Table of Contents 

INSURANCE-RELATED COURT CASES

COURT DECISIONS

Digested from case reports published in Westlaw,
West Publishing Co., St. Paul, MN

Builder’s insurer challenges garnishment

Monterra Homes (Powderhorn) LLC, a Colorado home builder, was sued by several families for construction defects in their Monterra-built homes. When Monterra was found liable, three of the home owners sought to garnishee the company’s commercial general liability insurance policies, issued by Assurance Company of America. Two of the families had purchased their homes directly from Monterra. The third, the Storbakkens, had purchased their home from a third party, the Kellans, who had purchased their home directly from Monterra in November 1995.

The Assurance policies had been issued on August 7, 1995, and were renewed annually for four years during the construction and sale of the three homes. The annual policies were identical except that an “earth movement exclusion” was added to the last three policies. The “earth movement exclusion” was intended to exclude coverage for damage resulting from swelling soil, common to that area of Colorado, which could eventually result in cracks in the foundation and structure of the home.

The Kellans sold their home to the Storbakkens in March 1998. At that time, damage to the foundation of the home had begun, but neither party detected it. By the summer of 1999, however, the exterior siding was separating from the foundation of the home, and there were cracks in the walls and ceilings. The cost to repair the home was $444,000.

Assurance argued that the damage to the home occurred when the Kellans owned the home, and that coverage for the builder’s liability became non-operative when the home was sold to the Storbakkens. The trial court found that 80% of the damage to the home occurred during the policy period. It allowed garnishment of the policy in the amount of $777,739.89, covering the Storbakkens’ repair costs, attorneys’ fees, litigation costs, and interest. The court of appeals reversed the lower court’s decision. The Supreme Court of Colorado then agreed to hear the case.

The relevant language of the Assurance policy in effect during the policy period covering Monterra’s liability provided: “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies … This insurance applies to ‘bodily injury’ and ‘property damage’ only if: (1) the ‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory’; and (2) the ‘bodily injury’ or ‘property damage’ occurs during the policy period.” In the context of the policy, “coverage territory” included “[t]he United States of America.” In addition, the policy defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The Supreme Court of Colorado reversed the decision of the court of appeals. It found that the proceeds of the insurance policy were available through garnishment to satisfy the judgment of a subsequent purchaser of the damaged home. Specifically, the court found that nothing in the policy stated that coverage terminated when the property was sold to a person who did not own it during the policy period when the damage occurred. While there was an exclusion in the policy for property owned by the insured, there was no exclusion based on identity or circumstances of the property’s ownership by another. Thus, coverage was not voided simply because the claimants (the Kellans) no longer owned the property.

The decision of the court of appeals was reversed, and the case was remanded with directions to return the case to the trial court for further proceedings consistent with the Colorado Supreme Court decision.

Hoang vs. Assurance Company of America-No. 05SC389-Supreme Court of Colorado, En Banc-March 5, 2007-149 Pacific Reporter 3d 798.

When “other insurance” clauses collide

On November 1, 2003, Cletus Ganschow was a passenger in a vehicle owned by Susan Messer and driven by Samantha Kinser when the vehicle was involved in an accident with Louis Pipito III. Pipito was allegedly negligent and was also an uninsured motorist. Ganschow sought uninsured motorist coverage for his injuries from his parents’ insurer, Citizens Insurance Company, as well as Messer’s insurer, Standard Mutual Insurance Company.

The Standard Mutual policy had uninsured motorist coverage limits of $100,000 per person and $300,000 per occurrence. The Citizens policy had uninsured motorist coverage limits of $50,000 per person and $100,000 per occurrence. Both policies contained “other insurance” provisions. Standard Mutual’s provision stated: “With respect to bodily injury to an insured while occupying an automobile not owned by the named insured, the insurance under part IV shall apply only as excess insurance over any other similar insurance available to such insured and applicable to such automobile as primary insurance, and this insurance shall then apply only in the amount by which the limit of liability for this coverage exceeds the applicable limit of liability of such other insurance.”

This provision went on to state: “Except as provided in the foregoing paragraph, if the insured has other similar insurance available to him and applicable to the accident, the damages shall be deemed not to exceed the higher of the applicable limits of liability of this insurance and such other insurance and the company shall not be liable for a greater proportion of any loss to which this Coverage applies than the limit of liability hereunder bears to the sum of the applicable limits of liability of this insurance and such other insurance.”

The Citizens Insurance “other insurance” provision stated: “1. Any recovery for damages for ‘bodily injury’ or ‘property damage’ sustained by an ‘insured’ may equal but not exceed the higher of the applicable limit for any one vehicle under this insurance or any other insurance. 2. Any insurance we provide with respect to a vehicle you do not own shall be excess over any other collectible insurance. 3. We will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits.”

Ganschow filed a complaint against both Standard Mutual and Citizens. Conceding that because of antistacking provisions his uninsured motorist benefits could not exceed $100,000, Ganschow claimed he was entitled to benefits under both policies. Standard Mutual sought a declaratory judgment clarifying the coordination of coverage between Standard Mutual and Citizens. Standard Mutual argued that the insurers’ responsibilities were to be calculated on a pro rata basis. Citizens responded by arguing that Standard Mutual carried the primary coverage and that Citizens carried only excess coverage.

The trial court found that both companies provided primary coverage with respect to Ganschow’s uninsured motorist claims. It agreed with Standard Mutual and prorated the claims. According to the court, a maximum of $66,666.67 was to be paid by Standard Mutual, and a maximum of $33,333.33 was to be paid by Citizens. Citizens appealed.

On appeal, Citizens continued to claim that Standard Mutual’s coverage was primary. Standard Mutual argued that the insurers’ “other insurance” provisions conflicted and should therefore be declared “mutually repugnant.” As such, argued Standard Mutual, the provisions should be disregarded, and the insurers should be liable for their respective prorated amounts.

The Court of Appeals of Indiana disagreed with Standard Mutual’s “mutually repugnant” argument. According to the court, the pro rata provision of Standard Mutual’s “other insurance” clause applied only where “similar” insurance was available. Citizens’ “other insurance” clause was triggered by the fulfillment of a specific condition—the ownership of a vehicle that was involved in the accident. Because Citizens’ clause was satisfied and Standard Mutual’s was not, the respective provisions could be “harmonized.” They were, therefore, not “mutually repugnant.” Standard Mutual was the primary insurer, and Citizens was the excess insurer. The court concluded that the trial court had erred in granting Standard’s Mutual motion to prorate the uninsured motorist coverage between the two companies.

The judgment of the trial court was reversed and remanded with instructions to enter judgment for Citizens Insurance.

Citizens Insurance Company vs. Ganschow-No. 18A02-0604-CV-312-Court of Appeals of Indiana-January 12, 2007-859 North Eastern Reporter 2d 786.

Cancellation does not equal expiration

In November 2001, Shahnaz Nazami hired Virgil Gifford, a local home improvement contractor, to renovate her home. While working on the project, Gifford failed to cover portions of the exterior walls of the home, resulting in water damage to the interior of the home. Nazami was under the impression that Patrons Mutual Insurance Company was Gifford’s insurer because Gifford had shown her a certificate of liability insurance from Patrons naming Nazami as the “certificate holder.” In fact, in May 2001, Gifford had obtained a general liability insurance policy from Patrons, through its agent Fallon Insurance Agency, but the insurance had been canceled without Nazami’s knowledge.

The certificate Gifford had shown Nazami was issued on June 7, 2001. However, according to its terms, it was issued “as a matter of information only,” and it specifically noted that the policy’s effective date was May 15, 2001, and that it would expire May 15, 2002. Furthermore, the certificate provided that the “issuing insurer” would “endeavor to mail” 10 days’ written notice to Nazami should the policy be canceled before the expiration date, though it disclaimed liability if notice was not mailed. Finally, the certificate provided that it “confer[red] no rights upon the plaintiff, did not constitute a contract between Patrons, Fallon, and the plaintiff, and was subject to “all the terms, exclusions and conditions” of the policy.

When Nazami discovered the policy had been canceled, she brought an action against Gifford, Patrons and Fallon. She alleged, among other things, fraud, negligent misrepresentation, and violation of Connecticut unfair insurance and trade practices statutes. In addition, she claimed that the failure of Fallon or Patrons to notify her of the cancellation of the policy constituted common-law negligence. With regard to these specific allegations, the trial court found in favor of Patrons and Fallon; Nazami appealed. The appeal was transferred to the Supreme Court of Connecticut.

On appeal, in support of her fraud and misrepresentation claims, Nazami argued that she had hired Gifford in reliance on the certificate, and that Fallon “knew, or should have known, that the [c]ertificate, as drafted, might lead her to believe that . . . Gifford’s insurance coverage was guaranteed until the policy expiration date.” The Supreme Court of Connecticut disagreed. Although the certificate contained specific dates of coverage, it also disclaimed liability in the event the policy was canceled. It “specifically and repeatedly distinguished between expiration and cancellation of the policy.” Thus, the court found that Nazami’s allegations were in direct conflict with the language of the certificate. In addition, the court noted that “even the most liberal reading” of Nazami’s fraud allegations did not support a cause of action for common-law fraud. Thus, the court found that Nazami failed to allege anything to support a claim for fraud, misrepresentation, or violation of the Connecticut statutes.

The court also addressed Nazami’s argument that Fallon and Patrons had a duty to inform her of the cancellation of Gifford’s policy. Again, the court found that Nazami’s allegations failed. According to the court, in order to claim negligence, it was necessary for Nazami to show that Fallon or Patrons owed her a duty of care. Because the certificate was issued “as a matter of information only,” conferred “no rights upon” the plaintiff, and did not constitute a contract between Nazami, Patrons, and Fallon, there was no duty. Thus, Nazami did not have a claim of negligence.

The judgment of the lower court finding no cause of action for fraud, misrepresentation, or negligence was affirmed.

Nazami vs. Patrons Mutual Insurance Company-Nos. 17537, 17539-Supreme Court of Connecticut-December 5, 2006-910 Atlantic Reporter 2d 209.

Builder seeks coverage for window damage

Advantage Homebuilding, LLC, a home building company, contracted with McGarrah Masonry to perform masonry work on several of its construction projects. On November 14, 2002, three home owners for whom Advantage had built homes sued Advantage for damages to windows on each of their homes. Advantage’s insurer, Maryland Casualty Company, refused to defend Advantage, claiming that exclusions in the policy excused them from that obligation.

The case proceeded to trial. The court found that the damage was caused by McGarrah Masonry. Advantage was ordered to pay $32,411 in damages for negligence and breach of contract/warranty. Advantage then filed a cross-claim for indemnification against McGarrah, and this was granted by the court. Advantage also filed a declaratory judgment action against Maryland seeking a determination that Maryland had been obligated to defend it in the underlying lawsuit. The declaratory judgment case was heard in Federal District Court applying the law of Kansas.

Two exclusions in the Maryland policy were at issue. The first exclusion, exclusion j(5), provided that the insurance did not apply to “That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.” The other exclusion, j(6), provided that the insurance did not apply to “That particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it” and “Paragraph (6) of this exclusion does not apply to ‘property damage’ included in the ‘products-completed operations hazard.’”

The lower court found that both policy exclusions applied, and that Maryland Casualty was not obligated to defend or indemnify Advantage in the underlying lawsuit.

On appeal, Advantage argued that exclusion j(5) had to be interpreted to apply only at the time an actual “claim” arose, and not merely at the time the damage occurred. According to Advantage, because no one was “performing operations” at the time the home owners claimed their windows were damaged, the exclusion did not apply. In addition, Advantage claimed that exclusion j(6) did not exclude coverage because the defective work was discovered after the contractor had completed its work.

The United States Court of Appeals, Tenth Circuit, rejected both of Advantage’s arguments. It found that exclusion j(5) clearly applied, because it unambiguously focused on when the damage at issue occurred. Because the lower court had found that the physical damage to the windows occurred during the course of McGarrah’s work on the homes, the property damage arose “out of the work of the insured, its contractors, or its subcontractors while ‘performing operations.’”

In addition, the court found that coverage was also excluded by exclusion j(6). The court acknowledged that this exclusion was “inartfully drafted”; however, it found that the exclusion was intended to exclude coverage for the cost of restoring, repairing, or replacing faulty workmanship on the part of the insured, its contractors, and subcontractors. Because it found that exclusions j(5) and j(6) applied, the court concluded that Maryland Casualty was not liable for the damages alleged in the underlying lawsuit. Nor was Maryland Casualty required to defend Advantage. According to the court, the language of exclusion j(6), combined with the overall policy language, eliminated any question that there was a potential of liability. Thus, Maryland Casualty was absolved of any duty to defend Advantage in the underlying lawsuit.

The decision of the lower court was affirmed.

Advantage Homebuilding, LLC, vs. Maryland Casualty Company-No. 05-3200-United States Court of Appeals, Tenth Circuit-December 13, 2006-470 Federal Reporter 3d 1003. *

CONTACT US | HOME