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Insurance Law Report: December 2020

December 09, 2020

Insurance Law Report focuses on developments in Florida, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Texas and Virginia.

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Mississippi Supreme Court Holds Insurer Waived Lawyer-Client Privilege When Its Claims Handler Relied Substantially on In-House Counsel To Prepare Denial Letter

The Mississippi Supreme Court recently affirmed a trial court’s finding that an insurer waived its right to rely on the lawyer-client privilege and was required to produce written communications between its in-house counsel and its claims handler and to produce its in-house counsel for deposition. Travelers Property Casualty Company of America v. 100 Renaissance, LLC, No. 2019-IA-00586-SCT 2020 Miss. LEXIS 409 (Miss. Oct. 29, 2020).

An unidentified driver struck a flagpole owned by the insured. The insured filed an uninsured motorists claim with its auto insurer, which the insurer denied because the flagpole was not a covered “auto.” The insured’s lawyer sent an email to the claims handler, which detailed legal arguments why the insured should be afforded coverage based on Mississippi’s UM statute. The claims handler sought legal advice from the insurer’s in-house counsel. The claims handler then sent a letter to the insured, which set forth the basis of the denial under the terms of the policy and under Mississippi UM law. The insured sued the insurer, asserting a claim for coverage under its auto policy and for bad faith. In her deposition, the claims handler could not offer any information as to why the claim was denied and testified that she was not familiar with Mississippi law and that she “may have” been assisted by in-house counsel. In response to the insurer’s summary judgment motion, the insured moved for additional discovery of emails between the claims handler and the in-house lawyer and for the in-house lawyer’s deposition. The insurer opposed on the basis of lawyer-client privilege. The trial court found the insurer waived the privilege and ordered production of the emails and the deposition.

The Supreme Court noted that the insured, through discovery, sought to understand the insurer’s reasons to deny the claim. The court, considering the claims handler’s repeated testimony that she “did not know,” held that the statements in the denial letter were not based on her actual personal knowledge and that if the claims handler relied substantially, if not wholly, on in-house counsel to prepare her denial letter, the reasoning of in-house counsel should be discoverable.

By: Lauren McCrory

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Eleventh Circuit Holds Under Florida Law That Courts May Consider Extrinsic Evidence Supporting Application of Exclusion in Duty To Defend Dispute

The 11th U.S. Circuit Court of Appeals recently held applying Florida law that an insurer could look to facts outside the four corners of a complaint in applying a CGL policy’s pollution exclusion to a case where contact with construction led to “bodily injury.” BBG Design Build, LLC v. Southern Owners Ins. Co., 820 Fed. Appx. 962 (11th Cir. 2020).

A part-time worker at a shelter house, which the insured was renovating, alleged injury from contact with “construction debris.” The claimant also alleged that the insured was negligent in managing the construction site by failing to ensure proper controls and protections were in place to contain “construction debris.” The complaint did not elaborate on the reference to “construction debris,” nor did it further describe the claimant’s “bodily injury.” The shelter’s CGL insurer denied coverage pursuant to the policy’s pollution exclusion. The insurer moved for summary judgment, arguing that the pollution exclusion barred coverage, and that this case fit into the exceptional line of cases that allows a court to consider facts outside the operative complaint in deciding the duty to defend. The district court agreed that extrinsic evidence, including the claimant’s deposition testimony and pre-suit demand, could be considered in analyzing the duty to defend.

The 11th Circuit upheld the district court’s ruling and held that there is no ambiguity in the policy’s pollution exclusion. The 11th Circuit held that the exclusion clearly encompasses the construction debris of the sort of which the claimant complained. The 11th Circuit reasoned that the operative complaint was an attempt to plead into coverage, and that the insurer had pre-suit knowledge of uncontroverted facts that placed the claimant’s claims outside the scope of the policy’s coverage. The 11th Circuit concluded that the situation was a rare exception to the “four-corners” rule, but that extrinsic evidence could be considered in analyzing coverage under the policy.

By: Michael DeMaio

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Texas Court Affirms Finding of No Coverage Under Pollution Liability Policy

A Texas court of appeals held that a gas spill at a convenience store was not covered under a pollution liability and environmental damage policy. Orange Cup Drive In LLC v. Mid-Continent Cas. Co., 2020 Tex. App. LEXIS 6993 (Tex. App.―Dallas Aug. 28, 2020, no pet. h.)

The insured operated convenience stores that sold gasoline. The insured had a pollution liability and environmental damage policy in place, which contained the following coverage parts: Coverage A for claims by third parties for property damage caused by a release; and Coverage B applying to cleanup costs incurred by the insured.

Gas tanks and pumps at one of the insured’s closed locations were discovered to have leaked gasoline, which permeated the soil requiring remediation. In coverage litigation, the insurer was awarded summary judgment that specific elements of the damages were not covered under Coverage A or Coverage B. The court of appeals found no coverage under Coverage A for costs to rebuild the convenience store because it did not cover damage to property in the “care, custody, or control” of the insured. Claims for mental anguish were also not covered by a definition of “bodily injury,” which required mental anguish to be accompanied by physical injury. The court further held that Coverage B was not satisfied as to cleanup costs because the insured had to be “legally obligated to pay” such amounts before coverage triggered. The court found that cleanup had not been ordered by an appropriate regulatory agency and that the insured had not paid the policy deductible, failing which the insurer’s obligation did not attach.

By: Chris Gabriel

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Florida Appellate Court Holds Insurer Waived Defense Against Bad-Faith Complaint by Not Raising the Issue in Response to Civil Remedy Notice

A Florida appellate court denied an insurer’s motion for dismissal of a bad-faith complaint because the insurer waived the basis for the motion by not raising it in its response to a Civil Remedy Notice of Insurer’s Violations (CRN). Bay v. United Serv. Auto. Ass’n., 45 Fla. L. Weekly D2380 (Fla. 4th DCA Oct. 21, 2020).

The insured filed an insurance claim under its homeowners’ policy. The insured alleged that the insurer underpaid the claim, which was supported by the findings of an appraisal panel. As a condition precedent to filing a bad-faith action, the insured filed a CRN with the Department of Financial Services, but it incorrectly named the insurer. The insurer filed a response to the CRN asserting certain deficiencies, but did not address the incorrect name. The insured then sued, alleging bad faith. The insurer moved to dismiss the complaint because the insured failed to file the CRN against the proper entity. The trial court granted the motion, finding that the insurer was not afforded proper notice because the insured failed to strictly comply with the statutory requirements for a CRN.

The appellate court reversed. It agreed with the trial court’s finding that the misidentification of the insurer failed to strictly comply with the statutory requirement, but held that the insurer waived the argument by not raising it in its response to the CRN. 

By: Derek Lenzen

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Florida Appellate Court Holds Insurer’s Pursuit of Appraisal Does Not Constitute Cure of Violations Alleged in Civil Remedy Notice

A Florida appellate court held that an insurer did not cure a Civil Remedy Notice of Insurer’s Violations (CRN) by having invoked the policy’s appraisal provision before the CRN was filed and later paying the appraisal award. Fortune v. First Protective Ins. Co., 45 Fla. L. Weekly D2092 (Fla. 2d DCA 2020).

The insureds filed a claim under their homeowners’ policy, and their insurer invoked the policy’s appraisal provision after it received an estimate from the insureds’ public adjuster. The insureds then filed a CRN alleging the insurer breached its duty of good faith by failing to identify the full scope of necessary repairs and refusing to properly adjust the claim. The CRN notably did not contain the amount necessary to cure the claim. The insurer generally denied the claims in the CRN and paid nothing. An appraisal award was ultimately entered, and the insurer promptly paid the net amount owed, which occurred after the 60-day cure period. The insureds sued for bad faith, and the insurer moved to dismiss, or in the alternative, for summary judgment on the basis that it cured the CRN by having invoked the appraisal.

The trial court granted the motion for summary judgment, finding that the insurer cured the CRN as a matter of law by invoking appraisal before the CRN was filed and timely paying the appraisal award in compliance with the policy, even though it was beyond the 60-day cure period. The insurer argued that when the CRN does not state the amount necessary to cure the alleged bad faith, its invocation of appraisal constitutes a corrective action (albeit retroactively). The appellate court reversed, reasoning that the cure to a bad-faith claim when payment is owed is paying the benefits owed within the 60-day cure period.

By: Michael DeMaio

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Florida Appellate Court Holds Insureds Materially Breached Policy Condition by Failing to Provide a Sworn Proof of Loss but Remands to Determine Prejudice

A Florida appellate court held that the insureds’ submission of a mold report did not substantially comply with their policy’s post-loss obligation to provide a sworn proof of loss and was a material breach of the condition precedent to filing a lawsuit. Prem v. Universal Prop. & Cas. Ins. Co., 45 Fla. L. Weekly D2044a (Fla. 3d DCA Aug. 26, 2020).

The insureds filed an insurance claim under their homeowners’ policy for damage from a plumbing leak. The insurer requested that the insureds provide a sworn proof of loss as well as other documents in support of the claim. The insureds provided a mold report and a leak report, neither of which were signed. The insurer renewed its request for a sworn proof of loss over the course of several months, but the insureds filed a lawsuit without submitting a sworn proof of loss. The insurer moved for summary judgment on the basis that the insureds did not satisfy the post-loss conditions precedent to filing suit. The insureds did not dispute that they had not submitted a sworn proof of loss but argued that providing the mold report and leak report was substantial compliance with their post-loss obligation, and that the insurer failed to prove it was substantially prejudiced by the failure to provide the sworn proof of loss. The trial court granted the motion.

The appellate court affirmed in part and reversed in part. The appellate court noted the post-loss condition standard: if an insurer establishes that an insured failed to substantially comply with a post-loss obligation, prejudice to the insurer is presumed and the burden shifts to the insured to show that any breach did not cause prejudice. The appellate court agreed that the failure to provide a sworn proof of loss was a material breach and that the reports provided did not substantially comply with the condition. However, it reversed and remanded on the prejudice issue to allow the court to make supplemental findings per the post-loss condition standard.

By: Derek Lenzen

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Oklahoma Federal Court Holds Neither Insurer Nor Insured Entitled to Lawyers’ Fees Under Oklahoma Law in Insurance Coverage Dispute                                          

A federal court in Oklahoma, analyzing an Oklahoma statute which authorizes lawyers’ fees to the prevailing party in certain insurance coverage disputes, declined to award lawyers’ fees to either the insurer or the insured, despite both parties prevailing on certain coverage issues at issue in the case. Allianz Life Insurance Company of North America v. Muse, 2020 WL 6298079 (W.D. Okla. Oct. 26, 2020). The statute at issue—Okla. Stat. Tit. 36 §3629(B)—provides:

It shall be the duty of the insurer, receiving a proof of loss, to submit a written offer of settlement or rejection of the claim to the insured within ninety (90) days of receipt of that proof of loss. Upon a judgment rendered to either party, costs and lawyer fees shall be allowable to the prevailing party. For the purposes of this section, the prevailing party is the insurer in those cases where judgment does not exceed written offer of settlement. In all other judgments the insured shall be the prevailing party. If the insured is the prevailing party, the court in rendering judgment shall add interest on the verdict at the rate of fifteen percent (15%) per year from the date the loss was payable pursuant to the provisions of the contract to the date of the verdict. This provision shall not apply to uninsured motorist coverage.

The insurer issued a long-term care policy to the insured and, after the insured claimed he was chronically ill, paid benefits under the policy. The insurer later asserted fraud and sought damages and a judicial declaration that the insured was not entitled to additional policy benefits. The insured counterclaimed for breach of good faith and fair dealing. The district court granted partial summary judgment in favor of the insurer on all but the fraud claim. Following trial, the jury returned a verdict in favor of the insured on the insurer’s fraud claims. Both parties requested lawyers’ fees under Okla. Stat. Tit. 36 §3629(B).

The court denied the insured’s request for lawyers’ fees, finding that the plain meaning of the statutory text is that it applies to claims based on “[a]n incorrect denial of an insured’s claim or an inadequate tender of benefits by the insurer, and not claims by the insurer alleging overpayment of benefits due to fraud by the insured.” The court further held that applying the statute’s fee-shifting directives to the insured’s claim would produce nonsensical results. The court denied the insurer’s request for lawyers’ fees because the insurer did not submit a written rejection within 90 days of its receipt of relevant proofs of loss as is contemplated by the statute.

By: Lauren McCrory

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North Carolina Trial Court Holds COVID-19 Government Shutdown Orders Constitute Direct Physical Loss

A North Carolina district court has held that restaurant operators were entitled to coverage for lost business income because of government shutdown orders due to the spread of COVID-19 triggering covering provisions under a common meaning of the term “direct physical loss.” North State Deli, LLC, et al. v. The Cincinnati Insurance Co., et al., No. 20-CVS-02569, slip op. (N.C. Super. Ct. Oct. 9, 2020).

Restaurant operators sued their insurer, seeking a declaration that the insurer must replace lost business income and extra expenses under property policies issued to them stemming from government shutdown orders in response to COVID-19. The policies at issue were all risk policies covering all “direct loss” unless excluded or limited, and they included “Building and Personal Property” and “Business Income (and Extra Expense)” Coverage Forms. The policies defined the term “loss” to mean “accidental physical loss or accidental physical damage.”

The insureds then moved for summary judgment, which the court granted. Because the policy did not define “physical loss” or “physical damage,” the court used what it considered common dictionary definitions to conclude that the ordinary meaning of “direct physical loss” includes the inability to utilize or possess something. The court determined that government shutdown orders deprived the restaurants of use of and access to their business property, and thus held that lost business income was the result of “direct physical loss.” The court rejected the argument that “direct physical loss” requires physical alteration to the property. The court found that its definition of the term was equally reasonable, thereby creating an ambiguity in the meaning of the term that must be resolved in the insureds’ favor. The court also reasoned that defining “direct physical loss” in terms of physical alteration would improperly render meaningless the term “direct physical damage.” 

By: Jared Burtner

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Federal Court in Mississippi Dismisses Restaurant’s Proposed Class Action Complaint Alleging Wrongful Denial of Claims for Business Losses due to COVID-19 Civil Authority Orders

A federal court in Mississippi, relying on a growing number of cases from other jurisdictions,  granted an insurer’s motion to dismiss the insured’s proposed class action suit by a restaurant seeking coverage for business losses stemming from COVID-19 civil authority orders. Real Hospitality, LLC d/b/a Ed’s Burger Joint v. Travelers Casualty Ins. Co., 2020 WL 6503405 (S.D. Miss. Nov. 4, 2020). 

The insurer moved for a dismissal, arguing that the insured failed to state a claim for coverage because the complaint did not allege physical loss of property or any physical damage to property as is required for coverage under the Business Income/Extra Expense coverage provision. The insurer further argued that even if it had suffered an actual direct physical loss of or damage to insured property, that the policy’s virus exclusion would preclude coverage.

The court agreed, holding that “direct physical loss of or damage to property” requires either tangible damage to the insured property or “the permanent dispossession of” property. The court also noted that the policy will only pay out business income during a “period of restoration,” which is defined under the terms of the policy to begin with the “date of direct physical loss or damage” and ends with “[t]he date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality” or “[t]he date when the business is resumed at a new permanent location.” The court found this definition would not make sense if there were not a requirement for physical loss of or physical damage to the property involved. The court also found that the policy’s virus exclusion would apply in any event.

By: Lauren McCrory

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Federal Court in South Carolina Finds No Duty To Defend Based on Evidence Attached to Insurer’s Declaratory Judgment Complaint

A federal court in South Carolina held that an insurer was entitled to judgment on the pleadings in its declaratory judgment action where the insurer attached to its complaint evidence showing that the allegations in the underlying suits occurred after the first of four successive policy periods and that certain property damage exclusions in the latter three policies barred coverage. Mt. Hawley Ins. Co. v. Carriage Hill Assocs. of Charleston, LLC, 2020 WL 5583631 (D. S.C. Aug. 18, 2020), appeal filed (4th Cir. Sept. 17, 2020).

The insurer filed a declaratory judgment action against a construction contractor, asserting that it had no duty to defend or indemnify the contractor in two underlying lawsuits involving claims for negligence and for breach of the implied warranty of workmanlike service for water intrusion allegedly stemming from the contractor’s work. The insurer attached to an amended complaint two construction permits for the project dated several months after the expiration of the first of four policies at issue. The court noted that South Carolina law permits consideration of facts outside of the complaint that are known to the insurer. Although it stated that it construed the pleadings in the light most favorable to the insured, the court concluded that based on the permits, there was no material issue of fact as to whether the insured’s work on the project occurred after the first policy expired. Accordingly, the court found that it did and held that the insurer had no duty to defend or indemnify under the first policy.

Later policies contained exclusions for “Damage to Property” and “Damage Arising Out of Your Work.” The court reasoned that the underlying lawsuits fell within the scope of the two exclusions because they stemmed from the insured’s work as a contractor on the construction project. The court further determined that the products-completed operations hazard did not limit application of the exclusions because the claims of one underlying plaintiff arose from the sale of the project to the owners, and the claims of the other arose from work performed during or after the condominiums had already been purchased. Therefore, the court held coverage excluded under the latter three policies and granted the insurer’s motion for judgment on the pleadings. 

Appeal is pending before the 4th U.S. Circuit Court of Appeals.

By: Jared Burtner

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Federal Court in South Carolina Examines Extrinsic Evidence to Find No Duty To Defend

A federal court in South Carolina held that an insurer had no duty to defend or indemnify where facts outside the complaint brought the claims within the scope of an exclusion. Atain Specialty Ins. Co. v. Carolina Prof’l Builders, LLC, 2020 WL 5877143 (D.S.C. Oct. 2, 2020).

In the underlying suit, a general contractor was sued for construction defects, and sought indemnity and a defense from its CGL insurer whose policy contained an endorsement that excluded coverage for “‘property damage’ … that first becomes actually or constructively known to any person … after the expiration of this policy regardless of whether there is repeated or continued exposure during the policy period….” The insurer contended that no one became aware of the property damage until after the policy expired and sought declaratory relief, filing a motion for summary judgment based on extrinsic evidence.

The court noted that while the duty to defend under South Carolina law is generally governed by the allegations in the underlying complaint, the possibility of coverage may also be determined by facts outside the complaint that are known to the insurer. In a novel burden of proof approach for an insurer’s summary judgment motion, the court found that none of the evidence offered by the insured showed any of the contractors or subcontractors had any knowledge of property damage during the policy period. The court examined the evidence and concluded that it did not support the assertion by the insured and its owner that they were, in fact, aware of the damage prior to the policy expiration. The court concluded that the plain language of the endorsement barred coverage, as the language was unambiguous and did not contravene public policy, and held that coverage was excluded under these facts. Accordingly, the court granted summary judgment in favor of the insurer. 

By: Machaella Reisman

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Federal Court in Texas Finds Pollution Exclusion Does Not Apply in Absence of Discharge, Dispersal or Release of Pollutant

A federal court in Texas found that coverage for benzene-induced blood and bone marrow cancer caused by handling of gasoline was not excluded by a pollution exclusion because there was no allegation of a discharge, dispersal, seepage, migration, release or escape of the pollutant. Canal Indem. Co. v. Caljet, 2020 U.S. Dist. LEXIS 178107 (S.D. Tex. Sept. 8, 2020).

Between 1985 and 2016, the injured party worked as a gasoline truck driver. Part of his job was to load benzene-containing gasoline at various terminals, which exposed him to benzene via inhalation and dermal absorption. He alleged that as a direct and proximate result of this exposure, he contracted blood and bone marrow cancer. A gasoline refiner’s commercial auto and commercial general liability policies at issue contained pollution exclusions, which excluded “‘bodily injury’ … which would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants….” The term “pollutants” was defined in pertinent part as “any solid, liquid, gaseous or thermal irritant or contaminant….”

The petition upon which the duty to defend was to be determined alleged that the injured party was “exposed to benzene through inhalation and dermal absorption of … gasoline.” The court held that the individual’s exposure was alleged to be a direct exposure, not a discharge, dispersal, seepage, migration, release or escape of the pollutant, rendering the pollution exclusion inapplicable. Consequently, the court concluded, a bodily injury caused by a pollutant is not sufficient to preclude a duty to defend, as there must also be an express allegation that the injured party was exposed by a discharge, dispersal, seepage, migration, release or escape of the pollutant.

By: Chris Gabriel

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Federal Court in Louisiana Finds Sale of Defective Property Does Not Constitute an “Occurrence”

A federal court in Louisiana granted summary judgment to an insurer that no defense or indemnity is owed with respect to a claim arising from the sale of property because said sale and the alleged defects in the transaction did not constitute an “occurrence.” Novak v. St. Maxent-Wimberly House Condo., Inc., 2020 U.S. Dist. LEXIS 167397 (E.D. La. Sep. 14, 2020).

Condominium owners sold their property to the underlying plaintiffs, who sued the owners for redhibition, negligent misrepresentation and detrimental reliance. A condominium unit policy issued to the owners insured against property damage caused by an “occurrence,” and the insurer moved for summary judgment that it had no duty to defend or indemnify because the sale of property did not constitute an “occurrence.” The owners argued that in one case, the Louisiana First Circuit Court of Appeal had found that a homeowners’ policy covered a claim for negligent misrepresentation; however, the court found that the Louisiana Third and Fifth Circuit Courts of Appeal had found negligent misrepresentation claims not covered under a homeowners’ policy when a plaintiff brought claims for redhibitory defects against an insured. The court granted summary judgment, “because the … alleged failure to disclose the defects in the [condominium] prior to and at the time of act of sale … do not constitute an occurrence under the Policy.”

By: Gabriel Crane

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Federal Court in Louisiana Finds That an Auto Owned by Member of an LLC Not a Substitute Auto Under Louisiana Law

A federal court in Louisiana denied an insurer’s motion for summary judgment that a truck owned by a member of the insured limited liability company did not constitute a substitute auto because even though Louisiana case law demonstrates that an auto owned by an individual who does business as a sole proprietorship cannot constitute a substitute auto, the insured in this case was a limited liability company (LLC). Cutrer v. TWT Transp., L.L.C., 2020 U.S. Dist. LEXIS 164808 (M.D. La. Sep. 9, 2020). 

A commercial automobile liability insurance policy issued to the insureds afforded coverage for “[a]ny ‘auto’ you do not own while used with the permission of the owner as a temporary substitute for a covered ‘auto’ that is out of service because of its: a. [b]reakdown.” The insured was listed as “TWT Transport LLC, Terry Reed and Tammy Ladner DBA,” although the policy designated the insured as “Individual.” A covered auto was disabled, so Mr. Reed used his personal vehicle to drive from Mississippi to Texas looking for work, towing a trailer he owned. The trailer separated from his truck and injured the plaintiff. In subsequent litigation, the auto insurer moved for summary judgment that Mr. Reed’s trailer could not constitute a substitute auto because Louisiana case law is that a vehicle owned by a sole proprietor cannot qualify as a substitute auto, contending that the policy designated the insured as “Individual” and thus a proprietor. The court denied the motion and concluded that notwithstanding the policy designation of the insured as “Individual,” TWT Transport LLC was, in fact, not a sole proprietorship, but rather an LLC, and a separate juridical entity from Mr. Reed. The court held that because TWT Transport LLC owned the covered auto and Mr. Reed owned the truck involved in the accident, the truck did not constitute a substitute auto under the policy.

By: Gabriel Crane

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Federal Court in Georgia Holds Reasonable Grounds for Denying Claim Does Not Support Bad-Faith Claim

A federal court in Georgia held that an insurer is entitled to summary judgment for a bad-faith claim when the insurer had reasonable grounds for denying coverage. Scheinfeld v. LM Gen. Ins. Co., No. 19-381, 2020 U.S. Dist. LEXIS 149360 (N.D. Ga. Jul. 9, 2020).

The insureds filed an insurance claim for alleged water and mold damage to a rental property. The insurer investigated the claim and determined that the damage was caused by repeated seepage.  The insurer denied the claim on the basis of the policy’s seepage exclusion. The insureds sued, alleging breach of contract and bad faith, and the insurer filed a motion for summary judgment on both the breach of contract claim and the bad-faith claim.

The district court granted the insurer’s motion for summary judgment on the bad-faith claim. The district court held that the insurer had reasonable grounds for denying coverage because the insureds suffered a leak that caused extensive damage and reasonable minds could disagree as to how long the leak was present (which was the material fact at issue for the breach of contract claim). The court concluded that because reasonable minds could disagree, the insurer’s grounds for the denial were reasonable, and the insurer was entitled to summary judgment on the bad-faith claim.

By: Derek Lenzen

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Federal Court in Georgia Finds That Homeowners’ Policy’s Defective Construction Exclusion Bars Coverage for Water Damage

A federal court in Georgia recently held that a homeowners’ policy’s defective construction exclusion bars coverage for water damage arising out of the defective construction of a home, but found that a question of fact remains on whether the policy’s deterioration exclusion applied. Rountree v. Encompass Home & Auto Ins. Co., No. CV 619-008, 2020 U.S. Dist. LEXIS 170741 (S.D. Ga. Sept. 17, 2020).

The insured brought a breach of contract action against his insurer after noticing issues in his home four years after the home was built. Construction defects, determined to be present when the home was constructed, were later discovered. The damage observed included workmanship defects in the flashing, weatherproofing and shingles that led to substantial water intrusion and damage. The insurer moved for summary judgment, arguing that coverage was barred pursuant to the “defective construction exclusion” and the “deterioration exclusion” in the policy.

The insurer argued that all of the insured’s claims flowed from defective construction and thus coverage was excluded under the defective construction exclusion unless the ensuing loss exception applied. The insured argued that the ensuing loss exception provided coverage for water damage resulting from the defective roof, despite being otherwise excluded. The district court disagreed, concluding that if the ensuing loss was otherwise excluded, it remains excluded. The district court then found that there was no dispute of fact as to the classification of the losses caused by defective construction and granted summary judgment to the insurer. However, the court found that a question of fact existed as to whether coverage for the damage identified as deterioration was excluded.

By: Michael DeMaio

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