Protective Safeguards and Condominium Property Insurance Coverage--Agents, Condo Boards, and Property Managers Beware!!

Merlin Law Group New York and New Jersey office 2017 Holiday Party and UGLY SWEATER contest
Merlin Law Group New York and New Jersey office 2017 Holiday Party and UGLY SWEATER contest

Protective safeguard provisions can lead to denials of coverage. Condominium officers and boards, their insurance agents, and especially their property managers should be very wary when the requirement of protective safeguards are included in a policy or mentioned in an application. A failure to have protective safeguards in place and working may leave a significant condominium property loss completely uninsured.

Here is the typical clause regarding protective safeguards for fire, but these can apply to burglary alarms and just about anything an underwriter desires to reduce the risk of loss of an insured peril:

We will not pay for loss or damage caused by or resulting from fire if, prior to the fire, you:

1. Knew of any suspension or impairment in any protective safeguard listed in the Sche- dule above and failed to notify us of that fact; or

2. Failed to maintain any protective safeguard listed in the Schedule above, and over which you had control, in complete working order.

If part of an Automatic Sprinkler System is shut off due to breakage, leakage, freezing condi- tions or opening of sprinkler heads, notification to us will not be necessary if you can restore full protection within 48 hours.

A recent New York case ruling that no coverage was afforded to a fire loss1 shows how these requirements can result in no insurance benefits for an otherwise covered loss:

The property insurance policy issued to defendant by plaintiff Illinois Union Insurance Company contained a protective safeguards endorsement (PSE) that unambiguously required as a condition of insurance that defendant maintain automatic sprinkler systems in complete working order in all buildings in its multi- building condominium complex. The investigation into the fire that spread through the complex causing extensive damage determined, inter alia, that some of the buildings did not have sprinkler systems and others had only limited sprinkler systems and not all of them were working properly.

...Both the Aspen and the Illinois Union policies contained the requirement of fully functional sprinkler systems in all buildings in defendant's complex.

The New York and New Jersey Merlin Law Group attorneys pictured above fight insurers with these protective safeguard issues on a regular basis. But, the best course of action is to avoid the problems altogether by avoiding these endorsements or making certain they are always compiled with.

1 Illinois Union Ins. Co. v. Grandview Palace Condominiums Ass'n, --- N.Y.S. 3d ---, 2017 N.Y. Slip Op. 07957 (N.Y. App. Div. Nov. 14, 2017).

Court Decision on "Your Work" Exclusion in a CGL Policy is a Head Scratcher

In Essex Insurance Co. v. DiMucci Development Corp. of Ponce Inlet Inc., U.S. District Judge Roy B. Dalton Jr. recently held that Evanston Insurance Company has no duty to defend a builder in a lawsuit alleging construction defects at one of its Florida condominium complexes based on an exclusion in the policy for damage to the developer’s own work.1

The lawsuit arose when DiMucci Development Corp. of Ponce Inlet Inc. (“DiMucci”) was sued by the homeowners' association at the Towers Grande high-rise in Daytona Beach Shores, Florida, for various construction defect related issues.

The construction defect lawsuit alleged that DiMucci ‘s work was defective on a portion of the high rise condominium complex and that the defective work caused property damage to other portions of the building that DiMucci also had constructed. More specifically, the Towers Grande Condominium Association alleged that DiMucci ‘s defective work resulted in damage to the roof and HVAC systems, as well as multiple water intrusion issues purportedly tied to poor waterproofing.

DiMucci had held three consecutive CGL policies with Evanston predecessor Essex Insurance Company between 2003 and 2005. During that time, DiMucci constructed Towers Grande, a 132-unit condominium building, with subcontractor Wayne's Roofing and Sheet Metal handling the roofing work.

After DiMucci tendered a claim for defense and indemnity to its general liability insurance company (Evanston), Evanston filed suit in Florida federal court in September 2014, seeking a ruling that its policy excluded coverage and therefore it had no obligation to defend or indemnify DiMucci.

After the parties filed cross motions for summary judgment, the trial court ruled that the so-called "your work" exclusion in DiMucci's CGL policy with Evanston precluded coverage because the underlying construction defect complaint only alleged damage to the builder's own work. The court found that the Your Work exclusion barred coverage, and that Evanston had no duty to defend or indemnify DiMucci.

This decision is notable because it takes the interesting position that because DiMucci constructed the entire high-rise—even though the defective construction caused damage to other parts of the high-rise—the exclusion applied not only to the portions of the high-rise where the defective work appeared, but even to the consequential damage to other parts of the high-rise caused by the defective construction work.

This decision is at odds with the law of numerous jurisdictions including (1) California (see Blackfield v. Underwriters at Lloyd's, London, 245 Cal. App. 2d 271, 273, 276 (1st Dist. 1966) - where defective construction is at issue, the “your work” exclusion only applies to the defective work itself, not the consequential damage caused by the defective work. [insured builder of tract home constructed home with defective fill/foundation; this caused the remainder of the house to suffer cracking, slanting, windows and doors could not be opened. Coverage for damages to the “other parts” of the house covered, i.e., not excluded]) (2) New Jersey (see Cypress Point Condominium Assoc. Inc. v. Adria Towers, 226 N.J. 403 (N.J. August 4, 2016), and even (3) Florida (United States Fire Insurance Co. v. J.S.U.B., Inc., 979 So.2d 871 (Fla.2007), and Auto–Owners Insurance Co. v. Pozzi Window Co., 984 So.2d 1241 (Fla.2008) both hold that faulty workmanship or defective work that has damaged the otherwise non defective completed project has caused ‘physical injury to tangible property’ within the plain meaning of the definition in the policy)) to name a few.

Policyholder advocates need to be aware of the authority interpreting and applying the so called “work product” exclusions as well as the fact that numerous jurisdictions permit coverage for consequential damage caused by defective workmanship even when coverage for the defective workmanship itself might otherwise be excluded.

1 Essex Insurance Co. v. DiMucci Development Corp. of Ponce Inlet Inc., No. 6:15-cv-00486 (M.D. Fla. Sept. 13, 2016).

Insurance Policies And The Exception To Exclusion Can Feel Like Trying To Fit The Pieces Of An Intricate Puzzle Together....Without Forcing Them

The coverages, limitations, exclusions and exceptions to exclusions buried in all those pages of property insurance policies can leave your head spinning when trying to make sense of it all. It can feel like trying to navigate through a complicated maze or fit all of the pieces of an intricate puzzle together without forcing them. This was demonstrated recently in a federal case from the Northern District of Florida, Bartram, LLC v. Landmark American Insurance Company, 2012 WL 1072207 (N.D. Fla. March 30, 2012).

The case involved an insurance coverage dispute between the apartment complex, Bartram, LLC, and several insurance carriers for damages stemming from faulty workmanship in the construction of the complex. There was primary coverage and three layers of excess coverage provided under builder’s all risk insurance forms. Each insurance policy excluded faulty workmanship from coverage. The policies also contained ensuing loss exceptions that provided coverage when “an excluded cause of loss ... results in a Covered Cause of Loss.” The parties agreed that the faulty workmanship exclusion applied, but they did not agree about the ensuing loss exception.

The insurers denied coverage for Bartram’s claim, and the lawsuit ensued. The parties filed competing motions for summary judgment based on the interpretation of the policies’ terms. Bartram argued that it suffered losses separate from and the result of the faulty workmanship, triggering the ensuing loss exception. Specifically, Bartram claimed water intrusion resulted from faulty workmanship and caused damage to the buildings’ exterior and interior finishes, wood sheathing, framing, balcony systems, drywall ceilings, and stucco. These damages were separate from the work needed to simply fix the faulty workmanship.

The insurers argued that an ensuing loss exception is not applicable if the ensuing loss is directly related to the original excluded risk. They argued that since the faulty workmanship naturally led to water intrusion without any new, independent cause of loss, there was no ensuing loss and coverage was barred by the faulty workmanship exclusion.

The Court noted that the cases cited by the insurers were distinguishable because the policies in those cases contained more detailed wording preventing the loss from being brought back within coverage under the exception to the exclusion. There was no such language in the policies that Bartram obtained.

The Bartram policies simply provided that if an excluded cause of loss “results” in a covered cause of loss, then “we will pay.” This means that ensuing losses, if they resulted from a covered cause, are covered under the policy regardless of whether the loss was naturally set in motion by an excluded cause of loss. The Court held:

Given the plain meaning of the policy language, if the faulty workmanship resulted in water intrusion that subsequently resulted in ensuing losses, the cost to repair the faulty workmanship is excluded but the ensuing losses from the water intrusion are covered.

The Court granted Bartram’s motion for summary judgment and held that the ensuing losses resulting from the faulty construction were covered. As this case demonstrates, even minor changes or variances in policy terms can have drastic results on coverage.

Colorado Court Employs Grammatical Approach to Determine Man-Made Earth Movement Not Excluded Under Earth Movement Policy Provision

If asked what an ordinary person might select for casual reading, one might think of books, magazines, or newspapers, but probably not insurance policies. If an ordinary person were to read an insurance policy, what would he or she think it meant? In states that employ the “reasonable expectations doctrine” for insurance policies, courts are often faced with this question. Colorado is one of the states that considers the reasonable expectation of the insured when interpreting insurance policies, and a recent condominium case there took a grammatical approach to determine what an ordinary reader would have understood the condominium policy to have covered.

In High St. Lofts Condo. Ass'n, Inc. v. Am. Family Mut. Ins. Co., 10-CV-02484-MSK-BNB, 2011 WL 4479120 (D. Colo. Sept. 26, 2011), a Boulder condominium started cracking and sloping when the city began road construction nearby. The condominium alleged that vibrations from the local construction caused the damage to its property. The condominium filed a lawsuit against the contractor responsible for the road construction and also filed a claim with its insurance company. The insurance company claimed that “earth movement” caused the damage, and that it was excluded under the following provision in the policy:

We will not pay for loss or damage caused directly or indirectly by any of the following. [ ... ]
(4) Earth sinking (other than sinkhole collapse), rising, or shifting including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil conditions include contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water underlying the ground surface.

To determine what an ordinary reader would understand this policy language to mean, the court took a fine-toothed comb to the grammatical structure of this exclusion.

[S]ubparagraph (4) … is somewhat of an ungrammatical maze. It begins by straighforwardly listing three verbs (technically verb-like gerunds)—“sinking,” “rising,” and “shifting”—each of which describes ways in which earth can move. Somewhat jarringly, the sentence then interposes a definitional term—“including”—without clearly indicating what term or terms are being defined. It proceeds to define one or more of the previous verbs with a noun phrase —“soil conditions.” Because the paragraph later defines the noun phrase “soil conditions” to itself comprise “contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water underlying the ground surface,” an ordinary insured attempting to understand the paragraph would simply substitute the definitional portion of the paragraph's second sentence for the term “soil conditions” in the first sentence, yielding a provision that purports to exclude coverage for “[e]arth sinking ..., rising, or shifting including contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water underlying the ground surface....”

This is somewhat of an improvement, although the object being modified by “including” is still unclear. An ordinary insured might then conclude that a given unit of earth can only move in a few different dimensions: it can “sink” or “rise” relative to its neighboring units, it can “shift” either laterally or forward and backward compared to its neighbors, or it can “expand” or “contract” itself. The remaining terms —“freezing, thawing, improperly compacted soils and the action of [subsurface] water”—describe mechanisms that would cause the earth to move, not movements themselves. Finally, the terms “settling, cracking or other disarrangement of foundations” describe damage that might result when the earth moves as described.

The court concluded that an ordinary person would reasonably understand this policy provision to exclude coverage for damage, when that damage results from movement of the earth caused by “freezing, thawing, erosion, improperly compacted soil, or sub-surface water.” In essence, except for improperly compacted soil, the court removed all man-made causes of earth movement from this exclusion. The court looked to the facts of the case and determined that man-made vibrations from nearby construction may have caused the condominium’s damage and denied the insurance company’s motion for summary judgment.

While some states like Colorado use the reasonable expectations doctrine, many other states take a plain meaning approach that lets the terms of the insurance policy control, regardless of the understanding or expectation of the parties. When analyzing the plain meaning of the terms of a policy, courts can also look to the grammatical construction to determine what policy provisions mean. See Farmers Ins. Exch. v. Versaw, 99 P.3d 796, 797 (Utah 2004); Rich v. Principal Life Ins. Co., 875 N.E.2d 1082, 1091 (Ill. 2007).

The grammatical analysis of the policy in the High St. Lofts case could also be used in jurisdictions that employ the plain meaning approach. The rules of grammar apply to what the terms actually mean as well as to what a reasonable person would expect them to mean. As illustrated by the analysis of this case, the interpretation of insurance policies is not always easy. If you have questions regarding your policy or interpretation, please contact competent legal counsel.

More on Condominium Insurance Exclusions

A few weeks ago, in my post, David Thompson’s Dirty Dozen Condo Insurance Exclusions, I wrote about property elements that were excluded from the master condominium policy under Fla. Stat. § 718.111(11)(f). I left that post a little open-ended by not nailing down how specific property items that are not expressly excluded in the statute would be treated, and I received a few questions following that post. To recap, Fla. Stat. § 718.111(11)(f)3 excludes from a master condominium insurance policy: (1) “personal property”, (2) a list of specific items such as floor coverings and electrical appliances, and (3) items that are “located within the boundaries of the unit and serve only such unit.”

The first question I received involved the statutory language of “personal property.” Under general property law principles, tangible personal property is privately owned property that is movable. This mobility distinguishes this type of property from real property, which is for the most part, immovable. Some personal property, however, can become part of the real property when properly affixed to it. For example, one can purchase a kitchen cabinet, roll of carpet, window shutter, or can of paint from a home improvement store. At the time of sale, the law would classify those items as personal property. Once those items are properly installed onto real property, such as a condominium unit, their classification in the eyes of the law will generally change to being part of real property, or fixtures. The law of fixtures is complex and beyond the scope of this post, but if there is sufficient interest, I may address it in more detail in a later post.

I also received a question regarding air conditioning units. The question came up not as I had posed it, as to whether an air conditioning unit would be considered an appliance or electrical fixture, but rather how it would be handled in light of the statutory language that excludes items “located within the boundaries of the unit and serve only such unit.” This raises an issue over how a split system air conditioning unit that has components located both outside and inside the boundaries of a condominium unit would be handled under the statute. Setting aside the possibility of excluding an air conditioning unit as being an appliance or electrical fixture, Fla. Stat. § 718.111(11)(n) gives more guidance on the obligations of an association to repair property items that serve only one unit:

The association is not obligatedto pay for any reconstruction or repair expenses due to property loss to any improvements installed by a current or former owner of the unit or by the developer if the improvement benefits only the unit for which it was installed and is not part of the standard improvements installed by the developer on all units as part of original construction, whether or not such improvement is located within the unit. This paragraph does not relieve any party of its obligations regarding recovery due under any insurance implemented specifically for such improvements.

While it appears that based on this statutory language, an association would not be required to repair the part of an air conditioner that is outside a condominium unit, each insurance policy is different, and the facts of each claim are never the same, so please contact proper counsel for assistance with your specific facts.

David Thompson's Dirty Dozen Condo Insurance Exclusions

A few weeks back, David Thompson, with the Florida Association of Insurance Agents (FAIA), wrote on the FAIA web site about “The Dirty Dozen” condominium insurance exclusions. Anyone who has access to the FAIA web site should definitely give it a read.

Thompson was writing about Fla. Stat. § 718.111(11)(f)3, which specifically enumerates twelve items that must be excluded from a condominium master insurance policy. Fla. Stat. § 718.111(11)(f)3 states:

The coverage must exclude all personal property within the unit or limited common elements, and floor, wall, and ceiling coverings, electrical fixtures, appliances, water heaters, water filters, built-in cabinets and countertops, and window treatments, including curtains, drapes, blinds, hardware, and similar window treatment components, or replacements of any of the foregoing which are located within the boundaries of the unit and serve only such unit. Such property and any insurance thereupon is the responsibility of the unit owner.

According to Thompson, remembering “The Dirty Dozen” exclusions is an easy way for condominium boards to field questions from unit owners about what is covered under the master policy. To spell out those exclusions listed in the statute, they are:

  1. Personal Property
  2. Floor Coverings
  3. Wall Coverings
  4. Ceiling Coverings
  5. Electrical Fixtures
  6. Appliances
  7. Water Heaters
  8. Water Filters
  9. Built-in Cabinets
  10. Countertops
  11. Window Treatments
  12. Window Treatment Components

Remembering this list is a great quick and “dirty” way to field questions regarding condominium insurance coverage, but associations should keep in the back of their mind that the list potentially runs deeper. Courts will use different methods to interpret the language of the statute in order to determine if an item is or is not covered. These methods are often discussed as rules of “statutory interpretation” or “statutory construction.”

For example, items expressly stated in the statute, such as water heaters and water filters, will likely always be excluded based on the “plain meaning” of the statute. What about a water softener? It is not expressly excluded, but a court may read it into the statute based on a “ejusdem generis” interpretation, which includes other items of the same class. Now what about an air conditioning unit? Is it an electrical fixture or an appliance? What about a water pump or other plumbing fixture? As items get further away from the defined list in the statute, the less likely it is that a court will find it excluded under the statute. Also, keep in mind that an insurance policy may exclude additional items from coverage.

Vacancy Exclusions Are Effecting More Claims In Today's Economy

In today’s down economy, more and more homes, condominiums, and buildings are becoming vacant each day. Recently, many national news sources picked up a story out of Ft. Meyers, where one family was the sole resident of a 32-story condominium building. While the family undoubtedly enjoyed exclusive use of the pools and other amenities, this freedom was not without problems. The family reported that they often found themselves dealing with trespassers and vandals roaming the empty building.

While empty buildings, condos, apartments, and houses cause a myriad of issues, problems relating to insurance claims for damage are becoming more frequent. While many people believe that an insurance policy will still provide coverage for an empty property, the reality is that policies often do not.

Many insurance policies do not provide coverage for property that has been vacant for more than 60 consecutive days. While many provisions are usually kept in place even after the property becomes vacant, damages resulting from vandalism, sprinkler leakage, broken glass, water, theft, or attempted theft are often excluded. Further, some policies reduce payments for covered losses to vacant property, leaving the policyholder without enough money to make necessary repairs.

Vacancy exclusions can affect unit owners and associations alike. While it is unusual for entire condominium buildings to be vacant, many times, total vacancy is not required for the exclusion to apply. Many policies consider a building “vacant” if at least 31% of the property is not being used for its intended purpose. Therefore, even though a handful of tenants may actually reside in the building, the property may still be considered “vacant” for insurance purposes.

Given that many condominium associations are beginning to resemble the “ghost towns” of old westerns, many insurers are taking advantage of a growing need for coverage. Insurers, such as American Integrity Insurance Group, based in Florida, are writing specific policies for vacant properties. These policies do not make a distinction between occupied and vacant properties and will generally provide the same coverages in either situation.

With hurricane season in full swing, it is important that associations and unit owners check their policy for vacancy exclusions. If you are unsure whether your property meets the definition of vacancy, contact your agent or insurance company directly. If you have a property that is vacant, make sure to contact your agent and inquire about potential policies that will provide coverage. Doing so now will save you a lot of headaches later.