More Common Sense: Coverage for Collapse Requires More Than an Engineer’s Finding of Substantial Impairment

apartment buildingIn February this blog commented on Washington State’s newly-adopted definition of “collapse” in property insurance policies that contain no specific definition of the term. (Observer, February 8, 2016, Common Sense Prevails:  State of Collapse Nonexistent Thirteen Years before Discovery of Decay)  At issue was the building owner’s attempt to tap its property policy’s coverage for collapse when hidden decay, although severe, did not result in the building falling down. Under Washington’s new definition, the Ninth Circuit Court of Appeals found no collapse of a condominium building that remained in use and occupied seventeen years after the insurance policy expired and severe decay allegedly developed. Queen Anne Park Homeowner’s Ass’n v. State Farm, 633 F. Appx. 415 (9th Cir. 2016).

On July 7, 2016, the federal court for the Western District of Washington issued its decision in another collapse case, applying the new definition. American Economy Insurance Company insured the Masters Apartments in Seattle with annual policies from 1999 to 2005. The first three policies provided coverage for collapse caused by hidden decay, but did not define “collapse.” Significant decay to the building’s rim joists was discovered in 2014. Because rot and decay were excluded from coverage, the owner sought coverage for collapse. American Economy hired a structural engineer who, after investigation, concluded that some of the rim joists suffered from “substantial structural impairment,” meaning that, according to the engineer, they did not meet the building code, and the building could be classified by a building inspector as dangerous. He also opined that several joists had reached substantial structural impairment between 1999 and 2002. Read more ›

Posted in Collapse, Hidden Decay

Wisconsin Supreme Court Narrowly Interprets the “Permanent Property Insurance” Condition in a Builder’s Risk Policy

fire damaged houseIn Fontana Builders, Inc. v. Assurance Company of America, Case No. 2014AP821, 2016 WL 3526408 (Wis. Jun. 29, 2016), the Wisconsin Supreme Court addressed whether the purchase of a homeowner’s policy by the occupiers and presumptive purchasers of a home that was still under construction terminated coverage under a builder’s risk policy issued to the builder and owner of the home. The builder’s risk policy contained a provision that the coverage will end “[w]hen permanent property insurance applies,” which the court referred to as the “permanent property insurance” condition. In a split decision, the court held that the homeowner’s policy did not “apply” so as to terminate coverage under the builder’s risk policy.

The case arose out of a June 28, 2007 fire that damaged a high-end custom home under construction in Lake Geneva, Wisconsin. At the time of the fire, the home was owned by its builder, Fontana Builders, Inc. The home represented a substantial investment for Fontana, as nearly all of its assets were invested in the house, which the company planned to use to generate new opportunities for itself in the luxury housing market. Fontana purchased a builder’s risk policy issued by Assurance in connection with its construction of the Lake Geneva home. James Accola was the president and sole shareholder of Fontana. Before the final completion of the Lake Geneva house, Mr. Accola and his wife moved into it with the intention of purchasing it upon completion so that they would have unfettered access to an example of Fontana’s finished work for marketing purposes. The Accolas purchased a homeowner’s policy with respect to their interests in the home issued by another insurer.

Following the fire, the Accolas made a claim under their homeowner’s policy and received payment for their personal property, additional living expenses, and some amount for “[a]ny other interest the [Accolas] may have [had] in the premises.” Fontana made a claim for damage to the house under the Assurance builder’s risk policy. Assurance denied Fontana’s claim on the grounds that its coverage ended when the Accolas purchased their homeowner’s policy for the property, pursuant to the builder’s risk policy’s permanent property insurance condition.

Fontana countered Assurance’s denial by arguing that its insurable interests were distinct from the insurable interests of the Accolas, even though Mr. Accola was Fontana’s president and sole shareholder. Therefore, Fontana argued, the purchase of a homeowner’s policy by the Accolas did not constitute “permanent property insurance [that] applies” so as to terminate coverage under the builder’s risk policy. Fontana also argued that allowing third-party potential purchasers like the Accolas to unilaterally terminate the builder’s risk policy by acquiring a homeowner’s policy would be inconsistent with Fontana’s reasonable expectations as a builder that its coverage would remain in place until the property was actually sold, and would give rise to unacceptable gaps in coverage.

The issue was originally decided by a jury, which agreed with Assurance that the purchase of the homeowner’s policy by the Accolas terminated coverage under the builder’s risk policy. The Wisconsin Court of Appeals affirmed the verdict and the trial court’s determination that the interpretation and application of the permanent property insurance condition in the builder’s risk policy was a question of fact for the jury to decide. On June 29, 2016, however, the Wisconsin Supreme Court, in a split decision, reversed the Court of Appeals, holding that the builder’s risk policy was not terminated at the time of the fire as a matter of law. It remanded the case back to the trial court for determination of Fontana’s and its mortgagee’s damages. Id. at ¶ 69.

In reaching this decision, the court first determined that interpretation of the permanent property insurance condition and its application to the underlying facts were questions of law for the court to decide – not a jury. The court acknowledged that there is an exception to the usual rule that interpretation of an insurance contract is a matter for the court, which exception applies when extrinsic evidence is necessary to show a party’s understanding of a policy’s words or terms at the time the insurance policy is initially agreed upon. However, that presents a different question from the application of a policy’s words or terms to a given set of facts. Id. at ¶¶ 44-49. “Thus, where a dispute turns upon application of an insurance policy to underlying facts, interpretation of the insurance policy presents a question of law for the court. In this case, a determination as to whether ‘permanent property insurance applie[d]’ was not an appropriate question for the jury.” Id. at ¶¶ 48-49. This part of the court’s ruling was unanimous.

The court then interpreted the provision at issue, which again provided: “[c]overage will end … when permanent property insurance applies.” The majority noted that the Assurance policy did not define “permanent property insurance,” nor did it “define what it means for permanent property insurance – whatever it may be – to ‘apply.’” Id. at ¶ 52. “Read in isolation, the phrase ‘when permanent property insurance applies,’ seems to present an ambiguity. The policy provides no explicit guidance as to the meaning of the term ‘applies.’ To whom or to what must permanent property insurance apply for coverage to end? The provision is indefinite at best.” Id. at ¶ 54. It then considered the two alternative meanings of that critical term:

On the one hand, an insured builder might reasonably expect builder’s risk coverage to end when the builder completes construction and the owner – be it the builder or a new owner – purchases a policy to provide adequate coverage for the finished structure. On the other hand, a party might conclude that it is reasonable for builder’s risk coverage to end when any other property insurance applies to the property, regardless of the party purchasing coverage or the particular insured. Id. at ¶ 55.

The majority concluded the most reasonable interpretation was that the “permanent property insurance – whatever that means – must ‘apply’ ‘to the builder’s insured interest in the property’” in order to terminate the builder’s risk coverage. Id. at ¶ 58. The court justified its reading by stating that the other conditions terminating coverage in the policy generally only end coverage upon a change in the builder’s insurable interest in the property, and the permanent property insurance condition should be read in that broader context.

The court concluded that Fontana and the Accolas were distinct legal entities insuring different interests in the property. Because the homeowner’s policy “in no way covered Fontana’s interest as a builder and owner … it did not ‘apply’ so as to supersede the builder’s risk coverage.” Id. at ¶ 64. Notably, because it concluded that the homeowner’s policy did not “apply,” the court did not address whether it constituted “permanent property insurance.” Id. at n. 15. However, in a concurring opinion, two justices opined that the homeowner’s policy “could not constitute ‘permanent property insurance [that] applies’ to the covered property,”  because the homeowner’s policy could not cover the damage to the house’s structure as a result of the Accolas not having an insurable interest in the house’s structure at the time of the fire.

The court further reasoned that this reading of the condition comports with the reasonable expectations of builders who purchase such policies that they will be covered throughout the entire construction process. The court stated:

. . . it is standard practice for banks making loans to construction companies to require those companies to maintain builder’s risk insurance throughout the construction process. Testimony at the second trial also indicated that banks making loans to home purchasers generally require purchasers to obtain insurance on the property prior to any dispensation of loan funds. Thus, any builder who procures a policy that terminates “when permanent property insurance applies” could face a time period near the end of construction in which the builder would have no insurance coverage for the property while a prospective purchaser prepares for closing – even if construction on the property continues and the prospective sale ultimately fails to close.

Leaving builders exposed to such uninsured risk of loss would thoroughly frustrate their reasonable expectations . . .  Id. at ¶¶ 66-67.

This case is only the second appellate or federal court decision to interpret the “when permanent property insurance applies” provision contained in many builder’s risk policies. However, its persuasive effect in other jurisdictions may be limited somewhat by a strongly worded dissent, in which one of the justices disputed the majority’s reasoning, stating that:

Under the unambiguous terms of the builder’s risk policy, the homeowner’s policy in effect on the date of loss constituted “property insurance that applies.” Coverage under the builder’s risk policy ended when coverage under the homeowner’s policy took effect. Id. at ¶ 102.


Posted in Coverage, Fire

The Second Circuit Requires Insureds To Be Truthful With Its Insurers

dry dock

In a twist on the old adage, “bad facts make bad law”, the Second Circuit’s recent decision in Fireman’s Fund Insurance Company v. Great American Insurance Company of New York, Civil Action No. 14-1346-cv, 2016 WL 2943139 (2d Cir., May 20, 2016), clearly demonstrates that bad facts withheld by an insured from its insurers can make for a very bad result for insureds.

This recent May 20, 2016, Second Circuit decision arose from a contribution action filed by Fireman’s Fund and the insured, Signal International, LLC, against the insured’s pollution carrier and excess property insurer, due to losses and environmental cleanup costs that resulted when the insured’s dry dock sank. Post-loss, and based on the $13.6 million value of the dry dock as represented by the insureds in the Statement of Values, the primary property insurer paid its total coverage amount of $10 million; and the excess property insurer paid $3.6 million. When the excess property and pollution insurers argued that their respective policies did not cover the costs of the dry dock removal and environmental cleanup, Fireman’s Fund, the marine general liability insurer, agreed to fund the removal and cleanup efforts, reserving its rights to seek reimbursement from the excess property and pollution carriers.

In response to the contribution action filed by Fireman’s Fund and the insured, both the excess property insurer and the pollution insurer sought the district court’s declaration that their policies were void due to the misrepresentations and nondisclosures of the dry dock’s deteriorated condition during the underwriting process. The lower district court agreed that each of the policies were void and Fireman’s Fund appealed to the Second Circuit.

In affirming the lower district court, the Second Circuit clarified the test to determine whether a policy is, in fact, a marine policy, and the importance of that determination upon the remaining rescission analysis, particularly when the policy is determined a marine policy and subject to the doctrine of uberrimae fidei (i.e., parties to a marine insurance policy must accord each other the highest degree of good faith). The Second Circuit’s analysis further demonstrates that, even with non-marine policies where the doctrine of uberrimae fidei does not apply, an insured must still provide information to an insurer in a way that is not misleading and half-truths by an insured will not always protect an insured from policy rescission.  Read more ›

Posted in Marine

An Injured Third Party’s Knowingly False Deposition Testimony Establishes the Materialty Component for Insurance Fraud

exercise equipment at fitness centerOn May 13, 2006, Edward Feierstein was driving home from his Philadelphia fitness club when his car was rear-ended. Two days later, Feierstein filed a claim with the tortfeasor’s liability insurer seeking reimbursement for his alleged bodily injuries.  Two years later he filed suit against the company’s insured.  The liability insurer, in its defense of the suit, hired a private investigator. Surveillance video footage was secured of Feierstein working out at a fitness center, and his club, while stretching, exercising on an elliptical machine, a weight-lifting machine, and playing tennis.

At his deposition, Feierstein was unware of the video surveillance.  He testified that he had not played tennis at all since the accident, nor worked out in any gyms since the accident. Feierstein withdrew his civil suit when he learned of the video footage.  On December 15, 2011, he was charged criminally with insurance fraud and perjury. He was convicted at a bench trial after his motion to suppress the video footage was rejected. On appeal, he claimed that the Commonwealth of Pennsylvania failed to prove the element of materiality with respect to his false deposition testimony. He claimed that his “mistaken deposition testimony” was material to nothing, that he was confused and, as such, incapable of forming the requisite intent, and claimed that his reasonable expectation of privacy was violated.  Relying in large part upon the opinion of the trial court, the Pennsylvania Superior Court in Commonwealth v. Edward Feierstein, 2016 WL 800615 (Pa. Superior Ct. 2016) affirmed the judgment of sentence.

The court held that even though the false deposition testimony occurred as a direct consequence of Feierstein’s civil lawsuit, rather than the initial submission of his insurance claim to the liability insurer, the distinction was meaningless since Feierstein’s litigation against the tortfeasor, in furtherance of his insurance claim, required that the insurer defend its insured against the suit. Thus, insurance fraud is not (and ought not to be) limited to the pre-litigation stages of a claim. Read more ›

Posted in Fraud

New Jersey Supreme Court Holds that a Person Violates the Insurance Fraud Statute Even if Insurer is Not Duped Into Paying a Fraudulent Claim

shutterstock_949171In the recent case of State of New Jersey v. Robert Goodwin, 224 N.J. 102, 129 A.3d 316 (N.J. 2016), the Supreme Court of New Jersey held that a person violates the insurance fraud statute, N.J.S.A. 2C:21-4.6(a), even if he or she does not succeed in duping an insurance carrier into paying a fraudulent claim. In doing so, the Supreme Court reinstated Robert Goodwin’s conviction for insurance fraud.

At trial, it was established that Goodwin and “Stacey” were involved in a romantic relationship since 2004 and living together in Newark, New Jersey. In April 2009, Stacey purchased an SUV for over $6,000, financed by Goodwin co-signing the loan. Insurance was procured from Progressive Insurance Company. Goodwin was the primary operator of the SUV.

While still in a relationship with Stacey, Goodwin secretly dated “Linda” who lived in an apartment located a few blocks away from Goodwin and Stacey’s apartment. On September 13, 2009, following an argument with Stacey, Goodwin drove the SUV to Linda’s apartment and parked it nearby. Linda’s trial testimony established that between 6:30 a.m. and 7:00 a.m. she and Goodwin walked to the SUV so that he could drive her to work. They found the vehicle severely damaged by fire. Goodwin then went to Stacey’s apartment and told Stacey that the SUV had been stolen and “burnt up.” Read more ›

Posted in Fraud

Recent Washington Decisions Illustrate Need to Handle Property Claims in Timely Manner

calendar-graphicAn issue that often arises in the context of property insurance is whether a carrier’s delay in adjusting a claim can create a basis for a viable bad faith claim.  The law in each state is different and the prudent practice is to consult a practitioner specializing in the law of the state in question.  This article focuses on Washington law and discusses two recent cases which illustrate the need to adjust property claims promptly. Failure to do so may expose a carrier to viable bad faith allegations sufficient to survive summary judgment and permit the policyholder to get its case before a jury.

First, in Hays v. State Farm Ins. Co., No. 46679–1–II, 191 Wn. App. 1053, 2015 WL 9435153 (Dec. 23, 2015), Division Two of the Washington Court of Appeals held that a roughly seven-month delay in responding to the insureds’ communications could amount to bad faith under Washington law. The court held this determination was an issue of fact for the jury.

In Hays, a February 2010 accidental fire totally destroyed the insureds’ home. The insurer acknowledged that this was a covered loss, and eventually paid the claim. However, the insurer and insureds had divergent accounts of the facts surrounding claims handling. According to the insureds, they received a check—without further explanation—in May 2010, and between June 2010 and October 2010 made repeated attempts to contact the insurer regarding the status of their claim, but received no response. In late October 2010, the insurer sent a more detailed response—including an updated appraisal of the insureds’ home requested by the insureds—but sent it to the insureds’ old address. It was not until December 2010 that the insureds alleged they actually received the correspondence to their correct address. Read more ›

Posted in Uncategorized

Virginia Federal Court Underscores Distinction Between a Loss and an Occurrence for Purposes of Notice Conditions

shutterstock_295330793 (2)In Clarabelle Wheeler v. The Standard Fire Insurance Company, 2016 WL 1164651 (W.D. Va. Mar. 23, 2016), the insurer argued that the insured failed to give “prompt notice” of the loss as required by the policy’s notice condition because she waited six-months to report five large trees had fallen on her barn. In support of this argument, the insurer offered evidence that the insured’s delay in providing notice prejudiced it by depriving it of an opportunity to investigate the claim and mitigate the resulting damage to the barn. Summary judgment in favor of the insurer as to whether there is coverage for the insured’s claim under the policy would often be granted on these facts.

But, the United States District Court for the Western District of Virginia denied summary judgment in this case based on the distinction between a “loss” and an “occurrence.” Read more ›

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Posted in Notice

Do Fidelity Policies Issued to Individual Partners Provide Coverage for Theft of Partnership Earnings?

shutterstock_198307964The Eighth Circuit is set to decide this question in 3M Company, et al. v. National Union Fire Insurance Company of Pittsburgh, Pa., et al., Appeal No. 15-3495. The answer will likely determine whether a blanket crime policy and multiple excess policies cover $176 million in partnership earnings 3M lost because of its partners’ massive Ponzi scheme.

Between 1999 and 2009, 3M invested over $100 million of its Employee Retirement Income Security Act (“ERISA”) plan assets and the earnings on those investments with an entity named WG Trading Company, L.P. Stephen Walsh and Paul Greenwood controlled WG Trading and were its general partners. 3M and two of its ERISA plans were limited partners in WG Trading. Unbeknownst to 3M, Walsh and Greenwood were fraudsters. They diverted hundreds of millions of dollars from WG Trading and another partnership for their personal use and to conceal the fraud. Read more ›

Posted in Theft or Dishonesty

Colorado Court Finds Legal Marijuana Insurable Under Commercial Property Policy and Orders Trial on Claim for Damaged Buds

shutterstock_75267472ArcView Group, which tracks the legal marijuana markets, recently estimated that legal U.S. pot sales could reach $6.7 billion in 2016. As the legal marijuana economy has grown, insurance coverage for this emerging industry has become a hot topic. The U.S. District Court for the District of Colorado in The Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company, No. 13-cv-03452-MSK-NYW, 2016 WL 632357 (D. Colorado Feb. 17, 2016) was recently faced with determining the extent of coverage under a commercial property policy for damage sustained to marijuana plants at a growing facility and addressing whether legal marijuana was even insurable.

Green Earth operates a retail medical marijuana business and an adjacent growing facility in Colorado Springs, Colorado. Green Earth contended that smoke and ash from a wildfire overwhelmed its ventilation system and intruded into its growing operation, causing damage to Green Earth’s marijuana plants. Green Earth made a claim for the damage under a commercial property and general liability insurance policy issued by Atain, seeking more than $200,000 for damage to its grow operation, specifically its “mother plants” and “clones,” and approximately $40,000 in damage to buds and flowers that had been harvested and were being prepared for sale. Atain denied the claim and Green Earth filed suit. Read more ›

Posted in Uncategorized

Common Sense Prevails: State of Collapse Nonexistent Thirteen Years before Discovery of Decay

shutterstock_309231059For years, property insurance policies that exclude rot damage have been called upon to cover rot because the policies extend coverage to “collapse”—an undefined term—caused by hidden decay, even if the structure remains standing and in use.

The Homeowners Association of the Queen Anne Park Condominium in Seattle discovered decay within the walls of its buildings in 2011. State Farm insured the Association with policies effective between 1992 and 1998. The policies excluded coverage for rot, but covered “collapse” caused by hidden decay. The Association argued that its buildings were in a state of collapse in or before 1998 and that State Farm covered the decay damage. State Farm denied the claim and the Association sued in federal court in Washington. The trial court granted summary judgment to State Farm and the Association appealed to the Ninth Circuit Court of Appeals.

Finding the meaning of “collapse” undefined in the policies and in Washington law, the Ninth Circuit certified the question of its meaning to the Washington Supreme Court. In Queen Anne Park Homeowners Ass’n v. State Farm Fire & Cas. Co., 183 Wn.2d 485, 352 P.3d 790 (2015), the Washington court held that “collapse” means a “substantial impairment of the structural integrity of a building or part of a building that renders such building or part of a building unfit for its function or unsafe.” The collapse must be “more than mere settling, cracking, shrinkage, bulging, or expansion.” 352 P.3d at 794. (See our Observer blog entry of June 23, 2015.) Read more ›

Posted in Uncategorized
About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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