Dig a Little Deeper
By Dawn Jackson, AU, AINS
Insurer denies claim regarding cleanup of rental property used for producing meth
The Court Decisions column is a popular feature in Rough Notes magazine, in part because the courtroom is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mere mental exercises. This column comes from the industry expert editors of Policy Forms & Manual Analysis (PF&M). This is a knowledge base consisting of more than 15,000 pages of coverage explanations from The Rough Notes Company’s digital solutions operation. The editors are going to dig a little deeper into one of those court decisions to identify a coverage problem, provide possible solutions or offer broader perspectives.
This case involved a tenant and a meth mess. Jeremy Kaiser owned a rental home and learned that the tenants who lived in the property might have been involved with drugs. The tenants willfully vacated the premises and Kaiser was able to inspect the property. Upon inspection, he found evidence of methamphetamines, and he contacted a bio recovery service. The recovery service checked and tested the dwelling and found methamphetamine vapors and residue throughout the home. It recommended cleanup before new tenants occupied the rental house.
It would not have made a difference whether the tenants were smoking or producing meth since, in either situation, the toxic chemicals, fumes and vapors are excluded from the policy.
Kaiser submitted a claim to his insurer for the cost of cleanup, but the claim was denied. Nevertheless, he continued cleanup and incurred more than $38,000 in costs. Once cleanup was completed, Kaiser sued his insurer for breach of contract and bad faith. He sought reimbursement for remediation, lost rent, and serving as the general contractor. He argued that the loss should have been covered under vandalism and malicious mischief.
Keep in mind that vandalism is excluded from the policy with very limited exceptions, including one for sudden and accidental direct physical losses caused by fire or smoke. However, smoke excludes the manufacturing of a controlled substance.
An expert witness, a chemistry professor at the University of Nebraska at Omaha, testified on behalf of the insurer. The professor said he had determined the tenants had indeed manufactured methamphetamines in the house. He explained that methamphetamine vapor is a toxic chemical, gas, or liquid and that the residue is a pollutant. The policy contained an exclusion that listed these terms. The district court agreed that coverage was excluded for the loss and found in favor of the insurer. Kaiser appealed.
In his appeal, Kaiser argued that the property was contaminated, in which the cleanup was considered decontamination. Further, he stated the cleaning company described the damage as contamination as well. Therefore, he understood the damage to be contamination and asserted that the policy’s definitions were ambiguous. The appellate court disagreed, but it’s important to know that the policy also excluded contamination.
Kaiser then argued that the loss was sudden but failed to prove that was the case. If we revisit vandalism, it is excluded from the policy with two exceptions, “sudden and accidental direct physical loss caused by fire resulting from vandalism,” and “any act of a tenant that results in sudden and accidental direct physical loss caused by smoke.”
The definition of “sudden” is relevant in terms of the policy in that pollution occurs over a period of time and is not considered sudden. The court found that the terms were not ambiguous because even a common person understood the definition of sudden. The tenants lived in the residence for over a year, and the production of methamphetamine had occurred over time. Kaiser had received reports from the neighbors that drug activity had taken place over this period. Plus, Kaiser had stated that the manufacturing and/or smoking of meth could have begun taking place on the day of move-in. Kaiser failed to present his case of a sudden occurrence.
Kaiser’s final argument to the court was that the genuine issue of material fact remained whether the property loss was caused by the tenants producing or using methamphetamine, since he was uncertain. He stated that he did not have a basis for any conclusion about the damage when he reported the claim.
The appellate court disagreed with Kaiser’s arguments. It stated that it is immaterial if the damage was caused by the use or production of meth, since the loss was concluded to be from the meth vapor and residue. It concurred with the district court’s grant of summary judgment to the insurer.
While the insured presented valid arguments for the coverages in question, the policy exclusions’ language was concrete against this type of loss. It would not have made a difference whether the tenants were smoking or producing meth since, in either situation, the toxic chemicals, fumes and vapors are excluded from the policy.
Further, the policy contained a provision that if any property loss resulted from multiple causes of loss, then the entire loss would be excluded from coverage if the primary causes of loss were excluded. In this case, the primary cause of loss, methamphetamine vapors, was excluded.
If you own a rental home, it’s essential to thoroughly understand the language of your policy’s coverages and exclusions, especially where meth is concerned. The cleanup from meth production can be dangerous and expensive. Further, without proper cleanup it can cause devastating health issues that could cost you and your tenants.
Dawn Jackson, AU, AINS, is senior editor, Technical & Educational Products Division, at The Rough Notes Company, Inc. She has more than 20 years of experience in the property and casualty insurance industry with a primary focus on commercial lines. She worked for fifteen years as a commercial underwriter with both national and regional carriers. Dawn is also an experienced business analyst with a primary emphasis on commercial underwriting systems. She has experience as a P-C claims trainer as well. Dawn is a licensed Indiana resident P-C producer, and she obtained her bachelor’s degree from the University of Indianapolis. Among the Technical & Educational Products Division’s offerings is Policy Forms & Manual Analysis (PF&M), a knowledge base consisting of more than 15,000 pages of coverage explanations offered through The Rough Notes Company’s digital solutions operation.