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 ›

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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 ›

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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 ›

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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 ›

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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 ›

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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 ›

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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 ›

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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. Read more ›

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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 ›

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Posted in Marine
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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