Auto Claims & Self Insured Retentions (“SIR”): Does the SIR Constitute “Insurance” ?

Posted on November 5, 2010 by Gregory Johnson

By Greg Johnson.

The determination of whether a self-insured retention (SIR) constitutes “insurance” within the meaning of an “other insurance” clause of another policy generally depends on the particular circumstances presented.  See, e.g., Champlain Cas. Co. v. Agency Rent-A-Car, Inc., 716 A.2d at 813 (1998) (noting that the “parties tend to paint with a broad brush, suggesting that self-insurance is a form of insurance . . . or alternatively, the antithesis of insurance” and observing that such labels are “generally unhelpful” to resolving the issue of whether self-insurance can constitute insurance). 

The determination of whether an SIR constitutes “insurance” is significant because “[m]any business liability policies contain self-insured retentions, which are, in effect, large deductibles.”  U.S. Fidelity & Guarantee Ins. Co. v. Commercial Union Midwest Ins. Co., 430 F.3d 929 (8th Cir. 2005) (quoting Allan D. Windt, Insurance Claims and Disputes, §11.31 (4th ed. 2003)).  

Although at first glance cases across the country appear to be inconsistent, the answer to the question is (or should be) fairly simple, at least in the context of auto accident claims involving a permissive user=driver. In jurisdictions which require a vehicle owner’s insurer (or self-insurance plan) to extend omnibus liability protection to permissive users, the SIR will invariably constitute “insurance” within the meaning of the permissive user’s policy.  Minnesota, as well as several other jurisdictions, requires the policy insuring the vehicle owner to extend omnibus protection to permissive users.  Minnesota also recognizes that if a vehicle owner self-insures, the self-insurance plan must provide the same “coverage” and incidents of “coverage” as an insurance policy insuring the vehicle owner. See, e.g., McClain v. Begley, 465 N.W.2d 680 (Minn. 1991) (same) (self-insurance obtained pursuant to Minn. Stat.  §65B.48, subd. 3, of the Minnesota No-Fault Automobile Insurance Act, “is the functional equivalent of an insurance policy” and “such a policy, if purchased [by the self-insured owner], would contain an omnibus clause extending coverage to permissive drivers as additional unnamed insureds” and constitutes “other insurance” within meaning of renter’s personal policy); White v. Howard, 240 N.J. Super. 427, 573 A.2d 513 (N.J. Super. A.D. 1990), cert. denied, 122 N.J. 339, 585 A.2d 354 (N.J. July 17, 1990) (“qualified self-insurance” obtained by car rental agency was the equivalent of “other collectible insurance” within the meaning of renter’s personal automobile policy); Boatright v. Spiewak, 214 Wis.2d 507, 570 N.W.2d 897 (1997) (statute requires self-insured car rental agency to “pay the same amounts that an insurer would have been obligated to pay under a motor vehicle liability policy if it had been issued” and, thus, protection extended to renter constituted “other insurance” within meaning of renter’s personal auto policy); Southern Home Ins. Co. v. Burdette’s Leasing Service, Inc., 268 S.C. 472, 234 S.E.2d 870, 872 (1977) (self-insurer is required to provide same protection to one operating self-insurer’s vehicle with consent as a statutorily required automobile liability policy must provide and, thus, protection extended to lessee constitutes “insurance” within meaning of lessee’s policy).  Thus, in jurisdictions which mandate that a vehicle owner’s policy (or self-insurance plan) extend omnibus protection to permissive users, an SIR in the vehicle owner’s policy will constitute “insurance” within the “other insurance” clause of the policy insuring the permissive user.

However, in jurisdictions which do not require a vehicle owner’s insurance policy (or self-insurance plan) to extend omnibus protection to permissive users, an SIR should not be considered “insurance.”  See, e.g., Home Indem. Co. v. Humble Oil & Refining Co., 314 S.W.2d 861 (Tex. Ct. App.1958), writ of error and reh’g denied, 159 Tex. 224, 317 S.W.2d 515 (1958) (self-insurance does not operate for benefit of negligent driver); Farmers Ins. Co. of Oregon v. Snappy Car Rental, Inc., 128 Or. App. 516, 876 P.2d 833 (Ore. Ct. App. 1994) (same);  American Fam. Mut. Ins. Co., v. Missouri Power & Light Co., 517 S.W.2d 110 (Mo. 1974) (same).  An SIR should not be considered “insurance” in such jurisdictions because the vehicle owner, if it paid the injured party for damages caused by the negligent permissive user, would be entitled to recover its payment from the permissive user — a proposition directly contrary to the purpose of liability insurance.  See Champlain Cas. Co. v. Agency Rent-A-Car, Inc., 168, Vt. 91, 716 A.2d 810, 813 (1998) (explaining basis for distinction in case law decisions and noting that “there is far less disagreement in the cases that a superficial perusal would suggest”).

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Posted in ADCF Policy, BAP, CGL, Coverage, PAP | Tagged , , , , , | Leave a comment

Insurance: Economic & Intangible Losses (Lost Profits, Idle Time, Increased Overhead, Liquidated Damages, Diminution in Value & Suppressed Rentals, Etc.

Posted on November 4, 2010 by Gregory Johnson

Faulty workmanship can produce several different types of injuries in addition to the typical claim involving physical injury to other property. Faulty or defective work can cause, and contractors may be confronted with claims alleging, numerous types of economic and intangible injuries such as construction delay damages, idle time damages, increased overhead costs, liquidated damages, lost profits, diminution in value, suppressed rental income and a host of other similar losses. Are the latter types of injury covered by the contractor’s liability policy? The short answer is: Maybe.  In Minnesota, coverage for such economic and intangible injuries will depend, in large part, on whether the contractor’s faulty work (1) caused physical injury to tangible property or loss of use of tangible property (i.e., “property damage” within the meaning of the policy); (2) the policy’s insuring clause obligates the insurer to pay “damages because of” property damage; (3) there is a “causal connection” between the economic or intangible injury and the property damage; and (4) the property damage upon which the injury is based is not excluded by one or more of the business risk exclusions in the policy.

Standing alone, economic and intangible injuries do not generally qualify as “property damage” under the standard Commercial General Liability (CGL) policy. (By “standard,” I refer to the policy issued by the Insurance Services Office (“ISO”)).  Prior to 1973, some forms of intangible injuries could qualify as “property damage.”  Prior to 1973, when ISO revised its policy form, CGL policies defined “property damage” as “injury to tangible property” rather than “physical injury to tangible property.” Under this policy language, many courts, including Minnesota, held that intangible injuries, such as diminution in value, qualified as “property damage” under the policy. See, e.g., McDowell-Wellman Eng. v. Hartford Acc. and Indem., 711 F.2d 521, 525-26 & n. 7 (3rd Cir. 1983) (and cases cited therein); Yakima Cement Products Co. v. Great American Insur. Co., 22 Wash. App. 536, 590 P.2d 371, 377 (1979), rev’d on other grounds, 93 Wash.2d 210, 608 P.254 (1980); Safeco Insur. Co. v. Munroe, 165 Mont. 185, 527 P.2d 64, 68 (1974); Hauenstein v. St. Paul-Mercury Indemnity Co., 242 Minn. 354, 65 N.W2d 122, 124-26 (1954). In Hauenstein, the Minnesota Supreme Court held that the insured’s application of defective plaster in an apartment building caused a diminution in value of the building, which constituted “property damage” under the policy.  The court noted that the measure of damages was the diminution in the market value of the building, or the cost of removing the defective plaster and restoring the building to its former condition plus any loss from deprival of use, whichever was less.  65 N.W.2d at 125.

However, in 1973, ISO revised the definition of “property damage” to require “physical” injury to tangible property. Because the injury to or destruction of tangible property must be “physical,” the majority of courts have held that claims for intangible injury, such as diminution in value, do not constitute “property damage.” See, e.g., Baywood Corp. v. Maine Bonding & Cas. Co., 628 A.2d 1029 (Me. 1993); Selective Insurance Co. v. J. B. Mouton & Sons, Inc., 954 F.2d 1075 (5th Cir. 1992); New Hampshire Ins. Co. v. Vieria, 930 F.2d 696 (9th Cir. 1991); SLA Property Management v. Angelina Casualty Co., 856 F.2d 69 (8th Cir. 1988); Hartford Accident & Indemnity Co. v. Pacific Mut. Life Ins. Co., 861 Fed.2d 250 (10th Cir. 1988) (1973 revision was intended to preclude coverage for intangible injuries such as diminution in value); Aetna Casualty and Surety Co. v. McIbs, Inc., 684 F. Supp. 246 (D. Nev. 1988) (noting that the inclusion of the word “physical” in the policy was designed to preclude recovery for consequential or intangible damages such as diminution or depreciation in value); Federated Mutual Insurance Co. v. Concrete Units, Inc., 363 N.W. 751, 757 (Minn.1985) (diminution in value does not constitute “property damage” under policy); Wyoming Sawmills v. Transportation Ins. Co., 282 Or. 401, 578 P.2d 1253 (1978) (the only reason for the addition of the word “physical” is to exclude coverage for intangible losses). In Aetna Life and Cas. Ins. Co. v. Patrick Industries, Inc., 645 N.E.2d 656 (Ct. App. Ind. 1995), the insured, a supplier, sued its CGL insurer which had refused coverage for the supplier’s settlement with a manufacturer to whom the insured supplied defective particle board. The particle board had been incorporated into the manufacturer’s campers. The court held that the CGL policy did not cover diminution in value of the campers which contained the defective components. The court recited the history of the “property damage” definition under the 1966 and 1973 versions of the ISO policy and observed that the prior version did not include the word “physical” which was added in 1973.  See also, Vasichek, Liability Coverage for “Damages Because of Property Damage” Under the Comprehensive General Liability Policy, 68 Minn. L. Rev. 795, 811‑12 (1984) (“[d]iminution in value is an economic loss. Diminution in value of tangible property is an incorporeal and intangible harm measured by market forces, not an injury to the material substance of the tangible property. Moreover, to interpret “physical injury” as encompassing diminution in value would render the word “physical” in the phrase meaningless. Diminution in value of tangible property . . .  is not synonymous with loss of use of tangible property. Although the two injuries may coexist in some fact situations, they differ in character and measurement”); Tobi Engineering, Inc. v. Nationwide Mut. Ins. Co., 214 Ill. App. 3d 692, 158 Ill. Dec. 366, 574 N.E.2d 160 (1st Dist. 1991) (delay damages incurred by contractor because of defective materials supplied by insured were not property damage losses); Hommel v. George, 802 P.2d 1156 (Colo. Ct. App. 1990) (economic loss sustained by investors in condominium development caused by contractor’s failure to complete project did not result from loss of use of tangible property and was not covered “property damage”); Lazzara Oil Co. v. Columbia Cas. Co., 683 F. Supp. 777 (M.D. Fla. 1988), judgment aff’d, 868 F.2d 1274 (11th Cir. 1989) (economic damages such as loss profits and loss of good will do not qualify as “property damage”).

Damages “Because of” Property Damage

The fact that economic and intangible injuries do not qualify as “property damage” does not, however, mean that such losses can never be covered under a CGL policy.  The insuring clause of the standard CGL policy obligates the insurer to pay both covered “property damage” and “damages because of” property damage. A loss resulting from “property damage” can be recoverable, whether or not the loss itself is tangible. The inclusion of the “because of” language obligates the insurer to indemnify the insured against economic and intangible injuries to the extent such injuries result from, or were due to, covered “property damage.” See, e.g., Federated Mutual Ins. Co. v. Concrete Units, 363 N.W.2d 751, 756 (Minn. 1985) (“the most sensible reading of the phrase ‘damages because of . . . property damage’ requires the insurer to pay all damages which are causally related to an item of ‘property damage’ which satisfies either of the policy’s definitions”); National Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., 532 F.3d 398, 403 (5th Cir. 2008) (applying Texas law) (consequential damages consisting of lost profits and diminution in value resulting from the insured’s damage to water heaters was covered by policy); Insurance Company of North America v. Aberdeen Insurance Services, Inc., 253 F.3d 878 (5th Cir. 2001) (applying Texas law) (where the insured’s negligence resulted in the breach of an oil pipeline, delaying the insured’s completion of its contract-based construction obligations, liquidated damages awarded against it were a direct consequence of its tortious conduct and were covered by the insurance policy); Gibraltar Casualty Co. v. Sargeant & Lundy, 574 N.E.2d 664, 671 (Ill.App.Ct.1991), (insurer had duty to defend insured against claim alleging increased costs resulting from construction delays attributable to insured’s design errors); Marley Orchard Corp. v. Travelers Indem. Co., 50 Wash. App. 801, 750 P.2d 1294, 1297 (1988), review denied, 110 Wash.2d 1037 (1988) (stress to trees constituted property damage and the resulting consequential damages were covered by the insured’s CGL policy); Am. Home Assurance Co. v. Libbey‑Owens‑Ford Co., 786 F.2d 22, 26‑27 (1st Cir.1986) (concluding that phrase “because of . . . property damage to which this insurance applies” covers consequential damages attributable to property damage covered by policy); Dimambro‑Northend Associates v. United Const., Inc., 154 Mich. App. 306, 397 N.W.2d 547 (1986) (consequential construction delay damages including lost profits, and additional overhead and labor costs following fire in tunnel under construction were covered by CGL policy); Aetna Cas. & Sur. Co. v. General Time Corp., 704 F.2d 80 (2d Cir. 1983) (lost profits resulting from insured’s defective motors were covered by policy); Todd Shipyards Corp. v. Turbine Serv., Inc., 674 F.2d 401, 418, 423 (5th Cir.1982) (finding the insurer liable for consequential damages resulting from covered property damage when the policy provides coverage for liabilities that arise “because of” property damage); Central Armature Works, Inc. v. American Motorists Ins. Co., 520 F.Supp. 283, 289 (D.D.C.1980) (lost profits stemming from loss of use of a shredder resulting from property damage inflicted by acts of the insured were covered by CGL policy); Globe Indem. Co. v. People, 43 Cal.App.3d 745, 750-51, 118 Cal. Rptr. 75, 79 (1974) (fire suppression costs expended by the state to prevent further damage to property qualified as damages “because of” property damage under CGL policy); Hartford A&I Co. v. Case Foundation Co., 294 N.E.2d 7 (Ill. 1973) (injuries consisting solely of economic loss are not covered by policy).  See also, Vasichek, Liability Coverage for “Damages Because of Property Damage” Under the Comprehensive General Liability Policy, 68 Minn. L. Rev. 795, 818‑19 (1984) (“[t]his reading of the phrase ‘because of’ limits coverage of consequential and tangible losses to situations where the insured can show a causal connection linking the losses to covered property damage and, concurrently, renders coverage highly elastic, with its scope adjusting to the causal connection with the ‘property damage’ and other injuries”); Tinker, Comprehensive General Liability Insurance-Perspectives and Overview, 25 Fed’n Ins. Counsel Q. 217, 254 (1975).

Thus, once “property damage” has been established, the insuring grant language obligating the insurer to pay “damages because of” property damage means that the insurer may also be responsible for economic or intangible losses that are causally related to that property damage. See, e.g., SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305 (Minn. 1995) (language “because of” property damage “requires the insurer to pay all damages casually related to an item of property damage under the policy definitions”); Minn. Mining & Mfg. v. Travelers, Ind. Co., 457 N.W.2d 175 (Minn. 1990) (“[t]he costs associated with cleaning up the contamination are more aptly characterized consequential damages flowing from the direct damage caused to the environment . . . [d]amages which are causally related to covered ‘property damage’ should also be covered under the language of the policy”); Atlantic Mut. Ins. Co. v. Judd Co., 367 N.W.2d 604 (Minn. Ct. App. 1985), aff’d, 380 N.W.2d 122 (Minn. 1986) (policy covered damages for labor “idle time” caused by defective pipe); Westfield Insurance Co. v. Weis Brothers, Inc., 2004 WL 1630871 (D. Minn. 2004) (“given the ‘because of’ coverage grant in the Westfield policy, the Court’s inquiry does not stop after it determines that Promenade’s claim of diminution in value is not property damage; rather, it must also determine whether such a claim is ‘causally related’ to an item of property damage, namely the damage caused by water penetration in 1997”); Reinsurance Association of Minnesota v. Timmer, 641 N.W.2d 302 (Minn. Ct. App. 2002), rev. denied (May 14, 2002) (economic losses such as lost investments, lost profits and other consequential damages are covered because “coverage is not limited to property damage, but includes other damages that flow from property damage”); Western National Mut. Ins. Co. v. Frost Paint & Oil Corp., 1998 WL 27247 (Minn. Ct. App. 1998) (language extending coverage to damages “because of” property damage, “permits coverage for Spartan’s consequential losses, including lost profits flowing from physical injury to its trailers which were caused by Frost’s defective paint”); Western World Ins. Co. v. H.D. Engineering Design & Erection Co., 419 N.W.2d 630 (Minn. Ct. App. 1988) (costs of clean-up, redesign and reconstruction were covered under CGL policy issued to subcontractor because the costs were  “causally related” to the property damage).

When addressing coverage under a CGL policy, each item of damage should be analyzed separately. See, Thermex Corp. v. Fireman’s Fund Ins. Co., 393 N.W.2d 15, 16-17 (Minn. Ct. App. 1986). Whether an item of claimed loss is “causally related” to “property damage” is generally a question for the trier of fact and Minnesota courts have yet to flesh out the precise standard to be applied in making this determination.  Some courts require the loss to be “directly related” to the property damage in order to be covered, while others have applied a “but for” or “arising out of” standard. At least one commentators has suggested that coverage should exist as long as the loss is “fairly traceable” to the property damage. See, Jeffrey W. Stempel, Law of Insurance Contract Disputes, 14-10 (2005) (“where economic damage occurs as a fairly traceable consequence of tangible physical injury, property damage coverage is available”). In Federated Mut. Ins. Co. v. Concrete Units, supra, 363 N.W.2d at 756-57 (Minn. 1985), the court held that some items of consequential damage were “simply too tenuously related” to any property damage to be recoverable as consequential damages under the policy.

In Lennar Corp. v. Great American Ins. Co., 200 S.W.3d 651, 679-680 (Tex. App. Houston, 14 Dist. 2006) addressed three items of loss in connection with the insured’s application of EIFS to residential homes.  The EIFS entrapped moisture which resulted in water damage to some of the homes. Depending on the home, the water damage included wood rot, damage to substrate, sheathing, framing, insulation, sheetrock, wallpaper, paint, carpet, carpet padding, wooden trim, and baseboards, mold damage, and termite infestation. Lennar presented three types of claims: (1) the costs to repair the damage to homes; (2) the cost to remove and replace EIFS as a preventative measure in all homes; and (3) overhead costs, inspection costs, personnel costs, and attorneys’ fees to assess damage in the homes.

The damages sustained by some of the homes constituted “physical injury to tangible property.” Accordingly, Lennar’s costs to repair the water damage was covered by Great American’s CGL policy. In some cases, Lennar had to remove some EIFS to access and repair underlying water damage or determine the areas of the underlying damage. In addition, during the repair process, some windows were broken, driveways were cracked, and landscaping was damaged.  The court held that these costs were covered as “damages because of” property damage. Lennar also claimed that it was entitled to indemnification for its costs to remove and replace EIFS on all the homes. The court held that these costs were not covered by the policy for two reasons.  First, the EIFS had not been physically injured and replacement of an initially defective product is not “property damage.” The court noted that the EIFS was not changed from a satisfactory state into an unsatisfactory state, or otherwise physically altered. The water damage to the homes damaged the “substrate and beyond,” not the EIFS itself.  The EIFS was already in an unsatisfactory state when applied to the homes because it is inherently defective. Therefore, the defective EIFS did not constitute “property damage.”  Second, the costs to fully remove and replace EIFS were not “damages because of” property damage. Even if all the homes experienced water damage, the court was unwilling to conclude that Lennar’s costs to remove and replace all EIFS on the homes were “damages because of” property damage.” The evidence reflected that Lennar had implemented a plan to remove EIFS and replace it with a traditional stucco on all the homes regardless of whether the EIFS had caused any damage.  The court noted:

[T]he evidence demonstrates Lennar’s intent was to fully remove and replace the EIFS as a preventative measure because it is defective. * * * Lennar arguably made a good business decision to remove and replace all the EIFS to prevent further damage. Nonetheless, considering the summary judgment evidence, we cannot conclude that it was necessary for Lennar to remove and replace all the EIFS in order to repair the water damage, if any, to each home. Therefore, the costs incurred by Lennar to remove and replace EIFS as a preventative measure are not “damages because of . . . property damage.” Accordingly, Lennar must apportion the EIFS-related damages between its costs to remove and replace EIFS as a preventative measure and its costs to repair water damage to the homes.

Lennar also sought indemnification for various costs it incurred in addressing the claims, including overhead costs, inspection costs, personnel costs, and attorneys’ fees. Lennar characterizes its overhead costs, inspection costs, personnel costs, and attorneys’ fees as “damages because of” property damage. The court disagreed, stating:

Lennar ignores the “legally obligated to pay” language in the insuring agreement. The “insuring agreement” provides that the carrier will pay those sums that Lennar “becomes legally obligated to pay as damages because of . . . property damage.” (emphasis added). The policies do not include a definition of “legally obligated to pay.” However, giving the phrase its ordinary meaning, it means an obligation imposed by law, such as an obligation to pay pursuant to a judgment, settlement, contract, or statute. * * * While Lennar may have been legally obligated to pay the third-party EIFS claims by replacing EIFS, making repairs, and/or making cash payments, it was not legally obligated to incur its own overhead costs, inspection costs, personnel costs, and attorneys’ fees in connection with settling the claims.  Moreover, the insuring agreement clearly refers to the claimant’s damages that the insured becomes legally obligated to pay. In contrast, Lennar’s overhead costs, inspection costs, personnel costs, and attorneys’ fees are not components of the homeowners’ damages. Rather, they are Lennar’s own costs incurred in connection with settling the EIFS claims. Therefore, Lennar was not legally obligated to pay these costs as “damages because of . . . property damage.”

As noted in Lennar Corp., it is generally recognized that costs incurred to prevent future, unknown damage (as opposed to the cost to repair property damage) are not covered by a CGL policy. In Westfield Ins. Co. v. Weis Builders, Inc., 2004 WL 1630871 (D. Minn. 2004), a Minnesota federal district court case addressed the issue in the context of a claim of water infiltration in a townhome development project.  Weis Builders contracted to build the townhome development and used several subcontractors. After the building experienced water penetration problems, the owner, Promenade Village Townhomes, LLC (“Promenade”), submitted various claims to Weis Builders. In response, Weis Builders performed a variety of repairs to address the problems.  One of the claims at issue in the case consisted of $669,022 of remedial costs relating to counter-flashing, caulking and grout work.  Westfield argued that these costs were not covered because they were aimed at preventing future, unknown damage as opposed to repairing property damage.  The federal district court rejected the argument because the “counter-flashing, caulking, and grout [was done] in response to claims made against it by Promenade relating to property damage that was occurring in various sections of the Development. In this way, the repairs were causally related to the property damage that the Development incurred.”  Weis Builders, 2004 WL 1630871 *8.

In Mattiola Const. Corp. v. Commercial Union Ins. Co., 2002 WL 434296, 2-4 (Pa. Com.Pl. 2002), the court was confronted with a claim for liquidated damages under a CGL policy. Mattiola was a company engaged in the business of saw-cutting concrete and asphalt materials in road and bridge construction. Mattiola entered into a subcontract with IA Construction whereby Mattiola agreed to perform saw-cutting work on a bridge owned and operated by the Pennsylvania Turnpike Commission. While performing this work, Mattiola employees accidentally cut certain structural steel members on the bridge, resulting in the stoppage of all work on the project. Mattiola arranged for the repair of the damage it caused but, as a result of the repairs, there was a substantial delay in the completion of the project and the project ultimately ran beyond the completion deadline by 69 days.  The Commission withheld liquidated damages of $75,900 from its payments to IA Construction. IA Construction, in turn, withheld the same amount from its payments to Mattiola.  At the time of the construction, Mattiola was insured under a CGL policy issued by Commercial Union (“CU”).  CU denied coverage claiming that the liquidated damages did not constitute “property damage” under the policy. Mattiola brought suit against CU and the court held that the liquidated damages were covered:

According to CU, the liquidated damages are not property damage and therefore are not covered by the policy. This argument fails to take into account the language of the policy, which extends coverage beyond property damage itself to damages incurred because of property damage. Clearly, the physical injury to the bridge resulting from the accident caused a substantial delay in the completion of the project. This delay can be considered a loss of use, and any resultant damages, including the liquidated damages, are attributable to the accident.  * * * In short, Mattiola caused the accident and the resulting property damage. Accordingly, the liquidated damages arose because of property damage addressed by the policy and are covered by the policy, subject to any possible exclusions.

“To Which This Insurance Applies”

The fact that causally related economic and intangible injuries can be covered under the standard post-1973 version of the CGL policy does not, of course, mean that such injuries will necessarily be covered in all cases. The insuring clause of the standard CGL policy only obligates the insurer to pay “damages because of . . . property damage to which this insurance applies”. The importance of the phrase “to which this insurance applies” was reflected in the New Jersey Supreme Court’s opinion in Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979). There, in rejecting the argument that consequential damages resulting from the insured’s faulty workmanship were covered, the court stated: “[t]he qualifying phrase, ‘to which this insurance applies’ underscores the basic notion that the premium paid by the insured does not buy coverage for all property damage but only for the type of damage provided for in the policy. The limitations on coverage are set forth in the exclusion clauses of the policy, whose function it is to restrict and shape the coverage otherwise afforded.” Weedo, 405 A.2d at 790. See also, Federated Mut. Ins. Co. v. Concrete Units, Inc., 363 N.W.2d 751, 757 (Minn.1985) (interpreting phrase “property damage to which this insurance applies”). Thus, as one leading commentator has observed, a CGL policy will only cover intangible losses resulting from “property damage to which the policy applies”, Tinker, supra at 254, and therefore intangible losses arising from damage to the insured’s own work or product — property damage which is explicitly excluded from the policy’s application – is also not covered. See also, Quality Homes, Inc., v. Bituminous Casualty Corp., 355 N.W.2d 746 (Minn. Ct. App. 1985) (if “property damage” is excluded, consequential damages resulting there from are also excluded); Hartford Accident & Indemn. Co. v. Pacific Mut. Life Ins. Co., 861 F.2d 250 (10th Cir. 1988) (“[s]ince the insured’s product and installation are not property damage to which this insurance applies, any consequential damages caused by such products and installation are not covered”); Vari Builders, Inc. v. United States Fidelity & Guaranty Co., 523 A.2d 549 (Del. Ct. App. 1986) (“[o]n the present facts the property damage predicating the consequential damages is specifically excluded from coverage by the business risk provisions [and, thus] . . . damages flowing from such property damage are not covered by the policy”).

In summary, in addressing a claim which alleges economic or intangible losses, one must initially determine whether the claim also involves “property damage” as defined by the policy. The CGL policy generally defines “property damage” to include both “[physical injury to tangible property” and “loss of use of tangible property.”  Assuming one of the two prongs of the “property damage” definition have been satisfied, the economic or intangible loss may be covered as “damages because of” property damage. That determination requires a sufficient “causal connection” between the economic or intangible loss at issue and the underlying “property damage.” Finally, if a causal connection exists, one must determine whether the underlying “property damage” upon which the economic or intangible loss is based, is subject to an exclusion.  If the underlying property damage is excluded, all claimed losses based on that property damage will fail as well. If the underlying property damage is not excluded, other losses will be covered.

Of course, the fact that such losses may be covered by a CGL policy does not mean they will be proven or have merit.  The underlying construction contract may contain a waiver of some types of consequential damages and the proof necessary to prevail on intangible losses such as lost profits, suppressed rental income, etc. can be rather stringent.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney licensed in your jurisdiction. © All rights reserved. 2010.

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Commercial Auto: Owner of Semi-Trailer not Vicariously Liable for Negligent Operation of Semi-Truck.

Posted on November 1, 2010 by Gregory Johnson

What definition of “motor vehicle” applies when determining whether the Minnesota motor vehicle vicarious liability law applies?   The Minnesota Court of Appeals addressed the issue in late 2009.

By 2005, only eleven states imposed vicarious liability on the owner of motor vehicle (California, Connecticut, Florida, Idaho, Iowa, Maine, Michigan, Minnesota, Nevada, New York and Rhode Island) as did the District of Columbia.  Under a vicarious liability law, the vehicle owner becomes legally liable for injuries and damages caused by a permissive driver of the motor vehicle. “[V]icarious liability is the ‘imposition of liability on one person for the actionable conduct of another, based solely on a relationship between the two persons.’” Sutherland v. Barton, 570 N.W.2d 1, 5 (Minn.1997) (quoting Black’s Law Dictionary 1566 (6th ed.1990)).

The Minnesota vicarious liability law is found in Minn. Stat. § 169.09, subd. 5a (previously Minn. Stat. § 170.54), which sets forth the general rule as follows:

Whenever any motor vehicle shall be operated within this state, by any person other than the owner, with the consent of the owner, express or implied, the operator thereof shall in case of accident, be deemed the agent of the owner of such motor vehicle in the operation thereof.

The policy of the vicarious liability law is to ensure that members of the public have “an approximate certainty of an effective recovery” when injured by the operation of a motor vehicle.  Milbank Mut. Ins. Co. v. U.S. Fid. & Guar. Co., 332 N.W.2d 160, 165 (Minn. 1983). Minnesota courts have consistently reiterated that the statute must be interpreted liberally to accomplish its purpose. Id. at 165-66; Christensen v. Milbank Ins. Co., 643 N.W.2d 639, 642 -645 (Minn. Ct. App. 2002).  (As noted in previous posts to this blog, the motor vehicle vicarious liability statute is pre-empted by the federal Graves Amendment in the context of rented motor vehicles).

The vicarious liability statute only applies to statutorily defined “motor vehicles.” Prior to 2005, when the vicarious liability statute was codified at Minn. Stat. § 170.54 (and was then referred to as the Safety Responsibility Act), the statute did not contain any definition of “motor vehicle” or refer to any other statute which defined the term.  In Great Am. Ins. Co. v. Golla, 493 N.W.2d 602, 605 (Minn.App.1992), the Minnesota Court of Appeals concluded that the definition of motor vehicle found in section 65B.43 of the Minnesota No-Fault Automobile Insurance Act (No-Fault Act), as opposed to the definition found in chapter 169, applied to the vicarious liability statute. By its terms, the No-Fault Act’s section 65B.43 definitions only applied to sections 65B.41 through 65B.71 while the definitions in chapter 169 only applied to statutes within that chapter. Thus, neither definition of “motor vehicle” clearly applied to Minn. Stat. § 170.54. The Golla court had to apply some definition to the term in 170.54 and ultimately concluded that the No-Fault Act’s definition should apply to the vicarious liability statute. See also, State Automobile & Casualty Underwriters v. Runia, 363 N.W.2d 818, 820 (Minn. Ct. App.1985) (applying No-Fault Act definition and finding that a snowmobile fell outside the definition); Mularky v. Kiewel, 1996 WL 70982 (Minn. Ct. App. 1996) (applying No-Fault Act definition of motor vehicle).  The No-Fault Act defines the term in Minn. Stat. § 65B.43, subd. 2 as follows:

“Motor vehicle” means every vehicle, other than a motorcycle or other vehicle with fewer than four wheels, which (a) is required to be registered pursuant to chapter 168, and (b) is designed to be self-propelled by an engine or motor for use primarily upon public roads, highways or streets in the transportation of persons or property, and includes a trailer with one or more wheels, when the trailer is connected to or being towed by a motor vehicle.

The application of the No-Fault Acts definition to the vicarious liability statute was problematic in that some vehicles (including, among others, automobiles registered in other states) were not “required to be registered pursuant to chapter 168” giving rise to the argument that no vicarious liability would attach to the owner of an out-of-state vehicle in the event of an accident in Minnesota.  However, in 2005, the legislature repealed section 170.54 and relocated it in section 169.09, subd. 5a, thus bringing the vicarious liability statute within a chapter that contained its own definition of “motor vehicle.” Minn. Stat. § 169.011, subd. 42 (defining “motor vehicle”).  Additionally, by express description, the definitions contained in section 169.011 apply to all of the statutes in chapter 169, which would include the vicarious liability statute. Minn. Stat. § 169.011, subd. 1. In Vee v. Ibrahim,  769 N.W.2d 770, 771-775 (Minn. Ct. App. 2009) review denied (Sept. 29, 2009), the Minnesota Court of Appeals ruled that the definition of “motor vehicle” in chapter 169, as opposed to the No-Fault Act definition, applies to the vicarious liability statute:

[T]he legislature has relocated the [vicarious liability] law within the scope of a specifically defining statute. * * * The legislature was aware that “motor vehicle” was defined by section 169.011 when it relocated the vicarious liability statute to the same chapter. This is strong evidence that the legislature intended the statute to be defined accordingly. If the legislature intended for chapter 65B’s motor-vehicle definition to apply to the vicarious liability statute, it had many means to indicate that inevident intention. It could have moved the statute within the expressly stated scope of the chapter 65B definitions. It could have amended the statute to expressly refer to the 65B definition. Or it could have left things as they were, tacitly acquiescing to this court’s construction in Golla. Instead, the legislature adopted a statutory definition for “motor vehicle” where previously none existed within the chapter that assigns vicarious liability. * * * We conclude that the intent of the legislature was to abrogate Golla implicitly. We hold that the definition of motor vehicle in chapter 169 applies to the vicarious liability statute.

The determination of which statutory definition of “motor vehicle” applied was of considerable significance in Vee v. Ibrahim,  769 N.W.2d 770, 771-775 (Minn. Ct. App. 2009). In that case, a semitruck and its trailer jackknifed after rear-ending a delivery truck, causing the trailer to swing into the oncoming lane and strike and seriously injure motorcyclist Randy Vee. The semitruck and semitrailer were separately owned. Randy Vee sued the two truck drivers and their employers.  He also sued the semitrailer’s owner, American President Lines (APL).  The claim against APL depended on APL being vicariously liable for the semitruck driver’s conduct.  The definition of “motor vehicle” found in the No-Fault Act, as noted above, defined the term “motor vehicle” to include “a trailer with one or more wheels, when the trailer is connected to or being towed by a motor vehicle.”  If the No-Fault Act definition applied, the owner of the trailer, APL, would have been vicariously liable for Vee’s injuries. By contrast, the definition in chapter 169 did not include a trailer.  Rather, Minn. Stat. § 169.011, subd. 42, defines the term “motor vehicle” to mean:

“Motor vehicle” means every vehicle which is self-propelled and every vehicle which is propelled by electric power obtained from overhead trolley wires. Motor vehicle does not include an electric personal assistive mobility device or a vehicle moved solely by human power.

Because the Minnesota Court of Appeals found the definition of “motor vehicle” appearing in section 169.011 applied, the semitrailer did not qualify as a motor vehicle under the vicarious liability statute. According to the definition, a motor vehicle is “self-propelled” or “powered by trolley wires.” Minn. Stat. § 169.011, subd. 42. A semitrailer is neither. The court further noted that its holding that a semitrailer was not a motor vehicle complemented the statutory definition of “semitrailer,” which is a “[vehicle] designed [to be] used in conjunction with a truck-tractor” and “includes a trailer drawn by a truck-tractor semitrailer combination.” Minn. Stat. § 169.011, subd. 72. A semitrailer therefore remains merely a “vehicle” even when it is drawn by a “motor vehicle.”  Because the motor-vehicle vicarious liability statute does not impose vicarious liability on the owners of semitrailers, APL was not vicariously liable for the accident.

Minnesota Statute § 169.09, subd. 5a, the vicarious liability statute, only applies to accidents that occur in the State of Minnesota.  In that event, the vehicle owner will be legally responsible (along with the permissive user) for all damages caused by the permissive user’s negligent operation of the vehicle. See, Boatwright v. Budak, 625 N.W.2d 483, 488 (Minn. Ct. App. 2001) (“[e]mploying a plain-meaning approach,” court held statute only applies “to accidents that occur within Minnesota”); Avis Rent-A-Car System v. Vang, 123 F.Supp.2d 504 (D. Minn. 2000) (Minnesota statute creating liability on part of owner for damages resulting from operation of automobile by another with owner’s consent did not apply to automobile accident in Michigan); West Bend Mut. Ins. Co. v. American Family Mut. Ins. Co., 586 N.W.2d 584 (Minn. Ct. App. 1998) (garage liability policy insuring Minnesota dealership’s vehicles did not afford any liability coverage for accident occurring involving dealership vehicle in Louisiana, a jurisdiction which did not impose vicarious liability). In light of the court’s holding in Vee v. Ibrahim,  769 N.W.2d 770, 771-775 (Minn. Ct. App. 2009) review denied (Sept. 29, 2009), which held that the statutory definition of “motor vehicle” in Minn. Stat. § 169.011, subd. 42 applies to the motor vehicle vicarious liability statute (as opposed to the No-Fault Act’s definition), the owner of an out-of-state vehicle involved in an accident in Minnesota has no basis to contend that the vicarious liability law will not operate to impose vicarious liability on the owner.

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please consult an attorney licensed in your jurisdiction. © All rights reserved. 2010.

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Commercial & Personal Auto: Vicarious Liability not Limited to Negligent Operation of Vehicle

Posted on November 1, 2010 by Gregory Johnson

By Greg Johnson. Every once in a while, while putting together a blog post on a particular issue, I run across a case that doesn’t fit into the post I am putting together, but is nonetheless interesting.

Here’s an oldie, but a goodie . . . involving trees:

The Minnesota vicarious liability statute, which generally operates to impose vicarious liability on the owner of a motor vehicle,  is not necessarily limited to claims involving the negligent operation of the motor vehicle. In Pluntz v. Farmington Ford-Mercury, Inc.,  470 N.W.2d 709 (Minn. Ct. App. 1991) review denied (Minn. Jul 24, 1991), Leander, a permissive user of the dealership’s vehicle, suffered a sudden and unexpected medical emergency while operating the vehicle, ran off the road and damaged plaintiff’s trees.  Although it was undisputed Leander went off the road as the result of an unforeseen medical problem and, thus, was not negligent, the statute which created liability for the damage to the trees, Minn. Stat. § 561.04, did not require a finding of negligence.  Rather, it imposed liability for injury to trees when trees were damaged without lawful authority.  Thus, whether Leander was negligent for causing the damage to the trees was irrelevant.  Because Leander did not have lawful authority to damage the trees, he was liable pursuant to section 561.04.  In addition, the dealership was liable.  The dealership was vicariously liable based on the agency relationship created by section 170.54 (now 169.09, subd. 5a). The court noted that the term  “accident” in the vicarious liability statute (which was not defined in the statute) included “an event that takes place without one’s foresight or expectation” or “an event which proceeds from an unknown cause,” (citing Webster’s Unabridged Dictionary (2d ed. 1983)), and the damage to the trees resulted from an “accident.” Id.  The court noted that while the statute “is typically used to impose liability on the owner of a car for negligent operation by the owner’s permittee . . . the statute is not restricted to negligence cases.”  Id.  Rather, the statute reflects public policy to hold owners of motor vehicles responsible for damages caused by their permittees and there was no reason to depart from that public policy in this case.   (Note that under the federal Graves Amendment, which I have addressed in a few prior posts, the owner of a rented vehicle would not be vicariously liable for the tree damage under similar circumstances).

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, consult an attorney licensed in your jurisdiction. © All rights reserved. 2010.

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Commercial & Personal Auto: Permissive Use, Omnibus Coverage & Split Liability Limits

Posted on November 1, 2010 by Gregory Johnson

I often receive questions regarding the “rules” which apply to accidents involving rental vehicles, loaner vehicles, leased vehicles, demos, spot-delivered vehicles, etc.  I thought I’d take some time to update some of my seminar materials and provide an update.   The following is a portion of my updated materials.  (I will provide more “specialized” rules in subsequent posts to this blog.  You can receive future blog posts automatically via e-mail by subscribing to the blog).

In many states, the owner of a motor vehicle is required to insure the vehicle under a liability policy which, in addition to insuring the owner, extends “omnibus” protection to a permissive user of the vehicle.  “Omnibus protection is the extension of liability coverage to a permissive user of a motor vehicle owned and insured in the name of another.” Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483, 485, n.2 (Minn. Ct. App. 1994).  In the majority of jurisdictions, the omnibus coverage afforded to permissive users under the owner’s policy is deemed primary vis a vis the coverage available to the permissive user under his/her personal auto policy.  This “priority” result is often mandated by operation of the policies “other insurance” clauses or by application of common law “closeness to the risk” tests developed by the courts or by statute.  In some such jurisdictions, the limits of liability available to the permissive user under the owner’s omnibus coverage must be co-extensive with the limits available to the named insured.  See, e.g., Smith v. National Indem. Co., 205 N.W.2d 365 (Wis. 1973) (car rental coverage contract which limited liability coverage for renters to less than coverage for rental agency was held invalid); Hardware Mut. Ins. Co. v. General Accident Fire & Life Ins. Co., 188 S.E.2d 218, 221 (Va. 1972) (court held that statute’s remedial intent prohibited split-limit provisions).  In other words, if the owner’s policy affords $100,000 liability limits to the owner, the policy must also extend $100,000 of omnibus coverage to permissive users.

By contrast, the Minnesota No-Fault Act (enacted in 1975), has never contained a statute requiring the policy issued to the owner extend omnibus coverage to a permissive user of the vehicle.  See, Minn. Stat. §65B.49, subd. 3(2).  Prior to the adoption of the No-Fault Act, Minnesota law mandated omnibus liability coverage.  Minnesota Statute § 170.40, subd. 2(2) (1971) provided that the owner’s policy must “insure the person named therein and any other person, as insured, using any such motor vehicle or motor vehicles with the express or implied permission of such named insured, against loss from liability imposed by law for damages arising out of the ownership, maintenance or use of such motor vehicle or motor vehicles.” Minn. Stat. § 170.40, subd. 2(2) (1971) (emphasis added). This statute imposed an omnibus coverage requirement on the owner’s insurer; however, it did not survive passage of the No-Fault Act.

In Leegard v. Universal Underwriters Ins. Co., 255 N.W.2d 819 (Minn. 1977), the Minnesota Supreme Court stated, in dictum, that an owner’s policy is only required to protect those “insureds” identified in Minn. Stat. §65B.43, subd. 5 (i.e., the named insured and resident relatives), which was not broad enough to encompass permissive users. Consequently, there is nothing in the No-Fault Act which specifically mandates that an owner’s policy extend omnibus coverage.

Despite the absence of any omnibus coverage requirement in the No-Fault Act, the Minnesota Department of Commerce and Minnesota courts have always assumed that this obligation exists. Historically, the Minnesota Department of Commerce has refused to approve for filing any personal auto policy that does not extend omnibus coverage to permissive drivers.  In addition, in the early 1990’s, the Minnesota Department of Commerce held that rental contract provisions which purported to shift all insuring obligations to permissive users were invalid, suggesting that omnibus coverage is required.  The presence of an “implied” omnibus coverage requirement gained further traction in McClain v. Begley, 465 N.W.2d 680, 682 (Minn. 1991).  In that case, the self-insured rental car company attempted, through its rental car contracts, to shift all financial responsibility to its renters.  The rental car contract in McClain required renters to assume full responsibility to the public and hold harmless and indemnify the rental car company from all liability. In an administrative proceeding, the Minnesota Department of Commerce found the rental car contact void and unenforceable under the No-Fault Act.  On appeal to the Minnesota Supreme Court, the rental car company did not contest the Department of Commerce’s ruling that the rental contract was void. Rather, it only argued that it could only be required to extend minimum limits of omnibus coverage to the renter (i.e., $30,000 per person/$60,000 per accident) despite having filed a self-insured certificate with the Minnesota Department of Commerce identifying a self-insured retention (SIR) of $500,000.  The Supreme Court, observed that “[s]elf insurance is the functional equivalent of a commercial insurance policy,” and went on to estop the rental car company from denying coverage in any amount less than the SIR.  In other words, the self-insured rental car company was required to extend $500,000 of omnibus liability coverage to the renter.  In a concurring opinion, which was considerably more thoughtful than the majority analysis, Justice Simonett concluded that a self-insured entity should be treated “as if it had purchased a policy of auto liability insurance for each of its vehicles with itself as the named insured.  Such a policy, if purchased, would contain an omnibus clause extending coverage to permissive drivers as additional unnamed insureds.”  Id. at 684.  Justice Simonett noted that a vehicle owner could limit the amount of coverage available to permissive users by contract, but in this case, the rental car contract was void.  Justice Simonett, thus, concluded that there was no contractual provision which served to limit the omnibus coverage and, consequently, the renter was entitled to receive the full $500,000 SIR.

Thus, the Minnesota Supreme Court’s decision in McClain superseded prior decisions that the presumptive amount of a self insurer’s omnibus liability insurance, absent any evidence of limits, was the statutory no-fault minimum. See, e.g. Anderson v. Northwest Bell Tel. Co., 443 N.W.2d 546, 549 (Minn. Ct. App.1989).

The leading case and most-often cited rental car case in Minnesota is Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn. Ct. App. 1994), a case the author handled for Agency-Rent-A-Car. In Agency Rent-A-Car, the rental car company (Agency) had a self-insured retention (SIR) of $500,000 and a $5 million excess policy.  The rental car contract provided that Agency would afford minimum limits ($30,000 per person/$60,000 per accident) of liability protection to its renters. At the time of the accident, Gruett (the renter) was insured with American Family under a personal auto policy affording $50,000 limits.  Gruett caused an accident and the other driver sustained $87,000 in damages. American Family argued that Agency was obligated to extend its entire $500,000 SIR to Gruett on a primary basis, such that American Family’s policy would not come into play – the damages, as noted, were only $87,000.  Agency argued that neither the No-Fault Act nor public policy required an owner of a vehicle, such as a rental car company, to afford liability protection to renters which is co-extensive with the level of protection the owner selected for itself.  Agency acknowledged that it was obligated to pay $30,000 of omnibus coverage on behalf of the customer pursuant to the rental car contract, but contended that American Family was obligated to pay the next $50,000 of damages and Agency was then liable for the remaining $7,000 based on its vicarious liability under Minn. Stat. § 170.54.  (Agency contended that it was legally entitled to indemnification for this $7,000 from Gruett, but agreed to waive the claim.

The trial court agreed with Agency on all grounds and the Minnesota Court of Appeals affirmed. The Court of Appeals noted that Agency was vicariously liable under Minn. Stat. § 170.54 (now § 169.09, subd. 5a) because it owned the rental vehicle that caused the accident and it had given the renter, the alleged tortfeasor, permission to drive it.   However, the dispositive issue was not whether Agency and Gruett were jointly liable for the plaintiff’s damages of $87,000 (they were by operation of Minn. Stat. § 170.54), but rather whether and to what extent Agency or American Family, or both, were obligated to pay that liability.  The Minnesota Court of Appeals agreed with Agency that it was obligated to pay the first $30,000 of damages, American Family was liable for the next $50,000 and Agency was responsible for the $7,000 balance (subject to its right of indemnification against the customer).  The Court of Appeals noted:

[T]he dispositive determination in this case is [whether] the limit of [Agency’s] . . . omnibus coverage per person was $50,000 and not $500,000.  * * * [American Family] argues that the liability limits a self-insurer reports to the Commissioner in the form of its self-insured retention must necessarily be coextensive with its omnibus liability limits per person per accident.  * * * We agree with [Agency] that even if its insurance obligation was primary over that of [American Family], it successfully contracted to limit that primary insurance to $30,000, the statutory minimum.  * * * Here, [Agency] executed a valid contract outlining the amount of omnibus liability coverage that it made available to lessees.  * * * Courts in other states differ on whether a vehicle owner may carry one level of liability insurance for itself and a different level of omnibus coverage for permissive users. * * * Minnesota has no omnibus insurance statute.  Courts in other states lacking such legislation have held that coverage for the named insured need not be coextensive with omnibus coverage. * * * We conclude that subject to the statutory minimum amount, an automobile rental company may limit its omnibus liability coverage to less than its own personal liability coverage, and it may do so in the rental contract. * * * We conclude that respondent has not unlawfully circumvented its duties as a self-insured no-fault reparation obligor.  * * * And limited coverage does not defeat the purpose of the Act, as long as there are no uncompensated victims.

The Agency Rent-A-Car case was thus the first Minnesota case to specifically hold that the limits of liability available to a permissive user under the owner’s omnibus coverage need not be co-extensive with the limits available to the named insured.  The insurer of the vehicle owner can limit the omnibus coverage it provides to permissive users to the statutory minimum limits while affording greater limits to the named insured owner.   The McClain case, which was distinguished in Agency Rent-A-Car, stands for the narrow proposition that in the absence of any agreement or other evidence to the contrary, and where the only evidence of insurance protection for accident victims is found in the self-insured obligor’s representations to the Commissioner in its application for self-insurance, then those representations shall constitute the limit of the obligor’s liability coverage to the accident victims. (The case also recognized that the insurer of the vehicle would have a right of indemnification against the permissive user if the damages exceeded the omnibus coverage afforded to the permissive user under the owner’s policy).

In 1994, a week or so before the Court of Appeals issued its decision in Agency Rent-A-Car, the Minnesota legislature enacted a priority statute for automobile liability coverage (referred to as “residual liability coverage” in the No-Fault Act).  Minnesota Statute § 65B.49, subd. 3(3)(d) provides in part that “a residual liability insurance policy shall be excess of a nonowned vehicle policy whether the nonowned vehicle is borrowed or rented, or used for business or pleasure.” The statute is not a model of clarity.  According to the Minnesota Department of Commerce and Minnesota courts, the statute is to be interpreted from the standpoint of the permissive user.  When viewed from this perspective, the statute requires the insurer of the vehicle owner (the insurer of the “nonowned vehicle”) to afford primary liability coverage to the permissive user vis a vis the coverage afforded to the permissive user under his/her personal auto policy.  This priority statute essentially codified the order of payment which resulted under common law. Prior to enactment of Minn.Stat. § 65B.49, subd. 3(3)(d) in 1994, priority was determined by a “closest to the risk” analysis. See, e.g., Interstate Fire & Cas. Co. v.. Auto-Owners Ins. Co., 433 N.W.2d 82, 86 (Minn.1988); State Farm Mutual Auto. Insurance Co. v. Budget Rent-A-Car, Inc., 359 N.W.2d 673 (Minn. Ct. App. 1984).

Following enactment of § 65B.49, subd. 3(3)(d), Minnesota courts held that contractual provisions which attempted to shift the obligation to afford primary liability coverage from the insurer of the vehicle owner to the permissive driver’s insurer were void and unenforceable. See, e.g., Hertz Corp. v. State Farm Mut. Ins. Co., 573 N.W.2d 686, 689 (Minn. 1998) (rental contract which obligated renter to assume all liability if renter had personal auto policy was void under No-Fault Act); Mutual Service Cas. Ins. Co. v. West Bend Mut. Ins. Co., 599 N.W.2d 585 (Minn. Ct. App. 1999) (holding that garage liability policy defining an “insured” to exclude a customer who had personal auto coverage contravened the No-Fault Act).  According to the Minnesota Court of Appeals, the Hertz and Mutual Service decisions, “on the basis of Minn. Stat. § 65B.49, subd. 3(3)(d), found an attempt to provide liability coverage only to permissive drivers who did not have liability coverage arising from his or her own automobile policy violated the policy of the No-Fault Act.” State Farm Mut. Ins. Co. v. Universal Underwriters Co., 625 N.W.2d 160 (Minn. Ct. App. 2001), rev. denied (Minn. June 21, 2001). The contractual provisions at issue were held void and unenforceable because the vehicle owner was “thrusting upon the renter its responsibility to provide liability coverage.” Id. (The Hertz and Mutual Service decisions are debatable. As noted by the Minnesota Court of Appeals in two other cases, “limited coverage does not defeat the purpose of the Act, so long as there are no uncompensated victims.” Agency Rent-A-Car, Inc. v. American Family Mutual Insurance Co., 519 N.W.2d 483 (Minn. Ct. App. 1994). See also American Family Mut. Ins. Co. v. Universal Underwriters Ins. Co., 438 N.W.2d 701 (Minn. Ct. App. 1989). In neither Hertz nor Mutual Service would the injured party have been affected had the contract provisions at issue been upheld.  The insurance would have simply been shifted between the insurers.  Minnesota Supreme Court Justice Alan Page correctly analyzed the issue in his dissenting opinion in Hertz, but the same is beyond the scope of this post).

There are three important principles for garage insurers, rental car companies and personal auto insurers to keep two things in mind when addressing claims. First, it is important to recognize that the priority statute, § 65B.49, subd. 3(3)(d), has no effect on the Agency Rent-a-Car decision and its authorization for “split-limits” policies.  The priority statute only requires (subject to the exceptions identified below) that the first layer of coverage – the omnibus coverage available under the owner’s policy, come first.  The priority statute does not mandate the limits of that omnibus coverage or require that those limits be co-extensive with the limits available to the named insured vehicle owner.  In State Farm Mut. Ins. Co. v. Universal Underwriters Co., 625 N.W.2d 160 (Minn. Ct. App. 2001), a customer of an automobile dealership insured by Universal caused an accident while operating a loaner vehicle.  The driver of the other vehicle was injured in the accident.  The Universal garage liability policy afforded $500,000 in liability limits for the named insured dealership and its employees, but contained a split-limit, step down provision limiting liability coverage for customers (omnibus insureds) to the “limit needed to comply with the minimum limits provision law in the jurisdiction where the occurrence took place.” Id. at 162.  Universal, represented by the author, acknowledged that it was required to afford the first $30,000 of liability coverage (the minimum limits required by Minnesota law) on behalf of the permissive user/customer, after which State Farm (which insured the customer under a personal auto policy) would apply. Finally, Universal contended that if the injured plaintiff still had uncompensated damages, the coverage Universal afforded to the dealership would be available for the balance of the injuries.  State Farm, on the other hand, argued that Minn. Stat. § 65B.49, subd. 3(3)(d) prohibited an insurer from contractually providing different liability limits for a permissive driver and motor vehicle owner.  State Farm contended that Universal was obligated to extend its full $500,000 liability limits as omnibus coverage to the renter.

The district court did not err in concluding that the policy clearly limits coverage for permissive drivers to the statutory minimum and that the higher limit continues to apply to the owner’s vicarious liability for such use. * * *  This court has previously held that a self-insured owner of a motor vehicle may contractually limit liability coverage for a permissive user to the statutory minimum, while providing a higher coverage limit for the owner. See Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483, 487 (Minn. Ct. App. 1994).  The decision in Agency involved a self-insured car-rental agency and the contractual limitation was contained in the rental agreement, but the analysis is not limited to self-insureds. * * * We noted in Agency that Minnesota does not have an “omnibus statute” requiring coverage of the named insured to be coextensive with coverage of any other person using the insured’s vehicle . . . Nothing in Minn. Stat. § 65B.49, subd. 3(3)(d) shows a clear intent by the legislature to restrict an insurer’s right to freely contract for different liability limits for permissive drivers and owners so long as the minimum statutory coverage is provided.  * * * The remedial purpose of the Minnesota No-Fault Act is not impacted by allowing split limits. We find Agency controlling. Minn. Stat. § 65B.49, subd. 3(3)(d) does not void the split-limit coverages provided in Universal’s policy.

Thus, although a vehicle owner’s insurer is required to afford primary coverage by operation of the automobile liability priority statute, Minn. Stat. § 65B.49, subd. 3(3)(d), Minnesota insurers (and self-insureds) can, consistent with Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn. Ct. App. 1994) and State Farm Mut. Ins. Co. v. Universal Underwriters Co., 625 N.W.2d 160 (Minn. Ct. App. 2001), rev. denied (Minn. June 21, 2001), contractually limit the omnibus coverage afforded to permissive drivers to the statutory minimum, while providing a higher coverage limit for the named insured vehicle owner. “[A] policy, if purchased, would contain an omnibus clause extending coverage to permissive drivers as additional unnamed insureds.” Hertz Corp. v. State Farm Mut. Ins. Co., 573 N.W.2d 686, 689 (Minn. 1998) (quoting McClain v. Begley, 465 N.W.2d 680, 684 (Minn. 1991) (J. Simonett, concurring).  Although Minnesota has no omnibus statute, the omnibus coverage afforded under the owner’s policy is required to afford coverage to the permissive driver, at least up to the omnibus coverage limit identified in the policy (or rental car contract). Several other states have likewise found that split limits do not violate public policy. See, e.g., Bowers v. Estate of Feathers, 448 Pa.Super. 263, 671 A.2d 695, 700 (1995) (listing states which upheld split-limit provisions); Lehman Eastern Auto Rentals, Inc. v. Brooks, 370 So.2d 14, 16 (Fla.Dist.Ct.App.1979); Universal Underwriters Ins. Co. v. Hill, 24 Kan.App.2d 943, 955 P.2d 1333, 1339 (1998); Windsor Ins. Co. v. Lucas, 24 S.W.3d 151, 154-55 (Mo.Ct.App.2000); Yosemite Ins. Co. v. State Farm Mut. Auto. Ins., 98 Nev. 460, 653 P.2d 149, 150 (1982).

Second, it is important to bear in mind that the automobile liability priority statute, Minn. Stat. § 65B.49, subd. 3(3)(d),only sets forth the “general” priority rule.  The statute is subject to the exception contained in Minn. Stat. § 65B.49, subd. 5a. See, Minn. Stat. § 65B.49, subd. 3(3)(d) (“[e]xcept as provided in subdivision 5a, a residual liability insurance policy shall be excess of a nonowned vehicle policy . . .”).

In 2000, Minn. Stat. § 65B.49, subd. 5a (j) was enacted and provided as follows:

The plan of reparation security covering the owner of a rented motor vehicle is excess of any residual liability coverage insuring an operator of a rented motor vehicle if the vehicle is loaned as a replacement for a vehicle being service or repaired, regardless of whether a fee is charged for use of the vehicle, provided that the vehicle so loaned is owned by the service or repair business.

In 2007, § 65B.49, subd. 5a(j) was amended to provide:

The plan of reparation security covering the owner of a rented motor vehicle is excess of any residual liability coverage insuring an operator of a rented motor vehicle.

A vehicle is considered “rented” for purposes of the “rented motor vehicle” priority statute “(1) if the rate for the use of the vehicle is determined on a monthly, weekly, or daily basis; or (2) during the time that a vehicle is loaned as a replacement for a vehicle being serviced or repaired regardless of whether the customer is charged a fee for the use of the vehicle.” Minn. Stat. § 65B.49, subd. 5a(b). “A vehicle is not rented if the rate for the vehicle’s use is determined on a period longer than one month or if the term of the rental agreement is longer than one month or the rental agreement has a purchase or buyout option or otherwise functions as a substitute for purchase of the vehicle.” Id.

There have been no reported appellate cases construing the “rented motor vehicle” priority statute, Minn. Stat. § 65B.49, subd. 5a(j).  Presumably, under the “rented motor vehicle” priority statute, the personal auto policy insuring the operator of the “rented” vehicle is required to afford primary liability coverage up to its stated limits of liability.  (This insuring obligation is reinforced by Minn. Stat. § 65B.49, subd. 5a(a), which requires that every plan of reparation security wherever issued insuring a natural person as a named insured . . . extend the plan’s basic economic loss benefits, residual liability insurance, and uninsured and underinsured motorist coverages to the operation or use of the rented motor vehicle.” Id. (emphasis supplied)).  If uncompensated damages remain, the policy (or self-insurance) insuring the vehicle would then be required to extend at least $30,000 per person/$60,000 of liability coverage, the minimum limits required by Minnesota law, just like the owner of any motor vehicle.  To the extent uncompensated damages remain and the vehicle owner is vicariously liable (see my prior blog posts addressing the impact of the Graves Amendment which abolishes vicarious liability for rental car owners and the No-Fault Act’s statutory cap on vicarious liability for rental car owners), the policy (or self-insurance) insuring the vehicle owner would pay the balance of the damages the owner is legally obligated to pay, up to its liability limits.

In my view, the case of Johnson v. Americar Rental Sys., 613 N.W.2d 773, 776 (Minn. Ct. App. 2000), review denied (Minn. Sept. 26, 2000), involving an accident that occurred several years prior to the passage of the federal Graves Amendment in 2005 and the amendment to Minn. Stat. § 65B.49, subd. 5a(j) in 2007, was incorrectly decided. In that case, Americar owned a rental car that was involved in a one car accident.  Johnson, a passenger, was injured.  At the time of the accident, Americar was insured by National Casualty. As was the case in Agency Rent-A-Car, the National Casualty policy afforded split-limits:  $1,000,000 limits for Americar, the vehicle owner, and $30,000 per person/$60,000 per accident for permissive drivers. Johnson’s husband, the driver of the rented vehicle, was insured by American Family with limits of $100,000 per person. The parties stipulated that Johnson’s husband was responsible for causing the accident and that Johnson’s damages totaled $225,000.   The parties also agreed that National Casualty was responsible for the first $30,000 of stipulated damages and that American Family was responsible for the next $100,000 of damages, a total of $130,000.  The dispute centered on the remaining $95,000 of damages.   The trial court held that Americar was vicariously liable for the final $95,000 of damages and, thus, its insurer was obligated to pay the balance.  Thus, under the trial court’s ruling, Johnson would have been fully compensated.  However, the Minnesota Court of Appeals reversed.  The Court of Appeals determined that Americar’s maximum vicarious liability obligation was $105,000 (based on application of the vicarious liability cap statute, Minn. Stat. § 65B.49, subd. 5a(i)(2)) and Americar was entitled to deduct National Casualty’s initial payment of $30,000 against Americar’s vicarious liability. Thus, instead of Americar/National Casualty paying an additional $95,000 to Johnson, only $75,000 was paid to Johnson.  As a result, Johnson received $205,000 in liability compensation, $20,000 less than her total damages. The problem with the holding in Johnson is that the Court of Appeals viewed the initial $30,000 payment as payment for Americar’s vicarious liability when, in fact, it was paid because National Casualty was required by statute and case law to afford $30,000 of omnibus liability protection to the permissive driver/renter. See, Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483, 488 (Minn. Ct. App. 1994) (“[w]e conclude that subject to the statutory minimum amount, an automobile rental company may limit its omnibus liability coverage to less than its own personal liability coverage, and it may do so in the rental contract”).  While an insurer’s satisfaction of an omnibus coverage obligation always serves to indirectly benefit the vicariously liable vehicle owner (by serving to satisfy a portion of the injured party’s damages), the payment is made to satisfy the financial responsibility or compulsory insurance requirements of the law, not the vehicle owner’s vicarious liability. National Casualty should have paid a total of $125,000 — $30,000 omnibus coverage limits on behalf of the renter and $95,000 on behalf of Americar.  The issue is, however, moot for cases involving “rental cars” by virtue of the Graves Amendment.

Third, I have addressed the federal Graves Amendment in prior posts.  It is important to note that the Graves Amendment’s broad preemption of vicarious liability for rental-vehicle owners is subject to a “savings clause” which preserves two types of state laws: (1) laws that impose financial responsibility or insurance standards on the owner for the privilege of operating a motor vehicle, and (2) laws that impose liability on businesses that rent or lease vehicles for their failure to meet the financial responsibility or liability insurance requirements. 49 U.S.C. § 30106(b).  Thus, certain financial responsibility laws in Minnesota are preserved and not subject to the Graves Amendment. For example, Minn.Stat. § 65B.48, subd. 1, which requires the owner of a motor vehicle to maintain a “plan of reparation security [providing] for . . . residual liability coverage in amounts not less than those specified in section 65B.49, subdivision 3, clauses (1) and (2)” is not affected by the Graves Amendment.  The minimum limit for liability insurance in Minnesota is $30,000 per person and $60,000 per accident. Minn. Stat. § 65B.49, subd. 3(1). The $30,000/$60,000 liability limit is obviously not affected by the Graves Amendment. Thus, even if the rented vehicle owner has no vicarious liability, the vehicle owner, and its liability insurer, must still maintain and extend at least minimum limits coverage.

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please consult an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Posted in ADCF Policy, BAP, Coverage, PAP, Rentals | Tagged , , , , , , , , | Leave a comment

CGL Coverage:”Your Work” Exclusion Comes Full Circle — Deletion of Subcontractor Exception

Posted on October 28, 2010 by Gregory Johnson

By Greg Johnson. It’s back to square one for some residential contractors.

In Grinnell Mutual Reinsurance Co. v. Wollak Construction, Inc., Civ. File No. 10-350 (RHK/LIB) (D. Minn. 10/15/2010), the federal district court, applying Minnesota law, held that the “your work exclusion” in a Commercial General Liability (“CGL”) policy issued to a general contractor did not afford coverage to the general contractor when sued for construction defects. The coverage issue was fairly simple. The Durans hired Wollak in 2006 to build a home on a lot they owned. In 2008, after construction of the home was completed, the Durans sued Wollak claiming that it committed breach of contract, breach of statutory warranty, breach of implied warranty, and negligence in its construction of their home. They identified various building code violations and other construction defects. Specifically, the underlying complaint alleged that Wollak: (a) failed to properly install windows, trim, hinges, flooring, heating, doors, shower stalls and doors pursuant to the installation instructions of the manufacturer and good building practice, and (b) failed to properly mark property lines, failed to fill in sink holes, painting, failed to properly pour concrete for patio, and failed to remove the silt fence.

The case was simple because the CGL policy issued to Wollak, the general contractor, by Grinnell did not contain the so-called “subcontractor exception” to the “your work” exclusion. Rather, the Grinnell policy simply excluded coverage for “’[p]roperty damage” to ‘your work’ arising out of it or any part of it . . .”.

To understand the case, some brief background history may be helpful:

Prior to 1986, the typical “your work” exclusion in the “standard” Commercial General Liability (CGL) policy (then referred to as the “work-performed” exclusion) provided: “This policy does not apply to . . . ‘[p]roperty damage’ to ‘your work’ arising out of it or any part of it . . .”. Because the entire construction project is the general contractor’s work, the exclusion bars coverage for the defective work of the general contractor and any subcontractor which gives rise to a claim for damage to the property which is the subject matter of the construction project. See, Bor‑Son Bldg. Corp. v. Employers Commercial Union Ins. Co. of America, 323 N.W.2d 58, 61 (Minn.1982); Knutson Constr. Co. v. St. Paul Fire & Marine Ins. Co., 396 N.W.2d 229, 235 (Minn.1986).  For example, in Knutson, the owner of an apartment complex brought suit against a general contractor to recover the cost of repairing structural damage to the complex. The general contractor then brought an insurance coverage action against its CGL insurance carriers. In upholding summary judgment for the insurers, the Minnesota Supreme Court reaffirmed its holding in Bor-Son that a CGL policy “does not provide coverage for claims of defective materials and workmanship giving rise to a claim for damage to the property itself which is the subject matter of the construction project.” Knutson, 396 N.W.2d at 235.

Because the “your work” exclusion in the general contractor’s CGL policy excludes coverage for the underlying “property damage,” any consequential losses or costs that are based on, or arise out of, the excluded “property damage,” are excluded as well. See, e.g., Federated Mutual Ins. Co. v. Concrete Units, Inc., 363 N.W.2d 751, 757 (Minn. 1985); Corn Plus Cooperative v. Continental Casualty Co., 444 F. Supp.2d 981, 988 (D. Minn. 2006) (“the Damage to Your Work exclusion bars coverage for the damages Corn Plus suffered to the welds of its expansion project . . . [and] all damages that Corn Plus has incurred or anticipates incurring based upon the cost of repair and replacement of the defective welding”), affirmed 516 F.3d 674 (8th Cir.2008). Stated another way, any damage arising from “property damage” which is explicitly excluded from the policy’s application are also not covered. See, Tinker, Comprehensive General Liability Insurance – Perspectives and Overview, 25 Fed’n Ins. Counsel Q. 217, 224-226 (1975).

In 1986, however, in recognition of the fact that general contractors have little, if any, control over the work of their subcontractors, the standard CGL policy was changed to incorporate an exception to the “your work” exclusion.  The so-called “subcontractor exception” provides:  “[t]his exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

The subcontractor exception has the effect of restoring coverage for the defective work of a subcontractor which causes damage to property which is the subject matter of the construction project.  See, e.g., Wanzek Const. Inc. v. Employers Ins. of Wausau, 679 N.W.2d 322 (Minn. 2004); O’Shaughnessy v. Smuckler Corp., 543 N.W.2d 99, 103-05 (Minn.Ct.App.1996) (recognizing that 1986 change to the “your work” exclusion changed standard CGL policy so as to provide coverage for property damage to a general contractor’s work when that damage is caused by a subcontractor’s defective work), rev. denied (Minn. Mar. 28, 1996), abrogated on other grounds by Gordon v. Microsoft Corp., 645 N.W.2d 393 (Minn. 2002).  An example of how the “your work” exclusion applies in the context of a 1986 CGL policy issued to a general contractor is as follows:

The named insured is a general contractor who has built an apartment house with the services of numerous subcontractors. After the building is completed and put to its intended use, a defect in the building’s wiring (put in by a subcontractor) causes the building, including work of the general contractor and other subcontractors, to sustain substantial fire damage. The named insured [general contractor] is sued by the building’s owner. Prior to 1986, the general contractor’s CGL policy would not afford any coverage to the insured for the resulting damages because the entire project is the general contractor’s work.  After 1986, the exclusion would not bar the claim.  Although, the named insured’s policy excludes damage to “your work” arising out of it or any part of it, the [subcontractor exception] . . . makes it clear that the exclusion does not apply to the claim. That is because the work out of which the damage arose was performed on the named insured’s behalf by a subcontractor. * * * Thus, barring the application of some other exclusion or adverse policy condition, the loss should be covered, including the part out of which the damage arose.

O’Shaughnessy, 543 N.W.2d at 105 (quoting Fire, Casualty and Surety Bulletins, Public Liability, Aa 16-17 (The National Underwriter Co. 1993)).

Thus, as a result of the subcontractor exception in a CGL policy issued to a general contractor, the defective work of a subcontractor which causes damage to the construction project (i.e., the general contractor’s work) is not excluded (assuming the insuring clause has been satisfied and there are no other applicable exclusions).  In addition, losses that are causally related to the covered property damage are covered as well.  See, Federated Mutual Ins. Co. v. Concrete Units, Inc., 363 N.W.2d 751, 757 (Minn. 1985) (interpreting “damages because of . . . ‘property damage’” language of insuring clause to extend coverage to losses causally related to covered property damage).

Many CGL insurers, in response to the significant increase in construction defect claims, have eliminated the “subcontractor exception” to the “your work” exclusion in policies issued to residential general contractors. That was the situation in Grinnell Mutual Reinsurance Co. v. Wollak Construction, Inc.,
Civ. No. 10-350 (RHK/LIB) (D. Minn. 10/15/2010).  Thus, the case was factually identical to cases that had been decided prior to the incorporation of subcontractor exception in CGL policies, such as Bor‑Son, 323 N.W.2d 58 (Minn.1982) and Knutson Constr., 396 N.W.2d 229 (Minn.1986) where the Minnesota Supreme Court recognized that a CGL policy “does not provide coverage for claims of defective materials and workmanship giving rise to a claim for damage to the property itself which is the subject matter of the construction project.” Knutson, 396 N.W.2d at 235.  The court in Wollak observed as follows:

When the “work-performed” exclusion was replaced by the “your-work” exclusion, it added an exception to the exclusion for subcontractors’ work . . . However, where subcontractors were not involved, the [“your-work”] exclusion remained the same. * * * The “your-work” exclusion continued to bar coverage for damage to the insured’s work, including the costs to repair or replace defective work. See, e.g., Corn Plus Cooperative v. Cont’l Cas. Co., 444 F. Supp. 2d 981, 989 (D. Minn. 2006) (Doty, J.) (interpreting the “your-work” exclusion to bar coverage for faulty welding work on an ethanol plant since the welds were the insured’s work). * * * Just like the “work-performed” and “your-work” exclusions interpreted in prior cases, the instant Policy excludes coverage for damage to property that was the subject of the insured’s construction contract caused by construction defects or faulty workmanship. The Durans’ claims all arise out of or involve damage to Wollak’s own work. Accordingly, all come within the Policy’s definition of “your work” and its exclusion for “damage to your work.” Since there is no longer a subcontractor exception (or any other exception) in the exclusion, the inquiry ends here.

In an effort to avoid the exclusion, Wollak argued that the exclusion did not apply because the presence of its defective work caused property damage not just to the work itself, but to the larger property (the homeowner’s’ entire lot). Specifically, Wollak argued that its work diminished the value of the entire lot.  The court correctly held that diminution in value was not covered.  First, although not resolved on this ground, it is well established that losses which are based on, or arise out of, excluded “property damage” are likewise excluded.  (See the discussion above, and Tinker article).  Thus, any diminution in value that resulted from Wollak’s work is similarly excluded.  Second, as the federal district court noted, diminution in value does not itself constitute “property damage.”

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Posted in CGL, Coverage | Tagged , , , , , , , , , , | 3 Comments

Howard on Missing The “Buss”: Pennsylvania Supreme Court Refuses to Recognize Insurers’ Right to Recover Defense Costs Expended With Respect to Non-Covered Claims

Posted on October 4, 2010 by Gregory Johnson

Howard on Missing The “Buss”: Pennsylvania Supreme Court Refuses to Recognize Insurers’ Right to Recover Defense Costs Expended With Respect to Non-Covered Claims.

Posted in Coverage | 1 Comment

Liability Insurance: The Risks of Denying a Duty to Defend

Posted on October 4, 2010 by Gregory Johnson

By Greg Johnson. Deciding whether to defend the insured in a third-party lawsuit (which generally involves a comparison between the allegations of the complaint and the policy), can be simple, complex or somewhere in between.  Regardless, insurers should always factor in the potential risks (and associated costs) associated with denying a defense before making its decision.  Those risks (which are the subject of this post and not found in any policy provisions) may militate in favor of extending a defense, at least in “questionable” coverage cases.

A Minnesota “insurer assumes two duties to its insured: the duty to defend and the duty to indemnify.” St. Paul Fire & Marine Ins. Co. v. Nat’l Chiropractic Mut. Ins. Co., 496 N.W.2d 411, 415 (Minn. Ct. App.1993), review denied (Minn. Apr. 29, 1993). The duty to defend is distinct from and broader in scope than the insurer’s duty to indemnify. Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283, 301-302 (Minn. 2006). “The duty to defend is broader than the duty to indemnify in three ways: (1) the duty to defend extends to every claim that ‘arguably’ falls within the scope of coverage; (2) the duty to defend one claim creates a duty to defend all claims; and (3) the duty to defend exists regardless of the merits of the underlying claims.” Wooddale, 722 N.W.2d at 301-302 (Minn. 2006).

In Minnesota, an insurer that fails to defend its insured against a third-party lawsuit faces several risks. One or more of the following general rules will come into play:

First, the non-defending insurer forfeits its right to control the defense and strategy, including the right to compel the insured’s cooperation in the defense of the lawsuit.

Second, the non-defending insurer will probably be involved in a “duty to defend” declaratory judgment action and will obviously have to pay its coverage counsel to prosecute or defend that action.

Third, if the court determines the insurer was required to defend, the breaching insurer will be obligated to reimburse all “reasonable” defense fees and costs incurred in defending the underlying litigation. See, Lanoue v. Fireman’s Fund Am. Ins. Co., 278 N.W.2d 49, 50 (Minn.1979).

Fourth, if the court determines the insurer was required to defend, the breaching insurer will be required to pay the “reasonable” fees and costs incurred in the declaratory judgment action which established the duty to defend. See, Morrison v. Swenson, 142 N.W.2d 640 (Minn. 1966); American Standard Ins. Co., v. Le, 551 N.W.2d 923 (Minn.1996) (restating rule that attorney fees are recoverable in a declaratory judgment action if there is a breach of a contractual duty, “usually by wrongfully refusing to defend the insured”).

Some jurisdictions have recognized that in a claim of equitable indemnification or contribution (e.g., where a participating insurer paid the insured’s defense costs and seeks reimbursement from the non-participating insurer), the non-participating insurer waives any right to contest the reasonableness of the defense costs. See, e.g., Safeco Ins. Co. of America v. Superior Court,  140 Cal.App.4th 874, 877-882, 44 Cal.Rptr.3d 841, 842 – 846 (Cal. App. 2 Dist. 2006) (by “its refusal to participate [in the defense of the insured], the recalcitrant co-insurer waives the right to challenge the reasonableness of the defense costs . . .”).  This rule makes sense inasmuch as the participating insurer monitored the defense costs and paid the costs as they were incurred — at a time when it did not know whether it would obtain reimbursement of any part of the defense costs it was paying. Further, the “need” to review the defense costs would not have been necessary had the non-defending insured agreed to participate in the defense of the underlying litigation.

Fifth, the non-defending insurer will likely be involved in a “coverage” action (or garnishment proceeding) relating to a settlement (or judgment) between the insured and claimant and the insurer will obviously have to pay its coverage counsel to defend that action.

Sixth, although a non-defending insurer generally retains the right to dispute coverage for the judgment or settlement, it waives its right to approve any settlement the insured may reach with the claimant. The insured is entitled to negotiate a good faith settlement with the claimant and the settlement serves as presumptive evidence of the breaching insurer’s liability. Butler Bros. v. American Fidelity Co., 120 Minn. 157, 139 N.W. 355 (Minn.1913). In an action to enforce the settlement and recover settlement payments, the insured is not required to prove that it was actually liable to the claimant. Id.  See, also, Pietras v. Sentry Ins. Co., 513 F. Supp. 2d 983, 986 (N.D. Ill. 2007) (the fact that the insureds “might have been able to dispute the plaintiffs’ claims . . . . does not mean that it was imprudent for them to settle, given the prospect of lengthy, expensive, and time-consuming litigation that they would have had to finance out of pocket”). To require claims to be actually tried in an action to enforce a settlement would defeat the purpose of settlement agreements. In addition, the non-defending insurer may have no right to object to the amount of the settlement unless it can establish bad faith, collusion or fraud. Id. (to require the insured to prove that “the amount paid was not excessive [does] not appeal to our idea of equity or law”); Motors Ins. Co. v. Auto-Owners Ins. Co., 251 Ga. App. 661, 664, 555 S.E.2d 37, 39 (Ga. Ct. App. 2001) (non-defending insurer cannot avoid liability unless it can establish the amount paid in settlement was so excessive as to show evidence of bad faith, or there was other evidence that the settlement was made in bad faith). This is a corollary to the rule that an insurer, which usually has the right to control the litigation, owes the insured a good faith obligation in considering settlement offers. By not defending the insured or acknowledging any obligation to protect the insured against a resulting judgment, the insured is likewise free to enter into a good faith settlement with the claimant. Under this view, the insured is placed in the same position it would have occupied had the policy provided that the insured (as opposed to just the insurer) had the right to make a good faith settlement.

(Note that in a Miller-Shugart settlement — where the insured pays nothing to the claimant in exchange for a release of personal liability and, thus, is “quite willing to agree to anything as long as plaintiff promise[s] them full immunity,” Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982) – the claimant (judgment creditor) is required to prove the settlement was reasonable and prudent.  The settlement will be deemed reasonable in amount where it approximates the amount the insured/tortfeasor “could have been liable for” as opposed to the amount the insured/tortfeasor “would have been liable for.” Osgood v. Medical, Inc., 415 N.W.2d 896, 903 (Minn. Ct. App. 1987), rev. denied (Minn. Feb. 12, 1988).  In Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277 (Minn. 1990), the Minnesota Supreme Court rejected the argument that an unreasonable Miller-Shugart settlement should exonerate the insurer from liability.  Instead, the Court held that if a Miller‑Shugart settlement is set aside because it is unreasonable in amount, the settlement is unenforceable, but the claimant’s tort action against the insured is reinstated for jury trial.

Some jurisdictions recognize, in a claim of equitable indemnification or contribution (e.g., where a participating insurer defended the insured and settled the claim against the insured) that the non-participating insurer cannot contest the reasonableness of the settlement amount. See, e.g., Safeco Ins. Co. of America v. Superior Court,  140 Cal.App.4th 874, 877-882, 44 Cal.Rptr.3d 841, 842 – 846 (Cal. App. 2 Dist. 2006) (by “its refusal to participate [in the defense of the insured], the recalcitrant co-insurer waives the right to challenge the reasonableness of the . . . amounts paid in settlement”). This rule makes sense inasmuch as the participating insurer, unsure about its prospects of recovering any portion of the settlement, sought to minimize its payment. Further, it is well known that when settling a lawsuit, the settling insurer will take into consideration the prospect of having to pay the future costs of defense, which may be quite large. Had the recalcitrant insurer agreed to contribute to the insured’s defense during the litigation, the insurers may have decided not to settle the lawsuit. The recalcitrant insurer should not be permitted to challenge the reasonableness of the settlement amount in such a case because its breach of contractual obligations probably played some role in the need to settle the case in the first instance.

Thus, assuming there is coverage for the settlement, the non-defending insurer will likely be required to indemnify the insured against a settlement that is greater in amount than that which the insurer could have secured had it participated in the underlying litigation.

Seventh, although the insurer can challenge its liability for the insured’s settlement, it likely has no right to a jury trial. Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277 (Minn. 1990).

Eighth, several jurisdictions have recognized that by electing not to participate in the defense of the underlying litigation, the insurer can be estopped from requesting any allocation between covered and non-covered damages. See, e.g., Servidone Const. Corp. v. Security Ins. Co. of Hartford, 102 A.D.2d 59, 477 N.Y.S.2d 725, 728 (3d Dep’t 1984), order rev’d, 64 N.Y.2d 419, 488 N.Y.S.2d 139, 477 N.E.2d 441 (1985) (when “insurer breaches its duty to defend, it must indemnify the insured for a reasonably arrived-at settlement because it is impossible to determine on what theory of liability plaintiff might have prevailed”); Prudential Property and Cas. Ins. Co. v. Lawrence, 45 Wash. App. 111, 724 P.2d 418, 423 (Div. 1 1986) (insurer that breaches duty to defend in lawsuit alleging covered and non-covered claims is estopped from denying coverage for a portion of the settlement if the settlement is not itself allocated between covered and non-covered claims); St. Paul Fire & Marine Ins. Co. v. Vigilant Ins. Co., 724 F. Supp. 1173, 1183 (M.D. N.C. 1989), aff’d, 919 F.2d 235 (4th Cir. 1990) (insurer was liable for settlement because the insurer had breached its duty to defend and the “settlement (should be) viewed as a cost of defending the suits”); Pacific Indem. Co. v. Linn, 590 F. Supp. 643, 650-51 (E.D. Pa. 1984), judgment aff’d, 766 F.2d 754 (3d Cir. 1985) (where insurer breached duty to defend and it was “impossible to determine on what theories of liability, if any, the underlying plaintiffs would have prevailed,” the “duty to indemnify must follow the duty to defend” and insurer was liable for the settlement even though only a portion of the injured party’s claims was covered); American Motorists Ins. Co. v. Trane Co., 544 F. Supp. 669, 690 (W.D. Wis. 1982), judgment aff’d, 718 F.2d 842 (7th Cir. 1983) (“I am not prepared to impose upon an insured which has conducted its own defense, negotiated its own settlement, litigated the insurer’s duty to defend, and prevailed in that action, the additional burden of allocating the settlement before it can collect any damages for the insurer’s breach. The insurer had the opportunity to participate in the settlement discussions. Its refusal to do so should not add to the insured’s burden”). Minnesota does not appear to have resolved the issue outside the context of a Miller-Shugart settlement which due to the lack of bona fides in the settlement process, imposes the allocation obligation upon the claimant/judgment creditor).

Ninth, if the insurer failed to communicate all policy defenses to the insured, it may be estopped from raising those defenses that were not disclosed to the insured.  See, SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305, 316 fn. 3 (Minn. 1995) (insurer could not rely on pollution exclusion where the insurer failed to assert this defense to the insured: an insurer “cannot . . . rely on its prior silence to defeat its duty to defend”).

In short, a liability insurer who elects not to defend the insured against a third-party lawsuit subjects itself to numerous risks and potential costs. Thus, before making  a determination that the insured is not entitled to a defense, the insurer should make absolutely sure that the complaint and facts known to the insurer at the time it is notified of the suit do not present any set of facts (either directly or inferentially) which, if proven, would subject the insured to a liability which could potentially be covered by the insured’s policy. Crum v. Anchor Cas. Co., 264 Minn. 378, 390‑392, 119 N.W.2d 703, 711 ‑ 712 (Minn. 1963) (where facts alleged in complaint “present a potential liability on the part of the insured covered by the insurance contract, the insurer is obligated to undertake the defense”); Meadowbrook, Inc. v. Tower Ins. Co., Inc.,  559 N.W.2d 411, 415 (Minn. 1997) (insurer’s duty to defend exists unless it “can be concluded as a matter of law that there is no basis on which the insurer may be obligated to indemnify the insured”).  As the above summary indicates, the risks (and costs) associated with making a wrong decision on the “defense” question are quite considerable.

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please consult an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Posted in ADCF Policy, Bad Faith, Coverage, Duty to Defend, Duty to Indemnify | Tagged , , , , , , , , , , , | Leave a comment

Reducing Defense Costs: “High-Low Coverage Agreements”

Posted on September 30, 2010 by Gregory Johnson

I was dusting off some old seminar materials and ran across an article I had written back in 1995 regarding the use of high-low coverage agreements.  In light of the economy and insurer’s efforts to save costs, the article is perhaps even more relevant today.   So, here it is:  

Insurers are quite familiar with the use of high-low arbitration agreements in the context of liability claims.  A variant of the high-low agreement can be used, quite effectively, in the context of a liability claim that “turns on coverage.”  For example, assume liability is not disputed and the damages range between $75,000-$100,000, but payment on the claim is dependent on the outcome of a coverage issue.  The insurer does not want to incur the expense of defending the underlying lawsuit – which is largely irrelevant as liability and damages are not really disputed and, in any event, its payment obligation hinges on coverage.  At the same time, the insurer does not want to deny coverage for the claim against the insured and risk a potential Miller-Shugart agreement wherein the insured, in exchange for a release, stipulates to a judgment (often inflated) to be collected only from the proceeds of the insurance policy.  See Miller v. Shugart, 316 N.W.2d 729, 735 (Minn. 1982). In this type of situation, the insurer can eliminate the need to defend the underlying lawsuit,  eliminate the risk of a Miller-Shugart and cap its top-end exposure by entering into a “High-Low Coverage Agreement” with the claimant.  Under this type of agreement, the insurer will commence a declaratory judgment action and agree to pay a low (say $5,000) regardless of the outcome of the declaratory judgment action and an additional amount (say $70,000) if coverage is established, in exchange for the claimant’s agreement to release the insured from any personal liability. 

This type of agreement has several benefits:  First, the insured is relieved of all personal liability (which, in turn, eliminates any bad faith potential).

Second, the claimant: (a) does not have to incur the costs (and time) associated with prosecuting the underlying liability action against the insured; (b) receives the guaranteed “low” ($5,000 in my example – sufficient to cover the hard costs associated with defending the declaratory judgment action); and (c) the right to collect an additional amount ($70,000 in my example) if coverage is in fact established by final judgment in the declaratory judgment action. 

Third, the insurer: (a) does not have to retain counsel to defend the insured in the underlying liability action; (b) incurs no costs in litigating the “irrelevant” liability/damage issues; (c) eliminates the risk of a Miller-Shugart; and (d) caps its top-end exposure.  The latter is helpful for setting reserves.  In addition, the insured, who has been released from all liability and no longer faces the prospect of an uninsured exposure, may be more cooperative in the declaratory judgment action.  

The insurer/claimant can also agree to submit the “coverage” issue to a binding neutral coverage evaluation process or binding arbitration (and split the costs) rather than prosecuting the coverage issues in a declaratory judgment action.   

For example, in St. Paul Fire & Marine Ins. Co. v. National Chiropractic Mutual Ins. Co., 496 N.W.2d 411 (Minn. Ct. App.1993), review denied (Minn. Apr. 29, 1993), the parties agreed that an arbitrator would make findings of fact and issue a written decision, the trial court would execute an order for judgment based on the special arbitrator’s findings and decision and “the parties . . . reserved their appeal rights and shall be entitled to appeal this case as if it had been disposed of by summary judgment by [a district court].” 

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Posted in Auto Dealer, BAP, CGL, Coverage | Tagged , , , , | 1 Comment

CGL Coverage: Latent Defects and Continuous, Progressive or Recurring Damages (Allocation of Liability)

Posted on September 27, 2010 by Gregory Johnson

By Greg Johnson. Which CGL policy (or policies) will apply in a property damage claim involving continuing, progressive or recurring damages?  Whether the underlying claim is one of environmental liability, asbestos, construction defect or products liability, claims involving damages which extend over multiple policy periods present unique and complex coverage issues for policyholders, insurers and courts.   Such claims raise a variety of issues, such as: what “trigger theory” should a court apply to determine which policies may apply; are the damages excluded by various provisions in the policies or any common law doctrine that is read into the policies; how should a court determine the number of “occurrences” under the policies; what method of allocation, if any, between successive insurers is most appropriate; how should a court deal with self-insured retainers or deductibles; and how should a court deal with periods, if any, during which the policyholder was self-insured?  The stakes in such claims are often high.

The vast majority of jurisdictions have adopted one of four trigger theories to allocate liability in claims involving successively liable insurers.  Have the allocation rules changed?  Yes, sort of.  Insurers and policyholders need to familiarize themselves with the allocation rules in Insurance Service Office’s (“ISO”) Known Injury or Damage (“KID”) provisions, which have recently begun to take center stage in claims involving ongoing, progressive and recurring damages.  Case law interpreting these provisions is just starting to develop.   The  Minnesota Court of Appeals will be addressing KID provisions in a construction defect-insurance coverage appeal the author is handling.

The standard CGL policy provides coverage for “property damage” (or “bodily injury”) that “occurs during the policy period,” meaning the insurer has agreed to indemnify the insured for any damages (or injuries) that occur during the policy period (subject to the other terms, conditions and exclusions of the policy). However, historically the standard CGL policy has not contained any provisions which attempt to allocate liability between current, past and future liability policies. See, generally, Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283 (Minn. 2006) (leading construction defect case in Minnesota involving successively liable insurers).  The policies’ “other insurance” clauses and common law “closeness to the risk” rules – which serve to allocate liability in claims involving concurrent coverage (i.e., liability policies issued to the same insured during the same policy period) — do not apply to claims involving successive or consecutive coverage (i.e., liability policies issued to the same insured over different policy periods).  See, e.g., Northern States Power Co. v. Fidelity & Cas. Co., 523 N.W.2d 657 (Minn. 1994) (noting the distinction between concurrent and successive policies and holding that “other insurance” provisions and “closeness to the risk” analysis do not apply to allocate liability in claims involving damage occurring over multiple policy periods).

As a result, courts developed common law rules of apportionment and tend to follow one of four “trigger” theories to allocate liability among policies “on the risk:” (1) the “exposure” rule, whereby only those policies in effect when the claimant or property was exposed to hazardous materials are triggered; (2) the “manifestation” rule, whereby only those policies in effect when the injury or damage was discovered are triggered; (3) the “continuous trigger” where the policies in effect at the time of exposure, the time of manifestation, and all the time in between are triggered; and (4) the “actual injury” or “injury-in-fact” trigger, whereby only those policies in effect when damage occurred are triggered.

These common law apportionment rules have, however, been modified to some extent by contractual “Known Injury or Damage” provisions.  In response to an onslaught of latent defect claims involving continuing, progressive and recurring property damage, the Insurance Services Office (ISO) created so-called “Montrose endorsements” (after the California case that led to its development, Montrose Chemical Corp. v. Admiral Ins. Co., 42 Cal. Rptr.2d 324, 913 P.2d 878 (1995), as modified on denial of reh’g (Aug. 31, 1995)) which attempt to allocate liability among current, past and future CGL policies for liability claims involving continuous, progressive or recurring injuries or damages. In September 1999, the Insurance Services Office (“ISO”) offered an endorsement adding “Known Injury or Damage” provisions to the insuring agreement of the standard CGL policy.  (See CG 00 57 09/99.) Later, the language used in the endorsement was incorporated into the CGL policy’s insuring agreement.  (See CG 00 01 10/01; CG 00 01 12/04; and CG 00 01 12/07.)  The Known Injury or Damage provisions added paragraphs 3(b),  (c) and (d) to the CGL insuring agreement, and provide as follows:

b.         This insurance applies to “bodily injury” or “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; and

(3)       Prior to the policy period, no insured listed under Paragraph 1. of Section II–Who is An Insured and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property damage” had occurred in whole or in part.  If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period.

c.         Bodily injury” or “property damage” which occurs during the policy period and was not, prior to the policy period, known to have occurred by any insured listed under Paragraph 1. of Section II—Who is An Insured or any “employee” authorized by you to give or receive notice of an “occurrence” or claim, includes any continuation, change or resumption of that “bodily injury” or “property damage” after the end of the policy period.

d.         “Bodily injury” or “property damage” will be deemed to have been known to have occurred at the earliest time when any insured listed under Paragraph 1. of Section II–Who is An Insured or any “employee” authorized by you to give or receive notice of an “occurrence” or claim:

(1)       Reports all, or any part, of the “bodily injury” or “property damage” to us or any other insurer;

(2)       Receives a written or verbal demand or claim for damages because of the “bodily injury” or “property damage”; or

(3)       Becomes aware by any other means that “bodily injury” or “property damage” has occurred or has begun to occur.

The overriding purpose of the Known Injury or Damage (“KID”) provisions is to allocate liability among current, past and future CGL policies in liability claims involving continuous, progressive or recurring injuries or damages. As between the policy in effect when the insured first discovered injury or damage and subsequent policies, the KID provisions assign liability to the policy in effect when the insured first became aware that bodily injury or property damage had begun.  To accomplish this result, ISO first expanded the stated scope of policy coverage under the CGL policy.  Unlike standard CGL policy provisions, policies incorporating KID provisions do not limit coverage to “bodily injury” and “property damage” that “occurs during the policy period.”  While “bodily injury” or “property damage” must occur during the policy period in order to trigger the policy (“This insurance applies to ‘bodily injury’ or ‘property damage’ only if: . . . (2) the ‘bodily injury’ or ‘property damage’ occurs during the policy period”), the KID provisions expand the stated scope of the policy to also include “bodily injury” and “property damage” which occurs after the policy period.  Subparagraph 3(c) states in relevant part:  “’Bodily injury’ or ‘property damage’ which occurs during the policy period . . .  includes any continuation, change or resumption of that ‘bodily injury’ or ‘property damage’ after the end of the policy period.”  For example, assume that an insured contractor negligently designed/installed a sprinkler system in a residential apartment complex.  One of the pipes breaks due to the insured’s defective design/installation, resulting in water damage to the building.  The insured contractor is notified of the pipe break, visits the complex and repairs the broken pipe, but does not correct its defective design/installation.  Under the KID provisions, the policy in effect at the time of the initial pipe break would be responsible for both (a) the property damage relating to the initial break; and (2) any future property damage caused by the same defective design/installation, even if those damages took place after the expiration of the policy.  Stated another way, a CGL policy which is triggered because a continuous injury or damage becomes known during the policy period is also responsible for any continuation, change or resumption of that bodily injury or property damage even if the bodily injury or property damage takes place after the expiration of the policy period.

Next, ISO included provisions providing that any policy issued after the insured first had knowledge that bodily injury or property damage had occurred, in whole or in part, would not apply. Paragraph b(3) provides that if the insured (or its authorized employee) knew that bodily injury or property damage had occurred, in whole or in part, prior to the policy period, that policy as well as any subsequent policies will not afford coverage.  See, e.g., Travelers Cas. and Surety Co. v. Dormitory Authority State of N.Y., __ F.Supp.2d __, 2010 WL 3001729 (S.D.N.Y. 2010) (“[b]ecause [the insured] became aware prior to the beginning of the policy period that damage to the flooring system had occurred or begun to occur, [the insured] cannot seek coverage for the flooring failure under the terms of the policy”); Trinity Universal Ins. Co. of Kansas v. Northland Ins. Co.,  2008 WL 4386760, 4-6 (W. D. Wash. 2008) (CGL policy containing “Known Injury or Damage” endorsement did not afford coverage to stucco subcontractor for water damages occurring after the policy inception date as “the record provides ample evidence that Jefferson had notice of the water damage allegedly caused (at least in part) by its stucco work” prior to the inception of policy); Harleysville Mut. Ins. Co. v. Dapper, LLC., 2010 WL 2925779 (M.D. Ala. 2010) (“the property damage at issue manifested itself prior to the policies’ inception” and therefore the known-loss endorsement applies to bar coverage); Keenan Hopkins Schmidt and Stowell Contractors, Inc. v. Continental Cas. Co., 653 F.Supp.2d 1255 (M.D. Fla. 2009) (known-loss provision relieved insurance company from liability for amounts arising out of property damage known by the insured prior to the inception of the policy); Quanta Indem. Co. Davis Homes, LLC, 606 F.Supp.2d 941 (S.D.Ind.2009) (known claim exclusion was enforceable because the insured had knowledge of at least some of the damage prior to the inception of the policy period). Cf Essex Ins. Co. v. H & H Land Dev. Corp., 525 F.Supp.2d 1344 (M.D.Ga.2007) (known loss provision did not apply to bar coverage; insured knew of property damage to neighboring property but not property damage to two other properties). In contrast to common law known loss/loss in progress doctrine (which focuses on the insured’s subjective belief as to whether it believed, at the time the policy was issued, that damages will continue in the future), the relevant inquiry under KID provisions is simply whether the insured knew that some damage arising from the same cause had occurred prior to the policy period. Travelers Cas. and Surety Co. v. Dormitory Authority State of N.Y., WL 3001729 (S.D.N.Y. 2010) (“[i]t follows from the foregoing policy provisions that, if an insured party became aware by ‘any . . . means’ that ‘property damage’ had ‘occurred or ha[d] begun to occur’ prior to the inception of the ‘policy period,’ then that insured may not seek coverage . . .”).

Thus, the KID provisions assign liability to the policy in effect when the insured first became aware that injury or damage had occurred and eliminate coverage under any policy issued thereafter.  In the sprinkler system hypothetical previously mentioned, the insurer on the risk at the time the insured learned of the first pipe break would be responsible for any property damage that resulted from the same defective design/installation, even though occurring after the expiration of the policy.  The policy or policies issued after the insured was notified of the initial pipe break would not apply.   To this extent, the KID provisions allow the insurers to decide amongst themselves which CGL insurer will be liable.   Some CGL insurers provided written notice of the change to their policyholders.  One such notice provided:

CLARIFICATIONS IN COVERAGE GA 101 10 01 Commercial General Liability Coverage Form

The Insuring Agreement for Bodily Injury and Property Damage, and separately for Personal Injury and Advertising Injury is modified . . . It further address[es] the applicability of the Commercial General Liability Coverage Form in situations involving continuation, change or resumption of the same “bodily injury” or “property damage” during or after the [policy period].  In most states, this revision to the Insuring Agreement represents neither a broadening nor a restriction in coverage from the original intent.  However, in certain states, this revision may represent a decrease in coverage.  This revision may result in the shifting of coverage, under certain circumstances, between current policies and past or future policies.

It is important to recognize that the KID provisions do not purport to eliminate coverage under CGL policies which were issued prior to the insured’s discovery of injury or damage.   Depending on the trigger theory used by the applicable jurisdiction, such prior policies may also be triggered and be required to respond to the claim.  As noted above, courts have tended to use one of four theories to apportion liability among insurers in cases involving ongoing damages: (1) the “exposure” rule, whereby only those policies in effect when the claimant or property was exposed to hazardous materials are triggered; (2) the “manifestation” rule, whereby only those policies in effect when the injury or damage was discovered are triggered; (3) the “continuous trigger” where the policies in effect at the time of exposure, the time of manifestation, and all the time in between are triggered; and (4) the “actual injury” or “injury-in-fact” trigger, whereby only those policies in effect when damage occurred are triggered. Minnesota, for example, uses the actual injury trigger theory.  Under this theory, an injury can occur even though not “diagnosable,” “compensable,” or manifest during the policy period as long as it can be determined, even retroactively, that some injury did occur during the policy period.  In re Silicone, 667 N.W.2d at 415; NSP, 523 N.W.2d at 663 (citing Am. Home Prods. Corp. v. Liberty Mut. Ins. Co., 748 F.2d 760, 765‑66 (2d Cir.1984)).  Thus, under Minnesota law, policies issued prior to the insured’s  discovery of any injury or damage can be triggered and can also apply to claims involving ongoing injuries or damages.  Presumably, the insured would be entitled to seek coverage under such policies as well as the policy in force at the time the insured first became aware of injury or damage.  The KID provisions only eliminate coverage under subsequent policies — policies issued after the insured first became aware that bodily injury or property damage had begun, in whole or in part.

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Posted in CGL, Coverage | Tagged , , , , , , , , , , | 2 Comments