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Archive for the ‘Insurance Coverage and Extra-Contractual Liability’ Category

Municipalities Continue Winning at Georgia Court of Appeals

Posted on: October 31st, 2019

By: Sun Choy and Wes Jackson

Last week the Georgia Court of Appeals issued a favorable ruling for the City of Statesboro that will benefit municipalities (and their insurers) across the state. The decision included two advantageous decisions for municipalities concerning “nuisance” claims against cities premised on third-party criminal conduct and the extent to which purchasing insurance will waive a city’s sovereign immunity.

In Gatto v. City of Statesboro (Ga. Ct. App. A19A1408, A191409, Oct. 21, 2019), the parents of an underage college student at Georgia Southern University sued the City of Statesboro after their son was killed by a bouncer at a bar. The parents claimed the City had maintained a nuisance by failing to shut down the bar where their son was killed, even though it was widely known by the City and University students as an establishment that will serve alcohol to underage patrons.

The City asserted multiple defenses to this claim, the two most important being (1) a City cannot be liable under a theory of “nuisance” for third-party crime; and (2) the City did not waive its sovereign immunity by purchasing liability insurance because a specific endorsement in its policy provided that the policy would not cover claims for which the City would otherwise be entitled to sovereign immunity.

As to the “nuisance” defense, Freeman Mathis and Gary attorneys Sun Choy, Jake Daly, and Wes Jackson had recently secured a reversal of a $10.6 million trial verdict against the City of Albany on strikingly similar facts. (City of Albany v. Stanford, 347 Ga. App. 95, 815 S.E.2d 322 (2018); see also prior blog posts here and here.) In Gatto, the Court of Appeals relied on Stanford to unanimously hold that cities cannot be liable for criminal conduct on private property under a “nuisance” theory because the “nuisance exception” to sovereign immunity only applies to “takings” claims of property, not to claims for personal injury or loss of life. The Court of Appeals’ decision in Gatto marks an important win for municipalities across the state, as it reinforces the Court’s decision in Stanford and, as a unanimous decision, creates binding precedent on this issue.

In a case of first impression, the Court also ruled favorably for the City on its sovereign immunity defense based on an interpretation of an insurance policy immunity endorsement. In Georgia, municipalities can waive their sovereign immunity on certain claims by purchasing liability insurance. To preserve cities’ sovereign immunity, some carriers have been issuing policies with an endorsement that effectively states the policy does not provide coverage for any claims for which the City would otherwise have sovereign or governmental immunity. Before Gatto, these endorsements and the extent to which they allow a city to retain its sovereign immunity had never been tested at the Georgia Court of Appeals or Supreme Court. However, the Court of Appeals held in Gatto that such endorsements are enforceable and, where the language of the policy expressly provides that it will not cover occurrences when sovereign immunity applies, the policy would not operate to waive sovereign immunity.

Gatto, then, marks two important and favorable developments for municipalities in Georgia. For additional questions about this case or sovereign immunity under Georgia law, please contact Sun Choy ([email protected]) or Wes Jackson ([email protected]).

Court of Appeals clarifies “Your Work” Exclusion in CGL

Posted on: October 30th, 2019

By: Robert Bazzo

A frequently litigated issue in the commercial general liability (CGL) policy is the extent and limits of the coverage for contractors under the definition of “Your Work” and related exclusions. Under the insurance laws in most states, defective workmanship alone is not considered an accident and, therefore, not “property damage” as the result of an “occurrence” within the standard CGL definition.

In a recent Massachusetts case, All America Ins. Co. vs. Lampasona Concrete Corp. et al., the trial court granted the insurance company’s motion for summary judgment based on a finding that the “Your Work” policy exclusion applied to the claim against the insured.

The underlying construction projects related to a new hospital’s concrete floor installation, 90,000 square feet at a cost of $30 million. As part of the construction project, the subcontractors had to install a flooring system for the first floor. This system consisted of a concrete slab (Lampasona’s work), installed over a plastic vapor barrier which was done by another subcontractor. The finished first floor of the hospital included flooring tile (attached with adhesive) and carpeting, installed by other subcontractors on top of the concrete slab.

After completion of the hospital, the owner complained to the general contractor that first-floor tiles had become loose, were “tenting” and “blistering” and that the liquid adhesive was leaking from underneath the flooring. The damage was allegedly related to excessive moisture migrating through the concrete slab. The claimed excessive moisture was allegedly caused by Lampasona’s installation (work product [or “Lampasona’s work”]), including (1) Puncturing the vapor barrier; (2) Improperly mixing fiber reinforcement into the concrete; and (3) Improperly curing the concrete.

Based on these allegations, the trial court found coverage for the occurrence to be barred by the “Your Work” exclusion [TO AVOID THE POSSIBLE READING THAT THE INSURING AGREEMENT DID NOT APPLY IN THE FIRST INSTANCE]. The trial court focused on the definition of “Occurrence” and the policy exclusion stating the insurance does not apply to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘Your Work’ was incorrectly performed on it.” In the judge’s opinion, Lampasona’s work applied to the entire flooring structure because it was an “integral and inseparable part” of the construction of the flooring surface. Although the flooring surface consisted of several different layers, only one of which was placed by Lampanosa, together they constituted “one completed product: Interior flooring for the first floor” of the hospital.

On appeal, the court found that the “Your Work” exclusion did not apply. The appeals court agreed that a CGL policy does not provide coverage for faulty workmanship that damages only the insured’s work product. However, the policy does provide coverage if the faulty workmanship causes property damage to something other than the insured’s work product. The appellate judges determined that the trial court did not properly differentiate between Lampasona’s work and the work of the other subcontractors. It was not wrong to conclude that the vapor barrier, concrete slab, and floor tiles or carpeting could be characterized as layers of an integrated flooring system. However, just because the separate parts made up one system does not mean that the exclusion applied. Instead, said the appeals court, “Where Lampasona was hired to install one layer of the flooring system but caused discrete damage to the other layers, that damage falls outside the . . . exclusion.”

If you have any questions or would like more information, please contact Robert Bazzo at [email protected].

To Be An Advertising Injury, Or Not To Be: That Is The Question

Posted on: October 29th, 2019

By: Michael Weinberg

The benefits of advertising injury coverage in the standard CGL policy  (the “Policy”) are welcomed by many insureds.  After all, marketing and advertising are important to most if not all businesses.  Under the Policy, coverage is afforded for “sums the insured becomes legally obligated to pay as damages because of personal and advertising injury” offenses.  Personal and advertising injury offenses are defined to include, among others, “the use of another’s advertising idea” or  “infringing upon another’s copyright, trade dress or slogan” in the insured’s advertisement.  Based on policy exclusions, however, there are limits to this coverage.

In the matter of Sterngold Dental, LLC v. HDI Global Insurance Company, 926 F.3d 1 (1st Cir. 2019), the U.S. Court of Appeals for the First Circuit had the chance to “sink [its] teeth” into the so-called intellectual property exclusion (“IP exclusion”). The IP exclusion precludes coverage for advertising injury “arising out of the infringement of copyright, patent, trademark, trade secrets or other intellectual property rights.” In the underlying suit, Intra-Lock, a competitor of Sterngold in the market for dental products, alleged Sterngold acquired value, name and brand recognition and goodwill in Intra-Lock’s OSSEAN trademark as a result of continuous and substantial advertising.  Intra-Lock’s OSSEAN trademark protected a dental coating component it developed for its dental implant product.  Here Sterngold’s advertising was alleged to cause confusion between Intra-Lock’s products and its competitor Sterngold’s.

Sterngold asserted that its insurer HDI Global owed both defense and indemnity because the complaint alleged advertising injury in that the Intra-Lock’s claims embodied an advertising idea taken and used by Sterngold.   Sterngold presented every possible scenario to its insurer to show the advertising concept was allegedly Intra-Lock’s idea.

The Court acknowledged the phrase “advertising idea”, as used in the Policy, was somewhat “nebulous.”  Yet, it was not without its limits.  If the insured took an advertising idea for soliciting business or an idea about advertising from a competitor, then the claim constitutes exactly that – an advertising injury for using the advertising idea of another.   However, not every advertisement using an idea from a competitor is enough.   If the advertising idea relates to a trademark and arises solely out of that,  then it falls within the IP exclusion, and there is no coverage.

The Court noted Intra-Lock’s allegations were narrow and could only be read to encompass Intra-Lock’s trademark infringement claim. Had the allegations been broader, and the advertising idea asserted a secondary source of infringement, (e.g., slogan) this may have impacted HDI’s obligation to defend and indemnity.  No such allegations were made.

The First Circuit’s decision in Sterngold draws attention to the importance of the particular facts alleged in a complaint when analyzing coverage issues. In that sense, it will be of interest in other jurisdictions as well, given that it interprets language in a common policy form in the context of trademark law.

If you have any questions or would like more information, please contact Michael Weinberg at [email protected].

What You Don’t Know Can Hurt You: The Enforceability of Long-Term Leak Exclusions

Posted on: October 24th, 2019

By: Anastasia Osbrink

My family and I recently arrived home one evening to discover our laminate floors warm to the touch and pushing up at the seams. A friend who was visiting asked if we had heated floors. Heated floors? Not in Southern California. What I was experiencing first-hand was a water pipe leak under our flooring. My first call was to a plumber who would be out the next morning to do a “slab leak detection.” My second call was to my homeowner’s insurance.

Indeed, the plumber detected a slab leak; and two days later the claims specialist from my insurance company met me at the house to examine the damage. The floors had been torn up by a remediation company. As we walked through the demo-zone trying to speak to one another over the deafening sound of massive fans and dehumidifiers trying to dry everything out, my claims specialist said something to me that I hadn’t considered: “you’re so lucky that you are in the 10% of homeowners who don’t have a long-term leak exception.” She stated she rarely sees a policy that doesn’t have the exclusion. I asked what constitutes “long term.” My claims specialist answered “long term” means over 14 days; and based on the amount of damage she observed the leak probably had been going on for a month or more. But there was no way I could have discovered the leak prior to the evening two days earlier. It doesn’t matter. Such exclusions apply whether or not the homeowner is, or could be, aware of the leak.

California courts (and courts throughout the country) are clear that long-term leak exclusions to coverage for water damage in homeowner’s policies are enforceable. (See Brown v. Mid-Century Ins. Co. (2013) 215 Cal. App. 4th 841 [insurance policies, like any contract, must be interpreted based on their plain meaning, and the plain meaning of a “sudden” leak that excludes long-term leak damage is self-evident and enforceable].) Though there are frequent disputes between homeowners and insurers about whether the leak did in fact exist for more than two weeks, insurers often refer insureds to plumbers from their “preferred vendor” lists. Frequently insurers ask those plumbers to opine as “experts” on how long the leak has existed. Homeowners may not realize when the leak first occurs. By the time they do notice, much of the water has dried up and the evidence has disappeared. Later, when the disgruntled homeowners consider a suit against their homeowners’ insurer for breach of contract, they have lost the ability to present evidence regarding the length of the leak. Additionally, these types of claims often raise a reasonable, genuine dispute regarding the existence of coverage. (See Chateau Chamberay Homeowners Assn. v. Associated Int’l Ins. Co. (2001) 90 Cal.App.4th 335, 347.)

An insured may argue that some of the claimed damage occurred immediately due to sudden discharge, which should be covered. (See Wheeler v. Allstate Ins. Co., 687 F. App’x 757 (10th Cir. 2017).) The Court in Wheeler, applying Utah law, held that coverage existed for any damage the homeowner could show resulted from the initial sudden leak within the first 13 days of the leak. (Id. at 772-73.) The court in another case in Florida, Hicks v. American Integrity Insurance Company of Florida, came to a similar conclusion. (Hicks v. Am. Integrity Ins. Co. (Fla.Dist.Ct.App. 2018) 241 So.3d 925, 926.) The practical effect of these rulings was to force a close examination of the insured’s evidence of a sudden leak and of the claimed damage caused by that sudden leak, as distinct from other damage.

Recent attempts by the California legislature to graft a delayed discovery rule onto such contractual exclusions (which would require both the homeowner’s actual discovery of the leak and the homeowner’s delayed reporting) have failed. Additionally, while nationwide there does not appear to be a push by state legislatures to pass such laws, there have been varied approaches by both insurers and departments of insurance to clarify these exclusions and the type of coverage available. For instance, the Texas Department of Insurance issued an Order stating that USAA reported to it that it would cover damage, including mold, caused by a “hidden” long-term leaks despite the fact that its policies contain standard exclusion language. (Texas Department of Insurance, Commissioner’s Order 02-0523.) Such clarifications could benefit not only consumers, but also insurers hoping to avoid breach of contract and bad faith litigation based upon exclusions.

If you have any questions or would like more information, please contact Anastasia Osbrink at [email protected].

Consent-to-Settle Clauses Under Review in Massachusetts

Posted on: September 30th, 2019

By: David Slocum

Earlier this month, the Massachusetts Supreme Judicial Court (the SJC), the state’s highest court, heard oral argument in a case which presents the question whether consent-to-settle clauses typical to most professional malpractice insurance policies should be deemed unenforceable as against public policy.

The case, Rawan v. Continental Casualty Co., places before the SJC an important issue of first impression in Massachusetts, the outcome of which will have significant implications for professional liability insurers and their insureds throughout the state.

The case arises out of an underlying engineering malpractice lawsuit in which plaintiff homeowners alleged the defendant professional engineer negligently designed their home.  The engineer was insured by Continental Casualty Co. (CNA) under a professional liability policy, which contained a standard consent-to-settle clause providing: “We [CNA] will not settle any claim without the informed consent of the first Named Insured.”

Consistent with its insured’s wishes, CNA made no settlement offer during the underlying engineering malpractice litigation.  At trial, the jury found the engineer was negligent and awarded $400,000 in damages.

Thereafter, in a separate follow-on lawsuit against CNA, the plaintiff homeowners alleged CNA had violated Massachusetts’ unfair settlement practices statute, Chapter 176D §3(9)(f), which requires insurers to effectuate a prompt, fair and equitable settlement when an insured’s liability has become reasonably clear.  Plaintiffs alleged CNA had failed to properly investigate and settle the plaintiffs’ claims against the engineer during the underlying litigation.

CNA moved for, and was granted, summary judgment in its favor on the grounds that its insured had not consented to settlement of the claims.  Thus, CNA argues, it was contractually bound under the consent-to-settle clause of the policy not to effectuate a settlement of the plaintiffs’ claims against the insured, irrespective of whether the insured’s liability had become reasonably clear.

In asking the SJC to overturn the trial court’s grant of summary judgment in CNA’s favor, the plaintiffs argue that such consent-to-settle clauses undermine the purpose of Chapter 176D by ceding settlement authority to insureds who potentially may unreasonably refuse to settle valid claims against them.  Plaintiffs contend that such clauses therefore should be deemed unenforceable as against public policy in Massachusetts.

CNA and a number of bar and professional associations, which have filed amicus briefs in its support, argue the grant of summary judgment in CNA’s favor should be affirmed because consent-to-settle clauses in noncompulsory professional liability insurance policies are compatible with insurers’ obligations under Chapter 176D.  They contend Chapter 176D’s purpose of preventing insurance company overreach is not implicated in such situations, and a professional insured’s important reputational interest also supports the enforceability of consent-to-settle clauses.

The SJC is expected to issue its decision in this important and closely-watched case later this term.

If you have any questions or would like more information, please contact David Slocum at [email protected].

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