Table of Contents 

INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Contractor sued over home’s defective exterior finish

James and Kathleen French hired Jeffco Development Corporation as general contractor for the construction of their new home. Jeffco hired a subcontractor to finish the exterior of the home. The subcontractor used a synthetic stucco product called Exterior Insulating Finishing System (EIFS). Almost five years later, the Frenches discovered moisture and water damage to the structure and walls of the house, caused by defective EIFS on their home’s exterior. The Frenches sued Jeffco to cover the cost of correcting the defects and the resulting damage.

Jeffco had commercial liability coverage through four different companies: Assurance Company of America, United States Fire Insurance Company, Ohio Casualty Insurance Company, and Travelers Casualty and Surety Company. The Assurance and U.S. Fire policies consisted of the 1986 version of the standard commercial general liability policy form drafted by the Insurance Services Office (ISO). The policy contained two exclusions from coverage. First, the policy excluded “[P]roperty damage expected or intended from the standpoint of the insured.” Second, it excluded “‘Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” This second exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

Jeffco notified all four insurance companies of the lawsuit. Assurance and U.S. Fire defended Jeffco under a reservation of rights. Ohio Casualty also agreed to defend, but Travelers did not. On the day of the trial, Jeffco and the Frenches reached a settlement agreement. Ohio Casualty consented to the agreement, but Assurance and U.S Fire did not. Pursuant to the settlement agreement, Jeffco assigned to the Frenches any rights, claims, or interest it had against Assurance and U.S. Fire.

The Frenches, as assignees of Jeffco, then filed an action against Assurance and U.S. Fire. The action was heard in federal district court using Maryland law. The district court concluded that no coverage existed under the Assurance and U.S. Fire policies because they expressly excluded coverage for property damage expected or intended from the standpoint of the insured. The Frenches appealed.

On appeal, the United States Court of Appeals, Fourth Circuit, agreed with the district court that the standard 1986 commercial general liability policy form published by ISO did not provide liability coverage to a general contractor to correct defective workmanship performed by a subcontractor. According to the court, the subcontractor’s defective application of the stucco system to the home was not an “accident” and thus was not an “occurrence” under the policy. However, the appeals court disagreed with the district court’s holding that the damage to the contractor’s otherwise nondefective work was not covered.

According to the court, the standard 1986 policy provided liability coverage for the cost to remedy unexpected and unintended property damage to the contractor’s otherwise nondefective work product caused by the subcontractor’s defective workmanship. Moisture leakage was an “accident” and thus an “occurrence” within the meaning of the policy. In sum, the cost of the defective stucco was not covered, but the water and moisture damage to the structure and the walls was covered.

The decision of the district court was affirmed in part and vacated and remanded in part.

French vs. Assurance Company of America-No. 05-1356-United States Court of Appeals, Fourth Circuit-March 14, 2006-448 Federal Reporter 3d 693.

Intentional act exclusion debated

Thomas and Cindy Kure had a homeowners policy issued by Illinois Farmers Insurance Company. Their son, Matthew, was involved in an altercation with Kyle Signorelli which resulted in Kyle being paralyzed from the neck down. Kyle’s parents sued Matthew Kure and his parents. Their complaint alleged that Matthew negligently injured Kyle and that he was also guilty of willful conduct and battery. The complaint also alleged that Matthew’s parents were negligent in allowing Matthew to use their vehicle to travel to Kyle’s house and in failing to control their son.

The Kures sought coverage for defense of the lawsuit and indemnity from Illinois Farmers. Farmers then filed an action for declaratory judgment, arguing that it had no duty to defend or indemnify Matthew or his parents. The trial court found that Farmers had a duty to defend Thomas and Cindy Kure, but that it did not have a duty to defend or indemnify Matthew. Accordingly, the court granted Thomas and Cindy’s motion for summary judgment in their favor. Farmers appealed.

The Illinois Farmers policy provided in pertinent part: “We will pay those damages which an insured becomes legally obligated to pay because of bodily injury, property damage or personal injury resulting from an occurrence to which this coverage applies. ‘Occurrence’ means an accident, including exposure to conditions which result during the policy period in bodily injury or property damage. Repeated or continuous exposure to the same general conditions is considered to be one occurrence.”

On appeal, Farmers argued that Kyle’s injuries did not result from an “occurrence” as defined by the policy. The lower court found that Kyle’s injuries resulted from Matthew’s intentional acts, and thus were not the result of an accident. According to Farmers, because there was no separate bodily injury resulting from Thomas and Cindy Kure’s negligent conduct, Kyle’s injuries were not the result of an “occurrence” and the policy did not apply. The Appellate Court of Illinois, Third District, disagreed. It noted that in Illinois, whether an occurrence has taken place is determined from the insured’s standpoint. Viewing the incident from their perspective, the complaint alleged only negligence by Thomas and Cindy. It did not allege that they intended, as a result of their negligence, that Matthew would injure Kyle. Thus, there was an “occurrence” within the meaning of the policy.

Next, the court considered whether the “intentional act exclusion” of the policy applied to Thomas and Cindy. The language of the policy provided that the exclusion applied when bodily injury, property damage or personal injury was “(a) caused intentionally by or at the direction of an insured; or (b) resulted from any occurrence caused by an intentional act by any insured where the results are reasonably foreseeable.” The court found the exclusion did not apply. Again, the complaint contained no allegation that Thomas or Cindy intended that Matthew would injure Kyle. Nor did it allege that Thomas and Cindy could even foresee such a result. Thus, the intentional act exclusion did not apply.

The judgment of the lower court in favor of Thomas and Cindy Kure was affirmed.

Illinois Farmers Insurance Company vs. Kure-No. 3-05-0262-Appellate Court of Illinois, Third District-April 3, 2006-846 North Eastern Reporter 2d 644.

Doctor sues agency in vicarious liability dispute

Frank E. Wilson, an obstetrician/gynecologist, was associated as an independent contractor with the Southboro Medical Group. The independent contractor agreement between Wilson and Southboro required both parties to indemnify each other for each other’s acts of negligence and to maintain professional liability insurance. There was no requirement in the contract that the parties carry coverage for vicarious liability (“the imposition of liability on one person for the actionable conduct of another, based solely on a relationship between the two persons.”—from Black’s Law Dictionary).

The James L. Cooney Insurance Agency procured professional liability coverage for both Wilson and Southboro, and at all times both parties carried the coverage required under the agreement. However, for many years, Southboro’s policy automatically included vicarious liability coverage for Southboro should Southboro face exposure for the negligent acts of its independent contractors. Around 1990 to1991, vicarious liability coverage was eliminated as a standard part of Southboro’s policy. In order to maintain it, Southboro would have had to pay significant premiums. Cooney did not inform Southboro of this change until March 1993. Southboro expressed an interest in purchasing the coverage, but thought the premium of $82,000 was excessive. It eventually purchased vicarious liability coverage, but not until 1996.

In June 1993, Wilson was sued for medical malpractice. Southboro, because of its association with Wilson, was joined as a defendant under a vicarious liability theory. Both parties were found liable, but before the trial on damages they settled for $1,440.918.19. Wilson’s insurer contributed $1 million. Because it did not have vicarious liability insurance, Southboro paid the remaining balance. Southboro then attempted to pursue indemnification against Wilson under the parties’ independent contractor agreement. Wilson eventually agreed to pay one half of the $440,918.19 paid by Southboro as long as Southboro assigned its right to sue Cooney for the absence of vicarious liability insurance. Wilson then sued Cooney, alleging that Cooney was negligent in failing to inform Wilson that Southboro no longer carried vicarious liability insurance. The trial court found that Cooney was negligent and awarded Wilson $275,000. Cooney nevertheless argued that Wilson could not recover because Cooney did not have a heightened duty to advise Wilson of changes in Southboro’s coverage. Cooney also argued that Wilson could not benefit from Southboro’s contractual relationship with Cooney. The court did not accept these arguments, so Cooney appealed.

On appeal, the Appeals Court of Massachusetts, Middlesex, found that Cooney’s failure to inform Wilson that Southboro no longer carried vicarious liability insurance did not cause additional injury to Wilson. According to the court, even if Southboro’s insurer had provided vicarious liability insurance, it would have had a right eventually to collect from Wilson. In addition, the court found that Cooney owed no special duty to inform Wilson that the clinic no longer carried vicarious liability insurance. Southboro was not required by contract or by law to maintain vicarious liability insurance. Furthermore, there was no legal reason for one policyholder to expect his insurance agent to inform him of changes in another policyholder’s insurance coverage. Neither was there any evidence that Wilson was relying on Cooney to keep him informed. Accordingly, the decision of the lower court was reversed and judgment was entered in favor of Cooney.

Wilson vs. James L. Cooney Insurance Agency-No. 05-P-382-No. 05-P-382-Appeals Court of Massachusetts, Middlesex-April 20, 2006-845 North Eastern Reporter 2d 1187.

Contractor & subcontractor argue liability for worker’s injury

John Halek, an employee of W.A. Anderson Construction Company, was injured when he fell while performing carpentry work on a residential construction project. The general contractor for the project was Kingsport Development, LLC; Anderson was a subcontractor. Halek sued Kingsport for his injuries, claiming that as a result of Kingsport’s negligence, he was knocked off the edge of a wall and severely injured.

Anderson was insured by State Automobile Mutual Insurance Company under a commercial general liability policy and a commercial umbrella policy. Kingsport was named as an additional insured under both policies. The CGL policy contained an additional insured endorsement that redefined “who is an insured” to include “any person or organization whom [Anderson was] required to name as an additional insured on [the] policy under a written contract or agreement.” Kingsport and Anderson did not have a written agreement. Furthermore, the CGL additional insured endorsement limited coverage as follows: “That the person or organization is only an additional insured with respect to liability arising out of … (b) ‘your work’ for that additional insured for or by you.”

Kingsport received notice of the Halek lawsuit on August 1, 2000, and immediately forwarded the complaint to its insurer, Zurich North America. Kingsport also notified Anderson (in 2002), but there was some confusion as to whether Kingsport wanted Zurich or State Auto to defend it. Eventually, however, in March 2003, Kingsport mailed a letter to State Auto formally tendering the action for exclusive defense and coverage. Seven months later, State Auto denied coverage and filed an action seeking a declaration that it had no duty to defend or indemnify Kingsport in the Halek suit. The trial court found that Kingsport did not have coverage under the State Auto policy; Kingsport appealed.

On appeal, Kingsport argued that its liability arose out of Anderson’s work because, “but for” Halek’s employment with Anderson and his presence at the jobsite, Kingsport would not have been sued. Kingsport also stated that it was a common construction industry practice for a general contractor to shift the liability risk for accidents to subcontractors by requiring the subcontractor to include the general contractor as an additional insured on the subcontractor’s insurance. The Appellate Court of Illinois, Second District, agreed with Kingsport. It found that the language “arising out of” in the State Auto policy was broad and vague, and that it therefore must be construed in favor of the insured. Halek’s injuries potentially arose out of Anderson’s work. It did not matter, as State Auto had argued, that the Halek action alleged negligence solely on the part of Kingsport and not Anderson. The State Auto policy required only that the liability arise out of Anderson’s work. It did not require a more detailed examination.

State Auto went on to argue that it had additional policy-related defenses for denying coverage, including the fact that there was no written contract or agreement between Kingsport and Anderson. However, Kingsport argued that, based on its wrongful denial of coverage and the fact that it waited seven months to file its declaratory judgment action, State Auto forfeited its right to make these arguments. The court disagreed with Kingsport. It found that State Auto followed the correct procedure and did not unreasonably delay seeking a declaratory judgment. Therefore State Auto was not precluded from making policy defenses in support of its denial of coverage. The court then concluded that there were issues that needed to be decided by the trial court, specifically whether or not Kingsport satisfied that it have a written contract or agreement.

The decision of the lower court was reversed, and the case was remanded for further proceedings.

State Automobile Mutual Insurance Company vs. Kingsport Development LLC-No. 2-05-0568-Appellate Court of Illinois, Second District-April 5, 2006-846 North Eastern Reporter 2d 974.

Insurer denies coverage for rental car accident

Jonathan Purvis owned a Toyota pickup truck that was insured under a business insurance policy issued by Progressive Casualty Company. In March 2000, Purvis needed a car with more passenger seats because he was having visitors, so he rented a car from Thrifty Car Rental. When he rented the car, Purvis declined insurance coverage and told Thrifty he would be the only one driving the car. Nevertheless, a day after he rented the car, Purvis gave his minor daughter, Ashley, permission to drive it. Unfortunately, Ashley and her passenger, Kelly Smith, were involved in an accident, and Smith was seriously injured. Smith’s parents filed a legal action against Purvis. Because he had declined insurance coverage for the rental car, Purvis sought coverage for the lawsuit under the Progressive policy. Progressive denied coverage. According to Progressive, Ashley was not an “insured driver” under the terms of the policy, and the rental car was not an “insured auto.” Ashley was found to be at fault in the accident, and the Smith/Purvis lawsuit was settled for more than $1 million. After the settlement, Purvis assigned any rights he had against Progressive to Smith. Smith then filed an action against Progressive in Purvis’ name. The lower court found that neither Ashley nor the rental car was covered under the Progressive policy when the accident occurred. Purvis appealed.

On appeal, Purvis argued that the policy language was ambiguous and should therefore be construed against Progressive. According to Purvis, the policy could be read to provide both operator’s and owner’s coverage. The relevant language of the policy provided that Progressive would pay “on behalf of an insured, damages … for which any insured is legally liable … caused by accident and resulting from the ownership, maintenance, or use of your insured auto.” “Insured” was defined as “1. You while driving your insured auto, 2. You while driving any auto other than your insured auto, except: a. autos you hire or borrow from your employees or members of their households. b. autos furnished for your regular or frequent use. c. an auto hired by you unless it is specifically listed in the Policy Declarations. 4. Anyone else driving your insured auto with your express permission. However, the owner or anyone else from whom you hire or borrow an insured auto is an insured only if that auto is a trailer connected to an insured auto you own.” “Your insured auto” was defined as “a. Any auto described in the Declarations and any auto you replace it with. If you want coverage for Liability to Others to apply to the replacement, you must notify us within 30 days of its acquisition … c. Any auto not owned by you while you are temporarily driving it as a substitute for any other auto described in this definition because of its withdrawal from normal use due to breakdown, repair, servicing, loss or destruction …”

The Supreme Court of Idaho found that this language clearly identified what was covered: the Toyota pickup and/or its substitute, and Purvis while driving certain other vehicles. The rental car did not qualify as a “substitute” vehicle because the pickup truck was in working condition at the time of the accident. Thus, the Progressive policy unambiguously excluded Ashley and the rental car from coverage.

Purvis also claimed that the Progressive policy violated Idaho statutory law because it did not provide the coverage required for either an owner’s policy or an operator’s policy. Again, the court disagreed. Idaho law requires an owner’s policy to “(a) Designate by explicit description or by appropriate reference all motor vehicles with respect to which coverage is to be granted; and (b) Insure the person named therein and any other person, as insured, using any such described motor vehicles with express or implied permission of the named insured …” The court found that the Progressive policy was an owner’s policy, that it designated the Toyota as the insured vehicle, and that it covered Purvis and Ashley when she was using the Toyota with Purvis’ permission. Thus, it complied with the statutory requirements for an owner’s policy. Because the court characterized the policy as an owner’s policy, there was no need to evaluate whether the policy provided the coverage required by law for an operator’s policy.

The decision of the lower court in favor of Progressive was affirmed.

Purvis vs. Progressive Casualty Insurance Company-No. 31410-Supreme Court of Idaho-December 20, 2005-127 Pacific Reporter 3d 116. *

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