Many property insurance policies that provide coverage for business interruption losses also include “extra expense” coverage for reasonable and necessary extra costs to temporarily continue as nearly as possible normal business operations, or to reduce the period of time necessary to resume normal business operations. Some policies also include provisions, sometimes referred to as mitigation provisions, which afford coverage for additional costs incurred by an insured to reduce its business income losses in the event its business operations are disrupted because of a covered loss. The differences between the two coverages, and how they might apply in the event of an otherwise covered business interruption loss, will depend on the wording of the provisions and the facts of the claim.
The U.S. District Court for the Eastern District of Arkansas recently addressed these issues in Welspun Pipes v. Liberty Mut. Ins. Co., in which the court granted Liberty Mutual summary judgment dismissing Welspun’s claim for additional costs to transfer production of specialized piping to an affiliate’s facility in India because the insured had not established the required elements for a covered “mitigation” claim.
Welspun suffered an interruption in its business due to a fire that damaged its facility in Little Rock, Arkansas, while the facility was covered by a commercial policy issued by Liberty Mutual. Before the fire, Welspun had entered into a lucrative contract with Enterprise Products Partners to provide specialized piping to be used in the Seaway Expansion Project. A fire damaged Welspun’s Little Rock facility before production of the piping began. Following the fire, Welspun asked Enterprise if it could shift production of the piping to an affiliate’s Indian facility, with all additional costs to be borne by Welspun. Enterprise agreed. Read more ›
In 2011, the California Insurance Commissioner promulgated a regulation governing replacement cost estimates for homeowners insurance (Cal. Code Regs., tit. 10, §2695.183 [the Regulation]). After the trial court and intermediate court of appeal invalidated the Regulation, this week the California Supreme Court reversed those decisions in a published decision, Association of California Insurance Companies v. Jones (Cal. Jan. 23, 2017) Case No. S226529.
The Regulation was originally enacted in response to complaints from numerous homeowners who found that they were underinsured only after disaster completely destroyed their homes. In investigating these complaints, the Department of Insurance had found that the replacement cost coverage limit recommended by a number of insurers for their policyholders had understated what was actually necessary to rebuild the insured’s home over 80 percent of the time, and that many of the replacement cost estimates by insurers failed to consider costs of replacing the foundation, debris/demolition expenses, overhead and profit, and engineering reports and architectural plans.
The Regulation does not require an insurer to recommend a particular policy limit or provide a replacement cost estimate when it was issuing or renewing a policy, but if the insurer does choose to opine on replacement costs, the Regulation specifies how that estimate is to be calculated and what factors it must include. Under the Regulation, the estimate must account for “the expenses that would reasonably be incurred to rebuild the insured structure(s) in its entirety,” including the cost of labor, building materials and supplies, overhead and profit, demolition and debris removal, and the cost of permits and architect’s plans. The estimate also must take into account “components and features of the insured structure,” including enumerated items such as the type of foundation and framing. Further, at least annually, the Regulation requires the insurer to “take reasonable steps” to verify that estimate methods are updated to reflect relevant changes. Read more ›
The preemptive effect of the National Flood Insurance Program (NFIP) on overlapping claims asserted by policyholders based on federal and state common law theories of liability is well established. “Numerous courts have held that claims other than those expressly authorized by the [National Flood Insurance Act (NFIA)] are preempted.” Slay’s Restoration, LLC v. Wright National Flood Insurance Company, Civil Action No. 4:15cv140 (E.D. Va. Jan. 3, 2017). In other words, if additional sums are allegedly owed under a Standard Flood Insurance Policy (SFIP), “the precisely drawn and detailed statutory and regulatory system in place under the NFIA and the SFIP provides the exclusive remedy.” Typically, the preemptive impact of the NFIP has been applied to preclude state court actions or state law claims challenging the denial of coverage or the handling of claims under SFIP policies.
In Slay’s Restoration, however, the Eastern District of Virginia was called upon to address a unique attempt by a non-policyholder, specifically a flood restoration company retained by the policyholder after a flood, to assert a claim under the federal Racketeer Influenced and Corrupt Organizations (RICO) Act against a Write Your Own (WYO) flood insurer and its adjusters for allegedly conspiring to fraudulently deny legitimate claims. The court rejected the non-policyholder’s attempt to fashion a RICO claim for two reasons: (1) lack of standing and (2) the preemptive effect of the NFIP.
The policyholder at issue, City Line Associates, LPs (City Line), owned 200 apartment units in 18 buildings in Newport News, Virginia that experienced flooding on September 9, 2014. Each of the buildings was insured under a separate SFIP issued by Wright National Flood Insurance Company (Wright National) as a WYO carrier. City Line contracted with First Atlantic Restoration, Inc. (First Atlantic) to remediate and repair the damage, and First Atlantic in turn subcontracted the entire scope of work to the plaintiff, Slay’s Restoration, LLC (Slay’s). City Line made 18 separate claims with Wright National for the costs associated with First Atlantic’s and Slay’s work on the impacted buildings, and Wright National dispatched an adjusting firm and its consultants to inspect and evaluate the claims. Read more ›
Does the efficient proximate cause rule serve to afford coverage for the additional costs to rebuild the foundation of a home in compliance with changed building code requirements beyond the sublimit of liability of an optional building ordinance or law endorsement? In an opinion ordered published on December 21, 2016, the Washington Court of Appeals said no, denying a homeowner the full cost of a new foundation as part of the repair of fire damage. Lesure v. Farmers Ins. Co. of Washington, Wash. App. No. 48045-0-II, 9/20/16 (ordered published 12/21/16).
Loretta Lesure insured her home under a policy issued by Farmers Insurance Company of Washington. Coverage A of the policy covered the cost to repair or replace the dwelling up to the policy limit of $112,000. The policy excluded coverage for direct or indirect loss resulting from the “[e]nforcement of any ordinance or law regulating construction, repair or demolition” of the dwelling, unless endorsed by the policy. Lesure purchased an optional endorsement that covered building code and ordinance upgrades, with a liability limit of 10% of the policy’s limit for covered property. Thus, the endorsement’s limit was $11,200.
A fire partially damaged Lesure’s home. The replacement cost estimate for the damage was $22,248.25. Because the home did not comply with current building codes, the city required that it be demolished and rebuilt to conform to code. In particular, the home required a new foundation. The estimate to rebuild her home with the code-required updated foundation was $125,397.12. Read more ›
It is well-established that claim processing and wrongful denial of coverage disputes involving federal flood insurance policies belong in federal court because they present substantial questions of federal law. The U.S. District Court for the Western District of North Carolina recently applied this rule when it denied the insureds’ motion to remand a case to state court in Henderson v. Nationwide Mutual Fire Insurance Company, 3:16-CV-419, 2016 WL 5415290 (W.D.N.C. Sept. 27, 2016). The Henderson Court, however, left open the question of whether disputes solely arising out the “procurement” of federal flood insurance policies likewise involve substantial questions of federal law or are matters of state law that can properly be determined by state courts. This is an issue on which courts around the country are divided.
The National Flood Insurance Program (“NFIP”) is a federal program pursuant to which persons can purchase Standard Flood Insurance Policies (“SFIPs”). SFIPs contain terms mandated by federal regulations. They can be purchased either directly from the Federal Emergency Management Agency (“FEMA”) or from private insurance companies known as “Write Your Own” or “WYO” carriers that are authorized by federal regulation to sell and administer SFIPs under their own names. Read more ›
Principle Solutions Group, LLC, an information technology company, lost $1.717 million when it became the victim of a fraud scheme for which it sought coverage under the terms of a commercial crime policy issued by Ironshore Indemnity, Inc. The policy provided coverage for “Computer and Funds Transfer Fraud,” “resulting directly from a fraudulent instruction directing a financial institution to debit your transfer account and transfer or, pay or deliver money or securities from that account.” At issue was the meaning of the word “directly,” as it pertained to the pending claim.
The fraudulent scheme involved two imposters. One of the imposters, posing as a managing director of Principle, sent an email that appeared to have been sent from the corporate email address directing the controller of the company to arrange a wire transfer to a bank in China in order to effectuate an urgent company acquisition. The email also instructed the controller to work with an attorney, a Mr. Leach, who was representing the company being acquired, to “ensure that the wire goes out today”. The person purporting to be Mr. Leach also emailed the controller sending wiring instructions to the bank in China, and then called the controller to emphasize that they needed to complete the wire transaction that day. The controller was not able to forward an email to the financial institution to wire the funds because it required more than an email to wire funds from an account. But after taking the necessary steps to effectuate an international wire transfer, including calling Mr. Leach to verify how Mr. Leach had received the wire instructions, the controller relayed this information to the financial institution, and the financial institution released the wire. Shortly after the wire transfer was made Principle learned of the fraud but unfortunately it was too late to recover the funds before they got into the hands of the parties perpetrating the fraud. Read more ›
On August 29, 2016, the U.S. Court of Appeals for the Tenth Circuit affirmed a Colorado district court ruling that the sudden obliteration of a building in a 2013 mudslide did not constitute an “explosion” under a commercial property policy. Accordingly, coverage for the loss was barred under the policy’s “Water Exclusion Endorsement,” which excluded coverage for, among other perils, “[m]udslide or mudflow.” Although the exclusion contained an exception for resulting losses caused by “fire explosion, or sprinkler leakage,” the Tenth Circuit held that the destruction of the building did not constitute an explosion as used in the exception to the exclusion. In construing the meaning of “explosion” as used in the water exclusion, the court emphasized that “context matters,” and holding otherwise would eviscerate the exclusion for “tidal waves, tsunamis and mudslides, which all typically produce extreme forces that can smash anything in their paths . . . .” See Paros Properties LLC v. Colorado Cas. Ins. Co., 2016 WL 4502286 at *8 (10th Cir. Aug. 29, 2016).
In September 2013, torrential rainfall triggered a violent flow of water, mud, and debris to careen down a hillside into a commercial building owned by the insured, Paros Properties LLC (“Paros”). After Paros submitted a claim to its insurer, Colorado Casualty Insurance Company (“CCIC”), for roughly $1.3 million in damages, CCIC denied the claim citing the policy’s “Water Exclusion Endorsement.” In particular, CCIC took the position that the damages were caused by a mudslide, and “mudslide or mudflow” were specifically excluded by the policy. Read more ›
Ruling in favor of the insurer on a motion for summary judgment, on July 29, 2016 the Fifth Circuit Court of Appeals held that under the terms of a commercial crime policy, proof of a forgery by the insured’s employee in extending $90 million of credit to a customer did not establish an unlawful taking as required by the policy terms. Tesoro Refining and Marketing Co, LLC v. National Union Fire Ins. Co. of Pittsburgh, PA, 2016 U.S. App. Lexis 13838 (5th Cir. 2016).
Tesoro, a refiner and marketer of petroleum products sold fuel on credit to petroleum distributor Enmex. On several occasions the credit director for Tesoro, for unknown reasons, falsified and forged signatures on numerous letters of credit purportedly issued to Enmex. These acts enabled the Enmex debt to Tesoro to grow to $90 million before the forgery was detected. Once the forgery was discovered, Tesoro filed suit against Enmex for breach of contract and fraud, which lawsuit was settled. Tesoro also filed a claim with its insurer National Union under its crime policy. Tesoro claimed the loss fell under the “forgery and alteration” section of the policy (which section did not cover employee forgeries) and then amended its claim to proceed under the “employee theft” portion of the insuring agreement. National Union denied coverage under both provisions. After suit was brought by Tesoro against National Union for breach of contract and bad faith, cross motions for summary judgment were filed. Ruling in favor of National Union, the federal district court in Western Texas reasoned that the employee theft coverage could include theft that was facilitated by a forgery, but that it did not cover forgery losses independent of a theft, which always required an unlawful taking in order to trigger coverage. Tesoro did not demonstrate that any unlawful taking had occurred and, therefore, the district court granted National Union’s motion for summary judgment. On appeal the Fifth Circuit agreed. Read more ›
Many first party property insurance policies exclude claims for water damage that occurs when the insured premises is left vacant or unoccupied, unless the insured has used reasonable care to prevent such losses. In litigation challenging the denial of such claims, whether or not the insured’s actions in preventing property damage were reasonable is generally treated as a question of fact to be decided by a jury. However, when the facts are not disputed, and there are no credibility issues presented, a court may grant summary judgment on behalf of the insurer upholding the denial.
Such a result recently occurred in a Pennsylvania case involving substantial losses as a result of water damage from burst pipes. Micalis Pazianas, M.D., et al. v. Allstate Insurance Company, Civil Action No. 16-2018, 2016 W.L. 387, 8185 (E.D. Pa. 07/18/2016). In Pazianas, the insured, Micalis Pazianas, left his insured home in Pennsylvania for England on October 10, 2014, and returned on February 5, 2015 finding water damage in excess of $50,000. Before leaving his home in October, Pazianas did not shut off the water supply or drain the water from the system or appliances. He set the thermostat at 55° F, but its manual directed the replacement of batteries once a year or before leaving home for more than a month. Pazianas did not do so, nor had he replaced them in more than a year. Pazianas thought he would return to the property in December, but he remained in England through January of 2015. Read more ›
A U.S. federal district court recently granted Peerless Insurance’s summary judgment motion, concluding that, as a matter of law, under Virginia law, a property policy insuring a building under renovation would not provide coverage for a collapsed basement wall due to a subcontractor’s lack of shoring,. Taja Investments LLC v. Peerless Ins. Co. a/k/a Liberty Mutual Ins. Co., Civ. No. 1:15-cv-01647, 2016 U.S. Dist. LEXIS 95760 (E. D. VA, July 21, 2016).
The plaintiff insured, Taja Investments, was a construction company, which was excavating a 4-5 foot crawlspace under a building to create a space with a 9 foot depth in order to allow for additional living areas. The insured’s claim arose out of the collapse of one of the basement walls due to the failure of the insured’s subcontractor’s to follow construction recommendations and provide shoring as the excavation progressed. Litigation followed after Peerless declined plaintiff’s claim.
In ruling on cross summary judgment motions filed by the insured and Peerless, the court rejected the insured’s arguments that: (1) while the basement wall collapse may be excluded by the workmanship exclusion, the cost of building repair was a covered ensuing loss; and that (2) the collapse occurred “underground,” and, therefore, the earth movement exclusion did not apply. Read more ›