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.

The Devil Is In The Details And Everything In First-Party Property Insurance Is A Detail

With so many recent disastrous events taking place across the United States it is important for associations, businesses and all policyholders to understand that in a property insurance claim, the devil is in the details. Hearing generalizations from insurance professionals about what may be covered and what may be excluded is not nearly enough when putting together a damage claim. The detail work is in the particular facts, documentation of the event and damage, and sometimes most importantly, the language of the policy at issue.

It sounds like an elementary statement, but many associations, businesses and policyholders may have no desire to read the terms of their property insurance policy, or if they do venture to read it, find themselves lost in a maze of complex terminology. Being proactive and having a copy of the current policy readily accessible for review by insurance professionals is important too. That way, if there is a potential claim, insurance professionals can review the policy to appropriately answer questions about coverage.

For example, in Park Country Club of Buffalo, Inc. v. Tower Ins. Co. of New York, a golf country club association presented a business income claim to its insurer for loss caused by flood damage to its golf course sand traps. Whether the sand traps were covered property depended on the terms and definitions of the policy. An endorsement titled Security for Golf Courses—Golf Course Grounds and Outdoor Property modified the terms of the policy to include golf course sand traps within “Covered Property,” and the Flood Endorsement specifically indicated that the insurer would pay for damages to “Covered Property” caused by flood or surface waters. The court held that “the only reasonable interpretation of those endorsements is that the policy covers flood damage to plaintiff's sand traps.”

This case brings the point home because it is clear that if the country club association and its professionals had not reviewed the endorsement forms that changed the standard policy language to include sand traps as “covered property” and provide coverage for flood damage to “covered property,” it may not have proceeded with a claim for the damages. Associations, businesses, individual policyholders and their claim professionals should all strive to go the extra mile in sorting through the details of their claim, documenting the claimed damages and reviewing policy forms.

Insurance Coverage May Require Analysis of More than Just the Policy

Sometimes it is easy to determine who is covered under an insurance policy just by looking at the declarations page of the policy. Other times it is not so easy. A recent case from State of Washington illustrates just how complicated it can be to determine who is and is not covered under a policy of insurance. In the case of Elkins v. QBE Ins. Corp., No. 11-5150, 2011 WL 1562386 (W.D. Wash. Apr. 21, 2011), an insured office condominium suffered a fire loss and questions arose as to whether individual office unit owners were covered for business interruption losses under the property insurance policy.

Although this case involved a business interruption claim, the court’s analysis hinged more on who was covered under the policy than whether a business interruption claim was viable under the facts. For those interested in business interruption claims, Michelle Claverol writes an excellent series of business interruption articles for the Property Insurance Coverage Law Blog, and I encourage all to read her posts.

Back to the Elkins case, to determine whether the property insurance policy covered loss of rents for individual office units, the court looked to the following documents:

  • Insurance Policy
  • Condominium Conditions, Covenants and Restrictions (CC&Rs)
  • Washington Statutes
  • Case Law

The policy named the condominium association as the insured and provided that coverage existed for the “building containing twelve professional units.” The policy further stated that it would pay for loss of “community income.” The court looked to case law to determine how to read the policy, and looked to Washington statutes to determine that individual unit owners were covered under the association’s liability policy, but not necessarily the property policy. The court also noted that the condominium CC&Rs only required that the association property policy cover the building and limited common elements. Any additional insurance was to be procured at the expense of the unit owners.

Since the policy did not define “community income,” that definition was left to the court to decide. The court turned back to the condominium association documents, Washington statutes, and policy provisions to come to the conclusion that individual unit owners were not covered for business interruption losses under this association’s property insurance policy and that “community” meant the association as a separate and distinct entity from the individual unit owners. The court granted summary judgment for the insurer, QBE, and dismissed the individual unit owners’ business interruption claims.

Because condominium association insurance policies can be lengthy, technical, and require analysis of additional documents other than just the policy, we always recommend contacting competent legal counsel to assist with insurance coverage questions and needs. 

Associations Should Begin Checking And Understanding Their Policies Now

With the Atlantic Hurricane Season rapidly approaching, associations should be checking with their agents and brokers to make sure that their property policies are in place and that all terms and conditions are understood. This includes the typical policies that provide coverage for events such as wind and fire, as well as flood insurance policies mostly issued by the National Flood Insurance Program.

For those with existing flood insurance policies, it is extremely important to know the conditions for coverage and to strictly comply with them in the event of a loss. These policies require prompt notice and inventories of personal property that must be submitted in accordance with the terms of the policy. Failing to comply with the proof of loss requirement can be an absolute bar to recovery despite an otherwise valid claim.

Associations should note that the following is generally required for all flood claims:

Within 60 days after the loss, send us a proof of loss, which is your statement of the amount you are claiming under the policy signed and sworn to by you, and which furnishes us with the following information:

a. The date and time of loss;

b. A brief explanation of how the loss happened;

c. Your interest (for example, “owner”) and the interest, if any, of others in the damaged property;

d. Details of any other insurance that may cover the loss;

e. Changes in title or occupancy of the covered property during the term of the policy;

f. Specifications of damaged buildings and detailed repair estimates;

g. Names of mortgagees or anyone else having a lien, charge, or claim against the insured property;

h. Details about who occupied any insured building at the time of loss and for what purpose; and

i. The inventory of damaged personal property described in [Article] J.3. above.

Strict adherence to proof of loss requirements is a condition precedent to recovery under the Standard Flood Insurance Policy. Substantial compliance is not sufficient; an insured must completely satisfy the proof of loss requirements before any monetary claim can be awarded.

Failing to adhere to these guidelines can relieve the insurer of its obligation to pay even the most obvious claims. Therefore, it is important to know your requirements under the policy before a loss occurs in order to ensure that your claim is not denied on a technicality.