INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Contractor paints itself into a corner

In 2004, Kiss Construction NY, Inc., filed a claim with its liability insurer, Rutgers Casualty Insurance Company, for injuries that allegedly occurred during the construction of a three-family building. At the time of the occurrence, Kiss was the general contractor for work that involved excavation and paving. Rutgers denied coverage, claiming that in its application for insurance, Kiss had misrepresented the nature of its business. Kiss filed a lawsuit seeking a declaration that Rutgers was obligated to defend and indemnify it. The lower court found in favor of Kiss. Specifically, it found that Rutgers was obligated to pay Kiss’s defense costs until the question of whether Rutgers could rescind the policy was decided. Rutgers appealed the decision of the lower court.

When it submitted its application for insurance, Kiss listed the nature of its business as ‘PAINTING-100%-100% INTERIOR.” On the declarations page, Kiss’s business was described as a painting contractor. On the Extension of Declarations, another description read “PAINTING INTERIOR BUILDINGS-NO TANKS.” When it accepted the policy, Kiss affirmed that the statements in the declara­tions were accurate, complete and based on representations it had made in its application.

On appeal, the Supreme Court, Appellate Division, First Department, New York, acknowledged that Rutgers did not establish that the policy itself limited coverage to painting or that the change in the nature of Kiss’s business altered the coverage provided. Nevertheless, the court concluded that the lower court should have declared the policy void. Two of Rutgers’ vice presidents testified in affidavits that the company did not write policies for construction work or general contractor work. In addition, underwriting guidelines and copies of emails declining coverage supported the fact that the company did not write policies for this type of work. According to the court, this was enough evidence to support Rutgers’ argument that the policy could be declared void because the nature of Kiss’s business at the time of the accident was materially different from the business described in the application. The court concluded that the policy was void ab initio (from the start) and that Rutgers was obligated to refund the premiums to Kiss Construction.

The decision of the lower court was reversed.

Kiss Construction NY, Inc., vs. Rutgers Casualty Insurance Company-Supreme Court, Appellate Division, First Department, New York-April 2, 2009-61 Appellate Decisions 3d 412.

Accident victim’s daughter seeks UM coverage

Barbara Testa was a passenger in a vehicle that collided with a vehicle owned by Benjamin Bellville. Bellville was an underinsured driver, and Testa was insured under her own auto insurance policy. She was severely injured in the accident and eventually died from her injuries. Testa’s daughter, Deborah Fackett, filed a wrongful death claim against Bellville. She eventually settled with his insurance company for the $1 million policy limit, but this amount was insufficient to cover all damages.

At the time of the accident, Fackett had an Allstate Insurance Company policy that included uninsured/underinsured motorist coverage. All of the parties agreed that Testa was not an “insured person” under the policy. Nevertheless, Fackett made a formal demand for uninsured/underinsured motorist policy limits. According to Fackett, the Nevada uninsured/underinsured motor vehicle statute provided that she was entitled to benefits because she was legally entitled to recover from Bellville for the wrongful death of her mother. Allstate denied Fackett’s claim and filed a declaratory relief action asking the court to declare that Fackett was not entitled to benefits under the policy. The district court found in favor of Fackett and concluded that she was entitled to uninsured/underinsured motorist benefits for the wrongful death of her mother. Allstate appealed.

The language of the Allstate policy provided: “[Allstate] will pay damages which an insured person is legally entitled to recover from the owner or operator of an uninsured auto because of bodily injury sustained by an insured person.” (Emphasis added.) The pertinent part of the Nevada uninsured/underinsured motorist statute provided that [u]ninsured and underinsured vehicle coverage must include a provision that enables the insured to recover from his own insurer up to the limits of his own coverage any amount of damages for bodily injury which he is legally entitled to recover from the owner or operator of the other vehicle, to the extent that those damages exceed the limits of the bodily injury coverage carried by that owner or operator.

On appeal, Allstate argued that the express terms of its policy required that an insured be injured and that, therefore, the policy did not provide coverage for Fackett’s mother, who was not an insured. In addition, Allstate argued that the plain language of the statute applied only to bodily injury suffered by the insured. Fackett argued that the statute applied to bodily injury suffered by anyone whose injury entitled the insured to a legal claim against the uninsured driver.

The Supreme Court of Nevada reversed the decision of the lower court and found in favor of Allstate. In reaching its decision, the court found that the policy language was clear and unambiguous, and that the statutory language “damages for bodily injury which he is legally entitled to recover from his own insurer” clearly referred to “bodily injury suffered by the insured—not by any person whose injury may give rise to a legal claim by the insured.” The court also found that Fackett’s interpretation of the statute would “strain the statute beyond its plain meaning.” Thus, Fackett was not entitled to uninsured/underinsured motorist benefits under the Allstate policy.

Allstate Insurance Company vs. Fackett-No. 49884-Supreme Court of Nevada-April 30, 2009-206 Pacific Reporter 3d 572.

Is stucco separation a “collapse”?

Kristine Hennessy owned a commercial building that she insured under a property insurance policy issued by Mutual of Enumclaw Insurance Company. The building was constructed primarily of concrete, although some of it was made with concrete masonry unit blocks. The entire surface of the building was covered by stucco.

In 2003, Hennessy discovered that some of the stucco covering on the building had separated from the concrete wall and was in danger of falling. She hired a contractor to remove the damaged stucco and filed a claim with her insurer for the cost of the removal and for damage to a window that had occurred as a result of the removal.

Both Hennessy and the insurer hired specialists to inspect the property to determine why the stucco was separating from the concrete wall. They learned that the material used to bond the stucco to the wall had deteriorated as the result of a process called hystereis. Hystereis is a slow process, and in this case the effects were visible only after approximately 30 years.

In 2005, Hennessy hired contract­ors to remove the remaining stucco and to install a new exterior. As the work was being performed, the extent of the damage behind the stucco became apparent.

The Mutual of Enumclaw policy generally excluded “loss or damage” caused by “collapse.” However, a section describing “Additional Coverage for Collapse” provided coverage for collapse if it could be proved that there was a specific named condition, such as hidden decay, that caused collapse of a building or part of a building and that damages resulted. Hennessy submitted a claim under the policy for expenses related to removing the old exterior and installing the new exterior. The insurer denied the claim. Hennessy then filed an action for breach of contract, arguing that she was entitled to payment for damage or direct physical loss caused by “collapse” of a building or any part of a building. The lower court found in favor of Hennessy; Mutual of Enumclaw appealed.

On appeal, Mutual of Enumclaw argued that the separation of the stucco from the exterior wall was not a “collapse” within the meaning of the policy. According to the insurer, a “collapse” must involve a complete and total “falling down.” The court evaluated various definitions of the term “collapse” and concluded that the term did not require a complete or total descent. The court stated that all that was required was that an object fall “some distance.” Applying the facts, the court found that the 2003 claim constituted a collapse because a portion of the stucco was, as reported by a witness, “just hanging there” and because the building suffered some damage. However, the 2005 stucco replacement did not constitute a “collapse” within the meaning of the policy. Thus, the court found that the lower court had erred when it found that there was coverage under the policy for the 2005 exterior replacement.

The court affirmed the lower court’s entry of judgment in favor of Hennessy for the 2003 repairs and reversed the decision awarding coverage to Hennessy for the 2005 repairs.

Hennessy vs. Mutual of Enumclaw Insurance Company-0510037; A133592-Court of Appeals of Oregon-April 29, 2009-206 Pacific Reporter 3d 1184.

Does policy cover code-mandated repairs?

DEB Associates owned an eight-story office building in New Jersey that was insured by Greater New York Mutual Insurance Company. In December 2003, a windstorm damaged the north side of the building’s seventh floor. Specifically, the brick façade was blown away and the perimeter wall and windows were damaged. When local code officials inspected the damage, they discovered that steel fasteners known as “angle irons” had not been used to secure the floor to the walls. The officials investigated further and discovered that angle irons had not been used throughout the entire building. (The building had been constructed between 1970 and 1972, prior to the 1975 adoption of the State Uniform Construction Code Act, which required the use of angle irons.) As a result of the inspection, the municipal code officials required that the building be vacated and brought up to current code standards before a certificate of occupancy could be issued. The cost of the repairs was approximately $500,000.

The Greater New York Mutual policy included “Increased Cost of Construction Coverage” as follows: “a. If a Covered Cause of Loss occurs to the covered Building property, we will pay for the increased cost to: (1) Repair or reconstruct damaged portions of that Building property; and/or (2) Reconstruct or remodel undamaged portions of that Building property whether or not demolition is required, when the increased cost is a consequence of enforcement of building, zoning or land use ordinance or law.”

Greater New York Mutual agreed to pay for the repairs to the seventh floor, but not for the repairs to the remainder of the building. When DEB Associates sued the insurer, a judge found that but for the collapse of the seventh floor, the repairs to the other floors would not have been necessary and concluded that coverage existed for all of the repairs. Greater New York Mutual appealed.

On appeal, Greater New York Mutual argued that the connection between the wind damage to the seventh floor and the order that repairs be made to the rest of the building was not sufficient for coverage to apply. The insurer also argued that there was no coverage “where damage to one portion of a building caused code officials to require repairs to separate, undamaged portions of the building.” DEB Associates argued that there was always coverage so long as there was a “covered cause of loss.” It also argued, in the alternative, that there was a sufficient connection between the damage to the seventh floor and the requirement that the remaining floors be repaired for coverage to apply.

The Superior Court of New Jersey, Appellate Division, addressed both arguments. It adopted a “proximate cause” approach, holding that there was coverage “where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or where the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk.” The court then concluded that there was a direct connection between the damage to the seventh floor and the additional work required to repair the building. Thus, there was coverage under the policy.

The decision of the lower court in favor of DEB Associates was affirmed.

DEB Associates vs. Greater New York Mutual Insurance Company-Superior Court of New Jersey, Appellate Division-June 1, 2009-970 Atlantic Reporter 2d 1074.