Alabama Supreme Court Addresses Coverage for Faulty Workmanship

In its recent decision Town & Country Prop., L.L.C. v. Amerisure Ins. Co., 2011 Ala. LEXIS 183 (Ala. Oct. 21, 2011), the Supreme Court of Alabama had occasion to consider whether an underlying suit for defective workmanship triggered coverage under a general liability policy.

The insured, a general contractor, had been hired to construct an automobile sales and service facility.  Shortly after completion of the project, the project owner discovered several defects.  Frustrated by the insured’s subsequent inability to repair the defects, the owner commenced suit, alleging various causes of action based on theories of tort and breach of contract.  Amerisure provided a defense to its insured under a reservation of rights.  The matter ultimately resulted in a judgment against the insured for approximately $650,000.  Shortly after judgment was rendered, Amerisure denied a liability to indemnify its insured on the basis that the suit did not allege an occurrence, and that even if it did, the policy’s exclusion applicable to property damage to “your work” barred coverage.  Plaintiffs in the underlying matter, standing in the shoes of the insured, contended that the allegations of faulty workmanship constituted an occurrence and that the exclusion was inapplicable because the property damage alleged was caused by the insured’s subcontractors rather than by work actually performed by the insured. 

The Court looked to its two prior decisions on the issue of what constitutes an occurrence in the context of faulty workmanship claims.  In United States Fid. & Guar. Co. v. Warwick Dev. Co., 446 So. 2d 1021 (Ala. 1984), the Court had held that an underlying claim did not allege an occurrence where the damage alleged was limited solely to faulty workmanship.  By contrast, in Moss v. Champion Ins. Co., 442 So. 2d 26 (Ala. 1983), the Court found an occurrence where the insured’s failure to properly construct a roof allowed for water intrusion to the plaintiff’s home, causing damage to plaintiff’s attic and ceilings.  The Court harmonized these two decisions by explaining that “faulty workmanship itself is not an occurrence but that faulty workmanship may lead to an occurrence if it subjects personal property or other parts of the structure to "continuous or repeated exposure" to some other "general harmful condition" (e.g., the rain in Moss) and, as a result of that exposure, personal property or other parts of the structure are damaged.”

The Court therefore held that to the extent that the underlying suit was limited to allegations of faulty workmanship, there could be no occurrence.  It nevertheless remanded the matter for further findings to determine whether the plaintiffs experienced any subsequent property damage, such as resulting damage to computers or furnishings.  In passing, the Court noted that if plaintiff did experience such property damage, it would necessarily follow that such damage was caused by an occurrence, and that the policy’s “your work” exclusion would not apply because of the exception applicable to work performed by subcontractors.

 

Application of Exclusion to Drywall Claim Does Not Render Coverage Illusory

The United States District Court for the Southern District of Florida has held on several occasions that the pollution exclusion applies to Chinese drywall claims.  See, e.g., CDC Builders, Inc. v. Amerisure Mut. Ins. Co., 2011 U.S. Dist. LEXIS 114509 (S.D. Fla. Aug. 16, 2011); Gen. Fid. Ins. Co. v. Foster, 2011 U.S. Dist. LEXIS 103618 (S.D. Fla. Mar. 24, 2011).  In its recent decision Colony Ins. Co. v. Total Contracting & Roofing, Inc., 2011 U.S. Dist. LEXIS 129269 (S.D. Fla. Oct. 18, 2011), the Southern District of Florida added to this line of cases by holding that a hazardous materials exclusion applied to drywall claims.  In doing so, the court rejected the insured’s argument that application of the exclusion rendered coverage illusory.

The insured, Total Contracting, was sued for having allegedly installed defective drywall in a home that it renovated.  Underlying plaintiffs alleged that the drywall emitted sulfides and other noxious gases, resulting in property damage and bodily injury.  Total Contracting’s insurer, Colony, denied coverage under a series of consecutively renewed general liability policies on the basis of a hazardous materials exclusion, applicable to bodily injury or property damage “which would not have occurred in whole or in part but for the actual or threatened discharge, dispersal, seepage, migration, release or escape of ‘hazardous materials’ at any time.”  “Hazardous materials” was defined as “‘pollutants’, lead, asbestos, silica and materials containing them.”  Thus, the exclusion tracked the language of a total pollution exclusion, but applied to a broader range of substances.

The underlying plaintiffs, who were parties to the declaratory judgment action, essentially conceded that the hazardous materials exclusion applied, as their suit against Total Contracting alleged that the drywall emitted gases that resulted in bodily injury and property damage.  Instead of challenging the applicability of the exclusion, underlying plaintiffs argued that application of the exclusion under the circumstances would render the policies illusory and thus violative of public policy.  The basis for this argument was that the exclusion contradicted in whole the coverage otherwise afforded under the policies.

The court initially agreed that based on Florida law concerning the pollution exclusion, as well as case law applying the pollution exclusion in the context of Chinese drywall, the policies’ hazardous materials exclusion had clear application to the underlying suit.  The court went on to hold that the exclusion did not render coverage illusory, since the policies provided “coverage for a seemingly wide-range of business activities described as ‘the contractors-subcontractors work.’”  The hazardous materials exclusion barred coverage for only a small portion of claims that otherwise fell within this coverage, and as such the exclusion could not be said to completely “contradict” the policies’ insuring agreements.  In other words, the exclusion did not completely negate coverage under the policies.  In passing, the court noted that if underlying plaintiffs’ argument were correct, then any policy with a hazardous materials exclusion (or a pollution exclusion) must be considered illusory, which would be an absurd result.

Eleventh Circuit Affirms Regulatory Investigation Not a Claim Under D&O Policies

In its recent decision in Office Depot, Inc. v. Nat'l Union Fire Ins. Co., 2011 U.S. App. LEXIS 20759 (11^th Cir. Oct. 13, 2011), the Eleventh Circuit Court of Appeals, applying Florida law, affirmed a lower court decision finding that Office Depot was not entitled to coverage under a primary and excess “organization insurance” policy for attorneys’ fees associated with an SEC investigation.

In July 2007, Office Depot gave notice to its insurers of an article from the Dow Jones Newswire reporting that Office Depot may have violated federal securities laws by selectively disclosing nonpublic information.  A week later, the SEC sent a letter to Office Depot advising that it would be undertaking an investigation into whether Office Depot had, in fact, violated federal securities laws.  A few weeks later, the SEC informally asked Office Depot to produce various communications relevant to its investigation. It was not until January 2008, however, that the SEC issued a formal order of investigation.  This investigation lasted over two years, and included subpoenas being issued to various Office Depot directors and officers, and  Wells Notices being issued.  In December 2009, the SEC filed a formal complaint and the matter was later settled.  At issue before the Eleventh Circuit was whether Office Depot was entitled to coverage for its attorneys’ fees associated with the SEC investigation during the period between the first letter in July 2007 and the issuance of the formal subpoenas and Wells Notices.

Office Depot argued, among other things, that its policies provided coverage for all defense costs incurred following its receipt of the SEC notice in July 2007, i.e., for the SEC’s informal investigation.  The policies’ insuring agreement applicable to organization insurance provided coverage for:

(i) Organization Liability. This policy shall pay the Loss of any Organization arising from a Securities Claim made against such Organization for any Wrongful Act of such Organization. . . .

Securities Claim was defined by the policies as:

…a Claim, other than an administrative or regulatory proceeding against, or investigation of an Organization, made against any Insured:

    (1)   alleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities . . .; or

    (2)   brought derivatively on the behalf of an Organization by a security holder of such Organization.

Notwithstanding the foregoing, the term "Securities Claim" shall include an administrative or regulatory proceeding against an Organization, but only if and only during the time such proceeding is also commenced and continuously maintained against an Insured Person.  (Emphasis supplied.)

Office Depot contended that it was entitled to defense costs dating back to the SEC’s July 2007 letter because the definition of Securities Claim did not expressly exclude informal SEC investigations.  Office Depot further argued that the carve-back provision of the definition of Securities Claim brought back into coverage an “administrative or regulatory proceeding.”

The Eleventh Circuit disagreed, explaining that the initial portion of the definition of Securities Claim, through the use of the disjunctive term “or,” eliminated coverage for two types of potential Securities Claims: those involving administrative or regulatory proceedings and those involving administrative or regulatory investigations.  The court determined that while the carve-back portion of the definition of Securities Claims gave back coverage for administrative or regulatory proceedings under certain circumstances, it did not restore coverage for investigations.  Thus, concluding that the SEC’s July 2007 was an investigation, the court held that Office Depot was not entitled to coverage for attorneys’ fees associated with responding to same.  It was not until the SEC issued subpoenas and Wells Notices to covered individuals that that the policies’ coverage was triggered.

The court considered several secondary arguments raised by Office Depot, most notably its argument that the policies’ notice provision operated to bring defense costs back into coverage.  This provision stated, in pertinent part, that if during the policy period Office Depot gave notice of circumstances that might result in a claim, then any future claim would be considered made at the time notice of circumstances was given.  Office Depot argued that by providing notice of the Dow Jones article to its insurers, it gave notice of circumstances, such that when the Claim was later made, “any costs incurred between the notice of circumstances and the date a Claim was made” was brought back into coverage.  The court rejected this bootstrapping argument, explaining that the notice of circumstances provision serves only to bookmark coverage under the policies for when a Claim is later made, even if outside the policy period, and does not operate to bring into coverage pre-Claim defense costs, particularly those relating to a non-covered regulatory investigation.

Florida Court Holds Insurer Has Duty to Indemnify Legionella Bacteria Claim

In Westport Ins. Corp. v. VN Hotel Group, LLC, 761 F. Supp. 2d 1337 (M.D. Fla. 2010), the United States District Court for the Middle District of Florida held that a general liability carrier had a duty to defend its insured in connection with a wrongful death lawsuit arising out of a hotel guest’s exposure to Legionella bacteria.  Among other things, the court held that such bacteria did not fall within the policy’s pollution exclusion.  More recently, in its decision Westport Ins. Corp. v. VN Hotel Group, LLC, 2011 U.S. Dist. LEXIS 117215 (M.D. Fla. Oct. 11, 2011), the court considered joint motions for summary judgment as to whether the insurer had a duty to indemnify with respect to such claims.

The insurer, Westport, argued that Legionella bacteria qualifies as a contaminant for the purpose of its policy’s pollution exclusion.  While the court rejected this very argument in its prior ruling, Westport argued that reconsideration was warranted based on recent decisions by the Eleventh Circuit Court of Appeals in Maxine Furs, Inc. v. Auto-Owners Ins. Co., 426 F. App’x. 687 (11^th Cir. 2011) (holding that curry aroma constituted a contaminant for the purpose of a pollution exclusion) and the Middle District of Florida in Markel Ins. Co. v. Florida West Covered RV & Boat Storage, LLC, No. 8:09-cv-2427-T-27TGW (M.D. Fla. Mar. 9, 2011), aff’d, 2011 U.S. App. LEXIS 16552 (holding that pollution exclusion applied to bacterial infection caused by millings from roadwork). The Westport court nevertheless distinguished both cases on the basis that neither involved bacteria.  Bacteria, explained the court, are living organisms not readily classified as solid, liquid, gaseous or thermal substances as required by the policy’s pollution exclusion.  Accordingly, the court reiterated its prior ruling that the pollution exclusion did not apply to the underlying suit.

The Westport court also revisited its prior ruling on the policy’s Fungi or Bacteria exclusion, which by its title alone seemed applicable to a claim arising out of exposure to Legionella bacteria.  The exclusion, however, applied only to “… bacteria on or within a building or structure, including its contents … .”  The underlying plaintiff was exposed to Legionella bacteria while in the hotel’s spa tub.  The court held that a spa tub did not qualify as a “structure,” which the court defined as “an edifice or building of any kind.”  The court further held that even if the spa tub could qualify as a “structure” for the purpose of the Fungi or Bacteria exclusion, the exclusion had an exception for bacteria “that are, are on, or are contained in, a good or product intended for bodily consumption.”  The court reasoned that the term “consumption” in this exclusion was not limited to actual ingestion, but instead meant “the utilization of economic goods in the satisfaction of wants.”  Thus, explained the court, the underlying plaintiff had consumed the hot tub water not in the sense of drinking it, but “to satisfy a desire or want.”  As such, the court held that the exception to the exclusion was applicable even if the tub could be considered a structure.

Illinois Court Holds Abstention Doctrine Does Not Require Dismissal of Insurance-Related Declaratory Judgment Action

Under Illinois law, an insurer has two options when it is unsure as to whether an underlying claim triggers a defense obligation under a liability policy: it can provide a defense under a reservation of rights or it can seek a declaratory judgment as to its coverage obligations prior to trial.  Employers Ins. of Wausau v. Ehlco Liquidating Trust, 186 Ill.2d 127 (1999).  The recent decision by the United States District Court for the Northern District of Illinois in Cincinnati Ins. Co. v. Silvestri Paving Co., 2011 U.S. Dist. LEXIS 114273 (N.D. Ill. Oct. 4, 2011) addressed the appropriateness of a declaratory judgment action under such circumstances.

Cincinnati Insurance Company’s insured, Silvestri, was named as a defendant or third-party defendant in three consolidated lawsuits alleging dumping of waste in violation of the Illinois Environmental Protection Act.  After initially disclaiming coverage, Cincinnati agreed to defend Silvestri in these matters under a reservation of rights.  Cincinnati then brought suit against Silvestri in federal court pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, seeking a declaration that it had no duty to defend or indemnify Silvestri on the basis of several coverage defenses, including the application of its policies’ pollution exclusion, the lack of an occurrence, and Silvestri’s failure to comply with the policies’ notice provisions.

Silvestri subsequently moved to dismiss pursuant to the Wilton/Brillhart abstention doctrine, which provides a district court with the discretion to stay or dismiss a declaratory judgment action when a parallel case is pending in state court that involves the same parties and identical legal issues.  Where, however, the declaratory judgment presents an issue distinct from the state court proceeding, abstention is inappropriate.  Silvestri argued that abstention was proper since the issues presented for adjudication in Cincinnati’s declaratory judgment action would also be resolved in the underlying suits and because Cincinnati’s duty to indemnify necessarily required a finding of fact in the underlying suits.  Silvestri further argued that Cincinnati was engaging in improper forum shopping since the judges in the underlying consolidated cases had ruled on certain issues relating to the duty to defend and indemnify involving other defendants and their respective insurers.

The court rejected each of Silvestri’s arguments.  Most pertinently, the court held that the underlying state court cases could not be considered parallel actions for the purpose of the Wilton/Brillhart doctrine because Cincinnati was not a defendant in those suits and because the coverage issues would not be addressed in those suits.  While the underlying suits would be determinative of Silvestri’s liability under the Illinois statute, those suits would not address Silvestri’s right to coverage for its liability.  As the court explained, “[w]hether Silvestri dumped ‘waste’ in violation of the IEPA [and] is liable for damages to the State of Illinois, is … independent from the issue of whether the allegations in the underlying case are covered by Silvestri's insurance policies with Cincinnati.” The court further held that it was irrelevant that the underlying courts addressed insurance coverage issues as to parties other than Silvestri and Cincinnati under entirely different insurance policies.  Such would have no effect on the insurance coverage dispute between Silvestri and Cincinnati and, at the very least, did not merit abstention under the Wilton/Brillhart doctrine.

Eleventh Circuit Holds No Duty to Defend Credit Card Transaction Claim

In its recent decision in Creative Hospital Ventures, Inc. v. E.T. Limited, Inc., 2011 U.S. App. LEXIS 19990 (11^th Cir. Sept. 30, 2011), the United States Court of Appeals for the Eleventh Circuit, applying Florida law, addressed whether the issuance of a credit card receipt to a customer constitutes “publication” for the purpose of a general liability policy’s “personal and advertising injury” coverage.

The insured, ETL, was named as a defendant in a class action suit alleging that defendants violated the Fair and Accurate Credit Card Transaction Act (“FACTA”) by issuing credit card receipts to customers that revealed more than five digits of their credit card numbers.  ETL claimed that the underlying suit constituted the personal and advertising injury offense of “oral or written publication, in any manner, of material that violates a person’s right of privacy,” thus triggering a defense obligation under a policy issued by Essex Insurance Company.  Essex argued, and the federal district court agreed, that ETL’s issuance of a credit card receipt did not constitute “publication” as that term is used in a general liability policy.  Relying on the Florida Supreme Court decision in Penzer v. Transportation Ins. Co., 29 So. 3d 1000 (Fla. 2010), the lower court held that “publication” requires dissemination of information to the public rather than to the individual cardholder.

On appeal, the Eleventh Circuit agreed that the Penzer decision was determinative of what constitutes “publication” under Florida law.  Penzer involved an alleged violation of the Telephone Consumer Protection Act (“TCPA”) resulting from the insured’s transmittal of unsolicited facsimiles, or “blast faxes.”  Relying on a standard dictionary definition of the word, the Florida Supreme Court held that publication involves some act of communication or dissemination of information to the public at large.  This definition, explained the court, necessarily encompassed the act of faxing an advertisement to 24,000 people at the same time “because it constitutes a communication of information disseminated to the public and it is ‘the act or process of issuing copies … for general distribution to the public.’”  Penzer at 1005-06. 

With this definition in mind, the Eleventh Circuit held that distributing a credit card receipt to a customer is not “publication.”  Rather, the receipt “is a contemporaneous record of a private transaction between ETL and the customer, and ETL neither broadcasted nor disseminated the receipt or the credit card information to the general public.”  The court distinguished a credit card receipt from the blast-faxes in Penzer on the basis that plaintiffs in Penzer did not solicit the facsimiles whereas in the underlying class action, the plaintiffs initiated the purchase that generated a credit card receipt.  The court further rejected ETL’s argument that the use of the phrase “in any manner” as used in the defined offense of “oral or written publication” expanded the definition of “publication” to include credit card receipts.  As the court explained, the phrase “‘in any manner’ merely expands the categories of publication (such as e-mail, handwritten letters, and, perhaps, ‘blast-faxes’) covered by the Policy” but did not dispense with the requirement that the publication itself be directed to the public at large.

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Louisiana Court Holds Allegation of Negligence Did Not Trigger Duty to Defend

In its recent decision New Orleans Deli & Dining v. Cont'l Cas. Co., 2011 U.S. Dist. LEXIS 111928 (E.D. La. Sept. 30, 2011), the United States District Court for the Eastern District of Louisiana had occasion to consider whether under Louisiana law, an underlying suit pertaining to the insured’s alleged practice of depriving its employees of tips triggered a duty to defend under a commercial general liability policy.

The underlying suit was brought by current and former employees of New Orleans Deli & Dining (“NODD”).  Plaintiffs alleged that customers deposited tips directly into a tip jar or otherwise paid tips directly a credit card slip, and that restaurant management had agreed to evenly distribute these tips to the employees.   Plaintiffs claimed, however, that management either kept the tips or otherwise donated the tips to charity.  The underlying suit alleged causes of action for breach of contract, negligence, fraud, unjust enrichment, and conversion.

The insurer, Continental, argued that it had no duty to defend the underlying suit because plaintiffs did not allege property damage arising out of an occurrence, but instead alleged intentional conduct resulting in pure economic loss, which cannot be considered property damage as that term is defined in a standard form general liability policy.  NODD, on the other hand, contended that the loss alleged in the underlying suit constituted property damage since it could be considered loss of use of tangible property not physically injured.  In this regard, NODD argued that the underlying plaintiffs claimed “that they lost the use of cash, which is a corporeal movable, and thus, tangible property.”  NODD further claimed that Continental at the very least owed a defense since the underlying suit alleged that NODD acted negligently in depriving its employees of their tip money, thus raising the possibility that NODD’s conduct was accidental.

The court held against NODD, finding that even if the alleged loss could qualify as property damage, the underlying suit did not allege an occurrence.  Looking to the complaint in the underlying matter, the court concluded that notwithstanding the general allegation of negligence, “[t]he alleged acts of implementing the tip policy and taking the tips were done intentionally, not accidentally nor negligently.”  As such, explained the court, the underlying suit did not sound in negligence but rather intentional tort, for which no duty to defend triggered under a general liability policy.