Virginia Court Dismisses RICO Claim Against WYO Flood Insurer and Its Adjusters

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 ›

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Posted in Flood Insurance

Coverage to Rebuild a Foundation to Comply with Changed Building Codes Following a Fire are Subject to Code-Upgrade Endorsement’s Sublimit

crack in foundationDoes 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 ›

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Posted in Efficient Proximate Cause

Can Disputes Related To Procurement Of Federal Flood Insurance Policies Be Litigated In State Court?

flooded neighborhoodIt 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 ›

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Posted in Flood Insurance

Claim For Fraudulent Wire Transfer Under Commercial Crime Policy Found to be Covered, Although Denial Not In Bad Faith

hacker accessing laptopPrinciple 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 ›

Posted in Bad Faith, Cyber Insurance

“Context Matters” – Tenth Circuit Holds Mudslide Not an Explosion Under Property Policy

cleaning up mudslide damageOn 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 ›

Posted in Coverage, Exclusions, Mudslide, Water

Forgery May Not Constitute “Theft” Under an Employee Dishonesty Coverage

Document forgeryRuling 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 ›

Posted in Theft or Dishonesty

Summary Judgment May Be Appropriate When Insured Fails to Take Reasonable Measures to Prevent Property Damage

burst pipe leaking waterMany 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 ›

Posted in Freezing, Homeowners Coverage, Vacant or Unoccupied, Water, Water

Workmanship and Earth Movement Exclusions Preclude Coverage for Collapse As a Matter of Law

House collapseA 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 ›

Posted in Coverage, Earth Movement, Exclusions, Faulty Workmanship or Design

Is a Rock a Landslide? Montana Supreme Court Says Yes

large boulders on hillIn a recent decision, the Montana Supreme Court upheld application of an Earth Movement exclusion to bar coverage for damage to a home when a single large boulder rolled down a hill and smashed into it. In doing so, the court gave the words of the exclusion their plain and ordinary meaning, refusing to give them a strained interpretation in order to find an ambiguity.

Russell Parker owned a vacation home near Sheridan, Montana. In March 2014, a large boulder fell from a hillside about 440 feet uphill from the cabin and smashed into the structure. Parker had insurance with Safeco and he submitted a claim.

Safeco hired an engineer who traced the path of the boulder back to its point of origin. The engineer observed soil remnants where the boulder originally sat in the cliff, and concluded that the freeze-thaw process of soil and water in the rock joints caused the boulder to dislodge and fall. Relying on the earth movement exclusion in the insurance policy, Safeco denied the claim.

Parker also hired an expert. He agreed with Safeco’s engineer as to the boulder’s original location and role of the freeze-thaw process. But Parker’s expert did not observe soil at the cliff, but rather saw “infilling from weathered granitic gneiss.” He concluded that no “soil” was involved because the decomposition of granitic gneiss did not create “soil” that would expand from freezing water. Believing that the policy exclusion was ambiguous, Parker sued Safeco. Read more ›

Posted in Coverage, Earth Movement, Exclusions

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
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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