Texas Court Considers Application of Action Over Exclusion

In its recent decision in Preferred Contrs. Ins. Co. Risk Retention Group v. Oyoque Masonry, Inc., 2013 U.S. Dist. LEXIS 105386 (S.D. Tex. July 26, 2013), the United States District Court for the Southern District of Texas had occasion to consider the application of an “action over” exclusion to an underlying personal injury claim.

PCIC insured Oyoque Masonry, Inc. (“OMI”) under a general liability policy.  OMI was hired to install a concrete wall at a residential subdivision.  The wall had been fabricated by a company related to OMI, and delivered to the jobsite by a trucking business – Gulf Coast – a company also related to OMI.  Gulf Coast hired an independent contractor, Calvin Finnels, to truck the wall from the fabrication facility to OMI’s worksite.  After the wall was lifted by forklift from the delivery truck, Mr. Finnels remained on the site to assist an OMI with installation of the wall.  Mr. Finnels was injured while performing this work, and he later brought suit against Gulf Coast and OMI.

The PCIC policy contained at “action over” exclusion stating:

This Policy does not apply to any claim(s) for "bodily injury", arising out of claim(s), or suit(s) by general contractors, subcontractors, independent contractors, their employees or volunteer workers, or any persons or companies who are affiliated with such persons or entities who provide work or products on job sites where the insured provides work, products or services as a contractor or subcontractor. This exclusion applies whether or not the persons or entities making such claims are hired, or retained by the insured on the job site where the claim(s) or suit(s) arise from.

PCIC argued on motion for summary judgment that the action over exclusion barred coverage for the Finnels suit because Mr. Finnels was an independent contractor – a fact that he expressly pled in his complaint.  OMI, on the other hand, argued against the application of the exclusion on several grounds, most pertinently that the exclusion did not apply because Gulf Coast was not a subcontractor of OMI. 

The court rejected OMI’s attempt to limit the scope of the exclusion, observing that by its express terms, the exclusion applies to any suit brought by a general contractor, subcontractor or independent contractor.  The court held that because Mr. Finnels alleged he was an independent contractor, the exclusion had clear application.  In so holding, the court reasoned that Gulf Coast’s “subcontractor status is relevant only if Finnels was one of its "employees", "volunteer workers", or "affiliated with" it, as provided in the Action Over exclusion.”  The court also rejected OMI’s contention that the exclusion applied only to independent contractors hired by OMI (i.e., the named insured) but not to independent contractors hired by other parties such as Gulf Coast.  The second sentence of the exclusion, reasoned the court, made clear that the identity of the employer is irrelevant.  As such, explained the court “because Finnels was an independent contractor under the Policy, the precise nature of the contractual relationship (if any) between Gulf Coast and OMI is immaterial.”

Georgia Supreme Court Holds Defective Work Is An Occurrence

In Taylor Morrison Servs. v. HDI-Gerling Am. Ins. Co., 2013 Ga. LEXIS 618 (July 12, 2013), the Georgia Supreme Court addressed whether a construction defect claim constitutes an “occurrence” for purposes of satisfying the insuring agreement of the CGL Policy.  The court was called upon to make that determination pursuant to a certified question from the United States Court of Appeals for the Eleventh Circuit.  

In the underlying lawsuit, Taylor Morrison, a homebuilder, was sued in California by sixteen homeowners claiming that the concrete foundations of their homes was improperly constructed.  The plaintiffs alleged that the failure of the foundations caused physical damage to their homes, including water intrusion cracks in the floors and driveways, and warped and buckled flooring.  HDI-Gerling initially undertook the defense of Taylor, but then sought a declaration in the U.S. District Court for the Northern District of Georgia that the CGL policy issued to Taylor did not cover the claims.  The district court granted judgment in favor of HDI-Gerling finding that the claims did not assert an “occurrence” as the only damage alleged was the work performed by Taylor.  That ruling was appealed to the Eleventh Circuit, which certified the issue of whether a claim for defective work qualifies an “occurrence” as used in the standard CGL policy.

The Georgia Supreme Court answered that question in the affirmative and rejected the district court’s ruling.  The CGL policy defines the term “occurrence” as an “accident,” and since an “accident” does not require a determination of the party who performed construction work or whose  interests were injured by that work, a claim for damages to the insured’s own work could qualify as an “occurrence.”  In the context of the term “occurrence,” the coverage determination depended upon whether the claimed damages were expected or intended from the standpoint of the insured.

The court went on to make clear that its decision was not contrary to the general rule that a CGL policy is not intended to insure liabilities for the repair or correction of the faulty workmanship of the insured.  The court recognized that the other clauses in the insuring agreement, including the requirement that the claim seek damages for “property damage,”  are better suited to preclude coverage for such claims.  The term property damage “must refer to property that is nondefective and to damage beyond faulty workmanship.”  The court was unwilling to define the line of demarcation between defective and nondefective property when both are a part of the same project.  The court also noted that policy exclusions are inserted into the policy to bar coverage for the repair or correction of defective work.  Finally, the court held that claims of fraud against an insured are generally not covered by a CGL policy, however a cause of action for breach of warranty may be covered where it includes a warranty given for nondefective property that was damaged by the insured’s defective work.

Missouri Federal Court Rejects Bad Faith Claim

In its recent decision in Hullverson v. Liberty Ins. Underwriters, 2013 U.S. Dist. LEXIS 101640 (E.D. Mo. July 22, 2013), the United States District Court for the Eastern District of Mississippi had occasion to consider the issue of whether Missouri law permits an insured to assert a bad faith claim sounding in tort based on an insurer’s breach of the duty to defend.

Liberty International Underwriters insured the Hullverson law firm under a professional liability policy.  The firm and several individual attorneys were sued in connection with various activities relating to the firm’s advertising.  Liberty denied coverage for the suit, prompting Hullverson to commence a declaratory judgment action against Liberty.  In addition to asserting causes of action for declaratory judgment and breach of contract, Hullverson’s complaint stated a cause of action for vexatious refusal to pay in violation of Missouri Revised Statutes §§ 375.296 and 375.420, and a cause of action for bad faith failure to defend and indemnify.

Liberty moved to dismiss Hullverson’s bad faith cause of action, arguing that Missouri’s vexatious refusal to pay statutes preempt such a cause of action.  The court agreed that as a general proposition, a bad faith cause of action for breach of duty to defend is not permissible under Missouri law.  The seminal decision on the issue, observed the court, is Overcast v. Billings Mut. Ins. Co., 11 S.W.3d 62 (Mo. 2000), in which the Missouri Supreme Court held that “an insurance company's denial of coverage itself is actionable only as a breach of contract and, where appropriate, a claim for vexatious refusal to pay.”  These decisions, explained the Hullverson court, make clear that absent wrongful conduct independent of the denial of the duty to defend, an insured cannot recast a breach of contract claim as a tort claim.   With this general rule in mind, the court concluded that Hullverson failed to alleged the requisite independent conduct that would permit a bad faith claim:

Plaintiffs have failed to plead or argue any conduct in Count IV that is distinct from conduct alleged in Counts I, II, and III. The bad faith claim is not wholly independent of their breach of contract and vexatious refusal claims. This is not they type of independent tort claim contemplated by Overcast. Plaintiffs have merely stated a claim for bad faith based almost wholly on Liberty's refusal to pay their insurance claim. Missouri courts have consistently interpreted the holding in Overcast to preclude these types of claims.

As such, the court agreed that Hullverson was limited to its claim for vexatious refusal to pay, and that its bad faith claim must be dismissed.

Florida Court Holds Assault and Battery Exclusion Applicable to Negligence Claims

In its recent decision in Tower Ins. Co. of New York v. Blocker, 2013 U.S. Dist. LEXIS 98296 (M.D. Fla.  July 15, 2013), the United States District Court for the Middle District of Florida had occasion to consider the scope of an assault and battery exclusion.

Tower Insurance Company insured JB Rentals under a general liability policy with the following assault and battery exclusion barring coverage for bodily injury:

            … arising from, due to or caused by:

(1)       Assault and/or Battery committed by any insured, any employee of any insured, any patron or customer of the insured, or any other person; or

(2)       The failure to suppress or prevent any Assault and/or Battery or any act or omission in connection with any Assault and/or Battery; or

(3)       The negligent hiring, supervision or training of any employee or agent of the insured with respect to the events de-scribed in (1) and (2) above.

JB Rentals sought coverage for an underlying suit arising out of the stabbing of an individual on its premises.   The suit alleged that JB Rentals failed to maintain its premises in a safe condition and that it knew “that criminal acts or attacks were reasonably likely to be perpetrated unless defendants took steps to deter and prevent criminal acts and otherwise provide proper security.” 

Tower provided JB with a defense in the suit, but commenced a coverage litigation seeking a declaration of non-coverage based on the assault and battery exclusion.  The insured agreed that the underlying incident qualified as an assault and battery for the purpose of the exclusion.  It nevertheless argued that the exclusion was inapplicable to the theories of liability asserted by underlying plaintiff; namely, JB Rental’s negligent failure to have prevented the incident. 

Citing to numerous Florida decisions, the court observed that “Florida [courts] have consistently found the exclusion to apply even when the underlying action is couched in terms of negligence by the insured with regard to the premises.”  In particular, explained the court, the phrase “arising out of” is construed differently than the phrase “caused by” and “requires more than mere coincidence, a causal connection, between the conduct and the injury, but not does not require proximate cause.”  As such, and having concluded that the theories of negligence asserted against JB Rentals were causally connected to the alleged assault and battery, the court agreed that the exclusion negated Tower’s duty to defend or indemnify.

South Carolina Court Rejects Theory of Seamless Claims Made and Reported Coverage

In its recent decision in GS2 Engineering & Environmental Consultants, Inc. v. Zurich American Ins. Co., 2013 U.S. Dist. LEXIS 95137 (D.S.C. July 9, 2013), the United State District Court for South Carolina had occasion to consider the limitations of coverage inherent in a claims made and reported policy.

Steadfast Insurance Company insured GS2 under a series of claims made and reported contractors’ pollution liability policies.  At issue were the policies in effect for the periods August 7, 2009 to August 7, 2010 and August 7, 2010 to August 7, 2011.  The policies were similar in all material respects.  The policies’ insuring agreements stated plainly that coverage was available only for claims first made during the policy period and reported to the insurer during the policy period or an extended reporting period, if applicable.  The policies provided for an automatic thirty day extended reporting period, and the option to provide a lengthier extended reporting period, upon termination of the policy, defined as “all theories of liability (direct or vicarious) asserted against any insured.”  In August 2010, while the 09-10 policy was in effect, GS2 was served with a complaint.  It failed to report the complaint to Steadfast prior to the August 7, 2010 expiration of its policy.  It was not until September 23, 2010 – nearly six weeks into the 10-11 policy period – that the underlying claimant gave notice of the matter to Steadfast.  GS2 only later gave formal notice of the suit to Steadfast in November 2010. 

In the ensuing coverage litigation, Steadfast argued that because there was no termination of coverage, i.e., because the 09-10 policy was renewed for the 10-11 policy period, there was no extended reporting period tacked onto the 09-10 policy.  As such, GS2’s failure to have reported the underlying suit to Steadfast prior to August 7, 2010 was fatal to its right to coverage.  GS2, however, argued that the renewal of the 09-10 policy should have the effect of extending the reporting period, relying on the Ohio and Kentucky decisions in Helberg v. Nat'l Union Fire Ins. Co., 657 N.E.2d 832 (Ohio 1995) and AIG Domestic Claims, Inc. v. Tussey, 2010 Ky. App. Unpub. LEXIS 741 (Ky. Ct. App. 2010), where the respective courts adopted a theory of seamless or continuous coverage, i.e., that the reporting period in a claims made and reported policy is extended if the policy is renewed.

Relying on what it deemed the majority rule, as demonstrated in decisions such as Checkrite Ltd., Inc. v. Illinois Nat. Ins. Co., 95 F. Supp. 2d 180 (S.D.N.Y. 2000) and Ehrgood v. Coregis Ins. Co., 59 F. Supp. 2d 438 (M.D. Pa. 1998), the District Court of South Carolina rejected GS2’s theory of continuous coverage, finding that the majority rule “better reflect the nature of the policies at issue and their actual language.”  The court further predicted that:

… the South Carolina Supreme Court would apply this reasoning to exclude coverage under the facts of this case and language of the present policy, which clearly and repeatedly advises that coverage requires a claim to be made and reported during the same policy period. Any ambiguity which might be found in the ERP, when read in isolation, is clarified by the language found in the introductory and basic coverage provisions quoted above. The policy even alerts the insured that such terms "may be different from other policies an 'insured' may have purchased."

Florida Court Holds Classified Operations Endorsement Precludes Coverage

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In its recent decision in Canal Indem. Co. v. Margaretville of NSB, Inc., 2013 U.S. Dist. LEXIS 93658 (M.D. Fla. July 3, 2013), the United States District Court for the Middle District of Florida had occasion to consider the limitation of coverage effected by a classified operations endorsement on a general liability policy.

Canal Indemnity Company insured Bad Lands Excavating, Inc., a construction subcontracting company, under a general liability insurance policy.  The policy contained a “special exclusion endorsement,” limiting coverage to those operations classified and specifically identified in the policy’s declarations or endorsements.  The policy also contained an endorsement excluding coverage for underground property damage caused by explosion or collapse.  In its application for the policy, Bad Lands was asked to disclose all operations it performed for which it was seeking insurance coverage.  In response, Bad Lands selected only grading of land, including “borrowing, filling or back filling.”  As a result, this was the only operation identified in the declarations page of the policy issued by Canal.

Bad Lands was later named as a defendant in a property damage lawsuit in which it was alleged that Bad Lands negligently installed sheet pilings on plaintiff’s property.  Canal took the position that by having only identified grading operations, its policy necessarily excluded Bad Lands’ sheet piling operations.  Canal further argued that sheet piling could not be considered a grading operation.  Grading, it pointed out, is commonly defined as “to level off a smooth horizon or sleeping surface,” whereas a pile is typically defined as a “long slender column usually of timber, steel or reinforced concrete driven into the ground to carry a vertical load.” Relying on these dictionary definitions, Canal argued that “no reasonable interpretation of ‘grading’ would contemplate driving columns into the ground, such as is done in pile driving.”  The underlying claimants, however, suing on behalf of Bad Lands, argued that because the policy did not define the terms “operations,” “grading of land,” “borrowing,” filling,” or “back filling,” these terms needed to be interpreted broadly in favor of coverage.  They also argued that if the policy did not insure piling operations, then the underground property damage exclusion was unnecessary, or at the very least created an ambiguity. 

The court rejected the claimants’ arguments, finding that the classification endorsement was clear and unambiguous, explaining:

The Court agrees with Plaintiff that no reasonable interpretation of these terms would assume that the smoothing or leveling off of a surface encompasses the driving of columns, or sheet piles, into the ground. Second, the Special Exclusion Endorsement unambiguously limits coverage to the sole classification shown on the declaration.

The court further rejected the argument that the underground property damage exclusion created an ambiguity, noting that the exclusion was boilerplate and that in any event, “Defendants cannot generate ambiguity with the circular argument that a particular exclusion would not be needed but for coverage of that activity.” As such, the court agreed that Canal had no coverage obligations with to the underlying suit.