Insurers in New Jersey Secure a Victory on Water Damage Claims, But How Big a Victory Likely Remains to be Seen

By Kevin Sullivan

Property insurance policies commonly cover water damage caused by an accidental discharge or leakage of water from an on-site plumbing system and commonly exclude water damage caused by a sewer backup.  So it’s not surprising that the cause of water damage is a common battleground between policyholders and insurers.  In Salil v. Ohio Security Insurance Co., 2018 WL 6272930 (N.J. App. Div. Dec. 3, 2018), insurers scored a victory when the court held that the release of water and sewage into a restaurant was subject to a $25,000 sublimit for water damage caused by a sewer backup.  But claims adjusters and policyholders confronted with water damage claims in New Jersey will no doubt continue to do battle over whether the Salil decision was a decisive victory for insurers or a limited one.  

 In Salil, the insured landlord leased its building to a restaurant operator.  After the insured’s tenant reported water and odor at the restaurant, the insured contacted a plumber, who informed the insured that a clog in the restaurant’s toilet caused Category 3 water to flow into the restaurant.  The insured allegedly sustained approximately $160,000 in restoration costs and loss of business income.  The plumber used a snake to clear the sewer line to remedy the issue.  The restoration company confirmed the cause of the loss was a sewer back up.  On this basis, the insurer determined that the cause of loss was a sewer backup.  The policy excluded coverage for water damage caused by a sewer back-up, but an endorsement restored that coverage, subject to a $25,000 sub-limit for “direct physical loss or damaged caused by water… which backs up into a building or structure through sewers or drains which are directly connected to a sanitary sewer or septic system.”  Pursuant to this endorsement, the insurer paid its $25,000 sublimit.  

The insured sued seeking its full damages “because the damage resulted from an accidental discharge of water from a blockage in the plumbing system within the property, rather than a sewer back-up originating outside the property….”  The trial court rejected this argument, stating that the insured could only seek coverage for the accidental discharge of water from the toilet if it was caused by a sewer back up.  On appeal, the insured argued that the trial court misinterpreted the policy language and mischaracterized the loss as a sewer backup.  The Appellate Division held that there were no disputed issues of fact, which presumably included the cause of the loss.  And the court also rejected both of the insured’s arguments.  The court held that the water damage endorsement was unambiguous and applied, and also rejected the insured’s attempt to distinguish a “sewer back-up from an accidental discharge of water.”

The Salil court’s holding is a victory for insurers facing water damage claims caused by backflow.  But before this victory can be deemed decisive, it likely will need to be subjected to further litigation.        

Illinois Court Addresses Insurer’s Duty To Pay For Insured’s Affirmative Claim

By Brian Bassett

In its recent decision in Great American E&S Insurance. Co. v. Power Cell LLC, 2018 WL 6696550 (N.D. Ill. Dec. 20, 2018), the United States District Court for the Northern District of Illinois held that Great American Insurance Company had a duty to defend Power Cell, LLC, d/b/a Zeus Battery Products in a lawsuit involving the recall of the claimants’ products, and the duty extended to Zeus’s affirmative claims.

The origin of the parties’ dispute was a product recall initiated by Spring Window Fashions (“SWF”), a business that sells battery-operated window shades.  SWF assigned blame for window shade failures to the Zeus batteries the company used. However, Zeus believed the window products’ failure was due to a design flaw in SWF’s products. Zeus stated that SWF’s false recall notices had harmed Zeus’s reputation, and it subsequently filed suit against SWF seeking a declaration that its batteries were safe along with recovery for the alleged misrepresentation. In response, SWF counterclaimed, alleging breaches of warranty and negligence and demanding indemnification for the cost of the Zeus batteries, the cost of replacing the batteries in the window products, and damages associated with the recall.

Zeus’ insurer, Great American, filed a declaratory judgment action seeking a ruling that it owed no coverage for the losses SWF was seeking to recover from Zeus.  Great American cited two reasons for its position: First, Great American argued that the Counterclaim filed against Zeus did not seek compensation for losses “because of” “property damage” caused by “an occurrence” within the meaning of the policy. Second, Great American asserted that Zeus failed to provide Great American with timely notice of the potential claim.

With respect to the first issue, the Great American policy stated that it will “pay those sums that the Insured becomes legally obligated to pay as damages because of ‘property damage’ caused by an ‘occurrence.’” The Policy defines “property damage” as “physical injury to tangible property, including all resulting loss of use of that property.”

Although the complaint against Zeus cited certain instances where customers’ window shades were alleged damaged as a result of the Zeus batteries, there was no suggestion in the complaint that SWF itself was seeking recovery for that property damage. Great American argued that property damage that is not itself part of the injured party’s damage calculation is “tangential” to the relevant claim and not covered under the Policy.  

The court rejected that argument, finding that it was not necessary for SWF be seeking recovery for “property damage” it suffered, but rather all it must show is that it is seeking damages “because of” property damage, even if that damage was suffered by a third party.  The court concluded that damages sought “because of” property damage include consequential damages precipitated by property damage, including those that do not affect the plaintiff’s own tangible property.

Great American also argued that Zeus failed to provide timely notice of SWF’s claim. The notice provision in Great American’s policy provided that an insured party “must see to it that we [Great American] are notified as soon as practicable of an occurrence which may result in a claim or suit which may involve this policy…” The Illinois Supreme Court has held that “as soon as practicable” means “within a reasonable time,” and in assessing the reasonableness of the time for providing notice to an insurer, Illinois courts consider five factors: “(1) the specific language of the policy’s notice provision; (2) the insured’s sophistication in commerce and insurance matters; (3) the insured’s awareness of an event that may trigger insurance coverage; (4) the insured’s diligence in ascertaining whether policy coverage is available; and (5) prejudice to the insurer.” West Am. Ins. Co. v. Yorkville Nat. Bank, 238 Ill.2d 177 (Ill. 2010). Here, the court found that each of the five factors were either neutral or tilted in Zeus’s favor and in view of the presumption that the court should construe an insurance policy strictly against the insurer, Zeus was entitled to summary judgment on the issue of notice.

Finally, the court held that Great American’s policy also required it to prosecute Zeus’s affirmative claim against SWF as that claim included a request for a declaration that Zeus’ batteries were not defective. The court recognized that the duty to defend “encompasses all litigation by which the insured could defeat its liability.” Great W. Cas. Co. v. Marathon Oil Co., 315 F. Supp. 2d 879, 882-83 (N.D. Ill. 2003). Great American expressly conceded that “any declaration Zeus Batteries were safe would . . . bind SWF and prohibit SWF from collecting its recall costs.” As success on its affirmative claim would reduce or eliminate Zeus’s liability to SWF, the court concluded that Great American’s policy required it to pursue both Zeus’s affirmative claim against SWF and defend against SWF’s counterclaims.


Supreme Court of Wisconsin Applies Pro Rata Allocation Based on Policy Limits to Co-Insurance Dispute

By Brian Margolies

In its recent decision in Steadfast Insurance Company v. Greenwich Insurance Company, 2019 WL 323702 (Wis. Jan. 25, 2019), the Supreme Court of Wisconsin addressed the issue of contribution rights as among co-insurers.

Steadfast and Greenwich issued pollution liability policies to different entities that performed sewer-related services for the Milwaukee Metropolitan Sewerage District (MMSD) at different times.  MMSD sought coverage under both policies in connection with underlying claims involving pollution-related loss.  Both insurers agreed that MMSD qualified as an additional insured under their respective policies, but Greenwich took the position that its coverage was excess over the coverage afforded under the Steadfast policy, at least for defense purposes, and that as such, it had no defense obligation.

Both the trial court and the intermediate appellate court held that because the Steadfast and Greenwich policies insured different insureds, during different time periods, the policies were not concurrent and that Greenwich, therefore, could rely on its other insurance clause.  The appellate court further concluded that Greenwich breached its defense obligation and that Steadfast, being equitably subrogated to MMSD’s rights under the Greenwich policy, was entitled to recover 100% of defense costs it had spent in connection with the underlying claim.

On appeal, the Supreme Court of Wisconsin, in a majority decision, affirmed the lower courts’ rulings concerning the other insurance issue, concluding that insurers can rely on other insurance clauses only in the situation of concurrent policies.  The Court agreed that the Steadfast and Greenwich policies were not concurrent, but instead successive, because they insured different insureds for different periods of time.  The Court concluded, therefore, that both insurers had a primary defense obligation to MMSD and that Greenwich breached this duty.

The Court went on to disagree with the lower courts’ rulings concerning the remedy available to Steadfast.  In particular, the Court reasoned that the appellate court erred in awarding Steadfast recovery of 100% of defense costs based on an equitable subrogation theory as this resulted in a windfall to the company that plainly had a defense obligation.  It reasoned that the appropriate remedy to Steadfast was based on equitable contribution, whereby it would be entitled to recover a share of defense costs from Greenwich.  The Court ruled, as a matter of first impression, that the contribution for defense costs should be pro rated based on policy limits.  Since the Greenwich policy had a $20 million limit of liability and the Steadfast policy had a $30 million limit of liability, the Court concluded that Steadfast was entitled to recover three-fifths of the defense costs it had paid.

Insurer Cannot Sue Law Firm It Hired to Defend Its Insured for Legal Malpractice

By Bradley Guldalian

In Arch Ins. Co. v. Kubicki Draper, LLP., 44 Fla. L. Weekly D269a (Fla. 4th DCA Jan. 23, 2019), the insurer hired a law firm to defend its insured. During litigation, the law firm failed to file a defense which resulted in the insurer paying a large settlement. Once the underlying litigation ended, the insurer filed a legal malpractice action against the law firm alleging its negligence caused the insurer to pay a settlement it should never have had to pay.  The law firm filed a Motion for Summary Judgment alleging the insurer lacked standing to sue the law firm because Florida law limited an attorney’s liability for legal malpractice to clients with whom the attorney shares privity of contract and the insurer and the law firm were not in privity of contract with one another.  The trial court granted the law firm’s motion and, on appeal, the Fourth District Court of Appeal affirmed.  In so holding, the court found nothing in the record to indicate the insurer was in privity of contract with the insured.  Rather, all evidence revealed the attorney was only in privity of contract with the insured.  Although the insurer alleged that it paid the law firm’s fees, was an intended third-party beneficiary of the relationship between the attorney and the insured, and that privity of contract with the attorney was unnecessary, the court rejected that argument holding none of the recognized exceptions to the strict privity requirement in Florida applied. 

Massachusetts Federal Court Holds No Coverage for Mold and Water Damage Claim

By Brian Margolies

In its recent decision in Clarendon National Ins. Co. v. Philadelphia Indemnity Ins. Co., 2019 WL 134614 (D. Mass. Jan. 8, 2019), the United States District Court for the District of Massachusetts had occasion to consider the application of a prior knowledge provision in the context of a claim for mold and water-related bodily injury and property damage.

Philadelphia insured a condominium property management company under a general liability insurance policy for the period September 1, 2007 through September 1, 2008.  In 2009, the insured was sued by a unit owner alleging bodily injury and property damage resulting from toxic mold conditions resulting from leaks that had been identified in her unit as early as 2004.  Notably, the complaint alleged that mold was identified in 2006 and that repair efforts were undertaken, but that these efforts all proved unsuccessful. Plaintiff alleged that she was forced to vacate her apartment in 2008 as a result of the conditions.

Philadelphia denied coverage to its insured for the underlying suit on several grounds, including a mold exclusion in its policy.  An argument was raised, however, as to coverage for property damage resulting solely from water intrusion, which was not subject to the exclusion.  Philadelphia argued that any such water-related damage was precluded from coverage on the basis of a provision in its policy’s insuring agreement stating that no coverage would be available for any property damage known to exist by the insured prior to the policy’s inception date and that “any continuation, change, or resulting of such … ‘property damage’ … will be deemed to have been known to have occurred at the earliest time when an insured … becomes aware” of such occurrence.

Looking to the allegations in the complaint – that water damage had been identified as early as 2004 – the court agreed that the damage was known by the insured prior to the inception of the Philadelphia policy.  In so concluding, the court rejected the counterargument that the complaint suggested the possibility of new property damage during the policy period given that the insured had undertaken repair efforts after the initial damage was originally identified.  As the court explained, “attempts to remediate the damage, even temporarily successful ones, do not transform the later continuation or recurrence of that very damage into new instances of property damage that would potentially be covered.” 

Nevada Supreme Court Holds Insurer Can Be Liable In Excess of Policy Limits for Breaching Defense

By Brian Margolies

In its recent decision in Century Surety Co. v. Andrew, 2018 WL 6609591 (Nev. Dec. 13, 2018), the Nevada Supreme Court had occasion to consider the damages available to an insured resulting from an insurer’s breach of its defense obligation.

Century insured Blue Streak under a commercial auto policy and was determined to have breached a duty to defend its insured in an underlying personal injury lawsuit arising out of an auto accident.  The lower court concluded that Century improperly relied on extrinsic facts in determining its defense obligation, and that as such, the disclaimer was improper.  The Nevada federal district court nevertheless concluded that while Century breached its defense obligation, its conduct was not in bad faith and that as such, Century’s payment obligation in connection with the resulting judgment was limited to its policy’s limit of liability.

On appeal, however, the question was raised as to whether Century could be liable for consequential damages in excess of its policy’s limit of liability as a “reasonably foreseeable result” of its breach of the duty to defend. This question ultimately was certified to the Nevada Supreme Court.  In considering this question, the Court observed that the majority rule, by far, is that an insurer’s damages for breaching the duty to defend are limited to reimbursement of defense costs and for payment of a resulting judgment or settlement up to policy limits, and only for covered damages, absent some finding of bad faith misconduct. 

The Nevada Supreme Court, however, found the majority rule to lack sufficient protections for insureds.  Citing to commentary in the ALI’s Restatement of Liability Insurance, the Court observed that the minority rule is fairer to insureds since it offers an insured the better opportunity for being made whole as a consequence of the breach of the duty to defend rather than placing “an artificial limit to the insurer’s liability within the policy limits for a breach of its duty to defend.” 

Thus, the Court adopted the rule that when an insurer breaches the duty to defend, it can be held liable for a resulting judgment in excess of its policy limits, irrespective of whether the insurer acted in bad faith.  The Court did, however, place a limit on this outcome by stating that the insured still has the burden of showing that the excess judgment was a consequence of the insurer’s breach and that the insured took all reasonable measures “to protect himself and mitigate his damages.”

Florida Court Holds Securities Exclusion Applicable

By Brian Margolies

In its recent decision in Colorado Boxed Beef Co., Inc. v. Evanston Ins. Co.,2019 WL 77376 (M.D. Fla. Jan. 2, 2019), the United States District Court for the Middle District of Florida had occasion to consider an exclusion in a management liability policy applicable to the purchase and sale of debt or equity securities.

Three individual officers and directors of Evanston’s insured, Colorado Boxed Beef, were named as defendants in a lawsuit for having allegedly made misrepresentations and omissions of materials facts in connection with their purchase of stock from the underlying plaintiff, also an officer of the insured. Numerous causes of action were alleged, including fraud, negligent misrepresentation, breach of fiduciary duty and rescission.

Evanston contended that it had no coverage obligation in connection with the suit on the basis of an exclusion in its policy applicable to claims ““[b]ased upon, arising out of or in any way involving…the actual, alleged or attempted purchase or sale, or offer or solicitation of an offer to purchase or sell, any debt or equity securities[.]” 

The court agreed that the exclusion applied so long as underlying claim “in any way” seeks recovery arising out of the sale of securities. Observing that the entire underlying lawsuit sought to revoke, rescind, or recover damage for the sale of stock to the defendant officers and directors, the court agreed that the exclusion applied.  In so concluding, the court acknowledged that the complaint described some activities that both precedent and continued after the sale of the stock.  The court nevertheless concluded that these allegations were made solely for providing details concerning the alleged misrepresentations and omissions made in connection with the sale.  As the court explained:

 … when read with the underlying complaint, these acts do not stand alone. They are part and parcel of the fraudulent inducement and purchase of the (suing) Sellers’ shares in the company. These purported claims more than “in any way involve” equity security sales, and these claims certainly “arise out of” the Sellers’ quest for SPA rescission and breach damages. … these acts are alleged to be ways the Buyers (Plaintiffs here) cheated the Sellers (Plaintiffs underlying) into taking low value – one of several fiduciary breaches which enabled the rescindable, self-dealing and injurious SPA. These are the very acts by which the securities fraud is alleged to have been accomplished. That the self-dealing might be sued upon by underlying plaintiffs in a separate action does not change what they are: part of the scheme to undervalue the company and cheat the sale price (i.e. “relating in any way to…and arising out of” stock sales).


Insurer’s Inadequate Communication with Policyholder Necessitates Trial in $22 Million Bad Faith Case

By Bradley Guldalian

In Wallace Mosley, a minor by and through his co-guardians, Roslyn Weaver & Dina Cellini, Esq., v Progressive American Ins. Co., Case No. 14-cv-62850, 2018 U.S. Dist. LEXIS 199078 (S.D. Fla. Nov. 25, 2018), the Southern District of Florida denied an insurer’s Motion for Summary Judgment in a bad faith claim seeking the recovery of a $22,663,058.00 judgment against its insured holding that questions of fact existed regarding the insurer’s alleged breach of its duty of good faith towards its insured where the insurer tendered its $10,000 insurance policy limits to the claimant’s attorneys in a timely manner but the insured refused to prepare a financial affidavit because he believed, pursuant to his religious and moral beliefs, that he was immune from suit as a sovereign citizen and claimed the affidavit was an “invasion of his privacy.”  In so holding, the court found that even though the insurer sent the insured a letter the insurer had received from the claimant’s attorneys asking the insured to prepare and send a financial affidavit verifying he had no viable assets, a question of fact existed as to whether the insurer acted in good faith because the insurer failed to send any documentation to its insured “explaining in any discernable detail the gravity of the situation” the insured was facing including the probable outcome of the litigation, the possibility that an excess judgment could be entered against him, or of the steps he might take to avoid entry of an excess judgment being entered against him. 


Third Circuit Holds No Coverage for Faulty Workmanship Despite Insured’s Expectations

By Brian Margolies

In its recent decision in Frederick Mut. Ins. Co. v. Hall, 2018 U.S. App. LEXIS 31666 (3d Cir. Nov. 8, 2018), the United States Court of Appeals for the Third Circuit had occasion to consider Pennsylvania’s doctrine of reasonable expectations in the context of a faulty workmanship claim.

Hallstone procured a general liability policy from Frederick Mutual to insure its masonry operations. Notably, when purchasing the policy through an insurance broker, Hallstone’s principal stated that he wanted the “maximum” “soup to nuts” coverage for his company.  Hallstone was later sued by a customer for alleged defects in its masonry work.  While Frederick agreed to provide a defense, it also commenced a lawsuit seeking a judicial declaration that its policy excluded coverage for faulty workmanship. The district court agreed that the business risk exclusions applied, but nevertheless found in favor of Hallstone based on the argument that Hallstone had a reasonable expectation that when applying for an insurance policy affording “soup to nuts” coverage, it this would include coverage for faulty workmanship claims.

On appeal, the Third Circuit acknowledged that the reasonable expectations doctrine can overrule policy language when the insured is issued a policy different than what it specifically requested to purchase.  The court nevertheless reasoned that this doctrine did not apply to Hallstone, which generally asked for a broad policy, but not specifically a policy that would insure faulty workmanship claims – a coverage the court acknowledged does not exist.  The pointed out the absurdity of relying on the reasonable expectations doctrine to overcome the policy’s otherwise plain and unambiguous language, observing that “Hall’s claim that he expected Hallstone’s ‘maximum,’ ‘soup to nuts’ liability policy to include workmanship coverage is no more reasonable than if a purchase of auto insurance expected his policy to cover repairs if his car breaks down, even if he asked for ‘soup to nuts’ coverage.”

Wisconsin Supreme Court Holds Fire Damage Resulted from Single Occurrence

By Brian Margolies

In its recent decision in Secura Ins. v. Lyme St. Croix Forest Co., LLC 2018 WI 103 (Oct. 30, 2018), the Wisconsin Supreme Court had occasion to consider whether a forest fire that caused damage to several homes and properties should be considered a single or multiple occurrences.

Secura insured Lyme St. Croix Forest Company under a general liability policy.  Of relevance was the policy’s $500,000 sublimit of coverage for property damage due to fire arising from logging or lumbering operations, subject to a $2 million general policy aggregate limit.  Lyme St. Croix sought coverage under the policy for a fire that resulted from its logging equipment.  The fire lasted for three days, burning nearly 7,500 acres and causing damage to numerous homes and businesses. 

Lyme St. Croix argued, and the trial and appellate courts agreed, that there was a separate occurrence each time the fire spread to a new piece of real property, and that as such, Secura was required to pay up its policy’s full $2 million aggregate rather than a single $500,000 limit of liability.  The appellate court based its decision, in part, on the 2014 Wisconsin Supreme Court decision in Wilson Mut. Ins. Co. v. Falk, 857 N.W.2d 156 (Wis. 2014), where the Court considered the issue of number of occurrences in a situation involving manure runoff from a farm that resulted in contamination of numerous drinking wells.  The FalkCourt rejected the argument that the spreading of manure as a fertilizer was the occurrence, instead concluding that there was an occurrence each time a unique well was contaminated by manure running off of the insured’s property.

Revisiting its decision in Falk, the Wisconsin Supreme Court drew a distinction between runoff that contaminates several wells over a lengthy period of time with a forest fire that consumes multiple properties over a short duration of time. The Court reasoned that in determining number of occurrences questions, “we must take into account elements of time and geography” and that as such, a single occurrence takes place if the “cause and result” are “so simultaneous or closely linked in time and space” as to be considered a single event by the “average person.”  The Court drew a distinction between loss scenario in Falk, which involved seepage of manure over an unspecified period of time, with that of a three-day fire, explaining:

A three-day fire in a discrete area caused by a single precipitating event would reasonably be considered by the average person to be one event. Regardless of how many property lines the fire crossed, the damage closely follows the cause in both time and space.