A recent case filed in the Western District of Texas highlights the importance of retaining experts to assist in evaluating the cause of loss early in the claim process. In White Lodging Services Corporation et al v. Liberty Mutual Fire Insurance Company,1 a hotel development and management company filed suit against Liberty Mutual over a collapse claim that arose during the construction of a hotel. The policyholder had a builders’ risk insurance policy issued by Liberty Mutual.

According to the Complaint, the policy:

  1. Provides coverage for direct physical loss or damage caused by a covered peril to (1) “buildings or structures” while in the course of construction, erection, or fabrication; and (2) scaffolding, construction forms, and temporary structures;
  2. Defines insured “buildings or structures” to include, among other things, “foundations, excavations, grading, filing, attachments, permanent fencing, and other permanent fixtures”;
  3. Defines “covered perils” to include all “risks of direct physical loss or damage unless the loss is limited or caused by a peril that is excluded”;
  4. Contains an “Earth Movement” Exclusion and a “Defects, Errors an Earth Movement Exclusion, which refers to “[a]ny ‘earth movement’ whether natural or manmade and regardless of cause and regardless of whether or not the cause of the ‘earth movement’ (1) originated at the covered property; or (2) was being performed at ‘your’ request or for ‘your’ benefit”;
  5. Defines “earth movement” as “[t]he movement of the ground, soil, sediments, substrates, or strata whether the movement is caused by an act of nature or is manmade, including but not limited to . . . any other ground movement, including sinking . . . , shifting, contraction, or rising of the ground . . . that cause cracking, settling, tilting, leaning, or shifting of covered property”;
  6. Specifies that under the Defects, Errors and Omissions Exclusion “[Liberty will] not pay for loss or damage consisting of, caused by, or resulting from an act, defect, error or omission (negligent or not) relating to (a) design, specifications, construction, materials, or workmanship . . . .”; and
  7. Explains that the Defects, Errors and Omissions Exclusion is also subject to the following exception: “if an act, defect, error, or omission as described above results in a covered peril, ‘we’ do cover the loss or damage caused by that covered peril.” This provision is often referred to as an “ensuing loss” provision.

Further, according to the complaint, the policy not only covers the cost to repair and replace covered property that sustains loss or damage from a non-excluded peril, but also includes a “Delay in Completion Coverage Part,” which promises payment for “actual loss of rental income incurred during the ‘delay period,’” which refers to “the period of time the completion of the construction, erection, or fabrication of a covered ‘building or structure’ is ‘delayed’ as a result of direct physical loss or damage caused by a covered peril to property covered under the Builders’ Risk Coverage form . . . .”

The insured contends that Liberty Mutual wrongfully denied coverage based on its misapplication of the earth movement exclusion. The insured also argues the wrongful denial claim is supported by the fact that Liberty Mutual has not supplied proper evidence to justify the coverage decision regarding the application of the earth movement exclusion.

The insured’s claim arose from a collapse that significantly delayed the construction of the Westin Austin Downtown Hotel in 2013. The insured describes the collapse as occurring when two “soldier beams,” which were part of the support system for the excavation during the early stages of construction, fell, weakening other aspects of the support scaffolding inside the excavated site. The complaint explains this issue caused major delays in the project, and that through its insurance claim, the insured sought reimbursement from Liberty Mutual for the loss of business income.

Despite submitting the claim to Liberty Mutual shortly after the damage occurred, Liberty Mutual denied the claim in December of 2015 based on the “Earth Movement” exclusion. However, the insured disputes that the 2013 collapse falls under this exclusion, based upon a report prepared by its engineers. The insured’s engineers determined that the collapse occurred as a result of construction design flaws, rather than rain or earth movement.

The insured further contends that despite sharing this and other information with Liberty Mutual, Liberty Mutual did not alter its coverage decision. Consequently, the insured filed suit.

MY TAKE

The case will ultimately turn on whether Liberty Mutual has any evidence to support its application of the earth movement exclusion and whether the insured’s engineers’ opinions about the cause of loss is correct. Under the ensuing loss exception to the “Defects, Errors and Omissions Exclusion”, it appears that there should be coverage for the claim if the insured’s engineers’ opinion about the cause of the loss is right.

This case highlights why it is important for public adjusters and policyholder advocates to retain experts early in the claim process to evaluate the cause of the loss. Cases like this are ultimately decided by a battle of experts, so it makes sense to retain experts early and put the insurer on notice of the insured’s coverage theory. Then, as the insured contends in this case, if the insurer has no evidence to support its coverage decision, or ignores evidence submitted by the insured that establishes why there is coverage, the insurer subjects itself to liability for breach of contract and bad faith.

Retaining experts early also helps public adjusters and policyholder advocates evaluate whether there is a viable theory for coverage before getting the insured’s hopes up and spending time, energy, and money toward a claim where there is ultimately no coverage.
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1 White Lodging Services Corporation v. Liberty Mutual Fire Ins. Co., No. 1:17-cv-00277 (W.D. Tex.).

  • shirley heflin

    Dear Mr. Pollack:

    It’s true that this case will boil down to a “battle of the experts” and which one the trier of facts believes. It’s astonishing, really, to read everything Liberty Mutual says it will cover in the event of a loss and then – when a loss happens – they don’t! Also, one should not have to be an expert to read and interpret their insurance policy, but they need to be to see what they ultimately are not going to get!

    Further, when an Insured suffers a loss, they’re already in financial straights. Then they have to spend thousands of dollars to retain an Engineer and other experts to “prove” and “protect” their claim rights. Sure, they may prevail in their Breach of Contract action and then have recourse for an extra-contractual (bad faith) action, but that’s years away. They paid premiums for IMMEDIATE coverage following a loss and in this case, obviously did not get it.

    Respectfully,
    SHIRLEY HEFLIN
    Tampa, FL

  • KelvinSampson87

    Mr. Pollack,

    In most standard ISO forms the earth movement exclusion is applicable even if their is a concurrent covered cause of loss that also contributes to the damage. So the engineers report may very well be correct that construction was faulty. However, as long as earth movement contributed in some way the entire loss is excluded. It is pretty well documented that earthquakes are very likely to cause fires, water leaks, damage to old or partially constructed buildings, etc. For this reason, the only way to truly exclude earth movement loss is in this manner.

    In most cases earthquake insurance is offered for an additional premium. This hotel development company has built over 100 hotels nationally and has the sophistication to be aware EQ insurance was an option but choose to take the risk to save on premium. This case is a great example of the importance of best in class risk management practices and in the importance of hiring an insurance agent that understand the policy he is selling you.