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

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.