courts have denied coverage for defective construction or materials claims, since damage to the drywall did not occur during the policy period – it was already defective when it was installed and is in the same condition when the problem is discovered. Other courts have concluded that there is no occurrence or event giving rise to the alleged loss where the defective material is unchanged from when it was installed. The damage to the plumbing, wiring, air conditioning, appliances and computers may be excluded as deterioration (e.g., gradual damage), or as rust or corrosion. There are, however, jurisdictions that regard the installation of the defective drywall as an ‘occurrence’ and consider the damage to be ongoing during the term of the policy even though the defective material itself may not be altered after its installation.

In summary, homeowners policies are not likely to respond to the costs of tearing out and replacing the defective drywall. And although they might pay for the ensuing loss to the wiring, plumbing, air conditioning and appliances, there is no guarantee, however, as these losses may also be impacted by exclusions for mechanical breakdown."

The last sentence is discouraging. Many insurance defense attorneys have confided some concern regarding the "ensuing loss" provisions of some policies. "Ensuing loss" provisions are the Lazarus clauses in property insurance policies. I strongly suggest you read Water Loss Denied? Ensuing Loss Provisions May Provide Coverage and consider how the various Chinese drywall fact patterns may impact possible coverage. I also strongly suggest you determine what local building and safety codes apply, and then carefully read the Ordinance and Law coverage and endorsements of the policy at issue.

So, what is the answer? While I like to be certain rather than give wimpy answers, it depends on the policy, the law that applies, and the facts of the loss. Some Chinese drywall is not as bad as other Chinese drywall. The particular facts of each case and causation issues first determine what exclusions, limitations and exceptions may apply.

I suggest you ask these questions when making the analysis:

• What is the problem with the drywall?
• How will it be fixed and what non-drywall areas will be impacted?
• What problems from the drywall are causing damage to other areas of the structure and what are those damages to the non-drywall areas?
• What exclusions and ensuing loss provisions may apply?
• What laws or ordinances regulate the need to replace or affect the method of repair?
• What state law applies?

I do not want to give away too much of my analysis to the bright defense attorneys reading this post. However, for those who opine there is no coverage, we all know some attorneys who give opinions like that and then later blame judges when it turns out they were wrong.

One thing is certain--there are a lot of these cases and the insurance industry is not advertising for cliams to be turned in. There will be litigation on these issues.