Sixth Circuit Holds Faulty Workmanship Is Not An Occurrence

In its recent decision in Liberty Mutual Fire Ins. Co. v. Kay & Kay Contracting LLC, 2013 U.S. Dist. LEXIS 23587 (6th Cir. Nov. 19, 2013), the United States Court of Appeals for the Sixth Circuit, applying Kentucky law, had occasion to consider whether a subcontractor’s allegedly faulty preparation of a building pad, and the resulting settling and structural damages to the building constructed on the building pad, constitutes an “occurrence.”

Liberty Mutual issued a CGL insurance policy to Kay & Kay as the named insured and included MW Builders as an additional insured (“the contractors”). Wal-Mart contracted with MW Builders as a general contractor to build a new Wal-Mart store. MW Builders in turn subcontracted with Kay & Kay to perform site preparation work and construct the building pad for the new store. After Kay & Kay completed the building pad and constructed the building, Wal-Mart notified MW Builders that there were cracks in the building’s wall. Wal-Mart demanded that MW Builders remedy these issues and fix the resulting damage. MW Builders in turn demanded that Kay & Kay remedy these issues and indemnify MW Builders from Wal-Mart’s claim. MW Builders and Kay & Kay reached an agreement and executed a new and separate contract under which Kay & Kay agreed to perform the remedial work demanded by Wal-Mart. Meanwhile, Liberty Mutual filed a complaint seeking a declaratory judgment against the contractors alleging that their claims were not covered under the CGL policy, in relevant part, because there was no “occurrence” alleged.

The CGL policy at issue contained the standard coverage language found in a standard Insurance Services Office form.  The policy provided: “This insurance applies to ‘bodily injury’ and ‘property damage’ only if…[t]he ‘bodily injury’ or property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory’… .” The policy defined “occurrence” to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy did not define the term “accident.”

The parties filed cross-motions for summary judgment on the limited issue of whether there was an “occurrence” alleged in the claim. After a hearing, the district court denied Liberty Mutual’s motion for summary judgment and granted the contractors’ motion. Liberty Mutual appealed.

Relying on Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W. 3d 69, 73 (Ky. 2010), the court noted that, standing alone, claims of faulty workmanship are not “occurrences” under CGL policies. The contractors argued that the damage was not Kay & Kay’s allegedly defective building pad (the work product itself), but was instead the collateral damage to the building (other property), which was the work of third-party contractors. The Court recognized that in order for there to have been an “occurrence”, there had to have been an “accident.” Following Cincinnati, the court concluded that the plain meaning of the term accident implicated the doctrine of fortuity, and it recognized that fortuity consists of intent and control.

After a careful examination of Cincinnati, the Court held that the facts of the case did not present an “accident” that would trigger coverage as an “occurrence” under the CGL policy issued by Liberty Mutual. The Court emphasized the importance the Cincinnati court put on “control” in analyzing the question of fortuity, and noted that the damages that occurred in this case were within the control of Kay & Kay; Kay & Kay was hired to prevent the settling and resultant structural damage that occurred. “In other words, the possibility of the type of damage in this case was exactly what Kay & Kay was hired to control.” The Court reversed the judgment of the district court and remanded the case with instructions to grant judgment for Liberty Mutual.

Alabama Supreme Court Holds Faulty Workmanship May Be An Occurrence

In its opinion in Owners Insurance Company v. Jim Carr Homebuilder, LLC, 2013 Ala. LEXIS 122 (Ala. Sept. 20, 2013), the Supreme Court of Alabama the court had the occasion to consider what constitutes an “occurrence” as defined under a CGL policy in the context of a construction defect claim.

Thomas and Pat Johnson hired JCH, a licensed homebuilder, to construct a new home in January 2006. Within a year of completion the Johnsons noticed several issues with water leakage which resulted in damage to other parts of the home. After JCH’s attempts at remedying the water infiltration issues were unsuccessful, the Johnsons sued for breach of contract, fraud, and negligence. JCH promptly tendered its defense to Owners Insurance Company, its general liability insurer. Owners provided counsel under a reservation of rights. After the dispute between the Johnsons and JCH was settled through arbitration, the trial court granted JCH’s motion for summary judgment holding that Owners policy covered the entirety of the arbitrator award.

On appeal, Owner’s argued that the property damage was not an “occurrence” as defined in the policy and as such no coverage would apply. In accordance with previously established principles, the court noted that whether faulty workmanship constitutes an “occurrence” depends on the nature of the damage caused by the faulty workmanship. On its own, however, faulty workmanship is not an “occurrence.”  The court further clarified that “faulty workmanship performed as part of a construction or repair project may lead to an occurrence if that faulty workmanship subjects personal property or other parts of the structure outside the scope of that construction or repair” to harmful or damaging conditions.

The court differentiated between instances in which a contractor is retained to perform work on an existing structure and the existing structure is damaged, and when a new structure is built and defective work results in damage to the new structure.  Where the contractor is hired to construct the entire structure, and a claim for damage to that structure results from the contractor’s defective work, the contractor is not entitled to coverage as the claim does not constitute an “occurrence.”

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.

Connecticut Court Holds Sexual Molestation Limitation Applicable

In its recent decision in Metropolitan Prop. & Cas. Ins. Co. v. Briggs, 2013 U.S. Dist. LEXIS 74885 (D. Conn. May 29, 2013), the United States District Court for the District of Connecticut had occasion to consider a homeowner’s insurer had a duty to defend its insured in connection with an underlying suit alleging sexual molestation.

The insured was alleged to have sexually assaulted a minor, while in the insured’s home, on repeated occasions during a two-year period.  The lawsuit alleged numerous physical and emotional injuries resulting from these incidents.  The insured sought a defense in connection with the suit from his homeowner’s insurer, Metropolitan Property & Casualty.  The Metropolitan policy provided coverage for bodily injury resulting from an occurrence.  The policy’s definition of bodily injury, however, expressly carved-out the following categories of harm:

a.   any of the following which are transmitted by you to any other person: disease, bacteria, parasite, virus or other organism; or

b.   the exposure to any such disease, bacteria, parasite, virus or other organism by you to any other person; or

c.   the actual, alleged or threatened sexual molestation of a person.

Metropolitan denied coverage to its insured on the basis that sexual molestation was an excluded category of bodily harm.  The insured, on the other hand, argued that the definition of bodily injury only excluded coverage for the “act” of sexual molestation, but did not exclude coverage for the harm resulting from molestation.   Specifically, the insured argued that “bodily injuries sustained as a result of sexual molestation should be covered by the policy,” at least for duty to defend purposes.

The court found the insured’s reading of the policy unreasonable, concluding that the insured’s strained interpretation of the policy definition of bodily injury would render moot all of the carved-out categories of harms.  As the court explained:

In addition to sexual molestation, the exclusionary provision excludes from the definition of bodily injury: disease, bacteria, parasite, virus or other organism. If we extend defendant's reasoning to these other excluded categories, insureds would be covered for bodily injury as a result of disease, bacteria, parasite, virus or other organism, despite that disease, bacteria, parasite, virus or other organism themselves, like sexual molestation, are clearly and explicitly excluded from coverage. This would render the exclusionary provision virtually meaningless.

Thus, finding that the only reasonable interpretation of the policy is that bodily injury resulting from sexual molestation is not an insured category of loss, the court granted summary judgment in favor of Metropolitan.

Alabama Supreme Court Addresses Coverage for Faulty Workmanship Claim

In its recent decision in Shane Traylor Cabinetmaker, L.L.C. v. American Resources Ins. Co., Inc., 2013 Ala. LEXIS 42 (Ala. May 3, 2013), the Supreme Court of Alabama had occasion to consider whether a general liability policy was triggered by an underlying claim arising out of alleged faulty workmanship.

The insured, Shane Traylor Cabinetmaker, L.L.C. (“STC”) was hired to perform cabinetry and woodworking on several homes.  STC later sued the developer/owner of the homes for amounts due under the contract and the suit included a claim for foreclosure on a lien.  The lawsuit also involved issues of whether the developer was a partner in STC.  The developed counterclaimed on several theories, including breach of contract, slander of title, and mental-anguish arising out of the slander of title.  Among other things, the counterclaim alleged that STC’s work was defective and had to be repaired or replaced.  The counterclaim, however, contained no allegation of specific damage resulting from the defective work.  STC’s general liability insurer, American Resources, denied coverage for the counterclaim on several grounds, including lack of bodily injury or property damage resulting from an occurrence.

Looking to its prior decisions concerning insurance coverage for faulty workmanship, in particular its decisions in Town & Country Property, LLC v. Amerisure Insurance Co., 2011 Ala. LEXIS 183, (Ala. 2011), United States Fidelity & Guarantee Co. v. Warwick Development Co., 446 So. 2d 1021 (Ala. 1984), and Moss v. Champion Insurance Co., 442 So. 2d 26 (Ala. 1983), the Alabama Supreme Court observed the general rule that faulty workmanship, in and of itself, is not an occurrence as that term is defined by a standard general liability policy.  The court observed that faulty workmanship can lead to an occurrence if it “subjects personal property or other parts of the structure” to some form of damage.  Applying this standard to the underlying counterclaim, the court agreed that there was no occurrence, because the counterclaimant alleged only defective work, but no physical damage or loss of use of property resulting from the defective work. 

In reaching its holding, the court considered STC’s argument that loss of use could be reasonably inferred from the counterclaim.  Specifically, STC argued that since the kitchen cabinets it installed had to be repaired, this aspect of the kitchens were rendered unusable to the claimant while the remedial work was underway.  The court rejected this argument, explaining:

Barbee's counterclaim alleged that STC and Traylor's defective work "requir[ed] Robert L. Barbee to repair and/or replace the work performed by Traylor and STC." It did not allege damage to other property resulting from that work. …  we decline to infer loss of use or other injuries based on speculation as to damage that was not alleged in the counterclaim or the amended counterclaim.

The court also considered STC’s argument that the counterclaim for mental anguish arising out of slander of title constituted a claim for bodily injury.  Without ruling on whether a mental anguish claim constitutes bodily injury in the first instance, the court concluded that the claim for mental anguish did not arise out of an occurrence because the mental anguish did not arise out of the alleged faulty workmanship.  Rather, the alleged anguish arose out of the business dispute between STC and the counterclaimant, and the intentional placement of a lien on the property which gave rise to the alleged slander of title.  Such acts, concluded the court, did not qualify as an occurrence.

California Court Reaffirms Negligent Professional Advice Not An Occurrence

In its recent decision in Aquarius Well Drilling, Inc. v. American States Insurance Co., 2012 U.S. Dist. LEXIS 172770 (E.D. Cal. Dec. 4, 2012), the United States District Court for the Eastern District of California had occasion to consider whether an insured’s professional negligence constituted an occurrence for the purpose of triggering coverage under a general liability policy.

The insured, Aquarius Well Drilling, was a well drilling and testing company.  In 2007, it was hired by a title company to test a well on a property that was in escrow and pending sale.  The purchasers of the property later brought suit against Aquarius, alleging that the company erred in performing the tests, which resulted in inaccurate information being disclosed regarding the well.   Aquarius’ general liability insurer, American States, denied coverage for the underlying suit on the basis that it did not allege property damage arising out of an occurrence.  Aquarius filed a declaratory judgment action against American States, which was dismissed earlier this year, although the court granted Aquarius leave to file an amended complaint.  Aquarius subsequently filed an amended complaint which American States moved to dismiss on the same grounds; namely, that the underlying suit did not allege an “occurrence.”

Aquarius claimed that its negligence in testing the well was an occurrence, defined in pertinent part as an accident, because it did not intend for the unintended consequences of the well testing, i.e., harm to the underlying plaintiffs.  American States, on the other hand, argued that Aquarius’ testing of the well was intentional, and as such could not be considered an occurrence regardless of the unexpected and unanticipated consequences of its negligence.  In considering the issue, the Eastern District acknowledged that under California law, the term “accident” as used in the standard general liability policy definition of occurrence “refers to the nature of the act giving rise to liability; not the insured's intent to cause harm.”  The only exception to this rule is when “some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.”

Aquarius argued that despite this body of case law, its conduct in testing the well should nevertheless be considered an occurrence because it provided its client with objective information concerning the well, and because it did not offer any opinions as to the condition or future viability of the well.  In other words, Aquarius argued that it was not giving professional advice, and as such, cases addressing whether an insured’s professional services can be an occurrence were distinguishable.  The court did not find this to be a relevant distinction, explaining that the key consideration is whether the insured’s conduct can be considered accidental:

California courts have stated "accident" refers to the nature of the insured's conduct, not his state of mind or to the consequences of the conduct … Thus, whether Aquarius' well testing was done negligently or not, regardless of the unintended consequences, "the insured's conduct alleged to have given rise to claimant's injuries is necessarily non-accidental, not because any 'harm' was intended, but simply because the conduct could not be engaged in by 'accident'."  … Plaintiffs could not have engaged in the well testing by "accident

Thus, the court concluded, the insured’s degree of knowledge concerning its negligence, and the content of its report, were irrelevant.  Instead, because the insured intentionally tested the wells and provided information to its client in its professional capacity, such could not be considered an accident for the purpose of a general liability policy.

California Court Holds Unintentional Conversion Not An Occurrence

In its recent decision in Alco Iron & Metal Co. v. American International Specialty Lines Ins. Co., 2012 U.S. Dist. LEXIS 166692 (N.D. Cal. Nov. 21, 2012), the United States District Court for the Northern District of California had occasion to consider whether an insured’s intentional acts that result in unintentional harms can be considered an “occurrence” for the purpose of a general liability policy.

The insured, Alco Iron & Metal Company, sought coverage for an underlying conversion claim brought by Caicos Investments.The suit alleged that Alco wrongfully entered Caicos’ property, removed its rail spurs, and sold the spurs to a third party as scrap metal. Alco claimed that it engaged in such conduct under the mistaken belief that it had permission to take the rail spurs, such permission having been given by Caicos’ then tenant, Sparetime Supply.In fact, Alco asserted a cross-complaint against Sparetime alleging that Sparetime had represented that it had authority to negotiate the terms of Alco’s use of the property.Alco’s general liability insurer, Chartis, disclaimed coverage to Alco on the basis that Cacios’ lawsuit did not allege an“occurrence” for the purpose of the policy’s property damage coverage part, defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”Chartis also denied coverage under its policy’s personal and advertising injury coverage on the basis that Caicos did not allege “personal injury” based on the offense of “wrongful entry.”

In the ensuing coverage litigation, Alco argued that its otherwise intentional actions should be considered accidental in light of Sparetime’s misrepresentations.In particular, Alco argued that Sparetime’s false representations constituted an “independent and unforeseen happening”that guided Alco’s conduct.Thus, Alco claimed that its actions in entering the property and taking the rail spurs were not intentional, but instead the result of its negligent reliance on Sparetime’s representations.As such, and because it did not intend to cause harm to Caicos, Alco claimed that its conduct satisfied the policy definition of “occurrence.”The court disagreed, citing to a long line of California decisions, such as Fire Ins. Exchange v. Superior Court (Bourguignon), 181 Cal. App. 4^th 388 (Cal. App. 2010), standing for the proposition that an insured’s subjective intent not to cause harm is not a relevant coverage consideration.As the court noted, an insured’s lack of“intent to harm” cannot transform an otherwise volitional act into an accident.

The court also rejected Alco’s contention that Sparetime’s representations constituted an “unexpected, independent and unforeseen circumstance” that otherwise rendered Alco’s actions accidental.The court observed a distinction between “accidental conduct and intentional acts for which the results were not intended.”Where the insured’s intentional actions directly result in an unanticipated harm, then there is no occurrence for the purpose of a general liability policy.By contrast, where an insured’s intentional actions are followed by an unanticipated and injurious act that the insured did not intend, then the injury can be said to result from an “occurrence.”Applying this reasoning, the court concluded that Sparetime’s false representations could not be considered a subsequent intervening event:

Here, the allegations in the underlying complaint were that Alco entered the property, removed the rail spurs, and then sold them as scrap metal.Although it did not intend to harm Caicos and acted under the belief that it was authorized to take these actions, Alco has not offered any material dispute of fact that it was intended to carry out each of these acts in the manner in which they were done and that it accomplished its objective, in taking the metal away and selling it.

In addition to concluding that Alco was not entitled to coverage under the Chartis policy’s property damage coverage, the court also concluded that the underlying complaint did not trigger the policy’s personal injury coverage based on the offense of “wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor.”Alco argued that “person” in this definition could refer to natural persons and businesses alike.Citing to California state appellate decisions as well as cases from California’s federal courts, the Alco court concluded that in the context of the Chartis policy, “person” could only refer to a natural person and did not include business entities.

Ohio Supreme Court Holds Faulty Workmanship Is Not an Occurrence

-->

In its recent decision in Westfield Ins. Co. v. Custom Agri Systems, 2012 Ohio 4712 (Ohio Oct. 16, 2012), the Supreme Court of Ohio, answering a question certified by the United States Court of Appeals for the Sixth Circuit, had occasion to consider whether “claims of defective construction/workmanship brought by a property owner [are] claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy.”  The court also had before it the certified question of whether the contractual liability exclusion applies to bar coverage for such claims.

The coverage dispute in Westfield arose out of Younglove Construction’s contract with PSD Development to build a feed-manufacturing plant in Sandusky, Ohio.  Younglove brought suit against PSD for non-payment of funds, which resulted in PSD filing a counterclaim for defective construction of a steel bin that had been built by Younglove’s subcontractor, Custom Agri Systems.  Younglove subsequently brought a third-party action against Custom, alleging defective construction and consequential damages resulting from the defective construction.  Custom, in turn, tendered its defense to its general liability insurer Westfield.  Westfield intervened in the lawsuit to seek a declaration that it had no coverage obligation to Custom, as Younglove’s third-party claim did not allege “property damage” arising out of an “occurrence.”  Westfield also sought a declaration with respect to the application of its policy’s contractual liability exclusion.   The Northern District of Ohio acknowledged that there was an open question under Ohio law as to whether construction defect claims qualify for coverage under general liability policies, but nevertheless granted summary judgment in Westfield’s favor.  The matter was appealed to the Sixth Circuit, which certified the question to the Ohio Supreme Court.

Citing to the Ohio Appellate Court decision in Heile v. Herrmann, 736 N.E.2d 566 (1st Dist.1999), as well as insurance treatises and case law from other states, the Ohio Supreme Court agreed with the general proposition that general liability policies are “not intended to protect business owners against every risk of operating a business,” nor are they “intended to insure the risks of an insured causing damage to the insured's own work.”  The court nevertheless stated that these general principles did not end the inquiry, but instead, the court was required to determine whether “Custom's alleged defective construction of and workmanship on the steel grain bin constitute ‘property damage’ caused by an ‘occurrence.’”

The court began its analysis with an overview of what constitutes an “occurrence,” defined by the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  It noted that the term “accident” was not defined by the Westfield policy, but that the term has an inherent “fortuity principle,” and thus is generally defined to mean “unexpected as well as unintended.”  Relying on the concept of fortuity, as well the decisions by lower Ohio courts and by the Arkansas Supreme Court in Essex Ins. Co. v. Holder, 37261 S.W.3d 456 (2008), the court concluded that faulty workmanship is not an occurrence for the purpose of a general liability policy, explaining:

… claims for faulty workmanship, such as the one in the present case, are not fortuitous in the context of a CGL policy like the one here. In keeping with the spirit of fortuity that is fundamental to insurance coverage, we hold that the CGL policy does not provide coverage to Custom for its alleged defective construction of and workmanship on the steel grain bin. Our holding is consistent with the majority of Ohio courts that have denied coverage for this type of claim. The majority view is that claims of defective construction or workmanship are not claims for "property damage" caused by an "occurrence" under a CGL policy.

In light of its holding on this issue, the Ohio Supreme Court did not need to reach the second certified question concerning the application of the Westfield policy’s contractual liability exclusion.

Supreme Court of Virginia Reaffirms No Coverage for Global Warming Lawsuit

In its recent decision in AES Corporation v. Steadfast Ins. Co., 2012 Va. LEXIS 81 (Va. Apr. 20, 2012), the Supreme Court of Virginia revisited its 2011 ruling concerning whether a general liability carrier had a duty to defend an underlying lawsuit pertaining to its insured’s alleged responsibilities for climate change.

The insured, AES, was named as one of several defendants in the suit brought by the Native Village of Kivalina, alleging that defendants’ direct and indirect emissions of greenhouse gases contributed to climate change.  Plaintiffs allege that climate change will result in the melting of polar ice caps, which will cause sea levels to rise and ultimately cause their lands to be permanently flooded.  While the underlying suit was dismissed by the United States District Court for the Northern District of California (and while the viability of climate change was called into serious doubt as a result of the United States Supreme Court’s decision in AEP v. Connecticut, 131 S. Ct. 2527 (2011)), a coverage question nevertheless was raised as to whether AES was entitled to a defense in the Kivalina lawsuit.  The Supreme Court of Virginia initially ruled in the insurer’s favor in a September 2011 decision.  See, AES Corporation v. Steadfast Ins. Co., 715 S.E.2d 28 (Va. 2011).  In January 2012, however, the Supreme Court of Virginia, in a surprising move, withdrew its 2011 decision and agreed to have further argument on the issue.

In its decision on rehearing, the Virginia Court essentially adopted its earlier ruling, holding that the underlying complaint, alleging causes of action for nuisance and concert of action, did not trigger a duty to defend.  The court’s reasoning hinged on the fact that the complaint alleged that AES intentionally released tons of greenhouse gases into the atmosphere.  Intentional conduct, explained the court, cannot be an occurrence and “[i]f a result is the natural or probable consequence of an insured’s intentional act, it is not an accident.”  The court nevertheless acknowledged that in some situations, when intentional acts give rise to a harm so far outside the ordinary expectations of a reasonable person, coverage may be triggered.  As such, the question for the court was “whether the Complaint can be construed as alleging that Kivalina’s injuries, at least in the alternative, resulted from unforeseen consequences that were not natural or probable consequences of AES’s deliberate act of emitting carbon dioxide and greenhouse gases.”

AES argued that this “alternative” was satisfied in light of the allegation in Kivalina’s complaint that defendants “intentionally or negligently” created the conditions for global warming.   AES further relied on the allegation that defendants “knew or should have known” of the consequences of greenhouse gas emissions, thus raising the possibility that defendants did not intend these consequences.  The court rejected these arguments, reasoning:

In the Complaint, Kivalina plainly alleges that AES intentionally released carbon dioxide into the atmosphere as a regular part of its energy-producing activities.  Kivalina also alleges that there is a clear scientific consensus that the natural and probable consequences of such emissions is global warming and damages such as Kivalina suffered.  Whether or not AES’s intentional act constitutes negligence, the natural or probable consequence of that intentional act is not an accident under Virginia law.

Thus, it was not enough that Kivalina alleged negligence in the alternative, since under Virginia law, an allegation of negligence is not synonymous with an allegation of an accident.  Because the Kivalina suit alleged that plaintiffs’ damages were the “natural and probable consequences” of AES’ “intentional emissions,” it necessarily followed that the Kivalina suit did not allege an accident.  In addressing this point, the court was careful to explain that its holding was limited to the unique facts pled:

The dissimilarity between the allegations in the Kivalina complaint and those in most other tort actions for bodily injury or property damage is the relevant intentional or negligent act alleged in the complaint.  Kivalina does not allege that AES’s intentional acts were done negligently.  The complaint alleges that AES was “negligent” only in the sense that it “knew or should have known” that its actions would cause injury no matter how they were performed.

Thus, the court concluded, regardless of AES’ ignorance, because the harms of its intentional emissions were the natural or probable consequences of such conduct, no occurrence was alleged and Steadfast owed no defense.

Eighth Circuit Holds Claim Against General Contractor Not an Occurrence

In its recent decision in Secura Ins. v. Horizon Plumbing, 2012 U.S. App. LEXIS 4477 (8^th Cir. Mar. 5, 2012), the United States Court of Appeals for the Eighth Circuit, applying Missouri law, considered whether an underlying breach of contract claim could be construed as an “occurrence” triggering coverage under a general liability policy.

The claims at issue in Secura arose out of the construction of an apartment complex in Kansas City, Missouri.  The owner, Metropolitan, hired Weitz Company as the project’s general contractor, and Weitz, in turn, hired Horizon Plumbing as the plumbing subcontractor.  The project ran into financial troubles and delays, which ultimately resulted in Metropolitan terminating Weitz.  Weitz later sued Metropolitan for breach of contract. Metropolitan asserted a counterclaim against Weitz, alleging that Weitz committed numerous breaches of contract, including failure to timely complete the project, failure to provide progress reports, failure to supervise and pay subcontractors in a timely fashion, failure to maintain adequate accounting records, and failure to correct deficient and defective work.  Weitz and Metropolitan both asserted third-party claims against Horizon for defective plumbing.  Among other things, they alleged that Horizon failed to properly connect various balcony drains, which allowed for water intrusion and mold.  Horizon’s insurers defended and ultimately settled these third-party claims.

At issue in Secura was whether Weitz, as an additional insured under Horizon’s policies, was entitled to coverage with respect to Metropolitan’s counterclaim.   Metropolitan was awarded $5 million in connection with its counterclaim, and the court ordered Horizon to pay Weitz $115,619.80 in attorneys’ fees and $12,576.30 in costs, these amounts be described as the portion of Weitz’s defense of the counterclaim arising out of Horizon’s allegedly defective plumbing work.  Horizon’s insurers paid this amount.  Weitz claimed subsequently claimed that as an additional insured under Horizon’s policy, it was entitled to reimbursement of the entirety of its costs in defending Metropolitan’s counterclaim – an amount approximating an additional $1.1 million.  Horizon’s insurers took the position that no coverage obligation was owed with respect to the remainder of the counterclaim because it did not allege “property damage” resulting from an “occurrence.”

Weitz argued that Metropolitan’s breach of contract counterclaim triggered coverage because it sought damages for, among other things, Horizon’s defective plumbing.  The court disagreed, finding that each of Weitz’s alleged failures “was within [its] control and management and its failure to perform cannot be described as an undesigned or unexpected event” and thus did not constitute an “occurrence.”  Moreover, the court rejected Weitz’s argument that the claim for failure to repair constituted an occurrence, explaining that:

Contrary to Weitz's contention, the disclosure of damages sought for failure to remediate defective workmanship was not based on an "occurrence" but rather a breach of a specific contractual duty to correct deficient work. There was no allegation of an accident or that Weitz's conduct had caused property damage. The fact that Weitz's failure to correct the defective workmanship resulted in financial expenses to Metropolitan was a "normal, expected consequence of [Weitz's] breach of contract and not an occurrence."

In passing, the court noted that while an additional insured is entitled to a defense, an insurer’s coverage obligation to an additional insured is limited to damages arising out of the named insured’s work.  Horizon’s insurers, explained the court, should not be required to provide a full defense merely because Metropolitan’s counterclaim included a small component related to Horizon’s work.  As the court concluded, “the insurers have already paid Weitz for all defense costs related to Horizon's work and they owe nothing more.”

Missouri Court Addresses Owned Property Exclusion

In its recent decision in Clarinet v. Essex Ins. Co., 2012 U.S. Dist. LEXIS 7300 (E.D. Mo. Jan. 23, 2012), the United States District Court for the Eastern District of Missouri had occasion to consider whether a general liability policy afforded coverage for an insured’s obligation to stabilize and later demolish its own building so as to prevent damage to third-party property. 

The insured, Clarinet, was the owner of a historic building located in St. Louis, Missouri.  The building partially collapsed as a result of a severe windstorm.  The insured undertook efforts to stabilize the building, but it ultimately was determined that the entire building needed to be razed in order to prevent harm to persons and to an adjacent bridge.  It was not until after the demolition was complete that the insured gave notice to Essex that it had incurred costs to stabilize and demolish the building and that it was seeking coverage under its liability policy for such costs.

Essex denied coverage for Clarinet’s stabilization and demolition costs on the basis that there was no property damage resulting from an occurrence.  Specifically, Essex took the position that to constitute an “occurrence,” there must be injury resulting from the insured’s own negligent conduct.  As such, Essex contended, a windstorm cannot qualify as an occurrence.  Essex also denied coverage based on an “owned property exclusion” and an exclusion applicable to vacant buildings.  Finally, it denied coverage based on Clarinet’s failure to have provided notice of occurrence prior to undertaking the stabilization and demolition efforts. 

The court only briefly addressed whether a windstorm can constitute an “occurrence,” noting that there was no guidance under Missouri law as to whether an occurrence must result from the insured’s negligent conduct.  Ultimately, the court resolved coverage on the basis of the policy’s owned property exclusion, applicable to property damage to:

(1)           Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property;  (Emphasis supplied.)

Acknowledging a lack of Missouri case law on the issue, the court surveyed case law from throughout the country as to whether the exclusion applies to bar coverage for costs necessary to prevent damage to third-party property.  In Castle Village Owners Corp. v. Greater New York Mutual Ins. Co., 878 N.Y.S.2d 311 (N.Y. 1^st Dep’t 2009), a New York appellate court held that the exclusion may not be enforceable when the insured has a legal obligation to prevent damage to another’s property.  The test in New York, as explained by the court, is whether there is a “nexus between the condition of the insured’s property and the existence of ongoing and immediate harm to the property of others.”  Courts in Michigan and Maryland, on the other hand, apply a more lenient standard, holding that the exclusion does not apply when the insured acts to prevent “imminent harm” to third-party property.  See, Aetna Cas. & Sur. Co. v. Dow Chem. Co., 28 F. Supp. 2d 448 (E.D. Mich. 1998); Aetna Ins. Co. v. Aaron, 685 A.2d 858 (Md. Ct. App. 1996).  Wisconsin courts, however, do not recognize an exception to the exclusion, holding it applicable even when there is imminent risk of damage to third-party property.  See, Watertown Tire Recycles, LLC v. Nortman, 788 N.W.2d 384 (Wis. Ct. App. 2010).  The Clarinet court ultimately decide concluded that Missouri courts, similar to those in Wisconsin, “would likely enforce the ‘owned property’ exclusion according to its plain terms, thereby excluding from coverage costs incurred to mitigate damage to third parties.”  In other words, there is no exception to the exclusion, even if the insured is acting so as to prevent third-party property damage that might otherwise be covered under a general liability policy.

The court found additional support for its conclusion on the basis of the policy’s exclusion applicable to any claims involving vacant buildings.  The policy specifically identified the building at issue as a vacant building.  The court further noted that the insured’s failure to have given notice to Essex of its stabilization and demolition efforts before incurring such costs necessarily prejudiced Essex and constituted an additional basis for noncoverage. 

Mississippi Court Addresses Coverage for Conversion Claim

In its recent decision in Markel American Insurance Company v. Tri-Miss Services, Inc., 2012 U.S. Dist. LEXIS 5850 (S.D. Miss. Jan. 19, 2012), the United States District Court for the Southern District of Mississippi had occasion to consider whether an insured was entitled to a defense under a general liability policy for a lawsuit alleging conversion.

The insured, Tri-Miss, was sued for allegedly purchasing over 13,000 pounds of copper and aluminum that it knew, or should have known, was stolen from plaintiff. The complaint specifically alleged that Tri-Miss demonstrated an intent to exercise dominion over the stolen metals, even after learning that the goods were stolen, thus giving rise to the intentional tort of conversion. Markel denied coverage to Tri-Miss, and subsequently brought suit, seeking a declaration that the underlying matter did not allege and “occurrence” and that coverage was otherwise precluded on the basis of the policy’s “care, custody or control” exclusion.

Tri-State argued that the underlying suit could allege an occurrence if it was determined that its purchase of the stolen property was accidental. The court disagreed, noting that under Mississippi law, conversion is an intentional tort that occurs when “the title of the lawful owner is made known and resisted, or the purchaser exercises dominion and control over the property by use, sale, or possession,” which is what plaintiff alleged in the underlying suit. These elements, explained the court, required intentional conduct from the standpoint of the insured. As such, and because the underlying plaintiff did otherwise not plead any conduct that could be construed as accidental, the court concluded that the suit did not allege an occurrence triggering a duty to defend.

The court also considered the policy exclusion applicable to property damage to “personal property in the care, custody or control of the insured.” The insured argued that the exclusion was ambiguous because the phrase “personal property” was not defined in the policy. Citing to various Mississippi case law and a dictionary definition, however, the court concluded that the phrase should be afforded a broad interpretation as any property other than real property. As such, the court held that the phrase “unambiguously includes the property at the heart” of the underlying suit, and that the exclusion therefore served as a secondary basis for noncoverage.

Virginia Supreme Court Holds Coverage Unavailable for Climate Change Suit

In AES Corp. v. Steadfast Ins. Co., 2011 Va. LEXIS 185 (Va. Sept. 16, 2011), the Supreme Court for Virginia addressed the issue of whether an insured was entitled to coverage for an underlying climate change lawsuit. 

The Steadfast litigation arose out of the climate change suit Native Village of Kivalina v. ExxonMobil Corp., et al., filed in the United States District Court for the Northern District of California.  The Kivalina lawsuit was brought by the Native Village of Kivalina against various energy-industry defendants, and alleged that defendants’ various operations resulted in the emissions of carbon dioxide and other greenhouse gases into the atmosphere, which in turn contributed to global warming. Plaintiffs further claimed that climate change would result in rising ocean levels, which in the near future would cause their native village in Alaska to be completely submerged and rendered uninhabitable.  Notably, the Village’s complaint alleged that the defendants intentionally emitted such greenhouse gases, and that defendants knew or should have known of the impacts that would result from such emissions.  In fact, the complaint alleged that the defendants engaged in a conspiracy to mislead the public about the science and dangers of global warming.

The lower court had held that the AES Corporation (“AES”), one of the defendants in Kivalina’s lawsuit, was not entitled to a defense in connection with the Kivalina lawsuit as the complaint did not allege an occurrence, which under Virginia law is a term synonymous with accident.  On appeal, the Virginia Supreme Court noted that while intentional acts generally are not considered occurrences under Virginia law, coverage can be available for intentional acts when the injury or damage resulting form such acts is not intentional.  Under such circumstances, noted the court, the inquiry “is not whether the action undertaken by the insured was intended, but rather whether the resulting harm is alleged to have been a reasonably anticipated consequence of the insured’s intentional act.”  The Village of Kivalina’s lawsuit alleged that all defendants, including AES, intentionally emitted greenhouse gases into the atmosphere.  As such, explained the court, AES’ right to coverage hinged on whether the alleged harms resulting from the emissions was reasonably expected.

AES argued that for the purpose of determining a duty to defend, the underlying suit at least potentially stated an occurrence, since the complaint alleged both intentional and negligent conduct and since the complaint alleged that AES knew or should have known of the harms that would result from its emissions, thus implying that AES was not aware of the harms.  The court disagreed and in doing so, relied on the allegation in Kivalina’s complaint that “there is a clear scientific consensus that the natural and probable consequence of such emissions is global warming and damages such as Kivalina suffered.”  This allegation, explained the court, in tandem with the allegation that AES intentionally emitted greenhouse gases, established that the underlying suit did not allege accidental conduct but rather intentional conduct.  As such, the court disagreed that the allegations of negligence could be construed as alleging an occurrence, explaining:

Kivalina asserts that the deleterious results of emitting carbon dioxide and greenhouse gases is something that AES knew or should have known about.  Inherent in such an allegation is the assertion that the results were a consequence of AES’s intentional actions that a reasonable person would anticipate.  … Even if AES were actually ignorant of the effect of its actions and/or did not intend for such damages to occur, Kivalina alleges its damages were the natural and probable consequence of AES’s intentional actions.  Therefore, Kivalina does not allege that its property damage was the result of a fortuitous event or accident, and such loss is not covered under the relevant CGL policies.

The court’s decision, and in particular its reliance on plaintiff’s assertion that there is a clear scientific consensus on global warming is likely to be considered controversial in some quarters.  It is unlikely that there will be further coverage litigation on this point, however, at least in the near future, in light of the United State Supreme Court’s April 2011 decision in American Electric Power Co. v. State of Connecticut, 131 S. Ct. 2527, (2011) holding that climate change suits such as Kivalina’s do not state a cause of action under federal law.

California Court Holds Groin Punch Not an Occurrence

The California Appellate Court for the Second Appellate District recently issued a ballsy decision that can only be described a low blow to insureds.  In State Farm General Ins. Co. v. Frake, 2011 Cal. App. LEXIS 911 (Cal. App. July 13, 2011), the court was asked to consider whether the insured’s intentional battery of his friend’s nether regions constituted an “occurrence” for the purpose of a renter’s liability policy.

The fracas in Frake reads like an episode of Jackass.  The insured, Frake, was visited by two former high school classmates in Chicago for a weekend of “partying and drinking” to be highlighted by a Cubs game.  These friends, immune to all fears of future fertility, enjoyed the age-old tradition of sucker punching each other in the groin which, to be frank, is best described by the court:

Frake explained that, since high school, his friends had engaged in “a cycle of horseplay[,] specifically … hitting each other in the groin.” During this “consensual” ritual, one person would normally try to “slap or hit [another person] in … the groin area,” and the recipient would then “attempt to return [the slap or hit].” According to Frake, the practice was so common that his friends would “greet each other with a one arm hug,” while covering their “groin area” with the other arm for “protection in case [someone] decided to … instigate th[e] horseplay.”

That weekend, after enjoying a ballgame of a more traditional  sort at Wrigley Field, and after all involved had consumed excessive amounts of alcohol, King attempted to punch Frake’s “friends,” but his aim was wide and his hand redirected  by Frake.  Having protected his flank, Frake fisted his former friend in the front, lending new meaning to taking the King’s bishop.  King later sued Frake alleging that “Frake deliberately struck King in the groin,” although the complaint did not contain any allegations as to whether Frake intended injury.  King was eventually awarded $400,000 for injuries way too painful for these authors to describe.

State Farm provided Frake with a defense under a reservation of rights, but later commenced a declaratory judgment action on the issue of whether the underlying suit alleged an “occurrence,” defined by the policy as an accident. Frake argued that that while he intended to strike his buddy’s bullocks, he did not intend to cause harm, and as such, his conduct should not be considered anything but accidental.  The court’s response to this argument can best be described as testy.  The court rejected the concept that the consequences determines whether one’s conduct is an accident, explaining:

The language of the policy at issue here, which is the same language used in most standard liability policies, supports the conclusion that the term “accident” refers to the insured's conduct, rather than the unintended consequences of that conduct. The policy provides coverage for “bodily injury … caused by an occurrence.” The term “occurrence” is defined as “an accident.” Therefore, under the policy, “an ‘occurrence’ is a causal event, defined as an ‘accident.’ In this context, an ‘accident’ cannot mean unintended damage because the causal event also would be the result. Logically, a consequence cannot cause itself.”  (Citations omitted.)

Moreover, the court rejected the insured’s arguments that the decision by the California Supreme Court in Delgado v. Interinsurance Exchange of Automobile Club of Southern California, 47 Cal. 4th 302 (Cal. 2009) and by the Second Appellate Division in State Farm Fire & Casualty Co. v. Superior Court, 164 Cal. App. 4th 317 (Cal. App. 2008) dictated the result that unintended consequences of an intentional act constitute an “occurrence” for the purpose of a liability policy.  These cases, explained the court, are consistent with the notion that absent “an intervening act of fortuity,” it is the injury-producing act that is dispositive of whether an occurrence happened.  Thus, cocksure of its decision, each member of the court ruled that State Farm did not owe a duty to defend or to indemnify Frake under the policy. 

EDS. NOTE: FOR OBVIOUS REASONS, THE IDENTITY OF THE AUTHORS OF THIS POST SHALL REMAIN CONFIDENTIAL.