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

Parsing the independent contractor exclusion

In March 2006, William Barry, a structural engineer, was assisting in the renovation of an old mill when he fell through a floor and was seriously injured. The mill was owned by Cable Mills, LLC, which planned to convert it to a mixed-use condominium complex. The architectural firm for the project was Feingold Alexander & Associates, Inc. Feingold retained Barry to provide engineering consulting services.

Cable Mills was insured under a commercial property and general liability policy issued by Lloyd's of London. Coverage was limited to "one building only." The building was described on the declarations page as a "vacant building." The policy contained an exclusion that stated: "This insurance does not apply to 'bodily injury,' 'property damage,' 'personal injury,' 'advertising injury,' or medical payments for operations performed for you by independent contractors or your acts or omissions in connection with your general supervision of such operations." When Barry filed a personal injury action against Cable Mills, Lloyd's cited the exclusion and refused to defend Cable Mills or provide coverage.

Cable Mills filed an action against its insurance agency, Coakley Pierpan Dolan and Collins Insurance Agency, Inc. (Coakley), alleging that it had failed to obtain appropriate coverage on its behalf. Coakley denied liability and filed a third-party action against Lloyd's seeking a declaration that there was coverage under the policy. The trial court denied Cable Mills's and Coakley's motions and found in favor of Lloyd's. Cable Mills and Coakley appealed.

On appeal, Cable Mills and Coakley argued that the exclusion did not apply to Barry's injuries because Feingold, not Cable Mills, had retained Barry's services. According to their argument, because the services provided by Barry were "performed for" Feingold and not Cable Mills, the employment relationship between Feingold and Barry fell outside the scope of the exclusion. In response, Lloyd's argued that it was improper to evaluate the Feingold-Barry relationship in such a narrow way.

The Appeals Court of Massachusetts, Middlesex, agreed with Lloyd's. According to the court, Barry's engineering services were "essential to the project" and therefore fell within the common meaning of "operations performed by you."

Cable Mills also argued that the parties did not intend to cover all subcontractors and sub-subcontractors hired by the first-tier independent contractors and that direct privity of contract was required for the exclusion to apply.

The Appeals Court disagreed. The court noted that Feingold and Barry had assumed roles as independent contractors contributing to the Cable Mills project. Cable Mills expressly granted to Feingold the explicit authority to "manage the Architect's services and administer the Project," including coordinating the services of all consultants involved in the underlying project, but did not delegate any other responsibility to Feingold with regard to the project.

The court noted further that the proposal letter submitted by Barry to Feingold gave Barry a "similar degree of control with regard to structural engineering and limited duties with regard to the rest of the project." The court stated: "[T]he plain terms of the business agreements describe services delegated to Feingold and Barry respectively as those to be performed by independent contractors." Accordingly, subcontractors such as Barry qualified as independent contractors under the plain meaning of the exclusion.

Finally, Cable Mills argued that because Lloyd's had chosen not to use a more broadly worded exclusion, the scope of the exclusion should be limited. Specifically, Cable Mills suggested that because Lloyd's did not use the phrase "arising out of" to signify that the injury would not have occurred "but for" the services required by the contracting party, the exclusion was inapplicable to subcontractors.

Again the court disagreed. It found that there was no "meaningful difference" between the phrases "arising out of operations" and "for operations" with regard to the services performed by Barry. The court also found that the only reasonable way to interpret the phrase "for you" was to read the word "for" as describing the excluded services as those performed in furtherance of Cable Mills's construction project.

The court concluded that the independent contractor exclusion applied to exclude coverage for Barry's claims. Accordingly, the judgment of the lower court was affirmed.

Cable Mills, LLC vs. Coakley Pierpan Dolan and Collins Insurance Agency, Inc.-No. 11-P-1852-Appeals Court of Massachusetts Middlesex-September 11, 2012-WL 3893165 (Mass. App. Ct.).

CGL policy is not a performance bond

Lagestee–Mulder, Inc. (LMI), was hired by Crown Centre LLC to construct a multi-story office building in Frankfort, Illinois. LMI subcontracted the supply and installation of the building's windows and doors to Frontrunner Glass & Metal, Inc. Pursuant to the subcontract, Frontrunner was required to purchase and maintain insurance that named LMI as an additional insured.

Frontrunner purchased an occurrence-based commercial general liability policy from Consolidated Insurance Company. The policy covered sums that Frontrunner and LMI became legally obligated to pay because of property damage caused by an occurrence that took place during the policy period. The policy also required Consolidated to defend any suit seeking damages for covered property.

During the later stages of construction, the Crown building experienced water infiltration at numerous wall locations, as well as other construction defects. Crown filed suit against LMI in Illinois state court, alleging various deficiencies in construction materials, workmanship, and in the building as constructed.

LMI tendered the defense of its claim to Consolidated on March 6, 2009; Consolidated made no coverage decision during the subsequent six months. Although LMI had not obtained a coverage decision, it began settlement discussions with Crown, and in October 2009 the lawsuit was settled. Although Consolidated was informed of all settlement talks, it participated in none. In a letter dated October 14, 2009, Consolidated denied coverage for Crown's claim against LMI and rejected LMI's tender of defense.

LMI sued Consolidated, alleging that the insurer breached its duties under the policy. The parties filed cross motions for summary judgment as to Consolidated's duty to defend, and the district court found that Consolidated had no duty to defend LMI because the underlying complaint failed to allege damage to any covered property. LMI appealed.

On appeal, the U.S. Court of Appeals for the Seventh District noted that, on a claim under Illinois law that alleges breach of the duty to defend, the underlying complaint and the insurance policy must be liberally construed in favor of the insured. The court added, however, that the mere possibility that covered damage occurred does not trigger a duty to defend.

On the question of coverage for the alleged damage, the court stated: "Where the underlying suit alleges damage to the construction project itself because of a construction defect, there is no coverage under a commercial general liability (CGL) insurance policy under Illinois law; by contrast, where the complaint alleges that a construction defect damaged something other than the project, coverage exists." The court cited Illinois case law holding that a CGL policy is not a performance bond.

The court went on to state: "The underlying complaint did not clarify what explicit damages Crown sustained, nor did it specify whether anything other than the building itself was damaged." The court rejected LMI's argument that "the complaint's vague use of the term 'damages' should be construed broadly enough to include all types of property loss, including covered loss to property other than the structure itself." The court pointed out that the water infiltration described in the complaint was not presented as the cause of unspecified property damage but rather as the result of faulty construction.

Because the complaint only alleged damage to the structure itself, Consolidated's duty to defend was not triggered.

The district court's grant of summary judgment in favor of Consolidated was upheld.

Lagestee–Mulder, Inc., vs. Consolidated Insurance Company-No. 11–3730-U.S. Court of Appeals for the Seventh Circuit-IL-June 26, 2012-2012 WL 2382470.

Wildfire woes: Where are the proofs of loss?

In August 2009, a wildfire destroyed 89 houses in Southern California. Homeowners filed claims with their respective insurers, one of which was Fire Insurance Exchange (FIE). After their claims were denied, the homeowners sued FIE, alleging that it collectively denied or underpaid valid claims. Their causes of action were for breach of contract, bad faith, and unfair business practices. The lower court found in favor of FIE, and the insured parties appealed.

The policies at issue provided that, as a condition of coverage, the insured parties had to provide timely notice of loss to FIE. One policy required "immediate notice," and the others required written notice "without unreasonable delay." The policies also required a signed, sworn proof of loss notice within 60 days of a request by FIE. Insured parties were precluded from bringing actions against FIE unless they had fully complied with all policy terms and conditions.

Appellant Ocie Henderson retained a public adjuster to manage his claim for damages and notified FIE of his loss on February 9, 2010. On February 11 and March 12, FIE sent written reminders of the proof of loss requirement. Having received no proof of loss 61 days after the first reminder letter, FIE sent a letter to the public adjuster denying Henderson's claim.

Appellant Anthony Wallace contacted FIE on March 28, 2010. He retained ALG to manage his claim. On March 30, FIE sent a letter to ALG asking to inspect the property and requesting it to submit a proof of loss. FIE inspected the property on May 6, then sent a letter to ALG asking for additional time to make a final determination. In those letters, FIE reminded ALG of the proof of loss form requirement.

FIE had not received a proof of loss form by June 23, at which time FIE notified ALG that it denied the Wallace claim on the ground that "there were insufficient levels of smoke, ash and/or soot related to the August 2009 wildfires to require any remediation" and stating that it was "not waiving any of the terms or conditions of the applicable insurance policy, or any defenses now or hereafter available under the policy or at law, all of which are being expressly reserved and retained."

Appellants Roscoe and Edna Allen submitted their claim to FIE on January 6, 2010. They also retained ALG to manage their claim. On January 12, FIE sent a letter to the Allens asking to inspect the property and requesting the proof of loss form. On February 9 and March 10, FIE asked for additional time to make a determination because it was waiting for an expert to submit a report and also was waiting for the Allens' proof of loss form. On March 15, FIE denied the Allens' claim, as it had with Wallace, and stated that it was "not waiving any of the terms or conditions of the applicable insurance policy, or any defenses now or hereafter available under the policy or at law, all of which are being expressly reserved and retained."

Finally, on June 2, 2010, John and Sharon Billingslea submitted a claim to FIE through their representative, also ALG. On June 24 and July 16, FIE sent letters advising that it needed additional time because it was awaiting the inspector's report and the proof of loss form. On July 27, it sent a letter to ALG denying the Billingsleas' claim on the ground that there was insufficient damage to warrant a claim. The Billingsleas sued for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair business practices.

The lower court found that because Henderson, Wallace, and the Allens did not submit proofs of loss, they were barred from bringing suit against FIE. The primary issue on appeal was whether, in order to sustain a defense based on the failure of each of the insured parties to submit a sworn proof of loss, FIE was required to show substantial prejudice. The Court of Appeal, Second District, Division 4, California, concluded that because FIE was the moving party and asserted a defense based on the lack of timely proof of loss, it had the burden to show prejudice. The court said that because FIE presented no legal argument or any evidence of prejudice as to Henderson, Wallace, and the Allens, it was not entitled to a decision in its favor. The decisions of the lower court in favor of FIE were reversed, and the cases were remanded for further discussion.

As to the Billingsleas, the lower court found that their delay in reporting their loss breached their policy's requirement that they give notice "without unnecessary delay," and that FIE was prejudiced by this delay. On appeal, the Billingsleas argued that FIE waived its defense based on delayed notice because it did not specifically object to the delayed notice until the lawsuit was filed. The Court of Appeal found that this argument required a factual determination. As a result, it overturned the lower court's decision and remanded the case for further discussion.

Henderson vs. Farmers Group, Inc.-No. B236259-Court of Appeal, Second District 4, California-October 24, 2012-2012 WL 5246912 (Cal App. 2 Dist.).




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