INSIDE THIS ISSUE
When Is A Leak Not A Leak
Cooperation Clause v. the Fifth Amendment... And the winner is...
Unintended Consequences Of An Intentional Act Can Constitute An Occurrence
California Maximizes Coverage For Continuous Property Damage
INSERT - - A View From the Colonies
WHEN IS A LEAK NOT A LEAK?
-Frank J. DeAngelis
Recently, in Federal Bake Shop v. Farmington Cas. Co., No. 97-476 (Sup. Ct. N.H. July 16, 1999), the Supreme Court of New Hampshire reversed the trial court's dismissal of a declaratory judgment action, concluding that the cause of the loss, a malfunctioning toilet fixture that caused an overflow of the septic system, was covered under the first-party property insurance policy at issue because the policy language regarding leakage was ambiguous.
The plaintiff owned a commercial building in Bedford, New Hampshire. The plaintiff obtained a first-party property insurance policy for the premises from the Farmington Casualty Company. In April 1996, the plaintiff discovered that a toilet installed by one of its tenants was "sticking," and that the malfunctioning toilet fixture caused a large amount of water to flow into the septic system. Consequently, the septic tank became overloaded and failed.
Plaintiff learned that in one fifteen-hour period approximately five thousand gallons of water had drained into the septic system, more than four times the system's capacity. The plaintiff also determined in its investigation that the excess water flow had continued for over fourteen days. As a result of the excess water flow, the plaintiff was caused to incur various expenses.
The plaintiff filed a timely claim with the defendant. The defendant subsequently denied the plaintiff's claim on the basis of an exclusion for leaks that occur over a period of fourteen days or more.
Plaintiff instituted an action in the New Hampshire Superior Court. Defendant filed a motion for summary judgment on the ground that the cause of the plaintiff's loss was specifically excluded from coverage by the terms of the policy.
The exclusion in the defendant's policy stated: "We will not pay for loss or damage caused by or resulting from . . . [c]ontinuous or repeated seepage or leakage of water that occurs over a period of 14 days or more . . . ." The trial court held that the exclusion was clear and unambiguous, and that the plaintiff's alleged loss resulted from "leakage" that occurred over a period of at least fourteen days. The plaintiff appealed the trial court's decision to the New Hampshire Supreme Court.
The plaintiff's appeal was based on the trial court's interpretation of the term "leakage." The plaintiff argued that "leakage" could not be fairly interpreted to mean "an excessive overload of liquid into the system due to plumbing fixture malfunction." The plaintiff contended that an insured of ordinary intelligence would interpret the term "leakage" to mean "a low volume movement of water." The defendant argued that the continuous leakage exclusion was clear and unambiguous and that the trial court properly interpreted the exclusion.
The New Hampshire Supreme Court began its analysis by noting that in interpreting the policy the court would "take the plain and ordinary meaning of the policy's words in context, and [would] construe the terms of the policy as would a reasonable person in the position of the insured based on more than a casual reading of the policy as a whole." Deyette v. Liberty Mut. Ins. Co., 142 N.H. 560, 561, 703 A.2d 661, 662 (1997).
The court then looked to the dictionary definition of "leakage." According to the dictionary, "leakage" is "the act ... of leaking" and "leak" as "to enter or escape through a hole, crevice, or other opening [usually] by fault or mistake." Webster's Third New International Dictionary 1285 (Unabridged Ed. 1961). The court acknowledged that the definition seemed to support the defendant's interpretation of the exclusion. However, the court said, when reading the policy as a whole a reasonable person in the position of the insured could interpret the exclusion as the plaintiff argued.
The Supreme Court focused on an exclusion that immediately followed the continuous leakage exclusion. The exclusion the court relied on precluded coverage for damage caused by "[w]ater ... that leaks or flows from plumbing ... caused by or resulting from freezing." Webster's definition of "flow" is "to issue in a stream: GUSH, SPRING, WELL." Id. at 875. The court concluded that the plaintiff's loss was more akin to a "flow" than a "leak."
The court also said that because the frozen pipe exclusion used the terms "flow" and "leak" disjunctively, a reasonable person in the position of the insured could understand the term "leak" to mean, as the plaintiff argued, a low volume movement of water. The court also took note that one other court had interpreted "leakage or seepage of water" to connote "a gradual and slow moving event." Primm v. State Farm Fire & Cas. Co., 426 So.2d 356, 360 (La. Ct. App. 1983). Because of the ambiguity in the continuous water exclusion, the Supreme Court reversed the trial court's decision and remanded it for further proceedings.
As a result of the decision in Federal Bake Shop, it should be clear to both insureds and insurers that a "leak" is a low volume movement of water, at least in New Hampshire and Louisiana. While the New Hampshire Supreme Court's opinion is somewhat extreme, insurers should be aware of the extraordinary steps taken by this court to extend coverage to an insured.
COOPERATION CLAUSE v. THE FIFTH AMENDMENT And the winner is...
-Lauren G. Dome
The clash between an insurer's right and obligation to investigate a claim and the insured's right to assert its Fifth Amendment privilege against self-incrimination was analyzed under Georgia law in Anderson v. Southern Guaranty Ins. Co. of Georgia, 235 Ga. App. 306, 508 S.E.2d 726 (Ga. Ct. App. 1998), cert. denied (Feb. 26, 1999). In Anderson, the insured sought legal defense from its homeowner's liability insurer in a civil case filed against her. She allegedly got on a school bus, attacked the driver with a cane, and then dragged the driver off the bus. At the time of the civil action by the bus driver, a jury already had convicted the insured of aggravated assault, simple battery, and reckless conduct for endangering the safety of school children in the related criminal action.
The easiest issue resolved by the court was that the insurer had no duty to defend the insured against charges of intentional infliction of emotional distress where the policy provided coverage and defense for "bodily injury" and not mental or emotional injury. The more difficult issue involved the insurer's obligation to defend against accidental occurrences that resulted in bodily injury not expected or intended by the insured. The court determined that the allegations of intentional torts in and of themselves will not automatically provide a basis on which the insurer can decline to defend when the insured asserts that the injury was an accident. In Georgia, a criminal conviction cannot be taken as evidence in a civil action to establish the truth of the facts on which the conviction was rendered. Therefore, the insurer could not rely on the conviction for assault and battery to establish that the insured expected or intended bodily injury. Id. at 235 Ga. App. 307, 508 S.E.2d at 729 n.1, citing Continental Cas. Co. v. Parker, 161 Ga. App. 614, 617, 288 S.E.2d 776 (1982). Rather, the insurer had to investigate the claim independently to determine whether the insured's actions were accidental or intentional.
A problem arose because the insured refused to answer the insurer's questions regarding the incident, citing her Fifth Amendment privilege against self-incrimination. She was concerned that her comments would adversely affect the outcome of her then-pending motion for a new trial in the criminal case. The court ruled that the danger of self-incrimination was sufficient to assert the privilege in the civil action. 235 Ga. App. at 310, 508 S.E.2d at 731. This privilege conflicted with the insured's duty to cooperate under the policy, i.e., "to secure and give evidence." The court disagreed with the insured's argument that she was unfairly forced to refuse to answer questions in violation of her insurance contract or give up her privilege, stating,
"In the present declaratory judgment action, [the insured] is not in the position of the usual defendant involuntarily brought into a civil case, then forced to confront the dilemma of surrendering the privilege against self-incrimination or suffering an adverse judgment.... Rather, [the insured's] demands for insurance coverage and a defense of the suit place her in a position more akin to that of a plaintiff who creates her own dilemma by bringing a civil action to enforce a contract, and who then refuses to provide information material to the defendant's defense by asserting the Fifth Amendment Privilege."
235 Ga. App. at 311, 508 S.E.2d at 731-32 (citations omitted). Thus, the Fifth Amendment privilege did not excuse the insured from complying with her contractual obligations. Accordingly, in certain situations, the Fifth Amendment would not prohibit a grant of summary judgment against the insured where a material breach of the contract would void coverage. In this instance, however, the court did not grant summary judgment because there were additional facts that needed to be developed, and the insured had expressed her willingness to cooperate at the conclusion of her criminal appeal, which had occurred by the time of this decision (for those interested, the conviction was affirmed).
UNINTENDED CONSEQUENCES OF AN INTENTIONAL ACT CAN CONSTITUTE AN OCCURRENCE
-Aaron F. Fishbein
The New York Appellate Division, Fourth Department, recently reiterated the well-established insurance principle that there can be liability coverage for an insured's liability arising out of his own intentional act if the resulting injury or damage was unintended. In Allegany Co-Op Insurance Co. v. Kohorst, 254 A.D.2d 744, 678 N.Y.S.2d 424 (4th Dep't 1998), the insured set fire to his own property. There was no reasonable doubt that he started the fire deliberately, since he was convicted of attempted arson in the second degree. The fire burned Michael King. Mr. King commenced a personal injury action against the insured. In a declaratory judgment action, the trial court granted summary judgment in favor of the liability insurer, holding that there was no "accident," and consequently no "occurrence," because the insured had intentionally set the fire. 678 N.Y.S.2d at 425.
The Appellate Division reversed. The court ruled that Mr. King's injury was an accident because the insured did not intend to hurt him, even though he did purposely start the fire. The court reasoned that
"Accidental results can flow from intentional acts. The damage in question may be unintended even though the original act or acts leading to the damage were intentional."
Id. (quoting Salimbene v. Merchants Mut. Ins. Co., 217 A.D.2d 991, 994, 629 N.Y.S.2d 913, 915-16 (4th Dep't 1995). The court distinguished decisions holding that injuries sustained as a result of rape and child molestation were not accidental, because in those cases the injury "flowed directly from and was inherent in the acts allegedly committed by the insured." Id.
The court's decision was in accord with established New York law. Courts applying New York law have long held that there can be a covered occurrence where the original act was intended, as long as the resulting injury or damage was unintended. Results of negligence and calculated risks may be unintended or unexpected. See, e.g., City of Johnstown v. Bankers Standard Ins. Co., 877 F.2d 1146, 1150 (2d Cir. 1989)("It is not enough that an insured was warned that damages might ensue from its actions, or that, once warned, an insured decided to take a calculated risk and proceed as before"); McGroarty v. Great Am. Ins. Co., 36 N.Y.2d 358, 368 N.Y.S.2d 485, 489 (1975); Gen. Accident Ins. Co. v. Manchester, 116 A.D.2d 790, 497 N.Y.S.2d 180, 182 (3rd Dep't 1986).
[Although we do not as a rule comment editorially on the decisions we report, it is at least noteworthy that the insured, who committed arson and was as a result subject to criminal penalties as well as (presumably) the loss of any first-party coverage protection, was nevertheless as a result of this decision entitled to coverage for liability to third parties injured by the very same arson.]
CALIFORNIA MAXIMIZES COVERAGE FOR CONTINUOUS PROPERTY DAMAG
-Diana E. Goldberg
Typically, determining the scope of coverage with respect to claims for continuous or progressive property damage requires the resolution of unique issues that are raised when a loss spans multiple policy periods. Thus, issues such as the number of occurrences, trigger, and allocation of damages are recognized components of any analysis of claims for losses that are perceived to be continuous. The application of retained limits was recently added to the list of issues raised by claims involving multiple policy periods.
In California Pacific Homes, Inc. v. Scottsdale Ins. Co., 83 Cal. Rptr.2d 328 (Ct. App. 1999), a construction company, California Pacific Homes ("CPH"), was named as a defendant in a lawsuit brought by homeowners seeking damages for construction defects in their condominiums. Ultimately, CPH agreed to pay a total of $1,975,000 to the homeowners in settlement. Following settlement, CPH sought indemnification from its CGL insurers.
Because the loss was continuous and spanned several policy periods, the settlement amount was allocated to CPH's insurers according to the number of years that each insurer was on the risk. Two of the carriers, Scottsdale Insurance Company and National Casualty Company, which issued policies for five successive periods from June 1, 1990 through June 1, 1995, took the position that they were not obligated to indemnify CPH until the insured had contributed an amount equal to its retained limit for each of the triggered policy periods.
The policies issued by Scottsdale and National provided that "the 'insured's retained limit' is $250,000 [of] ultimate net loss as the result of any one occurrence because of personal injury, property damage, or both combined," and that "the insurer will be liable for '$1,750,000 [of] ultimate net loss as the result of any one occurrence because of personal injury, property damage, or both combined.'" Therefore, according to the policy interpretation proposed by the insurers, which would result in the application of a retained limit for each of the five policy periods at issue, CPH would have had to pay $1,250,000 towards the settlement before seeking to recover proceeds from Scottsdale and National.
Upon learning of the position taken by Scottsdale and National, CPH brought an action against the two insurers seeking a declaration that CPH was responsible for only one self-insured retention for a single, continuous occurrence. The trial court, and later, the Court of Appeal, First District, found that the policies clearly limited the self insured retention to $250,000 per occurrence. In addition, both courts found that the application of a single retention to CPH's claim was supported not only by the parties' stipulation that the settled claims arose from a single occurrence, but also by the plain definition of the term "occurrence." Id. at 329.
The decision in California Pacific Homes clearly takes into account the effect that stacking the retained limits has on the availability of coverage. The Court of Appeal observed, "[j]ust as stacking of policies may have the result of providing far more coverage than an insured has purchased, so stacking of retained limits would have the effect of affording an insured far less coverage for occurrence-based claims than the insured has purchased." Id. at 332 (citing FMC Corp. v. Plaisted & Companies, 72 Cal. Rptr.2d 467 (Ct. App. 1998)).
The unfair effects of stacking had been recognized previously by the Court of Appeal, Sixth District, in FMC Corp. v. Plaisted & Companies. 72 Cal. Rptr.2d 467 (Ct. App. 1998). In FMC, an insured manufacturer sued its primary and excess/umbrella liability insurers, seeking a declaration of coverage for pollution claims stemming from the manufacturer's commercial activities that caused toxic contamination to soil and groundwater at a number of sites throughout the country. The FMC court found in favor of the insured, but the insured claimed that the court erred when it applied an anti-stacking rule in addition to finding that the insured was entitled to recover "all sums" under the policies at issue in that case.
The FMC court noted that "'[s]tacking policy limits means that when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy." Id. at 501. Applying a stacking principle to the facts in FMC, that court observed, would have entitled the insured to recover up to $7 million in liability coverage for a single occurrence under policies that specified a $1 million per occurrence limit. In short, "'stacking' of the limits of an insurer's policies for consecutive policy periods has been criticized as affording the insured substantially more coverage, for liability attributable to any particular single occurrence, than the insured bargained or paid for." Id. at 502 (citations omitted). The conclusion of the court in FMC was that an anti-stacking rule should apply so that only the policy limits of policies in effect during one of the policy periods in which coverage was triggered for a single occurrence can apply to property damage attributable to that occurrence, but that the insured could select under which of several triggered policies it was to be indemnified.
Similarly, the California Pacific Homes court endorsed the principle that once coverage is triggered the policy obligates the insurer to indemnify the insured for its entire loss, and successive insurers on the risk when continuous property damage firsts manifests itself are separately and independently obligated to indemnify the insured. California Pacific Homes, Inc. v. Scottsdale Ins. Co., 83 Cal. Rptr.2d at 332 (citing Aerojet-General Corp. v. Transport Indem. Co., 948 P.2d 909 (Cal. 1997)). For support, the trial court relied on the principles set forth in Montrose Chem. Corp. v. Admiral Ins. Co., 913 P. 2d 878 (Cal. 1995) as applied in Armstrong World Indus., Inc. v. Aetna Casualty & Sur. Co., 52 Cal. Rptr.2d 690 (Ct. App. 1996). In Armstrong, asbestos manufacturers sought to recover under liability policies for asbestos property damage. The Armstrong court concluded that the covenant contained in the policies at issue in that case to pay "all sums" that the insured was liable to pay as damages entitled the insured to select one policy, if several provided coverage, from which to seek indemnification for the entire claim. Although in California Pacific Homes the Court of Appeal subsequently noted that the Scottsdale and National policies did not contain the "all sums" language that appeared in the Armstrong policies, the Court of Appeal did not find the language in the Scottsdale and National policies to be inconsistent with the judgment of the trial court.
In response to the findings of the trial court, on appeal Scottsdale and National argued that because the insured retained a portion of the risk, their policies should be treated as excess coverage that would not be triggered until the "primary" coverage, the equivalent of five retained limits, was exhausted. Affirming the decision below, the Court of Appeal declined to apply the principle of horizontal exhaustion used in cases involving coverage under primary and excess policies, noting a distinction between apportioning losses between carriers and apportioning losses between an insured and its insurers. California Pacific Homes v. Scottsdale Ins. Co., 83 Cal. Rptr.2d at 333.
In the final analysis, the effect of the decision in California Pacific Homes is to maximize coverage for continuous or progressive property damage where multiple policy periods are triggered. On the other hand, the opinion's narrow scope reaches only those cases where a single occurrence is established by the facts. Multiple occurrences would more than likely lead to a different result.
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