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INSURANCE-RELATED COURT CASES

COURT DECISIONS

Digested from case reports published in Westlaw,
West Publishing Co., St. Paul, MN

Mall seeks recovery from shop in injury case

In 1999, Peggy Lampert, a customer of The 1/2 Off Card Shop, slipped and fell on ice while walking from the store to her car. The store was located at the Minges Brook Mall in Battle Creek, Michigan. The mall was owned by Minges Creek L.L.C. Lampert sued Minges Creek, The Card Shop, and the snow removal contractor in a Michigan state court.

As a tenant of the mall, The Card Shop was obligated to maintain a policy of public liability and property damage insurance with respect to the “leased premises” and the business it operated. The “leased premises” included the interior of the store and did not include the exterior walls, the roof, or the surrounding land. In addition, The Card Shop was required to pay a proportionate share of Minges Creek’s cost of maintaining and insuring the common areas of the mall. The Card Shop was insured by Royal Insurance Company of America. Minges Creek’s insurer was Chubb Insurance Company.

The state trial court in the Lampert lawsuit dismissed The Card Shop from the lawsuit. It found that The Card Shop did not “legally possess the sidewalk area where the fall occurred.” Minges Creek eventually settled the lawsuit with Lampert for $210,000. Chubb covered this cost as well as the cost of the defense.

Minges Creek then filed suit against Royal, and the case was removed to a United States district court. Minges Creek claimed it was an additional insured under The Card Shop’s policy with Royal. It sought reimbursement of the settlement cost and $26,700 in defense expenses. The district court found in favor of Minges. It held that Minges was an additional insured under the Royal policy, and that the accident occurred on premises used by The Card Shop. Royal appealed.

On appeal, Royal argued that although Minges Creek was an additional insured under The Card Shop’s policy, it was only an additional insured with respect to incidents occurring inside The Card Shop. The United States Court of Appeals, Sixth Circuit, agreed. It found that the lease and Royal’s policy were “inextricably intertwined and should be interpreted in context with each other.” In order for Royal to be obligated to defend and indemnify Minges Creek, the accident had to occur on “[p]remises owned or used by” The Card Shop. The lease defined the leased premises as the 6,796 square feet inside the Card Shop. It did not include the sidewalk where Lampert fell. Thus, Lampert’s accident was not covered by Royal’s policy and Chubb was the proper insurance company to defend and indemnify Minges Creek for the accident.

The decision of the district court was reversed, and the case was remanded to the district court with instructions to dismiss the complaint.

Minges Creek, L.L.C., vs. Royal Insurance Company of America-No. 05-1313-United States Court of Appeals, Sixth Circuit-March 16, 2006-442 Federal Reporter 3d 953.

Is damage from defective grout covered under CGL?

Berkel & Company Contractors, Inc., purchased grout from Metro Ready-Mix Inc. for use in several construction projects in the Baltimore area. Unfortunately, the grout was defective and Berkel was forced to demolish and reconstruct certain portions of the projects. Berkel had purchased construction products from Metro for some time. In fact, Metro had filed a legal complaint against Berkel for unpaid invoices totaling over $241,000. In an attempt to recover its additional costs caused by the defective grout, Berkel filed a counterclaim in the Metro lawsuit. In its counterclaim, Berkel claimed its additional costs exceeded $285,000.

Metro had a commercial general liability policy issued by OneBeacon Insurance Company and Pennsylvania General Insurance Company. The insurers provided a defense to Metro under a reservation of rights. Eventually, Metro and Berkel settled their dispute, but in the meantime the insurers had filed an action asking the court to determine whether they had a duty to defend and indemnify Metro. That action was heard in the United States District Court for the District of Maryland.

Because the parties had settled their dispute, the court found that the issue of whether the insurers had a duty to defend was moot. However, the court did address the issue of indemnity, i.e., whether or not there was coverage under provisions of the policies. The policy provisions were triggered when there was “property damage” caused by an “occurrence,” and the policy exclusions did not apply. An “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy did not define “accident,” but “property damage” was defined as “physical injury to tangible property, including all resulting loss of use of that property” and “loss of use of tangible property that [was] not physically injured.”

OneBeacon and Pennsylvania General argued that Metro’s supply of defective grout was a breach of its contractual obligation, rather than an “accident” constituting an “occurrence.” Metro argued that its negligent preparation of the grout was “accidental” and “unforeseen,” and was therefore an “occurrence.” The U.S. District Court agreed with the insurers. According to the court, the grout’s only purpose was to support the pilings and columns for the construction projects. It was an integral component in relation to the overall structure. Berkel’s damages that resulted from the defective grout “relate[d] to the satisfaction of [Metro’s] contractual obligations to construct its product.” They were not an “accident” within the policy definition of occurrence.

The District Court found in favor of OneBeacon and Pennsylvania General and granted their motion for summary judgment.

OneBeacon Insurance vs. Metro Ready-Mix, Inc.-Civ. No. AMD 05-1530-United States District Court, District of Maryland-April 18, 2006-427 Federal Supplement 2d 574.

Insurer denies Katrina claim

In June 2005, Elmer and Alexa Buente purchased a home in Gulfport, Mississippi. They also purchased an Allstate Property and Casualty Insurance Company “Deluxe Homeowners Policy” for the property. The policy excluded coverage for flood damage and for damage caused by “water or any other substance on or below the surface of the ground, regardless of its source.” In addition, coverage was excluded if there were two or more causes of loss to the covered property, and the main cause(s) of the loss was excluded.

Because of the location of the property, the Buentes inquired about hurricane coverage. They claimed that their Allstate agent, Brenda Pace, told them that “they would have full and comprehensive coverage for any and all hurricane damage, including any and all damage proximately, efficiently, and typically caused by hurricane wind and ‘storm surge’ proximately caused by hurricanes.” The Buentes also claimed that when they asked whether or not they needed to purchase additional flood insurance, one of Pace’s employees told them they did not need that type of coverage because they did not live in a flood plain. In addition, the Buentes claimed that this same employee affirmed that they would be covered for damage caused by a hurricane. The Buentes alleged that they reasonably relied upon the representations made by Allstate’s employees in making the decision not to purchase flood insurance coverage.

On August 29, 2005, the Buentes’ property was damaged during Hurricane Katrina. They called the Allstate “Natural Disaster Hotline” and were told that the damage from “storm surge” would be covered under the policy. However, the Allstate adjuster who was sent to inspect the property told the Buentes that “Allstate only pays him for adjustment of damages caused by wind, not water.” Allstate paid the Buentes $2,600.35 net of the deductible. The Buentes then sued Allstate, claiming that their covered losses were between $50,000 and $100,000, and that they were entitled to coverage for these losses.

Allstate filed a motion with the court to dismiss the action. According to Allstate, there were no facts that supported the Buentes’ argument that they were entitled to additional benefits under the policy. According to the court, the key issue was whether losses attributable to “storm surge” were covered losses because the “storm surge” was wind driven, or whether losses attributable to “storm surge” were excluded because such damages were caused by “water.” The court found that the policy language was ambiguous on this issue. On the one hand, the policy excluded coverage for wind and rain damage where water damage was the predominant cause of the loss. On the other hand, because the policy carried a specific “Hurricane Deductible Endorsement,” it was arguable that the policy granted coverage for wind and rain damage in the event of a hurricane. According to the court, if the Buentes could prove that the winds and rains entering their property through openings caused by the hurricane winds caused their losses, there would be coverage under the policy. Because the court had not yet heard the evidence, it was not appropriate to dismiss the case.

The court also addressed the Buentes’ argument that when they decided not to purchase additional flood insurance, they had relied upon the representations made by the Allstate employee. Under Mississippi law, if these allegations were true, Allstate could have potential liability for all of the damage to the property. Allstate argued that the Buentes did not set forth enough facts to support their claim. However, the court found that the Buentes were entitled to an inference that their reliance was reasonable, and that the case needed to proceed to trial to make a factual determination.

Allstate’s motion to dismiss was denied.

Buente vs. Allstate Insurance Company-No. CIVA105CV712LTSJMR-United States District Court, S.D. Mississippi, Southern Division-March 24, 2006-422 Federal Supplement 2d 690.

Insurer denies it owes duty to defend

In December 1992, Bruce Stein and Mark Mintz purchased a multi-family residential building in Los Angeles, California. They financed their purchase through Columbia Savings and Loan. Columbia’s loans were eventually assigned to State Street Bank as trustee. State Street’s function was to hold and manage Columbia’s loans, including the Stein/Mintz loan.

Ryland Mortgage Company was hired by State Street and others to service the Columbia loans pursuant to a “Pooling and Servicing Agreement.” Under the agreement, Ryland was to collect payments and generally manage the loans. If parties defaulted on their loans, it was Ryland’s job to foreclose on the properties, maintain and manage them, and then arrange for their sale.

Stein and Mintz defaulted on their note. Ryland foreclosed on their property, and State Street became the owner of the property. Before the property was sold, however, Steve Fallen, a visitor to the property, was injured when he fell down a staircase. Fallen filed a lawsuit against State Street and Ryland, alleging negligent failure to repair the staircase and negligent failure to warn of the resulting danger.

Ryland submitted defense of the lawsuit to its own insurer, Travelers Property Casualty Company of America, and State Street’s insurer, Liberty Mutual Insurance Company. According to Ryland, Ryland was a named insured under the Travelers policy and an additional insured under the Liberty Mutual policy. Both companies denied coverage. Ryland then filed a lawsuit against both insurers. Travelers subsequently assumed Ryland’s defense in the Fallen lawsuit; however, it filed a cross-claim in the Ryland lawsuit, claiming that Liberty Mutual should contribute to the defense. Liberty Mutual continued to assert it was not obligated to defend Ryland. The lower court found in favor of Liberty Mutual; Travelers appealed.

The Liberty Mutual policy insured State Street Bank and any “real estate manager” of State Street Bank. On appeal, Travelers argued that Ryland was a real estate manager within the meaning of the policy. It claimed that the Pooling and Servicing Agreement, which governed the relationship between State Street and Ryland, obligated Ryland to manage the property owned by State Street. Liberty Mutual argued that Ryland’s role was the servicing of mortgages, not real estate management.

The United States Court of Appeals, Fourth Circuit, agreed with Travelers. Under the Pooling and Servicing Agreement, Ryland was obligated to manage and maintain foreclosed properties until they were sold. It was undisputed that State Street owned the building when Fallen was injured, and that Ryland was responsible for the building’s maintenance at that time. Therefore, Ryland was the real estate manager for State Street. As such, Ryland was covered by the Liberty Mutual policy, and Liberty Mutual was obligated to share in the cost of its defense in the Fallen lawsuit.

Liberty Mutual also argued that State Street never contemplated providing insurance coverage for Ryland because under the terms of the Pooling and Serving Agreement, Ryland agreed to indemnify State Street for State Street’s management activities at the property. Because the court was deciding coverage only for Ryland’s liability to Fallen, the court found the indemnification agreement to be irrelevant.

The judgment of the lower court in favor of Liberty Mutual was reversed.

Travelers Property Casualty Company of America vs. Liberty Mutual Insurance Company-No. 05-1226-United States Court of Appeals, Fourth Circuit-April 12, 2006-444 Federal Reporter 3d 217.

Airline seeks coverage for 9/11 business interruption

Several commercial airline carriers, including US Airways, Inc., entered into an “All Risk Manuscript Property Policy” subscription insurance contract with six insurance providers. The policy provided commercial property coverage in the amount of $25 million from December 1, 2000, through December 1, 2001. One of the insurance providers was Caliber One Indemnity Company, which was later succeeded by PMA Capital Insurance Company.

After the terrorist attacks of September 11, 2001, the airport manager for the Metropolitan Washington Airport Authority ordered the evacuation and closure of Ronald Reagan Washington National Airport. Although other airports around the country were permitted to resume operations within several days after the attacks, Reagan was closed or subject to restricted access for two weeks. As a result, US Airways was not permitted to fly into or out of Reagan during the period from September 11 to October 4, 2001.

The Air Transportation Safety and System Stabilization Act governed how air carriers would receive federal compensation as a result of the terrorist attacks that occurred on September 11, 2001. US Airways’ claimed losses were $58 million, and it received approximately $310 million from the federal government pursuant to the Act. It also made a claim under the All Risk Manuscript Property Policy for business interruption losses. As a participating insurer in the policy, PMA’s maximum liability exposure under the policy was $2.5 million. When PMA denied coverage, US Airways sought a declaratory judgment that PMA was obligated under the policy to indemnify it for business interruption losses suffered as a result of the closure of Reagan National. It also claimed PMA breached the terms of the policy and its implied covenant of good faith and fair dealing.

PMA filed several motions defending its reasons for denying coverage. US Airways filed a motion for summary judgment presenting one issue: whether proceeds received under the Stabilization Act should offset any compensation received under the policy with PMA. With regard to US Airways’ motion, the trial court found that the payments received by US Airways from the federal government pursuant to the Stabilization Act were not required to reduce losses claimed under the policy. PMA appealed.

On appeal, PMA stated that Section 24 of the policy required that losses claimed under the policy be reduced by “[a]ll salvages, recoveries, and payments, excluding proceeds from subrogation and underlying insurance recovered or received prior to a loss settlement under this policy shall reduce the loss accordingly.” According to PMA, the plain language of the policy required that the proceeds received by US Airways from the federal government constituted “salvages, recoveries, and payments” within the meaning of the policy. The Supreme Court of Virginia agreed with PMA. It found that the proceeds were “recoveries” within the meaning of the policy. According to the court, Section 101 of the Stabilization Act clearly stated that its purpose was “to compensate air carriers for [direct and incremental] losses incurred by air carriers as a result of the terrorist attacks on the United States that occurred on September 11, 2001.” Thus the compensation was for the purpose of “regaining or restoring” the losses sustained; the proceeds received by US Airways were a form of “recoveries” under Section 24 of the policy. Accordingly, US Airways’ claimed losses against PMA under the policy had to be reduced by the amount it received pursuant to the Stabilization Act.

The judgment of the trial court was reversed, and final judgment was entered in favor of PMA.

PMA Capital Insurance Company vs. US Airways-Record No. 051179-Supreme Court of Virginia-March 3, 2006-626 South Eastern Reporter 2d 369. *

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