INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Stumped: Buried trees cause claim dispute

In 1972, William and Mary Anne Kelley hired Belair Construction Company, Inc., to build a house. Joseph Iantosca, a land developer and the president of Belair, signed the agreement, which included the specifications for the construction of the house. One of the specs required the removal of all trees that interfered with "construction of the dwelling, sewer, driveway and utility connections." Instead of moving the trees and stumps, however, Belair buried them on the site and poured the foundation over them.

Over time, these materials deteriorated, and the foundation began to settle unevenly, cracking in the process. William Kelley first noticed the cracks in 2002 and hired a professional to investigate the problem. The investigation concluded that the house had been built on unsuitable materials, that further settling and cracking could be expected unless intervention occurred, and that the intervention could take a variety of forms, all of which would involve significant expense.

Kelley had a homeowners policy issued by Liberty Mutual Fire Insurance Company. He sought coverage under the policy for the costs required to repair the problem. Liberty denied coverage.

In 2006, Kelley sued Iantosca, Belair, and Liberty under various theories, including breach of contract, misrepresentation, negligence, and unfair and deceptive practices in the conduct of a trade or business. With regard to Liberty, Kelley alleged unfair insurance settlement practices. Belair and Iantosca moved to dismiss the complaint. The lower court judge initially allowed the motion in part and denied it in part, but a different judge later dismissed the entire case. Kelley appealed.

On appeal, the Appeals Court of Massachusetts, Norfolk, found that the lower court had properly dismissed the misrepresentation and negligence claims alleged against Iantosca and Belair. The court then addressed the issue of whether the lower court had improperly dismissed the breach of contract claim against Belair.

The lower court had determined that any contractual obligation Belair undertook was merged in the deed Kelley accepted from Belair after the construction was completed. The court of appeals disagreed, and found that the acceptance of the deed signaled Kelley's satisfaction only with the transfer of title, not with the quality of the construction. The court therefore concluded that the lower court had incorrectly dismissed the breach of contract and unfair business practices claims because there were still issues of fact to be decided, specifically with regard to any misrepresentations Iantosca or Belair may have made about how the house was built.

The appeals court next addressed the issue of the Liberty Mutual coverage. The court noted that the homeowners policy expressly excluded "loss…[c]aused by…[s]ettling, shrinking, bulging, or expansion, including resultant cracking, of pavements, patios, foundations, walls, roofs or ceilings." The court stated that it was "crystal clear from the record that the damage to Kelley's house fell squarely within the exclusion." Therefore, the court concluded, Liberty was justified in denying coverage.

The judgment of the lower court was partially vacated and partially affirmed.

Kelley vs. Iantosca-No. 09-P-1116-Appeals Court of Massachusetts, Norfolk-October 21, 2010-935 North Eastern Reporter 2d 783.

Does policy cover "hidden seepage"?

In June 2001, Ella Boazova bought a house in Arlington, Massachusetts, and purchased homeowners insurance from Safety Insurance. In 2005, while renovating her kitchen, Boazova noticed that moisture had seeped into the wood sill on top of the foundation at the back of the house and that the wood sill, floor joists, and wall studs were rotten. She promptly filed a claim with Safety. When Safety denied her claim, Boazova filed suit against the insurer, alleging breach of contract and violation of Massachusetts insurance law.

Boazova hired an expert to evaluate the damage. He found that a concrete patio had been incorrectly poured directly against the house. As a result, moisture collected at the top of the foundation, causing the exterior siding and eventually the interior of the wall to rot. The expert concluded that the damage Boazova had discovered developed over an extended period of time and that it was hidden until she discovered it. Safety hired its own expert, who basically agreed with Boazova's expert.

Boazova claimed she was entitled to coverage under section I(A)(2)(e)(9) of the policy, which provided, in relevant part: "We insure against risk of direct loss to property described in coverages A and B only if that loss is a physical loss to property. We do not insure, however, for loss:…2. Caused by:…(9) Constant or repeated seepage or leakage of water or the presence or condensation of humidity, moisture or vapor, over a period of weeks, months or years unless such seepage or leakage of water or the presence or condensation of humidity, moisture or vapor and the resulting damage is unknown to all 'insureds' and is hidden within the walls or ceilings or beneath the floors or above the ceilings of a structure."

According to Boazova, her loss was caused by undiscovered water seepage, so it was covered by this "hidden seepage" provision. Safety disagreed, pointing to a specific exclusion that provided: "We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss:…c. Water Damage, meaning: (1) Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind." The lower court agreed with Safety that the exclusion applied and found no coverage for Boazova; Boazova appealed.

On appeal, Boazova argued that seepage, not surface water, was the "active efficient" cause of her loss.

The Appeals Court of Massachu­setts, Middlesex, disagreed. The court noted, as a preliminary matter, that the Massachusetts Supreme Judicial Court had found that an insured would not be entitled to coverage if an excluded event occurred anywhere in the "chain of causation." The court stated that Boazova was foreclosed from invoking her "train of events" argument. The court also noted that the water was not transformed into something other than surface water just because it entered Boazova's house. The court concluded that Boazova's loss originated from surface water, damage from which was expressly excluded under the policy. Therefore she was not entitled to coverage.

The decision of the lower court was affirmed.

Boazova vs. Safety Insurance Company-No. 09-P-189-Appeals Court of Massachusetts, Middlesex-December 16, 2010-2010 WL 5095298 (Mass. App. Ct.).

Did homeowners insurer waive its rights?

Lowell Patton owned a house in Lake Oswego, Oregon. The house was insured under a homeowners policy from Mutual of Enumclaw Insurance Company that Patton purchased through the Hopp Insurance Agency and its owner, Randy Hopp. Later, when Patton decided to remodel his house, he called Hopp and asked for an increase in his coverage. As a result of this phone call, Patton's dwelling coverage was increased to $600,000, the maximum amount offered by Mutual of Enumclaw. The policy also provided a maximum benefit of $120,000 for loss of use and a limit of $420,000 for personal property.

Patton's policy contained a guaranteed replacement cost endorsement, an alternative to the dwelling coverage limit of $600,000. Under the endorsement, Mutual of Enumclaw agreed to pay "not more than the lesser of: 1. The replacement cost of that part of the building damaged for like construction and use on the same premises; or 2. The necessary amount required to repair or replace the damaged building."

In November 2001, shortly before the remodeling was completed, Patton's house was destroyed by fire. Patton informed Mutual of Enumclaw that he intended to pursue a claim under the replacement cost endorsement. He obtained two estimates indicating that it would cost between $3.6 million and $4 million to replace the house. Gene Chandlee, the insurer's adjuster, obtained a much lower bid for approximately $1.5 million. He also informed Patton that reconstruction would have to be completed before the insurer would pay the full replacement cost. Patton told Chandlee that he did not think the house could be rebuilt for the lower amount using the same quality of materials and construction.

Patton attempted to begin the reconstruction process but ran into problems with the local building permit authorities.

Ten months after the fire, Mutual of Enumclaw's attorney wrote Patton a letter reminding him that replacement costs would be paid only after the reconstruction was complete, and expressing concern that Patton had not started to rebuild. The attorney reminded Patton that he had two years from the date of the fire to resolve any claims against Mutual of Enumclaw, and he informed Patton that the higher bid was not necessarily what the insurer would pay. He requested additional details to support the higher bid, stating that providing additional information would assist the insurer in ensuring the accuracy of the bid. He ended the letter with the following statement: "All rights under your policy of insurance with [MOE] are reserved. No waiver or estoppel of any kind is intended and none should be implied."

The attorney continued to remind Patton, in person and in writing, of his rights and obligations under the policy. Patton continued to experience building permit problems. The insurer's written correspondence continued to contain the language "All of the terms and conditions of your policy remain, including the two-year suit limitation. No waiver or estoppel is intended and none should be implied."

Patton eventually entered into a contract to rebuild the house for an estimated cost of $3.8 million. Just before the second anniversary of the fire, and before reconstruction had begun, he filed a complaint against Mutual of Enumclaw and Hopp. The complaint asked the court to declare that the insurer was obligated to compensate Patton for replacement costs incurred more than two years from the date of the fire. Further, the complaint alleged that the insurer had breached the policy by refusing to pay replacement costs in excess of the amount of Chandler's bid and alleged a claim of negligence against Hopp for failing to secure adequate insurance coverage. The lower court found in favor of Patton on the breach of contract claim and for Mutual of Enumclaw and Hopp on the negligence claims. Both parties appealed.

On appeal, Patton argued that the various letters he had received from the insurer's attorney had the effect of altering the terms of the policy so that he was no longer obligated to comply with policy conditions. The court disagreed. It found that the letters did not alter the unambiguous terms of the policy because they consistently reiterated that Patton's rights were subject to the terms of the policy. The court concluded that because Patton did not complete reconstruction within two years from the date of the fire, he did not meet the conditions of the policy. Thus Mutual of Enumclaw did not breach its contract.

The court then addressed the issue of whether Hopp was negligent in failing to procure adequate coverage. It concluded that Patton had not provided enough evidence of the value of the house that burned or of the availability of alternative loss-of-use coverage to prove that Hopp could have obtained better coverage on Patton's behalf.

The case was affirmed in part and reversed and remanded for new trial in part.

Patton vs. Mutual of Enumclaw Insurance Company-No. 03-11-12054; A134159-Court of Appeals of Oregon-October 20, 2010-242 Pacific Reporter 3rd 624.