THAT LACK OF COVERAGE IS CRIMINAL
Renting property usually is risky. One landlord’s experience was particularly poor. The landlord’s tenants were asked to leave when the renters appeared guilty of criminal activity. The property was inspected once the tenants were gone. The landlord found that his property may have suffered from either the use and/or manufacture of illegal drugs.
The landlord’s suspicions were confirmed by a service he hired. The property remediation firm performed tests and detected vapors and residue of methamphetamines. The property owner paid nearly $40,000 to clean the property so it could be safely occupied. He sued his insurer since it denied covering the remediation expense. The lawsuit alleged that the situation should be treated as vandalism and malicious mischief. The property owner argued that the insurer was in breach of contract and it was obligated to pay the property owner for the clean-up expense as well as for lost rental income. The insurer maintained that the situation was ineligible for coverage under a policy exclusion.
Read below for more information that reveals which party to the lawsuit’s arguments prevailed
In February 2013, Jeremy Kaiser (Kaiser) learned the tenants living in his rental property might have been involved with drugs. On May 1, 2013, when the tenants willingly vacated the premises, he inspected the property and found evidence of methamphetamines. Kaiser contacted a bio recovery service to inspect and test the house. Methamphetamine vapors and residue were detected within the entire house and clean-up was recommended before new tenants could occupy the rental home.
Kaiser submitted a claim to his insurer for the clean-up cost, but the claim was denied. He continued clean-up nevertheless and incurred more than $38,000 in costs. Once clean-up was completed, Kaiser filed a complaint against his insurer for breach of contract and bad faith and requested 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.
The insurer had an expert witness, a chemistry professor at the University of Nebraska at Omaha, who found the tenants had manufactured methamphetamines in the house. The professor explained that methamphetamine vapor is a toxic chemical gas or liquid and that the residue is a contaminant, chemical residue and pollutant. The policy contained an exclusion for which these items are listed. The district court agreed that coverage is excluded for the loss and found in favor of the insurer. Kaiser appealed.
Kaiser argued to the appellate court that the property was contaminated in such a way that the clean-up was considered decontamination. Further, he stated that the cleaning company described the damage as contamination as well. Therefore, he understood the damage to be contamination and the policy’s definitions were ambiguous. The appellate court disagreed.
Kaiser’s next argument was that the loss was sudden. The policy generally excludes vandalism, but has two exceptions as follows, “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.” However, Kaiser failed to show the loss was sudden.
The appellate court stated there is a disagreement in courts as to the definition of “sudden.” However, it found under the terms of the policy that pollution occurs over a period of time and is not considered sudden. Also, the court stated that the term is not ambiguous because even the average person understands the definition of sudden. The tenants lived in the residence for over a year, and the production of methamphetamine occurred over time. Kaiser had received reports from the neighbors that drug activity was taking place over this period. Kaiser also 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.
The following perils are excluded from the policy:
- Any type of vapors, fumes, acids, toxic chemicals, toxic gasses, toxic liquids, toxic solids, waste materials, irritants, contaminants, or pollutants, including, but not limited to:
- Contamination, including, but not limited to, the presence of toxic, noxious, or hazardous gasses, chemicals, liquids, solids or other substances at the residence premises or in the air, land or water serving the residence premises;
- Smog, smoke from the manufacturing of any controlled substance, agricultural smudging, and industrial operations.
- However, we do cover sudden and accidental direct physical loss caused by fire resulting from vandalism unless your dwelling has been vacant or unoccupied for more than 90 consecutive days immediately prior to the vandalism.
- Any act of a tenant, or guests of a tenant, unless the act results in sudden and accidental direct physical loss caused by:
- However, we do not cover loss caused by smoke from the manufacturing of controlled substances, agricultural smudging or industrial operations.
Further, the policy included a provision which stated that, if a property loss resulted from multiple causes of loss, then the entire loss would be excluded from coverage if the primary cause of loss was excluded.
Kaiser’s final argument was that the district court erred in granting the insurer summary judgment since he was unsure if the loss occurred because of the tenants producing or using meth. He disputed the factual information presented by the insurer that the tenants were making meth. He stated that he did not have a basis for any conclusion when he reported the claim.
The appellate court disagreed and stated it is immaterial if the damage was caused by using or producing meth since the loss was concluded to be from the meth vapor and residue.
The appellate court concurred with the district court granting summary judgment to the insurer.
307 Neb. 562 Supreme Court of Nebraska. Jeremy Kaiser, appellant, v. Allstate Indemnity Company, appellee. No. S-19-858. Filed October 23, 2020
Losing With Certain Losses
The situation above illustrates a maddening, but ongoing reality. Insurance policies often offer a tremendous amount of protection for many sources that cause damage. The protection comes at a cost, in the form of premiums.
Investments in personal and commercial property are valuable and protection is critical. Insurance, while a simple and convenient way to secure coverage is not often a popular way to do so. Why? Even today, insurance is regularly considered a necessary evil. One way that makes it more acceptable is by making it affordable and comprehensive. It should strike you that offering a lot of coverage for a low cost is not simple and that would be an accurate view.
Insurance policies that protect property do tread a line between types of losses that qualify for coverage and those that are barred from protection. The demarcation line can be confusing to insurance consumers. One source of loss that is excluded are pollutants and contaminants.
Below is an excerpt of wording regarding coverage and exclusions found under the Dwelling Fire Analysis Section of Policy, Forms and Analysis found in Advantage Plus.
PERILS INSURED AGAINST
- Coverage A – Dwelling and Coverage B – Other Structures
- The DP 00 03– Dwelling Property 3 – Special Form provides protection for dwelling and other structures against the possibility of direct losses.
- There is no coverage for:
2c(6). Vandalism, malicious mischief, theft, and attempted theft but only if the dwelling is vacant for more than 60 days before such losses (again note that dwellings under construction are not considered vacant).
2c(7). Continuous or a pattern of seepage or leaking water or steam:
The discharge must come from a covered dwelling’s household appliances or plumbing, heating, air conditioning or fire sprinkler system to be excluded.
2c(8). Loss caused by any of the following:
- Wear, tear, marring, or deterioration
- Inherent vice, latent defect, or mechanical breakdown
- Smog, corrosion, mold, or rot (wet or dry)
- Smoke caused by agricultural or industrial operations
- Pollution (of any type or source)
- Foundations, retaining walls, pavement, floors, roofs, or ceilings which have shrunk, expanded, cracked, settled, or bulged
- Birds, domestic animals, rodents, or insects
An Increasingly Troublesome Exposure
The cost facing the landlord described above was substantial. Sadly, the meth exposure to property owners is growing. Methamphetamines are toxic and significant levels of it in a property have to be remediated. This is not a situation that can be handled effectively by regular means. Properly restoring affected property involves an expert level of knowledge. Expert knowledge comes at a significant cost. Once a cleaning process is complete, it may need certification that work was done correctly. It may also require periodic testing to assure that a safe environment is maintained. Such testing may include taking and testing samples of soils surrounding an affected property site. Even if testing is negative, there are still costs in having materials and locations undergo collection, testing and analysis of results.
Here is a discussion of the problems associated with methamphetamines and property from Emarketing for Agencies found in Advantage Plus.
Meth homes are often abandoned and condemned, creating a problem for their respective neighborhoods, including pushing down its market values. They also continue as a magnet for illegal activity and/or can become an attractive nuisance, creating increased chances for injury to local children. They also can create an increase in exposure to thefts.
Meth homes also create a major problem for persons who, unknowingly, buy them. Most states have no laws that require prior meth use to be reported to prospective buyers. Stopping meth manufacturing does not end a problem. Making meth creates fumes and residue that permeates a home’s walls, ceilings, flooring, etc. Furniture is similarly contaminated. Regular cleaning efforts are inadequate in eliminating meth component contamination. Expert remediation is needed to remove the dangers caused by contamination from chemicals such as ether, paint thinner, different acids, even anhydrous ammonia. Without remediation, persons can be seriously sickened while occupying such homes. Problems that could develop include skin rashes, nausea, headaches, serious air passage irritation/burns, and serious lung damage. Prolonged occupation in contaminated homes could even cause death.
Due to the presence of invasive, dangerous chemical residue, proper property cleaning must be done by persons with the correct, special equipment and expertise. Areas used to make meth can be restored, but it involves many steps such as hauling and disposing of contaminated furnishings, cleaning of all surfaces. Interior spaces often have to undergo prolonged exposure to high temperatures (90 degrees of more) for several days. Extensive cleaning may involve partial dismantling and cleaning electrical wiring, plumbing, heating and ventilation systems. Special vacuums may be necessary. Expert testing and monitoring are also necessary. The entire process may easily cost upwards of tens of thousands of dollars.
Often, innocent parties turn to their insurance companies for help, but meth activity is NOT an insurable matter. Unfortunately, desperate for help, property owners frequently sue their insurers, trying to find any viable angle to secure coverage….and this creates a losing proposition…. for everyone.
If you’re a prospective homebuyer, specifically ask about the prior use of a home and get the seller to document that it was not used as a meth lab. If you are a landlord, be careful who you rent your property to and make sure that you monitor your property’s use. If you have to deal with a meth mess; be sure to contact services with the expertise to clean the mess up right.
Vigilance in Risk Mitigation
Insurance professionals can assist their clients in various ways beyond sales of insurance products and their renewals. It would be ideal if personal and commercial property insurance clients paid close attention to the myriad ways that their assets are threatened, but that isn’t realistic. However, this reality creates additional opportunities for service. It is valuable to demonstrate additional expertise and value by providing risk education.
While persons who own and rent out the properties often wish to reduce their obligations to essentials, such as property maintenance, securing and keeping occupants and regularly collecting rental income, insurance professionals can monitor the wider risk world and offer advice. Naturally, such advice may often be in the form of securing additional coverage via various policies and/or endorsements. But clients are frequently served well when provided with tips and information that facilitates risk mitigation and avoidance too. Since agents often commit themselves to additional education and observance of both current and developing risks, those efforts should be leveraged by creating opportunities to share this valuable knowledge.
Below is an excerpt of an article that discusses environmental and pollution exposures from the October 2017 issue of Rough Notes Magazine found in Advantage Plus.
Focus On Environmental And Pollution Coverage
By Lori Widmer
Where the claims are
Because pollution and environmental concerns run the gamut in terms of both industry and sector, it’s difficult to identify any one primary claim driver. Peeples says that mold continues to create a lot of buzz in the claims arena, which is where he’s seen some intense activity. “Generally, the environmental marketplace has been very successful selling pollution coverage to real estate investment trusts (REITs) and real estate owners (REOs),” he notes. These operations tend to focus on multitenant habitational properties, such as hospitality, office, commercial and retail operations, he adds.
Within those properties, Peeples says that water intrusion losses are increasing in frequency, “especially with all the rain in the west. So the number of mold claims has risen dramatically over the past several years.”
Geisler sees the same trend. “Unquestionably, mold is the most frequent claim at this time. Claims arising from mold seem to span all products and many different types of risks.” Among those, hotels, apartments and condos make up the majority of claims, with claims often occurring while capital improvements are being made. “Brokers with clients that engage in these types of services or that own these types of properties should fully vet these exposures and prepare their clients to answer questions from the carrier about their mold procedures and protocols.”
Another area of concern, Geisler says, is the increasing number of claims stemming from contractor activity. “Wood-framed construction projects and those that use gypsum concrete have seen the most severe claims. If the contractor does not take steps to prevent water infiltration prior to the building envelope being completed, or if it does not allow the gypsum concrete to properly dry and cure, mold will likely grow.”
Miller sees another claim driver, and it is one that can be easily mitigated. “While not new, insureds that do not use contracts in the course of their business continue to be problematic with respect to claims,” she says. “Lack of contract use consistently increases the cost of a claim. Agents and brokers should encourage their clients to incorporate contract use as standard operating procedure. If an insured does not have in-house expertise, many resources are available on the web.”
If that’s not enough, Geisler says, one particular claim source could become more of an concern. “While vapor intrusion has been an issue for many years, recently there’s been increased scrutiny and a push to reduce the standards applicable to many pollutants, especially volatile organic compounds (VOCs). As a result, formerly closed sites are being reopened from a regulatory standpoint and consultants are paying more attention to this issue when evaluating the environmental risks associated with a location. We expect claims in this area to increase accordingly. Additionally, following the high-profile issues in Flint, Michigan, drinking water has become a hot topic,” Geisler says.
Advice for agents and brokers
Agents and brokers, Geisler says, should anticipate increased interest on the part of carriers with regard to such exposures. Geisler says it’s important for agents to point out coverage gaps, and the best way is to “provide clients specific examples of claims that likely are not covered by their GL, auto or property policies. For example, mold is not generally covered under a builders risk, property or GL policy, but almost all property owners and contractors have a mold exposure.”
An awareness program also helps, says Peeples, who suggests that agents and brokers help clients develop water intrusion plans and awareness of mold, its causes, its impact and a solid response. “Your client can hire an environmental consulting firm to help develop the proper protocols or review its property manager’s response plans or processes,” he says.
Miller also suggests using claim examples to help clients understand the need for environmental coverage. “Agents and brokers should do their best to stay informed so they can share local or industry-related environmental events as examples of how environmental coverage comes into play,” she says.